July 2020 – Your Financial Pharmacist

YFP 163: Investing Beyond the 401k/403b

Posted on July 30, 2020November 2, 2022 by yfpadmin

Investing Beyond the 401k/403b

Tim Ulbrich and Tim Baker talk about investing beyond the 401k or 403b and break down the traditional IRA, Roth IRA, HSA, SEP IRA and taxable/brokerage accounts by discussing their contribution limits, how to appropriately use them and the advantages and disadvantages of each.

Summary

Tim Baker joins Tim Ulbrich on this week’s episode to break down investment vehicles beyond the 401k and 403b. To start, Tim Baker explains that investing is just one part of the financial plan and should not be looked at in a silo. However, when he works with financial planning clients he helps to get their nest egg on track so that they are financially prepared for their retirement some pharmacists feel overwhelmed that they will need $4 or $5 million at retirement. The certified financial planners at YFP Planning help to provide actionable steps to help you get you on track while keeping the rest of your financial plan in mind.

Tim runs through several investment vehicle options that are outside of the 401k or 403b employer-sponsored plans. He digs into the IRA, Roth IRA, HSA, SEP IRA and taxable/brokerage accounts and discusses their contribution limits, how to appropriately use them and the advantages and disadvantages of each. Tim also talks through YFP’s view of the priority of investing, common mistakes and assessing risk tolerance and risk capacity.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tim Baker, welcome back to the show. Two weeks in a row!

Tim Baker: Yeah, crazy. Good to be back.

Tim Ulbrich: Fresh off vacation, right? You’re primed and ready to go, talk about investing?

Tim Baker: Yeah. We spent a week at the Jersey shore, kind of close to my old stomping grounds. And good family vacation away from Baltimore and the city and do some good social distancing on the beach. And yeah, just feeling happy to be back but glad I got to get some quality time with the fam.

Tim Ulbrich: Awesome. So we’re back at it here today, talking about how to invest your money beyond an employer-sponsored plan like a 401k or a 403b, which we’ve talked about many times before on the podcast. And before we jump into this discussion, Tim, I think it’s important that we highlight, as I know I hear you say often, that investing, albeit a very important part of the financial plan, it is just one part of the financial plan. So talk to us about why that is so important that look at it that way. And really, what are all of the different parts that you work with in terms of the financial plan with clients?

Tim Baker: Yeah, so I think one of the issues that I have in, you know, with other financial planners, financial advisors, is a lot of financial advisors will say, “Hey, I do financial planning and investment management.” And it kind of, it grinds my gears a little bit because I think those are like one and the same. Like the investment management is nested in financial planning in the majority of cases. But the reason it’s separated out I think is because a lot of advisors will say, “I do financial planning,” but it’s really just managing your investments. They’ll say, “Hey, Tim, you have half a million dollars, we’ll manage that for a fee or we’ll get commissions or things like that. And then maybe we’ll talk about some of these other things along the way like insurance, especially if I can sell you insurance or hey, the kids are going to college. You’re probably not going to get any help with your student loans or anything like that. So to me, you kind of follow the money. So with the way that most advisors are paid, it’s based on the investments and then if they can sell you kind of a crappy insurance product. So it has like this elevated designation of, you know, with regard to the financial plan. And it is important and it is a main driver. But I think, you know, getting your student loans right, having a savings plan, a plan for the debt, a plan to pay off your house, you’re properly protected from an insurance perspective so you’re managing your risk, estate plan, your taxes, which permeate everything, you’re doing some planning for that. Like to me, it’s just one piece of the puzzle. And I think we kind of put the investment up on a pedestal. And again, it’s important. It’s typically the thing that’s most confusing or most exciting to the average consumer because it’s kind of like this, oh, OK, I can buy shares of this and I can be investing in these companies. But I often argue that those are some times where the more exciting an investment is, typically the worse it is for the investor because they’re chasing returns or they’re tweaking too much. So you know, at YFP, we do all of the things and we fit the investment and retirement piece into that puzzle. But then we also kind of go beyond where we talk about things like credit, credit score, credit report, and you know, kind of the life events of hey, Tim, I’m buying a house, I’m buying a car. I’m getting married, so now I’m combining finances, we’re having a baby, we’re retiring in a couple years, we’re getting into real estate investing, we’re negotiating our salary, we’re downsizing. Whatever that is, to me, those are the main — kind of some of the main drivers. We have the structure that is the financial plan, but then we have these life events that happen that can throw a wrench and kind of force us to zig and zag. So again, the investment is super important, but at the end of the day, it’s going to be one piece of the overall financial journey.

Tim Ulbrich: Yeah, and we’re going to keep coming back to this over and over again, that the financial plan and how you think through your financial decisions should be comprehensive, comprehensive, comprehensive. And so I think especially because we do so many episodes or blog posts or whatever that are more topical in nature. So here, we’re talking about investing. It might be student loans, it might be home buying. And I think it’s just human behavior that you hear something and you’re like, ooh, I can optimize that. Maybe after today, somebody’s like, ooh, I should go max out my Roth IRA. But you know, you take a step back and that may or may not be the best decision once you have a chance to look at all of the different components of the financial plan and understand how one decision can have a ripple effect into the others. So let’s jump in. I want to start by talking about the end, and that really is the nest egg. As we talk about long-term savings, trying to determine what we ultimately need to have saved so that we can turn that into a meaningful plan of what we should be doing today. So as you work with clients, Tim, on this long-term savings strategy, talk us through why that nest egg calculation is so important, what it is, and then how you ultimately are able to back that into a plan of something that they can take action on today.

Tim Baker: Yeah, so you know, typically when I talk to some of our clients that are in maybe 20s, 30s or even 40s, you know, I’ll ask the question, I’m like, “Well, how are you feeling about your retirement?” And you know, sometimes the question is — sometimes, especially early on in the 20s and maybe even 30s, it’s kind of similar to the question that we would ask when we would ask students and residents, probably students at like the APhA conference, we would say like, “How are you feeling about your student loans?” And a lot of the answer was like, “Ah, I just don’t even really look at it. I’m not really worried about it. I’ll figure it out later.” And that kind of perpetuates into like the next, really one of the next big things is trying to establish retirements savings. So it’s like, ah, I don’t really know. So then if I ask the follow-up question — if I say something, if I get an answer like, “Well, I guess I feel good about it, I’m getting a match and maybe I’m putting a little money into like an IRA or something,” I’m like, “Well, do you feel like you’re on track?” And you know, I think that question then kind of goes into like, well, I don’t know. I’m not really sure. I think I want to retire at 65, but there’s some people that think they have to retire or that they’re going to work forever. So what the nest egg is is it’s an exercise that we do, it’s a calculation that we do, and I kind of walk it line-by-line through with the client that says, that shows them if they’re — basically, are they on track or off track? And it’s kind of a binary thing. So what I often say to a lot of clients is like I say, “Hey, you know, you probably need $4 or $5 million to retire.

Tim Ulbrich: What?

Tim Baker: And they typically — yeah — and then they typically look at me like I have 4 or 5 million heads, right?

Tim Ulbrich: Yeah.
Tim Baker: So I say, “Alright, once” — I’m processing that look — once we get beyond that and what we typically do is then is we start to break or deconstruct that number down to a monthly number that we can digest today. So big, big number, way in the future, Tim, that doesn’t mean anything to me. That’s just this noise. That doesn’t connect. That doesn’t connect with me today. So what we do is we then break it down to a number that they can sink their teeth in today. So I can say, “OK, if you need — if we had nothing saved for retirement and you’re getting the match and maybe you’re maxing out your Roth IRA, you’re still running a deficit of $100 per month. So we need to maybe put a little bit money into the 401k or something like that.” So what it does is it provides actionable steps, you know, for them to kind of get on track. And then as they kind of pursue, we kind of check in with that calculation as the years go by, and then as we get into the 40s and 50s and 60s and 70s, we do a little bit more robust planning and kind of decisions that are stuff like, OK, if we retire early or if we downsize our house or if we relocate to this state that’s maybe more tax-free, we can kind of show the effects of that and if your money’s going to run out or not and at what age. So longer story longer, the nest egg calculation is really meant to say, alright, we need some type of money in the future so you’re 30-, 20-, 20-, 30-, 35-year-older self can retire and really not have to work anymore or have the option not to work. So you know, to bring this full circle, the investment plan and the retirement plan that’s kind of executed per what the nest egg says is really, really, really important.

Tim Ulbrich: Yeah, and you know, we’ve mentioned before on the show that saving for the future, whether it’s traditional retirement or something else, it shouldn’t be I hope, I wish, I dream, maybe. I mean, it’s a set of assumptions based on mathematical calculations. And we may or may not like the outcome of that, but we can then begin to understand the variables that go into that calculation and make adjustments or changes, whether that be investments or changes in expectations or adjustments in changes on how we’re executing our savings plan. And so Tim, we talk a lot about wow, it’s really important to invest, invest, invest and do so at an early age and you’ve got to take advantage of compound interest and let it work its magic. But I think we often brush over, you know, what does that mean? And why is that so tangible? So give us the 20,000-foot view of exactly what is compound interest, why that’s so important, and then perhaps an example of how investing can really help someone grow their nest egg. So somebody who is and is not investing.

Tim Baker: Yeah, so you know, we use this quote by Albert Einstein, and it says, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” So a lot of pharmacists, especially early on in their career, they’re feeling it from the paying it side, right? Oh man, I’ve got $200,000 in debt, I’m paying 6.5-7% in interest, you know, this is terrible. But you know, once we kind of have a plan for the loans — and I’m not saying it needs to be paid off — but once we have an intentional plan for the loans and our consumer debt is in check, we have an emergency fund in place, we can then really start dipping our toe very seriously into the investment waters. So you know, so that’s really the idea is that we want the compound interest is our money, we’re taking risks to earn it. But we’re putting it out, we’re putting it into companies and to maybe bonds and we’re saying, “Alright, here’s some money. Hopefully we can earn dividends and capital appreciation as we go. And I can get a much better return down in, basically in the future.” So to give you kind of a case study — and the reason this is really important is, you know, if we talk about Ally Bank, a big one for a high yield savings vehicle, but as many people with where interest rates are, you’re making like 1%. And one of the main things that you’re combating as you’re building wealth is tax, so Uncle Sam always needs his bite of the apple, and inflation. So — and I think, Tim, you might have created this graph, but I showed the graph of the $10 latte. So you know, if you have a latte that costs $4 in 2020, using historical rates of inflation of about 3%, in 30 years, that latte will cost $10. So this is why my dad, who’s in his 70s, would say, “Well, Tim, back in my day, the nickel would buy the whole candy store.” And now it doesn’t buy anything because prices, the prices of goods and services go up naturally over time.

Tim Ulbrich: So just a quick aside, Tim, on that. It made me laugh when you said that. I just — the other day with my boys I had a box of Cherry Heads with like a $.25 sign on the corner of the box, and I was like, “When I was a kid, we used to go out to the candy store. And those were not $.25.” So.

Tim Baker: Yeah. I mean, my wife sent me a picture of I think she filled up at like $1.25 because she had some points or whatever. And I was kind of reminiscing, like I think it was either when I started driving or when my brother started driving, gas was at like $.89 or $.99 a gallon.

Tim Ulbrich: I remember that.

Tim Baker: You know? And you see it in the movies. And those are — that’s a staple of American life. That’s pretty kind of inflation-focused because people really get upset when gas goes up because it’s right in our face, but if you think about all these other, I mean — gosh, we could talk about college tuition and drive our listeners off a cliff here. But yeah, I mean, prices just go up. So to combat the taxman and the inflation monster, we have to — we can’t just put our money into the mattress and not take risks. We can’t just put our money into a bank account and not take risks because naturally, maybe that $500,000 that you have in your bank account, maybe it’ll some interest, but in 30 years, it’s going to purchase about half of what you can purchase today.

Tim Ulbrich: Right.

Tim Baker: So if we take a case study here, so we’re going to talk about Conservative Jane. So Conservative Jane, she’s a pharmacist, she makes $120,000 in income, she gets her 3% cost of living raises, which might be generous. She gets that every year. She’s going to put 10% into her retirement plan, but she’s just going to put it into a Money Market, which is like a cash-like investment. And she’s going to work for 30 years. Over the course of that 30 years, she’s going to accumulate a nest egg of about $600,000. So you’re going to say, hey, that’s not too bad. But because hopefully a lot of our listeners are reading “Seven Figure Pharmacist,” we assert that — or at least you and Tim Church assert and I agree — that we need to be thinking like millionaires because it’s going to — that is what it will take for us to achieve that financial freedom, that financial independence that we’re looking for. So this Conservative Jane, she’s really afraid about what the market has done in the ‘08-’09 crisis, the subprime mortgage crisis if you remember that, the COVID crisis where the stock market did a nose dive here and now is recovering. And she’s saying, “You know what? I don’t want to look at my balance and see it go down. I just want to slow and steady.” So unfortunately, that amount of money is not really — if she retires at 65, it’s not going to last her until 95, 100, 105, which is typically what she’ll live to. So in an alternate reality, which again, another of maybe Einstein’s theories, we wave our wand and we say, OK, if we take a more aggressive stance with our investments and we take the exact same Conservative Jane with the same income, $120,000, the same cost of living raises, the same contribution amount, 10%, and the same timeline of career, 30-year, and the only thing that we do differently, the only variable that we change is we change the stance towards investment. So instead of being conservative, we’re being aggressive. And what the market bears consistently over 20+-year periods, it’s about a 10% return. And when we adjust that down for inflation, it’s about a 6.87% return. So this is where Aggressive Jane is now taking advantage of that compound interest, so those capital appreciation where you buy that stock at $100 and it sells for $500 in the future. Or the dividends that these companies will reward shareholders over time for being investors. So when we do that and we get that 7% return, it’s about a $1.2 million swing. So that nest egg is not going to be $600,000 now. With Aggressive Jane, it’s going to be $1.8 million. So and you’re not doing anything different except for your stance. So it’s going to be a rockier road, it’s going to be a bumpier road because you’re going to have ups and downs in the market, but if you believe that the market takes care of you over time like we do, it’s going to be OK. So to me, that is the power. And when we show that and we can demonstrate that in the nest egg calculation to say, hey, we’ll talk about risk here in a little bit. This is your risk tolerance, you’re showing this type of portfolio, but if we’re a little bit more aggressive, then they’re like, oh, well I don’t have to save as much right now or I’m actually set for where I’m at. I don’t have to work until I’m 85 years old. And I think demonstrating that, you kind of get that (sigh). And we’ve had clients that have looked at this and were like, alright, well, one spouse was maybe I don’t need to work anymore. We could have a single-income family because we want to stay home and raise the kids. That’s the power in it is to have some intentionality about what we’re doing and we’re not just like oh, I don’t really know how I’m tracking for retirement. And the sooner that you do it, you know, one of the big things that we say with working with a lot of young professionals is time is a great asset to have. We do believe that the income that pharmacists make is great. But time is a great asset to have, and it can kind of be a double-edged sword because some people are like, well, I have 20-30 years to figure that out. But the sooner that you figure it out, the better.

Tim Ulbrich: And I just love that example because as you had mentioned, one variable that was different, you know, where you put that money — so instead of a Money Market account, you’re investing that. We’ll talk about vehicles to do that here in a moment — the only variable that’s different. So you’ve already done the hard work. You’ve already said, “I’m going to save x% of my salary.” That example was 10%, perhaps those that are listening are aspiring for a higher number. But you’ve already made that hard decision. Now it’s a matter of where do I put that to be able to put myself in the best advantage and best position to achieve my long-term goals. So we’ve talked about the concept of what you need in the nest egg. We’ve talked about why investing and compound interest is so important. So the next natural question is, well, how do you get there? Where do I put my money? What are the options that I have available? And this episode is all about investing beyond the 401k and 403b. So we’re not going to talk about those two, and we’ll link to our investing series back from episodes 072-076 where we have more information on those. So let’s jump into those other investment vehicles beyond the 401k or 403b, Tim. And here we’re going to be talking about traditional IRAs, Roth IRAs, HSAs, SEP IRAs and taxable brokerage accounts. So we’re going to do this in a rapid-fire format. So Tim, we’ll tee up each one one-by-one, we’ll start with the IRA. And I’d love for you to talk about, you know, generally, characteristics and design, contribution limits and perhaps some advantages and disadvantages with each of these options. So let’s start off with the IRA.

Tim Baker: Yeah, so the traditional IRA or just sometimes called an IRA, this is an investment vehicle, I like to say investment bucket, that you can use as an investor often to supplement your 401k, 403b. So with this particular bucket, it is a bucket that you fill with pre-tax dollars. So anybody can contribute — anybody that has earned income can contribute to a traditional IRA. Now, once you start making more money than say like a resident makes, if you’re a normally salaried pharmacist, you don’t get that deduction but you can still put non-deductible contributions into your IRA, which you don’t get that tax benefit. And then any money — and this goes for any of these vehicles that we’re talking about — any money that’s inside of that bucket grows tax-free. So if you get investment income or if you get dividends paid, you’re not taxed on that. So outside of that, in the taxable account, you are taxed on that. And I’ll talk about that when we get there. So typically the contributions that you can make into these accounts are $6,000. So that’s in aggregate with the Roth IRA, which we’ll talk about here in a second, next. So if you put $4,000 into a traditional IRA, you can only put $2,000 into a Roth. So it’s in aggregate. But it’s completely separate from your 401k, 403, TSP. So these aren’t tied together in terms of contribution amount. Once you reach age 50 or older, you can put an extra $1,000. And like I said, this is subject to phase out for the deduction. So the IRS will look at your AGI and say, “Hey, Tim, you make too much money. You can put money in here, but you’re not getting that deduction.” So the appropriate use here is that you’re supplementing a 401k or you have no retirement savings, so again, we work with a lot of independent pharmacists that don’t provide a 401k to their employers. So call me if that’s the case, we can definitely help there. But in the meantime, you can use this as really your main retirement. And then in that case, you do get a full deduction, no matter what you make. You want to shelter your income from tax, so if you are trying to lower your AGI and you can, if you’re in the right tax bracket, so you’re a resident, that’s the way to do it, you’re deferring taxes on your investment portfolio. So it’s not taxed going in, but it is going to be taxed coming out when you distribute it in retirement. And then this is for long-term accumulation for retirement. So you’re not going to put money in here and then use it for a home purchase or something like that. So the biggest advantages here is, again, it’s a tax benefit, the investing selection is nice. So you can typically — I always talk about with the 401k, you kind of have to play with the toys in the sandbox, so you only get 20-30 selection. Here, you can basically invest in anything you want.

Tim Ulbrich: Right.

Tim Baker: And typically, less fees associated with it. Now the big drawback is if you do take money out, it’s a 10% penalty unless you’re 59.5. You can take loans against it, which I think is actually a benefit. And then the distributions when you’re retired are taxed as ordinary income, which is not great. So hopefully — I don’t know if that was quick enough, Tim, but those are the high level pieces.

Tim Ulbrich: No, that’s great. So there we were talking about traditional IRA. Let’s talk for a couple moments then about the Roth IRA.

Tim Baker: Yeah, so Roth IRA, a lot of the same things are true. The main difference here is that this is — you’re contributing it to a Roth IRA with after-tax monies, which means that you don’t get a deduction going in, so you pay the tax up front, it grows tax-free, and then when you distribute it in retirement, it comes out tax-free. So one of the things I’ll talk about is like I say, “OK, Tim Ulbrich, you have $1 million in your Roth IRA and $1 million in your traditional IRA. How much money do you have?” Unfortunately, your balance sheet says $2 million, but that’s not what you actually own because in the traditional IRA, Uncle Sam hasn’t taken his bite of the apple. So if you’re in a 25% tax bracket, in the traditional IRA, you own $750,000 of that and the government owns $250,000 of that as it’s distributed. So that’s kind of a high-level look at that. So you can convert a traditional IRA to a Roth IRA, and that’s kind of a separate ball of wax, but you can contribute up to $6,000, there’s a catch-up phase, again, this is typically to supplement the 401k. You’re looking for long-term retirement. You can use this money for like a first-time home purchase, you can distribute up to $10,000 without a 10% penalty. So there are some little nuances to — you don’t have loans or anything like that.

Tim Ulbrich: Yeah.

Tim Baker: And typically the investment selection is good. There’s less fees associated in most cases compared to like a 401k. And your distributions of basis, which is the money that you put in, are always tax- and penalty-free. Now the earnings that it makes could be taxed and could be penalized based on the situation, so that’s something to keep in mind. So high level between traditional pre-tax, not taxed going in, grows tax-free, tax comes out when you distribute it. For a Roth, it’s taxed going in, it grows tax-free, and then it’s not taxed coming out. So I usually take clients through some pretty cool graphics that show them that because it’s harder — oh, and the big thing I forgot to say — this is important — is that for a Roth, for a traditional IRA, anybody can contribute to a traditional IRA, maybe not get the deductions. For a Roth, once you start making a certain amount of money, the door starts to slam shut for you to actually make contributions. So as a single earner in 2020, once you start making more than $124,000, that Roth IRA door starts to shut. So then that’s typically where we do a nondeductible contribution to an IRA and then do a backdoor contribution to a Roth IRA.

Tim Ulbrich: Yeah, and since you mentioned that, Tim, and I’m glad you did, the backdoor, I would point our listeners to Episode 096. We talked about how to do a backdoor Roth IRA. And we also have a blog post on why every pharmacist should consider that as an option with their investing plan. We’ll link to both of those in the show notes. So that’s the IRA and the Roth IRA. Next up is the Health Savings Account, the HSA, also known as the Stealth IRA. Talk to us about that one.

