We have all heard the depressing headlines about how financial disagreements can impact a relationship. Therefore, I’ll spare you the statistics and instead of focusing on the problem, let’s talk about working towards a solution.
We all know dealing with money is hard enough on our own so it only makes sense that it can be messy at times when two people try to do this together. Often within a relationship, there will be two different philosophies and tendencies for how to handle money. Coming up with common goals and a plan to make those goals a reality can be very difficult. On the flip side, seeing progress towards those shared goals is incredibly rewarding! For many reasons, I am a firm believer that married couples should merge their finances and the rest of the article will work under that assumption.
Below is a list of 10 areas with discussion questions that every couple should work through together. I’m intentionally not providing solutions but rather providing conversation starters. Hopefully, I’m not acting as the kindling on the fire but please let me know how the conversation goes by commenting on this post at www.yourfinancialpharmacist.com or by shooting me an e-mail at [email protected]. While many of these are most relevant to those getting married or recently married, I’m convinced many are good discussions to have on a regular basis.
Before you jump in to start having these discussions with your spouse or spouse to be, it is important to note that often (not always) there is one person in a relationship that nerds out about the financial stuff and loves talking about these types of things. Usually, this individual is the frugal planner in the relationship. On the other side, there is often one person in the relationship that is a little more laid back about the financial stuff and getting into the weeds on the nerdy stuff isn’t his/her thing. One is not better than the other and, in fact, they are usually a good balance for each other if they can work as a team.
Why do I say all of this? Most likely if you are reading this article you are probably leaning towards the nerd side of the equation for your relationship. Therefore, be cognizant of how you approach this with your partner. Please don’t print off this list of questions and start rattling them off during dinner. That might not go over so well.
Here they are!
#1 – Goal setting
Have we discussed and agreed upon our short- (1-3 years), mid- (3-10 years) and long-term (>10 years) financial goals? Do we review these on a regular basis (e.g., every 6 months) and update them accordingly. (Tip: Here is a good resource to get you started in setting these goals: http://www.wclibrary.info/research/moneysense/documents/goals_worksheet.pdf)
#2 – Budgeting
Have we developed a monthly budget that accounts for all of our expenses and income? If not, what is our plan to complete that? If so, does that budget reflect our goals from #1?
#3 – Level of engagement
Does one of us take more of the lead than the other when it comes to managing our finances? If so, are both of us aware of our overall financial situation? Do we talk about this regularly?
#4 – Children (Besides wanting to have them or not…)
Is one of us staying home with the kids someday a desire? If so, how will we manage this financially?
How do we feel about paying part or all of our kid’s college expenses? How will we plan for this?
How do we feel about paying for private elementary, middle or high school? How will we plan for this?
What ideas do we have to teach our kids about properly managing money?
#5 – Giving
How does each of us feel about giving (how much and where)?
How will we budget for this?
#6 – Debt
How much debt have we acquired thus far and what will be our plan to pay off that debt?
How comfortable are we with having debt (break this down further to different types of debt including student loans, credit cards, mortgage, car loans, etc.)?
Are we OK with some debt and not other debt? If so, why is that the case?
#7 – Housing / Transportation
How do we both feel about renting property vs. owning a home?
If there is a desire to own a home, do we agree on the location, purchase price and % we would like to put down?
Do we view a car as a necessity or a luxury? Will we lease or buy our cars?
#8 – Balancing Financial Priorities
Of all the financial priorities we have to consider (giving, saving for retirement, housing, transportation, paying off debt, etc.), do we agree upon a plan for how we will balance these? Will we try to do several at once or focus on one before moving on to another?
#9 – Savings (emergency and long-term)
Are we more comfortable with 3 or 6 months of expenses set aside for an emergency fund or somewhere in-between? If we don’t currently have that saved up, how will we get there and where will we put it?
What is our risk tolerance for investing?
What financial goals are we trying to achieve by saving/investing?
How much will we invest/save for retirement each month?
#10 – Financial Records
Do we have all of our financial records in order with a plan for someone to be able to access that information in the event of an emergency?
(Tip: Consider creating a ‘legacy file/folder’ that includes all of your important financial records in one place. This could include insurance documents, living will, power of attorney, log of financial accounts and passwords, monthly budget, tax returns, college funds, student loan debt balances, retirement funds, car titles, home ownership records, etc. I can’t take credit for this idea. I learned this from Dave Ramsey and felt a huge sense of relief once Jess and I had this in place.)
Financial Homework: Your homework for the week is not to have all of the above discussions. If you do that, I will be impressed. Rather, just start the conversation. See if there can be a commitment amongst you and your partner to talk about these areas over the next 3-6 months. If you are up for it, agree upon a time you can sit down together to manage your monthly bills/budget while checking up on your progress towards the goals you set.
This article was written by Matthew Muir, PE, LEED AP BD +C. Matthew is a 2006 graduate of Ohio Northern University and currently works as a Mechanical Engineer at Advanced Engineering Consultants. He has some good points for us all to consider as we think about taking on any loan. If you have any questions about his article, feel free to comment on the blog or e-mail him directly at[email protected]
Quantifying debt can be challenging. You just graduated from college, purchased a home or took out a car loan. If you haven’t been reading Your Financial Pharmacist’s blog and saving up for a long time, you probably don’t have the cash flow upfront to fund a large purchase. For the sake of discussion, let’s assume you go to the bank and take out a 5-year loan for $25,000 to buy a new car. The bank hands you a check and you walk out the door with $25,000 in debt, right? Not so fast.
I’m going to challenge you to think a little differently. From now on, quantify debt by taking into account the total amount of money you will pay over the term of the loan, not just what you borrowed. Ready to get started?
Loan Amount (Balance or Principal you Owe): $25,000
Interest Rate: 6.0%
Term (Months): 60 Months
Before we start drawing conclusions, let’s talk a little more about how loans work. When you make your monthly payment, the bank divides your payment up into two categories: principal and interest. The principal is applied toward the balance of the loan ($25,000 in this case) and the interest goes into the bank’s pocket. The first payment of any loan is the most depressing one; you pay the most interest you’ll ever pay and the least principal you’ll ever get credit for (per monthly payment). Look at the numbers:
Bottom line: $480.95 of the $483.32 goes toward paying off your loan, that’s 99.5%
Yikes! If you paid the minimum payment for the life of the loan (5 years) than you would have paid a total of $28,999.23 (principal: $25,000, interest: $3,999.23) for your new car, which means you paid 16% more for the car than the dealership was charging. $4,000 might not seem like a lot of money to some, but keep in mind the loan amount and the term we looked at. Imagine what those numbers might be on a $250,000 house loan over 30 years. Scary, isn’t it?
