Month: June 2018

On Episode 054 of the Your Financial Pharmacist Podcast, Tim Ulbrich, PharmD interviews YFP team member, owner of Script Financial and fee-only Certified Financial Planner, Tim Baker about why he left his old financial planning firm in 2016 to start Script Financial. Script Financial is a financial planning firm dedicated to helping pharmacists meet their financial goals. Tim & Tim talk through why fee-only financial planning matters and why a revolution of fee-only planning is happening today. Head on over to https://yourfinancialpharmacist.com/financial-planner to get information on what to look for in a financial planner, to download the free guide ‘Nuts & Bolts to Hiring a Financial Planner’ and to learn more about the financial planning services offered by Script Financial.

Mentioned on the Show

• Script Financial
• YFP Financial Planner
• YFP Episode 049: Ask Tim & Tim: Should I Pay Off My House Early or Invest?
• YFP Episode 015: Financial Planning Series Interview with Tim Baker Part 1
• YFP Episode 016: Financial Planning Series Benefits of a Financial Planner Part 2
• YFP Episode 017: Financial Planning Series Questions to Ask – Hiring a Planner Part 3
• YFP Episode 032: Find Your Why (Part 1) – 3 Life Planning Questions
• YFP Episode 033: Find Your Why (Part 2) – The Path to Success
• XY Planning Network
• XYPN Radio: XY Planning Network Podcast

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 054 of the Your Financial Pharmacist podcast. Excited to have Tim Baker back on the mic to talk this week and next week about financial planning, specifically why fee-only planning matters and why you should care about how a financial planner is making his or her money. So Tim Baker, here we are, Episode 054. And after a few solo episodes by both of us, a couple guest interviews, it was all the way back on Episode 049 when you and I last did a recording together and that was the Ask Tim & Tim episode where we tackled the question from Michael in Columbus about paying off a home early versus investing. So it feels good to be back together on the mic. How have things been in your world?

Tim Baker: Yeah, it’s been great. Actually, the last episode I think was Tony, right? Tony Guerra, that was the first episode that I didn’t hear until it actually went live. So we pass along editing duties to our assistant Kaitlyn, who is doing an awesome job, so it was kind of weird being a full-blown listener last episode. So I’m excited to be back and record this epsiode.

Tim Ulbrich: Yeah, we’re excited. This is such an important topic and one that we get so many questions about. And I should say, we did address financial planning in a mini-series we did, episodes 015, 016 and 017, we chronicled a little bit of your journey from West Point to becoming a CFP, we talked about the benefits of a financial planner, and then we also talked about questions that somebody should ask when hiring a planner. So we’re going to dig a little bit deeper into those topics here in Episode 054, and then next week, we’re going to jump in even further about how financial planners get paid and specifically why you chose the pricing model that you did in Episode 055. So before we dissect why fee-only financial planning matters and hear why you were convicted enough by this fee-only movement to jump ship from your old firm, let’s go all the way back for a minute to your journey into financial planning. And again, I know we talked a little bit about this in Episode 015, but give us your backstory, the Cliff Note version into why you chose financial planning as a career, especially since — as I remember — at the time, you had a very successful six-figure income and career. So why did you make that decision to jump to the financial planning industry?

Tim Baker: I think it’s actually analogous to why a lot of pharmacists get into pharmacy. I was at a point in my career where I was making, I was actually making good money, but I didn’t feel, I didn’t feel like warm and fuzzy after going to the office all day. You know, the best job satisfaction I got was when I was developing my key members. And I got to a point where money’s great, but I wanted to actually sit one-on-one and help people. And you know, when I left that six-figure job, I did some soul-searching, and I think I took about nine months off, you know, thereabouts, and you know, I just did some traveling and I reconnected because at that point in my life, I was so distracted — not distracted, but I was so involved in my career, and I didn’t really leave a whole lot of room for anything else, which was a problem. So I kind of tried to return to basics and reconnect with my roots, and you know, I was looking at different career paths and what I wanted to do. And both of my siblings — I have a sister who is two years younger and a brother who is two years older — and they both kind of in separate conversations said, ‘Hey, this is why I think you would be good in financial planning.’ And for me, it was kind of like an epiphany that I had when I went to West Point that, hey, maybe I think I really could be good at this and would enjoy a career here. And I was looking for something a little bit more entrepreneurial, which financial planning, it typically is. And that was kind of the path that led me back from the West Coast back to the East Coast and landed my first job in a financial planning firm.

Tim Ulbrich: And Tim, I remember actually, I think it was when you and I were still in our probably in our, let’s call it our dating phase period when we were getting to know each other, post-our initial meeting at Bob Evans a couple years ago. I remember, we were down at your sister’s place in Columbus, great area, great community involvement there. And I remember you telling that story about your siblings saying, ‘Hey, I really think you would be good at this industry, financial planning, because you really like to help people.’ And at the moment, I obviously didn’t know you well; I didn’t understand it. Now that Jess and I have had a chance to work with you as our financial planner and obviously as I’ve gotten to know you over the past couple of years in much more detail, I totally get it because I think your obvious strength, in my opinion, is relationship building and really caring and understanding about people and their situations. And we’ll talk more about that when we talk about why fee-only matters, but I think that’s one of the reasons it matters because you really allow the space for you to get to know your clients. We talk so much on the show that so much of financial planning is the factors beyond money, right? And I think you really understanding, for example, Jess and I and what motivates us, where we get stuck, where we’re frustrated, and it’s genuine. And I think that that relationship-building piece is so important when you think about a financial planner who’s not just somebody that’s really tactically looking at spreadsheets and adjusting things and rebalancing portfolios but really trying to understand who you are as a person to guide ultimately, then, your financial plan.

Tim Baker: Yeah, it’s one of those things — and to be honest, I didn’t really quite understand it even when I was getting into it. And probably some pharmacists think the same things, like they don’t really understand the profession until you’re actually, like, in it. Because I get a lot of, I do get a lot of sideways looks when I’m like, ‘Hey, I want to help people. I want to be a financial advisor.’ People are like, what? That doesn’t really sound like a calling. And I think what often happens — this is probably what we’ll get into a little bit it — I think sometimes the industry, with the sale of product and things like that and how compensation flows, sometimes it can muck that up a little bit. And you know, it’s like whose interests are first? And that type of thing. I think ultimately, you know, when I looked at it from a very pure standpoint, meaning — I’ll use pure instead of ignorance — I just, for me, I just thought, OK, I can sit down across the table from somebody and look at their situation and try to provide, you know, a semblance of a plan or a semblance of that I care about where they are and where they want to go. And I think a lot of what happens in the industry is that just because of how it’s structured, some of that can fall by the wayside. And to your point, like I’m a big believer in behavior and the relationship, and you know, really managing kind of like a life plan rather than just a financial plan. The finances are just really a tool. What’s the bigger picture? And you know, I think oftentimes, we as people, we just get so busy and so — and a lot of it’s just asking questions. Like I’ve said this before, I try to ask good questions and get the heck out of the way and just really you know, course correct a little bit and ask those questions and really hopefully it be a period of self-discovery. So it sounds kind of maybe hippie and you know, like, very touchy-feely, and I think you joked about that before. But again, a lot of these things aren’t things that we necessarily slow down to talk about and really self-reflect. And I think that’s where I can step in and hopefully provide a little bit of that, you know, catalyst to do that.

