Pharmacist Personal Finance 101

Many pharmacists are the primary earners in their households, but they may cringe at the words budget, interest rates, and portfolio.

Pharmacists can advocate for health literacy among patients, so they should also be able to advocate for their financial literacy.

Because managing finances can be a daunting task, I have outlined some tips I have learned on my own journey to good financial health.

These tips cover the following:

1. Individual retirement accounts (IRAs)

2. Taxable investment accounts

3. 401k accounts

4. Disability and life insurance

5. Student loan refinancing

6. Mortgage refinancing

7. Automatic budget software

1. IRAs

One of the single biggest gifts you can give to your future self is starting an IRA as early as possible. Even 5 extra years of maturity on an IRA could make hundreds of thousands of dollars’ difference in retirement.

You can get analysis paralysis while researching Roth and Traditional IRAs, but it does not have to be intimidating.

Most married pharmacists will probably get to a point financially when a Roth IRA is no longer an option, and then they can pivot to a Traditional IRA. These options are easily explained and the income limits change yearly, so don’t dwell on that issue.

The easiest way to remember it? If you haven’t graduated yet, then start a Roth.

If you have graduated from pharmacy school and are married, then start a Traditional IRA because you probably don’t qualify for a Roth, unless your spouse does not work outside of the home.

You can have an IRA for each spouse in addition to an individual’s 401k. You may not need to contribute to both an IRA and 401k for tax purposes, but you should choose to automate your contributions to each on a monthly basis.

To learn more about investing, you should first familiarize yourself with the following boring financial terms:

• Dollar-Cost Averaging: automatically investing the same amount each month to “average” the cost of each share over the course of the year.
• Index Fund: a fund that automatically spreads out your investment among the top companies in a certain market.
• Low-Cost Index Fund: an index fund that has very low fees (eg, Vanguard funds).
• Tax Loss Harvesting: the practice of selling investments at a loss in order to offset the tax burden associated with gains on an investment (capital gains).
• Portfolio Diversification: having a mix of investments (bonds, stocks, index funds, etc.) in order to minimize risk and maximize returns.
• Portfolio Rebalancing: investments in a particular area do so well that some of them need to be sold off and the profits are used to purchase other funds to keep you at the correct allocation amount.

2. Taxable Investment Accounts

Now that you’re armed with these boring financial terms, you can open a taxable investment account. You can use it just as you would an IRA, except for 2 main differences: it gets taxed as income each year, and you do not have to wait until a certain age to withdraw from it.

Some companies that you may associate with taxable investment accounts are E-Trade and TD Ameritrade, but today, it’s even easier that that.

Betterment and Wealthfront offer all of the above boring financial terms and everything is completely automated. You can set up goals that project the growth of your investments over a certain time period, and you can easily see how a change as small as $100 per month will affect your portfolio after 10 or 20 years.

Try out the following formula:

[110 - (your age)] = % of your income that should be invested in stocks

Based on this, a 30-year-old pharmacist needs to invest 80% in stocks and 20% in bonds.

This is the gold standard, but you may choose to be riskier with 90% in stocks and 10% in bonds for a better return, or less risky with 70% in stocks and 30% in bonds, which would lower the return on your investment even further.

Sites like E-Trade and Sharebuilder can also be used to invest in index funds, but they do not offer the automatic Tax Loss Harvesting feature and automatic rebalancing for Portfolio Diversification tools like Betterment and Wealthfront do.

Your taxable investment account should be viewed as an extra “nest egg,” like a high-yield savings account, but with more risk. If you on the fence about whether index fund investing is right for your portfolio, then consulting a financial advisor at a company like Vanguard may be a good idea.

3. 401k

If you are working for a company that offers a 401k, the first question you should ask is:

“Is there a match?”

If the answer is no, then you may be better off using one of those robo-investing websites to set up an IRA.

One caveat is that if you are a really big saver, then the 401k is going to offer much more opportunity for stashing your cash. The annual contribution limit for an IRA was $5500 in 2015, but for a 401k, it was $18,000.

If you aren’t offered a company match, then you may be better off putting the bulk of your money into an IRA first, and then putting the remainder into a taxable investment account with a robo-advising company like Betterment.

