July 2023 – Your Financial Pharmacist

YFP 318: Midyear Tax Planning and Projections

Posted on July 27, 2023July 25, 2023 by Caitlin Boyle

YFP Director of Tax, Sean Richards, CPA, EA digs into what midyear tax projections are, why they matter, and specific examples where a midyear projection can help someone optimize their financial situation. We discuss the importance of adjusting withholdings, ensuring record keeping is up to date, common pitfalls business owners and side hustlers can avoid with a projection and tax considerations with student loan payments coming back online.

Episode Summary

YFP Director of Tax, Sean Richards, CPA, EA is here to explain the incredible benefits of doing a midyear tax projection. Sean defines a midyear projection, illustrates how projections can lead to peace of mind, and clarifies why everyone should be doing their own midyear projections. Our conversation explores why being proactive is always better than being reactive, why proactive planning is necessary when making big life changes like getting married or buying property, or getting a new job, and a host of real-world examples that highlight the undeniable benefits of midyear projections. Plus, Sean describes how midyear projections can help with tax optimization and strategies for student loan repayments, and the wealth of opportunities that become available to business owners who embrace proactive planning.

Key Points From the Episode

A warm welcome back to the show to YFP Director of Tax, Sean Richards.
How he’s spending his free time post-tax season as a father of two under two.
Sean explains what a midyear projection is.
How projections can lead to peace of mind.
Why everyone should be doing a midyear projection for themselves, according to Sean.
Real-world examples of the benefits of doing a mid-year projection.
How being proactive is better than being reactive.
Why proactive planning is a necessity when making big life changes like buying property.
The role of midyear projections in tax optimization.
Exploring the opportunities available for business owners who do midyear projections.
How a midyear projection can help you optimize your student loan repayment strategy.

Episode Highlights

“A lot of people get stressed out about taxes, and I don’t blame them — when you’re in high school, you learn that the mitochondria is the powerhouse of the cell, but they don’t teach you how to file your taxes and do basic finance things.” — Sean Richards [04:52]

“At the very minimum, anybody who’s paying taxes and has a job and has to file a tax return at the end of the year should be doing some level of projecting the end of the year, to make sure that there’s no crazy surprises.” — Sean Richards [09:27]

“To the extent [that] you can mirror your tax strategy with your financial plan; it’s always just the best way to do things.” — Sean Richards [34:25]

Links Mentioned in Today’s Episode

Episode Transcript

EPISODE 318

[INTRODUCTION]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here, and welcome to this week’s episode of the YFP Podcast, where we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, I welcome back to the show, YFP Director of Tax, Sean Richards. We discuss mid-year tax projections, what they are, why they matter, and specific examples for how a mid-year projection can help someone optimize their tax situation. We discuss the importance of adjusting withholdings, ensuring record keeping is up-to-date, common pitfalls that business owners and side hustlers can avoid with a projection, and tax considerations with student loan payments coming back online in a couple of months.

You can learn more about YFP tax services for both individuals and businesses, by visiting yfptax.com. Again, that’s yfptax.com.

[INTERVIEW]

[0:00:50] TU: Sean, welcome back to the show.

[0:00:52] SR: Thank you. It feels like I was just here, but it also feels like it was just tax season yesterday. So I think things are all sort of blending together at this point, which is understandable given the rush of everything, and now that we’re in summer and all these other stuff going on, but I love being here. I appreciate you having me back on.

[0:01:08] TU: So, we’re post-tax season, you’ve got a new baby in the house, we’re gearing up for mid-year projections, which we’re going to talk about in this show. You should have ton of free time right now, right?

[0:01:19] SR: Yes. I really haven’t been doing a whole lot of anything, just kicking back on the couch, and kind of watching a lot of TV and stuff. It’s baseball season, so you get these games that you can just sort of put on the background and sleep all day. That’s basically what I’ve been doing. Yes, nothing really going on at work, at home with the new baby, and the other baby who’s under two. Two under two right now, so yes, a lot of free time. So if you’ve got anything for me to work on, please send it over.

[0:01:45] TU: I’ll keep that in mind. Two under two is intense. Yes, I remember, I shared with you our oldest two are separated by 17 months, and our other two are a little bit further spaced out. Two under two is the real deal, so kudos to you and your wife for making that happen. As you were talking about yesterday, I can remember very well. All of a sudden, baby comes in and your oldest, who still is relatively young looks much older all of a sudden, right?

