After 4 years of undergraduate course work, another 4 years to complete a doctor of pharmacy program, and a year of residency training I thought to myself, “all that hard work is finally going to pay off”. I was finally going to be rewarded for devoting nearly a decade of my life training in my profession. While I didn’t go into healthcare to become wealthy, I would be remiss if I did not acknowledge that financial compensation factored into my career choice. After landing my first job as a clinical pharmacist I felt relieved. I’d never have to worry about money or budgeting again. In the past, I’d only had minimum wage jobs as well as my meager resident’s salary. No more would I have to scrounge for money to pay for rent and my meals would consist of more than Top Ramen or Hamburger Helper. When I received my first paycheck I had no idea what to do with it other than embark on a catharsis of spending. Big mistake. Unfortunately for me, throughout my schooling I’d never taken a class on money management and basic personal finance wasn’t a part of my pharmacy school curriculum.
If I could give my 25 year old self some advice, it would be these five things:
1. Resist the urge to drastically change your lifestyle.
This seems like a no-brainer, but it can be incredibly tempting to want to reward yourself for all those years of trading frat parties for Friday night study sessions. The first paycheck you receive out of school may be the most money you’ve come across in your life and you may feel compelled to make some extravagant purchases.
I should know.
I’m guilty of it too.
With my first paycheck I went straight to a car dealership and bought a $40,000 sports car. Keep in mind, I already had a perfectly good used car that got me through school. I didn’t own a home. I was renting an apartment and I had over $80,000 in school loans which I had just started to repay.
Not my finest display of critical thinking or decision making.
Fast forward three years later when my fiancee and I took our first steps toward home ownership. Instead of being able to put down 20% toward the purchase of a home, we were only able to put down a fraction of that amount. That cost us the chance to obtain a more competitive interest rate on our home loan, not to mention it also required us to purchase private mortgage insurance (PMI). PMI added an additional $400/month to our housing costs.
I would have been wise to evaluate many of my purchases early in my career through the eyes of a minimalist like Jennifer Taylor Chan. By giving into immediate gratification, I dug myself into a deeper hole. I should have kept the car I had, saved the money, or gotten more aggressive with my school loan repayment. I should have done anything other than plunge myself into more debt right out of school. The depreciating asset on four wheels that sits in my garage is a constant reminder of my lack of restraint.
2. Start contributing to your retirement EARLY.
Don’t underestimate the value of compound interest. If you don’t believe me, listen to Carl Nassib, Defensive End for the Cleveland Browns, eloquently explain the magic of compound interest.
As an intern, the company I spent a summer working for offered employees the opportunity to a buy company stock at a 15% discount up to $2,000. Fortunately, I did take advantage of this, realizing that even if I sold my stock at market value at a minimum I would have made 15% right off the bat. Additionally, it was a stock that paid a generous dividend which took advantage of the principle of compound interest.
You would think that I was on my way to making more sound financial decisions.
You’d be wrong.
As a pharmacy resident I had the opportunity to begin contributing to my retirement via a 401K offered by my company. As a 25 year old, retirement was the furthest thing from my mind so, of course I deferred. To make matters worse my company would have matched my contribution up to 10%. For me, this would have been about $1,000.
I took a pass on free money.
100% free money.
As I’m writing this I still can’t believe how absurd it sounds. Assuming a normal retirement age of about 65 years and a benchmark appreciation rate of 7%, not only did I give up the initial match ($1,000), I also gave up 40 years of compounded interest on that initial match which comes out to about $15,000.
In the graph below you’ll see the beauty of compound interest and the value of starting early. If you started contributing $200/month 10 years prior to retirement you’d have about $35,000, but compare that to about $243,000 if you started 30 years prior to retirement. Amazing.
Take advantage of any and all retirement or stock matching programs your company offers. Even if your employer doesn’t have a matching program, self-fund your retirement through a traditional IRA or a Roth IRA. Bottom line, contribute early and contribute often, you’ll thank yourself later.
3. Avoid borrowing from your retirement.
I once had a co-worker in his early 30’s that took out a $50,000 loan from his 401K so, he and his fiancee could have the wedding of a lifetime. It was a beautiful ceremony for sure, but not only did he have to pay the loan back at an interest rate of 4.25%, but he also lost out on decades of compound interest that his money would have earned him had he and his wife budgeted for a wedding within their means.