Loan Amount: $250,000
Interest Rate: 4.0%
Term (Months): 360 Months
Monthly Payment: $1,193.54
Total Interest Paid: $179,673.77
Loan Amount + Total Interest Paid: $250,000 + $179,673.77 = $429,673.77 (that’s not a typo)
Seeing that number makes me sick. (Hold on for a minute while I locate the nearest trash can!) By showing you these numbers, I’m not trying to discourage you from buying a house or borrowing money for a purchase, but instead trying to encourage you to pay off your loans quickly to minimize the extra money paid in interest so you can keep more of your hard-earned money. How do I do that? I’m glad you asked. The good news is that you are already on your way.
Know how much money your borrowing, for how long and how much it’s going to cost you if just pay the minimum amount over the full term of the loan (we covered this today). Shop around for the best interest rate. Credit unions can sometimes offer a better rate than a larger bank (less overhead).
Don’t pay just the minimum payment. Start by rounding your payment up every month. In my new car example, around $483.32 up to $500.00. You won’t miss the additional $17.00 per month, and at the end of the first year, you will have paid an additional $204 toward the principal on the loan. If you can, increase the amount you pay even more.
Stick to your budget regardless of what income comes in. Did you get a raise or bonus, a birthday gift, or find cash on the ground? Instead of looking at that money as “I wasn’t planning on receiving this money so I might as well spend it.” Use that extra money to pay off your loan quicker.
Take advantage of the months where you get an extra paycheck. If you get paid bi-weekly you will get 26 paychecks per year; 10 months you will get 2 paychecks per month and 2 months you will get 3 paychecks per month. Use the extra paycheck to pay off your loan quicker.
Consider setting up automatic bi-weekly payments (of half your monthly payment amounts). This is a similar principle to what was discussed in item #3. You will actually end up paying extra in principal per year just as a function of how the payment math works out.
Look for opportunities to refinance and consolidate your loan. (Your Financial Pharmacist Comment: This is a big one right now with many student loan borrowers having interest rates on loans in the 6-8%. More to come on this topic in the near future).
Ask for a lower interest rate. Never hurts to ask right? The worst they can say is no.
Cut expenses. Look for financial areas where you can make sacrifices. Cancel memberships and services that you are not using. My wife and I canceled cable and were able to save $50.00 per month. We use Netflix, an antenna, and YouTube and haven’t missed cable at all. Okay, I lied, maybe a little during football season. Go Ravens!
This is not intended to cover all the details about loans or to make you an expert. It’s important to do your research to ask the right questions while applying for a loan. What are the right questions to ask while applying for a loan? I’m glad you asked. Maybe Your Financial Pharmacist will invite me back to answer that question.
If you are reading this and have any other ideas about ways that to pay off a loan more quickly, please share your suggestions in the comments sections.
The following post was written by Jenna Garlock, PharmD, BCPS. Jenna is an Emergency Medicine Clinical Specialist at Cleveland Clinic Akron General Medical Center. She has an inspiring story about becoming debt free in such a short time from graduation.
Coming out of pharmacy school with thousands of dollars in student loan debt was quite intimidating, especially knowing that I was going to have a resident salary for a year after school. I was fortunate to not have the $200,000 of student loan debt like some, but my loan debt was significant enough to require financial planning to become debt free in a timely manner. Through hard work and dedication, I was able to pay off my loans ahead of schedule in 3.5 years! While paying off my student loans I completed a PGY1 pharmacy residency, paid for part of my wedding, and still had money for a few spectacular vacations. Paying off student loans is very doable, but I would not have been able to do it without a few key concepts, which I have outlined below.
Though sometimes tedious, being meticulous with money allocation really decreased financial stress. In order to determine how much money to assign to each subaccount my husband and I set up spreadsheets outlining monthly expenses, wedding expenses, home renovation costs, vacation expenses, and retirement planning. Monthly expenses are necessities, so money was allocated to this first, and the rest based on priorities. Student loan payments were incorporated into monthly expenses, and overpayment was determined by prioritizing “left over” money after monthly expenses were covered. Ultimately, overpayment of student loans is the key to paying off loans ahead of schedule.
Schedule
If planning to pay off your student loans ahead of schedule, it is vital to set and stick to a personal payment plan. My goal was to pay off my student loans in under 5 years, which would require me to overpay each month at least double my monthly payment. There were many times that I wanted to take my overpayment money and buy something different, whether it be for a trip, new clothes or electronic gadget. Though all these items are attractive, the items I wanted to replace were still fully functioning. I realized how paying off my student loans early would allow me to save more for the future, so I stuck to the schedule as planned.
Unexpected income
There are things that come every year such as birthdays, Christmas, opportunities for extra work shift, and tax returns. Usually, these all become a source of unexpected income. Every year I took my Christmas money from grandma and grandpa, money from extra work shifts, and annual tax returns to overpay on my student loans. This was money I was not depending on in the first place, so I treated myself to a couple more months of being student debt free! That was my splurge.
Plan for the future now, even when paying off debt
One of the aspects of life that college does not prepare you for is retirement planning. My husband and I were clueless as to where to even start, so we took a free 4-session class that was offered through his work. The class introduced basic retirement savings concepts, different types of funds, and savings strategies. Saving early was a point that was continually reinforced. For example, assume you have a 6% compounded rate of return. Person A saves $5,000/year for 10 years then contributes $0 for the next 20 years, for a total of $50,000 contributed. Person B saves $0 for the first 10 years then contributes $5,000 for the next 20 years, for a total contribution of $100,000. At the end of 30 years, Person A will have $224,044 and Peron B will have $194,963. The early bird gets the worm! After this class we determined that saving for retirement was as important as paying off student loans, so it was a matter of finding a balance of money allocation. Whatever you do, do not delay retirement saving!
Planning for the Future
Now that my husband and I are officially student loan free there is really no breath of fresh air. Our money just has new allocations like retirement planning, family planning, home improvement projects, and updating cars. Don’t get me wrong, we did take a nice ski trip to Colorado shortly after because that money was no longer dedicated to loan payments. Being student loan free allows you to take advantage of more opportunities in life! Our next big focus is retirement and family planning and setting ourselves up for a successful future.
