Save money or pay off debt, it’s a conundrum for new physicians. Both are important, but many physicians feel cornered by the decision because their budget only allows them to do one or the other. Instead of racking your brain to decide which to do, why not make it easy on yourself and just do both? In fact, not only can you do both, you can save more money and pay down debt faster using this winning strategy.
Budget like a Winner
Behind every winner, whether it’s a successful business, a flourishing country, or a self-made millionaire, there is sound, meaningful budget plan. You might not know that Warren Buffet, one the richest men in the world, lives on a middle class budget. On any level, it is nearly impossible to achieve any goal if your finances are not under control.
The key to budgeting is prioritization, tracking and discipline. Each dollar of your paycheck needs to be allocated among several spending categories with the goal of increasing the amount that is available for savings and debt. Living life on a budget doesn’t necessarily mean sacrificing a life style, but it should center on finding ways to save money within each spending category. If spending in a category exceeds the budgeted limit, then an adjustment must be made in another category in the following month’s budget.
Set the Bar High
From your initial budget set both a savings goal and a debt reduction goal. Make it realistic, but make it a stretch. This is your target and winners always hit the mark. The savings/debt target should be a total dollar amount that is to be drawn from your budget split proportionately to your needs. Generally, because the interest rate on debt is much higher than the interest rate on savings, you may want to begin by allocating more towards debt, say, 70/30. When you’re debt reduction gets ahead of target, you can adjust the allocation towards savings.
Pay Yourself First
As part of your winning budgeting plan, you need to always pay yourself first. If you’re savings/debt target is $800, before you make any other transaction that needs to go immediately into your savings account, and, from there you can make your debt payment. Do not divert from this practice. If you run into a budget problem elsewhere, you make adjustments in your other spending categories (i.e., no dinners out for the month).
Assuming you’re not behind on your debt, and you’re credit is good enough to attract credit card offers, consider transferring your high interest balances to a 0% or low interest credit card. Be sure to read the fine print on the offer and be aware that you will probably pay a transfer fee. But, here’s the key: Maintain your current level of debt payment. Do not succumb to the temptation to make a lower payment because you’re being charged less interest. If you were paying $300 a month on an 18% credit card, continue to pay that amount on you new 0% card. Then, be ready to make a similar transfer when the promotion rate ends.
Bonus Strategy: Borrow from Your 401(k)
Once thought to be a hands-off ploy, borrowing from your 401(k) may be the smartest thing to do right now. With loan rates around 4 to 5% over a five year repayment term, it certainly is the cheapest loan you can get. And, the good news is that you would be paying yourself back. It’s recommended that you don’t do this until you have implemented the other strategies outlined here. And, if you think there is any chance of a layoff at your company, you probably shouldn’t do it, because the loan would then come due in 60 days.
Invest in Your Tomorrow
Want more information about creating a financial plan? Schedule a financial planning consultation with a certified professional.