Tim Ulbrich: Yeah, spot on. And I remember even Tim Church and I talked about this when we were writing “The Seven Figure Pharmacist” book, and you know, obviously the title, “Seven Figure Pharmacist” implies a net worth of a million dollars or more, but we all know it’s not about just getting to a net worth of $1 million or more. I think if you crush your student loans, and you do awesome with your investments and home buying and other things you’re doing, ultimately, if there’s not a bigger plan or purpose there, I think people will find themselves disappointed. And I think that’s so much of what, in my opinion, people should be looking for in a financial planner — somebody who’s really going to help them pull out those pieces and parts like you and I talked about with Jess in Episodes 031 and 032 — I hope I have that right, somewhere around there.

Tim Baker: You’re better at that than me.

Tim Ulbrich: About finding our why, and I think that’s such a critical piece. So I have to be honest that as I started to think about this episode, I thought about all the pharmacists I’ve talked to over the last few years that, in my opinion, have appeared to somewhat aimlessly walk into a relationship with a financial planner. So what I mean by this is I hear a lot of pharmacists say and refer to their financial planner as ‘my guy’ or ‘my gal’ or maybe it’s somebody who mom and dad used and so by default, it’s going to be their same person. And of course, trust and relationships and knowing somebody’s important, but I’m fearful that there’s a lot of naive trust in that financial planner without really a full understanding of what value that person may or may not bring and whether or not they are actually obligated to be acting in the best interest — really understanding even how they get paid. I mean, would you say that’s a fair statement in terms of clients that you’ve talked with initially?

Tim Baker: Yeah, I think so. I think there’s a belief that all financial planners are created equal. And I would say this as full disclosure, this is not meant to be like a bask session. A lot of people that work in these capacities that are financial advisors or that work with mom and dad are, I think are pure at heart and want the best for their clients. I just think that there’s a better system to basically clear away some of the conflicts of interest. And for a lot of it — and I put myself in this bucket — you just don’t know any better. You know, I was into the industry, I was in the industry for quite a bit of time before I actually discovered the whole fee-only model and what that meant. But yeah, I would say that’s a true assessment, and what I try to explain is that it’s not apples-to-apples in a lot of ways. I’ll give you an example. You know, when I was at my last firm, what we typically did was cater to the pre-retirees and the retirees. And that’s what probably 90 percent of the financial planning firms out there do because the way that pricing model works is based on assets that you’ve accumulated over the course of your career. And that’s just basically how an advisor gets compensated is based on that number. And things like budgeting and student loans are not even really in the curriculum of the things you’re taught. You know, you’re taught more about stock options and things like that that for most — even most people, that doesn’t really matter. And things that have huge implications, especially towards the younger population — and I just remember kind of, you know, surprisingly asking questions about this and really no one knowing. And I’ve seen that with prospective clients where they’ll say, ‘Hey, I’ve been working with this advisor for a couple years, and I don’t really have a plan for my student loans.’ And some of the mistakes are you’re talking tens of thousands of dollars just because of you know, not having a clear strategy or not knowing what to do. You know, there was a conversation that I had about student loans, and they were like, ‘Oh, they just amortize over time, just like a mortgage would.’ I’m like — and at that point, I knew more than — I knew less than I do now but more than the other guys — and I’m like, no. And at that point, I’m like, I need to become an expert in this and really drill down as to what is going on with this because — and it’s not just pharmacists, it’s a lot of young people, especially with advanced degrees. And the fact that the industry I think in a lot of ways has failed in terms of providing good advice is a huge issue.

Tim Ulbrich: So you take your advice of the siblings, you go the financial planning route, you determine that’s the right career path for you, and you begin that first job. So tell us a little bit about that firm where you worked prior to then jumping to Script Financial in terms of the pricing model — and I know we talked a little bit about that in 015, 016, and 017, but what was that pricing model? And building on what you already said about where the interest may lie in terms of the client versus really the products and services that are being served?

Tim Baker: Yeah, so the first firm, it was an independent financial advisor firm. It was a solo practitioner, and he — I think he was ahead of the curve in a lot of ways. His niche was actually the LGBT community. He basically charged kind of very similar to what a lot of fee-based advisors charge. So a fee-based advisor is really, you can really in your quiver pick any way in which to charge the client for it to be profitable. So obviously, we’re talking about a business here. So the relationship needs to be mutually beneficial. You need to take care of the client, give them the financial products and plan and then obviously be able to run the business. So he typically would have the model of dependent on where the client fell in terms of assets and basically stage of life, that’s how he would basically determine how and when he would charge it. So to kind of give you an example, if you came in as a pharmacist and you had $150,000 in student loans but you have no assets to manage, he might charge you a flat, you know, a flat fee for a financial plan and give you advice that way. And then basically, the idea was when the assets were there, you kind of counted on that as an income stream. So as an example, you know, you get a financial plan, you work for a community pharmacist for five or 10 years, and then at that point, you know, you would count on the fact that if you left that job, you would be able to roll that money over into an IRA for him to manage. And then basically, it would be a percentage of that. Or in the meantime, you would sell that person insurance products or maybe a commissionable mutual fund that would pay the advisor 5% or whatever. And it would just be little dinks and dabs, like a little bit of — but the problem was is that it’s not clear to the consumer. So you’re like, OK, how are you charging me? Like you could charge me — he didn’t really do this — but you could charge me hourly. But it was commission, it was different products, it could be a flat fee for a plan. It was kind of all over the place, but then like once you reach a certain asset level, so if you work for that company for five years and you roll over let’s just say $100,000 just as an example, $50,000, then you would charge a percent based on that. But the problem with that model, Tim, is that typically what happens is that the people that pay the most in fee get the attention. So typically, if you’re working with your parents’ firm, and they’re paying x and you’re paying a quarter of x, you’re not going to get the attention. And that’s what often happens is that you just kind of, hey, i’ll buy you a mutual fund for your IRA every year, and then we might have a conversation. And then that’s it, and unfortunately, what the industry says is that, oh, you’re young, you don’t really have assets, there’s no need for a plan, there’s no need for advice, which is completely false. It’s more of a pricing issue than a planning issue if that makes sense.

Tim Ulbrich: Yeah, I love that, just the comment you made about where the attention goes. Follow the dollars, right? I even think about this as people may be considering a plan that their parents use. Again, it doesn’t necessarily mean someone is inherently not a good planner, but I think about the life stage my parents are in. They’re in a very much a wealth-building stage. And they obviously have a lot more assets to manage than I do, whereas I think about coming out of school, I didn’t know how to do a budget, I was $250,000 in debt, I didn’t have financial goals, like I need a lot of love and attention when I came out of school as do a lot of new practitioners, right? And is the pricing model set up in a way that’s going to allow that? And I think — and I might be getting ahead of myself here in a few minutes — but when you think about a fee-only model, if I’m paying you for your advice and your services, and that’s relatively similar to what somebody at the next stage of life is paying, you know, I have, then, the power, if you will, to say, hey, Tim Baker, I need your attention just as much as my parents do because you’re helping me in whatever stage I’m in, and you may be helping them in whatever stage they’re in. So you articulated well on a fee-based model, and I would agree with you in terms of it’s really hard to understand where the money comes from. And I think as you’re interviewing, as people in the YFP community are interviewing financial planners, if you find yourself confused about where the dollars are coming from, stop and make sure you get those questions answered because that probably means somebody’s not in the fee-only model.

Tim Baker: Yeah, and I remember, Tim, actually I think this was post-our Bob Evans first date, I think I remember you saying to me, ‘I’ve met with how many different advisors just to understand it, and you walk out of there and you have no idea like how it works.’ And I think you paid me a compliment that you did understand how I charge, and I brushed off my shoulder a little bit. I’m like, alright, I’ve got something here, no big deal.