Through careful planning and dedication, I was able to pay off my students loans ahead of schedule without ever feeling restricted. Hopefully, this gave you some ideas so you can soon be student loan free too!
There are many personal finance books and guides available to us today such as Rich Dad Poor Dad by Robert Kiyosaki, Think and Grow Rich by Napoleon Hill, The Millionaire Next Door by Tom Stanley, or The Total Money Makeover by Dave Ramsey to name a few. While these are all great reads, we should not lose sight that the book we refer to every day for truths on how to live our lives has great financial advice. While these modern day texts have biblically based financial principles sprinkled throughout them to various degrees, why not just go straight to the source to understand how God wants us to manage our money?
Is it any coincidence that the best-selling book of all time has such great wisdom for us in how we should manage our personal finances? What was written over 2,000 years ago is as relevant today as it ever has been. Right in front of us, we have the guiding principles that can help us serve as good stewards of what has been given to us to manage. The Bible has more than 2,000 references on every financial topic you can imagine including debt, budgeting, teaching our children, contentment, cosigning, giving, greed, inheritance, investing and so on. It is almost as if the writers of the Old and New Testament knew we could use some advice in this area of our life. Coincidence? I think not.
I think we all can agree that our society could use a dose of sound financial advice. We are struggling with debt and our capacity to both save and give. Just how much are we struggling?
In terms of debt, a recent study by Nerdwallet revealed the average household with credit card debt has a balance of $15,355, with a total debt owed by US consumers of $712 billion. While credit card debt is concerning, student loan debt is more so with US consumers owing a total of $1.21 trillion (1). According to the 2015 American Association of Colleges of Pharmacy (AACP) Graduating Student Survey, we know that 89% of pharmacy students borrowed money to pay for college expenses with a median balance upon graduation of $150,000 (2). In 2009, that figure was just $100,000.
How about saving for a rainy day? Without a savings account, we run the risk of taking on more debt or borrowing from areas that we shouldn’t borrow from (e.g., retirement) when an emergency strikes. According to a recent survey conducted by GOBankingRates, 28% of respondents had $0 saved in their savings account and 13% had less than $1,000 saved. While those with higher incomes had a higher percentage of savings, the balances in those accounts fall short of the often-recommended 3-6 months of expenses for a fully funded emergency fund. For example, in the income bracket of $100,000-$149,000, where many pharmacists would fall as a minimum assuming one income for the household, only 28% of respondents had $10,000 or more saved, meaning the vast majority do not likely have 3-6 months of expenses saved.
As you guessed, if we aren’t doing so well for saving for a rainy day, we probably aren’t doing well for long-term retirement savings. A 2015 report issued by the US Government Accountability Office revealed that approximately 29% of those in households age 55 and older had no retirement savings and no defined benefit plan (aka pension) (3).
How about giving? After all, the Bible gives us great instruction in this area. According to a study conducted by the Barna group, 5% of adults gave 10% or more of their income in 2012 to a church or non-profit organization (4). It is important to note that several biblical references refer to tithing as giving to the local church whereas this study used a definition of giving to the church or non-profit organizations and calculated the 10% by taking total giving divided by one’s household income.
What the Bible Says about the Ultimate Owner
The earth is the Lord’s, and everything in it.” (1 Corinthians 10:26)
God’s word to us is very clear that we are not the ultimate owner of our possessions. I don’t know about you, but I feel peace in that, especially when we have been given good advice to follow. While we are the ones making the transactions, the source of that income is His and the responsibility for managing that wisely was delegated to us. Our entire financial plan should be built around this truth of being a good steward of what God ultimately owns.
What is exactly is stewardship anyways? Chris Brown, the host of a stewardship radio show (www.stewardship.com), defines stewardship as “handling God’s blessings His way for His glory.” I love this definition of stewardship. How different would our view on personal finances look if we regularly prayed this prayer: “Lord, please help me to be a good steward of Your blessings as You see fit for Your glory.” That quickly changes the focus from us to Him. This prayer in the context of stewardship emphasizes four important points:
First and foremost, we are not the owner;
Second, we need help (‘Lord, please help…’). This may not come naturally to a broken world where greed and pride come into play, especially when we talk about finances;
Third, what we have been given is truly a blessing and we are entitled to nothing;
And fourth, we should handle our finances (aka blessings from Him) for His glory rather than ours.
If we acknowledge who the ultimate provider and owner are, we act from a position of trying to responsibly handle our personal finances for Him rather than for us. It changes the way we approach budgeting, giving, saving and our view on debt.
What the Bible Says about Taking on and Managing Debt
The Bible has nothing good to say about taking on debt.
“Let no debt remain outstanding, except the continuing debt to love one another, for whoever loves others has fulfilled the law.” (Romans 13:8)
“The rich rule over the poor, and the borrower is slave to the lender.” (Proverbs 22:7)
I went to college without a penny of debt and after finishing my pharmacy degree and completing residency, I had well over six figures in debt. I was sold the argument that debt would not be an issue since I would be making a significant income coming out of school. While my wife and I did not live an extravagant lifestyle by any means, we had borrowed money we had no business borrowing for things we didn’t need to buy. It all seemed so normal and manageable. ‘We had it under control,’ we thought. We had a good income and never thought twice about taking out debt for things that seemed ordinary such as buying a home, regardless if we were ready. After all, the bank said we were ready. In hindsight, it is hard not to laugh and be a little embarrassed about that considering the banks are encouraged to loan us money to make money on the interest of the loan. Of course, they didn’t bat an eye at the fact we had nowhere near 20% to put down on a home, didn’t have a fully funded emergency fund and still had over $100,000 in school loans at the time.
Debt repayment and taking on debt, is a sensitive topic to discuss, even amongst Christians. I think we get caught up too often in petty debates about debt and miss the point. We debate about interest rates and loan forgiveness programs and good debt versus bad debt. Whether or not a Christian should take on any debt is an interesting debate but not the main point. In my personal experience of having significant student loan debt, the bigger point is the impact debt can have on your life.
