Dr. Andrew Rollo shares personal finance advice for associate veterinarians.
Every college student knows how to live on the cheap. It's a simple matter of paring down to the bare essentials—like having a bike but no car. Or foregoing veggies to afford pizza (sorry, Mom). What many students don't know is how to effectively transition to living on the not-so-cheap—the grown-up salaries we step into as brand-new career professionals.
When I was 22 and finishing my second year of veterinary school, Dr. Jim Lloyd at Michigan State University tried to prepare me for the financial challenges ahead. He advised me to create a budget to fit a first-year veterinarian's salary (around $50,000). Compared to my income as a student, that seemed huge. I assured him I could make it work living off my current entertainment expenses of beer and pizza.
Dr. Lloyd reminded me that my school loans would have to fit in the budget, too, and suggested that someday I might actually want to get married. That would raise my cost of living exponentially, he said.
Nice try, I thought, but I'll be earning real money by then. I mean, how hard can it be?
Moving every year is not too tough when you can deflate your bed, flip it over your shoulder, and walk to your next rental apartment. But once you graduate, it's time to grow up and settle down. For me, that meant buying some real furniture. In my first week as a veterinarian, I bought a brand new couch. It looked great. It made me feel great, too, until I realized I'd spent half my first paycheck before I'd even received it! That's when it dawned on me that if I was going to get ahead, I would have to learn to budget. If you're a new graduate, or will become one soon, you need to learn this too.
Creating a budget can be tricky, especially during a major life change such as starting a new career. That professional-sized paycheck can seem deceptively large. But along with your new life come new responsibilities: job-related expenses and school loan payments among the foremost. A little planning now can save you a lot of headaches—not to mention money—later. Here are some tips, based on my own experiences as a new associate and input from friends and mentors.
In today's unpredictable financial markets, dependable returns on investments are scarce. You could put your money into a savings account, or even a CD. But earning 1 percent or 2 percent back isn't likely to fund your retirement—especially if you plan to spend it drinking piña coladas on the beach. So for those of us who like a predictable return on our money, even in these uncertain times, paying off high-interest rate school loans early makes sense. Every bit of your loan you pay off early saves you money.
Aggressively paying off school loans is not going to build your portfolio, but in the short term it will significantly lower your debt—at no risk to you. So let the economy straighten itself out while you concentrate on a sure thing. Before long, you'll have the opportunity to investigate more predictable investments. You'll have more money to invest, too.
The biggest debt on the minds of most new graduates is school loans. Nobody likes long-term debt, and educational loans can certainly linger. There are many ways to pay off loans, though, and each person's situation is different. If you have a hefty credit card tab, focus on that first. After all, your credit card interest rate most likely dwarfs that of your school loan, and attacking high-interest loans first saves you the most money.
Say, for example, that you have an interest rate of 7 percent on your school loan and 14 percent on your credit card. Those unpaid credit card bills will add to your debt twice as fast as your school loan will. By aggressively paying down your credit card balance, you can essentially "earn back" your 14 percent interest payment. You would be hard-pressed to find that kind of return anywhere on the market.
Out of school and off campus, you'll likely have a harder time getting around on foot or by bicycle. You may need to purchase a vehicle to get to work or to get the job done right. For example, a veterinarian who makes house or farm calls needs a reliable ride to do his or her job. If your job requires wheels, your employer may be willing to help. Otherwise, you'll need to weigh the costs of buying or leasing a new car. If a monthly payment with interest doesn't quite fit into your budget, consider buying a used car or sticking with the beater you already own.
As you settle into your new career, you may see purchasing a home as the next logical step. It could be your best financial step as well. (See "Homebuyer heaven".) In the past five years, mortgage rates have dropped to historic lows. Tread carefully, though. There are no guarantees when it comes to investments.
When I graduated in 2004, a person could get a mortgage at 5 percent interest. With home values skyrocketing, investing in real estate seemed to be an excellent move. Eventually, though, the bubble burst and home values declined. For many, what seemed like a good investment at the time has turned upside-down—in other words, the home value has gone down but the mortgage hasn't. An average-priced home could have easily lost $50,000 or more in value in the past few years. Now imagine that money put toward a school loan instead—that would put a significant dent in anyone's debt.
Aside from paying down debt, a retirement account is the best way to secure your financial future. The earlier you start saving, the better, because the interest you earn compounds—that is, it's added to your principal investment to earn even more interest every month. You can open a personal IRA or take part in a 401(k), which many practices offer as part of employee benefits packages. Whether you can afford a few hundred dollars a year or are able to max out at $16,500, a 401(k) is an excellent way to begin building your retirement nest egg. If your employer offers a match, then the deal is even sweeter, potentially adding several thousand more dollars onto your salary for the year, tax free.
When you're deciding how much to invest, look first to your annual budget. How much will you be spending on your mortgage or rent, loan repayments, auto expenses, and everything else? If what's left doesn't allow for you to make a large contribution to your retirement account, tuck away a small amount anyway, even if it's just $20 per paycheck. It may not seem like much, but saving develops a habit—a habit that will allow you to contribute more as your salary increases. In time, you'll create a nice base for retirement.
For long-time contributors who have seen their 401(k) values drop by half in recent years, paying into a retirement account may not seem like a good idea. As discouraging as financial markets may appear today, history has shown that diversified long-term investments pay off in the long run. The markets will return in time, just as we saw in the upturn from March to December last year.
I'm sure that somewhere out there is another 2004 graduate who didn't make the same mistakes I did. Maybe he began paying off his school loans on the 30-year plan, contributing to his 401(k), and investing aggressively in the market. Maybe he was smart enough, or lucky enough, to pull that money out before the markets crashed and pay down his 7 percent school loan. He was probably also wise enough to rent for five years until after the housing bubble burst and is now receiving the $8,000 tax credit for purchasing a new home. If this is you, then you've played the financial game to perfection (and perhaps missed your calling as a financial advisor—if you make the career switch, please give me a call).
For the rest of us who don't have the touch of Nostradamus or even much financial acumen, how do we decide where to put our money? No single approach works for all new graduates. Some of you will aggressively pay off credit cards and school loans. Others will take a little from each paycheck to gamble on the financial markets or make a down payment on your dream home. The bottom line is to be balanced and disciplined. Come up with a game plan to pay off the school loans before 30 years. See what fits your lifestyle for housing and a car. As little as it may be, commit to putting a set amount of money away from every paycheck for retirement.
That's how to decide and how to succeed: by sitting down, making a budget, and sticking to it. In the process, you'll also build your credit, which will pay off if you take the next big financial jump into practice ownership one day.
Will a recession this bad happen again? I hope not—but I know there will be downturns in the next 30 to 40 years. As veterinarians, we can take comfort in the knowledge that we're part of a stable profession. It's not going away or moving overseas, and we have many years ahead to earn money. The only question is, what will you do with yours?
Dr. Andrew Rollo is a Veterinary Economics Editorial Advisory Board member and an associate at Madison Veterinary Hospital in Madison Heights, Mich.