Tim Ulbrich: So if in a fee-based model, it sounds like it could be a combination of commissions, it could be from insurance products, it could be from investments, it could be in assets under management, it could be a flat fee for a plan. What are the inherent problems, then, with a model that’s priced like that in terms of where the client’s best interests really may lie or not?

Tim Baker: Yeah, I know. It’s funny because I joke when I talk to prospective clients about this. And you know, I say, when people at my last firm would say, ‘Hey, Tim, how do you get compensated?’ usually, that’s a cringeworthy question for a lot of advisors because, you know, part of it is because it takes awhile to explain. Another part of it could potentially take awhile to explain, like I said, these are all different ways that a fee-based advisors has in their quiver to be able to charge people. It doesn’t mean that everybody uses them, but for me, a young planner, I’m just trying to figure out a way to be myself and make a business out of what I was doing. I’d basically say, pull up a chair because this is going to take me awhile to explain it. So it could be, like you said, it could be an hourly fee, it could be assets under management, which I explained was 1% or 2% of whatever the assets that you are physically managing. It could be a mutual fund commission where, hey, you know, Tim, it’s a — let me give you $5,500 to invest, and then I’m going to charge you, you know, 5% on that, so it’s a $275 haircut. Or it’s a C-share commission, which is a 1% annual thing, and it’s a little bit more spread out. But those are more expensive over time. It could be an annuity, it could be life insurance. And typically, the life insurance that pays the advisor more is better for the advisor and not necessarily good for the person that’s buying it. So it’s just a hodge-podge of things, I thought at the time it was kind of obvious, but it totally wasn’t in terms of how it actually worked. I’m like, oh, it’s just this and this and then that’s how it works. But then like the next year, it could change to base on their circumstances. So there really wasn’t a clear path forward. And just things like — you know, I remember getting started, I would be doing happy hours and I remember — so these mutual fund wholesalers come into your office and they say, they whip out the glossy and they say, ‘Hey, this is why you should be our funds,’ which might sound maybe some more like drug reps or things like that.

Tim Ulbrich: That’s what I was just thinking, yes.

Tim Baker: And then they say, and then they basically say, ‘Hey, let’s go out to lunch, and I’ll tell you the great things about what we’re doing at ABC Mutual Fund.’ And then it’s kind of like — and then at my point in the career, I was — they’re looking for, ‘Hey, Tim, how can I help you grow your business?’ And I’m like, ‘Well, I’m doing these happy hours, I’m just trying to generate interest, people to see me.’ And I remember this instance where the guy was like, ‘Well, I’ll foot half the bill if I can come and speak.’ And I’m like, ‘Yeah, that sounds great because money’s a premium, marketing’s a premium.’ But then afterwards, I kind of had, you have that slimy feeling like I’m in the pocket of this particular — and I know in a lot of business, we joke about Shay (?) and construction business, it’s kind of like that’s how business works. I don’t want to be beholden to anybody because they paid for a happy hour. So I just, I wanted to be free, just free of the product, free of like what I was choosing as the tools to implement and really keep the advice pure. And it can be difficult to understand because again, I think probably 95% of the industry, there is a conflict between the advice that you give and the product you sell, and it’s just not commonplace for the whole fiduciary, the whole separation of product and advice, it’s not commonplace in the industry.

Tim Ulbrich: And I think that’s why I struggled with it so much, just as a pharmacist and a healthcare provider, I very naively come from the mindset of you act in the best interest of the patient, period.

Tim Baker: Yeah.

Tim Ulbrich: That’s what you do. I mean, that’s what you do, right? And so you know, should have known better, but obviously as you look at the financial planning industry, very different just in terms of the models that are out there, and actually the vast majority of planners not having to legally act in the best interests of the client. But the example you gave of the pharmaceutical industry and pharma is spot on. I can remember during residency and after rotations, we’d have drug reps come into the office, and they’re presenting the research that was, of course, sponsored by the company. You know, they’re presenting on viewpoint, and obviously as the provider, like we’re obligated to step back and say, ‘What’s the whole body of research? What’s the evidence behind this?’ And I think it’s similar here is you have to follow the money trail. Where is the money going? And as we’ll talk about here in the second part of the show, in a fee-only model, the money is going to the planner for their advice, not for a product, not for a commission, not for insurance or investments, it’s going for their advice, everything from budgeting to paying off student loans to end-of-life planning and everything in between to really look at your plan in a comprehensive nature.

Sponsor: I want to take a brief moment before we jump into the second part of the show and to highlight today’s sponsor of the Your Financial Pharmacist, which is Script Financial. Now, you’ve heard us talk about Script Financial before on the show, YFP team member Tim Baker, who’s also a fee-only certified financial planner, is owner of Script Financial. Now, Script Financial comes with my highest recommendation. Jess and I use Tim Baker and his services through Script Financial, and I can advocate for the planning services that he provides and the value of fee-only financial planning advice, meaning that when I’m paying Tim for his services, I’m paying him directly for his advice and to help Jess and I with our financial plan. I am not paying him for commissions, I am not paying him for products or services that may ultimately cloud or bias the advice that he’s giving me. So Script Financial specifically works with pharmacy clients, so if you’re somebody who’s overwhelmed with student loans or maybe you’re confused about how to invest and adequately save for retirement or maybe you’re frustrated with just the overall progress of your financial plan, I would highly recommend Tim Baker and the services that he’s offering over at Script Financial. You can learn more today by going over to ScriptFinancial.com. Again, that’s ScriptFinancial.com.

Tim Ulbrich: OK, so here we are, Tim. You mentioned, you know, holding some of those happy hours, really starting to understand kind of that fee-based model, trying to avoid, you know, some of that slimy feeling and really wanting to be objective in the advice that you’re giving, so tell us a little bit about ultimately, the pivot point of why you made that decision to leave and then give us that introduction into starting Script Financial. And I’ll start there and even jump ahead and say, why pharmacists specifically?

Tim Baker: Yeah. That’s a great question. And I would say, kind of back up a little bit. You know, like where I was in an independent financial planning firm, like I thought we were the bees knees. Like I thought we were it because we weren’t a big wirehouse or some of these bigger banks that you hear, you know, some of the not-so-great behavior. And we’re better as an independent because we can sell non-proprietary products, meaning we can basically sell any products that are out there. So in my mind, I had landed first time in the best model that was out there. And what I — I wouldn’t say quickly — what I very slowly realized was that I wasn’t in the best model and that there was a little bit more work to be done there. So basically, what happened was I was going through, I was kind of growing, I was slowly growing my business, and I just started to naturally gravitate towards younger people. You know, I kind of just remember retirees, pre-retirees coming in, and I just didn’t connect with them at all, like I just didn’t — retirement was so far away, and it just seemed weird that I would be sitting there, you know, talking about Monte Carlo analysis and things like that or long-term care insurance. And I just didn’t get, like I didn’t feel engaged. So i just started to really gravitate towards younger people. And at that time, it was actually my brother — and my brother works in a completely different industry, but he is very entrepreneurial, and he was researching — he’s a developer, so he’s researching the financial advisor industry and trying to figure out if he could build software that basically helped the industry. And he interviewed a guy named Alan Moore, and Alan was, is a young CFP, and he was starting something called XY Planning Network. And what XY Planning Network is is a group of fee-only CFPs that basically cater to Generation X, Generation Y. So he brought them to my attention and said, ‘Hey, are you fee-only? Like how do you charge? How does it work?’ And at the time, you know, he was basically saying like, dude, you’re wrong. The way that you’re doing it right now, it doesn’t work. This is a better model. And you know, what do you do when your older brother basically is trying to like tell you about your business? I’m like, get out of here. Don’t tell me about how to run my business.

