This spring, over 14,000 pharmacy students were awarded a Doctor of Pharmacy degree. Those graduates (except for those entering residency training) will be making approximately $120,000 per year depending on where they live and the type of practice they choose. Assuming most of these individuals will work 40 years with an average raise/cost of living adjustments of 3% per year, they will earn approximately $9 million during their career as a pharmacist.
If we assume 30% of that income (after deductions and credits) goes to Uncle Sam for federal income taxes, state income taxes and FICA and another 5% goes into a 401(k) or other employer sponsored retirement plan, approximately $6 million will make its way into the bank accounts of those pharmacists during their career.
Whoa.
That’s worth saying again. Recent pharmacy graduates will have approximately $6 million showing up in their bank accounts when it is all said and done. Remember, this assumes one household income, cost of living adjustments that only match inflation rates, and a career that lasts only 40 years.
What about for you? This total amount could be more or less depending on when you started working, how many years you work before retiring and how your salary changes throughout your career. Regardless of any one of those factors, it will still be a lot of money earned throughout your career.
That, of course, is the good news. Pharmacists have a great income to work with and if managed wisely, it should be way more than enough.
So what’s the bad news?
As we all know, when it comes to our finances, it is easy to go month after month without thinking much about the bigger picture. Over the past year, I’ve talked to way too many pharmacists that describe the feeling of living paycheck to paycheck despite making a six-figure income.
It doesn’t have to be this way. In fact, it shouldn’t be this way.
Why is this the case for so many pharmacists? Often, it is a result of not having a plan in place to direct where that money is going each and every month. How do I know? That is exactly how my Jess and I felt during our journey to pay off $200k in debt. We felt like we were living paycheck to paycheck (money in, money out) and doing that month after month soon become year after year (thankfully only a couple!) before we got serious about directing where our money was going. The reality was that we thought we had it all under control but in fact did not. After all, we didn’t rack up any credit card debt, we bought a reasonable home that was well under what the bank suggested we could afford and lived a pretty modest lifestyle. However, we didn’t have a plan in place that was directing where our money was going and a combination of expenses that weren’t in check quickly sucked up our income.
As we got serious about getting out of debt, we quickly realized that living intentionally with a plan that we were directing rather than doing a ‘good job’ and not overspending our income was two very different things.
It doesn’t matter if you make $50,000, $150,000 or $250,000 per year, without a plan expenses typically creep up and money comes in and out each month without much thought and direction.
What if instead you took a step back and asked yourself these three questions?
Do I have a good plan and system in place to wisely manage this $6 million that will be afforded to me throughout my career?
Have I set short and long term financial goals?
Does my monthly spending reflect my financial goals?
Don’t Let the Big Income Fool You
I’ve made my fair share of financial mistakes and many can be linked back to the complacency that comes along with a good income that can fool you if you aren’t careful. We all have had those months of falling off the wagon and not being intentional about directing where our money is going but we cannot let that be a trend over our careers or $6 million will come in and go out. The result will be working for years without much to show for that hard work.
Remember, this isn’t about being rich and putting together a plan so we can stockpile a bunch of cash. It is about responsibly managing our money so we can balance (1) enjoying what has been given to us, (2) saving for the future and (3) giving to others.
Your Financial Homework:
Do you feel like you are living paycheck to paycheck? If so, are there some areas you can make some easy cuts that will allow you to throw some of your income towards other goals such as retirement savings, giving, or paying more down on debt? For Jess and I (and I’m guessing for many others as well), our car payments were a big barrier to us being able to free up some cash. This might be a good place to start to get some momentum.
Furthermore, do you have a plan in place for managing this $6 million that will show up in your bank account? If not, today is the day to start! If you are looking for a place to get started, here is a basic financial goals worksheet and budget template.
Whether you are just out of pharmacy school with $200,000 in debt or in your mid-career with no debt and a half-million dollars or more saved for retirement, a plan that helps direct your money month to month is essential. John Maxwell is quoted as saying “A budget is telling your money where to go instead of wondering where it went.” Now that is the way to ensure that $6 million doesn’t slip through your hands without purpose.
