If you've been around the personal finance blogosphere, you probably have encountered this term - "Pay Yourself First." Or you may have read WealthyDoc's insightful guest post on Physician on Fire - Pay Yourself First? No, Pay Yourself Last. Since I've talked a lot about PSLF, I thought it's time we pay some attention to PYSF. So what exactly do we mean when we say "Pay Yourself First"? Let me explain.
The Traditional Method - Pay Yourself Last
If you're like most medical trainees, you probably spend a lot of time studying about medicine and how to take care of your patients and very little time worrying about finances. When your paycheck gets deposited into your bank account, a good chunk of that money has already been spoken for: student loan payment, car payment, rent, utilities, phone bill, credit card bill, doctor's bill, insurance premium etc. And if you're not keeping track or if you had gone on a spending spree last month, it's not difficult to imagine how you could have nothing left after paying all the bills. If you fall into this category, you are not alone. According to the latest data from the US Bureau of Economic Analysis, the average US personal savings rate has dipped to 3.8%, far below the 10-15% recommended by most retirement advisors.
A Change of Heart - Pay Yourself First (PYSF)
Here is the funny thing about "Pay Yourself First," it's really just a change of mindset. But we all know how difficult it can be to change someone's mind though, as we are so recently reminded by the tragic events in Charlottesville. So here's how PYSF works:
- Instead of taking care of your debts and commitments to other people first, you prioritize the commitment to your financial future/retirement savings.
- When your paycheck arrives every 2 weeks, set up a system that automatically siphons off a predetermined $ amount or % to go to your retirement savings/investments.
- Take care of your other commitments using what's left.
How I approach PYSF
As a resident myself, my income stream is limited. But I definitely want to take advantage of all the tax-advantaged retirement accounts available to me. Luckily for me, as someone who's been a thrifter all my life, I do not have any major debts prior to starting residency except for student loans. I was able to automate my monthly PYSF spending as follows:
If that seems like a lot of money to save on a resident salary, it is. In fact, nearly 100% of my after-tax paycheck goes towards PYSF. So you may be wondering - "How do you pay for rent, food, utilities and all of the other necessities of life?" I do it through 2 ways:
- Moonlighting income - While the number of hours I moonlight may differ from month to month, it's usually enough to take care of the ordinary bills.
- Frugal living - I practice what I preach and save money whenever I can. In fact, I recently bought my first suit since medical school and that's only because I've given up trying to squeeze back into my old suits.
Being a radiology trainee and a technology junkie, it makes sense that I am into automating everything in life. It follows that I'm a big proponent of PYSF. But I understand I have a special situation. Many of you may have significant debts in addition to student loans and you may not be able to max out all of your PYSF options. But most of you will soon. When you do, keep this article in mind and remember to pay yourself first.
Ryan created his virtual, fee-only practice to help young physicians take control of their finances. As part of a physician family, Ryan knows the pains, struggles and joys that come from a career in medicine. When his wife was in residency, he witnessed how vulnerable she was to poor financial advice that wasn’t in her best interest. Because of this, he shifted his practice to work exclusively with young physicians who could truly benefit from unbiased, quality financial advice. PWS seeks to provide clients with the financial literacy they didn’t received despite decades in school. He offers student loan analysis, comprehensive financial planning (starting at $200/mo.), and investment management (.75% per year) with no investment minimums. Wondering if you can save for retirement while paying off student loans? Click here.