[0:02:11] SR: Yes, she does look much older. But she also – and I swear it’s not just a comparison of or – I shouldn’t say the comparison, but now, we have a little one at home, so she seems older. But I swear, overnight, she went from being one and a half to being two and getting those terrible twos right in there. Because, man, it’s like you said, it’s intense. But it’s really exciting, it’s awesome. I mean, I couldn’t be happier with everything. But it definitely – it’s exciting challenge what I would say for sure.

[0:02:38] TU: Well, last time we had you on was Episode 309. We talked about the top 10 tax blunders that pharmacists make. That was coming off of the tax season. Here we are, end of July, people may not be thinking about taxes in the middle and dead of the summer, but we’re going to hopefully make a case of why tax is important to consider not just in tax season, not just in December, but really year-round. That’s our philosophy, our belief at YFP Tax, that tax planning, especially for those that have more complicated situations, when done well, is exactly that. We’re doing year-round planning, we’re proactive, we’re not as reactive. We’re going to talk about an important piece of that year-round approach, which is the mid-year projection today.

Before we discuss that midyear projection and some of the details and reasons of doing that, Sean, just define at a high level by what we mean by that term, right? We throw that around internally all the time, mid-year projection. All of our listeners certainly are familiar, hopefully, with filing taxes, but maybe not as familiar have experienced with a mid-year projection, so tell us more.

[0:03:42] SR: Yes. I mean, it really is. I mean, if you look at what it says, it’s a projection, right? You’re projecting out what you expect to have at the end of the year. Really what it is, is kind of like putting together your tax return now based on what you think it’s going to be at the end of the year. Obviously, there’s some variables there and some uncertainty with everything, as it always is with forecasting, and budgeting, and that sort of thing. That being said, given that there are uncertainties, there are things that you want to keep an eye on. So, yes, it’s really just doing a projection of your finances for the year, and really coming down to what we think your tax return is going to look like. Are you going to have a bill? Are you going to have a refund or not? Then, looking at that and working backwards to say, “What can we do to tweak things?”

[0:04:29] TU: If we go a layer deeper on that, Sean, why do one? What’s the case to have one done? What’s ultimately the goal that we’re shooting for here?

[0:04:38] SR: I think the goal, and I mean, you kind of alluded to before saying, people probably aren’t thinking about taxes right now, and that’s totally fair. I don’t expect people to be thinking about taxes right now, unless you’re maybe me or somebody in similar shoes as me. But, I mean, the goal is that a lot of people get stressed out about taxes, and I don’t blame them. It’s one of those things where I joke that when you’re in high school, you learn that the mitochondria is the powerhouse of the cell, but they don’t teach you how to file your taxes, and do basic finance things, right?

What generally happens is, you’re kind of – I don’t want to say sweeping things under the rug, but you’re not thinking about taxes, or it’s not top of mind throughout the course of the year. Then you get to the end of the year, and you’re doing your return. It’s all looked back, all historical. There’s not much you can do at that point, right? So if you’re filing your return next year, for this year, and you have a big refund, it’s nice to have a refund, but you’ve got all this cash all the sudden that you could have been doing stuff with last year or vice versa. You get to the end of next year, or the end of this year, you’re filing next year, and you have a huge bill.

Whether you have the cash ready to pay it or not, it’s nothing that anybody wants to have, right? The idea of doing the projection now is that you’re not getting to a point where you’re stressed out, thinking what could have been, what should have been last year. You’re getting ahead of those things and saying, “Hey, right now, things look great. Don’t have to do anything, or things don’t look as good as they could be. Let’s tweak that.” Or maybe not even any of those. It’s just, “Hey, right now, we have status quo, but there’s some things that are changing in my life. I have a new job, or I’m thinking about opening up a rental property, or something.” And making sure you have those ideas in your head now as opposed to, again, in April and handing it to your accountant saying, “I forgot to mention, I bought that house last year. Oops.”

[0:06:30] TU: Yes. I think with most things, and we’ll talk about some specific examples here. But most things when we shift to more proactive planning versus reactive, and obviously, for those that have more complicated situations, the more the proactive planning is going to help, and we’ll talk about that in more detail as well. But anytime we make that mindset shift, there’s an opportunity for peace of mind as well, right?

