Most physicians, or high-income earners, who I talk to know that they need to be saving – they’re just not exactly sure how to prioritize their different savings goals. Having enough cash flow to fund multiple savings goals at once is a huge financial “win”, but it can also cause some confusion when it comes to actually setting up your strategy.
Typically, I recommend that young families (or individuals) follow a straightforward savings strategy when they’re just getting started.
Emergency Savings or Job Mobility Fund
Money is a tool, and having an emergency savings fund built up for a rainy day gives you both freedom and flexibility. This might mean making career choices that are best for you and your family without having to worry about missing a paycheck or two during the transition. Doesn’t that sound like a good position to be in?
Viewing your emergency savings as a job mobility fund gives you the flexibility you need to shift gears, and pursue a career that impacts others in a positive way, or matches your values more closely. An emergency savings ranges between 3-6 months of living expenses. If you are a one-income household, saving on the higher end of that spectrum makes the most sense.
Employer Retirement Account Up to Match
Your next step is to maximize your employer’s retirement savings account up to the amount they’re willing to match in contributions. When you prioritize your retirement savings, you’re securing a comfortable future for yourself and your spouse. You’re also building a savings that helps you to live independently as a retiree (if that’s what you want), and thinking about some of your long-term goals. Planning retirement savings based on what you want to retire to can be incredibly rewarding.
Pay Off High-Interest Debt
As a young physician or high-income earner, you’re likely dealing with a mountain of student loan debt. When you create a debt repayment strategy, I usually recommend starting by repaying any high-interest debt you have. High-interest debt is any debt you have with an interest rate of 5%+.
This strategy is also called the “debt avalanche” strategy. There are a few other ways that you can organize your debt repayment that may work well for you, too! The debt snowball strategy, for example, prioritizes paying off smaller loans first, regardless of their interest rate. This might help you to feel a sense of accomplishment as you knock out small loans quickly in the beginning of your career, which helps you keep up some momentum.
Maximize Health Savings Account (HSA) Contributions
If you have a High-Deductible Health Plan, your next step should be to maximize contributions to your HSA. Funds in your HSA rollover year to year, so they act as a convenient way to save for rising medical costs that you may run into during retirement. However, the fund is flexible! So, if you have a large medical expense crop up in the next few years, you can tap into your HSA’s funds to cover the expense. Remember – your HSA funds can only be used for qualifying medical expenses.
Contribute to a 529 Plan
Have kids? This next step is designed to help you save for their future education expenses and to maximize your state tax benefits. Every state has a different tax deduction or credit for contributions made to their specific 529 plan. When you contribute enough to a state 529 plan to receive this credit or deduction, you’re maximizing education savings while still saving money on your taxes each year. Contributing to a 529 Plan also helps you to make education, and financial stability, a possibility for future generations. Can you imagine the success your kids or grandkids might have if they aren’t weight down by student loan debt when they get their degree?
Save for a House Down Payment
Is purchasing a home in your future? Your next step is to start putting aside money for a 20% down payment. It may also be smart to save a bit more than your estimated down payment to cover the unexpected costs of homeownership, as well.
Make Additional 529 Plan Contributions
Once you’ve completed the previous steps, you can look to start maximizing your savings in additional ways. For those with kids, this might mean automating additional contributions to a 529 plan, depending on your education savings goals.
Maximize a Backdoor Roth IRA
Another way to maximize savings as a high-income earner is to maximize a backdoor Roth IRA (assuming the benefits to this aren’t negated by the aggregation rule). Backdoor Roth IRAs aren’t an option you should explore without doing a significant amount of research, or speaking with an advisor, first.
To set up a backdoor Roth IRA, you would contribute a set amount of pre-tax funds to a Traditional IRA, and convert them to a Roth IRA at the end of the year. However, there are certain rules and tax implications that could negate the benefits you receive from having your funds grow in a Roth IRA account, which is why consulting with a professional may be in your best interest if you want to pursue this route.
Fund Taxable Brokerage Accounts
To continue saving for retirement, or to meet your other financial goals, you might consider looking into funding a taxable brokerage account. This should be the last savings step you take when prioritizing savings goals.
Pay Off Low-Interest Debt
“Low interest” debt is any debt amount that is less than 5%. After you’ve completed the steps above, from saving to paying off high-interest debt, you can start to focus on repaying lower interest debt. The only time this step wouldn’t make sense for you is if you’re expecting your loans to be forgiven through a program such as PSLF.
Automate What You Can
Once you decide on your savings strategy, the last thing you want is to get off track! To help yourself stay consistent, try automating what you can. Here are just a few ways you can start automating your saving:
- Automate contributions to your workplace 401k with every paycheck
- Set up an automatic deposit from your checking account each pay cycle to each of your earmarked savings accounts, based on your goals
- Block off time in your calendar every month to do a budget-check to see if you can increase the automatic loan payments you make, or if you need to do a manual contribution
The more you can automate things, the kinder you’re being to your future self. The less time something takes you, the more likely you are to keep up with the habit!