Do you remember when you opened your first bank account?
Maybe you were a kid and opened an account with your parents to deposit your allowance or chore money. Maybe you were in high school or college, holding a check from your first job.
Now, as you have matured and progressed in your career, the goals you have for your money have changed. You are saving for a house instead of a bike, or a wedding instead of a weekend vacation. Whatever your goals – it is important to be smart about how and where you save your hard earned cash.
The Importance of Having Cash Savings
From medical school students to doctors at the top of their field, everyone needs a good cash savings account. With stability as the top priority, cash reserves act as a safety net and as a short-term holding place for money you are planning to spend in the next 1-5 years.
According to a study by Bankrate, 60% of Americans don’t have enough money in cash savings to pay for an unexpected $1,000 expense. This is an alarming statistic, and if you have read or listened to any financial planning advice, you are familiar with the importance of an emergency fund.
An emergency fund is a pool of money that you hold in safe keeping just in case you lose your job or incur a major unexpected expense. As you start to make money as a medical professional, funding your emergency savings should be one of the first things you do. While other (seemingly more fun) things may catch your eye and your bank account, the emergency savings is designed to make sure you can continue to do fun things by paying for unforeseen expenses without putting you under or depending on credit.
Advice surrounding emergency funds varies slightly depending on who you ask, but our rule of thumb is to have at least three months of living expenses set aside. Building this up to six months over the course of your career is even better. As a medical professional, you know that accidents can happen; so as secure as your job may seem, having an emergency fund set aside may pay dividends down the road.
In short, to make the most of your emergency fund:
- Create an account specifically for building your emergency savings.
- Save 3-6 months of living expenses in this fund
- Only access the fund when you’re faced with an emergency or other serious, unexpected expenses
- Keep your savings in a high-interest account, so you can earn interest on your cash funds while you’re not using them
How to Start Saving
Depending on where you are in your career as a medical professional, your savings strategy could look drastically different:
As a resident right out of medical school, you may be stretched thin – just trying to get by while you make payments on your student loans.
An established dentist may have completely different goals – paying for kid’s college while considering buying another partner’s share of the practice.
As with any goal in life, small, methodical steps are the key to a successful savings strategy.
Here is a methodology anyone can apply, no matter where you are in your career:
Start with One Goal
Set a dollar amount or percentage of your take-home pay. You can start small, like $100 per month or 10% of each paycheck.
This can be as large or as small as you want it to be, but the important thing is that it is consistent. Build your savings contribution into your budget or spending plan so that every month it’s already set aside to transfer to your growing emergency fund.
Set a dollar amount that won’t be hard to achieve month-to-month, so you can build momentum. Soon you will realize that you’re not missing that portion of your paycheck anymore.
Increase Your Contribution
Once this happens, raise the amount you are putting into savings each month — raise it by $10 or 1%. Over time, as you raise your contributions, you will see your savings grow. This new habit will pay dividends as you build a comfortable cash reserve and start contributing to your long term investments.
Snowball Your Spending into Savings
In areas of your lifestyle, if you come into a situation where you are spending less than you previously were (say, your mortgage in Texas is less than what you were paying for rent in Chicago), consider adding that difference toward your monthly savings contribution.
This way, the money you weren’t aware you “received as a bonus” from the move is benefitting your long term goals without taking a dent out of your social life or other regular living expectations.
The Next Steps
If you’re starting to make more money and you have funded a healthy emergency fund, what do you do now?
As a medical professional with an interest in investing, it may be tempting to put all of your savings in the stock market. However, though the stock market is a great strategy for attempting to grow your long-term investments, be wary about putting any money in the market that you may need within five years.
Instead, take the time to think ahead and create a plan for the next few years. What major purchases will you need to make? Do you plan to move? Will you be going through any life changes like getting married or having kids? Determine how much you will need and create a savings account for those goals, in addition to your emergency fund.
The importance of a cash savings account is clear, but unfortunately too many people are still unprepared for unexpected financial hardship. Prepare yourself for the future — whether planned or unexpected — talk to an InvestRx Advisor about setting up a cash reserve account today.