Navigating Personal Finances

David Cecere, PharmD MBA
Assistant Director of Pharmacy
WVU Medicine
Morgantown, WV

Now that you have graduated from a pharmacy program and are beginning your professional career, what is your plan for financial stability? How do you pay down debt? How do you save for the future? Where do you start?

The purpose of this article is to offer some ideas on establishing a strong financial footing. We will review how to pay down debt, how to manage your current finances, and how to plan for future needs.

The Ghost of Financials Past
I have worked with many graduates from various programs, and I am amazed at the amount of debt that they have incurred. Over the past 30 years, the amount owed postgraduation has ballooned, depending on the loan program. It has been reported that 70% of the students who graduate this year will have loans averaging $37,172. This is a staggering amount of debt for someone beginning a new career, and the amount of debt owed by graduates increases yearly.

Not all school loans are created equally. Each has its own terms and interest assessment. Interest rates can vary from 4.6% to 7%, on average, with repayment terms of 10–20 years. To determine what you will actually pay back over the life of a loan, you can use one of the many online amortization calculators. Amortization calculators are helpful in showing you how much of your payment is allotted to the loan interest and how much to the principal payment. Early in the life of a loan, the interest owed makes up most of the payment. The percentage of your payment that goes toward interest decreases over the life of the loan, with a subsequent increase in the amount that is applied to your principal balance. For example, for a $30,000 loan at 4% interest over 20 years, the payment would be $181.79 per month. For the first month, $100 of the $181.79 would go to interest. 

If you are able, commit to paying more than the minimum payment each month. The extra money will go toward your principal balance. By doing this, you will pay off the loan more quickly and pay back less interest over the life of the loan. Treating the extra payment as part of the loan makes this easier to accomplish. For example, if the payment is $181.79, consider paying $200. This is not a significant additional amount, but it does add up over the life of the loan. By paying an extra $18.21 per month, you will decrease the life of the loan by 31 months and save approximately $1,830 that would have gone toward interest.

The Ghost of Financials Present
Ideally, your new position has come with an increase in wages. It is time to consider what to do with your salary. Paying monthly bills is the first priority, but you will also want to consider the following areas:

Credit Cards
Credit cards are a necessity. The interest rate on your card is based on your credit rating. As a result, credit cards have different interest rates. The average credit card interest rate is approximately 16%. When you are selecting a credit card, select one with a low interest rate, one with a rewards program, or one that has both features. As a rule of thumb, I recommend charging on a credit card only what you can pay off at the end of the month so that you avoid paying interest charges. This takes some discipline but is well worth the effort.

Budget
Create a personal budget. The best way to do this is to take 1–3 months of expenses and determine where your salary is going. In addition to tallying monthly payments you make on bills, consider saving all your receipts. At the end of the month, record all your expenditures. Not only will this exercise make you aware of where you are spending your money, but it may also give you an idea of where you can cut costs in order to free up extra money.

Emergency Fund
Emergency funds are kept to prepare for an unexpected loss in wages, such as illness or a job loss. Most experts recommend that you have 3–6 months of savings to cover expenses until the emergency is resolved. The amount you need depends on the expenses that you have.

It may take some time to save enough to cover your expenses. For example, if you need $2,000 per month for expenses, then you would need $6,000 in your emergency fund for 3 months of unemployment. If you saved $600 per month, it would take you 10 months to create enough in your emergency fund to cover 3 months of expenses.

The key is to get into the habit of saving regularly. If possible, automate a monthly transfer to your savings account. Stay on top of your expenses. Keep accurate expense records, including accurate checking account records. After analyzing your spending, do you see things you could do without? Can you bring a lunch from home instead of eating out? Can you make your morning coffee at home instead of buying that expensive flavored coffee? It’s okay to reward yourself once in a while if it’s done in moderation, but try to be conscious of your spending habits.

The Ghost of Financials Future
Even though you may have just graduated and are entering the workforce, time flies. It is never too early to start saving for retirement. Here are some tips:

Selecting a Financial Advisor

Getting financial advice from an expert is a good idea, but where do you start? It’s best to interview a potential financial advisor before enlisting the person’s help. You may want to consider these questions when selecting a financial advisor:

• Has the person been recommended by someone whose judgment you trust?
• Is the advisor independent, or does he or she work for a firm?
• Is the person’s work done on commission or for a flat fee?
• Does the advisor have references?
• Do you think you will like working with the person?

Retirement Plans
When investing for the future, ask yourself  “Am I a risk taker, or do I have a low tolerance for risk?” The answer to this question will help guide you on how to invest. 

Many organizations offer retirement plans that you can contribute to through a payroll deduction. This makes it easy to automate retirement savings. The most common type of retirement account is a tax-sheltered annuity plan, known as a 401(k). Nonprofit organizations offer a 403(b), which is equivalent to a 401(k). If you are a risk-averse investor, the money in your account can be used to purchase funds according to the year you plan to retire. If you plan to retire in 40 years, these funds weigh the amount of risk your account can tolerate over the course of its lifespan and adjust your investments accordingly. These funds are designed to offer higher risk with greater return (i.e., more stock investments) in the beginning and less risk with less return (i.e., bonds) as you get closer to retirement. If you are willing to tolerate more risk in your investments, you can formulate your own plan from a variety of offered funds.  The Internal Revenue Service specifies upper limits to how much you can contribute to your account each year, and you will need to determine what that ceiling is when contributing. 

Many different plans exist, and you may want to work with your financial advisor to select the one that works best for your current situation. In addition, your financial advisor can help you estimate how much you will need in your account when you retire. Typically, you can move your retirement savings in these plans between employers when you change jobs. 

Conclusion
New graduates entering the work force may want to consider the basic financial principles discussed above and begin implementing these recommendations:

• Start with formulating a budget. Determine how much you can save each month.
• Make a plan to start paying down your student loan debt.
• Apply for a credit card, but select and use one wisely.
• Create an emergency fund.
• Start saving for retirement.
• Consider hiring a financial advisor to help you meet your financial goals.