There is a weight that is on your shoulders when you are in debt. I didn’t realize this until we got out of debt. That weight dictates other parts of your life. For example, discussions about giving and seeing opportunities to help others comes up lot less often when we were worried about the next big student loan payment. Our eyes were focused on the here and now of that debt rather than looking towards the future and what plans God may have for that money.
At the end of the day, debt is risk. Some debt is certainly safer than others but it is a risk nonetheless. For example, if someone buys a house and only puts 5% down and the housing market tanks and/or values drop in the neighborhood, they may now owe more than they own and therefore could be at risk for foreclosure and/or not having the flexibility to move if a situation would arise where that may be needed.
The vast availability of credit in our culture allows us to buy almost anything without having the money to pay for it. Whether that be a house, car, or new couch, we can get what we want, when we want with having little to no money up front to pay for it. What is the risk? Either buying things we don’t need and/or buying things before we are ready to do so. This inserts the temptation to live a more lucrative lifestyle than we can really afford. It is a slippery slope.
What the Bible Says about Giving
The Old Testament has numerous references to giving in the context of ‘tithing’ or giving a tenth of your income (Genesis 14:20; Genesis 28:20-22; Leviticus 27:30-32).
I love the idea of giving the ‘first fruits’ that is referenced many times in the Old Testament (Exodus 34:26; Leviticus 2:12; Numbers 28:26; Deuteronomy 26:1-2; Proverbs 3:9) and strongly believe that is something we should apply today. Giving the first portion of our income to God’s kingdom reminds us that He is the ultimate owner and that we are called to be good stewards of what He provided.
There is a stark contrast between the context of giving in the Old and New Testament. In the Old Testament and under the law, there was an expectation to give 10%. It was legalistic in nature. Under the New Testament, giving is referenced in the context of generosity (not ‘what is the bare minimum’?) and it is a cheerful, sacrificial giving.
“If I give all I possess to the poor and give over my body to hardship that I may boast, but do not have love, I gain nothing.” (1 Corinthians 13:3)
“Each of you should give what you have decided in your heart to give, not reluctantly or under compulsion, for God loves a cheerful giver.” (2 Corinthians 9:7)
While we are under God’s grace today and no longer the laws of the Old Testament, I strongly believe there is value in keeping the tithe. The Pharisees gave us an example to learn from: the amount is not the priority to God. Rather, what matters is our attitude and love towards Gods.
“Woe to you Pharisees, because you give God a tenth of your mind, rue and all other kinds of garden herbs, but you neglect justice and the love of God. You should have practiced the latter without leaving the former undone.” (Luke 11:42)
So what are we to do with the advice we have in front of us regarding giving?
I feel convicted that giving should be a part of our budget as a minimum (the tithe) with flexibility to increase giving for various needs that you become aware of after you are walking down a sound financial path yourself. When exactly are we heading down a ‘sound financial path’? There are lots of opinions on this and while the Bible doesn’t give us the exact answer in the context of today’s financial world, I personally believe this means being out of non-mortgage debt and having an emergency fund built up.
What the Bible Says about Saving
When it comes to saving, finding the appropriate balance between saving wisely while avoiding greed is difficult and one with which many Christians struggle. On one hand, there is wisdom in planning for a rainy day and taking care of your family now and in the future. On the other hand, there is a fuzzy line between building up a cushion for a rainy day and caring for your family and lusting after a large nest egg.
Take a look at Matthew 6:19-21 to see what I mean about how this can be a struggle for us:
“Do not store up for yourselves treasures on earth, where moths and vermin destroy, and where thieves break in and steal. But store up for yourselves treasures in heaven, where moths and vermin do not destroy, and where thieves do not break in and steal. For where your treasure is, there your heart will be also.”
How can we be wise and save but protect ourselves from greed?
First, giving must be a priority. If we are regularly giving and making that the priority, our heart is likely to be better aligned to recognize who the ultimate owner is, and we can avoid focusing on saving for selfish reasons.
Second, we should ask ourselves what goal we are trying to achieve with saving? We are warned against saving to become rich (1 Timothy 6:9) but are encouraged to provide for our family (1 Timothy 5:8) and leave an inheritance (Proverbs 13:22).
I had a great conversation with one of my best friends and pastor at my home church about using money now to help those where there is an immediate need versus investing those funds for the future. We were specifically talking in the context of giving above and beyond the tithe. On one side, you may argue that if there is an immediate need, why wouldn’t you help now? On another side, you may argue that if you saved that money and invested it wisely over 10, 20 or even 30 years, the result would be a sum that could go much further than the money today. We came to a conclusion that this has to come down to two things. First and foremost, prayer. Go to God in these situations and ask for His wisdom in providing for His kingdom now or saving for His kingdom and caring for your family in the future. Second, where does your heart really lie? This may be exposed during prayer. If an immediate need to help is on your heart, the answer may be obvious from the Spirit. If not, seek God in prayer for how He wants you to best use this money.
So what about investing for retirement? Believe it or not, the Bible mentions the idea of retirement (Numbers 8:24-26). However, I’m certain the intent was not what we see portrayed on commercials today of longing for a day where we can disengage from work with a mass of money saved up to travel, play golf or do ‘all the things’ we wanted our whole lives.
Check this out. The Bible even gives awesome advice on how to invest including diversifying our funds (Ecclesiastes 11:2), avoiding unnecessary risk (Ecclesiastes 5:13-16) and being steady in our investment plan (Proverbs 21:5). It’s almost like God knew about the challenges we would face in today’s stock market. Oh wait, He did.
Saving a certain percentage of your income each and every month, with a diversified portfolio that matches your risk tolerance is the key to reaching your saving goals. Simple as that!
Stay the Course
Following the biblical principles for managing your money such as avoiding debt and giving away significant percentages of your income will feel at times like you are flying into a strong headwind that is our society. We are dependent more on debt today than ever before, are pressured to keep up a certain lifestyle that others around us may have, and we are tempted to forego giving to others to fund a lifestyle that we can’t afford.
It is important to note that none of the above has to do with our salvation. Therefore, managing your money wisely is not a salvation issue. Managing your money wisely is what we have been called to do; similar to how we are called to love our husband or wife and our children.
We are called to be good stewards of our resources and the Bible is very clear that our eyes need to be on Him and the hope that came in His Son rather than putting our hope in wealth. In Matthew 6:24, Jesus says, “No one can serve two masters, for either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve God and money.” We should be wise about handling our personal finances and spend time and efforts on thinking about these areas within our life including budgeting, saving, and giving. However, if we start to be drawn to our money or our focus becomes on accumulation and moves away from Him, we have been warned and need to go to Him in prayer to be centered on the goal.
