If you are like me, you grew up with little understanding of personal finance and what it takes to be financially secure.
I remember seeing my parents sitting at the kitchen table once every couple of weeks going through stacks of receipts and writing things down in a notebook. Beyond that, my exposure to managing money was limited to my allowance and coin jar. Which, admittedly, was primarily used for Nintendo games and baseball cards.
I was taught that saving was important but had no concept of what that was supposed to look like in real life. I was fortunate, in that my parents, both nurses, sacrificed immensely to help me make it through college without student debt.
It was during my fourth year of medical school that reality set in. I came to the realization that I was about to graduate with hundreds of thousands of dollars in student debt but had no idea how I was going to pay it off, let alone someday buy a house, pay for my (maybe someday) kids’ education, or plan for retirement.
I decided that had to change. So, I began reading, listening to podcasts, and learning as much as I possibly could about personal finance. Since then, I’ve spoken with many of my friends (within and outside of healthcare) and colleagues and have come to see that my experience is not unique.
Embarking on this journey can feel daunting! There is so much to learn!
Where do I start?
What is an emergency fund?
How do I begin investing?
If you are looking to get your financial life in order and are feeling overwhelmed, recognize that you are not alone. In my opinion, one of the most important steps you can take as you begin your personal finance journey is establishing financial priorities. So, I’d like to share with you how I approach financial priorities.
Priority #1- Emergency Fund
An emergency fund is the foundation of a healthy financial life.
I like to think of it as a guardrail against going further into debt in the event of a financial emergency, surprise layoff, or large unexpected expense.
Most financial experts recommend having 3-6 months of expenses set aside in your emergency fund.
Here is how you calculate the amount you will need in your Emergency Fund
1. So, your first step is taking some time to review your expenses for the last 2-3 months.* You’ll want to account for essential expenses such as rent/mortgage, utilities, car payments, groceries, student loan payments, gas, insurance premiums, etc.
2. Add up these monthly expenses and multiply by the number of months you’d like to have set aside in your emergency fund, and there you have it, your target amount!
You may look at that number and think, “There is no way I could ever get there!”
Believe me, that’s how I felt as well. One thing I have found helpful on my own financial journey is setting small goals that I can build upon as I work toward my larger goals.
So, for example, set a goal of having $1,000 in your emergency fund by the end of this year. If you set aside $83 per month, you’ll have $1,000 in a year. You can do it!
Where should you keep your emergency fund?
Most experts recommend a high yield savings account for several reasons.
First, the whole point of an emergency fund is having that money easily accessible should you need it.
A high yield savings account from a reputable bank is low risk and is insured by the Federal Deposit Insurance Corporation (FDIC). Secondly, a high yield savings account offers higher interest than most savings or checking accounts which allows your money to grow.
*I’m a really big fan of budgeting, or at the very least, tracking where your money is going every month. If you don’t know where your money is going, it's hard to be intentional about meeting your financial goals.
Priority #2- High-Interest Debt
I personally define high-interest debt as anything with an interest rate above about 7%.
Because if you were to invest your money in an index fund that tracks the total stock market or an index like the S&P 500, you can expect to earn an annual return of about 7-10% on average (there are some up years and some down years, but over the last 90+ years, the S&P 500 has averaged about 9.8% annually).
However, if you have debt with interest rates well into the double digits, it’s extremely unlikely you’d be able to earn returns even close to that over the long run by investing.
So, although not completely accurate, you can think of every payment you make on your credit card debt with a 17% interest rate as an automatic 17% return on your “investment.”
I really can’t emphasize how important it is to pay down high-interest debt, and quickly! It is a major obstacle to financial independence.
That said, I do want to take a moment to recognize that many people feel guilty and ashamed of their debt and/or financial mistakes they have made in the past. I want to say plainly that we are not defined by our mistakes. What’s important is that we learn from them as we move forward and commit to showing up for ourselves from here on out. You’ve got this!