I think a lot of people I talked to, Sean, when I say, “Hey, what are the opportunities? Are you thinking about opportunities to really optimize tax as a part of your financial plan?” Everyone’s like, “Yes, I want to do that. I want to make sure that I’m paying my fair share, but no more.” But then actually, executing on that. It’s like this cloud of not exactly sure what to do, how to best navigate it. I think that is the opportunity with the year-round planning. Ideally, we’ll make the case of why it’s important to have a CPA in your corner throughout the year as well. But I think that peace of mind part is just such an important piece, especially for many pharmacists, I know that have this lingering question of like, “Am I doing everything that I can?”

There’s the cleanup part where maybe we’ve made mistakes, or we don’t want to have a big bill or refund, but then there’s the second layer of that, which is that nagging feeling of like, is there something else I could be doing? I think that’s one of the values of projection.

[0:07:49] SR: Yes. I mean, the peace of mind thing, like you said, is that I feel like going back to the whole high school idea of how they don’t teach these things to a lot of folks. I remember getting my first job out of college, and I had an accounting, and finance, and even tax background from college. You start getting these things, “Hey, do you want to do an HSA? Do you want to do 401(k)?” There’s ROTH and traditional, there’s IRAs, and everything, and people are like, “I don’t know what any of this stuff is. I’m just – I’m getting a nice paycheck for the first time now. I know I want to save, but I don’t know what any of this stuff means.” It becomes overwhelming to have all these things happen.

Like you said, you don’t want to come to the end of the year and say, I wish I had done these things. Because I didn’t know that that – there were opportunities for me to save here and there. I just thought that I was doing the right thing by putting my money in this savings account or in this account. So yes, I think, again, the uncertainty, and just sort of lack of general tax knowledge in the country, and world can be stressful, and not having to worry about that is very important for peace of mind in general sanity.

[0:08:55] TU: To be fair, the process is more complicated than it probably needs to be. And because of those complications, there’s some of the ownership and work on us to be planning throughout the year. One of that part piece, of course, would be the mid-year projection. Sean, I have to admit, prior to really building our tax team over the last several years, a mid-year projection was something that was never on my radar. My question for you is, should everyone do a mid-year projection? Is this necessary for everyone?

[0:09:26] SR: I think it is. I think at the very minimum, anybody who’s paying taxes, and has a job, and has to file a tax return at the end of the year should be doing some level of projecting the end of the year to make sure that there’s no crazy surprises. You might be listening to this and saying, “Hey, my situation is really simple. I filled out my W-4 when I started my job. I don’t have any crazy stuff going on. I don’t think I really need to do this.” But again, we keep coming back to this peace of mind thing and that could be great. Maybe your return last year was fine, and there’s not a lot of stuff that’s changing, but there’s always changes to the tax law. I mean, the W-4 system changes all the time, and I know it’s not – people don’t even realize, “Hey, can I claim one or two exemptions?” That’s not how it works anymore.

There’s always changes to the law, and changes to things going on. Even if you think your situation is pretty simple, and doesn’t apply to you, just doing a quick check to make sure, “Hey, there’s not going to be any crazy surprises.” Again, with something like that, you’re not necessarily going to be saying, “Oh, am I taking advantage of all the laws that exist out there, and all the different ways to maximize my tax savings?” But you just want to make sure. “Hey, am I going to owe a ton of money to the IRS at the end of the year? Or am I going to get a ton of money back that the government was borrowing for me for free for the entire year?” What I would say is, if your situation is simple, you can even just go on the W-4 calculator that the IRS provides. It’s not perfect, please. No one from the agency come and chase me down. It’s not a perfect system, and there’s a couple of different things that can happen there.

You might go through the whole process and get a bad answer, and then say, “Well, what am I supposed to do with this? It just says that I’m going to owe a lot of money, but I don’t know how to fix that.” Or you might just use the tool, and like I was alluding to, you might just get frustrated with it and say, “Why all these questions they’re asking me? I don’t understand any of this stuff. Why is it so complicated?” It is a good starting point, I would say, especially for those with simple situations. But I would just advise to be wary when you’re doing it that. It’s not a perfect system, and it definitely can be a little confusing.

[0:11:34] TU: Yes, and I’ll be honest. Admittedly, I’m a little bit impatient, and want these tools to always be better than they are. I’ve been on the IRS W-4 calculator tools, and I’ve gotten annoyed, frustrated playing with that, and I’ve left. I think the decision tree to your point, for people that have a very simple tax situation, can they do it themselves? The technical answer is yes, there’s an IRS calculator. It’s going to give you some basic information. The follow-up question is, do you want to do it yourself? Then the follow-up question to that is, if you have a more complicated situation, and/or you’re looking for more input of advice based on the output of that number, that’s really where some of the assistance and help that can come in from working with professionals.