Tim Baker: Yeah. So this is typically paired with a high deductible health plan. So a high deductible health plan is a health plan that you’re — for an individual, the minimum annual deductible is $1,400 a year or more. And the max out-of-pocket expense is $6,900 a year more. So if you have the option with your employer, you’re young, you’re healthy — I guess you can be older and healthy — but if you’re healthy, you don’t go to the doctor a lot, this might be a thing to look at. And you can couple the HSA with this. So this is — the HSA is different from an FSA. FSA is a use-or-lose fund. So every year, you’re going to say, “OK, if I put $1,000 into this and I don’t use it, then I lose it.” And it doesn’t accumulate over time, so at the end of the year, you’re buying a bunch of stuff for like contacts and things like that. I don’t like playing that game. Whereas the HSA, it does accumulate over time. So you don’t have to use it. So the money goes in cash and then for some HSAs, you can invest it dollar one or maybe you have to wait for you to have a balance of $1,000 and then you can invest above $1,000. It just depends on the HSA. But it allows you — it’s very similar to an IRA in a sense of how you invest it. Now, the main thing for this, it has a triple tax benefit. So what I mean by that is for the IRAs, we were talking about a double tax benefit. You either get a tax break going in or going out. And it grows tax-free. With the HSA, there’s a triple tax benefit, meaning that you get a deduction — and it doesn’t matter how much money you make. So you could make $10 million a year, and you’d still get this deduction. You get a deduction as it goes in, it grows tax-free, and then it comes out tax-free if it’s used for qualifying medical expenses or once you reach age 65, you can use it for really whatever you want. So for a lot of people, they use this is as almost like another IRA bucket, which is what my household uses it for to get that. So it never sees the IRS. It never sees the taxman, if you do it correctly. So you can put up to $3,550 as an individual, $7,100 as a family, and then there’s a catchup after age 55, I believe. So you know, the advantages, the advantages of this is obviously the tax treatment, it’s another bucket that if you’re a little bit higher income that you don’t get some of the tax breaks like the traditional IRA deduction, you can put money in there. So what we try to do as a family is we fund this first and then we try to cash flow our health expenses as best we can.

Tim Ulbrich: So that’s the traditional IRA, Roth IRA, HSA. Talk to us about us about the SEP IRA.

Tim Baker: Yeah, so the SEP IRA out there is typically for those self-employed pharmacists out there or maybe ones that are running a side business or could be they work for a small business owner that has a SEP IRA as their sole retirement plan. So they look and act very similar to a traditional IRA, but they’re kind of like a super IRA because the contribution limits are a lot higher. So this is an employer-sponsored IRA, so if you work for a company that has a SEP, you don’t put any money into it at all, and you can’t put any money into it at all. The employer basically has to put — and they’re not necessarily as popular once you start getting employees just because there’s flexibility on when, you know, so you don’t have to contribute to it every year. So if you have a down year because of COVID or whatever, the business owner could say, “Hey, I don’t want to contribute this year.” But next year when business starts to pick up, you have to contribute at the same rate as you contribute to yourself. So if I put 10% in for what I make, you have to do the same for your employees. So typically the rules here, eligible employees have to be at least 21, they have to work for the employer at least three out of the last five years, they have to earn at least $600. So if you’re the employee and the owner, so if you’re one and the same person, this is kind of what I used early on in my business, a SEP, to basically save for retirement above and beyond the traditional IRA. So you can typically put in like the lesser of 25% or up to $57,000 as of 2020. So the hard part about this — and one of the disadvantages — it’s really hard because you’re really looking at what the business profits are to kind of gauge what you can put in. So in my experience, I would put money aside and then like on tax day when I had all those numbers, then that’s when I would kind of check the SEP IRA. So long story short, the IRA is just typically used for those self-employed, if you’re running a side business, you might be able to shelter a little bit of the business income there to help from a tax perspective, from a Schedule C perspective. But there’s no Roth component or anything like that. So there are some disadvantages.

Tim Ulbrich: So we have lots of tax advantage savings vehicles. So obviously the 401k or the 403b, traditional IRA, Roth IRA, HSA, SEP IRA, so as we talk for a moment about taxable brokerage accounts, not only what are they but what would their role be, considering that we have all of these other options available?

Tim Baker: Yeah, so the taxable account — and we can kind of talk about this in kind of the mistakes that I see — but the taxable account is often — think of it as like a savings account but on steroids. So instead of in the savings account that money just sits in cash and maybe earns an interest rate, in a taxable account, you can actually convert that cash into shares of an investment, you know, Facebook stock or S&P 500 ETF or a mutual fund, and then that’s where you start earning the capital appreciation, the dividends, etc. So the contributions here, it’s really unlimited. So you know, you can put a couple bucks a year into it or millions of dollars a year. It’s really — the world’s your oyster. Same thing with the investments: You can basically invest in whatever you want. There’s restrictions like you see in some of the retirement plans. You typically use this when you’ve exhausted your retirement contributions to some of these other accounts that we’ve talked about or if you say, “Hey, Tim, I want to retire at age 55,” a lot of these accounts, the IRA, the 401k, they’re going to say, “Hey, you’re going to be penalized to take money out until you reach this kind of arbitrary age of 59.5 years old. So if I retire at 55, I can’t get that money out of the 401k without a penalty. So when you might use this account for like near — like kind of the beginning phases of retirement and then shift — when you get to age 60, shift over. The other use for this is my wife and I use this for a future car purchase is we see where rates are and how the saver is taking a beating now because interest rates are so low. So we say, alright, we can use this taxable account, we’ll put a car payment worth every month into a taxable account and hopefully over the next five years, the average investment return in the S&P 500 is about 6-7%. Hopefully we can get that versus the 1% that we’re getting in our high-yield savings account. So it’s more of a near- to medium-term goal, which could be a home purchase, a car purchase, maybe real estate investing, investment, with the caveat that you could lose that investment. So you know, there’s risk there that you’re taking. So big advantages in terms of flexibility, there’s no penalty to withdraw, you can recognize losses to offset gains. So this is where you’re paying capital gains, whether they’re short-term or long-term. So when you buy that share at $100 and sell it for $400 in a taxable account, you’re paying $300 in capital gains per share. And so that is one of the disadvantages to the taxable account.

Tim Ulbrich: So Tim, we started by talking about the nest egg, what you need, and then we talked about the importance of investing and taking advantage of compound interest to get there, and then we talked about the vehicles that are available to get there, lots of different ones. So then the next question is, OK, well how do I prioritize this? I’ve got some dollars that I want to save each and every month towards my long-term savings goals to get to that nest egg and take advantage of compound interest. But with all of these options available, where do I go and in what order? And so this takes me back to Episode 073, where we talked about the priority of investing and we talked about the order in which we think you should consider filling your long-term savings or retirement buckets. And it’s important to say, as with any other part of the financial plan, this has to be tailored to the individual. So of course, this is not investment advice. But walk us through again, Tim, at a high level what we think of as the priority of investing between these different vehicles that are available to someone.

Tim Baker: Yeah, so assuming that we have kind of the foundation in place, the consumer debt is kind of taken care of, emergency fund, we don’t owe any taxes, we have a plan for the student loans, we’re kind of accounting for more of the near-term goals like travel, wedding, home purchase, education planning for the kids, really as we kind of wade into the how you prioritize, it’s going to depend. Obviously that’s my statement answer, but in most cases what we would say is you want to start with the employer match. That is — we talk about that’s free money in 99% of cases. 95% of cases, you always want to get, at least get the match so you don’t forego that benefit. And then typically, the next step, the decision tree here is based on if my — how great or not so great my retirement plan is. So you know, in a lot of cases, retirement plans, 401k’s, 403b’s, they have a lot of fees associated that the investor doesn’t necessarily see. So what we typically say is that if you don’t know, it might be good to go out into the IRA/HSA world and max those out next. And then go back into the 401k, the 403b, the TSP and get the max, which is in 2020 $19,500. And then from there, from a traditional investment perspective, that’s when you would start loading up in the taxable account or if you’re more nontraditional, you might look at real estate investment, investing in businesses, or something like that. So that’s typically kind of steps 1, 2, 3 and then 4 with regard to how to kind of prioritize your approach to filling your retirement buckets.

Tim Ulbrich: And you talked about one of these already, but common mistakes that you see people make in the investment prioritization, but talk us through some others that you commonly see as well as people are trying to sort out these different options.

Tim Baker: Yeah, so you know, often when I come across — and I had a conversation with a pharmacist here recently. You know, they get into investing before the debt is paid or there’s a plan for the debt. So that could be a student loan, that could be a credit card or a personal loan. So you know, you have $10,000 in credit card debt, but you’re putting 10% in — you get a 5% and you get a 10%, and you have a 10% contribution into your — you know, that doesn’t really make any sense. Or sometimes there’s no purpose or goal with the investment. So most of these accounts that we’ve talked about are retirement accounts, so they’re for retirement. But if you have taxable accounts, I often ask clients that have like a Robinhood account or — what’s the other one? Robinhood and…

Tim Ulbrich: Acorn?

Tim Baker: Acorn. And I’m like, what’s this account for? And they’re like, I don’t know. And to me, I think that’s dangerous — not dangerous, but just to me, I’d like to say, “OK, my wife and I, we have a taxable account, which is like Robinhood in terms of the same tax treatment. But it’s for real estate, it’s for a trip to Australia.” And sometimes we do the taxable accounts before we even get the match, we have an emergency fund in place. And I know why that happens. It happens — and I think you, Tim, and I can appreciate this — is because you’re interested, you’re curious, you want to see how some of these apps or like the investment works. And it feels good to invest in Tesla or Disney or Ford or whatever. But it’s kind of putting the cart before the horse. So in a lot of cases, we kind of advise clients, like, hey, you need a $30,000 emergency fund. Right now, you have $10,000. You have $30,000 in the taxable account. Let’s do the math here and figure that out. Another mistake is just having no concept — I know we’re not talking about it today — but no concept of how good or bad their 401k and 403b is, which that’s tough because it is very opaque to the investor, unfortunately. And then probably the last thing is just kind of having that 401k inertia where they just stick it at the match and then they wake up and they’re 45 and they’re still just putting it at 3% or 5%. So some of that investment, some of the mistakes I see with kind of the prioritization is kind of outlined there.

Tim Ulbrich: And you mentioned, Tim, earlier I think an important part about risk tolerance and understanding how that fits into your investment selection, your long-term goals. So how do you work through this with clients in terms of understanding the risk tolerance and then ultimately developing a portfolio that aligns with that.

Tim Baker: I kind of look at risk tolerance as — so you really have two things going on here. You have the risk tolerance, and then you have what’s called risk capacity. So risk tolerance is the amount of risk that you want to take. So in the case study that we went through earlier in this episode, we talked about Conservative Jane. So Conservative Jane didn’t want to take any risk at all, didn’t want to. The risk capacity is the amount of risk that you need to take or the amount of risk that you can take. So for some people, you know, if they’re age 50, they want to retire at age 60-65 and they haven’t done the things that they need to do throughout the course of their career and they’re a little bit behind, you need to take a little bit more risk to kind of make up for lost time. The other example is if you’re 30 years old and you’re going to retire at 65, you have 35 years, so you can take more risk because you just have a longer time horizon. So we measure the risk tolerance but then we talk about the risk capacity. And what I kind of say is — and I would say it’s not very common, but kind of the rules of thumb out there where you say, alright, you take your age and you sub — so say I’m 30 years old and I subtract that from 100, that’s 70. So the rule of thumb is you put 70% in equities and 30% in bonds. And I think that is utterly terrible. That’s a terrible rule of thumb. And I love those rules of thumbs and making it easier. But it’s — I think it’s the wrong advice. So to me, what I argue is if you have decades worth of time, 20-30 years, you really shouldn’t have many bonds in your portfolio at all, if any. So as an example, I’m — how old am I? — I’m going to be 38 this year, Tim.

Tim Ulbrich: Old. Old.

Tim Baker: Yeah. I’m getting up there. But I’m not going to smell bonds in my portfolio for another 20 years probably because, you know, right? And it sounds weird, but like when COVID happened and the market went down, like I never looked at my balances. I don’t care. And the reason I don’t care is because I’m not going to spend that money for another 25 years, 30 years. So in 25 or 30 years, we’ll probably remember COVID, but we’re not going to remember what our balances were there. So now if you’re 60 and you’re going to retire next year or in a couple years, then you do care. And that’s where we start shifting from an equity portfolio to more of a bond portfolio where it’s more safety in principle and you’re protecting what you’ve built over the course of your career. So that’s important. And that’s, again, something that when we talk about, when we change that one variable between Conservative Jane and Aggressive Jane, if you’re willing to kind of join me on that ride — and it can be bumpy — but the market goes up, then you just have to save less hard, if that makes sense. Because your money’s just going to go a lot further, and a lot of people get that wrong.

Tim Ulbrich: Yeah, and I remember when Jess and I were working through this with you, Tim, I remember taking an assessment that we each did that helped us understand our own risk tolerance but then also stimulated a great discussion between the three of us about OK, let’s take that information and then let’s also look at that in the context of our nest egg and our goals and everything else that we want to do. And I think that’s exactly how this process should work. So I want to talk about taxes for a moment. And we talk often because we so firmly believe that tax strategy and planning is ideal when it’s paired up with the financial planning in the process. So we are fortunate to have Paul Eichenberg, our IRS-enrolled agent, on the YFP Planning team to help our clients that are also working with our Certified Financial Planners. But as we look at the tax piece here in the context of investing — and we’ve talked a little bit about it already — but paint that picture for us. Why is the tax consideration and having that input so valuable as we are looking at it through the lens of the investments?

Tim Baker: Yeah, you know, just coming from the beach, it’s like tax is like the sand. Like it gets into everything, right? So it’s everywhere.

Tim Ulbrich: That’s good.

Tim Baker: And you have to consider that. And I’ll give you — I’ll kind of give you a real-world example. I was having a meeting with a client we’ve been working with forever and we were talking about his Roth IRA and some of the other things. And we’re not doing his taxes right now. I think he has a family member that does it. And I said, “Hey, let’s at least upload your tax returns so we can kind of take a look and see how everything’s doing and see if I can give you some advice.” And we found out that his AGI, it was actually too high for him to be making Roth contributions. So we’re going to have to basically back those contributions out, you know, put them into as a nondeductible contribution in the traditional IRA and then figure out a way to convert them. So you know, it’s going to cost him. There’s going to be a penalty and things like that. And it’s just one of the — this was the year that he kind of went over that threshold. He was working a lot of overtime, etc. So you know, so those types of things happen. But what I say to clients is like, look, most financial planners, they don’t do taxes. So in my last firm, we would say, “Hey, client, we don’t do taxes. But you know, go work with a CPA,” and then there was really no cross-planning between the two of us. And I think you leave a lot on the table when you do that or you potentially can run into some of the cases like I was telling here today. So my big pitch to the client that I just mentioned was like, hey, let’s just roll it up in with us. Let’s do it. Fire your aunt or whoever that’s doing it and let us do it because it’s just — it’s that important. So I think whether it’s something like the Roth contribution or just when to convert things, it’s just for everything, every financial decision that is involved typically has some type of tax implications. And what I’ve found, at least in my experience, is that similar to like the student loans, most financial planners don’t really understand student loans, most financial planners are not going to basically file the taxes and do the associated planning that is kind of need through every walk of life with regard to the financial plan. So that’s why we’ve kind of rolled that up into our service. And I think it just makes it — it allows us to have more robust conversations and cover more bases with regard to the journey that we’re on.

Tim Ulbrich: Yeah, great stuff, Tim. And we preach and hopefully model with our clients the importance of both the filing aspects as well as the strategy and the planning. And so our clients have the opportunity to work closely not only with you and Robert and the rest of the team but also with Paul to be able to make sure that that tax piece is closely integrated with the rest of the financial plan. So as we wrap up here, Tim, with everything that we have talked through here as it relates to investing, and from my experience, there is huge value for having a financial coach. And we know that investing is a huge part of the financial plan, as we started with. It’s only one part. And like we talked about, it’s essential for helping folks, me and others, increase their nest egg and ultimately achieve their long-term financial goals. And I know firsthand from my experience for Jess and I having you on our side as our coach to guide us through our options and help us assess our risk tolerance and ultimately put together that savings plan has been so critical. So for those that are listening that say, “Hey, I want a coach in my corner. I want somebody to help me guide me through not only the investing part of the financial plan but the rest of the plan and the ins and outs of each part of the plan,” talk to us more about not only where do folks go to ultimately have a conversation with you but also the offering and the service of what we do at YFP Planning.

Tim Baker: Yeah, so the best way to — if someone’s listening to this and they’re like, hey, that sounds really something that I need in my life, they can go to YourFinancialPharmacist.com and at the top right, there’s a “Book Free Financial Planning Call.” And you’ll see an appointment calendar where you’ll see my ugly mug and then also you, Tim Ulbrich, that we can have conversations about potentially working together. Or I think if you go to YFPPlanning.com is our other website, you can book a meeting that way. And those are free of charge. It’s really hey, this is us, who are you, let’s learn more about it and see if we would be potentially a good fit. You know, I think when — the way that I look at financial planning is I don’t really even look at it as like financial planning. I really look at our service as a life plan that is supported by a financial plan. So I often say, you know, we were talking about that nest egg as like, hey, you need $4 or $5 million in your nest egg, you know, let’s suppose that we work together for the next 20 or 30 years and we have $10 million in the nest egg. $10 million is better than $4 or $5 million. However, if you’re miserable because you haven’t done the things that you wanted to do in life, you feel like you don’t get fulfillment from your career, you haven’t traveled, whatever those goals are, whatever — we talk about the why — whatever that why is, who cares? Like what’s the point? What’s the point of making a six-figure income, what’s the point of becoming a Seven Figure Pharmacist, what’s the point of paying — like what’s the point if you’re not happy, if you’re not fulfilled? So to me, the hard part — so we’ve kind of gotten into some of the technical pieces today with regard to investing outside of the 401k, but to me the hard part about this is the human element.

Tim Ulbrich: Yes.

Tim Baker: It’s the how do we thread the needle between taking care of you, the listener that’s listening out there today, but then you the listener who’s 10, 20, 30 years older that things are completely different. So it’s threading the needle between taking care of yourself today and your future self. And that is hard, especially if you’re doing it with a partner, working with you and Jess, my wife, I mean, you just have different opinions about money and there’s compromise and things like that. So to me, we go into lots of different pieces of the financial plan and we kind of rattle off a bunch of them, but at the end of the day what we want to see — our mantra really is are we helping the client grow and protect income, which is the lifeblood of the financial plan? Without the income, nothing moves. So sometimes we kind of like poo-poo the six-figure income, that’s going to solve all your problems. It is good to have, but we want to be intentional. So how can we help you grow and protect the income, and then more importantly, grow and protect the net worth, which means increasing the assets efficiently, which includes the investments, but then also decreasing the liabilities efficiently, which includes things like student loans, paying off the house, etc. So assets minus your liabilities equal your net worth. So income and net worth quantitatively are the two most important numbers. And we track the net worth over time to show progress. But then it goes back to the who cares unless we’re keeping the goals in mind. And those are the qualitative aspect that we really have to pair. So you know, it’s not uncommon for me to say, hey client, we talked about this trip to Australia. We’ve been working together for 12, 18, 2 years, whatever that 12-18 months, maybe two years — and again, keep COVID in mind — but I’ll say, “Where’s the money? We haven’t done that yet, but where’s the money for that?” Either it’s important and we want to be intentionally saving towards that goal and check that off because when I asked you the questions of like hey, what are we trying to do? You said hey, that’s something that came to mind. So it must be important. Or maybe it’s not anymore. And then we’ll adjust the plan accordingly. So how can we help you grow and protect income, the net worth, while keeping your goals in mind? That’s our jam.

Tim Ulbrich: I love it. And again, YFPPlanning.com, you can book a free discovery call to see if it’s a good fit for you, good fit for us. And if we’re not already yet a part of the Your Financial Pharmacist Facebook group and our community of more than 6,000 pharmacy professionals that are answering questions, encouraging one another, challenging one another, I hope you will join us in that community. And as always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please leave us a rating and review on Apple podcasts or wherever you listen to your show each and every week. Have a great rest of your day.

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YFP 162: Credit 101

Posted on July 23, 2020November 2, 2022 by yfpadmin

Credit 101

Tim Ulbrich and Tim Baker, CFP® dig into credit, a not so exciting but incredibly important part of the financial plan. They talk about what makes up a credit score, the impact of good (or poor) credit, how to find and interpret your credit score, the difference between hard vs soft credit checks and how to protect your credit.

Summary

Assessing your credit report and credit score are integral pieces of the financial planning services offered at YFP, but why? The CFP® board focuses on several different topics like budget, taxes, insurance, retirement and estate planning, but YFP Planning expands that list to support clients with essentially any aspect of their life that carries a dollar sign. On this podcast episode, Tim Baker breaks down credit, its misperceptions and what factors go into your credit score.

Tim explains that credit starts with you and your behavior and that agencies create credit reports based on what they get from creditors, like loan servicers or credit card companies. A credit score is created from this record of payments and essentially shows a snapshot of your reliability or likelihood of paying debts on time. You’re then able to use your credit score to apply for more credit. Your credit score matters because it affects if you can get more credit and how much you pay for that credit (i.e. interest).

Tim also shares the 6 factors that go into a credit score. The high impact factors are credit card utilization, payment history and derogatory marks. Medium impact factors include age of credit and your total number of accounts. Finally, a hard inquiry (think applying for a credit card or mortgage) has a low impact on your credit.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. And today, Tim Baker and I are going to be talking all about credit. So Tim Baker, welcome back to the show.

Tim Baker: Yeah, I think it’s been awhile since I’ve been on a full like episode, so it’s good to be back.

Tim Ulbrich: It is. I feel like every time we do this, we say that and then we say we’re going to do more of it, and then, you know, it ends up being awhile. But we are going to do more of it in the future, and we have been doing more of it with the Ask a YFP CFP segment of the podcast. So Tim, credit as it relates to the financial plan. And with YFP Financial Planning clients, credit is a presentation, it’s a module that you walk through. And I think many people may not think about this as a core part of the financial plan and perhaps not even covered by many financial planners. So talk to us about why is credit such a big part of our financial planning services that we offer? And what’s really the goal of talking to clients about this topic?

