How to Avoid These 6 Common Financial Mistakes
On this episode, sponsored by Insuring Income, YFP Co-founder and Director of Financial Planning, Tim Baker, discusses common financial errors ranging from those made with investing, insurance, credit, and more. Whether you are just getting started with your financial plan or looking for a tune-up, this episode will help you avoid the most common financial blunders so you can maximize your financial plan and achieve your financial goals.
Summary
Tim Baker and Tim Ulbrich discuss six common financial mistakes and how to avoid them. While financial mistakes may seem inevitable, Tim and Tim speak from their own experiences with financial errors and share ways to prevent these mistakes from impacting your financial plan and financial goals.
Common financial errors discussed in this episode include:
1. Not taking advantage of employer match
When you don’t take advantage of your employer’s match, you essentially turn down free money. Many people don’t take full advantage of employer matches because they are not auto-enrolled to do so. Getting the maximum amount out of your employer match increases your compound interest over time.
2. No budget or no financial plan
Without a budget or financial plan, it is increasingly difficult to reach your financial goals. The budget is not a one-size-fits-all and should custom fit your personal experience and what works for you.
3. No insurance or inadequate insurance
As a pharmacist with a spouse, house, and mouths to feed, you should be aware of your insurance needs and insured for an event that will require insurance ranging from life, disability, or professional liability insurance.
4. Failure to monitor your credit reports
Tim Baker recommends checking your credit reports twice a year – he pulls his reports with the changing of the clocks for daylight savings. With the increase in the digital nature of personal information, it is critical to monitor your credit for errors and identity theft.
5. Not investing or not having the right attitude when it comes to investing
Being risk-averse may impact your long-term financial plan. Building and maintaining an appropriate asset allocation that matches your goals, risk tolerance, and time horizon while avoiding impulse purchases or hunches is a more intelligent way to positive investment returns.
6. Not utilizing professional advice
Financial professionals know what they are doing, and hiring someone allows you to have more free time to do the things you want to do.
Mentioned on the Show
- Insuring Income: Get Quotes and Apply for Term Life and Disability Insurance
- YFP Planning: Financial Planning for Pharmacists
- Mint
- YNAB
- YFP Budget Template
- Equifax
- Experian
- TransUnion
- Fair and Accurate Credit Transactions Act of 2003 (Fact Act)
- AnnualCreditReport.com
- YFP 162: Credit 101
- Schedule a Free Discovery Call with YFP Planning
Episode Transcript
Tim Ulbrich: Tim, welcome back to the show.
Tim Baker: Hey, Tim, thanks. Thanks for having me back. It’s been awhile.
Tim Ulbrich: What’s new and exciting from YFP Planning’s perspective?
Tim Baker: It feels like a lot, Tim. I feel like this year is full of change and we’re excited. A lot of things going on in the background. We’ve had our lead planners out in Columbus to do some planning. It was good to kind of meet up and now that people are getting vaccinated, to be able to meet up and do some planning and talk about our goals. And that was exciting to kind of show the new office, which people may or may not know that YFP has bought headquarters in Columbus. And we’re in the process of kind of renovating a little bit and getting that ready for us to move here in — move in here shortly. And that’s been exciting and having to deal with contractors, maybe not as exciting. I think the team has continued to expand. We finish up tax season here, which is always hair on fire, and we had a lot of good help to go through that. But we actually welcomed back a former team member, now current member again, Christina Slavonik, who worked with me a year or so ago and decided to kind of come back into the fold. And we’re super excited to have her as part of the team. And yeah, so lots of changes, but all good things I think.
Tim Ulbrich: Yeah, certainly excited to have Christina back, what that means for our team. Pumped up about the new office and it’s an open invitation to any of the community that’s in Columbus or finds their way traveling through Columbus, we’d love to host you and have a chance to meet up with you. Please reach out to us. And a shoutout, as you mentioned, Tim, to our tax team. I mean, over 250 returns that we filed this year, lots of wrenches that were thrown their way with extensions and delays in state extensions and legislative pieces that were being passed in the middle of tax season. And I thought they handled it well, and we’re ultimately able to serve the community, and we very much believe tax is an important part of the financial plan. So excited to see that continuing to grow. So today, we’re talking all about common financial errors. And you and I know that financial errors seem inevitable. We’re all human; we all make mistakes. And one of our goals with YFP is to help you, the YFP community, and certainly our clients as well, to avoid as many financial mistakes as possible. And certainly we have lots of resources that are here to help in this, whether it be this podcast, blog posts, checklists, calculators, and certainly our one-on-one comprehensive financial planning services as well. And just to be clear, this is not about shaming by any means. This is about learning and hopefully avoiding a repeat of making the same mistakes. So if you’ve already made some of these mistakes, certainly Tim and I have. We often talk about these between the two of us. We’ll that here again today. So if you’ve made some of these mistakes, certainly this is not about beating yourself up. Take what you’ve learned and certainly apply that information, and hopefully that can help with avoiding future mishaps or help you to spread the word and encourage and teach others along the way as well. So Tim, let’s get to it. We’re going to warm up with what many consider low-hanging fruit. No. 1 financial error/mistake I’m going to list here is not taking advantage of the employer match. So talk to us about the employer match and why not taking advantage of it is a significant financial error.