We’ll link to the show notes to the IRS W-4 calculator. Certainly, people can play around with that, which I’d recommend regardless of working with someone else. Just have a better understanding of the different inputs in these numbers, and hopefully to get the conversation started as well.

[0:12:33] SR: Yes, absolutely.

[0:12:34] TU: Let’s talk about some common examples where a mid-year projection can help. You’re in these conversations every week with our year-round tax planning clients. We talked about several these in Episode 309. Again, we’ll link to that in the show notes. That was a top 10 tax blunders that we see pharmacists making, which we recorded after the tax season. But I think there’s an opportunity here really to bring to life, not just the academic or theoretical side of why a video projection may be necessary, or what it is, but some actual examples where a mid-year projection can help. I’ll turn it over to you to talk through some of the most common places where you see this having value.

[0:13:11] SR: Yes, sure. I would say, the number one thing probably is just adjusting withholdings in a very – to put it in two words, it’s adjusting your withholdings, or adjusting withholdings, get rid of the “your” and “there.” But I swear I’m better at math than I lead on when I do these things. But yes, it’s adjusting withholdings. Like I said, the W-4 system changed a few years ago. Some people don’t even realize that. Some people probably set up their withholdings 20 years ago, and they started a job, and haven’t done anything since then. That might work for some folks, but the way that the W-4 holdings works now with the IRS is, if you get a new job, or your spouse gets a new job, or you have changes in salary, and everything, your withholdings might not be working the way that they did in the past.

You can also have other life events that sort of throw a wrench into that. You can get married, have kids. Even if you are married, you can kind of consider, and we’ll talk more about this when we get into some of the other blunders, but consider whether you’re going to file separately or file jointly. That changes the way you do withholdings and everything. That’s probably the number one area. Like I said, not withholding properly at the end of the year is almost certainly going to cause a problem whether it’s you’re over withholding, and you’re getting that big refund back, or you’re under withholding and you have a big bill.

The biggest and easiest way to kind of course correct. If we do a projection and we see that that’s the case, submit your W-4 to your employer, all of a sudden, you’re withholding appropriately. We can do a catch up to get you to where you need to be, or make an estimated payment or something like that. But I would say that’s the number one thing, and it sort of encapsulates everything else. Not entirely, but just because holding down a W-2 job and getting the taxes taken out of your paycheck is the way that most folks are paying the IRS. I would say, that’s probably the biggest one.

[0:15:04] TU: Let me jump in real quick, Sean, before you move on to other common examples, because that one is so common. I just want to highlight, when you think about the situations where withholding adjustments are necessary, you mentioned individuals getting married, and need dependents, I think about people that are moving different locations. They’re buying homes, new job, changes in income. These are things we see all the time. The key here is, we want to give ourselves as much time as possible to make a pivot, or a change on either side of this. We find out that, “Hey, because of X, Y and Z, we’re anticipating a big refund. All right. Let’s start making some adjustments, so we can put that money to work in other parts of the financial planning.”

We find out that we’re going to have a big liability due. Well, we just bought ourselves some more time to kind of budget, and plan before that payment is going to become due, and to make those adjustments. That’s so important, because this is the phase of life where we least want a surprise, right, especially on the O side of things, right? Getting married, moving, new job, new house, expenses that come with that. We want to avoid as much as possible, the surprises that are going to put a wrench in the other part of the financial plan.

I think withholdings, adjusting withholdings, we all are familiar with. You take a new job, you fill out the paperwork, but I think we can lose track of that throughout the year, or when those job changes aren’t happening. Just wanted to drive that home further.

[0:16:26] SR: The two things I would add to that are also – the big thing is that people are always excited about getting their refunds, right? If you get a big refund back, it’s cool. It’s almost like you found the $20 bill in your pocket, and went to the washing machine that you didn’t know about. But would you rather find out about a refund in April and get the cash back now, or find out now that you’re going to be getting that refund back, and then be able to actually put that in a savings account, or deploy it somewhere where you can get a return on it, as opposed to getting that cash back in a few months with nothing, right? It’s like a net present value sort of thing to borrow finance term. But would you rather get $10,000 in six months or $10,000 now? The answer is now, right?