Tim Baker: Yeah, so I think there is — you know, I kind of look at the financial plan. I mean, you have the core pieces that the CFP board teaches and there’s curriculum for that. And that’s the things that we talk about, which are kind of budgeting, cash flow, your balance sheet, tax, insurance, investment, retirement planning, estate planning. Those are the things that are — you know, debt management, not necessarily student debt but overall debt management — so those are the things that we kind of talk about as core to the financial plan. And we kind of — we do those things, you know, at YFP Planning, but we also have kind of adapted our service to talk about more things that are kind of top of mind for a lot of our clients and kind of what they’re experiencing. So those are things like hey Tim, I’m buying a home. What do I do? And you know, very much related to that is credit, you know, is making sure that the credit is pristine and looking good. It could be planning for a kid’s education, salary negotiation, things like that. So we kind of — real estate investing, most financial planners are not going to get into real estate investing because they’re not necessarily paid on the assets that are in real estate portfolios. So we kind of drift a little bit to kind adapt our service. And I would say credit is one that a lot of people don’t think about. But we often do it in tandem with the home purchase, so say, “Hey, if you’re going to make the biggest purchase of your life,” — and I’ll put it in and edit on that because I have clients that are like, “Well, the biggest purchase of my life is my pharmacy, my PharmD.” And I’m like, “OK, if you’re going to make the biggest purchase of your life at one time, you want to make sure that you get the — you have the best, you know, your credit is as best it can be and you get the best terms.” So a lot of people — and I can say, you know, we talk about mistakes that we’ve made in the past. I know, like in past life, I was afraid that my credit score — and I never really checked my credit, so I remember renting an apartment way back when, this was kind of when I was getting out of the Army and I’m like, I wasn’t always as great a saver and I would carry credit card debt and all that kind of stuff. And I would be scared because they were like, “Hey, we’re going to run a credit report.” I’m like, oh my goodness, like my credit’s probably looking — and I had no idea what it was. And I’m like, I was almost apologizing for my credit score, not knowing what it was. And I think it came back, it was like in the 800s. So in a lot of ways, credit is a good measure of your dependability and reliability and kind of your overall financial health. But also like not really because you can have a fantastic credit score but also be not necessarily positive on the balance sheet, you know, and things like that or at least moving in a positive direction. So we definitely look at this as a key piece of the financial plan and make sure that — and I really break it down into two pieces. You have your credit — you know, when we talk about credit, we have your credit score. And you have your credit report. And those are the things that we kind of break down and then we go into things like identity theft. But those are the two main pieces that we kind of work through.

Tim Ulbrich: Yeah, and I’m glad you said that, Tim, you know, that we shouldn’t confuse a good credit score with necessarily meaning that that’s — that you have a sound financial position or situation. Maybe that’s true.

Tim Baker: Yeah.

Tim Ulbrich: We hope that’s true. But you know, as we’ll talk about how credit scores are determined, you know, that may or may not connect with your net worth, that may or may not connect with your debt position, your asset position.

Tim Baker: Sure.

Tim Ulbrich: And I think I would encourage folks too, I’ve made plenty of financial mistakes. But one of the mistakes that I made related to credit is I underestimated the importance of credit based on my situation in the moment. So you know, I can think of several years ago right after we paid off our student loan debt where I really wasn’t worried about, you know, having a sound credit history. We did, but being able to continue to maintain that because I had really thought, hey, we’ve got no more debt, what’s really the need for credit going forward? We already purchased our home. But I think that speaks to a common situation that people may fall into similar to ours where you look at your financial situation for the future through the lens of what you’re doing today, right?

Tim Baker: Right.

Tim Ulbrich: And not think about what about a future home purchase? What about a real estate investment purchase? What about starting a business in the future? What about x, y, or z that may be important to be able to have that credit down the line? So thinking about where the future may go as well. So you mentioned, Tim, two important pieces here: credit report, credit score. So let’s jump into those both in more detail. And let’s talk about the credit report first. So where do you pull a credit report? What does it show? And why is it important to check it?

Tim Baker: Yeah, so I would say even before we get into that, I kind of want to back up and kind of just talk about like how really how the credit system works. So it really kind of starts with you and your behaviors. So where — how you’re getting credit, where you’re — so if we kind of walk through a scenario, let’s pretend, Tim, that you’re saying OK, hey, I want to buy a car. You’re going to go to the Honda dealership, the Toyota dealership, the Ford dealership or whatever, and say you don’t have the cash to pay. As most don’t. You’re going to basically put a note on the car. So the creditor, they’re going to say, “Hey, we’re going to lend you this $20,000. And every month, you’re going to pay this back with an interest rate.” So basically, your behavior of what you’re doing with Toyota or Honda or Visa or your student loans, your creditors are going to be reporting that back, you know, your payments, every month to these different reporting agencies. So the reporting agencies are Equifax, Transunion, Experian. And then these agencies are going to be taking all of that information that are sourced by the creditors and essentially they create these credit reports, which is just kind of a record of your — of kind of your payments based on what the creditors are telling them. And then from there, they create this credit score, which is basically a snapshot of your reliability or your likelihood that you’re going to pay your debts back on time. And then if we kind of bring this back full-circle, you then use your credit score to then apply for more credit. So it’s like this cyclical thing that happens with regard to the how credit works. Now, if we talked about the credit report first, the credit report, again, is a record sourced by the creditors of an individual’s different credit, you know, loan payments, etc. One of the misconceptions, it doesn’t show your credit score. So a lot of people — when I’ll ask clients, “Hey, have you run your credit report?” they assume that their credit score is there, and it’s not. So back in 2003, Congress passed the FACT Act, the Fair and Accurate Credit Transaction Act that gives free access to credit reports but not necessarily free access to your credit score. So every year, every 12 months, you can run a credit report from each of the three major credit reporting companies. Right now with the CARES Act, you can actually run this report weekly.

Tim Ulbrich: Yeah.

Tim Baker: Which is interesting. And sometimes needed, given what’s going on with some of the student loan services. We talked about that in the past. So to quickly break down the credit report, when you run your credit report — and you can do that at freeannualcreditreport.com I believe it is. Sorry, it’s annualcreditreport.com. So you can go there and you can see all the different credit reporting agencies and you can pick the one that you like. I like Transunion’s. It’s colorful, so they’re all essentially the same. But Transunion is kind of a prettier version. So you can pick Transunion. And I would say don’t run them all at the same time. Just run one. If you have a big discrepancy when we talk about credit score, then maybe run another one. So when you run your credit report, basically the things that you’re going to be looking at is kind of your pertinent information, so your name, maybe aliases, your birth date, your addresses. I joke that if I ever — so I’ve lived all over the country. If I ever forget like, OK, what was the address that I had in like southern California when I lived there, I look at Amazon and I look at my credit report because those are typically the best places for that. And then it might show like your occupation and things like that, but the bulk, the meat of the credit report is going to be your account information. So it’s going to show first any adverse accounts, so these are things that have like negative, like a negative report associated with that, so like a missed payment or something of that sort. And then all of your satisfactory accounts, so these are accounts in good standings with no blemishes at all. So that’s really kind of the — and you’ll see, like when you look at it, you’ll be like, oh yeah, I forgot about that account or this account’s been closed for five years but it’s still going to show on your credit report for a total of 10. So it’s kind of a little bit of a trip down memory lane, but it’s a good exercise to pull their credit report, to look at it. We do that on behalf of clients. But I even tell clients, like I’m not going to know if something looks kind of fishy or out of whack because, again, I wasn’t there. But I can kind of still look and provide feedback and overall advice on how to better improve the credit report.

Tim Ulbrich: Yeah, so again, annualcreditreport.com. You can do that once per year for free through each of the three agencies. Although as you mentioned here, in the CARES Act time period, you can do that more often. And we’d certainly challenge and encourage our listeners that have not done, I think it’s a great exercise, for the reasons that you mentioned, but also just another way that you can be engaged and involved in your financial plan as we talk about credit being an important part of the financial plan. So Tim, you talked about one misconception around credit, which is that your report does not include your score. Those are two different things. What are some other common misperceptions that you hear about credit that we can debunk right now before we go into talking about credit scores?

Tim Baker: Yeah, so some people think that like, oh, if I check my credit, it’s going to drop. And that’s not true at all. Like you know, the government actually wants you — like before, you had to pay for your credit report. Now, they’re giving you free access. Another big thing is closing — and some of this sounds like counterintuitive — but like closing an old account improves your credit score. And in fact, I actually just had this happen in one of mine. I had a very old credit card that I think I used when I was at West Point that eventually, it eventually like closed because I just stopped using it. And my age — so we’ll talk about different factors that affect your credit score — age of credit is going to be one of those. So that longstanding account that was open basically cut my age of credit in half, which lowered my credit score. So that’s another big one. You know, another thing is like, hey, if I have a missing payment on a credit card and I have a derogatory mark, if I basically get that back to where it’s good to go, then that comes off my credit. And that’s not true. Like I had a — I think it was back in 20 — and I actually show it on my credit report when I go through this with clients. Back in May of 2010, I went 30 days over — like I didn’t pay my credit card and it went 30 — once it hits 31 days, then it basically is a derogatory mark. That stayed on my credit report until May of 2017. So it can be — some of those things can be very long in terms of them coming off.

Tim Ulbrich: This was the old Tim Baker, right?

Tim Baker: Yeah, this was the old Tim Baker. I actually want to go back to my calendar and see what was going on. I’m pretty — and I kind of joke, you know, the two things that — and I wouldn’t say it’s just two things, but the two main things that my parents taught me about money growing up was don’t have credit card debt, like pay those off, and then like buy a house, that’s a good investment. And I obviously didn’t listen to that first one 100% of the time. So but that derogatory mark stayed on my credit report, you know, for seven years. So you know, this is where we talk about like autopayment and things like that. Like don’t — make sure that you’re — and for some people, some people, they’re like, ah, 30 days, they just throw up their hands. And then the next 30 days, that’s another derogatory mark. And then there goes the 90 day, that’s another. So you don’t want to let those cascade. And then probably another one is like being a cosigner doesn’t make you responsible for the account. That’s exactly what it does. So lenders like cosigners because it’s two different people that they could potentially revert back to if the credit goes — if the loan goes into default. So that’s exactly what that does. So that, you know, you’ve got to look at that from a some people are like, oh, yeah, well I’ll cosign for my brother’s car note or my kid’s or things like that. You’ve got to be wary of that because at the end of the day, you want to protect yourself — you want to help loved ones, but you also want to protect yourself in terms of your credit. And probably the last one that, you know, you hear is like, well, if I pay off this debt, my credit is going to be boost by 50, 100 points. And it’s not — there’s just so many different — it’s not a linear relationship. There’s so many different factors that go into your credit score that it’s going to depend on a variety of things of how your credit score is going to move.

Tim Ulbrich: Yeah, and I think that last point’s a good segway into what is a credit score and what makes that up so you can have an understanding how any one decision may or may not move the needle very much based on the components and the percentage that they make up of that overall score. So give us the broad definition of a credit score.

Tim Baker: Yeah, so the credit score is really a number that summarizes your credit risk based on a snapshot of your credit report at a particular point in time. It’s really the picture of your ability to pay back a loan over really the next two or three years. So the higher your credit score, the more likely you’ll be able to pay back the loan and on time. And really, the credit score matters because it affects whether you can get credit and what you pay for credit, meaning if you have a higher credit score, then you can potentially get better rates. A higher score, you know, will more than likely be more chance of approval for that credit. It can affect your ability to rent an apartment. Sometimes it affects your ability for your deposit on a telephone, a utility, that type of thing. And a lot of employers will run credit scores just as kind of a measure of your dependability. So it can have far-reaching effects. So you know, if we look at kind of the different bands on credit — so like some people will say, oh, like my credit score is only 760. Like that’s a really good — in essence, that’s an excellent credit score. So anything about 750 is excellent. Good is kind of the 700-749. Fair is 650 to basically 699. And it goes all the way down to poor then bad credit. So this is a really, really important score. And if you look at it from the — I try to look at it from both sides of it. So you look at it from the lender’s perspective, you know, when, you know — and we talk about this like, we kind of talk about this with like interviewing like candidates and things like that, you’re trying to really get a good snapshot of this person and by answering a series of questions or something like that. And from a credit granting decision, the lender is really trying to get a good snapshot of how hey, if we, you know, if we’re going to take risks to lend you this $300,000 for a home, we want a good feel that you’re going to be able to pay this back and on time. And from their perspective, they’re using that as a way to, you know, sum up your dependability.

Tim Ulbrich: Yeah, and I don’t want to brush over — you mentioned it — but not only impacting your ability to get credit but what you pay for that credit. I think that’s so incredibly important when you talk about big purchases like a home. And we talked about this in Episode 159 with the refi and, you know, what is the difference of a point or point and a half? And that can be due to credit and how attractive you are as a lendee. But obviously that has significant impacts on your monthly budget as well as over the life of the loan, student loan refi, car buying, the list really goes on and on, real estate investing and so forth.

Tim Baker: Yep.

Tim Ulbrich: So you mentioned the number and the ranges that we see in a credit score. We talked a little bit about why it matters, what it can impact, the various parts of your plan. Talk to us about the new FICO credit score effective January 2020.

Tim Baker: Yeah, so they’re trying to like tweak the system a bit to kind of make it more of a reflection of like a borrower’s behavior. So one of the things that they changed at the beginning of the year — and FICO is the biggest credit score out there. I think Vantage is the next one. But FICO’s the big one on the block. They’re trying to tweak their algorithms, so they’re going to judge more harshly those who fall behind on payments. And what they’re trying to do is give more weight to people that are basically improving their credit situation. So they’re looking at more like trended data. So the example I’ll give is let’s pretend that you have $40,000 in credit card debt, and we work with clients that have $40,000 in credit card debt. And let’s pretend that over the year, the first year that we’re working with them, that $40,000 moves to $20,000 as an example. And then we basically compare that to another client that we’re working with that just basically has we’ll say $5,000 in credit but at the end of the first year, they still have $5,000 in credit balances that they’re carrying. The first client would actually be, you know, graded out a little bit better because they’ve gone from $40,000 and their trended data says they’re moving in the right direction in terms of paying off their credit whereas the other client, which we’re kind of just saying they’re treading water, their balances are the same, would be graded more harshly. So today, that second client, that $5,000 is — before we made the changes would have a better credit rating whereas the one that’s trending in the right direction now is they’re giving more consideration to that, which is good. I think the other thing that they were looking at changing is to kind of — you can play a little bit of a smoke-and-mirrors game with credit. So if I had $40,000 in credit card debt and I moved that to an unsecured personal loan, that actually helped my credit score out quite a bit. So now, for those types of loans where you’re kind of just shifting it from a credit card debt to a personal loan, it’s still graded similar to how like a credit card would be. So they’re recognizing that there’s a lot of people that will consolidate credit card debt into other types of debt. And they don’t — they want to make sure that they’re capturing that data accordingly.

Tim Ulbrich: Sure.

Tim Baker: So they’re going to continue to — it’s not a perfect system at all. But you know, they’re trying different ways to make sure that they’re capturing overall behavior and where a particular borrower is trending with regard to their credit decisions.

Tim Ulbrich: Yeah, and I think that makes sense in terms of the trends and, you know — I think about this in terms of like when we admit student into the PharmD program, you’re looking at the whole picture, but often the best indicator of their success going forward is the most recent behavior. So you know, if you see somebody really struggled academically in their first or second year of undergrad but they’ve significantly improved in their third and fourth year, obviously that’s an indicator of where they’re going to go, even though overall, they may not be as competitive as some students who did average throughout. So let’s talk about a credit score and how it’s calculated. So how is a credit score calculated? What factors are considered in this calculation? And what’s considered high impact versus lower impact?

Tim Baker: Yeah, so there’s really six different factors that kind of go into your credit score. So we’ll start with the high impact ones. So really, there’s high impact ones. The first one is credit card utilization. So the credit card utilization is — it’s basically the amount of credit that you’re carrying month-to-month. So if we say that — and really, this is a high-impact factor. The lower the utilization, the better. So lenders like to see that you’re not using too much of your available credit. So the more you use, the harder it is to pay off. So the idea is to keep the balances low. So the example I give is let’s pretend that you have a line of credit on your credit cards of $10,000. So if you’re carrying $3,000 worth of credit card balances every month, then your utilization is basically 30%. And that, you’d be right in the middle of the pack. That’s kind of a fair credit utilization rate. So the idea here is that to be excellent, you want to have basically under 10%. So in that case, the borrower, if they want to have an excellent credit card utilization, it would be carrying $1,000 or less. Now obviously we’re big believers in just paying off the credit card every month. But that’s a big one is that lenders like to see that you have a little bit of rope but you’re not using all of it. The second one is kind of the payment history. So lenders look at this factor to determine how likely you’ll make future payments on time. So that’s like not being like me and making sure that 100% of the time you’re paying your debts back and on time. So you want to be aware of lateness, you want to set up things like automatic bill pay, those types of things and not let those latenesses cascade. And for you to be excellent, you really want to be 100% effective. Good is 99%, fair is 98%. And you’re going to say, “Wow, Tim, that’s like, that’s really tough.” But if you think about it, you know, think about like if you were to pay off a student debt, like let’s pretend you refinanced your loans a couple years ago and you made your last payment in July of 2020. Those payments and that account is going to stay on your credit report for 10 years. So it’s not going to come off until July of 2030. So if you add up all of these different accounts and all of these monthly transactions, like the denominator is very large. So you know, even if you do make — miss a payment, you’re still going to be in that high 90s. Probably the last high-impact factor is derogatory marks. These are basically the result of things like a late payment or if you go to collections or have a bankruptcy. The derogatory marks are going to be anything that’s adverse that a creditor is going to want to know. So this is high impact. The lower, the better. And again, these are where you want to make sure that you’re keeping all of your accounts in good standing and they’re not basically moving from an account in good standing to an adverse account. The other ones are going to be — so the age of credit is more of a medium impact. So the higher or the longer, the better. So they’re looking at really 9+ years. So this is where some people, some younger clients get penalized. I actually had a client that was — I think she was 28. And her age of credit was like 38 years old, or 38 years. And I was like, what’s going? And I think her parents put her on like a Conoco gas card as like a user or whatever. And that like really helped her credit history. So lenders like to see that really it’s not your first rodeo, you have experience using credit. So you can improve your age of credit by keeping accounts open and in good standing. The next one is total accounts. So I thought this was — like when I was learning about credit way back in the day, I thought this was a little bit of counterintuitive. Actually, the total accounts, higher is better. So lenders like to see that you’re using various accounts. So it could be installment accounts, so loans paid in fixed increments over a period of time. So take like a car loan, a student loan, a mortgage. It could be revolving credit, so credit lines that have variable payments. So think of like a credit card, an open credit line, which could be things that are balances that need to be paid every month. So think of like a utility or a cell phone bill. So it suggests that — it’s kind of a little bit of the herd mentality. It suggests that other lenders have trusted you before, so we can trust you as well. So they like to see, you know, lots of different — and for you to be in the upper echelon here, excellent is like 21 accounts or more. And you’re thinking like, wow, that’s a lot. For pharmacists, this is typically a piece of cake because everytime your loans are disbursed, so think like per semester, that’s an account. So pharmacists usually have a really easy time of getting this, even if they don’t have credit cards or things like that, they typically have a lot of accounts listed on their credit report.

Tim Ulbrich: Unfortunately.

Tim Baker: Yeah, unfortunately. And then finally, the last one. And this is a lower utilization as like a hard inquiry. So this is lower is better. This results in applying for credit. So the idea here is that they don’t want people that necessarily don’t have great credit to kind of be fishing for credit like all over town, essentially. So you’re applying for credit and you’re just trying to find somebody to lend you money. So instead of — and that’s kind of like a shotgun blast. You take a sniper approach. So like if you’re going to buy a car, you’re going to narrow it down to the dealership or two that you’re looking at and apply for credit there instead of like just going everywhere. So these hard inquiries stay on your report for two years. I feel like I have a bunch of these from refinancing my house. I switched from Sprint or Verizon, they check your credit there. So ways to kind of get around this is you can take advantage of like preapproved credit cards where they’ve already kind of pulled your credit. If you use that car buying example, you know, if you say, hey, you apply for credit at Ford, Toyota, Chevy, etc., if they’re within a relatively short period of time, like I think it’s like a week or two, they group all of — it might be like three or four inquiries they’ll group together as one. But excellent is that 0-1. I think for right now on one of my credit reports, I have like three or four. And again, my credit is in the 800s, so it’s not a big, big thing. But it is something that they want to kind of keep tabs on because they don’t want people just fishing for credit. So those are really the different factors that kind of go into your credit score.

Tim Ulbrich: So before we talk about hard v. soft pull — because I think that’s an important distinction that many of our listeners would be interested in — I want to go back to that first one: credit card utilization because I think this is one where people might be surprised by that number of less than 10% or even try to get below 30%. So I imagine there is many people out there that might have, you know, one major credit card that they use, all their monthly expenses go on there, so they’re putting $4,000, $5,000, $6,000 and they’re obviously above that threshold. So what’s the play here? Is it trying to get that limit increased? Is it having multiple cards to diversify those expenses? What do you typically advise or work with clients here?

Tim Baker: Yeah. So you know, it’s something that I think you have to kind of tread carefully. And I kind of — depending on the client that I’m working with and the situation that we’re in, I’ll advise them accordingly. So you know, one of the ways to kind of game the system is if you say, hey, I have $2,000 worth of purchases of balances that I’m carrying, and I’m in a $10,000 limit. You’re in the 20%, which is not necessarily excellent. So one of the things that you could potentially do is ask for a credit increase, a credit line increase. So again, you’re increasing that denominator that kind of gets you — if you go from $10,000 to $20,000, that gets you kind of in that excellent band. I’ve done that in the past — or I’ve suggested that to clients in the past, and it’s worked, especially clients that are trying to get into like from like a 740, 745 credit score to a 750 and they’re like on the verge of buying a house. But if I also know that that client struggles with credit card debt, like I wouldn’t necessarily suggest that because now we’re just giving them a bigger chasm to kind of tumble into. So there are ways to kind of game the system. I think again, FICO and Vantage, they’re trying to kind of figure out ways to kind of, you know, get around that. But the utilization is still very, very important. If you’re maxing out your cards all the time, lenders want to know that. So yeah, I mean, I think it depends so much — like everything, it kind of depends on the situation and the person that we’re working with. But there are ways to kind of, I kind of say game the system because, again, you’re not really changing anything about your own behavior. You’re just kind of changing the numbers and the calculation and getting a little bit of a better score. So it’s going to depend on the situation. But I would imagine that they’re going to — you know, and I’ve also had clients that I’ve suggested that to that come back and they’re like, and actually the creditors push back on that. So it’s not — it used to be that — and in some cases, it still is — it’s like, yeah, no problem. If you want to spend more money, we’ll definitely collect the interest. But I think they’re trying to find ways to kind of make that a little bit harder so that they know that it’s not just for kind of gaming the system.

Tim Ulbrich: Yeah. So hard and soft pull on your credits. What’s the difference? And give us an example.

Tim Baker: Yeah, so typically I think for all three of the credit reports, at the end you’ll see kind of your soft pulls. So you’ll see like, hey, I’ve never done any type of business with like Discover card, but you’ll see them on your credit report.

Tim Ulbrich: Yeah.

