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The Right Way to Save and Accumulate Money
Glossary
 

Welcome! This article is part of a Medscape Physician Business Academy course, . Visit the Course Page to take the full course and receive a certificate.

How to Save More

In chapter 1, we looked at the importance of starting to save for retirement early and consistently because of the benefits derived from compound interest. Saving is also recommended for physicians' financial planning because there will be goals along the way to prepare for, such as family needs, education costs, and retirement years.

Here are several ways in which doctors starting out in practice can learn to be better savers.

Save up before you buy, especially for large purchases. In the past, people saved up for the car, appliance, or vacation they wanted before buying it. Now, people typically make the purchase first and decide how to cover the costs later. They may be hit with large interest costs and a lengthy payback schedule for the credit cards used.

Saving before purchasing can lead to good habits, satisfaction, and a sense of who you are. In contrast, spending money before it's been saved can cause anxiety, worry, and loss of self-respect, even though it provides short-term "wins" that can satisfy you for the moment.

Set aside time at least once or twice a year to review your finances and statements. This process is very valuable, to give you a better understanding of where your money is actually going. Many credit card companies provide an end-of-year breakdown of what you spent your money on. Reviewing these is useful for seeing where your money is actually going—sometimes it's a major eye-opener.

Reviewing your finances and statements is useful for seeing where your money is actually going.

Today, many people pay all bills and check their account balances online. If so, it's still, or even more, important to be getting a comprehensive read on your finances to see what's actually happening. Withdrawals, deposits, and charges are worth noting, too. Many people don't know what has happened to their money once it's spent and can't make changes to save more because they are in the dark.

Prioritize your wish list. What do you wish to accomplish—a trip around the world? Education for your children? And what can wait until later? You decide, and act accordingly.

Have many "pockets" to remind you to save for many goals. Some people keep better track of their savings by setting up many accounts, each of which is assigned to a specific goal. For example, you may have an education account, a new car/house account, or a modernize-the-bathroom account. That can remind you to save for a certain goal.

Look for the Danger Signs

There are some danger signs to watch for as you review your progress at spending and saving:

Holding high interest rate debt. If you are continually increasing or just barely holding steady with the credit card debt you have accumulated and it is keeping you from moving forward, you probably have too much debt. Are you paying off the interest charges each month and not lowering the principal amount? Try increasing your payments until you make a considerable dent in what you owe. If you have many debts, a rule of thumb in financial planning is to pay off the debt with the highest interest rate first. Often, credit card debt carries higher interest rates than student loans, although the latter shouldn't be defaulted on in favor of catching up with card debt.

Having many credit cards. Do you need more than two credit cards? There is some truth to the idea that when you pay for an item by cash or check, you feel the heat and think twice about whether you need to make a purchase. When you pay by credit card, you tend to deal with the reality of the costs later. Retire all but two of your cards, and use them judiciously.

Retire all but two of your cards and use them judiciously.

Being unaware of your credit rating. If your score is over 700, you are doing well. If it is over 800, you're a winner. Keep your credit cards to a minimum, and you may have a higher score. The idea that you have the option to charge on many cards and ratchet up your debt may keep you from getting the mortgage you want later.

Keeping money secrets from your family. Are you withholding spending information from your loved ones? Are you ashamed of something you've done financially? This is not a good way to earn trust, whether you do it by omission or by hiding purchases. Clear the air, discuss your expenses, and negotiate future financial purchases with your significant other.

Living like older physicians live. Young physicians often try to move ahead quickly. You went to school for years, worked hard toward your career, and want to drive a great car and live in a nice neighborhood. But be careful about keeping up with Dr Jones. Live within your means at first, and move up when you are prepared for it. Having very large monthly expenses and working long hours to meet them can make you stressed and resentful. Think about whether this expense-heavy lifestyle is right for you.

There Are Many Ways to Save Effectively

The advantages of compound interest. The more you save and invest, the faster your money will grow. Compounding allows you to accumulate interest on your original investment, as well as interest on the interest. You can quickly accumulate money beyond your original amount.

For example, if you invest a principal amount of $2000 and your interest rate is 10% (which would admittedly be high right now), after the first year you will have $2200. After the second year, you will still be getting 10% on your principal, but in addition you will get 10% on the interest you gained in the first year as well, resulting in a total of $2420. By the third year, you will have $2662 as a result of receiving interest not only on your principal, but on your interest, too.

If you get a raise, continue to live as if you didn't have it.

Save your raises. If you get a raise, continue to live as if you didn't have it. Put the raise in savings, and spend the same amount as last year.

Put your bonus away. If you get a bonus, use 20% of it for something you've been wanting. Save the other 80% for your retirement or another specific goal.

Leverage education debt that's paid off. If you've been paying for education—yours or your children's—continue to save that same amount when the education period is behind you.

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Welcome! This article is part of a Medscape Physician Business Academy course, . Visit the Course Page to take the full course and receive a certificate.

 

Karen Altfest, PhD, CFP®

| Disclosures | January 01, 2018

Authors and Disclosures

Author(s)

Karen Altfest, PhD, CFP®

Principal Advisor and Executive Vice President, Altfest Personal Wealth Management, New York, New York

Disclosure: Karen Altfest, PhD, CFP®, has disclosed no relevant financial relationships.