Tim Ulbrich: Go do your developing, right? Go do your whatever.

Tim Baker: Exactly. And then I started to like crack open the book of what fee-only was, and I just started to listen to XYPN radio, which is the podcast they have. It just kind of chronicled different firm owners who are young and kind of worked for other firms and maybe there wasn’t a clear path forward or they saw that, you know, fee-only was better. Maybe they came from the broker-dealer, commission, fee-based world that I did. And I just started to just cram these episodes. And you know, at that time, most of my clients were pharmacists — and I’ll tell the backstory in a second, but I just started to like — wheels started to turn for me, and I’m like, you know, if I’m not comfortable as the consumer doing what I’m doing, why would I position myself as this? So I just started kind of planning from there. And you know, I wanted to make sure — you know, typically when you Google ‘questions to ask your financial advisor,’ typically they’re going to say, are you a CFP? Which I was at that point, a Certified Financial Planner. And then, how do you get paid? And typically, the fee-only model is, they’re very vocal in terms of this is the best model because it reduces the conflict of interest. But there’s still some there; there’s no such thing as conflict-free advice, but that was kind of the early makings of Script Financial, at least in terms of planning and all that. So that’s kind of how that started.

Tim Ulbrich: So talk us a little bit more then, you make this jump, you identify fee-only’s where you want to be, and you say, ‘I’m going to really own the pharmacist space.’ Because what we’ve come to realize after you and I met is that nobody was really — I mean, there’s people that dabble in healthcare financial planning at large, couple people that are out there working with independent pharmacies as a group, but nobody that we know of really niched down and said, ‘I exclusively want to work with pharmacists.’ So talk about that.

Tim Baker: Yeah. So part of the — you know, and I give credit to XY Planning Network, one of their big things is it’s all about niche, you know, owning a niche and really being — because I think what often happens is that financial advisors, financial planners say, oh, like you have a pulse, I can work with you. And you become, you become master of none, you know? You’re very general, you’re a generalist. So working with somebody who is a retiree, like you said, your parents versus you, is very different. And so I started to think about that, and I was like, that makes a lot of sense. And by the way, I’m more drawn to younger people, that kind of Gen X, Gen Y, and you know, the millennial generation’s like 80 million, so that’s not really a niche. It is, in a sense, but you can niche down further. So when I started in the business, one of my first clients was a West Point classmate of mine. He got out of the Army, moved to Baltimore, and that’s really one of the reasons why I’m in Baltimore. I came for an Army-Navy game many, many years ago and really like Baltimore. And they became early clients and then his wife was a pharmacist. And I just started to get referrals through them, and I quickly found that my small client base was mainly pharmacists. So I’m hearing this podcast, I’m hearing niche, I’m hearing fee-only, and I think I was on a drive out to Ohio to visit my sister, and it just clicked for me. I’m like, I’m doing it. Like this is what I’m doing.

Tim Ulbrich: Those are great moments, aren’t they?

Tim Baker: Oh, man. And I guess that was an epiphany moment for me too. I typically say I’ve really only had two of those, but that’s probably the third one where I’m like, this is what I’m doing. And almost like unapologetically like focused on that because I would even — because a lot of my friends in Baltimore are pharmacists. We joke that if 10 of us go out, typically, there’s eight pharmacists and two are non-pharmacists. But even some of my pharmacist friends, they looked at me like I was crazy. But I was unapologetic. I’m like, to me, this is what I’m going to do. So I just started this — like I said before, this thousand cups of coffee. So I would just talk to every pharmacist that I could get my hands on and say, ‘Hey, pharmacist. This is my idea.’ Or maybe not say it that bluntly, but what are the things from a financial perspective that are really kind of top of mind? What’s troubling you? And at the time, it wasn’t readily apparent that the big things were, hey, I’m overwhelmed with student debt, like at least for me. Like I wasn’t completely bought into the niche. So what my research showed me was kind of some of those major pain points being, hey, Tim, I’m overwhelmed with my student loans. I’m really unsure about how to properly save or budget or just invest for my future. And then I feel frustrated because I make a good income, but I’m not progressing financially. And I think once I logged into that, that’s what I often say to a lot of prospective clients, and they’re like, ‘Wow, Tim, you just described me. Check all three of those boxes.’ And for me, that’s not something you’re going to get from a typical, run-of-the-mill, like if I was Baker Financial Planning, and I was basically servicing anybody that was alive, I wouldn’t have the attention to be able to say — and it’s funny, I was on a prospective call yesterday who actually heard you on one of your recent webinars. And he was talking to me, and he assumed that I was — he didn’t know which Tim he was talking to. So he assumed that I was a pharmacist, so he like started to talk, and he’s like, ‘Oh, are you a pharmacist? I don’t remember which Tim.’ And I’m like, ‘I’m not a pharmacist, but I’m tracking all that stuff because I talk to so many of you guys that I understand the language and I understand kind of the transition from P4 to PGY1 and then kind of new practitioners and beyond.’ So to me, I think, you know, embracing that niche — and what I saw in the market, to your point, Tim, was you know, a lot of advisors will go after doctors because there’s kind of that inherent, they make big incomes and everyone wants to kind of go after that demographic of people. And you know, pharmacists and dentists were kind of like throw-ins, you know what I mean? So there wasn’t anybody that was saying, hey, you’re a pharmacist? You’re my guy or you’re my gal, let’s figure this out. And to me from a business standpoint, that just made a lot of sense to just try to own that and really, you know, immerse myself as much as I could. So I just talk to a lot of different pharmacists, and one thing I don’t think I’ve ever said speaking before is, you know, one of the things that I need to figure out when I did this career switch, even going from the firm that I was at to basically by myself where I’m basically trying to build a firm from nothing, really, is I need to figure out ways to generate income just in case the runway runs off. So things like uber and things like that, that was on my radar. But I actually — and it’s on my shelf here. I have — it’s the Pharmacy Technician Certification Exam. So I’m like, hey, if I’m going to be…

Tim Ulbrich: I remember that, yeah.

Tim Baker: If I’m going to trumpet “I understand the niche,” I should, you know — so I kind of got through, but then the business kind of started to take off. But that was always in the back of my mind was to kind of work inside of a pharmacy — and maybe I’ll still do it, work inside of a pharmacy and really understand that. So I was, Tim, I was all-in. And I think a lot of people probably still do, they’re like, ‘You do what?’ Because I’ll stand up at networking things, and I’ll say, ‘Fee-only financial planning for kind of the Gen X, Gen Y pharmacists.’ And people are like, huh? Because most people stand up, and they’ll say, ‘Our business does everything for everybody.’ And to me, this is the mark in a lot of ways.

Tim Ulbrich: Yeah. And I can attest to the fact that I think you’re the only financial planner that knows terms like PGY1, collaborative practice agreement, provider status. I mean, I feel like you read up on it, we talk about it, you get the market, you get the space, and it seems small, but it’s so important. And to your point, when you get up and talk with other planners, like, you know, trying to service everyone versus obviously what we’re doing is focusing specifically on pharmacists and building that community around pharmacists, that’s so valuable to really know that space to the depth and the detail that I think that pharmacists deserve and the clients deserve. So what — we’ve dodged around a little bit I think defining directly fee-only. So give me the 30-second pitch in exactly what is a fee-only financial planner? You know, the straight definition of that.

