Timothy O'Shea, MS, PharmD
Timothy O'Shea, MS, PharmD, is a Clinical Pharmacist working at a regional health insurance plan on the east coast. Additionally he works per diem at a nationwide retail pharmacy chain. He graduated from MCPHS University - Boston in 2015 and subsequently completed a PGY-1 Managed Care Pharmacy Residency. He completed his M.S. in Health Services Administration, with a focus on Health Economics and Outcomes, in 2018. His professional interests include pharmacy legislation and managed care pharmacy. He can be followed on Twitter at @toshea125.
Being able to effectively manage your finances is crucial in achieving long-term financial stability and aggressively tackling student loans should be your first step in the process. This article will highlight 4 tips that can all pharmacists to help pay off student loans faster.
1. Make a budget.
Creating a budget is arguably one of the most important things you can do to put yourself in a sound financial position. As financial guru Dave Ramsey explains, “When you make a budget, you take the first step toward getting control of your money so you can build wealth.” In this case, we’re trying to tackle student loans to be able to build wealth down the road.
A personal and/or family budget allows you to better understand your total income and expenses. Within a budget, you can set different amounts that you expect to spend in a given month on different areas (e.g. housing, transportation, food) and then track your expenses over time to ensure you stay on track.
Budgets are important as people vastly underestimate how much they spend every month on non-essential items. For example, spending $8-10 per work-day for lunch may seem insignificant, but that can add up to over $2,500 per year. Add in other things like buying a coffee every day, frequent vacations, and expensive hobbies and you’re talking about a significant chunk of money that could instead be going toward student loans.
Of course, there should be tradeoffs; perhaps instead of buying lunch every day, consider switching to just once a week and packing a lunch other days. Keeping a strict budget and moderating your spending will allow you to have more money every month to throw into your loans. It also has the benefit of keeping you disciplined and in charge of where your money is going. Alarmingly, one Gallup poll found that only about one-third of Americans maintain a household budget.
There are a number of online templates and software you can use to help create a budget. Mint is one of the most popular free and versatile budgeting programs available.Through Mint, you can create a personalized budget, link your credit or debit card, and track your spending. Mint can also send you alerts for unusual spending in specific areas, analyze spending trends, set financial goals, and keep track of student loans. You Need a Budget (YNAB) is another good option, though it charges a one-time $50 fee after the free 1-month trial. Or if you prefer something simpler, you can track your monthly income and expenses within Excel.
2. Create a financial blueprint.
Now that you have a budget it’s time to consider drafting a short and long-term roadmap for your finances. In general, the best advice to pay off student loans quicker is to live significantly below your means. ‘Lifestyle creep’ is a common phenomenon where an individual starts to increase their standard of living and expenses to match their increased income. As a pharmacist, this is easy to fall into once you start getting your first few paychecks and realize you have more money than you’ve ever had before.
To avoid lifestyle creep think about where you can limit your expenses and live more frugally. For example, living at home for a few years after graduation can be a great way save money, although this may not be an option for some. Avoid luxury apartments or buying an expensive home while you still have large amounts of student loans. Additionally, avoid buying a new and/or expensive car. Just because you can afford the $500-$600 monthly payment doesn’t mean you should. Instead, buying a used car in the $6000-$8000 range is generally the preferred economic decision.
I often hear pharmacists talking about needing financial advisors to manage their finances, but in reality this isn’t necessary for most people. There is a wealth of financial information that can be found on the internet at no cost that can help guide you in the right direction. Of course, for those with complicated tax and investment portfolios, a financial or tax advisor can be a valuable resource.
3. Work more.
Working more hours sounds like an obvious suggestion to pay off students faster, and it is. Working overtime can significantly provide you with more income to put toward student loans. If overtime is not an option, consider finding a per diem job, doing freelance work, or making money from a hobby (e.g. starting an Etsy shop). For me this meant working per-diem as a retail pharmacist in addition to my full-time job.
It’s important to note that contrary to some people’s opinion, working extra hours is almost never a bad idea financially. Picking up additional shifts will never completely “move you into the next tax bracket” and taxes on overtime hours will never be so high that you “won’t be making nothing extra at all.”
Tax brackets work in such a way that your income is taxed at different rates that is set every year by the federal government. In 2017, all taxable income up to $9,325 is taxed at 10%; after that taxable income from $9,325 to $37,950 it is taxed at 15%, from $37,950 to $91,900 at 25% and $91,900 to $191,650 at 28%. Hypothetically, if your 2017 taxable income was $91,000 and you made an additional $10,000 from a second job, only the amount above $91,900 would be taxed at the higher 28%, not your entire combined income.
Additionally, overtime is taxed the exact same way as normal income. It may feel like you paid more in taxes when you look at your paycheck but that’s likely because overtime pay is often 1.5 times your gross pay, so because you were paid more you also paid a little more in taxes. Of course with all that being said, plenty of arguments can be made that working over a typical 40-hour week can be mentally taxing and lead to burn out, missed social interactions, and a poorer quality of life. It really comes down to individual choice; however, my philosophy has always been to work as much as possible while young to put myself in a better financial position for when I start to have a family.
4. Refinance loans.
I’ve previously talked about refinancing student loans, however it’s an important consideration to be able to pay off loans quicker. Most financial advisors recommend that all new graduates with student loan debt at least consider whether refinancing is right for them. This is especially important for new graduates with interest rates on loans over 8-9%. Refinancing has the benefit of providing lower interest rates, consolidating all loans into 1 loan for better convenience, and if no co-signer is needed on the new refinanced loan then parents can be removed if they originally cosigned.
There are a number of vendors to refinance student loans that can be found through a simple Google search although I found SoFI to offer the best resources, repayment plans, and interest rates. Refinancing through SoFI will save me approximately $15,000 in cumulative payments over a 10-year term by lowering my interest rate to 5%. It has also removed the hassle of dealing with multiple loan providers.
Notably, those with poor credit scores, low salaries, or those who want to keep provisions in federal loans may to seek further research before refinancing.
What financial tips do you recommend to others to pay off student loans quicker? Tweet them to me @toshea125.