Every physician wants to save money, but building good money habits is more difficult than it sounds. Saving additional money each month allows you to put more toward things like retirement, college tuition, emergency funds, and other vital expenses.
It’s impossible to completely transform your financial outlook overnight, but the changes you make today will affect your entire financial future.
These are ten habits to save more money that you can develop right now
Focusing on Debts
Physicians and other high-income professionals often graduate with costly student loans, and you might also go into debt on a credit card, auto loan, personal loan, or other forms of credit.
While contributing to debit balances doesn’t put any money in your savings account, you’ll almost always end up saving money by paying off debts as soon as you can.
Debts accrue interest every month, and credit cards come with interest rates as high as 15 to 20 percent.
Rather than simply making the minimum payment each month, try to pay off as much as you can afford. Once you’re debt-free, you can start putting most of that money into savings.
If you’re struggling with debt, it might make sense to refinance your balance to pay a lower interest rate.
Some refinancing services also allow you to consolidate your debts, making it easier for you to make your payments each month.
In addition to reducing your interest rate, refinancing sometimes leads to a lower minimum monthly payment, allowing you to pay off debts with less of an impact on your budget.
Shop around and compare refinancing options to see if there’s one that matches your needs.
Balance transfers offer some of the same benefits as refinancing for credit card debt, and many credit card banks offer low balance transfer fees along with an extended introductory period with 0 percent interest.
If you’re currently paying off significant credit card debts, a balance transfer could drastically reduce or even eliminate your interest.
You can also take advantage of introductory periods to finance major purchases without paying any interest.
If you want to spend $9,000 on a car, for example, you could apply for a new credit card that offers 15 months without interest.
From there, you could contribute just $600 per month to pay off the entire balance by the time the interest kicks in.
But this can be a huge trap for people who can’t handle their credit cards. 0% balance transfer offers are one of the major reasons behind huge household credit card debts.
If you’re struggling with multiple debts, you might not know how to approach your payments each month.
While you should always make at least the minimum payment, there are a variety of ways you can use any extra money.
Many financial experts recommend starting with the debt with the highest interest rate, but the cash flow index is more effective if you’re interested in increasing your cash flow.
There are a few different strategies you can use to pay off your debts more effectively.
The debt snowball, popularized by Dave Ramsey, recommends contributing extra money to debts with the smallest balance first.
From there, you can gradually move to your largest debt. This method doesn’t consider interest rates.
Rather than helping you get out of debt more quickly or with less interest, the snowball is simply intended to be easier to stick to than the other options.
If you’re having trouble contributing more than the minimum payment, starting with smaller debts will help you gain some momentum.
The debt snowball strategy is better than simply making minimum payments, but the debt avalanche is more effective for minimizing interest.
This method involves prioritizing debts with the highest rates, then moving on to those with less interest.
Since the debt avalanche is focused on interest, it’s mathematically the best way to get out of debt while paying as little in interest as possible.
Every month you wait to pay off debts with high rates will add a significant amount of interest to your total.
Cash Flow Index
While interest is an important consideration when it comes to debts, the cash flow index takes into account how each debt impacts your cash flow.
To calculate the cash flow index of each debt, divide the total balance by the monthly minimum payment.
High minimum payments take more out of your cash flow each month, so paying them off first will give you more money to use.
This strategy is especially effective if you plan to use the new cash flow on investments, a 401(k) employer match, or something else with a high return.
In these cases, you can generate more income than what you pay in interest, making it more efficient to use the money elsewhere rather than paying off a low-rate debt with a low cash flow index.
Each of these strategies offers its pros and cons depending on your financial priorities. That said, you should use whatever method you feel most comfortable with—the most important thing is finding an approach you can commit to.
It’s easy to spend too much if you’re not keeping track of expenses, and budgeting is one of the first steps toward a healthier financial future.
A clear budget outlines exactly what you can afford to spend on each category and makes sure you have enough to cover everything each month.
Without a budget, it’s much more difficult to identify problematic spending habits. Once you’ve reviewed a few bank statements, you’ll have a better understanding of what you can improve.
If you don’t like the idea of budgeting on pen and paper, use a budgeting app to monitor and categorize each transaction.
Keep in mind that it’s easy to maintain minor, gradual changes, while it can be much more difficult to stick to major changes if you try to make them immediately.
Start with small, realistic goals each month and give yourself something to build on in the future.
Building an Emergency Fund
Most American workers live paycheck to paycheck, and that’s an unfortunate necessity for a significant percentage of our population.