We have advice right in front of our eyes that has been tried and tested for over 2,000 years. Isn’t there wisdom in taking that advice?
References
2015 American Household Credit Card Debt Survey.
American Association of Colleges of Pharmacy (AACP) Office of Institutional Research and Effectiveness. Graduating Student Survey: 2015 National Summary Report.
United States Government Accountability Office. Report to the Ranking Member, Subcommittee on Primary Health and Retirement Security, Committee on Health, Education, Labor and Pensions, U.S. Senate. May 2015.
Assuming you will retire at 65 and die at 82 (morbid, right?), how much money do you think you will need to have saved for retirement? Furthermore, what factors led you to come up with that figure?
In order to estimate a dollar amount needed to retire, we need to make some assumptions including the following:
Life expectancy
Age of retirement
Salary increases
Rate of inflation
Percentage of working income needed to live each year in retirement
Rate of return on our investments before and after retirement
Once we make these assumptions we can come to a dollar amount needed to reach financial independence or better known as the point when one can retire and replace his/her income without having to work. What a sweet moment, right?
While this won’t be a perfect assumption considering variables that can come into play that have a significant impact on the end goal such as uneven growth in investments through the working years, unpredictable changes in income, and investments fees, it is a good place to start. Therefore, let’s walk through an example together that has three different scenarios to highlight how changing one or two variables can have a significant impact on the result. You can then change the assumptions and run through it yourself.
As of today, if a male were born in 1984, he is expected to live to be 82 years old (check out your own life expectancy at https://www.ssa.gov/OACT/population/longevity.html). Therefore, if this individual were planning to retire at the age of 65, he would have to have funds available to live for 17 years beyond the date of retirement. For this example, let’s assume this pharmacist is making $120,950; the median pay cited by the 2014 Bureau of Labor Statistics.
When we make assumptions on the factors noted above, we need to keep a few things in mind.
First, what is your desired retirement age? Yes, lots can change along the way for lots of reasons but if you could choose your desired retirement age right now, what would that be? This will have a significant impact on the calculations as you will see in a minute.
Second, what percentage of your income during the working years do you want to have available in retirement. 80%? 100%? 120%? You can choose any number depending on your desired lifestyle in retirement. Often you will hear that a lower percentage of your income (such as 80%) is reasonable to have during retirement with the assumption that expenses during one’s working career will be higher than that during retirement. For example, during retirement, the goal would be to have a paid off home without any monthly mortgage payment like was being made during working years. The counter to this argument could be for someone that desires to have significant expenses in retirement (e.g., travel, buying a second home, etc.) or would like to be in a position to give away money at a rate he/she wasn’t able to do during the working years. In this case, an assumption of 100% of today’s salary (in future dollars) is reasonable or maybe even 120% depending on your desired lifestyle during retirement.
Third, what rate of return do you anticipate you will get on your investments before and after retirement? While much of this is out of our control based on the volatility that comes along with investing, a projection can be made based on how conservative (assumed lower %) or how aggressive (assumed higher %) you may be in your investment approach. In future articles, I will spend lots of time covering types of investments, advantages/disadvantages to those investments and factors to consider when putting together a portfolio that matches your goals and risk tolerance. For now, let’s make it simple by choosing a lower assumption (such as 6%) if you tend to be more conservative and a higher assumption (such as 8%) if you tend to be a bit more aggressive. Some could argue the 6% isn’t very conservative and 8% isn’t very aggressive, but for the ease of making these assumptions, let’s go with it. If you want to be more conservative or aggressive, you can make those changes when running the numbers yourself.
So, let’s get back to our example of a male born in 1984 and look at three different scenarios. For all three scenarios, we will assume he has no retirement savings to date. Hopefully, that is not the case but certainly not an unheard of scenario considering many new graduates are strapped with significant debt coming out of school. Take note of the numbers in bold that are the factors that are changing between the three scenarios.
Assumption
Scenario 1
Scenario 2
Scenario 3
Current age
32
32
32
Salary
$120,9501
$120,9501
$120,9501
Current retirement savings
$0
$0
$0
Projected age of retirement
65
67
70
Years of retirement income needed (based on life expectancy of 82)
17
15
12
Expected income increase (per year)
3%
3%
3%
Projected rate of inflation (per year)
3%
3%
3%
Percentage of current income (in future dollars) needed in retirement
100%
90%
80%
Pre-retirement investment returns
6%
7%
8%
Post-retirement investment returns
3%
3%
3%
Assume Social Security Benefits?
No
No
No
Amount saved at date of retirement
$5.4 million
$4.6 million
$3.6 million
Amount needed to save each month to reach retirement goal
$4,990
$3,001
$1,496
1 Average pharmacist salary according to Bureau of Labor Statistics, 2014
Wow, what a difference! In Scenario 1, he would have to save $4,990 per month all the way up until retirement to reach his goal. That would be well over 50% of his salary to start and likely not a realistic scenario. Compare that to Scenario 3 where he would have to save $1,496 per month to reach the retirement goal. Still a lot per month but much better and more realistic at about 20% of his salary. While we may not like the assumptions used in Scenario 3 such as having to work until 70, having to live off a lower percentage of income during retirement or assuming more aggressive returns on investments during the working years, the key is we have a goal in place with reasonable assumptions that will inform a plan to achieve that goal. Without that goal, we are hoping to have enough saved for retirement but may fall significantly short and/or be unpleasantly surprised as we near that age.
One last thing worth discussion is the power of starting early. In scenario 3, if this individual would have started at 26 instead of 32, he would be able to reduce the amount he needs to save per month towards retirement by $395 to meet the same goal of having $3.6 million saved. I don’t know about you but an extra $395 per month is a big deal!
So how does this example compare to the number you wrote down just a few minutes ago? Maybe it shocks you or maybe it validates your thinking. Regardless, once we get to this point we can now determine a plan for what needs to happen each year, or even each month to achieve this goal.
So here is your Financial Homework this week. Play around with the retirement calculator at https://www.dinkytown.net/java/RetirementNestegg.html You can make your own assumptions to determine your retirement number and then work backward to figure out how much needs to be saved per month to achieve that goal.