[0:17:09] TU: Especially with where interest rates are on high-yield savings accounts and other things.

[0:17:12] SR: Exactly. I mean, any way that you can get a little bit of extra cash now as opposed to tomorrow, or anytime in the future, it’s better. Then the other thing that I would say, I keep going back to the whole W-4 withholding thing, is that you might be perfectly fine at your job and nothing has changed. When I say perfectly fine, status quo, right? You’re working the same job, standard raises every year, nothing crazy going on. But with the way the W-4 systems work now, if your spouse goes and gets a new job, and they update their W-4, but you don’t do anything on your end, that can mess things up. People don’t realize that. They’re thinking, “Hey. You go and claim the exemptions that you’ve always claimed in the past.” We have one kid, or two kids, or whatever it is, but that’s not the way it works anymore.

Even if it’s not you that’s had changes to your life, specifically, you have to think about your entire family and everybody who’s landing on that tax return at the end of the day. That’s one thing that definitely slipped some folks minds, I would say.

[0:18:05] TU: Great stuff. So just withholdings, I’m hearing you loud and clear, probably the most common thing that we see. It’s one of those things that big impact, but not a huge amount of work to be done to make this pivot. That’s a low hanging fruit. Talk us through other common examples where a mid-year projection can really help.

[0:18:24] SR: One good one is, this is another kind of, “Hey, this comes up every year with tax and filing is record keeping.” So we get to the end of the year, you purchased a rental property, and you’re excited about it, you’re getting some cash and everything. And now it’s time to file taxes. Instead of just your typical, “Hey, Sean, or Mr. CPA, here’s my W-2, and here’s my 10-99, and I’m good to go.” You have a rental property now. There’s a lot of things that need to go into something like that. You might not be thinking about some of the ins and outs that happen with that. I mean, if you have improvements to your property, those are treated differently than if you have electricity costs that go into your property. There’s a lot of different things that people don’t think about.

It’s not even that people don’t think about it, you don’t want to be scrambling at the end of the year to say, “Ah, I got to go get all those receipts, and get all my finances together and all that stuff, and try to get pulled all together when everybody’s trying to all do the same thing.” The extent you can get ahead of that now is great, obviously from a getting your ducks in a row and helping your CPA out at the end of the year. But also, going back to this whole idea of what am I going to owe at the end of the year? If you’re able to come to me or whoever you’re working with and say, “Hey, here’s the settlement statement for the house that I just bought. Here’s all the details. Here are all the closing costs and everything. Can you build that into my projection?”

The answer is absolutely yes. I’ll run that through and see what your rental is going to look like for the year or anything. It doesn’t have to be a rental property. You can be starting a side business, or doing anything like that. But just having this stuff together gets you ready for the end of the year, but also allows us to be able to, again, do those calculations to say, “Hey, you know, that rental that you built, or that you just bought, and you just did that big addition on? Well, that’s going to save you in depreciation this year, so you’re going to get a refund back. Let’s redeploy that cash.” Maybe you put it back into the rental property, I don’t know. But now we have the opportunity to do something with it.

[0:20:27] TU: I’m so glad you mentioned this one, because we are seeing a larger and larger part of our community that’s jumping into real estate investing. We’re seeing a larger percentage of our community that’s jumping into a side hustle or a business. Just so important, and we’ll talk about other things for business owners here in a moment to consider. But what we’re trying to avoid – not that this ever happened, Sean. But we’re trying to avoid is, hey, we get to tax filing, and you ask for the information come February and March. It’s like, “Oh, yes. By the way, I bought a rental property eight months ago. Can you figure this out right for me tomorrow?” Again, proactive planning.

[0:21:05] SR: Now, that example, “Hey, I bought a rental property last year, I forgot to mention it to you.” People might be rolling their eyes saying, “Okay. Well, if you work with an accountant, who is not going to tell their account about their rental property?” Sure, that’s totally – that might be unrealistic to some folks, I get it. But we’ve seen plenty of circumstances where folks have been, say, living in their house for 20 years. They decide, I’m going to rent out a couple rooms in the house this time for the first time. Hey, that’s awesome. Get some side income, be able to write off some of the expenses. It’s great. You’ve been living in this house for 20 years. We need to start taking depreciation on this house for rental, we need all the costs for the last 20 years that you put into that thing.