Tim Baker: And what they’re doing — kind of think of it as like marketing. So they’re paying the reporting agencies to basically say, OK, show me the people that have a score from 700-750 or whatever. And they’re basically looking at your credit and devising a marketing strategy or deals for you to potentially — so that’s why you might get a mailer from Discover because they prequalified you for a deal. A hard inquiry is performed when you actually apply for a loan like a credit card, a mortgage, and the lender checks your credit history before granting or denying the loan. So these are the ones that basically stay on your report for two years whereas the soft ones, they don’t really have — they’re recorded, but they don’t really have any sway on your credit history at all. And it’s kind of something that’s good to review, but they’re not really, they’re not really going to move the needle in terms of — so like when you go to refinance your loans, to get a quote, they might do a soft pull on your credit. And it’s not going to affect anything, but then actually when you go to apply, they’ll do a hard pull. And that results in a hard inquiry, which will then be on your credit report for two years and it could potentially tick your credit down for, you know, a little bit. Like I said, it’s not going to move the needle much. But those are the big differences between the soft is kind of like where you’re just checking things out. The hard is where you’re basically signing papers for a particular loan.

Tim Ulbrich: Yeah, and student loan refi is a good example. I think for our audience, that may hit home where they’re initially trying to gather rates across multiple companies in terms of soft pull, but then they ultimately move forward with one in terms of that full application, signing papers, and that’s where that hard inquiry would come from.

Tim Baker: Yep.

Tim Ulbrich: So let’s wrap up by talking about identity theft. What should somebody do if they find out that their information has been compromised or that someone has stolen their identity, is making charges out of their accounts or perhaps some listening want to be proactive and try to protect their identity and information? What advice would you have there?

Tim Baker: Yeah. So I don’t — I think this is kind of, I think in kind of the world that we live in, it’s not necessarily a question of if, you know, your identity is going to be stolen. It’s really a question of when, unfortunately. So I want to say, I don’t know, every other month, once a quarter, a client will say, my identity’s been stolen, what should I do? And you know, we typically kind of go through, like we obviously contact that creditor and we shut it down. You want to run a credit report, you want to dispute. And a lot of banks, like I’ll get alerts and things like that. They’re like, ‘Hey, is this yours?’ and I’m like no. So a lot of the banks have mechanisms in place to kind of protect you. But it also kind of gives you a little bit of a false sense of security too. So you want to make sure that you’re checking your reports regularly. And I tell clients, I try to do mine personally like when the clocks change. So when they fall back and they spring forward, like when you change the batteries in your smoke alarms. So I think it’s a good practice. And one of the times I checked mine — I want to say this was maybe five years ago — I checked my credit report, and it wasn’t necessarily identity theft, but there was a credit card that I shared with an ex long ago that just popped up on my report. And it affected my credit a lot, so I went in and I disputed it. You can go on to whatever, Experian, Equifax, Transunion and dispute those online. And then that basically puts the onus back on the creditor to basically say that this is a legit thing. And it was cleared from my credit report pretty quickly. So probably the biggest thing, though, outside of kind of being aware of your report and your score is looking at either like a credit freeze or credit lock. And they’re going to be very, very similar. But there’s slight differences. So both are ways to protect your credit reports from being used by scammers to open up new accounts or file your taxes with your social security number. They’re often — these are often used interchangeably. They are similar, but there’s slight differences. So the freeze, you can freeze your credit at each of the three credit reporting bureaus. It essentially restricts access to your credit report. And lenders can’t see your information until you unfreeze it. So it’s really a good protection against fraud. And unfreezing could require your name, social, a password, maybe even a pin. And this is going to be free by federal law. Federal law requires free credit freezes and unfreezes. The lock is where you restrict most lenders’ access, and you can lock your credit report immediately at any time. And sometimes there’s — I don’t think right now because of COVID, but some of these — this is like a charge, so there’s a monthly fee that you pay to a credit bureau. Again, it’s a preventative measure to prevent scammers. But this is not governed by federal law. So under the freeze, you’re kind of protected; under the lock, not necessarily. So I would always kind of revert to the freeze. You know, freezing your credit when I’ve done it — and if you’re not making any credit granting decisions, you’re not buying a house, a car, refinancing anything, it probably makes sense to go through and freeze your credit. It probably takes about 3-5 minutes each for each of the — and then to freeze it and then call it a day. So you’re going to need things like your identifying information, your name, address, birthdate, social. You might be able to — you might be required to basically set up a pin for that. So that’s going to be very, very important to protect. But this is going to prevent people from basically opening up fraudulent accounts in your name. And then when you go to make a credit granting decision, you just unfreeze it. So it’s kind of just a good defense rather than just keeping it unfrozen and open all the time. And believe it or not, this happens — I’m sure many people listening are like, yeah, that’s definitely happened to me. I’ve had this situation. And it’s typically not until you kind of talk to me about this or you have a big loss that you’re like, yeah, I’m keeping it frozen because it’s just not worth the time and the hassle to kind of go through mitigating losses or just the hassle of an identity theft event.

Tim Ulbrich: Great stuff, Tim Baker, as well. A topic that has been long overdue for us to talk about on the show. Three years in, we finally got to it. But I think this episode is a great reminder of the comprehensive nature of the financial plan. And we talk about this over and over again because it’s so, so important that when you’re working one-on-one with a financial planner, it’s not just about debt, it’s not just about investments, it’s not about any one given part of the financial plan. You have to look at really the whole spectrum. We say comprehensive means anything that has a dollar sign on it, we want to be involved with. And I think this is a great example where credit can transcend so many parts of the financial plan. It really speaks to the power of having a financial planner in your corner. So for those that are interested in working with YFP for comprehensive financial planning, make sure you head on over to YFPPlanning.com, where you can book a free discovery call. And as a reminder, show notes for this episode and every other show that we do, you can get access by going to YourFinancialPharmacist.com/podcast and finding the episode and getting the resources and information that we covered on that show. And please don’t forget to join our Facebook group. Over 6,000 members strong, pharmacy professionals committed to helping one another. And last but not least, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please leave us a rating and review on Apple podcasts or wherever you listen to your podcasts each and every week. Have a great rest of your day.

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Posted on July 16, 2020November 2, 2022 by yfpadmin

5 Key Financial Lessons to Teach Your Kids

Cameron Huddleston, award winning journalist and author of Mom and Dad, We Need to Talk: How to Have Essential Conversations with Your Parents About Their Finances joins Tim Ulbrich to talk about five key financial lessons to teach your kids.

About Today’s Guest

Cameron Huddleston is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. She also is an award-winning journalist who has written about personal finance for more than 17 years. Her work has appeared in Kiplinger’s Personal Finance magazine, MSN, Yahoo, USA Today, Chicago Tribune and many more print and online publications.

Summary

Cameron Huddleston, personal finance journalist and author of Mom and Dad, We Need to Talk: How to Have Essential Conversations with Your Parents About Their Finances joins Tim Ulbrich back on the podcast to dig into 5 key financial lessons to teach your kids. Cameron and her husband have tried to instill these lessons in their own children who range between the ages of 8 to 15. Cameron shares that she wasn’t given much financial education growing up which caused her to make some mistakes with money. She wants to openly communicate to her children about money so that they can form a healthy relationship with it. These lessons include: money is not a taboo topic, money must be earned, make saving a priority, it’s ok to spend but don’t waste your money on junk and be grateful for what you have.

During this episode, Cameron shares several tips that help to bring these lessons into your daily lives. For example, she suggests talking to children about money from a very young age so that they can form a healthy relationship with it and learn how to use it wisely. When they are younger, you can explain to them that money is used to buy things, like food or toys. As they get older, this can turn into talking about how to spend money and following a budget. Cameron also shares that her children have financial chores, in addition to chores that they don’t receive money for. She gives her older two daughters money monthly and her son, the youngest child, an allowance weekly. They are encouraged to put this money in three different jars to either save, spend or give. This helps them think about what they want to use their money for and shows them what happens when they use their money to purchase something.

Cameron discusses speaking to your children about money in the last chapter of her book Mom and Dad, We Need to Talk: How to Have Essential Conversations with Your Parents About Their Finances.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. And I’m excited to welcome Cameron Huddleston back onto the show. Cameron is the author of “Mom and Dad, We Need to Talk: How to have essential conversations with your parents about their finances.” She’s also an award-winning journalist who has written about personal finance for more than 17 years. Her work has appeared in Kipplinger’s Personal Finance magazine, MSN, Yahoo, USA Today, Chicago Tribune and many more print and online publications. Cameron, thank you so much for your willingness to come back onto the show.

Cameron Huddleston: Thank you so much for having me.

Tim Ulbrich: So we had you on the podcast way back in Episode 108 to talk all about your book, “Mom and Dad, We Need to Talk,” and that was a great conversation and you provided many valuable tips and thoughts around having this sometimes difficult conversation or conversations with our parents. And while today we’re not going to talk about having these conversations with our parents, we’re going to flip the script and talk about having these conversations, these important money conversations, with our kids. And the final chapter of that book, Chapter 17 in “Mom and Dad, We Need to Talk,” was “Pay it Forward. Start Talking to Your Kids.” We’re going to use that chapter as well as an article that you recently wrote that’s on your website and we’ll link to in the show notes titled “What I Teach My Kids About Money” to use that article as a framework for our discussion today. So before we jump into the five key things about money that you’ve tried to share with your children, tell us a little bit more about your family as I think that context will be important to our discussion here today.

Cameron Huddleston: Sure. So I have three kids. They range in age from 8 to 15. Actually, my 15-year-old is turning 16 in August.

Tim Ulbrich: Oh gees.

Cameron Huddleston: I know. My 13-year-old turns 14 in July. And so two girls, one boy, all very different in the way they think about and handle money, which makes it interesting and a bit of a challenge when it comes to teaching them about money. And this should be my key warning to parents of children who are still young and just kind of starting to figure things out that no two kids are alike, which I’m sure every parent has figured out. But no two kids are alike when it comes to their approach to money. I mean, even if you’re in the same household and you’re talking about the same things, it just, it becomes very apparent from the time children are young how they view money differently.

Tim Ulbrich: Yeah, and I think that’s fascinating, Cameron. You know, something my wife and I talk about with our four boys — and I would say we’re, ours are a little bit younger, so 9 down to just over 1. So obviously we’re not talking with our 1-year-old yet about money. But what we’ve realized is, you know, with our three older ones just how different — I mean, to your point — just how different they can be in so many different areas but even when it comes to things like questions they’re asking about saving and spending and how we are spending our money. And I like to think that we’ve been relatively consistent in our household. But nonetheless, you know, you take their different personalities and I think that can lead you to a different outcome with money for each and every child but also how you approach this topic. And so we’re going to talk about five key things about money that you’ve tried to share with your own family. And we hope that that will provide a framework for those that are listening to be able to apply some of these principles in their own households. So before we jump in to these five things, I’m curious, you know, we talk a lot on the show about when it comes to two individuals, two spouses working together on a financial plan, how important that communication is and how important it is to be on the same page and to have good conversations about money. So were you and your husband both on board with these five points? Was it something that you were leading more? That he was leading more? Talk to us a little bit more about the dynamic and the vision for teaching your kids about money as it relates to you and your husband.

Cameron Huddleston: Sure. I don’t think we ever sat down and started making a list of things that we wanted to teach our kids. It just happened naturally. I do think that my husband and I are pretty much on the same page when it comes to money. I feel fortunate that we don’t fight about money, which is something that’s so many couples do. We’re similar in our spending patterns. We’re similar in our beliefs about money. We did come from very different money/financial backgrounds, but I don’t think that’s really created a lot of an issue for us. It’s just I think being on the same page has helped us convey a consistent message to our kids. There was one area where we had a bit of a disagreement, and we can kind of get into that because that’s one of the points I make — and I know you’re referring in particular to a post I had on my blog about what I teach my kids. And so — and that comes, that point where we have a little bit of a difference of opinion is when it comes to allowance, which is what we — and we can discuss that.

Tim Ulbrich: Sure.

Cameron Huddleston: But yeah, I feel like we do take a similar approach that’s made it easy when it comes to teaching our kids about money and instilling a set of values about money.

Tim Ulbrich: Yeah, and as you mentioned, the article in reference here is “What I Teach My Kids About Money.” We’ll link to it in the show notes and that will be the framework for our five points about money and teaching kids about money. So let’s jump in. No. 1, money is not a taboo topic. And you mention in your blog that your middle child asked you why people think it’s bad to talk about money. So tell us about that conversation, how you responded, and what your family dynamic is in terms of how you approach and how you speak about money as a family.
Cameron Huddleston: So a few years ago, my middle daughter, who might have been around 11 or so at the time, out of the blue, she comes up to me — and I remember I was sitting in my office — and she says, “Why do people think it’s bad to talk about money?” And I was a little bit taken aback by the question because I was wondering what prompted her to ask that.

Tim Ulbrich: Yeah.

Cameron Huddleston: And I know why she did because we talk about money all the time, so in her mind, there’s nothing wrong about talking about money. Someone must have said something at school or maybe she saw something on TV, I don’t know. But when she asked me that, I wanted to explain to her in an age-appropriate way why people think talking about money can be a bad thing. I actually used something I had heard from a financial psychologist I know. And what he had explained to me and what I told my daughter was that the reason people often are reluctant to talk about money or they think it’s a taboo topic is because there’s a lot of shame around money. And I explained to her that some people are embarrassed if they’re having a conversation with someone else about money that maybe they make more money than the other person or they’re embarrassed because they make less. And that’s what can create the awkwardness, having more or less than someone else and you don’t want to feel like you’re bragging about how much you have or you don’t want to feel like you’re not doing as well as another person. So that’s what I explained to her. And I guess she kind of processed it in her little head and went on about her way, but like I said, we talk about money all the time. We’ve been talking to our kids about money matters since the time they could talk. Of course, when they were 2 years old, we weren’t talking about mortgages and debt and interest rates and that sort of thing. You know, just explaining the basics: This is money, this is a coin. They would go with us as we run errands and using that as an opportunity to explain things cost money. We have to earn that money to pay for those things. We have to make choices about what we’re buying. These were not conversations I had in my family when I was growing up. We didn’t talk about money at all. My dad was one of those people who said, we don’t talk about money. It’s not polite. And so I wasn’t raised with a good personal finance education from my parents. I had to figure out a lot on my own. When I got out into the real world, I made a lot of mistakes. And thank goodness I became a personal finance journalist because it’s taught me everything I know and needed to know about money. And I don’t want my children to become adults without a strong financial foundation. That’s why my husband and I have been talking to them since the time they were little about money so they can learn to use it wisely and they can have a healthy relationship with it.

Tim Ulbrich: So a couple things I want to unpack there that you said. You know, the shame piece really stands out to me because it’s almost like the baseline that, you know, we often feel shame around money and talking about money, typically, as you mentioned, because either the feeling that we may have more or less than somebody else, so there’s this natural point of comparison. My question that I’m thinking through is like, where does that come from? Is that innate human behavior? Is that because of the society that we live in? Is that because of the money scripts and the conversations that we were a part of or not a part of as a child that we may or may not even remember those? Like what are your thoughts on why even young children may begin to pick up on some of that in terms of this concept of shame around money and conversations of money?

Cameron Huddleston: I think it’s more the latter two reasons that you mentioned: society and those money scripts. I think we tend to view our self-worth in terms of how much money we have or don’t have, unfortunately. And so we think people who are wealthy are somehow better and those who are poor aren’t as good. And I wouldn’t say this is universal, but I would say that this, this idea is engrained into a lot of our heads. And then like you mentioned, the money scripts. If you grew up in perhaps a lower income family where, you know, people were always talking about how they wanted more money but then perhaps disparaging people who were making a lot, referring to them as, oh, the rich or greedy, it does affect the way you think about money when you get older. Maybe you want to do well and improve your lot in life, but there’s that idea in your head that if you become rich, you’re greedy and you’re somehow bad. And those things we don’t often realize are there deep down and can help us or not. I shouldn’t say help us — can lead to bad relationships with money and these negative thoughts about money that lead to this idea that we shouldn’t be talking about it.

Tim Ulbrich: And I struggle as a parent, Cameron. I struggle in conversations with my boys trying to strike the balance — and I don’t know if I’m doing it well or not, but I feel like I tend to have a frugal mentality and mindset. And what I worry is if that’s what they hear me talking about all the time, I don’t want them to have that restrictive mindset around money. But I also want them to be conscientious in terms of how they spend and alternatively, if they hear about the wealth-building and the growth side of it, I don’t want them to lose sight of there’s hard work and effort that goes into earning money and to have that association between work and money. So I feel like probably, you know, myself and many others that are listening may not have some of these conversations either because they don’t know how to have them or out of fear of what they’re saying may be developing a mindset that they already have or they don’t want their children to have or baggage that’s being passed on from one generation to another. So when I hear you say that “we as a family” talk about money all the time, like give us some tips or strategies. Like how is that conversation just a regular conversation in the household? Is it specific moments? Is it around the dinner table? Is it when you’re out and about at the stores? Like what does this practically look like that we as parents can better engage our children in this conversation?

Cameron Huddleston: So obviously it’s going to depend on the age of the child. When your kids are young, the least you want to do is introduce them to the concept of money. This is a coin. And you want to wait until your kids are at least old enough not to stick those coins into their mouths and swallow them.

Tim Ulbrich: I did that as a child, so yes.

Cameron Huddleston: Right. All kids do it. They all do. They want to pick things up and stick it in their mouths. So you know, when they’re maybe 2 or I would say perhaps even 3, probably 3-4 years old, they’re less likely to stick those things in their mouths. This is a coin, this is money. We use it to buy things. This is paper money, a dollar bill. And here we are, we’re at the store, we’re at the grocery store, we’re buying things. And so often, we will use a debit card or a credit card. So explaining to your kids, you know, I just put this debit card in. I put this credit card in. But it’s still money. The money is coming out of my bank account. That’s something that would come up more when they’re 5 years old or so. 3-4, this is money, we have to earn the money, we use it to buy things. You know, and letting them see what it is. Let them touch it. Maybe even, you know, giving them your spare change and letting them start collecting that money in a coin jar or a piggy bank, something along those lines. You know, and then as they get older, the conversations can be more advanced, talking about spending decisions. You go to the grocery store, they’re begging for — or you go to Target. Let’s use Target as a good example because they sell everything.

Tim Ulbrich: Everything.

Cameron Huddleston: And so they want a toy — everything. We all know that we spend too much at Target. You go to Target, and the kids want a toy. And that’s an opportunity for a conversation, “while it’s great that you want a toy, but we are here to buy this. We don’t have money in our budget,” or, “This is not something that we need to be buying right now. You get gifts on your birthday, you get gifts on holidays.” Making those things clear. You know, I would tell my kids before we went to the store so there wouldn’t be a meltdown. “We’re going to the store to buy this. We are not going to buy you a toy.” Now that my kids earn their own money through allowance, I tell them, if this is something you want, you use your money to buy it. And it’s funny how quickly —

Tim Ulbrich: That changes.

Cameron Huddleston: They don’t want that thing so much anymore.

Tim Ulbrich: That’s right.

Cameron Huddleston: No, I want you to get it for me.

Tim Ulbrich: Yeah.

Cameron Huddleston: So it just — really, our conversations are part of our daily living and them — you know, they become, like I said, they do become more advanced as your kids get older and you have to talk about more serious things like buying a car and whether that’s something you expect them to pitch in and help you do. Do they have to pay for gas? Do they have to pay for insurance? Do they have to use their allowance to pay for things they want? Do they have to use it to pay for things they need? It just — you know, a friend of mine who is a financial coach said she had a client who told her that she didn’t talk about money at all with her kids because she didn’t want it to stress them out. She wanted them to be kids. And I thought, this is so unfortunate. You’re missing a really good opportunity to help your kids develop a healthy relationship with money. If you don’t talk about it at all, you create that idea that it’s taboo. And then as they get older and they haven’t had that experience with money, they struggle to make smart decisions.

Tim Ulbrich: Yeah, and I think going back to your Target example, I think it’s really important — in my opinion — to teach kids at a young age and all throughout the concept of opportunity cost. Obviously I’m not going to use the word “opportunity cost” with my 5-year-old, but getting them to understand like if we’re at Target, you know, I try not to use language like, “We can’t buy this,” or, “We can’t afford this,” but rather because, as you mentioned, because of the budget or “We’re here to do this,” or, “We’re choosing to do this and we’re not buying this because we want to be able to do this.” So really, I think that tradeoff concept is so important. And as you mentioned, I think when it’s our own money and our own allowance, that becomes a little bit more clear and obvious. But when it’s not their own money, that may not be as obvious. So No. 1, money is not a taboo topic. Really great introduction and conversation there. No. 2, money must be earned. So you alluded to this in terms of the discussions you and your husband have had, but talk to us about, you know, the options of either chores or allowance and how you made that decision and how that ultimately has played out in your own home to be able to connect this concept of money and work and earning that money.

Cameron Huddleston: So because I have been writing about personal finance so long, I have written about the topic of allowance on several occasions. I’ve interviewed a variety of experts. And there are a variety of approaches to allowance. One of them in particular is to give your kids financial chores. So you give them a certain amount, and then they are expected to use that money to pay for certain things. So the allowance is not tied to the chores you do, but you have to use it to pay for certain things. Initially, I really liked this idea and discussed it with my husband. And he felt very strongly that our children’s allowance should be tied to their chores because in the real world, you have to work to earn money. And he wanted them to learn that from a young age. Money is not just handed to you; you have to work. Now I know some people will say, “Well, if you tie the chores to money then you’re going to end up having more fights and the kids aren’t going to want to do the chores, they’ll just say, ‘Well, fine, I’m not going to do it. I don’t care if I don’t get any money.’” I do think it’s important that kids have to do some chores without getting paid for them, just because they’re part of the family.

Tim Ulbrich: Yeah.

Cameron Huddleston: And you have to pitch in when you’re part of the family. So there are some things my kids are expected to do, and they don’t get paid for it. But we have a spreadsheet that we have printed out, and it hangs up on the refrigerator, and it details what the kids are supposed to do and what — the way we do it is they get penalized if they don’t do those things. So they get a certain amount each month for my daughters, each week for my son because he’s younger. And if they don’t — so for example, if he doesn’t make up his bed every day — and he doesn’t have to do a great job, he just essentially kind of has to get the covers up and not leave it looking sloppy — he loses $.25.

Tim Ulbrich: OK.

