A Crash Course in Finance for the New Pharmacy Graduate
Create financial freedom later with these tips.
So you’re just getting ready to graduate after at least 6 years (in my case 8 — I got a bachelor’s degree first) of study, most of which you had no money to spend, and you can almost taste the success of your first gig paying over 100K – time to spend some money, right?
While it is important to reward yourself, keep in mind that now is a crucial time for your financial future, so start thinking about it now. If you want to retire one day and retire well (i.e. get to travel, be financially secure) then you have to start early.
1.Start putting money in the bank for an emergency fund. This is the highest priority item. Ideally you should have enough money in the bank to pay your expenses for 6 months in the case you lose your job. I can say after 7 years as a pharmacist I have personally seen pharmacists laid off several times, so don’t consider yourself immune to this — prepare in advance!
2.Start maxing out your 401k now, if you can. Currently the IRS limit for contributions into a 401k is $18,000. I would highly encourage you to contribute this amount to it every year and forget you ever had it. Doing so has several advantages:
a. Tax breaks: You will not be taxed on that money until you remove it after you retire, at which point you will likely be taxed at a much lower rate (due to lower adjusted gross income). This can also potentially lower the tax bracket you are in, meaning you pay a lower percentage of tax on the rest of the income you earned.
b. Employer contributions: Most employers will match up to around 5% (depending on the employer), meaning if you do not contribute you could potentially be leaving free money on the table! If you do not max it out, then at least contribute up to the amount that is matched at all times.
3. If you still have money left, go to an IRA. If you have maxed out your 401k, have built up your emergency fund, and still feel like you have a little extra left to put away then an IRA is a good option. There are 2 types of IRAs: an traditional IRA, where money is put away pre-tax and taxed after retirement, and a Roth IRA, where money is put aside after tax and can then be removed tax-free after retirement. I would encourage you to consider using a passive investing strategy, which is to invest in funds that are managed automatically by a computer and thus come with lower fees. The other strategy, known as active investing, is where there are people who are actually choosing companies to buy and sell for the fund. They have not been shown to outperform over long periods of time than passively invested funds, especially when you take into account the higher fees. Vanguard is a great company and the company that developed low-fee passive investing, but there are others that provide this type of fund as well. Vanguard (and I’m sure others) have ‘target’ retirement funds that will give you a nice blend of investments based on how long you have until retirement. These are a great place to start.
4. Don’t buy ridiculous things. Now is probably not the smartest time to buy a brand new Porsche, a big boat, or any other endless money pit (even if they are a lot of fun). If you hold off for a few years, you will be able to build savings, payoff more student debt, and have a better idea of what your monthly after-graduation budget will look like prior to making that purchase.
5. Payoff student debt as much as you can. Be very, very aggressive with paying off your student debt if you can. Interest rates for me were between 6-7%, which can get incredibly expensive. While you do get to write that off your taxes, it does not make up for the amount you will spend paying interest. There is no penalty for paying ahead, and if you are paid biweekly then you have 2 extra paychecks per year (2 months with 3 paychecks). At least some of those paychecks should be going towards student loans.
6.Be careful with financial advisors. While this might not be true even the majority of the time, they are often going to look out for their interests, not yours. Investing for retirement is not so complicated that you can’t get started without them. Plus, unless you have already maxed out your 401k and your IRA as well as paid off student debt (which the vast majority of us will have not done these things for years after graduating), then you have no need for any other financial instruments. Unless you do have that need, don’t pay the extra fees that come along with having an advisor. Either way, you need to educate yourself in personal finance well enough you can make good decisions now and determine whether or not you are getting good advice when you do decide to talk to an advisor.
7.Make sure you have the proper insurance to protect your assets. In addition to malpractice insurance, be sure you are covered well enough for short-term disability and long-term disability. This is probably a good time to buy a life insurance plan as well. Another often-missed type of insurance that is very affordable and can protect you from a wide range of liabilities is called umbrella liability. Once you get enough assets someone might see you as the target of a lawsuit this is a type of insurance well worth its premiums.
8.Enjoy your new success, in small ways! While this might not be the best time to buy a fancy car or a big boat, you should enjoy yourself! Take some trips, go out to eat more, buy yourself a book that you wanted, and relax a little bit. One of the best ways to stay positive, happy, focused, and ready to go in refreshed to do the best for your patients is to be sure to reward yourself in a small way on a regular basis. It doesn’t have to be very expensive and I promise you it works.
Editor's Note: The following is a full list of exception to withdrawal penalties from the IRS for everyone to have: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions.