by Kimberly Palmer
Young professionals today aren’t exactly known for our financial expertise. Dubbed “generation debt,” we’re stereotyped as over-spending shopaholics, easily enticed by credit cards, lattes, and the latest smartphone. But that reputation, it turns out, isn’t fair.
Yes, we have more student loan debt than previous generations, and average credit card debt among twenty-five- to thirty-four-year-olds has climbed 50 percent since 1989, to over $4,000 per person. But we also have greater earning power: The number of people enrolled in graduate programs has increased over 70 percent since 1976, making Generations X and Y the most highly educated group of Americans to date.
The best financial roadmap for young doctors, medical workers, and other young professionals goes far beyond just paying off debts. Being smart about money begins with being smart about what you want out of life. What would you do if you weren’t limited by time or money? Do you want to start a nonprofit, travel around the world, or take a year-long work break to pursue a passion project? To generate ideas, brainstorm with family and friends.
Once you have those big goals in mind, it’s time to figure out a way to get there, which starts with a budget. Most people find that two-thirds of their after-tax income goes towards three big costs: Food, housing, and transportation. If possible, minimize that pricey trifecta by living in a smaller home, taking advantage of public transportation, and eating at home as much as possible. That will give the rest of your budget more freedom.
Your budget, which you can track easily on free websites such as mint.com or on a simple spreadsheet, will probably look something like this:
- The basics: food, housing, and transportation: 50 percent
- Debt payments: 5 to 10 percent, depending on the size of student loans
- Savings: 25 percent, including retirement savings
- Professional expenses, including professional association fees, publication subscriptions, and attending conferences: 5 percent or less
- Household expenses, including services such as cleaning and general upkeep: About 5 percent
- Entertainment: 5 percent or less
These categories add up to less than 100 percent in order to allow for some wiggle room, and to personalize your plan to fit your own needs, such as child-care costs, extra-large student loan payments, or a scuba-diving hobby.
To some people, a savings rate of 25 percent will sound high. In fact, most Americans manage to save just 5 percent of their incomes. But in order to establish financial security, putting one in four dollars aside for the future is necessary, especially considering how many employers are cutting back on pensions and other supplementary savings plans. The most successful savers start slowly, by putting just 2 percent of their monthly salary aside (through automated paycheck deductions) and then slowly ramping up that percentage until hitting their goal rate.
The debt piece of the puzzle can be tricky, since many people are tempted to just slowly pay off their student loans over their 20 or 30 year terms, instead of unloading them early. Here’s the problem with that: Many student loans carry high interest rates – north of 5 or 6 percent – which means graduates are paying far more in interest than they can earn on any savings at the bank. That’s why it can be a smarter move to pay off high-interest student loans early, after putting aside a three-month cushion for emergency funds. This might not be possible soon after graduating, but within five years it might be.
Another classic mistake: Scrimping on professional investments. You worked hard for your career, so don’t stop investing in yourself now. Setting aside money (and time) to keep up with professional networks, participate in associations and conferences, and generally remain plugged in to new developments is key to remaining an active contributor to your field.
If you’ve never stuck to a budget before and the whole process sounds a bit overwhelming, start by keeping track of your spending for two weeks. You might be surprised to find that you’re wasting money on happy hour tabs but your coffee habit is hardly worth limiting.
Eventually, budgeting will feel like cooking: As long as you approximate the amounts as well as you can, things will generally work out, and, once you establish some routines, then you don’t even have to think about it anymore.
My sister Christina, a fourth-year medical student, is the perfect example of this. She knows that in order to remain on top of her game throughout her long days at the hospital, she needs to wake up early – sometimes as early as 3:30am – to practice yoga. She also put a big chunk of her budget towards getting her yoga teacher certification. Because yoga is so important to her – and she wants to combine her interests in yoga and medicine, as she already does on her Prescribing Yoga (prescribingyoga.com) blog – it was a great investment. Being smart about your money means having more energy to put into whatever it is you really care about.
Kimberly Palmer is a personal finance columnist at US News & World Report and author of Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back. She can be reached at Generation Earn.
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