Cameron Huddleston: And I will tell you, it has worked incredibly well. Once we instituted that system, things got done around the house. Shoes were not left out because with my son in particular, who was always leaving his shoes by the sofa, his room was always a mess, and when I would ask him on the weekend, it’s time to clean up, oh no, I can’t do it. You have to help me. Once he was in charge of doing all these things and he knew that he was going to lose money because he’s very motivated by money, he was on top of it. Just the other day, he said to me, “Oh, Mom, I forgot to make up my bed two days in a row. I’ve lost $.50.” And I was like, “Well, you need to make yourself a to-do list that says, Start the day by making up my bed, so that you know that you do it.” It has not, fortunately, caused fights in our household. The kids are willing to do their chores. They know if they don’t do them, they’re going to lose money. So my son, he gets his payment every week in cash. He has a choice of putting it into a Save, Spend, or Give jar. And I let him make the choice because when you’re older, you have to make those choices. Now I will tell you he has raided some of his Save and Give jars so that he could spend some money. And he looks back and he says, “Oh my gosh, I don’t have any money left.” And that’s a lesson that he has learned. My daughters, they get it monthly just because they’re getting a larger amount of money. But it works for us. That’s not to say it’s going to work for everyone. And I think it’s important to figure out a system that works for you. So if you feel strongly that money should be earned, then you can have an allowance that’s tied to chores. If you don’t like that idea, you can use, I don’t know, the financial chores system. The key is to give your kids their own money so that they have experience using it and making decisions with it.

Tim Ulbrich: And there’s something you said there that really stands out that I want to make sure we dig in for a moment here is that your son being younger, you had more frequent moneys that were given and it was given in cash, right? I think that’s really important at a younger age that there’s not a long time period, that they can see that immediate connection between the work that is or is not and the money that is or is not earned. But I also think it’s important as they get a little bit older that you give them a little bit more leeway and by increasing some of that flexibility, it also puts some of that responsibility on them to manage over a longer period of time. So for example, you get paid on the first of the month or however you do it and somebody wants to buy a really nice new pair of shoes. And now they’ve got 30 days left of the month where they have no money left. Like that’s something that we have to reconcile — we have to reconcile with every month, right, in terms of how we balance that per month and then obviously eventually even over longer periods of time. So I’m assuming, was that intentional, both the time period as well as the mode of like cash or non-cash? Talk to us a little bit more about that.

Cameron Huddleston: Yes. Yes. And so with — well, my oldest has a bank account. We set it up last year. She actually got paid for a job. She worked for a week at a local camp here helping out, and they gave her a check. And so we opened up a checking account for her so she could deposit that check and put money in there. My middle child, who was — let’s see, she was 12 at the time. My oldest was 14 when we opened up that checking account. And so I was still paying — well, still am paying my middle child — in cash. We wanted to switch her to a checking account, but with the pandemic, we haven’t been able to go to the bank and I couldn’t open an account for her online because of her age. She, at least with the bank we use, she needed to be 16.

Tim Ulbrich: Right.

Cameron Huddleston: And to be honest, I haven’t checked to see if the banks have actually opened their doors. But when I was checking before to see if I could set up an account for her, they were closed at the time. She very much wants to have a bank with her money being deposited directly into the checking account I think most likely because she wants to have that debit card so that she can do online shopping, which her sister has done some of. And what I will tell you too, this is really interesting and I had read about this and I’m sure you probably have too. You know, studies show that when you pay with plastic, you don’t feel the pain of parting with your money as much as you do when you hand over that cash. And I’ve watched it firsthand with my oldest daughter, who is a natural saver. She’s such a tightwad, which is probably a good thing. But sometimes, she’s so stingy to the extent that just it pains her to make decisions about spending her money when it was cash. Since she’s had this debit card, I have found that she’s a little bit more willing to spend. And she will admit that too. So my middle child, who is a bit more of a spender naturally, I know that when she does get that debit card, she’s going to want to use it to spend more and will not hang onto her money as well as she has been doing. So it’ll be interesting to see what happens once we finally get a bank account open what she does with that debit card.

Tim Ulbrich: I’m so glad you brought that up because I’ve experienced something similar with my oldest where when we opened up an account for him, it went from, you know, I got this $50 cash bill for my birthday to now you put it in this online virtual world that I — like he almost viewed it as he like lost it. Like it doesn’t exist anymore, it’s not physical anymore. And so there’s a great conversation to be had there. But I think this nuance between the emotional and the behavioral side of the cash in hand versus just the credit or the debit card and having those conversations — I’ll never forget one day, I was in the grocery store. And he was I think 5 or 6 and one time we were at the checkout line, I swiped my card and he made a comment, something along the lines of, ‘Oh, so if you need something, you just swipe your card and you get it.’ And I was like, oh wow, we’ve got some work to do, you know? But I think thinking of it through the view and the lens of a child and how they observe — and obviously I’m not suggesting that you have to go out and buy cash for everything, but using some of those moments as a conversation starter to teach some of those important differences and principles. So that was No. 2, money must be earned, different ways certainly to do that. No. 3, make saving a priority. So how do you explain the importance of saving money to children? You know, I think it’s such a difficult concept because there’s a natural tendency to, you know, yes, if I can connect that work to money, now I want to spend that money on something I want. So how do you explain the importance of saving money to children? And is there a certain age at which you think that conversation begins to be fruitful?

Cameron Huddleston: So if you’re paying your kids an allowance or they’re earning an allowance if you want to put it that way, I think it’s a good idea to start at that point of encouraging them to save by having those Spend jars, the Save jars, the Give jars if that’s something important in your family too so that they’re making those decisions from an early age. You know, how much of my money do I want to set aside for the future? How much do I want to give to help others? So as soon as you start that allowance system, saving should be a component. Now with small children, the idea of saving, say for a car when they’re 16 or saving for their college tuition, that’s too abstract for them. And it’s too far out in the future. I feel like with younger kids, one of the easiest ways to get them to understand the concept of delayed gratification is to — and this might sound contrary to what you’re trying to achieve — but to encourage them to if they want to buy something, to save up for it. So because that’s more tangible to them. And it’s something that’s a little bit more exciting than thinking about saving for a car when they’re 16 years old. So like I said, with my oldest, she’s a natural saver. And it’s just, it’s very easy for her to hang onto money. We would give her change, our spare change when she was little. She would get cash from her grandparents for birthdays, and she hung onto it and hung onto it. And when she was — oh gosh, she was in elementary school, early elementary school. She had enough saved to pay for about half of an iPad. And we pitched in the other half as a gift for her. My middle child, as soon as she got money, she wanted to spend it. And so we had to work really hard with her to tell her, “Look, what do you want more? Do you want these little trinkets? Or would you rather save your money to get something that you really want, this toy that you’ve had your eye on?” So we used that initially to motivate her. And so once she got in the habit of saving up to get something she really wanted, saving just became a more natural habit for her. She doesn’t want to spend her money all the time now as soon as she gets it. She has amassed a decent amount of savings that she’s kind of hanging onto. And once she sees that money accumulating, she doesn’t want to part with it as easily anymore. Because then that means she’s going to have less money. Both of my daughters, when I told them, “Look, you’ve got the money. You can pay for it.” They’re like, “But no, then I won’t have as much.” My son has been more of a challenge. He is 100% a spender. And he very much — and we can get into this because this is one of the things I mentioned too in that article — he very much wants what his friends have. And so when he gets money, he wants to spend it. And we’ve had to work harder, and fortunately I’ve had my two daughters who’ve been trying to pound this message into his head too — “Hey, why are you spending your money on these toys? They fall apart so quickly.”

Tim Ulbrich: Yeah.

Cameron Huddleston: And he’s had to learn that lesson a few times. He spends it on something, it falls apart, and then he’s upset, he regrets it. So we are making progress, slowly but surely.

Tim Ulbrich: Yeah, and just a great example there with the three children, back to our conversation at the very beginning of how different this one principle can be applied and should be applied and customized in three different ways. And I really like what you said, Cameron, about this concept of saving, having them save up to buy something that they want but in the shorter term and how different that is than having them save and put money in a long-term savings account or thinking about college or cars or things that are far off, abstract and may lose that motivation. So you want to have some of that yes, we’re teaching them to save but also want them to see the rewards that happen through that saving process as well. So you mentioned this a little bit, but No. 4, it’s OK to spend but don’t waste money on junk. So going back to the example you just gave with your son and your daughters, helping guide him a little bit, how do you as a parent, how do I as a parent, you know, strike this balance between you need to learn this lesson, it’s important to spend but just don’t waste money on junk and let them make some of those mistakes versus, you know, I’m going to give you a sandbox in which you can play because I know that these aren’t junk but I want you to have some choice in the process as well. Any advice you would have in this area?

Cameron Huddleston: Sure. So this is something that we’ve done with my son. So when he wants to get something, we have a discussion about it. And this happens all the time because in school, they have book fairs. And they always have, in addition to books, they have all sorts of trinkets they can buy. They have fundraisers, you know, where you can get contributions and if you do, you get toys. And he’s all about winning the prize. And so when he wants to use his money to buy something, I ask him, “Well, do you think this is the best way to spend your money? Is this something you really want?” And if he’s dead set on getting it, oh yeah, yeah, yeah, OK I have to have this. I have to have this. OK, well how about we do this? Let’s wait a week and see if this is something you still want. We did this, actually — I can think of a specific example. Last year, they had a fundraiser to school. And if he got a certain donation amount, then he would have won this prize. And I said, “Well let’s” — and he was ready to raid his piggy bank and use all of his money so that he could donate enough to win this prize, which is great that he wanted to make a donation, but it really wasn’t the best reasons. He just wanted to get this particular prize. I said, “Well let’s go online and see how much this toy actually costs.” So we found that he could get two of those things for $9. And so well, let’s wait until the end of the week, see if you still want it. And the next day he came back and he’s like, I still want it. I said, “OK, well it’s not the end of the week.” By the end of the week, he had forgotten about it. And so that cooling off period I have found helps. And of course, asking your kids to use their own money, you know, even reminding them of times when they’ve bought something and then they regretted it. Hey, remember when you bought that pen at the book fair and it broke the next day? “Oh yeah, yeah, yeah, that was a bad idea. I don’t want to do that again.” But it’s OK to let them make mistakes because if they don’t, they’re never going to learn. So — but just having those conversations and when they want to buy something, getting them to at least reflect for a few minutes on whether that’s the best way to use their money or if there’s something that would be a better use of their money I think is a good idea.

Tim Ulbrich: Yeah, and such great advice with the cooling off period and something that I think we need to ask ourselves. Are we role modeling that, you know, for our children? You know, I can think of several examples in the last couple months where probably conversations my wife and I have had about buying something and are we even articulating, you know, let’s wait a day or two and think about how this impacts other areas or do we really need this, do we really not need this? And are we role modeling this but also applying it in our own situation because I know I have found that to be true over and over again how something — how your feelings toward buying something can change significantly with just one night’s rest, let alone a whole week to be able to think about that. And one tangible example I can think of is in the last week, we’ve been waiting to watch Hamilton, you know, recently released on Disney+. And I thought, oh, it would be really nice if we like upgraded our TV game and our sound system game. This is a good reason to do it. And I’m glad we didn’t because it came, it went, we watched it, it was great. But it would have been as good, you know, nothing really changed. And so I think just taking the time to think about it, to cool off. Doesn’t mean you can’t spend money, you shouldn’t spend money, but just really evaluating how that impacts other parts and taking the time to think through that. So No. 5, which is something I have such a great desire for my kids to have and I struggle with how to instill this is to be grateful for what you have. So how do you instill in your children that, you know, they don’t have to have everything someone else has and that there are a lot of people that may have much less and to instill this mindset of gratitude and even taking a step further, a mindset of giving?

Cameron Huddleston: One of the conversations that we have with our kids about money is about how we choose to spend our money and what our values are. So we have let our kids know that one of the things that we really value are experiences: travel. We love to travel. We have a goal of getting our kids to all 50 states before they graduate from high school. This summer has put a damper on that. We had plans to knock out several states in the middle of the U.S., but that did not happen. But when the kids are asking for something, something perhaps that’s expensive, we tell them, “Well, you know, remember how we’ve talked about how we choose to spend our money on travel? We could afford to buy this, but if we did, we would have less money to travel. What do you enjoy more? What do you think you would like more? Do you like getting to go places and seeing new things? Or do you really want, I don’t know, a new iPhone?”

Tim Ulbrich: Yeah.

Cameron Huddleston: You know, so getting them to think about what they value, what we value, is important and pointing out when — and this is in particular with my son, who as I said, really wants what his friends have. I don’t have that issue so much with my daughters. But when he constantly says, “So-and-so has this. So-and-so has that,” I tell him, “Well, you have a lot. There will always be people who have more. There will always be people who have less.” We choose — and going back to this conversation about what we value — we choose to spend our money on these sort of things, on experiences, on travel. Yes, I know you want to have all of these toys and it seems really wonderful, but you have a lot of toys already. And if we bought you every toy that you wanted, then we wouldn’t have as much money to do some other really fun things. And you know, in the moment that conversation usually works. You know, it gets them to realize. The problem is getting that idea to stick in his head because as I said, he just, he wants to keep up with the Joneses. My daughters don’t ask for nearly as much. They don’t seem to be as concerned about what their friends have. And I feel so fortunate that they don’t. You know, even with him, I hear things like, “Oh, my friends’ homes are better than ours. They have a pool. We don’t have a pool. Why can’t we have a pool? Can’t we buy a pool?” And I tell him, “Well, we probably could a pool if we really wanted to. We could put a pool in if we really wanted to. But your dad and I have to save for things in the future too. We can’t spend all of our money on what we want now. We have to have money for when we’re older and we don’t want to work anymore, money for our retirement. We have to pay for things like if someone has to go to the hospital or if we have to get a new car. So if we spend all of our money right now, we won’t have enough money in the future when we need money too.” So I have a lot of conversations with him about it. I feel like maybe I’m making some progress slowly. You know, but I have to spend a lot of time pointing out to him, you have a lot. You’re not going to have everything. But you do have a lot already, and you need to be thankful for what you have. It is certainly a challenge. And as I said, you know, some of my kids are much more receptive and I believe much more grateful for what they have than the other — just singular other — with my son. But it is something I am trying to instill in them because I feel like if you are always longing for more, you’re never going to be satisfied with what you have.

Tim Ulbrich: Yeah, and as a father of four boys, I have a soft spot for your son. So I hope he doesn’t feel like we’re singling him out.

Cameron Huddleston: Sorry.

Tim Ulbrich: What you said about him reminds me, I feel like this topic, when you’re talking about values and vision for your financial plan — and I love that you’re doing that because we talk a lot about with our financial planning clients about having a vision and a purpose for your plan. And under that becomes the framework of why we’re paying off debt or why we’re saving or why we’re investing in life experiences and how we balance and prioritize all of those. And this is the beginnings of that conversation, right? What’s the values in which how we spend our money? What’s the vision for how we spend our money? And I think it’s a conversation that reminds me of the book, “Compound Effect” by Darren Hardy where it’s the every day, every week conversations. Any one of those may not seem significant or that it’s moving the needle, but over the course of time, you know, we hope that that will bear the fruit in which we desire that it will. Thank you, Cameron, for a great discussion and taking the time to come back on the Your Financial Pharmacist podcast. And we’re going to link to your book, “Mom and Dad, We Need to Talk: How to have essential conversations with your parents about their finances” in our show notes for this episode as well as your article from your website, “What I Teach My Kids About Money.” So we will link to both of those in our show notes so our listeners can go and learn more or pick up a copy of your book, available at Amazon, Barnes and Noble. But in addition to those two resources, where can our listeners go to connect with you and to follow your work?

Cameron Huddleston: You can learn more about me at CameronHuddleston.com. You can — there’s a link to email me if you want to get in touch with me. I have a newsletter, I have some free resources on the site. You can follow me on Instagram @cameronkhuddleston. And you can follow me on Twitter @CHLebedinsky. I know it’s a little confusing. I’ve got my maiden name that I use for my byline, and I’ve got my married name, which just happened to end up being my Twitter name. And so I know it’s a little confusing, but that’s where you can find me.

Tim Ulbrich: Awesome. And no worry, we’ll connect to all of those in our show notes. So go to YourFinancialPharmacist.com/podcast. You can find this episode and within there, you can find not only reference to the article and Cameron’s book but also the ways to connect with her. So Cameron, again, thank you for your time and for coming onto the Your Financial Pharmacist podcast.

Cameron Huddleston: Thank you so much for having me.

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YFP 160: Navigating the Home Buying Process Through the YFP Concierge Service

Posted on July 9, 2020November 2, 2022 by yfpadmin

Navigating the Home Buying Process Through the YFP Concierge Service

On this week’s episode, sponsored by HPSO, Nate Hedrick, The Real Estate RPH, interviews two pharmacists, Shelby Bennett and Bryce Platt, about their home buying experience. Shelby and Bryce recently worked with Nate via the YFP Real Estate Concierge Service to craft a plan and connect with a local preferred agent to buy their first homes.

About Today’s Guests

Dr. Shelby Bennett

Dr. Shelby Bennett is a Clinical Assistant Professor at the University of Nebraska Medical Center College of Pharmacy. Originally from rural northwest Iowa, Shelby graduated with her PharmD from Creighton University in 2016. She then completed a community-based pharmacy residency with the University of Kansas and Balls Food Stores in Overland Park, Kansas, where she earned a teaching certificate from the University of Kansas Health System. After residency, Shelby designed and implemented clinical services at two independent community pharmacies closer to her hometown. Shelby made the switch to her dream career field and bought her first house (with some help from Nate and the YFP team!) during the COVID-19 pandemic, and she’s here to tell the tale. She is excited to be back in Omaha, where she resides with her cat, Sophia.

Dr. Bryce Platt

Bryce Platt earned his Doctor of Pharmacy degree from the University of Kansas and completed a postdoctoral fellowship in Population Health Management with Omnicell and Campbell University College of Pharmacy and Health Sciences in July 2019.

Applying five years of experience in community pharmacy practice and the same passion for improving healthcare, Bryce has worked alongside engineers, data scientists, business analysts, and executives over his career, providing clinical expertise and gaining valuable experience in improving population health. Key projects include leading clinical content preparation for a national health plan program, evaluating international markets for potential Omnicell expansion, working with international teams on protocol development for a research study, assistance with development of a new Medication Therapy Management platform, developing an opioid abuse mitigation program, and preparing business cases for innovative Omnicell solutions.

Bryce is currently the Clinical Pharmacy Specialist at Omnicell and serves as a preceptor for pharmacy students from six different universities during their rotation.

Summary

On this podcast episode, Tim Ulbrich hands the mic over to Nate Hedrick, The Real Estate RPH. As both a pharmacist and a real estate agent, Nate has a unique perspective on the home buying process and he’s used it to help many pharmacists achieve their dream of owning a home. Let’s put it this way: he’s got the insider’s view.

Nate interviews Shelby and Bryce, two pharmacists that both bought their first homes with the help of the YFP Real Estate Concierge Service. Shelby purchased a single family home Nebraska and shares her journey of real estate agent struggles, house she chose a lender and her lessons learned along the way. Bryce recently purchased a condo in North Carolina to house hack. Inspired by YFP 130: House Hacking Your Way to Financial Freedom, Bryce got to work and within months made this dream happen. Bryce talks about how the YFP Real Estate Concierge Service connected him with a preferred local agent, his most crucial team member on this real estate adventure and how he was able to get a pharmacist home loan with IBERIABANK/First Horizon for 3% down with no PMI.

The Real Estate Concierge Service is designed to help pharmacy professionals get connected with local preferred agents and have support well past closing on a home. Here’s how it works:

Step 1: Crafting a Plan. We start by designing a plan that works with your budget and your financial goals. Our 30-minute jump start planning session helps determine your needs and answers your important questions right from the beginning.

Step 2: Connecting you with a Pro. You need an agent you can trust. And one that understands a pharmacist’s busy schedule. Our network of agents have gone through a rigorous screening process to ensure they have your best interest at heart. Once we know what you’re looking for, we’ll connect you with one of our preferred local agents that will help find the perfect place to call your own.

Step 3: Staying the Course. After connecting you with a preferred agent, we stay involved well past closing. If questions come up, priorities change, or you need an unbiased opinion, we’re available to lend an ear and a helping hand.

Book a free 30-minute jump start planning call with Nate today!

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. Excited to have back perhaps the most frequent guest on the Your Financial Pharmacist podcast, Nate Hedrick, The Real Estate RPH, who’s going to be joining us as we highlight two case studies of pharmacists that worked with Nate as a part of the real estate concierge service to land really two incredible opportunities. And we’re going to talk about those in more detail on this week’s episode. So Nate, welcome back to the show.

Nate Hedrick: Thanks, Tim. Always nice to be here.

Tim Ulbrich: What’s new and exciting up in Cleveland, Ohio?

Nate Hedirck: Besides quarantining, actually Kristin and I just dove into our first out-of-state investment property. So we’re currently in the middle of figuring that whole game out. So I’ve been posting a little bit about it and I’m sure I’ll be posting more as demo gets underway. But that’s the exciting real estate world that I’m living in right now.

Tim Ulbrich: I saw your photos on Facebook, and I think for those that may not have experienced that firsthand or that experience of doing a flip and a demo, quite a project like that might give some people palpitations. But it looks like you’ve got your hands full.

Nate Hedrick: Oh man, yeah. The smell in there — and I have not been there, full disclosure — but I have been told it is horrible and the heat has not been helping. So we’re starting off maybe on a yucky note. But hopefully it will get better as time goes on.

Tim Ulbrich: Yeah, which either unfortunate or fortunately, depending on how you want to look at it with real estate, often means a great opportunity if you’re willing to work through some of that to be able to have a good investment opportunity, whether you end up flipping it or whether you keep it and BRRR it, it sounds like it might be a good opportunity. And we’ll feature that perhaps on a later episode of the podcast as well.

Nate Hedrick: Great.

Tim Ulbrich: So really excited, two awesome stories that you are going to feature, individuals, pharmacists that you’ve worked with as part of the real estate concierge service to help them with their home buying purchase as their agent and I think two very different stories. But we’ll really give our listeners an inside look into what that service is all about and perhaps even give some of our listeners some ideas about investment opportunities with Bryce’s story. So tell us a little bit about what our listeners can expect to hear from these two interviews that you did.

Nate Hedrick: Yeah, so you let me take the mic for the first time, which is kind of cool. I got to be on your side of the table, which was fun. So I interviewed Shelby and Bryce. And Shelby — both of them, actually — are first-time homebuyers. And what I think is going to be nice to share with you guys is that Shelby was really kind of your standard first-time homebuyer, looking for a place to live, you know, nothing frilly about it. And so I think moving for a new job. So she’s going to be a really great story to kind of showcase what most people are going to go into. And then Bryce is another great case study because he was looking for more of it as an investment property. And he actually ends up buying a 4-by-4, which we’ll talk about. But he’s a house hacker. So we’ll talk about what that looks like and what that’s going to do for him. But it’s two good stories of how first-time homebuyers can go in different directions and I really think it brings interesting notes to what the concierge service can provide.

