Many people think a good job is the path to financial freedom. Sorry folks, that’s only half the story. Your career and finances are definitely related, but your knowledge of money (or lack thereof) is what determines your financial success. So if you want to improve your career and financial situation, you’ll need to boost your money skills. And here’s the best part: good money skills are based on some fairly simple rules that anyone can learn.
A lot pharmacists I talk to don’t have a good understanding of money. Many tell me they hate dealing with money, and when it comes to their careers, many feel trapped working in their pharmacy job just so they can pay their bills. Most pharmacists believe that if they work hard, negotiate good salaries and avoid losing their job, they will be able to buy nice things and eventually retire one day. But that’s only partly true.
Sure hard work is necessary to achieve your goals, but you have make sure you’re moving in the right direction. A good plan based on strong principles is what actually creates the path to your financial goals. Once a good plan is in place, those who feel trapped in their jobs will realize they have better choices and the power to change.
So what are the basics of good money management? Here are three easy to follow principles that everyone needs to understand:
Step 1: Understand who your are working for.
The first step is to understand who you work for. This might sound straight forward at first. Some pharmacists might say they work for an organization, like Shoppers Drug Mart, or St. Joseph Healthcare. Others might say they work to support their families or themselves. And come tax time, many pharmacists might say they work mostly to support the government. So who’s right?
The reality is that most of us work for many people besides ourselves. This idea is brilliantly illustrated by personal finance author Robert Kiyosaki, in his book, Rich Dad, Poor Dad (Warner Business Books: 1998). Mr. Kiyosaki concludes that most of us work for three specific groups.
First, we work for our employer. Most pharmacists work as employees. For those in the private sector, that means working for a business owner or corporation. According to Kiyosaki, most of the benefits from an employee’s hard work flow directly to owners, corporations and shareholders.
Second, we work for the government. Taxes are by far the biggest expense for pharmacists. Consider this: the average pharmacist in Canada pays the equivalent of five months salary in taxes. Kiyosaki says that most of us spend the first several months of each calendar year essentially working for the government.
Finally, we work for the financial services industry. After taxes, Kiryosaki says our next largest expense is our mortgage and credit card debt. With debt levels in Canada at historic levels, it’s hard to argue against this point.
So its important to realize that a large chunk of our money goes to people other than ourselves. Not only that, these outsiders are paid first. Taxes come straight off our pay cheques, and mortgage payments are taken automatically from our bank accounts.
Once you realize all the groups you effectively work for, you can then move to the next step. Specifically, you can learn how to get your money back working for you.
Step 2: Get your money working for you.
Most pharmacists need to work for their money. But with some careful planning, your money can do most of the work to help you achieve your financial goals. The key is to pay yourself first by saving and investing consistently. Sure you still have to pay your taxes and mortgage, but you need to get into the habit of saving a portion of each pay cheque before you do any discretionary spending.
Paying yourself first means saving some money before you do anything else. Many people save only after paying all their monthly bills – that’s called paying yourself last. To escape the trap of working for everyone else but yourself, you need to put yourself on your list of payees.
The idea of paying yourself first has been around a long time. Author George Samuel Clason was one of the first to write about it his 1920s book called The Richest Man in Babylon (Penguin Books, 1926). The mechanics behind this idea is simple: Once your money starts to generate returns, that amount will be added to your savings and generate its own returns. If you don’t spend the income from your investments, the extra cash makes your original savings even bigger.
Savings accounts and GICs pay low returns, so a good strategy is to invest for the long-term. Sure an investment account can get pretty volatile at times, but the long term trajectory is positive because the global economy as a whole is always growing. Also, many investments pay out cash regularly in the form of dividends and interest, so your money keeps growing as you don’t raid the account.
Step 3: Grow your assets. Trim your liabilities. Repeat.
Once your money is working for you, you will be able to see your results in your net worth. Your net worth is calculated by adding all your assets (what you own), then subtracting all your liabilities (what you owe). From a cash flow stand point, your assets make you money, while your liabilities cost you money.
Assets are mostly long-term items, like a house, investments or retirement accounts. As I said before, markets go up and down, but if you leave your investments alone they will eventually grow over the long-term. In the meantime, you can focus on your debts.
Remember, a debt means an outside person (in this case your bank) is getting a chunk of your hard-earned money before you do. To increase the cash coming in, while at the same time reducing the cash going out, its important to trim your debts.
Credit card debt is expensive debt that should be tackled first. A good strategy is to allocate any extra cash (i.e. a work bonus, raise, gift) toward your credit card debt until balance is fully paid off. Your next priority should be paying down your other debts (like your mortgage) as soon as possible.
You should calculate your net worth at least once a year to measure your progress. Over time, your assets will grow, your liabilities will shrink, and your financial flexibility will improve.
A new perspective on your pharmacy job
Which brings us back to your career. Once your financial plan begins to bear fruit, you will be able to see your pharmacy job in a different light. With a solid financial plan in place, you will be able to see your job as a means to an ends, as opposed to a vicious circle of endlessly paying bills. In the end, its your money skills that determines your career flexibility and financial freedom.
Anyone can improve their career and financial path. You just need some basic money skills and a plan that’s based on solid financial principles. Pharmacists can create a plan themselves or use the help of a trained professional. Either way, it’s important to get your plan – and your money – working for you as soon as possible.