Tim Baker: Yeah, so I think this is where often we say, it’s free money. So not often do you ever come across a situation where there’s money to be had, you know, without anything in return. So I think in a lot of cases — and I know there’s some gurus out there that say like if you’re in debt, you shouldn’t even do this, and I would probably disagree with that. I think there are some exceptions if you have lots of high interest like credit card debt, consumer debt, then this might be a situation where you don’t want to get the match. But I would say for the most part, if your employer has a 401k or a 403b match or whatever that is, you want to make sure that you are taking full advantage of that. Most employers are going to have matches that are going to incentivize you to put anywhere between 2-6% to get the full match. There are some that are designed to push you a little bit further. But for the most part, if you’re in that sweet spot of putting in 2-6% of your income into a 401k to get a full match, I would say to do that. The reason that you want to do this is because if you can get that dollar, those dollars deferred and into that retirement account, this all goes back to the concept of time in the market versus time in the market. And really taking advantage of more compounding periods to take advantage of the compound interest. So if you’re out there and you have — you’re looking at your student debt or if you have sizable consumer debt and you’re like, man, I just feel like I put money in and it stays the same, that’s compounding interest kind of taking advantage of you. And what we want to do is flip the script a bit and get that to where your money is making money. So Albert Einstein has said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” So the idea here is that you can get your money to work in the investment world and keep it working and allow those dollars to make baby dollars and they make baby dollars. That’s the idea here. So it’s really about time in the market. We see this as less and less of an issue now that I think it was the Obama administration, you know, has really pushed 401k plans to have an auto-enroll feature. So based on studies on this, if we are the variable that gets in the way, meaning people, that we typically are going to go with whatever is the default. So if the default is not to enroll and you have to actually take steps to do that yourself, we’re not going to do that. If the default is that we’re already auto-enrolled, then that’s what we’re going to do. So a lot of these plans — and Tim, our plan has this — is that after a certain period of time, we auto-enroll participants and we say, “OK, we’re going to auto-enroll them at x%.” For ours right now and for — speaking of the YFP 401k — we auto-enroll at 3%. The maximum match is if they put 4% in. So they would just have to go in and make that determination that they would like to do that. So auto-enroll features on 401k’s have made this a little bit less of a common mistake, but they’re still there, nonetheless, and we still come across more than you would think of those that are not putting in at least to get to the company match. And just to kind of put a bow on this, think of this in this light: You know, if you’re a pharmacist and we use round numbers here — if you’re a pharmacist and you’re making $100,000 and your company offers you a 3% match, think of that — and you’re not taking advantage of that right now, think of this as like a 3% raise where you are making $103,000 because $3,000 of that is going into your company 401k. And it’s surprising, you know, I think if you — dependent on the 401k — and I know we’re going to talk about the fees in an upcoming episode — but dependent on the 401k, it’s surprising how quickly those types of accounts can grow if you are deferring dollars out of your paycheck so you’re hopefully not missing it too much, it invested in the right way, and it’s not being eaten away by fees. It’s surprising how quickly those accounts can grow. This is a big, big miss if you’re not necessarily taking advantage of a match.
Tim Ulbrich: Great stuff, Tim. And I think just to further highlight time value of money, and I think for those that are listening that are especially getting started on the employer contribution side and perhaps aren’t leaning into that match yet, there is some trust in the momentum in compound interest, right? You can run the calculations, see the numbers, but it does feel like early on that you’re putting money in and you’re not seeing that growth until obviously those funds get to a certain balance and then you start to see the momentum of the growth on the growth. But to take your example, Tim, of somebody making $100,000, 3% employer match, $3,000, I would encourage folks to also think about it’s not just that $3,000. It’s what would that $3,000 be worth in 25 or 30 years? Right? So you know, that $3,000, if that were to grow at let’s say 7% average annual rate of return over 25 years, that $3,000 in 25 years is worth more than $16,000. So time value of money is not just what does it mean in today’s dollars, but what would it also mean in the opportunity cost of not investing those dollars? So that’s No. 1, not taking advantage of the employer match. No. 2 is no budget, no financial plan. Harsh words, Tim Baker. What do you mean by that? And you know, budgeting, spending plan, whatever we want to call it, why is it so critical to the financial plan?