Over the past six months, I have given a handful of talks to various groups of pharmacists and pharmacy students outlining how we (myself included) can better manage our money. One of my favorite questions to ask the audience is “How confident are you in your ability to become a millionaire by the time you retire?”
The typical response is one of silence.
So I ask for a raise of hands and just about every time a small handful will say they are “very confident” they can save a million dollars or more while the majority say they are not confident at all they can achieve this goal.
It is clear that talking about becoming a millionaire is not a comfortable topic for most.
For some, I get the feeling it is uncomfortable to talk about becoming a millionaire in a culture where we don’t openly talk about money very much. Separate conversation for another day but if we want to help each other and teach our kids how to handle money appropriately and wisely, we need to talk about this more often. For others, I think the mountains of student loan debt make it hard to see into the future of saving a million dollars. And for many, I get the impression that accruing a million dollars seems like a scary number that is out of reach.
In fact, most millionaires inherited their money, correct?
I thought the same until I read The Millionaire Next Door by Tom Stanley where his research shows that the majority (80-85%) of millionaires in America are 1st generation. That means that most millionaires are you and I that diligently plan for the future and save each and every month over a long period of time.
Here is the thing. We have to change the tone of this conversation about becoming a millionaire. It is not a bad thing, it is not greedy and it certainly is not impossible. In fact, I contend that most pharmacists that plan to retire at a reasonable age (say 65-70 years old), that will live into their 80s or 90s and desire to have a lifestyle that resembles their working years (or somewhere close), it is not a question of “Do you think you can save a million dollars?” but rather a fact that “You need to save a million dollars.”
The math doesn’t lie.
Here is an example to highlight this using a Nest Egg Calculator. I would encourage you to run the numbers yourself based on your personal situation. If a pharmacist is 30 years old and has $50,000 saved in retirement, plans to retire at 65, will live to 85, desires to live off of 80% of his/her current income in retirement and is modest in their investment approach, he/she will need to have approximately $5 million saved for retirement.
That makes sense when you think of inflation and the fact that there would be twenty years (after retirement) where savings would need to fund a lifestyle where there is no income. Certainly the variables can change such as working longer, living off a lower percentage of your current income during retirement, or assuming you will have social security benefits available. However, no matter what changes you make (unless you work until you die or close to you die), you ‘need’ to have $1 million dollars.
Therefore, we need to talk about the concept of becoming a millionaire much differently. It’s not about being rich.
So Why Save to Be a Millionaire?
There are five main reasons that motivate Jess and I to stay debt free, develop a plan for how money is spent each month and consistency save for retirement at the expense of spending today.
#1 – To be in a position to give away money in a way we have never been able to do so before. I firmly believe giving should be an important part of every financial plan from the beginning (even during debt repayment) but what I’m talking about here is giving at a much greater level and being in a position to meet the obvious needs we see each and every day.
#2 – Having a secure financial future for our family. As outlined above, saving a million dollars or more will be necessary to take care of our family if we want to retire at a reasonable age (even if we live off of 50% of our current income during retirement). Again, it’s not about being rich.
#3 – To leave an inheritance to our family that will have an impact for generations to come. Compounding growth is an amazing phenomenon…$3 million dollars left to the next generation can easily become $30 million dollars or more for the generation that follows. Lots to be said here about the pros/cons of leaving money to the next generation but for now, let’s leave it at this and assume the next generation will handle that money wisely.
#4 – To teach our boys how to work hard and that if you set a goal and work towards it, you can achieve it.
#5 – Getting to the point of having the flexibility to do what we want, when we want rather than working out of necessity. Don’t take this the wrong way. I love the work that I do. However, I think many (including myself) would prefer to be in a position to choose what work we do when we do it. That may mean doing the same exact thing as I am doing now but the difference is having the independence to make that decision beyond any salary influences.
Your Financial Homework: Do you believe you can become a millionaire? If not, what is holding you back? If you haven’t already, run you own calculations using the Nest Egg Calculator to see if you are on track for saving each month to meet that goal. Remember, saving for retirement is just one part of your financial plan and I would not recommend you focus solely on this goal at the expense of giving, paying down debt or building an emergency fund. There is great value in having a stepwise approach to balancing the competing financial priorities that are thrown at you every day.
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 atwww.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.
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.
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.
