About a year ago, Natalie, a female dentist in her early 30s, connected with me via a friend from dental school. She seemed a bit overwhelmed. She and her husband had just gotten married and they hadn’t really discussed their joint finances before.
As we began getting to know each other, they mentioned that despite making a great living, they felt like they were spinning their wheels and weren’t sure what to focus on when it comes to their newly joint finances. This is a phrase I’ve heard often. It’s clear that making a high income is not enough to help with financial anxiety. You have to know how to optimize that income.
Having a high income can really help you build wealth, but first you need to have a plan for keeping and allocating that money in the most appropriate way depending on what’s important to you.
Natalie’s concerns are very real (and all too common):
How can I play catch-up with my friends who got nonmedical degrees and starting earning years before I graduated?
With inflation so rampant, what do we do with the $200K that’s sitting in the bank?
Should we pay off my six-figure dental loans or refinance?
How will our lifestyle be impacted once I work less to start a family?
How much house can we afford knowing I might take a pay cut?
What happens if I can’t work (due to a disability)?
Playing catch-up
I'll address this one first, because it’s very human to compare ourselves to others and think we are “behind” when it comes to money.
Let’s say you and your friend graduate 10 years apart; she graduated way sooner than you with a business degree and started investing before you. However, the likelihood your income is higher helps you catch up.
Your friend started investing 10 years before you. She deposits $6,000 per year, and her interest rate is 8%. Her deposits over 40 years will be $240,000. These deposits will earn $1.44M in interest over 40 years, with a total future value of the investment at $1.68 million.
You get started 10 years after Natalie, making yearly deposits of $13,720 (more than double what your business school friend does) at an interest rate of 8%. Your deposits over 30 years will be $411,600 and will earn $1.27 million in interest. The total future value of this investment is $1.68 million! So even though you started 10 years later, you caught up to your friend in the end.
Click on this future value calculator to play with some numbers
Hoarding cash
Second, I see many couples hoarding cash in the bank. Natalie and her husband held all the cash because they weren’t sure where to put it.
There is so much information on Google that doing searches only adds to the confusion because we are overwhelmed with all the different opinions.
If you stumble on Dave Ramsey, he’ll certainly tell you to just pay off your debt and call it a day! That might be good advice for some (e.g., someone with high-interest credit card debt), but it’s usually bad advice for a high-income earning couple who can put their money to better use and manage the debt responsibly.
In Natalie’s case, they were really excited to buy a home together and start a family, so we decided it’s best to have the cash available for a home down payment especially with this crazy seller’s market.
Debt: Pay it off or refinance?
Natalie had 250K in student loans left at 6% interest rate. She was no longer on track for forgiveness due to her high income, so she ended up refinancing at 2.75% over 15 years to shave off $125K in interest expense over the next 15 years.
Family and lifestyle
Natalie is already looking ahead to having kids and recognizes that she may take a 20% pay cut to care for a child. As such, we had to review the couple’s cash flow to determine how much house they can afford on their current income and how that would be impacted when her pay drops.
We also figured out their monthly retirement savings target to make up for lost time and picked an asset allocation model that ensures the money works hard for them (because as it turned out her husband had invested in a very conservative fund within his 401(k) and the rate of return on your investments is one important assumption in order to determine your “monthly savings target.”
Disability
And finally, I always consider disability insurance as a key piece of your financial life. As a dentist, you invested years of your life in your education and clinical practice and your ability to produce an income is your biggest financial asset. Don’t protect your home and auto and forget to insure your income. As such, Natalie obtained an own-occupation policy to replace the maximum amount of income just in case something happens and she can’t work for an extended period of time.
Everyone’s situation is slightly different but remember, the most important thing when it comes to your money is to figure out what is most important to you and create a plan of action.
Author disclaimer:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment, tax, or legal advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
