Financial independence starts with budgeting and saving | ADA Member Advantage

Financial independence starts with budgeting and saving

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You’ve worked hard to get here. Your academic studies are (or nearly are) behind you, and a rewarding professional career is ahead of you. Right now, you may have a student loan, personal loan, mortgage, or even credit card debt. You may feel overwhelmed by the level of debt or number of outstanding loans — especially when faced with the reality of starting salaries, training programs, and life events. No matter where you are financially, smart budgeting and saving strategies can help you build a path to financial freedom.

Figure out your after-tax income
Your budget should be based on your take-home pay (income minus taxes and other deductions), not your gross salary.

Know your fixed costs
Fixed costs are bills and expenses that don’t vary from month to month, such as mortgage and other loan payments, utilities, etc.

Use the 50/30/20 budget rule
One simple budgeting method starts with dividing your income into three buckets: The first 50% of your income (maximum) should cover your necessities — essential expenses like groceries, utilities, rent and the minimum payment due on your debts.

Another 30% should cover discretionary items — personal lifestyle expenses that allow you to make some choices toward “living the good life” and living within your means.

The remaining 20% should go to savings, including contributions to retirement, extra debt payments, emergency savings, and other investment or savings plans. You should make these payments and contributions after your essential expenses and before discretionary spending. A simple budget calculator can help you stay on track.

Save for an emergency or “rainy day” fund
Because insurance can’t cover every eventuality, having a financial cushion can help get you through an unexpected challenge, such as an urgent home repair, medical bill, or job loss. How much cash you should have in an emergency fund varies, but most financial experts recommend saving enough to cover 3-6 months’ worth of necessary expenses.

Protect your assets and yourself with insurance
No matter how well you plan, things happen. Make sure you protect your most important assets. Property, health and life insurance will add to your expenses, but they can save you a lot of money and aggravation if something goes wrong.

Plan for your family
A 529 college savings plan — officially known as a qualified tuition plan — is a tax-advantaged savings plan operated by a state or educational institution to help you save for future college costs. Most states now have at least one 529 plan available but they differ from state to state, so research these different plans before you invest.

Have a plan for extra income
Sometimes, unexpected good things happen. If you come into extra money — a raise, year-end bonus, tax refund or inheritance — put a portion of it toward paying down your debt. If you’re building your savings, you may consider a high yield savings account to take advantage of competitive rates while keeping your immediate access to funds when you need them.

Understanding compound interest
Compound interest is a marvelous thing and its magic means that your savings can account for much of the value that you will work for in accumulating assets for your retirement. But it’s important to start saving now! Over the years, interest earned on previously earned interest (compounded) can reach a sizeable amount.

As an example, Dentist A and Dentist B both plan to practice for 40 years, retiring at the age of 66. If Dentist A saves $50 per month starting right out of dental school in a 401K or similar retirement account, after 40 years, assuming 4% interest (which is pretty conservative) they will have $57,255.36. Only $24,000 of that is in contributions.

If Dentist B doesn’t save anything for the first 10 years of her career, but starts putting in $50 per month for 30 years, assuming that same 4% interest rate, they will have $33,813.13. Those ten years without compound interest resulted in a difference of $23,442.23.

A quick and easy way to determine the effect of compounding is to use the “Rule of 72.” The “Rule of 72” determines the number of years it will take to double your money, or when borrowing — to double the amount paid. It works like this. The number of years required to double the money is 72 divided by the interest rate. If the interest rate is six percent, then 72 divided by six = 12 years for an investment to double. At nine percent, it takes eight years. How long will it take to double your debt? At an interest rate of 18 percent, which is the range of credit card debt, 72 divided by 18 is four years.

With some early planning and a few financial tools, you can get on track to financial independence at any stage of your dental career.

Laurel Road is endorsed by ADA Member Advantage to provide student loan refinancing services to ADA Members. Qualifying ADA Members receive a 0.30% rate reduction1 to Laurel Road’s already low rates for the life of the loan, plus an additional 0.25% rate discount when monthly payments are made automatically from a bank account. Additionally, ADA Members receive a free 30-minute student loan consultation from the Laurel Road experts at GradFin and a 20% discount on annual GradFin membership2