Tim Baker: And some people would disagree with this. But I guess some people, especially if they might lend credence to like, you know, if you’re starting out, if you’re a new practitioner, definitely budget. If you get to a certain inflection point, you don’t need to budget. I would disagree in a sense. If you think about this in terms of like if you think about your household and the salaries you make as like revenue, if you’re a household and you’re making $200,000-250,000 as a household and you equate that to like a business and a business making that revenue, businesses are going to have budgets, they’re going to have projections, they’re going to bucket money for certain — just like we do, Tim, at YFP. You know, we have ‘this is the amount of money we want to spend on marketing, and this is the amount of money that we want to spend here and there.’ Like that’s a budget. And I would say that if you treat your household as a company, like you’re going to earmark those for different purposes. So I think this is a way of how you go about and do that. So I think where budgeting kind of gets a bad rep is the $0-based budget where every dollar has a job and you basically assign a purpose for every dollar that kind of flows through the household. And for some people, that can be super arduous, that can be super over-the-top. But I don’t necessarily think it’s an exercise that doesn’t have merit or value. But I think typically as you go, you find the flavor of ice cream that works for you. So there’s lots of different types of budgets out there. You know, you have the $0-based. I’ve seen a line item budget, I’ve seen a pay yourself first budget. There’s a lot of different ways to go about it. I think at the end of the day, a budget goes back to what is the intention of the resources that you have.
Tim Ulbrich: Absolutely.
Tim Baker: And applying that to — and by intention, we typically mean like goals. So what are the goals that you have? What are you intentionally trying to achieve with the six figures of income that you’re earning? And how do we go about that? So the budget is typically the structure or the steps to go from ‘Hey, I want to travel,’ or ‘I want to be able to give back,’ or ‘I want to be able to take care of an aging parent.’ The budget is typically the mechanism that allows that to kind of come to be. So I would say that this is typically lockstep with the savings plan. Most financial planners, in my opinion, they’ll say, “OK, your savings plan is your emergency fund, and that’s it. So you need to have $20,000 in your emergency fund as an example or $30,000 in an emergency fund,” and then it stops there. I think it needs to go further. So I think your budget and how you’re spending needs to kind of be in sync with how you’re deliberately saving for different things that are basically on the docket for goals. So — and I wouldn’t even call this a step, Tim. It’s a process. I’m a big Sixers fan, trust the process. Hopefully JoJo is going to come back —
Tim Ulbrich: I was going to say…
Tim Baker: No, but it’s a process. And I think what people do and where they get hung up on budgeting is that it’s more about striving for improvement and not perfection.
Tim Ulbrich: Yeah, that’s right.
Tim Baker: We want everything to be balanced, we want everything to kind of line up. And in most cases, that’s not going to happen. So depending on the budget and what flavor that suits you best is going to really allow you to kind of figure out how it works. So to me, this is really about being more intentional with spending, being more intentional with kind of top-line revenue. So this is not just an effort in kind of an exercise in scarcity of like, hey, this is what the pie is. I want to challenge you to grow the pie. So to me, it’s looking at both sides of that equation and really striving for improvement of what you’re trying to accomplish and not perfection. So I think that if you can kind of wrap your arms around that and not be wed to one way of doing things, then I think you’re going to see improvement. So and there’s lots of different tools out there, technologies, Mint, YNAB, some people use good old-fashioned spreadsheets, some people use envelopes, like physical envelopes to do this. At the end of the day, you know, I think the question you should be asking is, am I intentional with how I’m spending? Am I intentional with how I’m bringing money into the household? And does this align with the goals that I have set out for myself. And if it doesn’t, then I think that’s where you kind of need a little bit of a gut check to make sure that you’re on track.
