Saving and investment strategy in 2019
Disclaimer, I am not a personal finance expert. If you’re a personal finance newbie just like myself, the SEC has a really good resource called introduction to investment for you to peruse.
Because I’m not an expert I have to do a lot of reading on personal finance from various sources and this is the best strategy I am plotting myself and maybe you’ll also find it useful.
Financial experts recommend for you to start saving and investing as soon as possible because of compounded interests.
Well, most pharmacists don’t have that luxury. It usually takes 3 years of undergraduate studies in order to apply to pharmacy school. Approximately half of pharmacy students have a bachelor’s degree.
Pharmacy school takes 4 years to finish, increasingly pharmacy graduates opted for a 1 to 2 year residency or fellowships to remain competitive in the job marketplace.
Best case scenario, a pharmacist will not be earning any income until they’re in their late 20’s or early 30’s.
So compared to a 22-year-old college graduate, pharmacists are already behind in terms of savings and investments. Luckily, according to (BLS) the average salary for pharmacists is at $126,120 as of May 2018.
Unfortunately, pharmacists are also saddled with an average of $157,425 in student loan debt according to AACP. If you attended a private pharmacy school, you’ll owe more on average. Private pharmacy school student loans averages $182,417.
You’re in better shape if you attended a public pharmacy school. Pharmacy graduates carry an average student debt of $131,153.
What is the best investment and savings strategy for new pharmacy graduates?
Delay big purchases and focus on paying off your student loans.
After that’s taken care off then begin to focus on retirement by taking advantage of tax advantage plans such as 401 (k) and IRA.
There are two kinds of 401 (k), traditional and Roth. Roth 401 (k) is when you make contributions after tax. The added benefit of Roth 401 (k) is that interests and dividends accrued from the account is tax free.
Young pharmacists should take advantage of company matches. At the minimum, contribute enough to get the company’s match. You need to ask your HR department or do your own research but typically company matches starts at 3% dollar for dollar and fluctuate up to 6%.
If you’re not contributing the minimum amount to receive company matches then you’re leaving money on the table.
Once you have achieved that then you can up the ante and continue to increase until you reach the maximum allowed, which is $19,000 in 2019.
You may also want to consider an individual retirement account or IRA if your company does not offer a company sponsored retirement plan. In 2019, the cap for an IRA account is $6,000.
If you are 50 years and older, the IRS allows you to contribute more in a program called catch-up contribution. You can contribute up to $25,000 in the 401 (k) program and $7,000 in the IRA program in 2019.
However, there’s a snag when it comes to IRA for pharmacists, specifically the Roth IRA program. The reason being you’re disqualified because of your high income. According to the IRS, if you’re an individual making more than $137,000 or married with a combined income of $203,000, then you can’t contribute to a Roth IRA account.
|Individual Income||Family Income|
|Cannot exceed $137,000 per year|| |
Cannot exceed $203,000 per year
Fortunately, there’s a loophole for you called a backdoor Roth IRA. Essentially you are going to open an IRA account with the maximum allowable $6,000 for an individual. Then you can convert that amount into a Roth IRA account since you’re using funds of your own post-tax. I will explore more on backdoor IRA when I open an IRA account for myself.
My previous employer used Vanguard to manage their 401 (k) program. It’s probably who I am going use to open a Roth IRA account.
401 (k) will be the backbone of my retirement investment. Originally, I was contributing to a traditional 401 (k) plan. As I increase my contributions to the maximum allowable, I’m changing my contribution to a Roth 401 (k) to maximize tax benefits when I retire.
Eventually, I will diversify my portfolio over time as my savings increase. I will also designate an emergency fund or a rainy-day fund. Usually, experts recommend you to have enough funds to cover at least 3 to 6 months of expenses.
Your savings should be at least 10% to 20% of your income. I am at 12% right now and will be increasing the percentages as soon as I pay off my student loans.
Want to see how millennial are saving over 50% of your income and achieve your financial freedom goal? Read about it here.
According to CNBC there are 5 steps to financial freedom:
- Automate everything
- Track your spending
- Trim your biggest expenses
- Boost your income
- Set a goal and monitor your progress
Let’s try to implement the 5 recommended steps and transfer it to my current financial situation.
- Automate everything
I am currently automatically contributing $300 to Betterment on a monthly bases and is contributing the same amount toward my emergency fund. Another good alternative to Betterment is Wealthfront.
- Track your spending
I am a long time fan of Mint. Mint helps me track my monthly expenses and allow me to link all of my different accounts together in one place. A good alternative to Mint is Personal Capital. PC is more geared toward investment and will help you keep track your net worth.
- Trim your biggest expense
Paying off my student loans is my current project. My next target is to tackle our mortgage. Now there are tax benefits to my mortgage and there is some debate in the personal finance community the pros and cons of keeping your mortgage or paying it off early. In my situation, because I hate debt, I want to pay off my mortgage as soon as possible.
- Boost your income
I am attempting to increase our earnings through side hustle such as this blog. I also plan on opening a high-yield savings account. I may experiment with peer-to-peer lending via possibly Lending Club in the future. When the real estate condition is ideal, I will probably buy an investment property and put it up for rent (more on this later). Municipal bonds and government bonds is another safe place to put some of my extra money.
- Set a goal and track your progress
I am starting a spreadsheet to track my net-worth. My goal is to retire comfortably. I just started following the FIRE community and am learning a lot. I consider myself a partial FIRE enthusiast. Although I am not looking at early retirement, I am working toward financial independence. Personal Capital is another tool I just started using and it’s helped me keep track of my progress toward my FI (financial independence) goal.