A few years ago I had a co-worker ask me what MBA program to choose. He was already fully vested in the company and had no intention of leaving. He was primarily looking to rise within the ranks and earning an MBA while attending school part-time would help him achieve that goal. With his career path, an MBA from any university would have been sufficient. He was admitted to both a prestigious private university as well as a public university. He could comfortably afford the public university on his current salary, but he so badly yearned to attend the private school despite the bone-crushing debt that he would incur. I advised him that an MBA from either school really wouldn’t change his career trajectory so, the less expensive option made the most sense. I even advised him that billionaire and Dallas Maverick’s owner, Mark Cuban’s rationale for attending Indiana University’s Kelley School of Business wasn’t because it was the most prestigious, but because
“ Indiana University’s Kelley School of Business had the least expensive tuition of all the business schools on the top 10 list.”
Youthful exuberance got the better of my coworker and he opted for the private university and taking money from his 401K to help pay for it.
The absolute last thing you want to do is to destroy all of your hard work by borrowing from your retirement. You could be sacrificing decades of valuable compound interest. Aside from a few extenuating circumstances, there’s never a good reason to borrow from your retirement. Life is all about choices. If you don’t have the money in the bank for that new car or that expensive vacation, maybe you really don’t need it.
Sure, you only live once, but do you really want to spend that one life working longer than you have to?
4. Don’t be afraid to live at home.
They say home is where the heart is. I say home is where you can get a head start in life. Looking back, I definitely wish I was able to live at home the first year or two of my professional career instead of throwing away money on rent every month. The value of my independence paled in comparison to the nest egg I could have built to start my life. If your job location and family will allow it, don’t be afraid to live at home temporarily. The money you can save towards a down payment on a home or school loan repayment cannot be overstated enough.
In my case, living at home wasn’t geographically feasible, but it didn’t stop my younger sister from learning from my mistakes. Even with a six-figure salary, she lived with my spouse and I for almost 10 years after completing her graduate degree program. Where can I sign up for that?
5. Avoid adjustable rate mortgages (ARM).
Don’t be fooled into believing you can afford a home for the long term if you can’t afford to put down at least 20% of the purchase price to obtain a fixed-rate mortgage such as a 30-year or 15-year fixed-rate mortgage. An ARM may allow you to get into your first home without the prerequisite 20% down payment or allow you to purchase a more extravagant home than what you could normally afford if you were to get a fixed-rate mortgage, but there are some risks.
One of the most common types of ARMs is a 5/1 year ARM.
With a 5/1 ARM, your initial interest rate will be fixed for a period of five years. Generally, the initial rate of a 5/1 ARM is lower than that of a 30-year fixed-rate mortgage, and is sometimes referred to as a “teaser” rate. After the initial five-year period, your interest rate and monthly payments will adjust annually, based on an index that is determined by some underlying interest rate (such as U.S. Treasury yields). After five years, the rate will reflect the current level of the index, and subsequent increases or decreases will be determined by changes in the index. — Matthew Frankel, CFP (TMFMathGuy)
Take a look at the scenario below comparing the puchase of a $500,000 home with a 30-year fixed-rate mortgage and a 5/1 ARM. Initially, the 5/1 ARM will save the borrower about $100/month, but after 5 years when the ARM adjusts the monthly payment could blow right past the 30-year fixed-rate monthly payment, leaving the borrower in a precarious situation. All told, through the life of the loan the 5/1 ARM is significantly more expensive.
So, what were some of those risks that I mentiond earlier? Once the 5-year teaser rate ends there is the very real posibility that your monthly mortgage payment will increase as you saw above. If you don’t have the income stability to weather fluctuations in your monthly mortgage payment after the teaser rate period ends you could be staring down the barrel of a forecloure like many families did during the housing foreclosure crisis 10 years ago.
If losing your home wasn’t bad enough, along with foreclosure comes a black eye to your credit report which will last 7 years. There are some cases where an ARM may be the right choice. The obvious one is if you don’t plan to remain in your home for more than 5 years. For most individuals though, if you need an ARM to buy a home you’d be better off saving up or looking at purchasing a more affordable home.
They say that hindsight is always 20/20. Still, I can’t help, but think of where I’d be financially if I could undo some of the poor financial decisions I made. My loss is your gain. It isn’t too late to learn from some of my mistakes and be on your way to a more secure financial future. Good luck.
If you have any comments I’d love to hear from you either in the comments section below or at email@example.com.