Tim Ulbrich: Yeah, intentionality really stands out there to me, Tim, whether someone’s listening and they’ve got a net worth of -$400,000 or a net worth of $4 million. The process may look different, the intensity of the month-to-month might look very different, but at the end of the day, like budgeting, whatever you want to call it, to your point about looking at it from the point of a business, it’s about what are the goals, what are we trying to achieve, and then what’s the plan to make sure that that’s a reality. And the buckets might look bigger or smaller, the process might look more or less intense. But it’s about being intentional with the goals and the plan. For those that are looking for a starting point, a template, a process, you can go to YourFinancialPharmacist.com/budget. We do have a spreadsheet that you can get started with, certainly not necessarily the ending point. You can implement technology tools and evolve it from there, but that can be a good starting point. So that’s No. 2, no budget, no financial plan. No. 3 is no or inadequate insurance. I’ve mentioned before, Tim, on this podcast that insurance I think is an often overlooked part of the financial plan for obvious reasons. Thinking about something like a death or a disability or a professional liability claim isn’t necessarily the most exciting thing to think about when it comes to financial planning, especially when we can think about things like investing or saving for the future or getting rid of that student loan debt. So tell us here about what you see as some of the common pitfalls around inadequate insurance coverage.
Tim Baker: I think what a lot of people default to, a lot of pharmacists default to, is that what their employer provides as part of their compensation package is the plan for their insurance. And it’s not. It’s typically — we view it as a benefit that should be taken into consideration as we’re building out an insurance plan for your financial plan. And we’re really talking about the protection here, so like what we talk about with our YFP planning clients is how are we helping them growing and protecting — so protecting being the operative word in this step — their income and growing and protecting their net worth while keeping their goals in mind? So protection here is what we’re talking about. And typically, you know, what we focus on is things like life, disability, and professional liability. So your employer might provide you different coverages based on the employer. And that’s going to mean different things to different people, depending on their life situation. But oftentimes with pharmacists, you need to take more action in this or you run the risk of exposing yourself to a loss that could potentially be catastrophic. So you know, health insurance — so I would say that the one thing that is a plan and not necessarily a perk is health insurance. So health insurance, you’re typically best to go with the group policy, although that could change in the future. That could change where the way that employer compensation packages are designed in our country is that if the government isn’t providing that, it’s health insurance the employer does. That could change in the future, and we’ve seen that with things like pensions and 401k’s where pensions have gone away and they’ve been more robust, and a lot of it put the onus back on the employee for saving for retirement. So that could change in the future. But if we break down the insurance piece, a big miss is if we say not having adequate insurance is knowing what to have, knowing what you think that you need from particularly a life and disability insurance policy. You know, I typically say with regard to life insurance — and another piece of the protection of the financial plan is estate insurance — is that typically when you have a spouse, a house, and mouths to feed, those are typically going to be the opportunities to make sure that you are protected from a life insurance perspective and from an estate planning perspective. So more often than not, pharmacists are going to need a lot more of a benefit than what their employer can provide. So that’s typically where you want to go out into the individual policy world and make sure that you are fully protected. That’s one of the problems in the financial services industry too is like we come across a lot of pharmacists, Tim, that they might be 27 or 28 and they’ve been sold a crappy insurance policy, life insurance policy, that they don’t need, right? Because they don’t have a mortgage, they don’t have other dependents relying on them, their loans are going to be forgiven upon death or disability, so it’s just a policy that they probably don’t need right now. So it’s kind of like you have a hammer and you see a nail and it was a good cookie-cutter solution for everyone. One of the mistakes here is not understanding the need. So like we’ll have clients that will come in that will have young kids and things like insurance are not even brought up. And I look at that and I’m like, that’s a big risk. Like the student loans are important, and you’re talking about real estate investing and some other things, but like we probably need to address this first. So — and it’s typical, right? We don’t want to — we typically think that it’s not going to happen to us, a premature death or disability. So it’s very natural. So that’s part of the planner’s job is to kind of bring that to the forefront and make the proper recommendations. The other thing we’ve been talking about is disability insurance. So these are typically more likely to happen and typically more expensive because you typically have medical bills that are going to pile up as a result of a disability. So having the proper insurance there, whether that is through your employer or your own policy or buying a supplemental policy to kind of make you not whole but make you to — indemnify you to a certain threshold that you feel like you can continue the household, that’s a big thing. And a lot of these policies, the way that they’re written don’t provide a lot of protection. So it’s really looking at does it make sense to add a policy for yourself? So the idea here is that the sooner, the better. Whether it’s life, disability, the younger that you can get these policies in place, typically the better from a cost perspective. A lot of the policies that you have through your employer, the group policies, they’re not portable. Or if they are, they’re not great compared to the individual policies. So I think if you can have these separate from the employer, it makes a lot of sense with regard to protecting your financial plan.