One final thought. Remember that saving for retirement is one of many financial goals and should be considered in the context of those other goals such as giving, saving for kids college, paying off the house, etc. Do not jump into changing one factor of your financial plan without considering the others.
P.S. If you didn’t figure it out, the example used in this post is based on my birthday! Therefore, I have 50 more years to live according to the life expectancy calculator. Jess and I are currently saving 22% of our income towards retirement so we are close to being on track to achieve the goal but have some work to do!
According to the 2015 Salary Survey conducted by the Ohio Pharmacists Association, the average yearly salary for a pharmacist in Ohio is $121,388.1 In comparison, the median household income in Ohio between 2009-2013 was $48,308.2
It is tempting for us to be lulled into the comfort of an income that is more than 2x the median household income. We worked hard to obtain that degree and should enjoy that income, right? Yes, of course we should enjoy the blessing we have been given but we also have a responsibility to manage that income wisely. It can be easy to become complacent with a six figure salary where your expenses slowly rise while time is ticking away with little to no progress made on other important financial goals such as eliminating debt, saving for retirement and having the ability to help others through giving.
Almost 1/5 (19%) of Americans spend more than they earn3 and 3/10 adults don’t save any portion of their household income for retirement.4 We, as a culture, often spend too much and don’t save enough. The result? Feeling like we are living paycheck to paycheck despite having a six-figure income.
The good news is that for pharmacists we have the hard part taken care of (the good income) and now we need to make sure we are doing the dirty work to manage the expenses side so we can win financially in the long run.
Here are three tips to help you on your journey to achieve financial freedom.
#1 – Get out of non-mortgage debt as soon as possible.
Getting completely out of debt is the ultimate goal, however, here I am specifically talking about non-mortgage debt. For pharmacists, the largest area in this bucket is likely to be student loans. According to the 2014 National Pharmacist Workforce Study, pharmacists within five years of graduation carry an average debt load of the $108,000. In 2004, that figure was just $42,000.5 A six-figure debt coming out of school is A LOT of debt.
There are two main reasons why I am a proponent of paying off debt as soon as possible coming out of school rather than making payments over 10+ years. First, you gain some momentum with early financial wins that will give you some breathing room and empower you that you can succeed long term with your personal finances. Second, it often forces you to get serious about making a budget to avoid adjusting your lifestyle up too much when you take that first job. What does minimum payments do for you on your student loans? For someone that isn’t disciplined, it may give him or her the impression they have more room in their monthly budget than they actually do if they were paying these loans off faster. The result? Often living up to a higher income by making a significant home purchase, buying nice cars, clothes, etc. because there is more cash flow ‘available’ on a month to month basis. There is nothing is wrong with enjoying some of your income but I’m convinced that the lifestyle you maintain in your first 5-7 years out of graduation will be close to the lifestyle you maintain in the long run. Therefore, if you make a commitment to pay off loans faster, you will be more likely to set a budget and keep your expenses down over the long run.
If you have low interest non-mortgage debt (e.g., student loan at 3%, car loan at 2%, etc.), there can be an argument made to pay minimum amounts on those loans to also focus on saving for retirement where you may have a higher return on your investments. However, if you, like I did, have many high interest rate loans (6-7%), I don’t think that argument carries much weight and would urge you to focus on getting out of debt before focusing heavily on achieving other financial goals (e.g., retirement savings, buying your dream house, etc.)
Why all the fuss about getting rid of debt? If not managed properly, it can hinder your ability to save for the future and give you the feeling of not making much momentum towards achieving your financial goals. For example, according to the 2015 Consumer Financial Literacy Survey, 58% of those paying off their own student loans or children’s loans noted being unable to establish emergency or retirement savings or purchase a car due to the financial commitment those loans required.4
#2 – Work towards putting away 15% of your gross income per year.
Some of you may say, “check, already done.” For others this will be a gut check. If you do the math on 15% of the average salary quoted earlier in this article that would be $18,208 per year or $1,517 per month. It is hard to put away that kind of money when you are strapped with debt and as I suggested earlier, I would wait on making serious progress towards this goal until you are out of debt; especially if you have high interest rate student loans.
If you can get in this habit early, it will pay off BIG TIME in the long run. The two keys to building a large nest egg that will last you throughout retirement include time (1) starting as early as possible so compounding interest can do the hard work for you, and (2) being consistent (doing this every month over many years). I shared in an article recently on Pharmacy Times that a pharmacist doing this out of graduation should easily become a multimillionaire in his/her lifetime. If 15% seems to big of a jump to start, just like we counsel patients on diet and exercise, start small, get some wins and build off of those wins. Maybe it starts at $100 or $200 per month.
#3 – Budget off of a reduced portion of your take home pay.
I get it. It’s not that sexy topic to talk about, but if you are struggling with managing your day-to-day finances and feeling like you should have more money available earning the type of income you do, it is time to get serious about setting a budget. This was the hardest but yet most impactful part for my wife and I in our journey to pay off $200,000 in debt. The budget we used to do this was pretty intense but allowed us to make significant progress in a short period of time to keep us motivated along the way.
I am convinced that the key to being successful with debt elimination and saving for retirement is this step. You have to make debt elimination and retirement savings a priority, rather than an afterthought, and the way to do that is by making them a line item in your budget.
In order to free up the money to do steps #1 and #2, get in the habit as soon as possible to set your budget off of some reduced portion of your take home pay. For example, if your take home pay is $7,000, set a budget at 75% or $5,250 per month. Now we have $1,750 per month to throw at debt, save for retirement, purchase a home, boost our giving, etc. I get it. It is hard and sounds way easier than it is. I’ve been there. But when your financial priorities become a priority through which you set the rest of your budget, the magic begins to happen.
The following post was written by Ben Michaels, Pharm.D. Ben is an assistant pharmacy manager for Kroger Columbus KMA. He received his Doctor of Pharmacy degree from University of Cincinnati’s James L Winkle College of Pharmacy and completed a community residency program with Fred Meyer/Oregon State. In addition to practicing as a pharmacist, Ben works with students at The Ohio State University to help orientate resettled refugees to using community pharmacies in the United States. He aspires to enable pharmacists and pharmacy students understand finances and achieve their financial goals. If you have any questions for Ben, please contact him at [email protected]
Does the thought of saving $3 million by the age of 65 make you uneasy? More importantly, how can you do it? Using the average pharmacist salary of approximately $117,000, let’s assume that a pharmacist graduates at age 25 and starts saving 10% of his/her average salary until 65. This pharmacist decides to put all the money under his/her mattress. Over the next 40 years this pharmacist would be sleeping on $466,680. While the pharmacist did a great job at saving, this leaves him/her over $2.5 million short of achieving our goal and sleeping on a very uncomfortable mattress!
