NPX Launchpad Winter 2016
Money Matters - Bonus Edition
Don't Let the Big Income Fool You - Timothy R. Ulbrich, Pharm.D., R.Ph
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
Interested in taking some next steps to get out of debt? I recently published a free e-guide titled “The Path to Debt Free: A Pharmacists Guide.” You can check it out at www.yourfinancialpharmacist.com
#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.
Start Your Own Journey
New Practitioners are in the perfect position to chart their financial path. I’ve heard too many people who are close to retirement, or are retired, say “I wish I would have thought about this at your age.” There is no better time than now to set your financial goals and to develop a plan to achieve those goals.
Let’s keep the conversation going. You can send me questions and/or share your progress on achieving financial freedom on Twitter (@FinancialRPh) or via Facebook (www.facebook.com/yourfinancialpharmacist). Please visit www.yourfinancialpharmacist.com to sign up for my blog designed for pharmacists and pharmacy students. Let’s all learn together.
- Wallace A, Wotruba K, Bourgeis B. Ohio Pharmacists Association 2015 Salary Survey. Ohio Pharmacist. December 2015; 15-17.
- United States Census Bureau: State and County Quick Facts: Ohio. Available at https://www.census.gov/quickfacts/fact/table/US/PST045217http://www.census.gov/quickfacts/. Accessed January 10, 2016.
- FINRA Investor Education Foundation. Financial Capability in the United States: Reports of the Findings from the 2012 National Financial Capability Study. Available at http://www.usfinancialcapability.org/downloads/NFCS_2012_Report_Natl_Findings.pdf. Accessed January 10, 2016.
- National Foundation for Credit Counseling (NFCC). The 2015 Consumer Financial Literacy Survey. Available at https://www.nfcc.org/wp-content/uploads/2015/04/NFCC_2015_Financial_Literacy_Survey_FINAL.pdf. Accessed January 10, 2016
- Midwest Pharmacy Workforce Research Consortium. 2014 National Pharmacist Workforce Survey. Available at http://www.aacp.org/resources/research/pharmacyworkforcecenter/Documents/FinalReportOfTheNationalPharmacistWorkforceStudy2014.pdf. Accessed January 10, 2016.