Priority #3- Investing
If you have established an emergency fund and paid down your high-interest debt, your next priority is investing!
If you haven’t already, open a traditional IRA or a Roth IRA. The exact type of account that you open depends on your personal financial situation.
Simplistically, a traditional IRA is an account in which (depending on your income) your contributions are tax-deductible, your money grows tax-free and is then taxed when you take it out in retirement.
A Roth IRA is an account in which your contributions are “post-tax” (not tax-deductible), your money grows tax-free, and withdraws are tax-free in retirement.
There are caveats and nuances to each of these, so take some time to learn about them and choose the one that works best for you and your current situation!
It is also important to note that there are many other types of accounts out there, but these are two of the most common and most easily accessible accounts.
Another important thing to point out is that a traditional IRA or a Roth IRA is an investment account, not an investment. After you contribute to your traditional or Roth IRA you then have to manually invest the money!
When it comes to investing, I am a big proponent of low-cost index funds. There is a lot of interesting research out there that demonstrates that low-cost index funds nearly always outperform higher-fee actively managed funds*.
While low-cost index funds are incredibly un-sexy and somewhat boring (definitely not the material you’ll find Wolf of Wallstreet), they are, in my opinion, some of the best investments out there.
Companies like Vanguard, Fidelity and Schwab are great places to find these types of index funds.
*Actively managed funds are essentially funds in which really smart financial analysts using fancy computer algorithms try to “outperform” the market and charge hefty fees while they are at it!
Priority #4- Low-Interest Debt
Once you have an established emergency fund, paid down your high-interest debt, and have begun investing, your next priority is low-interest debt.
For most people, this is student debt, a mortgage, or car payments. There are two reasons that, in my opinion, this should be a lower priority than investing.
First, as I mentioned above, it is not unreasonable to expect to earn annual returns of 7-10% by investing in an index fund that tracks the total stock market or an index like the S&P 500.
So, if you simply directed all your money toward your 3% mortgage, you are missing out on an additional 4-6% return on your “investment.” Secondly, perhaps the greatest contributor toward building wealth is time. The longer you have to invest, the longer you have to let compound interest work for you. If you earn a 10% return on $1,000 invested this year, you’ll be earning a return on $1,100 next year ($1,000 + 10% = $1,100). As your money grows each year, you are earning growth on top of growth on top of growth.
However, there is absolutely something to be said for being debt-free. Eliminating debt not only frees up money for other things but also provides incredible peace of mind! Therefore, it is still a high priority in the overall journey toward financial independence, but just not quite as high as the other three.
One Big Caveat: A 401(k) with an Employer Match
If you work for an employer that matches your 401(k) contributions, in my opinion, you should absolutely be contributing to your 401(k) at least up to the amount your employer will match. You should do this no matter where you are on your journey through the four financial priorities above. An employer match is “free” (not really, it’s a benefit you earn by being employed!) money! Don’t pass it up!
If you are new to this whole personal finance thing, I hope you find these principles helpful. I want to emphasize that personal finance is personal. Each of us has our own unique set of circumstances, challenges, and goals. It’s tempting to look around and compare ourselves to where others are at on their own personal finance journey. What is important is that you show up for yourself and set goals that will get you to where you want to be.
Stop for a moment. Take a deep breath. Congratulate yourself for showing up. And dive in.
I am not a financial advisor, and this is not intended as financial advice. This is my own personal perspective on financial priorities. Please be sure to do your own research!
About the Author
My name is Justin. I’m originally from Tennessee but currently live in Los Angeles. I am a pediatrician, and I am currently in fellowship training for pediatric critical care medicine. I enjoy traveling with my incredible wife, baking, exploring the LA coffee scene, and cycling. I believe personal finance education should be simple, easily accessible, inclusive, and provided in a way that can be understood by anyone. Personal finance is such an important aspect of overall well-being, yet, it is something most of us aren’t taught about at home or in school. I am working to change that, with a special emphasis on providing education to folx in healthcare.