Tim Baker: So fee-only basically means that the firm or the advisor earns their fee — they earn no commission. So they earn their fee directly from the client themselves, so not through a mutual fund company or life insurance company. There’s no commissions on products that are sold, there’s no kickbacks for referrals or anything like that, and a fee-only financial advisor follows the fiduciary standard of care, which is opposed to the suitability standard of care. So the way I describe it, Tim, is — I think I’ve said this before is — if I’m selling you a suit, and I’m following the suitability standard of care, I just have to measure you and make sure that the suit fits. But that suit could be Philadelphia Eagle midnight green with Philadelphia Philly red polka dots. It could be like disgusting looking. If I’m following the fiduciary standard of care, not only does it has to fit, but it has to look damn good on you. It has to be in your best interest. So if you equate that to the industry, I could say, ‘Hey, Mr. Judge, I know we’re standing here in court because my client, Tim Ulbrich, is really upset about the annuity that I sold him that paid me 8%.’ I can make a case that it is suitable given his income and his assets and all that stuff, but I can’t make a case that it’s necessarily in his best interest. So it’s a little bit harder of a standard of care to achieve, so really, again, like when I work with clients, I say, ‘OK. What are the client’s goals? And then how can I help them grow and protect their income and grow and protect their net worth?’ And to me, those are the two lenses that I’m looking at. And that’s basically how I dispense advice, if you will. And to me, I think that’s the best model to do it.

Tim Ulbrich: Yeah, and just to get granular on this, so when Jess and I are working with Tim Baker as he is our planner — you know, I’m paying him on a monthly basis purely for his advice, input, guidance to Jess and I — but he’s not making any money off of insurance products, commissions, investments, etc. So just to give one example where I think this is beneficial. We had a call, I think it was last week or the week before, and we were probably on the phone for an hour and a half, two hours just talking about kind of bigger life career goals and where does the financial piece — we talked, as we documented in episodes 031 and 032 about kind of our overall purpose and goals. And that stuff is so critically important, as I’ve already talked about earlier on the show, and if I may work with a financial planner that’s not fee-only, they may see $300,000 or $400,000 of assets and really want to focus there, where obviously we’ve got so many other things we’re trying to look at and balance. And I think the value of that, we have experienced firsthand. So I believe, obviously, that I think many people could benefit from your services. And one of the things we realized recently, Tim, I think it was in the Facebook group. We had probably one of the biggest YFP fans out there ask the question of, hey, where can I find a good fee-only Certified Financial Planner? And what that told me is we have not done a good job of making it crystal clear that obviously YFP via Tim Baker and Script Financial offers financial planning services. So this is me from the mountaintop, shouting, saying, ‘Yes, we offer these types of services.’ So what is the best next step that people can take if they’re interested in learning more about your services?

Tim Baker: Yeah, so I would say just go to ScriptFinancial.com. You’ll see a nice green button on the homepage that says, “Schedule a Free Call.” And it’s a little bit misleading because typically, I like to do video conferences or in-person meetings. So if you’re in the Baltimore area, obviously, we can meet in-person. But I like some face-to-face via video conference. I think Script Financial services, I think we service clients in like 15 states now. 15 or 16 states. So we’re growing, but a lot of it — even clients that I have in the Baltimore area, they have kids so they don’t want to deal with traffic, they’ll just do the virtual meeting through the video conference, and it works out well. So yeah, ScriptFinancial.com, you’ll see a nice green button that says “Schedule a Free Call,” and yeah. We can just chat and see if we’d be a good fit.

Tim Ulbrich: Awesome. Good stuff, Tim. And on next week’s episode, we’re going to talk a little bit more about the different pricing models that are out there for financial planners, why you should care about how a financial planner gets paid, and ultimately why and how you landed on the pricing model that you have at Script Financial that’s based off of income and net worth. So make sure to join us next week on Episode 055. As a reminder, don’t forget to head on over to YourFinancialPharmacist.com/financial-planner. Again, that’s YourFinancialPharmacist.com/financial-planner to get information on what to look for in a financial planner, to download our free guide, “The Nuts and Bolts of Hiring a Financial Planner,” and to learn more about the financial planning services offered by YFP team member and fee-only Certified Financial Planner Tim Baker. So that’s all for today’s episode, have a great rest of your week.

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On Episode 51 of the Your Financial Pharmacist Podcast, YFP Team Member Tim Baker, CFP talks the 8 things to do or avoid to evade financial purgatory after graduating from pharmacy school.

Episode Transcript

Tim Baker: What’s up, everybody? Welcome to Episode 051 of the Your Financial Pharmacist podcast. Tim Baker here, flying solo, I think for the first time. I guess when you hit Episode 050, I guess we’ve made, so we’ve only sent one Tim to the mic. But all kidding aside, I am happy to be here to host today, and I really want to speak to the recent graduates out there because of I think how important this particular time is in life and in your financial life and in general. So it got me thinking, Tim Ulbrich and I were out at the University of Southern California, speaking to the, basically the entire rising P1s and P3s and the recent graduating class who was hard at work studying for their boards and took some time to listen to Tim Ulbrich and I speak about personal finance. And I’ve got to give USC a shoutout, a well deserved shoutout, to Dr. Park, Carolina and Rocio, I think it was, our stay there and our interaction — Tim Ulbrich and I were excited to come speak, and I think we left even more fired up after our engagement with the students. Super impressive group across the board, and it really got me thinking, especially after talking to the recent graduating class about how important this time is for them. And it really sets the pace. And you know, my work with pharmacists across the country, oftentimes I speak with pharmacists who are five, six, seven years out or more, and they feel like they have nothing to show for it. And I mean, think about even Tim Ulbrich and Tim Church, kind of both admit to, you know, what happened to them after graduation. They were basically kind of sputtering a bit and not really sure how to approach the loans and, you know, not much in the way of making a dent in the debt, maybe a little saved. And I think what often happens is that the pharmacy salary or the promise of that six-figure salary lures you into thinking that everything will be OK because really, you know, as a student, you’re not really making anything. And the promise of making $120,000 soon, you know, once you pass your boards that is, it’ll figure itself out. And that tends not to be the case in a lot of ways. So hopefully, you know, if you are a recent grad, if you’re transitioning to a six-figure income or maybe to a residency program, or if you are a new practitioner and you feel like you’ve been sputtering and this really hits a chord that it’ll prompt you to change course and to right the ship in a sense and get your financial plan in order and really get that moving.

So one of the things that, you know, we discuss often is that, you know, pharmacists on average will make $9 million over the course of your career. $6 million will actually flow through your bank account. So think about that. That’s a lot of money, and I often say to pharmacists, ‘So what are we going to do about it?’ You know, and obviously if you’re transitioning to a residency program, and that might be a little bit of a delayed bird, and that’s OK. And you’re not going to have as much flexibility here as maybe a counterpart that is going, that is foregoing the residency. But I think it’s still important to kind of be mindful of the income that’s going to be coming in.