So where are we going to get the extra millions from? A 401(k) (or 403(b) or 457(b) if you work for certain organizations) is one of your best tools for making up this difference. Throughout the rest of the article, I will use the terminology 401(k) to represent these employer-sponsored retirement plans. For many pharmacists, these terms may be something that you have heard of, but may not fully understand. After all, you graduated with a pharmacy degree, not a degree in finance! To summarize these types of accounts, they are a retirement savings account sponsored by your employer normally managed by an outside financial institution. Here is a link from Investopedia that provides more information.
There are three major advantages to using a 401(k) as a savings vehicle for retirement:
Your contribution to a traditional 401(k) is tax deductible. What this means is that if you earn the average pharmacist salary of $116,670 and contribute 10% of your salary ($11,667 per year) to a 401(k), your taxable income for the year is now $105,003.
The contributions (employee and employer match) to a traditional 401(k) grow tax-free. However, it is important to note this money will be taxed upon withdrawal. While we won’t spend time in this article discussing the Roth 401(k), it is important to note this option may be available to you in your employer offered retirement plan. In a Roth 401(k), you will pay income taxes on your contributions but your account will grow tax-free and you won’t have to pay any taxes on your withdrawals during retirement.
Many employers will match a percentage of your 401(k) contributions. Let’s look at a potential scenario again using the assumptions from above.
If the mattress money stocking pharmacist from above put the same amount of money into a 401(k) account that didn’t make any interest at all in 40 years, but his/her employer matched 3% of the contribution, instead of amassing $466,680 over 40 years, he/she would have $606,684. That’s an extra $140,004 just from the employer that would be lost if he/she did not take advantage of the 401(k) plan!
Hopefully the above information will have convinced you to start contributing to your 401(k) plan if you aren’t already. So now that you are ready to contribute, where can you get more information on managing your account? Fortunately, there are some great websites that can provide you with tools to help you plan your retirement.
The website Investopedia, which I already reference above, is a page that provides definitions and general information related to investing. There are articles on managing a 401(k) and also some useful budgeting tools. This site is a good starting point to learn many of the basic terms and theories used in the financial world.
Once you get your retirement account up and running, you may see that you have some options with regards to how you wish to allocate the money that you are saving in the account. Futureadvisor is a free service that allows you to link your 401(k) through their website and then gives you investing advice based on an analysis of your account. The alternative to this would be meeting face to face with a financial planner, which is also a great option if you are unsure about how to invest your savings.
If you want to work out the numbers and see what adding a bit more money each month will do long term, you will want to use some financial calculators. Just like calculating vancomycin peaks and troughs, you can do this all by hand, but using a calculator makes it much easier. Bankrate and Smartasset both have calculators for almost every financial situation you can think of. Besides retirement calculators, these sites offer calculators for real estate, loans, relocation, and many other categories.
You probably already use the internet to read reviews of products or services that you are looking to purchase and financial services are no different. A helpful site that reviews investment accounts along with credit cards, bank savings and checking accounts, insurance, mortgages, etc. is Nerdwallet. If you are looking to open any type of financial account, this site is a great place to do some research first.
The last sites I want to mention are robo-advisor sites. The two major sites are Betterment and Wealthfront and you can find reviews of each on the previously mentioned Nerdwallet. If you find yourself in a position where you want to start a retirement account but your employer doesn’t offer a 401(k), these sites both provide a way to invest funds and then use computer algorithms to do the investing and trading for you.
Returning to the previous example of the mattress money-stocking pharmacist, let’s compare what his/her savings might have been if he/she invested for 40 years in an employer-sponsored traditional 401(k) where the employer matched 3% and the average annual rate of return was the 8% using this calculator from Bankrate. Under the same assumptions previously mentioned this pharmacist would have $4,097,413 saved in their retirement account at age 65. Even with a conservative average annual return of 4%, this pharmacist would still have 1,472,308 saved at age 65 or $865,624 more than his mattress-stuffing peer. I invite you to use the calculator and plug in your own financial numbers and see the difference that 401(k) contributions can have on your retirement savings.
At the time of writing this article, I was sitting in a Honda dealership getting some service done on my 2005 Honda Odyssey that has just over 150,000 miles on it. Jess (my wife) and I bought this used car back in 2011 right before my oldest son, Samuel, was born. It had just under 70,000 miles logged and we have beat it up pretty good with our many trips to Toledo and New York to see family. Lots of good memories in this car.
The license plate lights were out and the water guards underneath the van were falling off. I also asked them to take a look at the brakes as Jess noticed they seemed a bit shaky. I had come in that day hoping to leave with a bill for $100 or less.
Come to find out, the rear brakes were shot and needed replaced and the front ones weren’t too far off. The total charges were going to be over $700. It was time to dip into the emergency fund.
Why does having an emergency fund matter? Peace of mind. Peace of mind in knowing that the emergency isn’t going to blow up and derail our monthly budget and peace of mind knowing we can keep moving forward with our plan to achieve our short and long-term financial goals.
Am I annoyed that I have to fork over more than $700 to repair the minivan? Of course I am! Who wouldn’t be? Is it going to ruin my day? No, with the exception that I can’t help think what that $700 would be worth in 25 years if I were able to invest it rather than hand it over to the Honda dealer. I’ll get over that (eventually). Is it going to derail Jess and I from achieving our long-term goals? Absolutely not. Is it going to cause a big fight between Jess and I? Nope. We prepared for moments like this so we can write the check, work to build back up the emergency fund and move on.
I am confident that achieving long-term financial goals requires having some barriers between you and life’s emergencies to allow you to continue to pursue those goals when life creeps up on you.
Let’s face it. An unexpected expense is likely to happen so why not plan for it? According a recent Bankrate survey conducted, 4 of 10 respondents or their immediate family member experienced one or more major unexpected expense in the last year. Who knows what it could be? An unexpected root canal, emergency surgery for your pet, transmission gone bad, or a health care bill from a high deductible plan. The list could go on and on. The point is we can’t predict the unexpected event but we can plan to be ready financially when it does happen.