Tim Ulbrich: Yeah, and I think you’ve covered a lot here, and there’s just a lot to think through. And we’ve only talked through very briefly three different areas. You mentioned professional liability, life, disability. But questions of like, what do you need? What do you not need? Based on what you do need, how do you shop for those, looking for policies that — and getting advice that really has your best interests in mind to make sure you’re not underinsured or overinsured? What does your employer offer? What do they not offer? What’s the gap? What are the tax implications? So important part of the plan. I think our planning team does an awesome job of weaving this in and for folks to consider, are they underinsured? Do they have adequate insurance or not? And how does that fit in with the rest of their financial goals and plans? So that’s No. 3, no or inadequate insurance. No. 4, Tim, failure to monitor credit reports. Wow. When I think of checking a credit report, I think of boring, No. 1. No. 2 is necessary, right? So you know, why is this such an important step? How often should one be doing it? And why do they need to monitor credit reports over time?
Tim Baker: Yeah, and I would definitely chalk this up to like to stage of life. So you know, if you’re more Gen X or Baby Boomer, this might not be as important because you might not be making the big decisions, although you could be sending kids to college, there might be some loans that you’re taking out. But I would say that if you’re — a lot of the clients that we work with, you know, especially as they’re starting their careers, there’s a lot of decisions that are being made that credit granting is on the table. So that’s like home purchase, car purchase, things like that. Naturally, because of age of credit, your credit is going to become stronger and stronger as you go because that’s the way that the factors that kind of go into your credit score, age of credit is a big one. But I think the big thing that is kind of universal here that is becoming more and more of a thing is just the identity theft stuff. So as our lives become more and more digital and there’s more exposure to theft, it’s kind of this cat-and-mouse game. It’s not really a question of if, it’s really when. Having kind of eyes on this is really important. So I like to typically recommend that we check credit at least twice per year. So I kind of do it when the clocks change, so when we spring forward and fall back. I myself have gone through this exercise. I’ve found large enough mistakes on my credit report that drastically changed my credit score. And this is even — like when I first started advising clients on credit, this was before the days of like banks learning kind of suspicious behavior. A lot of these banks, a lot of these institutions, they’ve come a long way to alert you and kind of give you some structural things to look at, you know, if you have expenses that are out-of-state or whatever. Even in that environment, there were some things that were from my credit report that should not have been there, that drastically changed my score. So typically, you see differences in scores because you have different formulas that every Equifax, Experian, Transunion are using to calculate your score. Different creditors are going to report differently. So if you buy a Toyota, they might be really good about reporting to Equifax but not Transunion for some reason. Or Mastercard is really good, but this other company isn’t. So you’re going to have different inputs. And really, that’s going to be the big factor that will see why your scores are different. But I think the big thing for all those that are out there listening to this is going to just be from an identity theft. And I’ve looked at client credit reports, and I’ve made comments about hey, these are things that we can do to improve this or these are different factors to consider, but I can’t look at a credit report and know that hey, this doesn’t belong there. So it’s really kind of home cooking that is really important here. So the Fact Act that was enacted I think in 2003 allows you to access your credit report for free one time per year from each of the three reporting agencies for free. So you go to annualcreditreport.com. It sounds fake, it sounds kind of hokey, but that’s the way to — the site that you want to go to is annualcreditreport.com, and pull your credit score from each of the reporting agencies. I would just kind of rotate them through and take a glance at it, see if there’s anything fishy or — and then you can always dispute things that are inaccurate, and it’s pretty easy to do that on the website there. So that would be a big thing that I would make sure that you want to build into your practice.
Tim Ulbrich: Yeah, I think to your point, this is a good maintenance part of the financial plan, right? It’s like periodic oil changes, like we’ve got to be doing this. I like your rhythm of when the clocks change, twice per year, again, annualcreditreport.com. We talk about tax being a thread of the financial plan, credit is a financial — is a thread of the financial plan, impacts so many different areas, whether that would be home buying, real estate investing, business purchases, you mentioned identity theft, so something we’ve got to stay on top of. We did an episode, Episode 162, where we talked all about credit, importance of credit, improving your credit, understanding your credit score, credit security practices, so I’d encourage you to check that out. Again, Episode 162. Tim, No. 5 here on our list of common financial errors is not investing or improper attitude towards investing. Now, I think we’ve talked a little bit about not investing when we talked about not taking advantage of the employer match. So obviously time value of money, compound interest, we’ve got to be in the market. Talk to us more about the improper attitude towards investing. What do you mean there?