4. Disability and Life Insurance

Many pharmacists may already have disability insurance and life insurance, but some may not. If you are the primary earner in your household, then you may want to look into getting disability and term life insurance.

No, not Aflac short-term disability insurance. I’m referring to a good long-term disability and term life insurance company such as Northwestern Mutual.

A good long-term disability insurance policy should replace 60% to 70% of your salary after 90 days of being out of work. That means you will have to live off of your savings for 90 days, so plan accordingly.

Term life insurance should be around 7 to 10 times your annual salary, but you may not need it if you do not have a spouse or dependents reliant on your income.

Know the difference between term and whole life insurance, because whole life insurance is much more expensive and sometimes sold as a retirement vehicle.

You should not rely on whole life insurance as an option for retirement savings. The fees are high, the risk is also somewhat high, and you are able to accumulate some cash value in the policy, but it is usually not the best option.

Be very careful when you’re approached by a “financial planner” working for an insurance agency, because most of them are merely insurance salesmen.

If you are looking for a true financial planner, then you need to look for a fiduciary financial advisor. By law, fiduciary advisors must act with your best interests in mind.

Unless you have dependents or loved ones who rely on your salary, you may not even need life insurance of any kind. Once you don’t have any debts, you may not need disability insurance, either.

These are very personal decisions that you should make on an individual basis.

5. Student Loan Refinancing

If you are a recent graduate, then student loan debt is probably a huge financial obligation.

Fortunately, new grads may qualify for some of the new student loan refinancing options. The companies currently offering these options are CommonBond and SoFi.

One thing that keeps recent grads from refinancing is that a non-government student loan may no longer qualify for tax-deductible interest. This is something that you should ask your CPA about, but based on the average pharmacist salary, you are only allowed to deduct $1200 per year because of income limits.

Most people are paying a lot more than $1200 per year on student loan interest, to say the least. You may actually save more money on a monthly basis by refinancing.

Here is how to check:

[(Monthly payment - Principal payment) x 12 - $1200] = Annual Interest Paid in Dollars

If you can refinance that same amount outside of a government loan, then you may be able to save more than that amount of annual interest paid.

For example, if you refinance at 1.9% and your monthly interest payment is only $50 instead of $300 on a $30,000 loan, then your annual interest paid amount would be $600.

So, would you rather pay $3600 in interest and get to deduct $1200 of it for an annual interest of $2400? Or would you rather refinance and lose the deduction, but only pay $600 in interest?

It may sound crazy, but this scenario is extremely possible, and companies like SoFi are saving their customers an average of $14,000 over the life of their student loan.

6. Mortgage Refinancing

The same criteria for student loan refinancing should be applied to mortgage refinancing. Do you research, but talk to your tax professional before committing to anything.

Ideally, you should be refinancing your mortgage to decrease your interest rate. This will probably lead to a higher monthly payment.

If you are already having trouble meeting your monthly mortgage payments, then refinancing is definitely not the best option for you.

When you’re refinancing, you will probably also see shorter loan terms. So, instead of a 30-year loan term, you may be looking at a 15-year loan in order to secure the absolute best interest rate based on your credit.

Like many other things in life, interest rates are negotiable! So, do not go with the first rate that the bank quotes for you.

Get at least 2 quotes from other banks and share those quotes with the bank that you would ideally like to go with. Be ready to walk away if your bank of choice does not relent, but in my experience, it always does.

7. Automated Budgeting Software

There are so many great budgeting software programs available today. Sticking to a budget only takes a one-time setup and a very small time commitment each month to make changes or identify problems.

Maybe you still believe budgeting involves checkbook balancing and Excel spreadsheets, but not anymore. Most online budgeting software is completely automatic.

There are several free and easy-to-use online budget software sites. One very popular option is Mint.

Once your banking information, credit cards, and loans are entered into Mint, the service will automatically suggest budgeting categories based on your average monthly spending. You can adjust it as needed and set goals for saving money, paying down debt, and even retirement.

Multiple family members can have log-ins and download the app on their phones. It is super easy to use and can be set up to send you text message alerts for low balances, fees, and weekly financial summaries.

These online websites are “read only,” meaning they can only view the account information, not access it.

As business expert H. James Harrington once said:

“Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.”