I mean, I know now some people might be sweating saying, oh, boy, that’s a lot of look back, right? But it’s something that’s going to need to get done anyway, so we rather get ahead of it now or have me looking for that in April, right?

[0:21:55] TU: Yes, good stuff.

[0:21:56] SR: A little bit of a different example there. But hopefully trying to get some people thinking about things.

[0:22:01] TU: Yes. I think, just a proactive, when people are starting, I’m thinking about a lot of individuals in our community that are new real estate investors, first property. So I’m not sure, number one thing on their mind, especially if they’re not yet working with an accountant would be thinking about a lot of the record keeping and get ahead of the proactive tax planning. Now, if they’ve worked with an accountant, or they are multiple properties in, different situation, the trigger goes off. Similar if you’ve been in business for a while, the light bulbs go off more often, like, “Oh, yes. I got to talk to the accountant about this.”

What about opportunities for tax optimization? One of the things I think about with a mid-year projection is, “Hey, we’ve got an opportunity.” Again, proactive not reactive, to really look ahead and say, “Hey, there are the things that we can be doing to pay our fair share, but no more, and optimize their overall tax situation.” Tell us more here.

[0:22:51] SR: Yes, and this one’s good, because it applies to everybody in a very broad spectrum of things, depending on what you have going on in your financial life. That could be something where it’s as simple as, “Hey, I’m working a W-2 job, my spouse is working a W-2 job, we don’t have any kids, nothing else really going on. What can we do to optimize our taxes given our situation?” That’s a perfect example of where it’s an awesome time for your accountant and your financial planner to sort of work together. Because there’s always the idea of, “Hey, we want to maximize our tax savings, but we have a life. We need to be able to have cash to pay our bills and do other things too.” It’s a very delicate balancing act of, “I want to maximize my tax savings, but at the same time, have enough cash to do all the things that I need to do.” It’s a perfect time to work with both your accountant and financial planner to say, “Hey, should I put more money into my HSA? Should I put money into a 529 plan? What kind of thing should I be doing with my extra cash? That opportunity cost of $1?”

But you can also have more, I say, more fun examples, because it’s the ones where you can really think about different opportunities that are out there, and how to take advantage of these laws. An example of that would be, say you have a side business, and you need to buy a new vehicle. There’s so many different things that you can do with that. I could spend an hour maybe. We’ll have a separate podcast on buying a vehicle in the active locations of doing so. I mean, get side business. Hey, how much are you going to be using this thing for business? Are we able to take a section 179 deduction? Is it a type of vehicle that would qualify for something like that?

We have all these new EV credits with the inflation Reduction Act. Are we going to be able to take advantage of all those? What if we use it for business? Can we still take the credits and everything? That might be a little bit of a nuanced example to some folks, but it’s a perfect example in my mind of how something that is, maybe on a day-to-day thing that happens. But something that purchase that folks are going to need to make in their life, most likely. You can really use that as an opportunity to say, “Hey, I got to do this anyway.” How can I also maximize my tax savings at the end of the day, when you’re sitting in a car dealership, and the people are trying to sell you on all these different tools, and upgrades, and everything. You’re probably not thinking, “Hmm. I wonder if I can save my taxes with this purchase?” But it’s always possible.

[0:25:15] TU: I’m going to give credit to our community. I think they are asking that question, Sean.

[0:25:18] SR: They are, for sure. I’m getting that one a lot. In fact, I would be – I challenge you to find another community that’s as interested in the EV craze right now, which is awesome, I have to say. Really, folks should be looking more and more into that, because of those credits I just mentioned. They’re just every year getting better. But yes, I love it. I mean, every year I’m seeing more folks buying EVs, or buying used EVs and getting the credit now. It’s good stuff.

[0:25:46] TU: So, as we continue talking about some of these common examples where mid-year projection can help the other one that I think about, Sean, that we’re seeing a lot more of is, business owners, especially new business owners, right? Maybe they are thinking about tax considerations, withholdings, making sure they’re making quarterly estimated payments if they have to. What’s the opportunities here with the business owners as it relates to the mid-year?

[0:26:11] SR: Well, this is where I say, take all the examples I was just giving you, and throw them out the window. Not exactly, but when I was talking about how adjusting your withholdings is such an important part of this entire thing – I shouldn’t say throw out the window, because they do definitely go hand in hand. But if you’re a business owner, you have a side gig, you’re making money doing that, you’re almost certainly not getting W-2 income from that job. Or I shouldn’t say, you’re almost certainly not, but there’s a good chance you’re getting income from that business that is not having taxes withheld on it.