Tim Ulbrich: Yeah, I think there’s a little bit of everything here for those that are listening, you know, whether they’re first-time homebuyers going about it more the traditional way, first-time homebuyers that want to do some more creative house hacking, investing, or those that have a home and perhaps want to get into real estate investing. I think there’s something to take away for everyone that’s listening. And you use as the framework for your interviews the six steps to the home buying process, which we outline in the home buying, YFP home buying guide. And so for those that want to download that guide and learn more about those steps and be able to connect that with the interviews that you did, head on over to YourFinancialPharmacist.com/homeguide, all one word. Again, YourFinancialPharmacist.com/homeguide. And hang with us, so we’re going to go into Shelby’s interview and then you’ll hear from Bryce as well and his interview with Nate. And then we will wrap up the show talking a little bit about the concierge service, connecting it back with those interviews and those stories and where you can learn more to connect with Nate from there. So let’s transition to hear Nate’s interview with Shelby.

Nate Hedrick: Hi, Shelby. Welcome to the show.

Shelby Bennett: Thanks, Nate. Thanks for having me.

Nate Hedrick: Yeah. It’s great. I really appreciate you being here. It means a lot to have you on the show. Can you dive in and tell us a little bit about yourself?

Shelby Bennett: Yeah, absolutely. So I am a pharmacist that graduated in 2016. So this is going into my fourth year of practice and recently made a big job change from an independent community pharmacy in rural Iowa where I’m from and recently took a job teaching at a college of pharmacy in Omaha, Nebraska. I went to college at Creighton here in Omaha for undergrad and pharmacy, so it’s kind of good to be back in my old college town. And yeah, I just bought my first house, which is what I’m here to talk about a little bit.

Nate Hedrick: Yeah, you just moved in — what? Two weeks ago now? Three weeks ago?

Shelby Bennett: About a month ago. I closed May 29.

Nate Hedrick: OK. Nice. And how’s the move-in process going?

Shelby Bennett: It’s going well. Everyone’s telling me that home projects never end, and I’m definitely starting to understand that. I think I’m finally to the point where all the stuff is out of the boxes. It’s just not put away yet.

Nate Hedrick: I knew that when we moved into our last house that any boxes that were there after like a year, we just didn’t need that stuff. We could just throw it out. So hopefully you’ve got everything unpacked, you’re in a good spot.

Shelby Bennett: Absolutely.

Nate Hedrick: Well we’re going to jump in and do a little bit about that experience. I again want to follow the Six Steps to Home Buying Guide that we have available through Your Financial Pharmacist. That guide will actually walk you through the same six steps that Shelby and I are going to walk through today. So if you take a look at No. 1, we are talking about making sure you’re ready. So this is before you start a Zillow search, before you do anything, you know, how do you determine if you are ready to buy a home? So Shelby, can you tell me a little bit about why you decided to buy a home instead of continuing to rent?

Shelby Bennett: Yeah, absolutely. So I decided to buy a home because I was ready for the permanence of living in one place, because I wanted to feel I had the freedom to make changes to the house or the yard without having to ask for a landlord’s permission. My last rental was a small house, and I liked not having neighbors as close as you do when you live in an apartment. But I was also ready for more space. My last place was only about 650 square feet, so I was ready to expand.

Nate Hedrick: Totally understand that. Yep. We were similar when we made our decision. So that’s great. And then if you’re like any good pharmacist like me, you’re probably extra detail-oriented. But did you dive into the numbers really deep on the budget? Or were you using something more broad? How did you set that ideal budget or how did you look at that question?

Shelby Bennett: Yeah, so this is going to be one of those don’t-try-this-at-home examples.

Nate Hedrick: Perfect.

Shelby Bennett: I discovered the YFP Home Buying Guide after I’d already started looking at houses online. So I definitely did this part in the wrong order. I started looking at house in the neighborhoods I wanted to live in and then extrapolated my budget backwards based on the houses that I liked.

Nate Hedrick: That’s awesome. You’re not alone in doing that. I think most people actually operate that way.

Shelby Bennett: My logic was, OK, so it will cost x amount of dollars to buy a move-in ready house in Dundee, like can I afford to live there? But then I got lucky in that after meeting with Tim Baker and working through some of his equations based on income and expenses, the budget I had originally set wasn’t really too far off topic. So I got lucky there.

Nate Hedrick: That’s good. Yeah. Tim’s home buying guide that he does with the YFP Planning is great. I love that spreadsheet.

Shelby Bennett: Yeah, that’s really nice.

Nate Hedrick: Great. Alright, so you’ve set your budget, maybe in a little unorthodox way, but I think probably more normal for most people, I like that. And then you’ve got to determine what’s important. You’re looking at things like location, size, flexibility, that’s our step No. 2. So this can get a bit overwhelming. You’re going from every house in a particular location and how do you narrow it down to what you’re looking for? So what were some of the criteria that you focused on when you were trying to determine what was important to you?

Shelby Bennett: Yeah, absolutely. So it was really important to me to be close to work. I grew up in a rural area, so everything that you wanted to do from a work perspective was really close, and then everything you want to do from a cultural or a shopping standpoint was a long ways away. But it was important to me to maintain the same short commute that I had had in my previous experiences. So because I’d lived in Omaha for six years during undergrad and pharmacy school, I had a pretty good idea of the neighborhoods that I’d want to live in that would be a short commute to work.

Nate Hedrick: Nice.

Shelby Bennett: And I also wanted enough space for my immediate family to visit and stay. My previous house was too small for all of us to hang out at the same time. And then as I alluded to earlier a little bit, I wanted a house that didn’t need a lot of interior work done. I figured starting a job, buying my first house, moving in a couple hours away, was enough projects to start with, especially since I’d be living in the new house during a renovation. So exterior work I was OK with since it doesn’t really affect the function of your house. But interior work, I wanted it mostly done.

Nate Hedrick: Yeah, that makes sense, especially with starting a new job and moving across the state and all that. That makes total sense.

Shelby Bennett: Yeah.

Nate Hedrick: Great. Well, were you able to hone in on that? It sounds like you had a couple of projects, but hopefully they haven’t been too overwhelming.

Shelby Bennett: Yeah, yeah. So I actually had a contractor come earlier today and look at a couple things. But yeah, I ended up picking a place that had some exterior projects that needed to be done but ended up finding a place that almost everything I wanted done was on the inside. So almost everything on the inside was already done, excuse me.

Nate Hedrick: Great. That’s great.

Shelby Bennett: So that was really nice.

Nate Hedrick: Good, good. Well one of the other important aspects that we really want to focus on too is Step No. 3, which is assembling your team. You know, there are a lot of important team members included in the home buying process, right? You’ve got a real estate agent, you talked about working with Tim, so your financial planner, maybe an accountant, sometimes a lawyer in most states. So looking back at your purchase, who would you say were the most essential members of your team?

Shelby Bennett: Yeah, so I’m going to rank my team members by how many questions I asked each of them.

Nate Hedrick: I like this.

Shelby Bennett: Definitely the award for the most questions asked and answered goes to my local real estate agent that I worked with through most of the process, Rebecca. A month out from closing and we still probably talk about once a week. So she was really great to work with. Next up is probably Tim Baker, who’s been working with me on financial planning with YFP since November of last year. So kind of around the time I decided I wanted to be buying a home soon and kind of looking at some of those things. My parents were definitely a sounding board for me when I had questions. And they came with me during showings to catch things that I didn’t. None of us are real estates experts, but it was nice to just kind of have an extra set of eyes and to think about things that maybe I didn’t. And then last but definitely not least was you, Nate. You definitely came in clutch for me during a couple of slightly awkward dilemmas throughout my process.

Nate Hedrick: Yeah, I want to talk about that because that’s actually one of the main reasons I wanted to have you on because I think this is really good. We talk about our concierge service and the home buying concierge and how that works. And in my head, it’s this perfect system, right? We match you with an agent and you get off and you find your dream home. But in reality, it’s not always perfect, right? So we originally connected you through the concierge service with Emily, right?

Shelby Bennett: Mhmm.

Nate Hedrick: And things were — it was OK, but it wasn’t a perfect fit. So maybe you can tell us a little bit about that because I think this is a really cool story to share about what this can look like.

Shelby Bennett: Yeah, absolutely. So I think I talked to you probably on a Thursday night, and I think by Sunday night I’d already received an introduction to my first agent, Emily. And I was pleasantly surprised at how quick the process was, even though you hadn’t worked with agents in Omaha before. My first interactions with Emily were pretty positive. She was quick to respond to my questions. I had requested to see a few properties that I had seen online, and she set up showings for them. I’d never really been to a house showing before. So I didn’t know what to expect except that I figured it probably wasn’t exactly like you see on HGTV. I remember not really knowing how to feel after that first day of showings. It was exciting to get out and see houses, but I didn’t feel that supported by Emily as we looked at houses. She’d let us into the house and then just kind of wait for us to be done exploring. She was available for questions but usually gave short answers I didn’t fully understand. The one house I saw that I felt like I could see myself in needed a lot of yard work and some of the windows needed to be replaced. I felt like the more excited that I got about the house, the more she seemed to be talking me out of it. Spoiler alert, that’s the house I ended up buying. But we’ll get to that later.

Nate Hedrick: Nice.

Shelby Bennett: But yeah, my situation was a little unique in that I was looking for houses during the interview process for my new job. So I wasn’t in a place to make an offer for at least another couple weeks. I think that definitely affected my experience with Emily. So the second time I wanted to set up showings, I feel like she tried to talk me out of them a little bit, saying they probably wouldn’t even still be on the market by the time I was ready to buy. When I asked if I could still see the properties to learn more about the home buying process so I wasn’t scrambling at the end when I really needed something, you know, she made me whittle down the list of places I wanted to see from five to three for a five-hour round trip drive on my part. And then all of a sudden she had this schedule conflict, and she sent another agent to show me the homes. And that was super awkward for me. I didn’t really know. I was like, isn’t that your job? I didn’t really know what to expect from her or from me or if I’d done a wrong thing. It was definitely awkward for me. But even though that was super awkward, I feel like it was the best thing that could have happened in hindsight because the new real estate agent, Rebecca, was super personable, she was exploring the houses right there along with us. And she was giving us insight about the homes and the neighborhood. And I felt like she really welcomed my questions. I didn’t feel like they were stupid questions, that I asked too many or anything like that. And we just had a great time seeing the homes. We had a lot of fun, and I left feeling just a lot more hopeful. The only thing is I didn’t know like was it possible to break up with your real estate agent? Could you switch to a new one? Like I had no idea.

Nate Hedrick: Yep.

Shelby Bennett: So thankfully, the next day, Nate, you’d sent me an email just checking in to see how things were going. And thank goodness for that. I had decided to fill you in on my predicament.

Nate Hedrick: I remember that email.

Shelby Bennett: Oh my gosh, I’m so glad I did. I feel like you just really validated all of the concerns I was having, and you helped me make the transition from Emily to Rebecca by helping me understand kind of the structure of real estate offices and kind of what to focus on when kind of asking to switch. I can’t imagine how the home buying process would have gone if I hadn’t reached out to you, taken your advice and then decided to work with Rebecca moving forward.

Nate Hedrick: Well, we messed it up to begin with, right? We gave you Emily first, so we had to fix it and get you back on track.

Shelby Bennett: Well you didn’t know.

Nate Hedrick: No, and you know, it’s hard, right? So we do these interviews, and we interview these agents. But until someone’s worked with them that we know, there’s no way to know up front. And so luckily, Rebecca was on Emily’s team and was just a much better connection point for you. She was much more first-time homebuyer-centric. And it was obvious in your email that she was someone that you connected with and that you were going to be able to work with long-term. So I’m really glad we were able to get you switched over to Rebecca. So again, the point here is that, you know, we try, we do the best that we can, but the concierge service is not perfect. But the good news is that we’re always a part of your team. So when something like that happens, you did the exact right thing, just reached out, say, “Look, this isn’t working. I need to pivot.” And we can help you make that pivot. So again, I really — I love sharing the good stuff that we do with concierge services, but I’ve also got to make sure that we share the real stuff too. And this is exactly that. So thank you for telling that story.

Shelby Bennett: Yeah.

Nate Hedrick: Alright, so then once we found a place, we found the original place and then we got talked out of it, now we’re back. Then it’s choosing a loan and getting preapproved. So a lot of people kind of struggle when it comes to getting financing. And so this is Step 4. So can you tell us a little bit about how you went about navigating that process and any tips that you have for our listeners now that you’ve gone through it once for yourself?

Shelby Bennett: Yeah. Absolutely. So I was in the market for financing in April. So right in the middle of the COVID shutdowns. So Rebecca had recommended that I choose a lender I knew I could get ahold of on short notice since not everyone was working from the office anymore. She said that delays from lenders can delay closing on the house. I definitely didn’t want that, ended up kind of a short schedule from by the time I accepted the job to the time I needed to be moving. So I knew I needed to get going more quickly. So yeah, so thankfully I have an extended family member who’s a home mortgage consultant. So I knew I’d be able to contact him if I needed. So the process I used, I got some rate quotes from both my family member’s national lending company and then I talked to others to see what rates were being offered by IBERIABANK/First Horizon, as recommended by Tim Baker. And then because I’d be putting 20% down with a conventional loan — and that was I guess a recommendation from Tim as well — and the interest rates were similar between the two lenders, I decided to choose my family member as my mortgage consultant because I wanted somebody, kind of like Rebecca, that I was comfortable asking questions to and somebody I felt like would recommend the best options for me and not just try to sell me something. I think my biggest tip is to really just use your home buying team to help you make those financing decisions. I don’t know about a lot of you out there, but I am not an expert on finances by any means. And so it was so nice to have pros to reach out to when I had questions or wasn’t really sure because I ran into another situation I was pretty sure I had all my financing ducks in a row. And then I had an immediate family member recommend I put less than 20% down after reading an article about how COVID would affect the housing market and its potential to be worse than the Great Depression, in the article’s words. And man, that really threw me off. On super short notice, I talked to both Robert and Tim Baker at YFP and to you, Nate, to kind of get your take on the situation. I knew my family member was coming from a place of care and concern for me, but I definitely didn’t want to make a decision I’d regret later, especially not one that costs a lot of money and was spread out over 30 years. So just like with my real estate concerns, both Robert at YFP and I feel like Nate, you really took the time to answer my questions, kind of justify both my concerns and then tailor your response around some of the details of my particular situation. And it was just so nice having another opinion. It made me feel like no question I had was a stupid question. And it just really made me feel like I had another person I could reach out to and I was like, I have no idea what I’m doing.

Nate Hedrick: Good, well I’m glad we could be there for you. And you’re right, the amount to put down and the type of financing and all the things that go into that, it’s so different for everybody. I think we’re so quick to say, you know, 20% is what you’re supposed to do. And it just feels like that’s what you hear about. But the reality is that it’s different for every situation and every person. So it’s always good to get those second and third opinions from someone else that knows your finances and knows what you’re going through. So yeah, definitely a tricky spot, but I’m glad you had the support that you needed. Alright, so Step No. 5 is finding your home and negotiating. So we talked a little bit about finding that home and the home search process. But I guess I’ll ask this too, it sounds like COVID did have an impact. Did that interrupt showings in any way? Or did you have any issues with seeing houses?

Shelby Bennett: Yeah, so I wasn’t really sure what to expect from that search process kind of at first. I spent a lot of time, especially early on, looking at real estate websites online. I set a lot of email alerts for houses that fit my criteria. But yeah, COVID definitely affected kind of the second half of my search process. Ended up doing a lot more FaceTime showings than in person, which with a five-hour round trip drive was actually really nice. I don’t know that I would have done as many of those without COVID. And so in some ways, it was nice because when you saw a house on FaceTime and you knew it definitely wasn’t the one, then you didn’t have to drive so far. But it was hard to get a really good feel of the house just from your phone.

Nate Hedrick: Yeah, until you’re standing in that space, it can be tricky to get a true feel for what that house is going to be like.

Shelby Bennett: Yeah, so I got really lucky in that the house I ended up buying I had seen in February before I knew I was going to be moving and before all of that. They had fixed up a lot of the windows and some of the yardwork, and so then Rebecca actually reached out, you know, mid-April to say, “Hey, what do you think about this house?” And I was like, “Funny you should mention. I feel like that was the house I liked.”

Nate Hedrick: “I know the house well.”

Shelby Bennett: Yeah, “that was the house I liked that nobody else liked for me.” COVID also made me feel a little bit like people weren’t putting houses on the market. And so it was frustrating at times to feel like I wasn’t going to find a place in time. But kind of by the end, I guess the search process was more or less like I imagined. You go to the house, you open up all the cupboards, you explore everything, and then you kind of talk about pros and cons of each place. Turns out Omaha is a seller’s market, so it was a little more stressful than I thought with fewer homes on the market and a little more buyers competition. Some houses I liked were off the market in less than a day, and so that was just kind of blew my mind.

Nate Hedrick: Wow. Yeah, no doubt. Gees. And we’re actually seeing that around the country right now. We’ve got a seller’s market pretty much everywhere. Inventory is very low. I know of very few areas in the country right now that are buyer’s markets. So that’s not totally unique to Omaha at this point. And then did you — you know, the part that intimidates most people about this step is the negotiation. Did you get into any negotiations with the seller or how did that part go?

Shelby Bennett: Yeah, absolutely. So Rebecca was really great at walking me through the negotiation process because I definitely wasn’t comfortable with that going in. So she had recommended a price range to start my offer at and actually had reached back out to Emily to kind of get her thoughts since she had seen the house as well. And so they kind of helped me understand where would be a good place to start and then helped me understand a little bit of the seller’s thought process kind of through the negotiation process and what they’d likely be thinking. And then, you know, she talked with me about common things home buyers usually negotiate on when they offer versus like what you might negotiate or put into the offer after the home inspection and kind of at different points along the way. We ended up negotiating the price of the home down about $17,000. And we got the seller to purchase the home warranty, so I was really happy about how that all ended up.

Nate Hedrick: Nice. That’s great. And it’s really nice to hear that Rebecca and Emily helped you really kind of step into the seller’s shoes for a minute because I think it’s easy to walk into a sale as a buyer and think, gosh, I’ve got to get this for as low as I possibly can. And I’m going to negotiate hard on everything. And the reality is like, there’s just two people trying to have a transaction. And so stepping into their shoes can actually help you a lot of times with that negotiation. So that’s great.
Shelby Bennett: Yeah, absolutely.

Nate Hedrick: And then the last step is Step 6, which is inspect, insure, and close. And I think a lot of this tends to run together, right? All these steps are kind of going on simultaneously. So you know, with all of the stuff that’s going in this, I guess I’ll just ask, is there anything that you learned or that you would have done differently now that you’ve gone through the closing process as a first-time home buyer?

Shelby Bennett: Yeah, so I definitely learned at the inspection that I don’t know a lot of structural things about houses.

Nate Hedrick: They didn’t cover that in pharmacy school? What the heck?

Shelby Bennett: No. My inspector and my agent were really good about explaining the significance of the findings during the inspection and kind of suggesting what to ask the sellers to fix. I definitely recommend being present for your inspection walk-through, even if it’s in the middle of a pandemic and you have to wear a mask like I did. But so you can physically see the inspection report findings, they can physically point out different things throughout the home. There were a lot of terms that I didn’t understand. But once I could see what they were talking about, it made a lot more sense. I definitely recommend that. Closing was definitely a blur for me. I was I think the first in-office closing the title company had after doing drive-through closings for COVID.

Nate Hedrick: Oh, wow.

Shelby Bennett: My title agent said she would email me the closing documents to review beforehand, and with all the craziness going on, I wish I’d remembered to reach out and tell her I never got them. But I couldn’t until it was too late, and then I closed right away in the morning. So when I got to closing, like there would be all these super long documents, and my title agent was great and would say like, “Hey, this is just a document that your lender needs to do x.” But I’m like, “It’s four pages long and this is all it says?” You know? But I definitely didn’t take a lot of time to read them being close proximity like in an office was definitely something that was very taboo kind of at the end of May with COVID anyways. And so I didn’t necessarily probably take as much time as I would have to like read everything. And then it was a bummer that Rebecca, my agent, couldn’t be there either. Turns out real estate agents and sometimes family members can be present at closing to kind of help answer any questions and kind of be there for support. And instead, I was in a conference room across from the title agent with a big plexiglass divider and just a little slot to pass papers back and forth.

Nate Hedrick: Wow. Oh my gosh, that’s so crazy.

Shelby Bennett: So yeah, so that was a little wild. So I wish I had been a little more proactive and remembered to reach back out and see those closing documents ahead of time. But overall, you know what, it went well. I haven’t discovered yet that I made any big mistakes. So you know, it all turned out for the good. But definitely something I feel like you just, you don’t know about until you have the experience.

Nate Hedrick: Absolutely. I remember my first closing as a home buyer and was just overwhelmed with the amount of things I was signing and I just wrote a giant check for a bunch of money, and it was terrifying.

Shelby Bennett: Right.

Nate Hedrick: So yeah, I totally understand. And that’s really great that you were able to share some of that with our listeners because again, step back, ask questions, and review the documents ahead of time. That’s a really good piece of advice. Well, you’ve given us some great tips, and I really appreciate you sharing your story today. Is there anything else that you want to share with our listeners that you — about the home buying process or really anything in general?

Shelby Bennett: Yeah. So really the only thing I had to share was something you just touched on. Don’t be afraid to ask questions. I think especially as a first-time home buyer, I definitely felt a little bit like I was annoying people on my team at times. But I’m like, this is your job. You know, like.

Nate Hedrick: I pay you for this. Hold on.

Shelby Bennett: I was like, home buying just isn’t one of those things, like you mentioned, like we don’t learn that in school. There’s no place to learn about it except for when you go through it. And it’s a huge decision. So I definitely say reach out, take advantage of all your resources. There’s lots of pros who’ve done this before and are super willing to help. So you don’t have to do it alone, and no question is too small.

Nate Hedrick: That’s really great advice. I really appreciate it. That’s awesome. Well Shelby, thanks so much for being on the show. It just means a lot that you would come on and share your story. And again, I think our listeners are going to learn a lot from what you had to say. So appreciate it.

Shelby Bennett: I appreciate that, Nate. Thanks again for having me.

Nate Hedrick: Hi, Bryce. Welcome to the podcast.

Bryce Platt: Hey, Nate. Thanks for having me.

Nate Hedrick: Absolutely. We’re glad to have you on the show. So I guess we’ll start off, can you tell us a little bit about yourself?

