Let’s be honest. Doctors have the stereotype of being wealthy, but like all assumptions, it doesn’t apply to everyone.
While you’re just getting started or when you have more expenses than income, it can be a challenge to set aside enough money to cover an emergency fund. Plus, having 3-6 months of expenses may mean you’ll need tens of thousands of dollars in that account, depending on your bills.
Still, the only way to reach that goal is to get started. No matter where you’re at in your medical career and your salary, follow these steps to build your emergency fund today.
Consider the potential ways your expenses may change over the next few years. Will you have a loan paid off? Are you planning to buy a house or car or pay for college?
Craft a monthly total using the projected expenses plus what you know you will likely need for overhead and extras. Multiply that number by how many months you want to cover with your emergency fund. This result may seem high or even impossible but don’t budge. Let it be your target to work toward. You may find that when you do hit that number, it isn’t enough. And if it’s too much, you’ll have an extra buffer between your bank account and any emergencies.
This step is where a financial advisor comes in handy. You’re looking at thousands of dollars saved into an account where you can access it in case of an emergency. It makes sense at first to place your funds in a savings account, but if you do, you could be missing out on the benefits of compound interest. Yes, savings accounts have small interest rates, but you may be better off using another option. However, any account you use should have easy accessibility and high liquidity.
This article by OJM Group discusses various investment accounts for beginning doctors, but we’ll review some of the most commonly used options here:
You can also choose to keep your cash in a safe place, but this money can be easily stolen or lost, and you won’t be protected against this loss as you would with an FDIC-insured account. You’ll also lose out on the gains of compounded interest.
Here’s the action step: Decide where the money will come from to fund your account. You don’t need to have it all at once or add it to your account in large chunks. Instead, pick an achievable target amount for your current budget. It may be $100, $500, or something else.
Open a checking or savings account with that amount (unless you choose to keep your money in cash). Then, make a plan. How soon do you want your emergency fund completed? Divide the total target number by how many pay periods you have to reach that deadline, and you’ll see how much money you need to add to your fund per paycheck.
Now, decide how you’ll come up with that regular deposit. Consider having a portion of your direct deposit set up to go to your emergency fund, bypassing any interaction with you. If that doesn’t work or won’t cover the whole amount, review your budget. Where are you spending money that could be redirected to reach your target?
Depending on your expenses, you may find it easy to allocate those extra dollars by cutting subscription services, switching insurance companies, or following these debt.org tips to reduce spending.
Creating your emergency fund may take years as you adjust to your salary and life as a physician. But starting today will get you there faster than waiting until you have “enough” to invest. Follow these three tips, and you’ll have a healthy surplus fund to pull from on those unexpected rainy days.
