Basic Financial Tips for Veterinary Students
by Todd Balsley and Michael Mullaney
Even if you don’t have a lot of time to worry about your finances, don’t fall into the trap of putting financial matters on autopilot by signing up for a loan or credit card without careful consideration. Without trying to overstate matters, the financial habits you develop while in school can have a significant bearing on your financial well being for years to come. Shortsighted or uninformed decision making can have a profound impact not only on how you meet your educational expenses and manage student loan obligations, but also (and perhaps more importantly) on how quickly you make the important transition from maintaining debt to building wealth and net worth.
The building blocks of any financial plan begin with taking time to think through basic financial decisions — and the minor effort required to create a budget may save you hundreds or even thousands of dollars in the long run. You’ll find a wealth of online and downloadable tools on the Financial Planning Resources page. Use these resources to better understand your current, pending and potential financial obligations.
Here are three tips to better manage your expenses:
- Watch what you spend
Review bank statements and follow a budget. The key is to gain insight into your spending habits as it is impossible to manage expenses and make appropriate adjustments without having visibility. Be prepared for potentially uncomfortable feelings about where your money is spent day-to-day and week-to-week and learn to develop a critical eye toward the necessity of every purchase. You may be able to identify opportunities for substitutes (i.e. brewed coffee for lattes) as well as expenses to eliminate altogether.
To conduct a comprehensive review of your spending, try to reduce or eliminate your cash transactions during a one-to-three month period. The intent is not to increase your credit card debt, so if that is a risk you should consider using a Debit card. The key is to develop a paper trail that will support your review process. Taking advantage of your bank’s online banking tools and electronic statements to aggregate and digitize your expense trail will make the review a much easier process and one you are more likely to actually perform.
Finally, keep abreast of the fees you’re paying for your credit cards, bank accounts and ATM transactions. These are avoidable expenses that often go unnoticed and unquestioned.
- Know what you owe
Understand the composition of your loan portfolio and each loan’s respective interest rates and repayment terms. In this exercise, don’t just focus on student loan debts. Instead, focus on the widest possible range of obligations you have, including debt such as credit cards and car loans.
A review of your liabilities will allow you to identify which are the most costly (i.e. bad debt). Bad debt should be targeted for the quickest and most aggressive repayment. This may prompt the question “Isn’t all debt bad?” While there is some validity to that view, it’s important to understand that all debt is not equal. One can argue that certain types of federal student loans that carry fixed interest rates and long repayment terms are debts that might not be advantageous to retire early. For instance, consider a student loan debt that carries a fixed interest rate below 4% and an investment opportunity returns over 6%. Aside from paying the minimum required amount on the loan, the latter investing scenario is generally the more sensible option for allocating any excess funds and the student loan could be considered good debt.
AAHA has compiled several resources to help you understand the real cost of your loans. Visit the Financial Planning Resources section for quick links to online loan calculators and a downloadable loan amortization spreadsheet.
- Be smart about saving
Most students receive the loan funds from their school at the beginning of each loan period and use some of those funds to cover living expenses. Instead of putting all of the money in a checking account that earns little to no interest, use a high-yield savings account to earn higher than average interest.
Caution: As with any strategy, effectiveness varies by situation. For instance, paying down the balance on a high interest rate credit card may be more beneficial than keeping extra money in a savings account.)
While many of these suggestions may seem simplistic, developing an understanding of where you spend your money and how much your debt really costs will help you stay on top of your finances, make better decisions, potentially save thousands of dollars and begin to plot a course towards building a positive net worth.
Okay, I have a budget. Now what?
There are myriad strategies and tactics that will ensure you go beyond basic budgeting and begin building wealth and positive net worth. Among the most important are:
- Time Value of Money
You’ve probably heard the old saying, “A dollar today is worth more than a dollar tomorrow.” Sparing the technical economic theory, here’s an example that reflects the rationale for the time value of money:
Which option do most people choose: Having $100 today or $100 exactly one year from today? Not surprisingly, most want the money now — and not just because they want to spend it. Most realize that investing $100 today will result in $100+ in a year.
The practical take-away is that in any financial decision that presents options, you should always recognize the time value of money. Using the previous example, consider how best to invest. If you simply deposit the $100 in a low-yield bank for a year, your initial deposit plus interest might be $103. In assessing your options, you’ll need to determine if other uses of the money will yield a greater return when considering risk and liquidity needs.
While this example is simplistic, it illustrates the type of thinking that can help inform decisions such as whether to take on debt to open a private practice or work as an employee at a hospital or university.
- Selective debt repayment
Even today, some types of debt can be considered good debt. For instance, consider the hypothetical case of a recent veterinary school graduate who has $750 per month in debt payments: a minimum credit card payment of $200 and $550 in student loan payments.
The credit card debt is $7,500 at 16.5% while student loans total $50,000 at 6.8%. Under the current payment terms, credit card debt would be outstanding for approximately five years and student loans for 10. If the graduate leverages the inherent flexibility in student loan programs that allow interest only payments of approximately $300, he or she would have additional cash to apply to the much higher rate credit card debt. As a result, credit card debt will retire faster, reducing the amount of interest paid.
Of course, the preceding example does not adequately reflect all real-life debt scenarios. For instance, some students may have consolidated their student loans in 2005 or 2006 to fix interest rates at low amounts (some less than 3%); others may have an opportunity in the summer of ’08 to do the same. In these cases, it is advisable to pay every higher rate debt off before paying down the lower rate debt. Further, one could make the case that starting to save (perhaps towards retirement or to build net worth) before elimination of these low-cost debts is advisable.
Remember, smart debt repayment strategies are not limited to student loans. When thinking about debt, always allocate funds to pay off high interest rate debt first.