Raising a family is an exciting time. I can say from personal experience that the days are long but the years go by fast. The days get extra long when you find yourself up multiple nights in a row with a baby that doesn't sleep! Outside of those occurrences, there isn't much more in life that can bring you as much joy as being apart of a loving family. However, regardless of what your family dynamic is, you shouldn't let your financial wellbeing take a back seat. As your family grows and evolves, you want to make sure that your finances are also keeping pace. With busy work schedules, child events, volunteering, hobbies, and spending time with extended family, it can be hard to allocate time thinking and working on your personal finances. So in this blog, we explore PharmD Financial Planning's six simple money tips for PharmD's with young families. How to make the most of your financial situation while shepherding your family at the same time.
- Stop with the budgeting.
- Getting the appropriate life insurance coverage
- Start maximizing your tax efficiency
- The benefits of saving early in life
- Managing your debt to income ratio
- Getting your estate in order
Hold up! Before you continue on, enjoy this complimentary checklist: What-Issues-Should-I-Consider-When-Having-Or-Adopting-A-Child-2021.pdf
Is a blog not your preferred method of information consumption? That's ok, we've got you covered! Take a look at our PharmD FP Video: 3 Tips To Improve Your Overall Financial Wellbeing
No More Budgeting
Budgeting sounds financially responsible. You figure out what you want to spend your money on in a given month or year and you hold yourself to that limit. It's so simple in theory. The only problem is it's unrealistic. Budgeting gives you permission to spend money. Most people that create a budget go into it thinking that they will use self-control and pure willpower to stay within the spending restraints they have set for themselves. But lets be real. If willpower and self-control alone were enough to control our actions, we'd all be millionaires with six pack abs. Instead, we act everyday based on habit. Over the course of our life we have accumulated habits that we use to speed up the way we react to situations around us. These habits control the way we spend our money as well. And to think that setting a budget on a piece of paper is going to be enough to break those subconscious habits we have instilled within us is lunacy. This is why starting a budget is like setting a new years resolution. Both will most likely be broken and forgot about within a month. So what can we do instead?
Start Tracking Your Spending
If we really want to regain control of money, we need to first understand where and how it's actually getting spent. I get the privilege of asking many clients this exact question. "What do you think you spend most of your money on?" Most people feel like they have a good idea of where their money goes. But most become surprised with the hard data that gets shown to them when they actually start tracking it. Most people end up stating that they couldn't believe they spend $X amount on this or that. Or they had no idea, as a family, so much money was being allocated toward a specific area (Amazon shopping, anyone?). And that is normal behavior. It's why setting a budget doesn't work. You will unknowingly give yourself spending parameters that will grossly under or overestimate what you are actually spending your money on. This will cause such a dramatic shift in your current lifestyle, that it will become a huge pain in the butt to continue on with.
However, tracking your spending will let the pre-frontal cortex of your brain rationalize those expenses. That rationalization and immediate emotional reaction to that rationalization will slow down the embedded habit that causes you to spend your money like that in the first place. For example, after the first month of tracking your spending, you notice that a large portion of your income is being spent on golf accessories. After seeing this information laid out in front of you, an emotional response will follow. That emotional response will be extremely subtle, but it'll be there. It may be a feeling of regret or disappointment in yourself for letting your spending get carried away that much. Now, the next time you are presented with an opportunity to spend money on golf accessories, you will consciously remember that emotional response and it will force you to rationalize the expense with your competing desire to control your spending. You may very well end out making that same purchase again, but now you are doing it with that opportunity cost in mind. This will start to build new spending habits that will force you to continuously be aware of the trade-offs your making with every purchase you make. This will ultimately help you better align how you spend your money with the other important financial goals you have.
Get The Right Amount Of Life Insurance
Regardless of what you say, everyone likes life insurance. The life insurance premiums that we are all required to pay is what we don't like. But having a young family that depends on you for everything means the stakes are way to high to not have life insurance. The first and most important factor you need to consider when it comes to life insurance is making sure you have enough coverage. Once you understand how much life insurance you need, you can better understand which types of life insurance can meet that need while also staying within the parameters of what you can afford.
This is usually where the decision of purchasing term life insurance compared to permanent life insurance comes in. Don't let a life insurance salesmen talk you into buying a permanent policy that doesn't provide you with the proper coverage, just so they can earn a bigger commission. All the other features and benefits that are "sold" during a life insurance sales presentation should come second to making sure you are actually getting the appropriate coverage you and your family need.