What should an emergency fund look like? A good rule of thumb is saving up 3-6 months of expenses (not income) in a place that is readily accessible (and separate from your other account where expenses are made) such as a simple savings account or money market savings account. If your monthly income and expenses are the same, it is time to get serious about that budget!
Don’t get too excited about the annual percentage yield (aka how much interest you will earn per year) on a simple savings or money market account. A quick search online at the time of this post showed savings accounts having rates hovering around 1% and money market savings accounts around 0.75-1%. If you are looking for an account, you can go to Bankrate to search for the best rates. You should also check with the bank you are already using to see if their rates are competitive. Save any excitement for returns to your retirement savings. The goal here is just security and protecting your financial plan.
Three tips to consider when building your emergency fund
Determine if you want to have 3 months of expenses, 6 months of expenses or somewhere in-between. Two main factors that impact this decision include your money personality and your ability to get extra cash if needed. First, and most importantly, what is your personality when it comes to money? Can you sleep better at night knowing you have an extra cushion in the event of an emergency? Where applicable, make sure to take your spouse’s personality into account when making this decision. I always suggest that if one partner wants to be more conservative (6 months of savings) and the other more aggressive (only 3 months), it is best to err on the side of 6 months. The second major factor has to do with your ability to get extra cash quickly in the event of an emergency. For example, in the event of a major health crisis or a job loss, can you or your spouse pick up some extra money through working extra shifts to avoid having to borrow to cover the expense? If yes, maybe you err towards the 3-month end of savings. Thankfully, pharmacists are currently in a good spot to pick up some extra work or a new job.
If you are not yet at your desired amount for an emergency fund, make this a budget item to pay yourself first rather than trying to scrape up what is left afterwards. Obviously you want to build this up as fast as you possibly can but if you are several thousand dollars off, determine what that difference is and divide it by 12 to make a plan to save that much per month over the next year to catch-up. For example, if you have $8,000 saved and determine that you need closer to $12,000, take the difference and divide it by 12. The result would be saving $333 per month for 1 year to have a fully funded emergency fund. If you find yourself struggling with how to make that amount a part of your monthly budget, you can extend that past 12 months or better yet, look for other areas to cut so it can fit.
Re-evaluate the amount needed in your emergency fund every year for significant changes that may alter how much you want to have saved. For example, if you purchase a home, have a baby or move from residency into your first job, your 3 or 6-month amount needs to be adjusted.
Here’s the fun part. As you tighten up your budget and your expenses go down, the amount needed in your emergency fund is less and you can get on to focusing on other financial goals (retirement, giving, travel, etc.) faster. That is good motivation to get your monthly expenses down.
Financial Homework (your first one!): Determine if you have a fully funded emergency fund and if not, outline a plan to get there.
In 2002, I graduated from high school and was on my way to start pharmacy school at Ohio Northern University. At the time, I did not have a penny of debt. My parents had done an awesome job of teaching me the importance of work and managing that income in a responsible way divided between giving, saving and spending.
Fast forward to 2009, just 7 years later, and I had obtained a doctorate degree, was married, and finished residency training. I was now over $200,000 in debt.
It all seemed so normal and manageable. ‘I had it under control,’ I thought. I was making a six-figure salary and never thought twice about taking on that much debt.
‘It wasn’t even stupid debt,’ I rationalized in my mind. No credit card debt. No fancy cars. No extravagant toys. My wife, Jess, and I seemed to be living a normal, reasonable and responsible life.
In 2012, the humbling moment had arrived. I was broke.
The reality was sinking in…I had a great income, but didn’t own anything and owed a whole lot. At the time, I had a net worth of negative $225,000.
The reality of being broke with a net worth of negative $225,000 hit Jess and I over the head pretty hard. We had come to realize that this reality of being broke meant that:
Despite our hopes and dreams, we were not in a position to move to a larger home in a more convenient location.
We were not able to go on the vacations we had desired or if we did, we would feel stressed due to delaying progress on paying down the debt.
We were not in a position to give to those in need at the level we had desired.
With the reality sinking in of what it meant to have a negative net worth of $225,000, I found myself confused. Why in the world was I broke and feeling like I was living paycheck to paycheck despite having a six-figure income?
I also felt trapped that in the event of an emergency or wanting to make a job change in the future, that decision was largely made for me since I had so much debt.
Like many other pharmacy students, I once had dreams of a great income that would allow me to have financial flexibility and freedom. Being strapped with $200,000 in debt was far from flexible and free.
No More Being Broke
In 2015, just 6 years after finishing residency training, Jess and I hit submit on our very last payment of over $200,000 in non-mortgage debt. We finally had financial freedom, flexibility and peace of mind!
When we hit submit on that last student loan payment, the feeling was one of pure joy. We now had more than $2,000 per month now freed up to pay off the mortgage early, save for retirement, give, have some fun and save for our kids’ college education.
The feeling of living paycheck to paycheck each month was finally gone.
Rather than being trapped and confused, Jess and I felt in tangible ways the reality of being debt free:
We were able to cash flow vacations within 1-2 months of saving and enjoy these vacations free of any worries of whether or not we should be having fun or paying down debt.
We were able to give over $8,000 to urgent needs in our community within a 12-month period.
We were able to start paying down our mortgage and build some equity in our home so we could have the flexibility and freedom to move if we desired without having to go back into debt.
There is a Better Way
If you are in the weeds of paying off debt, feeling like you will never get those loans off your back or frustrated with the fact that you are feeling financially pinched despite making a great income, I’m here to encourage you that it can be done and is worth the hard work to get it done!
Pharmacists today are facing an unprecedented financial situation that pharmacists in the recent past did not have to deal with. It is not normal, nor healthy to be in six-figures of debt despite making a six-figure income. Graduates are coming out of pharmacy school with a median student debt load of $150,000 and an income that is slowly eroding because salary increases are marginal compared to the increase in debt loads.
More than ever, you, as a pharmacy professional, have to take control of your personal finances or it will take control of you.
By working hard and following a step-by-step plan, Jess and I went from a net worth of negative $225,000 to a positive net worth of $265,000 in an 8-year period. That is almost a half-million dollar swing in just 8 years!