Bryce Platt: Sure. My name is Bryce Platt. I’m from Kansas originally and went to the University of Kansas for my pharmacy school, graduated in 2018 and then did a post-grad fellowship in population health management in North Carolina. I’d never been to North Carolina before until that fellowship. Spent a year there and did I guess not bad enough that they felt the need to get rid of me, so they decided to keep me. And stayed on as the clinical pharmacy specialist for pop health programs. And that’s where I’m at now.

Nate Hedrick: That’s great. That’s amazing. And you just bought a house there, right?

Bryce Platt: I did. I just bought a four-bed, four-bath condo.

Nate Hedrick: That’s amazing. Yeah, and that’s exactly why we’ve got you on the show today to talk a little bit about that experience. So again, we appreciate you being here.

Bryce Platt: Thank you.

Nate Hedrick: Great. So what I thought we would do is out on our website, on the YourFinancialPharmacist.com Real Estate page, we have a home buying guide. And it is the six steps to follow to basically have a great home buying experience. And so I thought we’d walk through those six steps and kind of see what your experience with those six steps and get some feedback from you, if that works for you.

Bryce Platt: Yeah, hopefully I can share a little bit of knowledge and help some people who haven’t done this before.

Nate Hedrick: Perfect, that’s what we’re looking for. So alright. We’ll start with No. 1 — oh, and if you’d like to get access to this yourself, you can to YourFinancialPharmacist.com/homeguide. And you can download those six steps. You can follow right along with us or work on your own plan there at home. So Step 1 on there is making sure you’re ready. So this is kind of the before you start searching on Zillow, you know, when you’re deciding that buying a home is the way you want to go, there are a number of steps that you should be taking, things like budget, things like looking at your location and all that goes into that. And so Bryce, tell me a little bit about how you decided to buy a home instead of continuing to rent.

Bryce Platt: Neither you or Tim know this, but this completely started from me listening to Episode 130 on this podcast.

Nate Hedrick: Oh nice.

Bryce Platt: It was where Craig Curelop from Bigger Pockets came in to talk about his house hacking strategy guide, his book that he had released.

Nate Hedrick: Yep.

Bryce Platt: So I listened to that mid-February and was like, I mean, my lease ends in early August. So I can go ahead and do this. It wouldn’t be any more expensive than renting, and I’d have the benefit of the cash flow and building some equity in an actual property. So I went forward with buying the book and from that first step in mid-February, I had closed on this condo by June. And before that never even considered should I look at a property? Should I buy a house? Didn’t even cross my mind at all.

Nate Hedrick: That’s great. Well, that’s awesome. I’m glad we’re inspiring a couple people out there. That’s the goal. So that’s amazing. And like I mentioned, one of the other steps to determining if you’re ready is figuring out things like budget and questions like that. So did you sit back and were you the classic detail-oriented pharmacist doing all these hard numbers? Or how did set about things like a budget?

Bryce Platt: You know, I can’t say that I had a budget. What I did was I completely looked at deal numbers. I looked at it completely as an investment. So I didn’t have a top number except for what the bank was willing to loan me. Beyond that, just did the numbers for the property work? Which of these look like the best deals and investment property? So as long as those numbers worked, it was very loose on the actual list price.

Nate Hedrick: Yeah, this is really different than buying a traditional home that you’re going to live in. It’s really more of an investment. And so approaching that like a business decision makes a lot of sense.

Bryce Platt: Absolutely.

Nate Hedrick: I guess, so that leads us really nicely into our next point, which is determine what’s important. And it sounds like house hacking was the thing that you wanted to do. So maybe you can — I know we talked about, like you said on Episode 130 with Craig, but can you talk a little bit more about exactly what is house hacking and how does that work?

Bryce Platt: Sure. House hacking is the idea of you owning a property, buying some kind of property, and being able to essentially lower that mortgage payment by having other people pay you money to live there. So that could be as intense as you buy a mobile home and live on the parking lot in front of your apartment or your property and rent out the actual property. Or it could be as minimal as you live in the house and you have like a garage that you’ve turned into an Airbnb spot. And you just rent it out occasionally for short-term renters. So there’s a big spectrum there. The traditional is you buy like a duplex, a triplex, quadplex, and rent out the extra units and you live in one unit. I tried to do that, and we can talk about that a little bit later. But this condo worked out much better as a investment property for me.

Nate Hedrick: Yeah, and so you’ve got a four-by-four. So maybe you can explain what that is for someone that might not know.

Bryce Platt: Sure. So the — if you remember, I don’t know, maybe back in college, you have this shared space where there’s a living room, a kitchen, that four people share. And then each person has their own bedroom with a door and a lock, a bathroom and a walk-in closet. So we all have our own private space as well as sharing the living room and kitchen.

Nate Hedrick: That’s great. What an amazing setup. And I’m sure that’s not possible everywhere, but it sounds like that’s a great fit for you guys.

Bryce Platt: Absolutely. It’s near the big public college here in North Carolina, so it’s traditionally been for students. But with COVID just happened in March, the students that were here broke their lease and moved out. And that wasn’t uncommon for the seller. So he had multiple properties like this that had nobody in there.

Nate Hedrick: Oh, wow.

Bryce Platt: And so he was looking to get rid of some of these.

Nate Hedrick: That’s great. And I guess we don’t have to get too far into the numbers, but I mean, is it looking good? Like are you going to be able to live for free? Because that’s the dream, right?

Bryce Platt: Yes, that is the dream. The reason I chose this property was — so I looked at multiple duplexes, which were really all that are around this area of North Carolina. There’s not really triplex or quadplex that are available. And the duplexes had decent cash flow numbers, but because of COVID, no one really wanted me to come like look at it in person.

Nate Hedrick: Oh, wow.

Bryce Platt: Because, you know, they were listed before COVID happened. So these were just people looking to sell eventually but not in a huge rush. For this condo, the numbers are much better anyways. So I essentially am doing a rent-by-the-room strategy, as you might imagine, with four-bed, four-bath. So these aren’t people that knew each other before coming in. So if we talked about the 1% rule here, this is more like the 1.5% rule. So the numbers are pretty good. And even with me living here as one of the rooms, I’m making a few hundred dollars every month over the mortgage.

Nate Hedrick: That’s amazing.

Bryce Platt: And the interest and the insurance and the taxes and the HOA fees, even.

Nate Hedrick: That’s amazing. Good for you. And for those of our listeners that don’t know the 1% rule, really popular in rental property investing, means that if the purchase price is, let’s say it’s $100,000, you should be able to bring in about $1,000 in rent every single month. So 1% of the purchase price is your goal number. And that 1% rule is kind of a quick back-of-the-napkin math for determining if a rental property is going to be worth considering.

Bryce Platt: Absolutely.

Nate Hedrick: So anything over the 1% rule is great, and it sounds like you’ve almost hit the 1.5%, which is amazing.

Bryce Platt: Right, and that’s even, like I said, with all of the PITI, insurance, taxes, interest and including the HOA fees, which are an extra couple hundred dollars on top of all of that.

Nate Hedrick: Yeah, those HOA fees can be killer, so being able to include that and including that in your budget, like that’s amazing. That’s great.

Bryce Platt: Yeah, I really am not bothered by the HOA fees because as my first house and as never having even considered doing things before this, like I mentioned, I do not want to have to figure out how to do landscaping and take care of huge roof, replace the roofs and the siding on the houses. Here, they have a pool and a sand volleyball court and a basketball court. And there’s no way I’d want to take care of those either.

Nate Hedrick: Yeah. I mean, your repair costs go basically to $0. It’s great.

Bryce Platt: Well, I wouldn’t say that because inside the condo, I have to take care of everything inside the condo. But anything that’s really — that’s typically a really large capital expenditure for a house, I don’t really have to prepare for those.

Nate Hedrick: That’s perfect. Great. Well and then I guess the next step, we’ll move along here, No. 3 is assembling your team. And there are a number of important team members that we list in our document, everything from a real estate agent, a financial planner, an accountant, sometimes there’s a lawyer that needs to be involved. So now that you’ve kind of made this purchase and you’re looking back, who were some of those most essential members of your team, would you say?

Bryce Platt: It was easily my real estate agent, Adam.

Nate Hedrick: OK.

Bryce Platt: When you’re looking for a real estate agent for house hacking specifically or any kind of investment property, really, you want a real estate agent that has done investing themselves so they know what you’re looking for. You’re not looking for the super expensive, granite countertops and the high-rise ceiling and the fancy chandeliers. You’re looking for a place that, for example, meets the 1% rule or you are able to cover the mortgage with your rent. So working with a real estate agent that understood that made it a lot easier.

Nate Hedrick: Good. And we were actually lucky enough to be able to connect you with Adam through our concierge service, right? So can you tell me a little about that experience? It sounds like it worked for you.

Bryce Platt: Yeah. Again, neither Nate or Tim paid me for this. So I will give them my endorsement.

Nate Hedrick: Uh oh.

Bryce Platt: It was super easy and working with Adam, made connecting me with Adam here in North Carolina. Because I had — like I said, I started from absolutely no idea what I was doing to getting this book and was able to eventually turn it into a condo a little over three months later. So the connection with the real estate agent was vital to doing this.

Nate Hedrick: Wow, that’s so good. I’m so glad you had a good experience. That’s what we’re all about. I appreciate the endorsement, and I’ll send you the check after this.

Bryce Platt: Yeah, alright.

Nate Hedrick: Great. Well No. 4 is choosing a loan and getting preapproved. A lot of people tend to struggle when it comes to financing. I get this question a lot that people are pretty good about the home search and what they want. But when it gets to financing, people kind of struggle a bit. So how did you go about navigating that process?

Bryce Platt: With house hacking, you want essentially the lowest down payment as possible. Obviously on Your Financial Pharmacist, I mean, I’ve followed you guys for a little while and I use the website, so I started with Credible to compare the different lending institutions and what kind of rates they had and the limits and such. But after that, IBERIABANK/First Horizon, which is a specific partner of YFP, they had the best interest and guaranteed no PMI, which is Private Mortgage Insurance where if you typically on a normal property, if you put down less than 20% on the property as a down payment, you have to pay PMI to protect the lending institution. The insurance doesn’t cover you. It covers the bank in case you default on that. So you’re paying them insurance for the bank, which is ridiculous. Anyways, and they also only require a 3% down payment. So I only had to put down 3% and was able to go without PMI and still have a pretty low interest rate. The 3% down payment, I will say was only if it wasn’t multi-family. So even if it was a duplex, triplex or quadplex, they do require for IBERIABANK/First Horizon 15% down payment.

Nate Hedrick: OK.

Bryce Platt: That’s something that both Tim Baker and I learned. And so I felt the need to share that. But if it’s not a multi-unit property, you can do as low as 3% down payment, and that’s what I did.

Nate Hedrick: Nice. Yeah. So this was — it basically is almost like a four-plex, but it wasn’t considered that because it’s a four-by-four as far as the bank is concerned.

Bryce Platt: Right.

Nate Hedrick: Oh, that’s great.

Bryce Platt: It’s a single family property.

Nate Hedrick: Yeah. Cool. Interesting. That’s a really neat mix. And for our listeners who are interested, you can go learn more about Credible and IBERIABANK/First Horizon at YourFinancialPharmacist.com/real-estate. So please take a look at that and you can learn more about those sources, just like Bryce did. Great. So No. 5 is finding your home and negotiating. So a lot of people, again, struggle with the negotiating side of this. But we’ll start with the home search, so can you tell me a little bit more about the actual search process, and it sounds like COVID kind of impacted some of that as well, so maybe you can share a little bit more about how that went.

Bryce Platt: Absolutely. So it was easier than I expected, but like I said, I didn’t really have any preconceived notions on what it was going to be like because I had never even considered this before. So Adam set me up on the MLS, the listing service, so I could see everything that was available to buy and so I could evaluate properties based on, you know, evaluating the deals and investment property whenever I wanted. And in the MLS, I could even request a showing from Adam to see these properties. This aspect was kind of impacted by COVID, like I mentioned. There were a couple duplexes that I had tried to see. But they didn’t want to open for showings, so I kept looking at other deals that were coming up and then eventually, this condo came up. And he was in much more of a hurry to sell, you know, because he had been vacant for a month or two at that point because the students had broken their lease. So it came on the MLS, the numbers were way better anyways than the duplexes, so made it a lot easier to request a showing here. And since there were no students or anyone here, didn’t have to worry about COVID stuff.

Nate Hedrick: Nice. Yeah, and it sounds like, you know, with it being vacant, you might have had a little room to negotiate there too, I imagine.

Bryce Platt: Yes. So personally, I’m comfortable with negotiation. If you guys have ever read the book, “The Difference,” about a boss — it’s an amazing book.

Nate Hedrick: Yes.

Bryce Platt: I’ve read it multiple times, both before I negotiated for this property and before I bought my car. And it worked out very well. I was able to bring the price down about 5% and keep all of the furniture that was here.

Nate Hedrick: Oh, wow. That’s amazing.

Bryce Platt: It worked out pretty well.

Nate Hedrick: Yeah. Well, we should put a link to that book in the show notes. I highly recommend that book. It’s good for business negotiations, life negotiations, I use it to negotiate with my toddler all the time. So I definitely recommend it. Very cool.

Bryce Platt: Throwing some mirroring out there.

Nate Hedrick: Exactly, mirroring works great on a toddler, I promise. That’s so cool. Well, and then the last step is No. 6, inspect, insure and close. So a lot of this can kind of get a bit nebulous. There’s a lot involved. So I guess what I’ll ask is, is there anything you learned or would have done differently now that you’ve gone through the closing process, you’ve been a first-time home buyer and made it out to the other side. You know, what are some tips you can share with our listeners?

Bryce Platt: Find a really good real estate agent because Adam made this go so smoothly for me. I had no issues. He provided me with a very good inspector. I had an insurance broker that I had no issues with, a closing agent, and had nothing that I needed help with. Zero issues with closing. And I hope that I can say that after every property I close on.

Nate Hedrick: Good, I’m so glad. And you’re totally right. That agent is so in charge of connecting you with the right people, otherwise you’re going out and finding your own lender just magically, and you’re going and finding all these different people. If you’ve got one point of coordination, it can get so much easier. So I’m glad that you had that great experience. That’s amazing.

Bryce Platt: Yeah, if people have the connections, which obviously I did not just starting, I mean, you could maybe find some good people to work with. But when you’re just getting out here in the first place, I think it’s more important to just figure out the people that your real estate agent trusts, as long as you trust your real estate agent.

Nate Hedrick: That’s great advice. Awesome. Well, good. Well those are the six steps. It sounds like you’ve made it out the other side. How is everything going with the actual finding tenants? I mean, that’s where we’re at now, right? Are we still running into COVID issues? Or how is that going?

Bryce Platt: Sure. So I had expected to rent to mostly students. As I had mentioned, it’s nearby the school and there were students living here before. As I made my listings, almost mainly following what Craig mentions in his house hacking strategy, I had many people interested. But they were mostly non-students. So right now, I have one person that’s in a similar life position as me, recently graduated out of school, so a young professional. And then one that is an intern and in school or I guess in the summer part of school. And then the third person of the, you know, there’s four rooms, I’m taking one of them obviously, so two of them are filled. The third one just applied this morning, and I expect that he will be accepted as well. So I think I’ve got it all filled out. And as I mentioned to Nate before we started the podcast that I don’t have to pay the first mortgage payment until August. So I am getting — I got my first rent payment like a week and a half ago. And that was nice to have before I even have to pay the property costs.

Nate Hedrick: That’s a cool moment. That’s when it feels real, like OK, I’m actually doing this. This is pretty awesome.

Bryce Platt: Yeah. And like I said, from starting mid-February from absolutely nothing to middle of June or the beginning of June, I closed on a property, I would not have ever guessed that.

Nate Hedrick: So yeah, so now you’re basically a landlord a couple of months later. That’s pretty incredible.

Bryce Platt: Absolutely. And like I said, no — I could have had no idea this was something I could do. But with lots of education — the YFP podcast was what kickstarted it. And then that’s also how I found Bigger Pockets, and Bigger Pockets was a huge education for me. I’m still working through all their podcasts. I haven’t even gotten through to the current ones, and I was still able to do it before I even caught up on Bigger Pockets stuff. So that’s two great communities that can help educate people to feel at least comfortable enough to take a step and do it.

Nate Hedrick: Great. We’ll make sure to put that in the show notes as well. I love Bigger Pockets, and I’ve been really diving into the Real Estate Rookie podcast they’ve been putting out recently. That’s been a great show.

Bryce Platt: Absolutely.

Nate Hedrick: Well Bryce, anything else you want to share with our listeners before we let you go?

Bryce Platt: Spending time to educate yourself is going to make you feel better about actually taking action. But you can’t stop with just educating yourself. There’s always — you have to take an action step. And after I bought that book, I kind of felt like, oh, I’ve made my step. I’m doing well now. But luckily for me, in my toastmasters group, there’s a real estate agent. And so I started talking to her about investment properties. And she kind of worked with me a little bit and wasn’t able to commit the time because she was working on her own investment property at the time.

Nate Hedrick: OK.

Bryce Platt: And then Tim Baker actually recommended I work with Nate to get a real estate agent here in North Carolina. And so that was the real action step that after I had done that, it was just a snowball effect. You didn’t have to worry about like, oh, am I doing the right thing? It was, I’m in the action phase now.

Nate Hedrick: Yeah, it’s hard to make that first jump. But once you do, it’s easier to make the next one and the next one. So that’s great.

Bryce Platt: Oh yeah.

Nate Hedrick: Well Bryce, we really appreciate you being on today. I think this has been an awesome story to share with our listeners. So just appreciate your time.

Bryce Platt: Yeah, no problem. Thanks for having me on, guys.

Tim Ulbrich: Alright, great stuff, Nate. Thank you for taking the mic and taking the time to interview Shelby and Bryce. And a thank you to Shelby and Bryce for taking the time out of their schedule to do that interview. So let’s talk, Nate, through the concierge service. Obviously they saw it come alive through these stories. But we’ll talk step-by-step what folks can expect from that service, how it works, and what they can expect throughout the entire process from looking for a home all the way to landing that property. So Step No. 1, crafting a plan. So talk us through that.

Nate Hedrick: Yeah, so just like we were talking a little bit in the interviews, the whole first step is figuring out a plan, right? We want to come into this with your goal is to buy a home or sell a home or invest or whatever the plan is. Let me help you put some framework behind that plan, so looking at things like budget, looking at things like location, what’s your goal with this property, right? Are you looking to buy your first house and then rent it out in a couple years? Or are you looking to buy your forever home? And those are all very different approaches, and they require very different agents and what they specialize in. So that very first step is really going to be our 30-minute jumpstart planning call. And during that call, I’ll be connecting with you and actually talking through those things that I just mentioned to figure out what the best course of action’s going to be. And that allows to kind of move forward with a really good mindset of, this is the goal. This is what we’re trying to achieve with.

Tim Ulbrich: Awesome. So Step 1, crafting a plan. Step No. 2, connecting you with a pro.

Nate Hedrick: Yeah, and this is where we then jump in and use that information from that jumpstart planning call to actually connect you with a local agent. And this is either someone that we’ve worked with in the past that other pharmacists have utilized or worked with recently, or it’s maybe a new person if you’re in an area where we haven’t added someone to our network yet. And what I’ll do is I’ll actually go out and interview a couple of agents, find somebody who I think is going to be a good fit, and then I’ll get you connected with that person. And it’s not just an agent too, right? Because that agent is going to become the boots on the ground leading your team. But it’s also going to lead to connecting you with lenders, connecting you with contractors, lawyers. Whoever you might need in that local area, they’re going to be the expert for that. And so we help kind of facilitate all those things with that connection.

Tim Ulbrich: And after connecting with a pro, Step No. 3, staying the course, to me is really important. Because I think while they’re going to have that interaction with the agent, obviously questions will come up. And through that crafting a plan in Step No. 1, you’ve got an idea of what they’re looking for for their situation and how that may fit, you know, in with other questions that they have as it relates to that home buying experience. So talk to us about staying the course and your involvement with them throughout the process.

Nate Hedrick: Yeah, this is the part that I think is actually most important because finding that initial agent is not a foolproof process, as you can tell with Shelby’s interview, right?

Tim Ulbrich: Yeah.

Nate Hedrick: We didn’t get it right right off the first bat. And that’s OK because we’re there as a part of your team the whole time. So even if it doesn’t go 100% the first time, we’re still involved in the process. And we’ve had a couple of clients now where we’ve pivoted a little bit from the initial person that we worked with to maybe a subagent or a totally different agent based on needs and how those have changed. So that whole idea that we are still on your team during the entire process, it’s absolutely essential to the concierge service. And it’s really the cornerstone of what we do.

Tim Ulbrich: Yeah, and I’m so glad that came out in Shelby’s story. And as you said, we’re not always going to get it right, and I don’t think we should expect to, right? As I think about so much of the agent relationship with a client and my experiences buying a home, sometimes that just comes down to personality fits. You know, obviously there’s the knowledge component and you want somebody who knows the market and who’s going to be your advocate. But sometimes, you know, an agent that works for Shelby or for Bryce may not be a good fit for me or somebody else that’s listening. So really finding that right fit and if it’s not the right fit being able to get back with you to be able to make sure that that right fit ultimately does get in place with the client.

Nate Hedrick: Yep.

Tim Ulbrich: Awesome. So as a reminder, if you head on over to YourFinancialPharmacist.com and you click on “Buy or Refi a Home,” from there you’ll see an option where you can find an agent, get a time scheduled with Nate for that 30-minute jumpstart planning session. Again, YourFinancialPharmacist.com, at the top you’ll see there “Buy or Refi a Home,” find an agent, and that will take you to get a time scheduled with Nate. So again, Nate, thank you for taking time to come onto the show again and thank you for taking the time to bring Bryce and Shelby’s story onto the show as well.

Nate Hedrick: Happy to do it.

Tim Ulbrich: As we wrap up this week’s episode of the Your Financial Pharmacist podcast, I want to again thank our sponsor, HPSO. HPSO’s the leading provider of professional liability coverage, insuring more than 100,000 pharmacists nationwide and sponsored by the American Pharmacists Association. As I mentioned before, when I was a practicing pharmacist, I carried my malpractice insurance through HPSO. And with individual policies for qualified persons starting at just under $150 per year, it’s a no-brainer compared to the cost of a claim and worth the extra peace of mind. Plus discounts are available for qualified students and recent grads. So head on over to HPSO.com/YFP to learn more. Again, HPSO.com/YFP. And as always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please do us a favor and leave a rating and review in Apple podcasts or wherever you listen to your podcasts each and every week. Have a great rest of your day.