Take Control Of Your Taxes
No one likes paying more than they have to when it comes to taxes. With all the changes that have taken place within our tax code over the last 48 months, there has never been more opportunity for young families to receive tax benefits. Dependent care FSA and dependent Care Tax Credit changes, child tax credit increases, and stimulus checks are the most recent examples of how families with young children can maximize their tax planning benefits. And we may be getting even more and longer lasting benefits in the future.
Because of this, it's important for a young family to have a good understanding of what their tax situation looks like. I'm not advocating for you to become a tax expert, but having a basic understanding of your tax makeup is crucial. What is your adjusted gross income? What are your marginal and effective tax rates? What deductions, credits and tax filing statuses do you have available to you? These are a few examples of information that will be helpful to know when determining if anything in your tax life should be changed in order to have a better chance at maximizing the benefits of any government or IRS initiatives.
At PharmD Financial Planning, we understand the benefit of proper tax planning so much so that we require all of our ongoing clients to incorporate tax planning into our work together every single year. The biggest reason why this is important for young families is because it can lower the tax liabilities you may experience in the future. Reducing your current and future tax burdens today may end up saving you from having taxes becoming your biggest expense as you age. Just look at pre and post retirees today. Aside from healthcare, most people find that their biggest expense in retirement are taxes.
Start Saving Right Now
It doesn't matter if cash flow is tight. Find a way to start putting money away for your future self as soon as possible. The most powerful force in our financial world is compounding. Setting money aside, regardless of how much, will allow the power of compounding to start working in your favor. How big a a deal is this? Well lets consider two scenarios. First, let's assume that you are 25 years old and plan to contribute $200/month into a Roth IRA. You do this for 10 years until you are 35, at which point you stop contributing all together. If we assume that you can average an 8% rate of return on your money every year, this 25 year old can expect to have accumulated $180,267 by the time he/she reaches age 55. The total contribution you would have made over those first 10 years was $24,000.
Now, instead of starting at 25, you begin to contribute the same $200/month, starting at age 35. And you make this contribution into the same account that is earning 8% each year for the next 20 years. At age 55 you would find that you have accumulated $117,804.08. Your total contribution in this scenario is $48,000.
You contribute half as much of your own money in scenario one, and end up with over $62,000 more at age 55. All because you decided to start investing 10 years sooner. Saving in the right kind of account is also important. You could start saving in a regular investment account, IRA, Roth IRA, HSA, 401(k), etc. But regardless of where you start saving your money, actually starting and doing it as soon as you can will make the biggest impact on your financial future.
Manage Your Debt to Income Ratio
Debt isn't the worst thing in the world as long as it's managed appropriately. The biggest problem I have with debt is the lack of financial flexibility you are able to retain. It limits the future opportunities you can take advantage of, due to lack of available cash flow. So managing your debt and doing your best to keep it under a certain debt to income ratio is important.
A debt to income ratio is simply dividing your current monthly debt obligations (mortgage, car payment, student loans, etc) by your gross monthly income. So if you are paying $2,400/month in debt payments and earn $9,000/month in income, your debt to income ratio would be approximately 27%. Most financial institutions would see a debt to income ratio between 20% to 30% as financially healthy when they are determining whether to lend money or not. So this should be a goal for all young families as well.
Get Your Estate Planning In Order
For many young families, proper estate planning if probably something you are not to concerned about. But that doesn't mean it's not important. Making sure beneficiaries are updated is a great first step, but you shouldn't stop there. With a young family, making sure you have a will or trust in place is ideal. Young children can't take ownership of a lot of financial assets until they reach a certain age. So if you were to pass away and leave your assets to your kids while they are young, could result in a lot of issues.
Having a legal document, like a will, could provide for a smoother and more beneficial transition of those assets if something like were to happen. These legal documents could also allow for any of your other wishes to be acted on. Like who you'd like to step in as a guardian for your kids. Or when and how much of your money you'd like your children to get control of if you were to die. It will allow you to retain a little control over your property even after you're gone.
Life is messy. Money is messy. Combine the two and things can get pretty hectic. You don't have to be perfect with your finances. But you can't completely ignore them either. Use these 6 simple money tips to ensure you are maximizing your financial wellbeing. Not only for your benefit, but for the benefit of your young family as well.
Looking For A Fiduciary Financial Planner?
Check-out PharmD Financial Planning. PharmD Financial Planning is a fee-only, fully fiduciary, wealth advisory firm. We help pharmacists reduce taxes, invest smarter, and optimize their finances. For Pharmacist Families By A Pharmacist Family. Working with pharmacists all over the United States. Learn more here! 👇