That said, you may be able to make more room for savings each month once you’ve managed to reduce your spending.
Without an emergency fund, you won’t have any money to fall back on if something happens.
Anything from an illness or injury to losing your job can have an immediate impact on your finances, and it’s important to be prepared for these possibilities.
Many financial experts recommend saving enough money to cover three to six months’ worth of expenses.
Even if you can’t reach that goal immediately, whatever you can contribute will still make a difference.
After debts with high-interest rates, an emergency fund should be one of your top financial priorities.
Saving for Retirement
You might think of retirement as something to think about later, but it’s never too early to start saving for your future.
Most Americans don’t have enough in retirement savings, and starting now will make it that much easier to reach your retirement goals.
If your employer offers 401(k) matching, make sure to contribute enough to receive the full match.
My employer matches dollar for dollar for up to 6%. Meaning if I contribute 6% or more, my employer will also contribute 6%. If I contribute ony 2% then my employer will also contribute upto 6% of my gross income.
Employer matching allows you to effectively double that portion of your income, so it’s one of the best ways to use your money.
Yearly contributions to 401(k) accounts and IRAs are limited, so it’s important to get started as soon as possible.
That said, you can go over those limits once you reach the age of 50 if you need to make catch-up contributions. This is one of the best ways to catch up on your retirement savings.
It’s important to have concrete retirement goals, and it’s easy to underestimate how much money you’ll need once you stop working.
Most people continue to spend close to as much as they did when they were employed, so you should have enough saved to cover expenses for many years.
The earlier you start, the less of your income you’ll have to contribute to reaching that goal.
People often find it easy to budget for the first few days or weeks, but it can be tough to stay committed over a longer period.
Maintaining your motivation is one of the biggest challenges when it comes to saving money.
If you’re having trouble sticking to a budget on your own, consider talking to a close friend or family member about your situation.
Ask them to hold you accountable and check in periodically to make sure you’re on the right track. This way, you’ll have something to keep you motivated when you’re tempted to spend beyond your budget.
Accounting for Major Purchases
An emergency fund protects you from surprise expenses, but many other major purchases can be equally damaging to your budget.
It’s important to budget for cars, weddings, gifts, and any other expensive items well in advance.
If you don’t think about a $500 expense until the month it comes up, for example, it could be impossible to pay for it without going over budget or into debt.
Instead, think about that cost six months earlier and deduct one-sixth of the cost from each month’s budget. This strategy spreads the impact over a longer period of time and makes it easier for you to adjust.
Remember that it’s always best to avoid going into debt if possible, especially if you’ll have to pay interest.
If you can save in advance and buy these items in cash, you won’t have to worry about them after leaving the store.
Even without interest, finance plans lock you into long-term payments that you could have to default on if your financial situation changes.
Monitoring Your Credit Score
Your credit score has a significant effect on your ability to qualify for credit cards and loans, and a good credit score will also lower your interest rates.
It takes time to improve your credit score, so you should start thinking about it now rather than waiting for it to come up.
Some of the most common causes of a poor credit score include missed or late payments, defaulting, and high credit utilization.
Try to use no more than 30 percent of your credit limit each month, especially if you’ll need a line of credit in the near future.
The average age of your accounts has a small impact on your credit, so opening a new account will slightly decrease your score, although the effect will lessen over time.
Hard pulls on your credit will also have an impact on your score. Try to avoid opening any accounts in the months before getting a new line of credit.
As a rule of thumb, you shouldn’t open a new credit card or another loan for a year preceding a mortgage application.
Putting money in a savings account will generate some interest, but you can earn a lot more by investing your extra cash.
Investing can be confusing at first, but you’ll quickly develop a strategy that matches your budget and financial goals.
There are more tools than ever to help new investors get started, and you can earn substantial returns even with a small initial balance.
Set up automatic contributions and include them in your budget each month. Once you get in the habit of investing, you won’t even miss the money you contribute.
Creating Measurable Goals
There’s nothing wrong with budgeting just to track your spending, but you can get more out of it by developing clear short- and long-term goals.
Having something to work toward also makes it easier to identify successes and failures.
Instead of just trying to “save money” for example, try to save a certain amount each month for something important like investments or retirement.
Knowing that the money is going to something you care about will give you extra motivation throughout the month. You can always change your goals later if you under- or overestimated how much you could afford to save.
It’s easy to fall into bad financial habits, but you can get back on track quickly if you’re committed to saving more money. These are some of the best ways to improve your money mindset and put yourself in a better financial position.