Tim Baker: Yeah, so I think there’s like two extremes here when I would say that typically doesn’t necessarily align, which I think with what I think is a healthy investment portfolio. So one is not wanting to dip your toes into the market. So I kind of hear like, ‘Oh, I don’t want to take risks. I don’t want to lose any money.’ And I think for us to kind of stay in front of things like the inflation monster, like taxes, you can’t just stuff your mattress full of dollars and hope to one day be able to retire comfortably. You know, so it’s kind of like if you want to make an omelet, you’ve got to crack some eggs. So the idea here is that we need to build out a portfolio that takes risk intelligently but that is over the course of your career in line with what you’re trying to achieve. And most people, you know, if you’re in your 20s, 30s, 40s, and maybe even 50s, they typically are more heavily weighted in bonds than they need to be, in my opinion. So you know, a lot of people when the market crashed at the beginning of the pandemic, they’re like, oh my goodness, Tim, like I want to take my investment ball and go home, meaning like I want to get out of this investment. And the idea is no, like let’s keep going. Either let’s put more money in or let’s hold the course. So you want to do exactly what the opposite of how you feel. So you know, the big drivers in your ability to build wealth over time from an investment perspective is that you have the appropriate asset allocation, so the mix between stocks and bonds, and really driving your fees as low as possible with regard to the investments. In a lot of cases, when we look at our clients, there’s a lot of opportunity for improvement there. And one of the things we talk about in webinars and even in our presentation with clients is that you look at all the variables in investing, and we have conservative — we talk about Conservative Jane. So Conservative Jane makes $120,000, she gets 3% cost of living raises, she works for 30 years, but she doesn’t invest the dollars. She basically keeps them in cash or like a Money Market. At the end of that time period, she has $600,000. But then we look at Aggressive Jane, who does the exact same thing except the only thing that she changes — and I think the big thing is she puts 10% into her 401k — the only thing that Aggressive Jane does differently than Conservative Jane is that she trusts the market in the long run. So the market returns about 10% year over year, and we adjust it down for inflation to about 6.87%. And Aggressive Jane is not saving harder, she’s not working longer, she’s not making more money, she’s just trusting in the market over that amount of time, and the swing is about — I think it’s $1.2 million. So Aggressive Jane at the end of those 30 years will have $1.8 million. So that’s very impactful if you can internalize that and bake that into your investment strategy is really trust the market. Over long periods of time, it’s very predictable. The only other thing I think I’ll say about this is the other side of that is that people have maybe unrealistic expectations of their investments. So they think that if they invest a certain way for four or five years that they’re going to have this portfolio that it can live off the interest. That’s not the case, you know. And I think that there is a lot of speculation and things like that where you’re heavily invested maybe in crypto or these certain stock that can get you into trouble. And I typically say that it’s not that there’s no room for that, it’s that the overwhelming majority of your investments should be super boring and bland and not exciting at all. And typically the more exciting that the investments are, the worse it is for you, the investor. Keep that in mind as well.
Tim Ulbrich: Tim, I would argue — and you probably see this with clients and our planning team does as well — I’m not sure there’s a harder time than right now to trust the market over a long period of time and stay the course. You know, you mentioned that a good long-term investing plan — I’ve heard you say before — should be as boring as watching paint dry, right?
Tim Baker: Mhmm.
Tim Ulbrich: And I have that head knowledge, like I agree with that and I suspect many of our listeners do as well, but pick up any news cycle for 24 hours, right? I mean, whether it’s — and I’m not saying any one of these alone, to your point, is necessarily a bad thing or that folks shouldn’t be doing them — but whether it’s news around crypto or NFTs or ESGs or think of what happened with GameStop and Robinhood and others, like and I think it really challenges like the philosophy and you really have to be disciplined in like tuning out the noise for long-term investing strategies. Now again, I want to highlight, I’m not saying any of those things doesn’t necessarily have value or doesn’t have a place in one’s plan, but if the vast majority of an investing plan should be boring and should be over a long period of time, we’re trusting the market, it’s hard right now. I mean, it’s hard. Are you feeling that pressure not only individually but I sense from clients you’re probably seeing some of that as well.
