Automate your finances
Your Financial Pharmacist By Timothy Ulbrich, PharmD
It’s easy to feel overwhelmed as a New Practitioner when you are faced with multiple financial priorities. You not only have your monthly bills to pay, but you are also juggling how to pay off those pesky student loans while saving for retirement, building a down payment for a home, and hopefully having some fun along the way.
If all your money is sitting in a checking account as one lump sum without a designated purpose, it’s human nature to spend it without much intention. By automating your finances, you are able to minimize this risk and be on a path to meet your financial goals.
Prioritize your goals
Goal setting and budgeting are the key components to begin the process of automating your finances. The financial goals you are making should be specific, measurable, realistic, and have a “why” behind them. Lay all your goals on the table and prioritize them with numbers to help identify what you should go after first or how many goals you may be able to handle at one time.
After prioritizing your goals, the next step is to create a zero-based budget. At the end of the budgeting process, you will be left with your disposable income. Your disposable income is calculated by taking your take home pay and subtracting your essential and discretionary (nice to have) expenses. When you know your disposable income, you are ready to move into the process of automating your finances. Beyond your monthly bills, there are three main areas to consider for automation.
1. Student loans
By automating your student loan payments, you are setting yourself up to pay them on time each month. Of course, you don’t want to make a late payment on your student loans in general, but on-time payments are especially important if you are enrolled in the Public Service Loan Forgiveness Program, since a late payment won’t count as a qualifying payment. Also, if you end up refinancing your student loans, setting your payments to be automatically taken from your checking account will usually result in a lower interest rate.
2. Retirement savings
Unlike previous generations who may have depended upon pension plans to fund retirement, today’s New Practitioner has to do most, if not all, the hard work to save each and every month for the future. Ultimately, saving approximately 15% to 20% for retirement from each paycheck should be your goal. By automating your retirement savings, you’re putting money away before it even hits your checking account.
3. Sinking funds
Besides paying off student loans and saving for retirement, we all have financial goals that can easily go unrealized if we don’t have a plan to ensure they get funded. Whether it is saving for an emergency fund, going on a vacation, buying a new (used) car, or putting a down payment on a home, you will want to list and then prioritize these goals. Then, using your disposable income available each month from your zero-based budget, create and set up long-term savings accounts and name the accounts for each of your sinking funds. Then, put those on auto withdrawal so that once your paycheck goes into your checking account it will disperse into your long-term savings account for your sinking funds.
To get more information on how to get started with automating your financial plan and setting up sinking funds, make sure to check out Episode 57 of the Your Financial Pharmacist Podcast.