New Practitioner Network: Personal Finance – Good Advice! Dr. Vishal Barela Many people graduated from pharmacy school in May, and many more will soon graduate and enter the workforce. As a recent or soon-to-be grad, you are likely dealing with larger sums of money for the first time; therefore, managing money is more important now than ever. What should you do with your new paycheck? Buy a car? Take a great vacation? Although very tempting, two smart money moves you should consider include saving for retirement and creating an emergency fund. Save for retirement now! Although you are a new practitioner, take time now to think about saving for retirement! Contemplate this question: what does retirement mean to you? Does it mean a home in the mountains or at the coast? How about a part-time job and time with grandchildren? As a recent graduate, these questions may seem too far off to think about; however, it is a myth to think you have plenty of time to start saving for retirement. The longer your investments compound, the larger they will grow and increase your probability of attaining the retirement “dream” you want! How can you start the saving process? First, take advantage of your employer’s retirement savings plan. These plans, called 401(k), 403(b), or 457(b), allow you to set aside a portion of your salary from each paycheck “pre-tax” permitting you to invest the money into tax advantaged accounts that also defers the taxes on the earnings you re-
ceive. These accounts allow you to compound the returns much faster than taxable investments. Many employers offer matching contributions up to a specific dollar amount or percentage of your salary, which is more reason to utilize these retirement saving plans. Another advantage these plans offer is portability. You are allowed to transfer or “rollover” your account to your new employer’s plan if you leave your current employer. Second, set-up automatic deductions from your payroll or checking account for deposit into an Individual Retirement Account (IRA.) These are tax advantaged accounts in which the individual contributes to the IRA and receives a tax deduction in the amount contributed if the individual’s income is below certain levels. The funds invested into the IRA are allowed to grow taxdeferred, meaning that the gains are not taxed until withdrawn. Create an Emergency Fund! What if something happens and you are out of work for several months? As a new earner one of the easiest and most effective savings goals is to create an emergency fund. An added bonus is that an emergency fund helps you get in the habit of saving. Financial advisors suggest that an emergency fund representing three to six months of living expenses be established for use in periods of unexpected financial difficulty. A frequent budgeting mistake is to save the amount you have left at the end of the month. When doing that, you of-
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ten have nothing left for savings; therefore, make sure to deduct money from your paycheck as soon as you receive it. Most advisors recommend allocating a percentage of each paycheck to your emergency fund until you have the amount accumulated to meet your desired goal and then redirect this same amount towards your retirement account. A word of caution: use your emergency fund for true emergencies! As your balance grows, it can be tempting to use that money to take a vacation. If impulsive spending is a problem, keep your fund in a separate savings account. This way, you are required to take several steps before getting access to those funds. As a new practitioner, receiving a hefty paycheck for your hard work feels great, but spending impulsively lays down habits that can hurt you in the longrun. Start your spending and saving habits on the right foot by saving for retirement and creating an emergency fund … you will never regret that you did! Vishal Barela, PharmD; barnelavs@gmail.com Bibliography Kapoor J, Dlabay L, Hughes, Hart M. (2016) Focus on Personal Finance: An active approach to help you achieve financial literacy, 5th edition. Ambrose E, Lankford K. (2018, March) Are you on Track to Retire? Kiplinger’s Personal Finance; 24 – 32.
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