Tim Baker: I kind of don’t listen to it. I don’t really read much — I mean, I try to read into it just to have an understanding of what’s going on, but I guess for me, I don’t feel the pull like I used to back in the day. One, because it’s a very humbling experience, and sometimes my clients haven’t been humbled. But like I kind of equate this, Tim, to kind of go a little bit off topic here, it’s like have you ever been around someone that’s like, man, the world is going to heck, this generation, whatever. And I think back on like well, what did they say about like the hippie, like free love? I feel like it’s always — like they probably were saying that about the dot-coms when before that, so there’s probably always been things like that that have tempted people to kind of go awry. And maybe cryptocurrency is a thing that does ultimately shatter our traditional way of looking at money and investments and things like that. I don’t know. I mean, I think that it’s really too soon to tell on that. But yeah, I mean, I think so. I mean, I think it is tough. I think if you’ve been humbled enough, it can be a little bit easier to drown it out. But to me, I think of this as like singles and doubles, singles and doubles, to use the baseball analogy is that if you’re going up at every at-bat and you’re trying to hit the cover off the ball, you’re going to strike out a lot. And you might hit a few home runs, but we’re really looking at consistency. And if I know that there is this — the S&P 500 returns this, and it’s never been, we’ve never had a rolling 20-year period that’s been negative, even through the Great Depression, I’m going to bank on that unless told otherwise. So like, that can be hard for people to hear because they think of investments and they think sexy and exciting and things like that, but that’s not what I think a healthy investment plan makes. I think you want to keep the speculation low. And I’m not saying that that’s not — I still from time to time will go to a casino and play Blackjack or play poker. I still gamble just because I don’t do it as much as I did when I was younger, but just because I’m out and I’m with friends or I’m doing whatever. But if that’s the bulk of what your plan is to get to financial freedom, so to speak, I would caution you.
Tim Ulbrich: Yeah.
Tim Baker: And it could work. I mean, it could work. You could put all your proverbial eggs in the Amazon bucket and be completely OK, but you know, the way that people view Amazon — maybe not now but you know, 5-10 years ago, was very similar to how they viewed Sears back in the ‘70s, ‘80s, and ‘90s.
Tim Ulbrich: That’s right.
Tim Baker: And that company was this behemoth and they sold everything and would never go away. And then all of a sudden, it’s not a viable company anymore. So — and I can say this, I used to work for Sears back in the day, so I can say that not everything lasts. But I think that the U.S. stock market has been very predictable over the long run.
Tim Ulbrich: That’s a great example, Tim. We might be dating ourselves a little bit, but you think of — I can remember when it was the lesser known at the time Walmart and Amazon entering into the KMart and Sears world. It’s hard to even think of that in today’s day and age. I think your point about being humbled is a really interesting one. You know, we’re talking about common financial errors. So I’ll throw one out here. 2008, I was humbled by thinking I could pick individual stocks. Thankfully, I didn’t invest a whole lot of money. Circuit City, how did that work out? Right? So you know, I think your point about being humbled and again, there may be a portion of the portfolio where this makes sense for many folks, especially if they want to scratch that itch. The other thing you mentioned here, which I want to highlight we’re going to come back to next week is you mentioned fees. And we’re going to talk next week about how important it is to really understand the fees of your investment portfolio and really understand the impact that those fees can be having on your long-term returns and the importance of holding on to as much of your investment pie as possible. So stay tuned with us next week as we talk about fees. Tim, I want to transition into our sixth and final error, which is not using professional advice, not having a coach in your corner when it comes to the financial plan. And I think this is a good segue to what I just mentioned of this day and age, there’s a lot of noise. And so having somebody who’s keeping you accountable, who’s really reflecting back to you what you said were important and the goals, helping you look across the financial plan and really helping to direct you towards those end goals that you had articulated and to keep you on the path when human behavior may suggest that we want to go off the path from time to time. So obviously we’re biased, full disclaimer, we wholeheartedly believe in the value of a financial planner, otherwise we wouldn’t be doing it. So Tim, tell us why you think this is such an important part of the plan and why it’s perhaps a mistake if folks leave out a coach from their plan.
