It’s that time of year, when people seem to be asking more questions about how to manage their money.
I suppose it has to do with the turning of the (academic) year, as medical students graduate, and start earning an income; as residents and fellows graduate and look forward to earning a much larger income; and as new attendings finish their first 1-2 years, and wonder where all their money went.
I thought I would share the best financial advice I’ve ever read, and talk about why I think it makes the biggest impact on someone’s financial health.
To be fair, there are many excellent books on personal finance out there. Most of them go over the same key aspects of managing money smartly. So a lot of what makes this the most influential advice I have seen has a lot to do with my history–what I was doing in my life, how many other books on personal finance I had read previously, etc.–and may not hit you between the eyes in the same way.
The Advice
The first book on personal finance that I recall reading front to back was The Wealthy Barber, which I read in my mid-20’s, while working a low paying retail job. It is written as a series of lessons given to an assortment of younger adults (a single entrepeneur, a single factory-worker, a married teacher) by an apparently unlikely financial guru: the town barber.
Chapter 4 has the first lesson; it’s titled “The Ten Percent Solution.” Our students are advised to save 10% off the top of their monthly paychecks (in addition to saving for retirement), and to put it aside to grow.
The author uses some… interesting math to demonstrate the power of compounding interest (think 15% annual returns), in order to make the prospect more appealing, but I think this is the most awesome advice.
The kicker for me, the reason I felt I could actually do such a thing, was this sentence, though:
Then Mr. White [the barber’s source of financial wisdom] made a very generous offer. “Roy, you arrange to have that thirty dollars a month [10% of his salary] go directly into a separate savings account, and from there to an investment. If at any time saving that thirty dollars runs you short of funds, I’ll lend you whatever you need at no interest. You can pay me back whenever it’s convenient for you.”
David Chilton, from The Wealthy Barber.
I don’t have a wealthy Mr. White to make me such an offer, and probably you don’t either. However, it is obvious that by keeping some of that 10% savings as cash, you can effectively bail yourself out, if needed.
This has been the basis of my own “secret savings account,” which has funded a lot of big goals in my past (a house, a car, student loan pay offs). These extra savings have provided a stable foundation in my attending life, which made these goals, and an FU fund, possible.
The Benefits
The first benefit, probably the greatest, is prompting me to live below my means.
Especially now, when I have my savings taken out before money hits my checking account, I live my life (mostly) as though I have a smaller paycheck. So I tend to spend less than I earn.
This is a huge advantage in life, as there is really no way to get ahead financially if you spend everything you earn, let alone spending more.
All financial advice flows from this point, which is why I think this general principle is fundamental.
The second benefit, which may be more of a personal thing, flows from the fact that I don’t always send my savings to investments. This turns my savings account into a slush fund, or an emergency fund. I have become my own Mr. White.
Looking back at my check registers from residency, I have periodically moved money back from savings to checking to pay for expenses that were higher than expected. I can see the same pattern even today, though it occurs much less often.
The third benefit, which is the one usually used to sell this idea, is that I have a lot more money.
I’ve used some to fund big financial goals: I live debt-free. I could buy another car in cash if I wanted. I could take off work for 6-12 months if I needed to.
In addition to all that, I did send much of these savings to my investments, leaving me with a bigger brokerage account and a Roth IRA of a modest size: not enough to retire on, but enough to pay for a lot of my mundane fun stuff in retirement (think, clothes, subscriptions, gym and training fees, in addition to resuming my coffee shop habit).
Do you have a favorite piece of financial advice? What is it?