As a new graduate, it has been great to finally have money coming in the right direction. Getting paid a salary is much better than taking out student loans. The big question that comes with that salary, though, is “Where do I put the discretionary income?” Once the bills are all paid, grocery runs made and the minimum loan payments are in, what do I do with what’s left?
The conventional wisdom, and what has been hammered into all graduates since veterinary school, is to put everything extra you have toward paying off the student loan principals. In the short term, this makes solid fiscal sense. Most student loans accrue interest at rates between 5-7%. It stands to reason that if you can’t get a matching or improved return on an investment, then you are losing money, right?
Not so fast. The one thing that we so often fail to consider with any financial decision is the opportunity cost of said decision. With student loans, the goal is to be continuously decreasing the amount of principal. Over the course of time, the interest gets smaller as the principal gets smaller. This same process works in reverse for any money that we save or invest. As we gradually add to that money over time, the interest amount gets larger and larger. Additionally, this money is still available to you for other purchases down the road, rather than being completely gone toward a loan repayment.
There are a couple of different avenues that are available to young graduates to begin this path of investment. One of the simplest and safest ways to begin making your money work for you is through a high-yield CD or a savings account.
CDs have been around for ages and present the highest interest rates of the safe options. The drawback of the CD is that it requires you to lock up your funds for 12, 24 or 36 months to get the highest interest rates.
A high-yield savings account allows a similar interest rate with vastly increased flexibility when it comes to getting your money out. Many online savings account options are available with variable interest rates from 1.5-1.85%. Most of these accounts don’t have a minimum balance, and many have no fees. This allows you to open an account quickly, without much of an opening deposit, and begin gaining higher interest on your savings than the standard 0.01% interest savings account that comes with most major banks.
The other route that is available for investment comes through a financial advisor. These traditional investment routes come with a higher level of risk but also a larger opportunity for percent yield. I recommend getting in touch with the financial advisor in your team of professionals and working on a medium-risk investment policy toward which you can start putting money.
The biggest benefit that all of us have as new graduates is time. We are at the beginning of our career arcs, and as such, we can absorb a larger amount of risk with our investments than practitioners nearing retirement. This is the time in your career to take charge of your finances and make your money work as hard as you do!
Zach Loppnow is an associate veterinarian at Anoka Equine in Elk River, Minnesota. He is a member of the AAEP and the MVMA, and he has a background in business management and personal finance.