Tim Baker: Yeah, so I think if we look at it like our mission of empowering pharmacists to achieve financial freedom, I think we both agree that in a one-on-one engagement with a fiduciary, a fee-only planner, is the shortcut to that. And I think we’ve seen that a lot with our clients where we see kind of the before picture and the after picture, and those are typically because of I think that relationship that a planner has with a client and the way that is forcing them to think differently, right? So like I often joke that I’m a financial planner, but I need a financial planner because I need someone to — a third party to objectively look at our financial plan and say like, am I insane? Or are we nuts? Or are we on track? Right? So I like I know the technical piece of it, like I know what it is to be a CFP and what — just like you’re a pharmacist and you need to know the technical piece of it or a doctor, they’re still going to go to like other health providers to kind of provide that insight and those opinions. But so I think the third party is a big thing. I think the other thing that we don’t necessarily trade on that much is, you know, like for a lot of people, when’s the last time you actually sat down and talked about goals with yourself or like with a partner? So like, you know, I kind of equate this to like I’ve been in periods of my life, Tim, where you are so — I don’t want to say like zoned out but like you ever get into your car and you’re going to work, and it’s 6 o’clock in the morning or whenever you go into your work, and you drive that 30-minute commute, and then you get to work and you don’t even remember any of that drive. It’s just —
Tim Ulbrich: That’s right. Yep.
Tim Baker: You’re on like autopilot. I think that the danger of not utilizing a professional in some regard is that you get into that where you like wake up 10 years from now or 20 years from now and you’re like, what the heck did I actually do? Or like is this a wealthy life for me? And you’re not having those critical conversations with yourself or out loud, which I think can be so powerful. So where are we going? Are we sure that’s where we want to go? Is this insane? And having that kind of, again, objective third party to make sure that we’re outlining goals and we’re being held accountable to that. And then I think the other thing that like is really important is that guidance, is that knowledge, is that technical expertise with best interests in mind. So to me, like if you’re talking to a financial planner, the two things that I think need to be there and if they’re not I’m going the other way is are you a CFP? So unlike a PharmD or JD or MD, like this is a designation that there’s an ethics requirement, there’s an experience requirement, there’s an education requirement that most financial advisors don’t need to kind of do what they’re doing. So like the barrier to entry to become a financial planner is very low. So you want to make sure that the CFP designation is there. And I think the other thing is are you a fiduciary? Are you going to act in my best interests? Or can you put your interests, meaning the planner’s interests, ahead of mine? And what most people don’t know is that 95% of advisors out there are not fiduciaries. And typically if you know the names of those types of firms, they’re not fiduciaries, meaning that they can put their own client — put their own interests ahead of their client’s. So you know, I think that the technical expertise and that is, those are just table stakes. Like I think that that’s going to come with the territory. It’s really I think overlying the human element and to me, I think what we try to do from a planning perspective is make sure that we’re taking care of clients today, say in 2021, but we’re also taking care of clients in 10, 20, 30 years from now and their future self and really threading the needle between taking care of what’s going on today and then that future version of yourself. And I feel like if you don’t feel like that push and pull, if you’re always saving or if you’re always spending, that can lead to some problems. And I think that having that objective third party to kind of guide and hold you accountable, give you some tough love, give you some encouragement, give you some idea of where you’re at compared to peers, for example, I think that’s vitally important.
Tim Ulbrich: Yeah, and Tim, what you said about the human element just really resonates with me and I think will with our community as well. I mean, I think we often may have a perception of financial planners or advisors, whether that’s from movies or books we’ve read or parents that have worked with an advisor, whatever it be, but we tend to think I think of more of that tactical type of moves that folks are making, right, whether that’s certain investing decisions and insurance decisions, maybe it’s Roth conversions, things like that, tax decisions, etc. All of those are important and to your point, that’s table stakes in terms of an expertise that they’re going to provide. You want that knowledge, experience, and expertise. But it’s the human element. I think so much of the value you’ve provided to Jess and I has been in the conversations that have been initiated and the constant revisiting of what are our goals? What did we say was important, and are we actually living the wealthy life that we said we wanted to live? And the answer to that is not always yes, but we need that compass that we’re moving towards and we need that reminder, we need some accountability, we need a coach to make sure as life is racing by that we’re ultimately stopping, pausing, and getting back on the direction that we said was so important. So for those that are listening to this, if that is resonating with you, we’d love to have an opportunity to talk with you to see if what we offer from a financial planning standpoint is a good fit for you. You can go to YFPPlanning.com, you can schedule a free discovery call. Again, YFPPlanning.com. Tim or I would love to have a chance to talk with you further. Tim, great stuff. We’ve covered six common financial errors, and as always, we appreciate the community listening in to this podcast. If you liked what you heard on this week’s episode of the podcast, please do us a favor and leave us a rating and review on Apple podcasts or wherever you listen to the show. That will help other pharmacists be able to find this show as well. Thank you so much for joining, and we look forward to this episode next week. Have a great rest of your day.
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