Let’s assume you are a healthy young dental practitioner. You are working and starting to pay off some of your school loans. Suddenly, the unexpected happens and you are left physically unable to work. Your disability insurance does not start paying benefits for six months. To prepare for these and other unexpected circumstances, a general personal finance rule to follow is to save at LEAST 10% of your gross earnings each month. Before all else, start saving money in an “emergency fund.” In this fund, you will want to save to cover at least six months of your fixed expenses, or expenses that you have to incur each month. For example, you will still need to pay rent and buy some groceries. You can save for emergency using several vehicles, including:
1) Checking Accounts;
2) Savings Accounts;
3) Money Market Accounts; or
4) Certificates of Deposit.
These are all stable and liquid (i.e. easily converted into cash) options. You can open any of these accounts at a bank. However, be careful when purchasing a certificate of deposit. In return for a higher interest rate, a certificate of deposit requires that you leave your money with the bank for a fixed term. This will limit immediate access to your funds.
Once you have saved for an emergency, you should start saving for retirement as early as possible. Assuming that you are able to make your normal debt payments on time each month, you should think about funding a retirement account. There are essentially two types of retirement accounts: tax deferred accounts and tax exempt accounts. A tax deferred account (like a traditional IRA) is one where you pay tax on your contribution when you withdraw the funds at retirement, but you get a tax deduction for them in the year of the contribution. A tax exempt account (like a Roth IRA), is not taxed upon withdrawal of funds at retirement, but you do not get a tax deduction in the year of the contribution. However, be weary, because if you withdraw money from a retirement account before your retirement age, there may be steep tax penalties assessed for doing so.
Generally, as a young practitioner, you should fund all of your possible tax exempt accounts first and then fund your tax deferred accounts. If your employer has a 401K plan, contribute to it. If you are an independent contractor or your employer does not offer a retirement plan option, you can fund a Roth IRA, traditional IRA or both. There are limits placed upon some retirement plan contributions (e.g. an income limit on a Roth IRA contribution), so you should speak to an advisor about the details. If you want to fund a Roth or traditional IRA on your own, most brokerage and investment management companies offer online account set up as well.
For your reference, these companies are all widely known and can help you set up your retirement accounts:
What have you done so far to save for an emergency or retirement?
~Megan Hille, Esq., Pesavento & Pesavento Ltd.