# 3 Financial New Year's Resolutions for Pharmacists

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A New Year is almost upon us, and there isn't a better time to make some decisions and build habits that will have a lasting effect on your financial freedom.

A New Year is almost upon us, and there isn’t a better time to make some decisions and build habits that will have a lasting effect on your financial freedom.

Here are 3 New Year’s resolutions that every pharmacist should consider for 2016.

Resolution 1: Establish a plan to be debt free, and take a step toward paying off at least 1 loan in 2016.

Note: I didn’t say get out of debt in 2016. If you can make that happen, then great, do it!

For many, it likely won’t be an achievable goal, so start small.

Write down all of your debts. If you haven’t done this before, let me warn you that this is painful and depressing. However, you and I both know that you can’t start making true progress until you know what you are facing.

After you write them all down and are making at least the minimum payments on all of your debts, you need to determine which debt you will pay off in full first. Should you start with the car payment? Student loan? Credit card?

There are 2 common debt repayment methods you may have heard about before. One is the snowball method, and the other is the avalanche method.

In the snowball method, you start paying your debts off 1 by 1 from the smallest amount to the largest amount regardless of the interest rate.

This, of course, assumes you are paying minimum payments on all debts, and any extra money available to throw at the debt is used to pay off the 1 with the smallest balance.

Once you pay off 1 debt, the amount you were paying toward that debt rolls into the next.

For example, let’s assume you have 3 debts of \$1000, \$2000, and \$3000, and the minimum payment on all 3 debts is \$100 a month.

If you put together a plan that allowed you to have \$500 per month to pay toward your debts, you would pay \$100 to each of the 3 debts as the minimum payments required and then take your remaining \$200 available that you budgeted for your debts and put it to the smallest debt—the \$1000 debt.

Once you have paid off the \$1000 debt, you would take the \$100 minimum payment you were making toward that debt, plus the \$200 extra payment, and throw that amount (\$300) at the next debt, and so on.

The goal here is to get some momentum and wins that keep you motivated and excited to get out of debt as fast as possible.

In the avalanche method, you list out all of your debts and after making minimum payments on all, throw everything extra at the 1 with the highest interest rate.

Once you have the debt paid off with the highest interest rate, you move to the debt that has the next highest interest rate and so on.

For example, if you had debts of \$1000, \$2000, and \$3000 at 8%, 6%, and 4% interest, respectively, you would pay off the \$1000 debt first, the \$2000 debt second, and the \$3000 debt third.

The argument in support of this method is to save the most money by paying off highest interest rate loans first.

My personal opinion is this. If you are going to be paying off your debts for years or you have some very high interest rate loans (eg, credit card debt at 22%), there is likely a significant mathematical advantage to the avalanche method.

However, if you are going to pay your debts off within a short period of time and if interest rates don’t vary too much from one debt to another, I would suggest the snowball method because of the tremendous psychological effect this can have in staying motivated. You can run the math yourself to see how big the difference would be.

About 2 months ago, I shared my journey to paying off \$200,000 in debt. The key to this was having a detailed plan (aka budget) to maximize every penny we could to throw at the debt. I also shared the budget that allowed us to be successful in accomplishing this goal.

Need some motivation and help to achieve your goal of becoming debt-free? Check out the free e-guide titled “The Path to Debt Free: A Guide for Pharmacists” available at www.yourfinancialpharmacist.com.

Resolution #2: Fully fund your emergency fund.

An emergency fund should be 3-6 months of your expenses. The key here is expenses, not income.

Unless, of course, your expenses are 100% of your income, which then means a separate New Year’s resolution of spending less than you make.

This money should be kept in a readily accessible account such as a simple savings account at your bank or a money market account. The key here is to build a barrier between you and life’s unexpected expenses to prevent derailing from achieving other financial goals, blowing up your monthly budget, and/or causing significant stress.

Having this will protect you from having to go further into debt and/or borrowing against your retirement.

According to a 2015 Bankrate Consumer Survey, 30 million Americans (13%) tapped into retirement savings to cover an unexpected expense (aka “emergency”).

We want to keep moving forward with our financial goals, and having an emergency fund will ensure we don’t go backward.

Looking to get some momentum with a quick win on this one? Start by building a starter emergency fund of 1 month of your expenses and go from there. Set a small goal and build upon it.

Are you a planner? Take the total amount needed to fully fund your emergency fund and divide it by 12 and make a commitment over the next year to save that amount per month.

By the end of 2016 you will have a fully funded emergency fund in place. Some may be wondering do I do 3 months or 6 months or somewhere in-between? That depends on your tolerance for risk and the stability of your job.

Resolution #3: Take a step or 2 to building your retirement savings.

The goal we are working toward is 15% of your gross income per year going toward retirement.

In a recent article, I shared what consistently saving 15% of your income toward retirement could look like. The result was several million dollars.

The earlier you can start and the more consistent you can be, the better.

Start with your employer match (with a 401k or equivalent) and go from there to get closer to the 15% goal. Make it automatic.

After taking your employer match, take advantage of any tax-advantaged savings opportunities such as a Roth IRA. It is worth noting that there are income limits you need to be under in order to invest in a Roth IRA. Check the Internal Revenue Service rules and regulations for more details.

You need to balance retirement savings with the debt you are paying and the emergency fund you are building.

Depending on how much debt you have, interest rates, and how long you will be paying off that debt will determine how to balance these 3 important goals.

If you have already done all 3, congratulations! Please encourage a family member or friend to do the same.

If you haven’t done any of these or feel like these are overwhelming, start with 1 and go from there. Share your progress with others and ask someone to keep you accountable.

I would love to hear about your journey. Please shoot me a message on www.yourfinancialpharmacist.com to let me know how it is going.

Here is to a great New Year with financial peace and freedom!

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