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YFP 159: 5 Lessons Learned During a Home Refinance

Posted on July 2, 2020November 2, 2022 by yfpadmin

5 Lessons Learned During a Home Refinance

Tim Ulbrich shares his recent experience refinancing his primary residence. He talks through the numbers, how they determined the breakeven point, the rationale for refinancing and 5 lessons learned along the way.

Summary

On this episode Tim dives into his experience and the numbers associated with refinancing his primary home with IBERIABANK/First Horizon. The big question Tim asks is, should you refinance your mortgage? To know if refinancing will make sense for your personal situation, Tim mentions that you have to take many factors into consideration including the current interest rate, monthly payment, PMI, the total amount paid over the life of the loan and how long you will live in that residence. On top of those considerations, you also have to assess all aspects of your financial plan to make sure this is the best move for you.

Tim and his wife Jess purchased their home in Columbus, Ohio in 2018 for $345,500 and put 20% down which left them with a loan amount of $276,400. They had a 30-year conventional fixed mortgage with an interest rate at 4.625%. Without taxes and insurance included, their principal and interest payment on their mortgage was $1,421.08. Jess and Tim began shopping around to refinance in early Spring of 2020 and chose to refinance with IBERIABANK/First Horizon. Their new mortgage is a 30-year fixed loan at 3% interest (difference of 1.625%) leaving them with a monthly payment of $1,136.22 (difference of $284.86).

Tim mentions that while they were happy about seeing the initial lower monthly payment and large reduction in interest, the math cannot stop there and that you have to dig into other considerations to decide if refinancing is right for you. In their discussion, Tim and Jess talked about restarting the clock on a new 30-year mortgage, the costs associated with the new loan and when their break even point would be. They also talked about how they could strategically use the monthly savings they would have. After crunching these other numbers they decided that it was a no brainer for them to refinance.

Tim also discusses 5 lessons he learned along the way while refinancing his home which include:

taking the time to weigh the pros and cons of refinancing to different mortgage terms
avoiding looking at refinancing your home in a silo without considering the rest of your financial plan
differences in the appraisal process
how much closing costs will be
always read documents closely and ask lots of questions

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. On this week’s show, I’m going to be flying solo to give you an inside look into the refinance that my wife recently did on our primary residence. Now, on Episode 139, Nate Hedrick, The Real Estate RPH, and I talked through should you refinance your mortgage? And I’m not going to rehash that episode in its entirety. I want to hit a few highlights that will help frame our conversation today. So let’s start with what is mortgage refinancing?

So really when you think about a mortgage as a bank or lender giving you money to pay for a home, and you, the borrower, have a certain amount of time, essentially the term, to pay that money back. And mortgage refinancing, a lender or bank gives the leftover amount to pay the existing mortgage, and you get a brand new one, which essentially resets your loan. Now, it’s possible to refinance your mortgage with the same lender. And people choose to refinance their mortgage typically either to reduce their monthly payment, reduce their overall interest, to get better equity in their home if the house went up in value, perhaps eliminate PMI, Private Mortgage Insurance, or to reduce the term of the loan, for example from a 30-year to a 20-year or a 15-year. Now, you likely qualify for a mortgage refinance if you already have a mortgage. And to get a good refinance offer, three main categories will be looked at: the equity that you have in your home, so the difference between what your home is worth and what you currently owe in terms of the mortgage; second is your credit score; and third would be other debt that you have incurred, whether that be student loan debt or credit card debt, for example. Now, since this is a new mortgage when you refinance, you’ll incur the same costs as you did when you purchased your home. Now they may look different if you’re using different companies, but you’ll still have closing costs, title fees, and so on. And that’s an important consideration as you’ll see here in a few moments with our example.

And to figure out if mortgage refinancing makes sense for your situation, you really have to know your current interest rate and your monthly payment, principle and interest — we’ll talk about that and an example here in a few moments — what that rate and payment will change to when you refinance, what your overall payment will end up being, and how long you plan to live in that home because as we talk about calculating a break-even point, essentially how much are you going to save per month relative to the costs incurred to refinance, obviously you want to be in the home longer than whatever that time period is. So the length that you’ll be in your house or that you project to be in your house — of course anything can change — is really important to consider when looking at refinancing, depending on the amount of closing costs you’ll have to pay with that new mortgage.

So that’s exactly what we are going to do today. I’m going to jump into the numbers, talk through the situation my wife Jess and I went through recently as we refinanced our home. We’ll dig into the weeds a little bit with the numbers, and then we’ll take a step back and look at some of the lessons that were learned throughout that refinancing process.

So let’s dig into the numbers. Now, we purchased our current home in Columbus, Ohio — Go Bucks! — back in October 2018 for $345,500. So that was the purchase price of the home back in October 2018. We put 20% down when we made that purchase, so our loan amount was $267,400. So again, purchase price, $345,500, because of 20% down payment, our loan amount was $267,400. Now, for financing, when we purchased this home back in October 2018, we had a 30-year conventional fixed loan at 4.625%. Now for those of you that know the current market of interest rates, that number should raise some eyebrows. Pretty much this was the peak of the market in terms of interest rates when had purchased back in October 2018. So bummer but it was what it was when we moved to Columbus at the time. Now, to distill all of this down to a monthly payment that is due on our existing mortgage, again, 30-year fixed, this was $1,421.08. And this is principle and interest only. So for those of you that currently own a home, you know that when you’re making your monthly payment to whoever your lender is, typically you’re paying principle, interest, as well as taxes and insurance. And then if you have a homeowners’ association fees or other things that are in there as well. So again, this $1,421.08, to be specific, this does not include property taxes and insurance. And for those that are curious, those additional monies for property taxes and insurance that were going to escrow for us totaled about $689 per month, which brought our total monthly payment due to just over $2,100 per month. So for this example of running the number to compare the existing mortgage with the new mortgage via the refinance, I will only use principle and interest — again, $1,421 per month — to be consistent, knowing that that is the fixed amount for the life of the loan with the 30-year fixed loan that is the product that I’m referring to. And that insurance and taxes can and will change over time. So even in the two years that we’ve lived here in Columbus, our property taxes have gone up, and usually that’s the trajectory. But when it comes to insurance, it may be that your insurance goes up or perhaps you requote that over time and you’re able to keep that cost down or even see that decrease over time.

So that was our existing situation. We were about almost this coming fall, we’d be two years into the home, monthly payment of $1,421 of principle and interest. So starting in early spring 2020 when interest rates were falling, we started shopping around to refinance. And at that time, our remaining balance due on the mortgage was $269,500. So $269,500. So again, our original loan amount back in October 2018 was $276,400. Through payments down on principle, when we looked at refinancing, our remaining balance due is $269,500. And after shopping around at a local credit union that I had worked with previously and getting several quotes online through various lenders, we ended up working with IBERIABANK/First Horizon. And a shoutout to Tony Umholtz and his team at IBERIABANK/First Horizon, including Cindy and Karen. Tony was on Episodes 136 and 154 of the Your Financial Pharmacist podcast where we talked about the pharmacist home loan product and considerations for home buying during a pandemic. So if you want to learn more about those topics, learn more about Tony, learn more about IBERIABANK/First Horizon, I would encourage you to check out Episodes 136 and 154.

So we moved forward with our application to refinance with IBERIABANK/First Horizon for the remaining loan balance due, again $269,500, for a 30-year fixed term at 3% interest. So if you remember, I said 4.625% was our original interest rate. And here, we were looking to refinance to 30-year fixed term at 3% interest. So our new monthly payment would be $1,136.22, to be specific, which is $284.86 less per month than the previous payment that was due. So our previous payment, again, $1,421. Our new payment would be $1,136. So about $285 less per month with the refinance. Now, that really shows the power of interest. And here again, we’re looking at an interest rate reduction of 1.625%, which is why that number per month in terms of savings is so significant. So again, 4.625% down to a refinance at 3%. Now, I’m not guaranteeing talking about rates, obviously that depends on current markets, individual factors related to the lendee, so I’m just highlighting here what was our case and our example.

Now, when comparing this from a mathematical standpoint, we can’t just stop there. So we look at that number, we’re like, great. $285 less per month. Who wouldn’t want to have $285 per month back in our pocket? But we need to consider that we were restarting the clock on a new 30-year mortgage, again, the definition of refinance, and I was incurring costs associated with the new loan. Right? Closing costs, including lender costs, title fees and insurance, and so on. And again, I’m not going to be representing or including property taxes or insurance, even if those are costs incurred at closing. And that really depends on the timing of payments that you’re making for escrow and whether or not you are even in escrow as those will even themselves out over time. And I’ll give some more information on that in a moment. So if we factor in No. 1, the costs associated with extending the loan back out to 30 years by looking at the total amount that would be paid over the life of the loan and we factor in the closing costs, we can then determine a break-even point for the refinance. Again, what’s it going to cost to do this? And how much are we going to save per month? And how long will it take to recoup those savings?

So let’s look first at the cost associated with extending my loan back out to 30 years by comparing the total amount that would be paid over the life of the loan if we stayed as is with our existing mortgage or if we were to refinance the loan. So for our existing mortgage, again, we would have paid it off, assuming no extra payments that would be made to reduce principle, we would have paid it off on October 1, 2048. It’s just even crazy to say that out loud. This means that we had 339 repayment — remaining payments, which would have resulted in about $482,000 that would have been paid out of pocket over the life of the loan with our existing mortgage. And the way I calculated that was taking the remaining payments due, 339, and multiplying it by our monthly payment of approximately $1,421. Now, with the new mortgage via the refinance, we would have a monthly payment of $1,136 and some change. But instead of 339 remaining payments, we would have 360 payments because again, we’re restarting this 30-year clock. So in this example, if we take $1,136, we multiply it by 360 months, we see that over the life of the loan, we’d pay $409,000 and some change. So this is where the math gets really interesting. And for those that like to geek out on this stuff, it gets exciting. Not only with the refinance are we saving $285 per month approximately, but we’re going to be saving about $73,000 in monies that are paid out even though the refinance would put us back on a 30-year clock. So by looking at the total cost over the life of the loan, we saw that was going to be the difference between $482,000 of the existing mortgage or about $409,000 if we refinance. So again, not only the reduced monthly payment but also over the life of the loan, we’re going to be saving a significant amount in terms of those monies that are paid over the life of the loan. Again, this really highlights the power of interest is real. But as I alluded to earlier, we can’t stop there as we have to think about and consider the closing costs.

So our closing costs, which as I look at our example included lender fees, the appraisal, title costs and the recording fees, were in total $3,204.75. And I would really encourage you as you look at the mounds of paperwork that are associated with a home purchase or a refinance to really look closely, especially at your closing disclosure document. This is where you’re really going to be able to see all of these fees itemized and if you begin to compare one lender to another or negotiate some of these fees, this is the document that’s really going to help you understand what these fees are. So again, for us, our closing costs included lender fees, appraisal, title costs, and a recording fee that in total came to $3,204.75. So again, even though there often is cash due at closing unless you roll it into the loan, which I would caution you to really evaluate — and I’ll talk about that in a moment — so even though there is often cash due at closing for property taxes and insurance, depending on the timing of when those payments are due and how escrow is handled, I’m excluding those here as those will essentially true up over time. And what I mean by that is that if you have money sitting in escrow today, accruing for your next property tax bill, for example, you will also be putting money into escrow at closing, again depending on the timing of the year and what’s required by your local area. So you will eventually receive those monies back if there’s a discrepancy in terms of the timing of when payments are made, which typically there is. So these will essentially balance out or true up over time, even if you’re fronting some more cash in the moment at closing. So yes, you have to bring money typically at closing to pay for those dollars going into escrow as they are collecting those monies in advance for future payments that are due, again, assuming you are using escrow. About 20% of people don’t. But again, these will even out over time. So we’re only looking at the other closing costs that are included in this example. OK, enough about escrow. Escrow is annoying, one of the reasons that we really want to get out of escrow when we refinanced.

So we are now at a point where we can determine break-even. So we know that closing costs were $3,204.75 and monthly savings due to the reduced principle and interest is about $285 per month, so essentially the question here is how many months of saving $285 would it take to recoup the investment we’re making of closing costs that were going to be incurred of about $3,205. So if we take closing cost number, $3,205 divided by $285, that shows us that it will take 11 months for us to break even. Now, this one’s a no-brainer because of the significant rate reduction and perhaps that is the case for many of you as well. But as you will see, when you have less difference in the rate, let’s say it’s closer to 1%. You’re going from a 4.2% to 3.2%, the time to break even extends as that rate difference collapses. And you must consider, as I mentioned before, a very important variable, which is how long do you anticipate being in the home? Because how long you anticipate being in the home is ultimately going to impact whether or not you see yourself in the home for that time period that it will take to be able to recoup those costs for closing.

Now, as I look at this math, one of the things this does not include that I think is worth considering is what do you decide to do with that $285 per month saved? So in this example, if I were to save $285 per month, that’s great. But what if I were to take that money and then have that money working for us, whether that be investing that money in a 401k or Roth IRA, some type of brokerage account, depending on what goals and what you’re trying to, or what if you were to take those monies and invest it in real estate or other business activities and that money may be able to grow for you? So just as one example, if you were to take that $285, invest that in an index fund over 30 years that was earning on average 7% growth, you’re looking at another roughly $330,000 of savings that would accrue over this 30-year period. So it’s important to ask yourself, as we’ll talk about here in a moment, what’s the goal with these savings if you’re going to incur savings? And are you strategically using those savings and earmarking those savings for another part of your financial plan and other goals that you have?

Now, here’s the good news. All of those calculations that I just did and walked through one-by-one to show you how we got to that decision point, we have a calculator available on the website, shoutout to Tim Church that helped us put this together. If you go to YourFinancialPharmacist.com/mortgage-refinance, you can put in the numbers. What do you currently owe? What’s your interest rate? What would be your new loan amount? What would be your new interest rate? What’s the term? And it will spit out essentially that break-even time period for you. But again, I can’t overemphasize that it’s not just the numbers. You must consider the rest of your financial plan, other goals you have, what the primary purpose is for the refinance, and even other factors, which takes us to the second part of today’s episode where I’ll briefly talk through some lessons learned throughout the refinance process.

So let’s talk through five lessons that were learned or reinforced throughout this process. No. 1, taking time to weigh the pros and cons of refinancing at a 15-year or a 30-year fixed mortgage. And while there are certainly other options, whether it be a 20-year fixed term, a 10-year fixed term, an adjustable rate mortgage, these two options, a 15-year fixed and the 30-year fixed, are the most popular products and for the majority listening will be the path forward. So I would encourage you, when you’re looking at a 15-year versus the 30-year — and this was a great exercise for my wife and I to walk through — is to do the math, but don’t stop at the math. Do the math plus, you know, think of variables such as visualizing yourself 15 or 30 years from now. How do you feel about having a mortgage payment? There’s no right answer to this. How do you feel about having a mortgage payment? And what else might be going on in your life that would help answer that question for you? So you know, for some people that I talk to, it might be that they’ll have kids that will be going onto college or some other variable that they may feel one way or another about having a mortgage payment for that period of time. But don’t underestimate that factor in visualizing yourself in that future state. Another factor to think about: How long do you plan on staying in the home? We’ve talked about this already, and you can’t always predict this but going to be a very important variable to understand. Obviously the longer than you’re in your home, depending on the rate differences that you’re seeing throughout the refinance, the more likely you are to be able to reap those benefits.

Other questions you want to be thinking about here in addition to the numbers: What are the savings over the life of the loan between the two options? And does that, how does that weigh against the increased monthly payment? So you know, what I mean by that is if somebody’s looking to go from a 30-year to a 20-year or a 15-year because they want to more aggressively pay off their home, they’re going to see as they run the math significant savings, likely over the life of the loan. Right? Because of the reduced monies that are being put toward interest. But typically if you’re going from a 30 to a 20 or a 15 and you’re staying in your current home, that’s going to mean a bigger monthly payment. So how do those savings over the life of the loan weigh against that increased monthly payment? And how much room can your budget handle in terms of a larger payment if you’re reducing the term of your loan? And what could change that you may or may not foresee? For example, do you have buffers in place that if for whatever reason that larger monthly payment were to become a concern? So do you have more than one income in the household. Do you have diversification of income? Do you have a good emergency fund? And what other goals are on your plate, whether that be student loan repayment, on track with investing, kids’ college savings, other goals that you’re trying to achieve. And do you need that extra margin or not? Perhaps can you focus at a greater extent on your mortgage repayment? The other thing, as I’ve alluded to once already, is what is the opportunity cost of having your money tied up in low interest debt? And again, there is no one right answer to this, as there typically is not when it comes to the various parts of your financial plan. So as Jess and I really weighed this, as we were looking at 30-year at a 3% versus a 15-year at 2.75%, if we looked at the savings over the life of the loan, and let’s just say for simplicity that is, I don’t know, $40,000 or $50,000 difference, how do we evaluate that against the opportunity cost of that additional $285 per month or whatever it would be as you do these calculations being tied up in an extra additional higher monthly payment that perhaps could be used elsewhere, if that’s a goal you have for investing in real estate or other things that you’re trying to do. And I think it’s important to talk through the pros and cons of that opportunity cost.

OK, so that’s No. 1, taking the time to weigh the pros and cons of refinance at a 15-year, 30-year or some other term. No. 2 is avoiding the silo effect. Now, what I mean by the silo effect is that looking at only one part of your financial plan at a time while you’re not considering the impact it will have on the other parts of your financial plan. This is really easy, whether it’s student loans, investing, or here we’re talking about refinancing, for example, you might see an advertisement or read a story about how interest rates have dropped and it’s a great time to refinance. You might even run the rates to see what it would mean for your monthly payment. But you’re only focused on that one part of your financial plan. So take a step back, look at the rest of the picture, look at all of your goals, look at what this means from a monthly cash flow standpoint, and then make that decision in the context of the rest of your financial plan. And that is really the value, one of the main values, in my opinion, of comprehensive financial planning and having a coach that can help you work through that process. And so shoutout to our YFP Planning team, our comprehensive certified financial planners, which for those that are interested can learn more at YFPPlanning.com. I would also encourage you as we’re talking here about avoiding to silo effect to really ask yourself what is the motivation to refinance? Is it to free up extra cash per month? So again, the example as we look at our example, stay at the current term but reduce your monthly payment. If so, do you have a plan again for how those monies saved will be allocated towards another goal and that will help prevent any lifestyle creep that may happen from those savings? Or is your goal to pay down the home faster and save some interest that would be paid out over the life of the loan?

No. 3 is, you know, one of the things that I saw that I heard often is the differences you can see in the appraisal process. And this was really, you know, eye-opening for me. And I think this is important. And why an appraisal matters is when you go to sell your home, obviously appraisals have an impact on the lending side. If you are trying to determine how much equity you have in your home for things like PMI and other aspects, understanding the value of your home relative to what you earn is very important. Or for those that may eventually pursue something like a HELOC to be able to have a HELOC for a variety of different reasons, whether that be real estate investing, whether that be having a backup emergency fund, your appraisal is really going to matter. And what we saw in the variance of an appraisal, what our home was worth based on comps, was when we had within the same year a HELOC appraisal done, that came in at our home at about $338,000. And again, we purchased at $345,500. And then when we went through the refinance, that came in around $371,000. So a really significant over $30,000 difference. And again, I think that shows you some of the subjectivity and variables that can go into a difference of appraisal. So I say that just to be ready for, you know, I think it’s easy to look at RedFin or look at Realtor.com or Zillow or some tool or have an idea of what you think it should be worth. But at the end of the day, the bank’s going to be using that appraisal number, that’s going to have a big impact on when it comes to either purchasing or refinancing a home or perhaps even taking out a line of credit.

No. 4 is when it relates to the cash that you need at closing, do not forget about property taxes and escrow. Now, I told you that I excluded those from the example. But I want you to be aware that often, you’re going to have to either front those costs at closing, again, depending on the timing of when all those are due, depending on if escrow is or is not involved, but that you may have a reimbursement, a payment that comes back if you have existing monies that are leftover in escrow from before the refinancing. So you want to consider your closing costs here. We talked about those, the lender fees, the title costs, if you end up buying any point, which essentially is a process where you can pay to reduce the interest rate. All of that is going to result in what you would owe in terms of costs that you’re going to have to bring in terms of cash at the table or that that can get rolled into the loan. But again, think about that in terms of the impact of what that means for interest that you’ll pay on that as you go to pay that money back. So I think this is a good reminder as you look at your closing costs that much of this can be negotiable, whether it’s lender fees, whether it is title expenses. We’ve talked about this on previous episodes of the podcast where we’ve talked about home buying. But really looking at closely understanding these fees and the disclosure documents are really important and making sure as an educated consumer, you have your best interests in mind.

And Lesson No. 5, which goes without saying but has always, always been a good reminder of how important this is, is read your documents closely and ask lots of questions. Read your payoff statements, read all about understanding your closing costs, understand your options with escrow, read all of it. It’s boring, it’s going to put you to sleep, but it’s incredibly important. The more you read, the more informed you will be, the more questions you’ll ask, and perhaps errors that you’ll catch along the way. And if nothing else, just have a good, better understanding of the process. And really be careful about teaser rates that are introductory types of rates or closing costs that get rolled into your loan because often, you may see advertisements for no closing costs, but at the end of the day, that may not be completely true as those costs might be rolled into the loan, which you’ll end up paying plus interest over the life of the loan. And here I would also encourage in this fifth lesson learned is to not undervalue the human element. So similar to car insurance, you know, it’s been my experience that yes, rates and fees matter. But so does being able to quickly communicate with an individual and to work with folks that can quickly get your question and can ultimately be there in your corner to make sure that you feel comfortable with the process. And I think the other valuable piece of working with an individual is that I saw rates vary by the day, even within the day. And having a good relationship with a lender is that somebody that can be there, ready to act for you and tell you when that best time to act may be based on what they’re seeing with rates.

So in the show notes, which again are available at YourFinancialPharmacist.com/podcast, find Episode 159, you can find the show notes, including the resources that I mentioned, previous episodes, and calculators that we have available on the website. And don’t forget to join our Facebook group, over 6,000 members strong, pharmacy professionals all across the country committed to helping one another on their path towards financial freedom. And last but not least, if you liked what you heard on this week’s episode of the podcast, please leave us a rating and review in Apple podcasts or wherever you listen to your podcasts each and every week. Thank you for joining us and have a great rest of your day.

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Month: July 2020

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