So back in Episode 035, I had Dr. Sarah Fallaw, who owns Data Points. And basically, that’s a tool that I use that manages a client’s behavior. And it’s based on the research that her father did, Dr. Thomas Stanley, who wrote “The Millionaire Next Door,” and essentially what he studied was that there are really six major factors of the millionaire next door is the people that have achieved a net worth of $1 million or more. You know, there are behavioral factors that come into play that really play a part into achieving that type of wealth. In the episode, we talk about those factors — basically, frugality, confidence, responsibility, focus, planning and monitoring and social indifferent. And these are all factors that play a part and that can be measured versus your peer group. A lot of what I do, you know, is not necessarily — or the value that I provide clients is not really in the order of, ‘Hey, Tim, where should I invest this money? What mutual fund or ETF should I pick? Or what insurance policy should I have?’ And those things are important, but they’re very technical. I think the overarching part of this whole financial planning piece is the behavior, is how we behave. So the message to a recent graduate is be on your best behavior. School is out, you are fixing to make a sizeable income, and not to go nuts. And I use nuts facetiously, but you know, the tendency as humans is that if there is an abundant resource, we’ll spend it. And that could be true as that paycheck flows through your account, you feel that, man, I have a lot of money, what can I buy? What can I purchase? And in the age of social media where everyone’s getting a new car and a big house and taking these trips — and those things are important, and those things, some of those things are important. Those things should be baked into your financial plan. You know, the social indifference part of it is that you’re not going to get caught up in the FOMO or the YOLO of things. And to be honest, I would say that you should, you just graduated, you should treat yourself. You should be able to splurge some and celebrate those wins. But do it in a way that is purposeful, that is maybe not long lasting. So don’t go out and buy, you know, a $50,000 car that you might not be able to afford because that one’s tough to get out from under, and now you’re stuck with that car payment. But I think the behavior is such a big part of this.

So aside from being on your best behavior, think about your goals. And it sounds trivial, and it sounds really not that important, but when I interviewed Tim Ulbrich and Jessica Ulbrich back in Episode 032 and 033 where we talked about find your why, these are often questions that we don’t ask ourselves or we don’t talk about with our spouse or our partner. And we should. And sometimes it’s just life gets busy, and we really don’t take the time to say, where am I going? Why did I go to school and get this degree? And why am I taking this job to earn this money? Like what’s the point? And I often say to clients, you know, because the way that I work with clients and the way that I price my services is based on the client’s income and net worth. And you know, because I think that is the best way to measure basically financial health and progress. And I think it has the least amount of conflicts of interest with regard to giving sound advice. But it’s flawed in a sense that if we work together for 30 years, and I help that client their nest egg number of $5 million or $6 million or whatever the heck it is and they can comfortably retire, but they’re miserable because they haven’t done things that they wanted to do throughout life like hike Machu Picchu or do that European trip or maybe have a family or buy this house or whatever it is, what’s the point? You know, what’s the point of that? And I think it’s a constant exercise in taking care of the present self and looking to the horizon and making sure that we’re taking care of the 30-year or 40-year-older self as well. And I often think that like if you don’t feel that push and pull, you’re probably not doing it right. And I think that’s the same with budgeting, the evil b-word. If you’re not feeling kind of the push and pull — and I think if you’re doing effective budgeting, you’re creating a sense of scarcity because you’re doing the things, you know, the proverbial things like paying yourself first, which is easier in theory, harder in practice.

So in terms of your goal, we subscribe to the what, when and why method. So that basically means that we have statements that basically look like this: “I will x by y so that z.” So what, when and why. So an example of that would be “I will save $5,000 by December 31, 2018 so I can protect my financial plan from an emergency.” That’s a pretty good one. And that actually might not be a bad one — obviously, this is not advice — but that might not be a bad one to look at. But I think another part of this — and we talk about this often is like, you know, think about your goals. But how do you feel about them? Like when you think about — obviously, the elephant in the room is student debt. And you might have heard us talk about student debt once or twice on this podcast. How do you feel about the debt? How do you feel about being able to retire at age 50 or 60? Or how do you feel about the prospect of hustling over the next few years to get through the debt? Or the prospect of investing and watching your, basically your nest egg grow? I think often that we try to — and I say we, maybe it’s my profession or whatever — but we try to out-math you and say, well, time value money and blah blah blah. And that stuff is important, but like if I have clients that are like, I can’t sleep or I’m anxious because these student loans are just gnawing at me, well, let’s do something about it. Let’s be proactive. And you know, the math might say one thing. But that doesn’t mean that that has to be our path. So really think about how you feel and you know, challenge yourself. What are 3-5 financial goals you can write down today and realistically achieve in the next five years? And what I often do with clients, and I think we did on the episodes with the Ulbrichs was transport yourself to that time in the future. So if you’re 26, and you’re thinking five years, uh, I don’t know. I don’t know what I would do in five years, think about it as if you’re 31. And then look back as a 31-year-old and think about that half a decade that just went by, and ask yourself, what does success look like? And I think if you can kind of start with the end in mind and look back, it makes it a little easier to do. I think.

So think about your goals. And really, the next step — and man, I’m going to say it. I’m going to beat the horse dead once again. But it’s the budget. It’s all about that budget. And you know, I think for people that have big, hairy, audacious goals or that — and one of them might be to get through the student debt as fast as possible. One might be to basically be in a position where they can retire comfortably early. It really could be anything. But really take the time — and you know, if you are a pharmacist that recently graduated, hopefully — you know, when we were talking to USC, a lot of their students, they were about ready to go to their residency, and obviously they knew what they were going to make or they had jobs from whether it was community pharmacy lined up, and they had offer letters. So you more or less get a sense of what you are potentially taking home every month. So determine that take-home pay. You know, do some calculations of what will come out because of taxes and different, you know, whether it’s health insurance or all that type of stuff. And then really next is determine what your essential expenses are. So in my world, we call these nondiscretionary monthly expenses. So these are things that are going to come out regardless of if you have a job or not. So things like your student debt payment. That could be argued because if you do have financial hardship, a lot of times, both with your federal loans and even if you were to do a private refi, a lot of those situations, you can get some reprieve. But I probably would calculate it as such. The essential expenses are going to be things like your mortgage or your rent, groceries, utilities, cell phone bill. We can’t live without our cell phone, right? So take a tabulation or make a list of all those expenses and add them up. And then really the next thing is to take and determine your discretionary expenses, so that could be entertainment like Netflix, Hulu, going to the movies, things that if it were to hit the fan, you probably could cut. And then from there, you can essentially determine what is left over, which is your disposable income. And by the way, part of what the essential expense probably should be is savings. So savings is actually categorized as an expense because you are foregoing immediate consumption. So what I often do with clients, and I do it with their client portal, we’ll do a retroactive budget. It’s one of the first meetings we go through. If we determine that, hey, we have $10,000 flowing through our account, and we can see it because of all the transactions and then we can see all the stuff that’s basically flowing out of their account, the exercise is basically to show if we have $10,000 flowing into our account, we essentially should have $10,000 flowing out. And that’s what’s called a 0-based budget. So every dollar has a job. And part of that $10,000 flowing out is hopefully savings. So if we determine after we go line-by-line through every part of their budget that, hey, the expenses actually add up to $9,000, then that tells me that we have $1,000 either to maybe put towards their loans, maybe if they have credit card debt, that would probably be the first thing we do. Maybe it’s to plus up their emergency fund or just savings in general. So we talk about sinking funds, and that’s kind of for those non-monthly expenses that pop up like home maintenance or car maintenance or things like that that aren’t necessarily an emergency, but they happen. So that’s essentially what that looks like. And I think, you know, and we talk about this in our student loan course. In module 1, Tim Ulbrich goes through this. I think having that disposable income number, knowing your number is so powerful because it really can dictate, you know, exactly where to go and how to fund your financial plan. I really encourage to do this, and you can use a napkin, you can use Excel, you can use something like Mint or YNAB or envelopes, that’s what Tim Ulbrich used when he paid off his debt. So I think if you have that number, you can very purposely apply what that disposable income is towards your goals.