That is probably the number two or number one and a half blunder that we see where folks have these businesses. They’re not setting aside cash. They get to the end of the year, and are excited to give me the P&L that shows, “Hey, look at all this money I made.” Then I say, “That’s awesome. You owe some money in taxes, do you have that ready to go?” And it’s like, “Oh, I wasn’t thinking about that.” It goes hand in hand with the withholding, but it’s really just hey, let’s look at the business right now. Where are we mid-year? What’s your P&L look like to date? What kind of expenses do we have coming up for the rest of the year?

I talked about these EVs and things. How can we think about maximizing your savings there to reduce your business income, and be able to say, “All right. Well, at the end of the year, we’re expecting that we’re going to have $10,000 in business income.” Being able to say that now, and make your estimated payments up to the IRS is not only a good thing, it’s actually what you’re required to do per the law, right? That’s where I would say that a projection isn’t a nice to have, but an absolute necessity if you’re a business owner. It’s something where you can’t really say, “Hey, I’ll think about this later, or let’s just hope the chips fall in a good spot.” You really need to be doing a projection now to say, “What am I going to owe? Do I need to pay estimated taxes now? Should I have been making estimated quarterly payments up until now? Maybe I need to do a little catch up to hopefully not have a penalty at the end of the year at this point?” But again, to any extent you’re able to get ahead of that now, when I’m looking at the calendar, it says July versus December, January, April, it’s always better.

[0:28:25] TU: Yes. Especially, Sean, think about those new business owners again. Where, often, there’s excitement around the growth, there’s a reinvesting of any of the profits that tried to continue to grow the business. If we can identify some of this mid-year, sometimes that even inform some of the business strategy of like, “Hey, are we charging appropriately? What’s the service model look like?” And making sure that accounting for taxes as I look at the bottom line, and making sure we’ve got cash on hand to do these other things, and of course, not being caught off guard as you mentioned, as well.

[0:28:59] SR: Yes. To give – I don’t want to say a very specific example, because it’s something that we see very, very often. It might seem specific to some folks, but I think a lot of people here will resonate with this. But big one is, business owners, especially first-time business owners paying themselves. A lot of folks will do that, and then they’re maintaining their records and saying, “Hey, my net income is going to be pretty low at the end of the year, so I don’t have to worry about estimated taxes or anything like that.”

Then, we get to the end of the year, you provide your P&L, and I say – actually those $10,000 that you paid yourself, it’s not really a salary expense of the business, because it’s just a sole proprietorship. It’s actually just taxable income to you whether you took the cash or not. That can be very eye opening in a bad way for a lot of folks at the end of the year. It’s not entirely intuitive to think of it that way. You might be thinking, “Well, I worked with the business, I’m paying myself. Isn’t that an expense?” In the eyes of the IRS, depending on the way you’re set your setup, it may or may not be right. Getting ahead of that now and having your accountant maybe give you that bad news of, “Hey, that money is actually something you’d have to pay taxes on the end of the year now so you can plan ahead.” — Is always better than getting that during your tax review meeting in April or May

[0:30:14] TU: Yes, and I get it. For the small business owners, we were there several years ago. For the small business owners that are just getting started, you’re looking at working with a CPA, it’s another expense in the business. I get it, right, but it’s going to pay dividends when you talk about making sure you’ve got the right entity set up classification, separate conversation for a separate day. Making sure we’re withholding correctly, getting financial statements set up correctly, making sure that we’ve got the books in good order. These are all going to be critical components to building a healthy business. You’re not going to get all of it right as you’re getting started, and that’s okay. I think some of that is natural. But making that investment, and building that in as an expense of the business from Jump Street as a part of just doing business to make sure you’ve got all of that in order is going to be really, really important.

[0:31:05] SR: Right. It’s not just a nice to have, like I said, it’s something where that should be part of your plan from the get go, and you’re building this out. People might be thinking about, well, “Hey, isn’t this podcast supposed to be about doing a mid-year projection? Why are we talking about what my business looks like? That’s kind of different than my taxes, right?” But like I said in the beginning when I was explaining what a projection is, you’re really just basically doing your tax return for the end of the year with the information that you have on hand. One of the lines right there is, “Hey, what’s your business income?” If you want to do a correct projection for your taxes, you’re going to actually have to do a projection for your business as well. Even though it might seem like it’s going a little bit too far, or you might not be able to connect those dots there, it’s something that it’s absolutely intertwined and something that you need to do for sure.

