Overcoming Common Money Dilemmas

Personal finance can be stressful. A wrong move can set back retirement. A poor investment can lose a boatload. And money is the biggest cause of divorce among couples.

Everyone faces a handful of money dilemmas throughout their lives, and how they handle these issues can be extremely important. Frequently, money dilemmas occur when another person is added to the mix. Couples rarely tend to have identical ideals when it comes to their finances. In fact, as LearnVest points out, opposite financial types tend to attract. Someone more frugal is likely to fall for a spendthrift.

Most Americans know their financial literacy level leaves something to be desired, according to a survey from FINRA Investor Education Foundation. A year ago, the survey asked Americans on 5 basic financial literacy questions and only 14% were able to answer all 5 correctly.

Less than half of the states (40%) are adequately educating their high school students in financial literacy, according to a report from Champlain College’s Center for Financial Literacy.

If you stumble across one of these financial dilemmas, will you be able to overcome them?

1. Combine money as a couple?

This can be especially difficult the later in life a relationship starts. The longer a person spends independently handling his or her money, the more complicated combining accounts can be. A couple in their early 20s might find it easier to combine money than one in their late 30s.

Plus, the older you get, the more accounts you might find you have accumulated during your lifetime. Which ones should be consolidated? Should some accounts stay separate? Should all be shared?

Just how different you and your partner’s spending habits are could be the best indicator of whether or not to combine accounts. Separate accounts with some money can be used to avoid judgment among couples with differing spending patterns.

2. Which goal to focus on first?

Everyone should have a number of financial goals they’re aiming for, but it can be difficult to decide the order in which to reach for them.

Paying off debt (particularly credit card debt) should be a priority, followed by building up an emergency fund and saving for retirement (which will be ongoing throughout your career). Once these are in line, you can focus on other goals. But where do you begin? There could be student loan debt left to pay off, but you might also want to start thinking about your children’s college education.

David Blaylock, CFP with LearnVest Planning Services, said doing the math can help make the decision easier. In the above example, saving for college through a 529 plan might let you earn returns of 7%, but a graduate school loan could cost more in interest. It becomes clear that you need to take care of that high-interest-rate debt first.

“There is always going to be something that takes precedence over another thing based on the numbers,” Blaylock told LearnVest.

3. What insurance do you need?

Deciding on the level of coverage can be difficult, especially when there are so many insurance policy options. Sometimes people want to get a higher level of coverage because they want to protect family left behind. However, this might not feasible.

Once again—and as always when it comes to personal finance—math will be the ultimate decider. The premiums should fit comfortably into your budget, but the dollar amount should be enough to cover the funeral, medical costs, and other costs your income contributes to.

Life insurance isn’t the only policy physicians should be considering, though. Disability insurance is a wise decision, especially for those who are specialists who might not be able to do their job, but still work in a lower-paying healthcare role.

See Physician’s Money Digest’s recent 2-part series on physician individual disability insurance (part 1 and part 2).

4. What to do with extra money?

Perhaps, you’ve come into a sudden windfall, such as a larger-than-expected tax refund, a minor lottery win, a sudden increase in pay, or an inheritance. People often receive a lump sum of money, but they don’t always make good decisions with it.

For some people, a salary increase might only mean more money to spend on material things to boost quality of life. For others, extra take-home pay might be used to pay off debt faster or added to savings.

Firstly, make sure primary financial goals are covered. Particularly, take a close look at your retirement savings. While some people might think saving 10% for retirement is adequate, Fidelity Investments suggests physicians should be saving at a rate of 15% or higher. Plus, less than two-thirds of physicians younger than age 50 were saving up to the IRS limits.

Fidelity recommends that people earning more than $120,000 plan to replace 71% of their income in retirement, and saving at a rate of 10% simply won’t cut it.

5. Pay off debt or invest?

There is a rule of thumb to invest young, invest often, and invest as much as you can. However, young workers, particularly recent medical school grads, have a huge amount of student loan debt, which can make investing difficult.

The beauty of investing young is that compounding interest works very well in your favor. A $100,000 investment at age 30 with a 7% return will be $761,256 at age 60. However, the same investment at age 40 is just $386,968 by age 60.

For any debt that will be forgive, the minimum should be paid. However, for debt that is not eligible for forgiveness, the loans with higher interest rates should be paid off first. The situation is similar to the one example considered when evaluating which goal to focus on first. Earning a 7% return won’t seem so great if you are paying 8% in interest on a loan.