And secondarily, you know, in talking, you might be a resident out there, and believe me, in the student loan course, we ran what a typical resident makes, and honestly, there’s not much left over. So I think when we looked at that — now, you’ll get a reprieve if you do look at an income-driven plan, obviously. And that’s one of the things to be aware of too. So if you’re a resident, there’s not a whole lot to work with, so I think the name of the game in that is really to kind of hold on and not incur additional credit card debt and really come out when you transition to that six-figure income ready to go. But the next part — and I’ll speak to residents on this part too — is really have a plan for your debt.

So the first one I would definitely look at is the credit card debt. And I’m finding more and more new practitioners, when I speak to them, have said that they’re leaving school or they’re taking on credit card debt during school. And that’s one thing that even before we get serious with the student loans, the credit card debt gots to go. Secondarily, having a plan for your student debt, obviously is super important. Properly inventorying your loans, whether your federal loans or private loans, and then really selecting the appropriate strategy and repayment plan. So the two broad strokes in terms of strategy are the forgiveness option and the non-forgiveness option. And you know, basically the forgiveness option can be broken down by the Public Service Loan Forgiveness program, which obviously can be very controversial. But you can also be forgiven — a lot of people don’t know this — outside of that program. And they’re a little bit different of programs, but if you are a resident and you think that you’re working for the nonprofit or a government entity, starting the clock on that PSLF, that 10-year program, should happen for jump street, should happen immediately. And that’s one of the things that we discuss in the student loan course is how to really optimize that if you are in that situation. We have a lesson just for that. But if you’re in a non-forgiveness strategy, so you look at the forgiveness strategy and you say, thanks government, thanks, but no thanks, I think I’m going to do it on my own. And really this is probably more of a proactive. The problem with the forgiveness programs is they are more of a reactive. You’re kind of hoping and crossing your fingers that the programs will be around. And I think that they will be around in terms of at least being grandfathered in, that’s Tim Baker’s opinion based on some of the things that I’ve seen come out recently. And we probably can do a whole different episode on that. So if you listen to the podcast, and you’re part of our Facebook group, if that’s something that you want us to talk about, the PSLF program, the state of that, I can kind of give some thoughts and we can probably do an episode just around that. But if you’re in a forgiveness strategy, it’s more reactive, and you’re hoping, OK, government. Please follow through on the things that you said that you do. And if you’re in the non-forgiveness strategy, it’s more, OK, taking the bull by the horns, being more proactive and not necessarily be where you’re paying off $8,000-10,000 per month like we’ve seen some of our debt-free pharmacists do, but there’s a spectrum that you can fit in depending on what your disposable income number is and whether that is staying in the standard repayment plan or looking at one of our partners that does the private refinancing. There’s a lot of different ways to kind of, to look at it, and you know, you just want to make sure that you have a purpose. So I often see a lot of pharmacists, they say, ‘You know, when I got through pharmacy school, you know, I knew I couldn’t make the standard repayment plan, so I decided to go into IBR or ICR,’ and that’s one of the income-driven plans that’s out there and maybe not necessarily one of the best ones. But there’s really no intent behind it. And you know, I think oftentimes, what I see is people that are, borrowers that are kind of in between. And I think what we espouse in our course is that you need to really be either pursuing a forgiveness option or pursuing a non-forgiveness option and really fly one of those two flags. If you’re kind of in the middle, you’re in no mans land or no persons land, to be politically correct. So if you are a new graduate, and you’re hearing me talk about loans, and you’re looking for some clarity, like I mentioned, the student loan course for pharmacists is out, and it’s ready for you to sign up, so visit courses.yourfinancialpharmacist.com to enroll. And really, it’s a three-module course, each module taught by a different Tim. So Module 1, we start you off with getting organized, so doing a proper inventory of your loans, walking you through loan basics, the total cost of loans, budgeting. I teach Module 2, which is determine your payoff strategies. I walk you through exactly the two main strategies and where you potentially fit. I throw in some case studies, and also, there’s one lesson that is targeted just for residents. And then finally, Tim Church wraps it up with Module 3, which is optimizing your payoff strategy. So the course is chocked full of goodies and resources and really, when you are done taking the course, you should walk away with clarity and confidence about how to tackle your loans. So again, go to courses.yourfinancialpharmacist.com to enroll.

The next thing to really discuss is having an emergency fund. So the textbooks say — the emergency fund is basically liquid assets, we’re talking cash money, that is set aside for those unexpected, I can’t believe that actually happened and I need to spend money, events. And what the textbook says is that you need to have 3-6 months of those nondiscretionary or essential expenses. So if you’ve done your budget, thank you very much for doing your budget, but you should know that number. So as an example, if your loan payment is $1,500, and your rent is $1,000, and you are single, what that means is that you should have six months, — because if you’re single, you should have six months. If you are a dual income household, you should have three months, and there’s shades of gray in between. But if you were single and your rent and your loan payment combined are $2,500, multiple that by 6. Congrats, you need $15,000 to cover that. And that’s not even — that’s just covering that — that’s not even the groceries, the utilities, all those things. But you can see how much potentially you need for an emergency fund. So I guess what I want to say here and what I often say to clients is this is what the textbook says. But if you are looking at aggressively paying off loans or depending on where you’re at on the spectrum, you don’t have to basically build Rome in a day. Work towards $5,000. $5,000 will probably cover 75% of emergencies out there, maybe. Work towards $10,000. $10,000 will probably cover 90% of emergencies, maybe. So I think — so this is kind of what I have when I build plans out is have conversations, ask good questions of the clients, of my clients. And then basically say, OK, let’s phase this in. So Phase 1, by the time we get to this level of emergency fund, then we’ll work more aggressively toward this other goal and the next level. So don’t get discouraged, but having a properly funded emergency fund is super important to this whole thing, this whole financial picture.

The next thing that I want to mention that is attributed to a lot of the lifestyle creep that I see, not just with young pharmacists but also young professionals in general — so really what I’m talking about here are car purchases and home purchases. Now, Tim Ulbrich did an excellent job going through car buying in Episode 047, so if you haven’t listened to that, take a listen. So I won’t spend too much time on car buying. But you know, I would just say, and what I say often to young professionals and sometimes have to say this to myself is, you know, once you go in high-end Beamer, Lexus, Audi, it’s really hard to go back. So I’m not trying to dampen the spirit here, but you don’t have to have your dream car — and frankly, you don’t have to have your dream home — right off the bat, especially if you’re staring at $160,000, $250,000, whatever that is, that student debt picture. So because — and I know from experience working with some clients, they go out and they make that purchase, and those cars, they just depreciate so fast. So even if they want to get out of it, you know, they’re underwater, and now they’re stuck with an $800 car payment, and that’s no bueno. So really think long and hard before that happens. What “The Millionaire Next Door” says is that most people that achieve that $1 million net worth, they’re thinking that some other sucker, maybe — can we say sucker? — some other sucker is going to buy a car new, take that depreciation, and then the millionaire is going to come in three, four, five years later and buy that car when most of the depreciation has come off. So just a think to kind of marinate on.

