Congratulations! You have come so far, learned so much, and it’s finally time to start the career you have worked so hard to prepare for. Along with this new job comes the coveted “pharmacist salary” you’ve been dreaming of for the past six or more years. Personal finance can feel overwhelming, especially when it isn’t something that is taught in school, but it doesn’t have to be. If you can get a few of the big things set on autopilot, you will be golden. Here are a few financial pearls I learned along the way, and wish I understood when I graduated.
A) Max Out Your 401k (or TSP if you are a VA/DoD pharmacist)
As pharmacists, we are extremely lucky to be in the position that we experience a huge salary bump after graduation or residency. This high salary is a gift, but can be a double edged sword when it comes to your tax rate – helloooo 24%. Want to keep more money in your pocket and make sure you are set for retirement down the road? Meet the 401k/TSP.
From the moment you start your first “real” pharmacist job, set your 401k/TSP on autopilot to max out every year. In 2020, you can contribute $19,500 (not including any additional match from your employer), or $750 per paycheck (if paid every 2 weeks). I know that sounds like a lot. No matter if you are coming from virtually no income as a student or from your ~$45,000 stipend as a resident, I promise you will still be excited with the amount your paycheck has gone up, and you will be a little less shell shocked by how much is taken out for taxes.
B) IRAs – what is the difference between Traditional and Roth?
I can remember the moment during residency that I googled this exact question. I even called my mom and asked for her to explain it – to which I was still very confused. I had heard that an IRA was important and that maybe I could save on taxes if I contributed to one, but beyond that I was pretty lost. So let’s break it down.
IRA – Individual Retirement Account. This is an investment account that you open on your own and is not associated with your employer. There are two types:
Traditional – saves on taxes NOW, but you have to pay taxes on the principal plus it’s
Roth – you pay taxes on the contribution now, but it grows tax free. Extra bonus: you can pull out the original contributions at any time before retirement without penalty –
not routinely recommended, but a great safety net to have just in case.
You can contribute $6,000 per year (as of 2020 – subject to increase in the future) into an IRA and you can mix and match between a traditional and a Roth if you wanted. There is no right answer as to which is better. There are income thresholds for both of them and once your income gets too high you are no longer eligible to contribute – Start contributing early and often. If you are maxing out the 401K, it may be good to opt for the Roth IRA so that down the line you can choose which “bucket” you want to pull from based on your financial situation at the time – either pre-tax or post-tax.
Remember: An IRA or a 401k/TSP is NOT an investment – it’s a vehicle for investments. Think of it like a coffee mug – the IRA is the mug and the coffee or tea you select to put in it are the investments.
C) You Need a Budget
Let me say it again for the people in the back – YOU NEED A BUDGET! I know budgets are taboo and can feel like a drag, but you will be so much more successful and feel much more in control of your finances once you have a system.
First, figure out how much your life costs – rent, bills, essential spending (groceries, gas, etc), monthly subscriptions, and anything else you can anticipate on a monthly basis. Now compare to your monthly income – how much is leftover? Based on your priorities, decide how much of that that leftover is going to go towards savings and investing and set that on autopilot. Lastly, the remainder is your discretionary spending – spend guilt free on whatever brings you joy and know that you are still making major progress towards your financial goals.
There are a number of different apps and websites that can be used to make this easy and part of your daily life – You Need a Budget (YNAB), Every Dollar, Mint. Alternatively, you can use a google sheet on your phone. No matter which approach you take, find something that you can stick with and is sustainable for you.
D) The Dreaded Loans
Those six to eight years of higher education did not come cheap and now you have to tackle that debt. Your college loans are likely a group of multiple different loans with different interest rates and balances – take the time to review this and be familiar with them. There are two well known approaches to tackling debt:
The Snowball Method – Disregard interest rates – put any extra payments towards the
loan with the lowest balance first. A loan balance of $25,000 may feel too large and daunting to tackle, but a loan of $1,000 may feel more manageable. This approach capitalizes on the feeling of accomplishment and success when completely removing a debt from your list. That positive feeling will encourage you and motivate you to keep tackling each debt bit by bit.
The Avalanche Method – Prioritize based on interest rate – put any extra payments
towards the loan with the highest interest rate first. While this doesn’t have the extra
motivation boost as the snowball method, it does have the math working for it. If you can be disciplined enough to keep chipping away at it month after month, the avalanche method is going to get you there faster.
At the end of the day, whichever approach resonates with you and will help to keep you
motivated, is the one that you should go with. Both approaches will help you take a huge step in the right direction towards a debt free life.
E) Avoid Lifestyle Creep. But Also, Treat Yo Self
Lifestyle creep can be the biggest financial downfall in a high earner’s life. Growing up, my parents always said “the more you make, the more you spend” – suggesting how easy it is to be subject to lifestyle inflation. This is one of the reasons why it is so important to have a system in place to monitor your spending and make mindful decisions regarding where your money is going. It is easy to feel like you need to “Keep Up with the Joneses” – finance the big house and new BMW, but it is often hard to undo this lifestyle inflation and step back from that once it has occurred. Don’t be afraid to live like you are still on that resident or student stipend for as long as comfortable and focus on making intentional decisions with your hard earned salary.
On the flip side, you have spent the last six or more years working your tail off. You deserve to “Treat Yo Self”. Paula Pant, an icon in the personal finance world, always says – you can have ANYTHING, but not everything. Live a financial life full of intention. Get the big things right – put a system in place to get your savings and investments on autopilot and spend your leftovers without guilt on whatever makes you happy and fulfilled.
Amanda Atherton, PharmD
Amanda is a clinical pharmacist focused on chronic disease state management. She is passionate about helping clients find balance in their lives and ensure they are living their healthiest life – both physically and financially. Amanda strives to improve overall health and well being by empowering others to take control of their finances and supporting them as they identify and achieve their financial goals.