You know, the other thing in terms of major purchases is the house purchase, the home purchase. And same thing with the car, you don’t have to buy your dream home right away. If you are faced with a massive amount of student debt, essentially, you’re broke. So to add another $300,000, $400,000, $500,000, that’s a lot of debt. So we’re a big believer in having as much money that you can bring to the table with regard to a home purchase. PMI, Private Mortgage Insurance, it doesn’t put any equity into your house. It just basically evaporates money from your balance sheet. You know, I think obviously, a very small percentage of people can come to the table — I think it’s like 10% come to the table with that 20% down payment. I would listen back to when we had Nate Hedrick on Episode 040 and 041 where we talk about home buying, that it’s important cash is king with this, it’s important to come to the table and really think about that. And I think if you can set the target of 20%, it really will force down your purchase price. So obviously, if you are looking at a $300,000 house — and I know those students out at USC are laughing at me right now — but if you’re looking at a purchase price of $300,00, that essentially means that you need to save $60,000. So maybe that $300,000 purchase becomes a $250,000 purchase. The point is is that what often happens is when you look at the decision to buy a house, I think sometimes we as a de facto because we’re told that the American dream is to purchase a home and build equity, that it’s almost like our birthright. And it really isn’t. It really isn’t. I think it’s something that should be done responsibly. And one of the tools that we talked about in our recent talk is that, you know, a $1,500 rent payment does not equal to a $1,500 mortgage payment because you need to factor in things like taxes and fees and closing costs and all that stuff, the maintenance of the home. And the New York Times has a great calculator that we’ll link in the show notes that basically looks at all those variables and basically tells you, you know, if we look at the purchase price, the interest rate, how long you plan to stay in the house, taxes, all that stuff, that there’s a break-even point that basically, the calculator will show it makes sense to buy or it makes sense to rent. So the word of caution here is not Debby Downer, but it’s just to think of that purchase not necessarily as an investment, because it’s really not. I think a home that you live in shouldn’t really be thought of as an investment. And again, once you sign those papers and you’re on the hook for a $2,000, $2,500, $3,000 mortgage payment, you really limit yourself in terms of flexibility with other parts of your financial plan.

So another thing to keep in mind is investment. So if your employer provides a match, absolutely should be matching that and getting the full match. Oftentimes though, what happens is I see people start a new job, they are delayed because they have to be at a job for a certain amount of time, maybe it’s six or 12 months, and then all of a sudden they’re like, well, I really like this paycheck, maybe I won’t put money into my 401k. And during that time when you’re not eligible for that 401k, you have that lifestyle creep. You buy the house or the car, and it doesn’t make sense for you. You’re basically, you’re capped out, and it’s hard for you to defer money into that 401k. So that’s something to be mindful during that period before you become eligible. And I would say, bank it in a savings account just like you were deferring it into a 401k.

The other thing to be mindful of is really what’s called 401k inertia. So if you’re employer matches 3%, you know, absolutely you should try to match 3% without question. What often happens is that it anchors the person to that 3%, whereas in reality what I tell clients, it’s kind of a race to 10%. You want to be — when we do those nest egg calculations, you need to be deferring some money away, stocking some money away for that 30-year-older self. So don’t get anchored down by that 401k match, whether it’s 3%, 5%, 6%, and just be mindful of that. And a lot of 401k’s now, you can basically build in like a percent increase every year, and I would totally tell you to do that. Just schedule it, 1, 2%, start that as soon as possible.

So the last part I want to mention is insurance. So the message here is beware, but be covered. So the two that I want to really discuss here is life insurance and disability insurance. And we’ve talked about life insurance in Episode 044 and disability insurance in Episode 045, and you know, I think that these are a crucial part of the financial plan. And really, we talk a lot about accumulation and growth of your assets and of your net worth. This is really the protection of that. And I think that is equally important.

So a few points about life insurance. If you are a new graduate, and perhaps you’re single, you don’t have a family, you don’t own a house, you probably don’t need insurance or you probably don’t need that much insurance. Pharmacists are often targeted, particularly with life insurance, because of the incomes that pharmacists make. And on numerous occasions, when I work with pharmacists, sometimes I have to unwind some of the policies that are sold them. And what I mean by that is you know, at YFP, we believe that term — if you do buy insurance, term life insurance is the best way to go. It’s pure insurance, which basically means that there’s no savings or investment component. It covers you for a period of time. So it could be 20, 25 or 30 years. And if you don’t die during that time, which hopefully you don’t, basically at the end of that term, it expires. It’s essentially done its job. Whole life or what’s called permanent insurance or variable life or universal insurance, there’s different types of permanent insurance out there, essentially, it is part insurance and part savings or investment. And typically, these types of insurance policies are five, six, seven times more expensive than a term policy. And I think that they are often, you know, they’re better for the person or the salesperson that is selling it than it is for the person, the pharmacist in this case, that is buying it. Life insurance I think is crucial. And just to kind of give you a sense of what a policy costs, you know, general rule of thumb — and I think we talk about this in Episode 044 — is 10-12 times income is essentially probably what you need. Say you make $100,000, you need basically $1 million to $1.2 million. So a healthy 30-year-old, so just to kind of give you a sense, so think 30/30/30. So a healthy 30-year-old who purchases a term life insurance policy for 30 years, basically will pay between $30-35 for that policy. So you know, double that, between $60-70 will probably cover you. And the sooner that you get it, obviously, so maybe you don’t have kids, but you want coverage. The sooner you get it, every year that goes by, those premiums go up about 8-10%. So you know, obviously, life insurance is crucial.

Disability insurance probably even more so, especially for you new grads out there. As we mentioned, $9 million over the course of your career, that’s what you’re going to make. You spend lots of time, lots of blood, sweat and tears to get your PharmD, to get licensed, to get going. You’re going to want to protect that. Having a policy to cover you — and we talk about this in Episode 045, and I encourage you to listen if you haven’t listened to that — is important. And to kind of give you an idea, if you were to buy a long-term disability policy on your own to cover 60% of your income, which is kind of best practice, you’re going to spend probably about $120-150 per month to get coverage. Now, some of you are going to be covered by your employer. So we often say that you should get a supplemental insurance policy to basically cover the gap because most employers won’t cover a full 60%, so you should get a full policy that covers that gap with the ability, what’s called a rider, to buy up in case you were to go to a job that doesn’t have that full disability policy. And the same thing with life insurance. Some of you are going to have life insurance through your employer, and it might be one or two times income, and you really don’t even have to do anything to opt into that, it’s just automatic. But oftentimes, it’s going to be far below what you actually need to be fully covered. And it’s also good to have a portable life insurance policy that basically doesn’t matter where you’re working to have that coverage.

You know, we covered a lot of ground here. And you know, and again, you know, the timing here is crucial. What you’ll do here in the next one, two, three years will really set the tone for your financial life and the outlook going forward. So you know, be on your best behavior. Think about what your goals are. Have a budget in mind. Make sure you have some type of emergency fund in place. Have a plan for your debt, whether it’s the credit cards or the student loan debt. You know, be mindful of how much you’re spending on those major purchases. Cash is king. Get into the investment game, whether that’s just taking the match on your 401k to start, that’s good. And cover yourself, but beware. So you know, life insurance policies and disability policies are important.

So you know, the Tim Baker challenge, you know, what are you going to do? What is your plan? If you’ve listened to this episode, and you’ve written down 3-5 of your goals that you’re going to achieve in the next five years, tag me on our Facebook group, call me out and say, ‘Hey, Tim. This is the plan.’ And you don’t have to be a new grad or a pharmacist. I encourage you if you haven’t done this yourself, put it out there. I will respond, and we can have a conversation about that. But I’m so happy that you guys joined me this podcast. It was a blast doing it by myself and looking forward to next time.

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