[0:31:51] TU: Last but certainly not least on our list. What would be a YFP episode if we didn’t talk about student loans? We’ve got student loans coming back online here in a couple months. A lot of questions that are coming up related to the restart of those payments. We’ve talked at length before about how tax and student loans can certainly be intertwined, depending on one’s loan repayment strategy. What is the value or potential value here, Sean, for someone that’s optimizing, or looking to optimize your student loan repayment strategy, and where the mid-year projection can play a role?

[0:32:24] SR: Yes, I can’t take any paternity leave anymore. Because when I do, it seems like they announced all these student loan changes, and everybody’s all excited and wants to talk to their CPA, and I’m sleeping on the couch with the kids and everything. So lesson learned there. But yes, absolutely. This is another example that I would say is a perfect example of where mirroring your tax strategy and working with a financial planner, or whoever manages the finances in your household and does the budgeting and everything is absolutely instrumental in making all this work together.

Yes. I mean, with student loans, there’s a lot of different things that can happen there. People have been asking me about, “Hey, so I’ve heard that you can file separately, or file jointly, or do these different things to maximize, or I should say, maximize savings, minimize my loan payments, or my spouse’s loan payments.” Yes. I mean, that is something that you can make that decision when you’re doing taxes to say, “Hey, am I going to file separately or am I going to file jointly?” But it all goes back to that idea of withholding and making sure that you were know how that works. Most of our clients who aren’t doing the student loan thing that are married, generally, are filing jointly. That’s what you’re told from the get go, right? “Hey, you get married, you file jointly, you get all the benefits of doing it, it’s the best way to do things.”

For someone to come and tell you, “Hey, actually, going forward, filing separately might be better for you.” Not only is that shocking for some folks to hear or like a complete change of what they’ve been told throughout the course of their life, but it also changes how they need to do withholdings and how they need to think about credits that they might have, whose return is that going to land on, and just one spouse withholds a little extra and recognize at the end of the year, they might get a refund that offsets their spouses tax bill or something like that.

There’s a lot of things that you want to make sure that again, even though you think that might be something you can make that call at the end of the year, just given all the different stuff going on with the loans, being on top of that now, and trying to minimize those surprises is always a better thing to do. To the extent you can mirror your tax strategy with your financial plan, it’s always just the best way to do things.

[0:34:31] TU: Great stuff. As always, Sean, as we wrap up this episode talking about the mid-year projection and the role it can play in some of the areas where it can effectively be utilized. Let me encourage folks to check out the resources and services that we have available, yfptax.com. We’ll link to that in the show notes. We have individual year-round tax planning led by Sean. As well as for those that do own a business, bookkeeping to fractional CFO, as well as some of the business tax planning that’s associated with that. Again, yfptax.com, you can learn more, you can schedule a call with Sean as a discovery call to learn more about that service, and whether or not that’s a good fit. Sean, thanks so much. Appreciate it.

[0:35:13] SR: Thanks, Tim. Talk to you soon.

[END OF INTERVIEW]

[0:35:15] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide, and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archive, newsletters, blog post, and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacist unless otherwise noted, and constitute judgments as of the dates publish. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements.

For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist podcast. Have a great rest of your week.

[END]

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YFP 317: YFP Planning Case Study #7: Balancing Student Loans, a Wedding, Home Buying, & Saving for Retirement

Posted on July 20, 2023July 19, 2023 by Tim U

The team at YFP Planning discusses a case study that includes balancing student loans, a wedding, home buying, and saving for retirement.

Episode Summary

Welcome to our seventh installment of the case study series with Tim Baker, CFP®, RLP®, Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®, and Angel Melgoza, MS CFP®. During this episode, we are sharing a fictitious case study with you about an engaged couple in their 20s. We delve into their finances, expenses, and their goals before discussing their assets, savings, investments, liabilities, and debt. Angel and Kelly discuss why they would tackle student loans before anything else in this couple’s financial plan, how recent changes announced to student loans will impact their loan repayment strategy, how marriage, children, and other big life events affect financial planning, and the importance of emergency funds and savings. Finally, we talk about why wealth protection is so important and why we see clients struggle with that the most.

Key Points From the Episode

A warm welcome to today’s guests, Kelly Reddy-Heffner and Angel Melgoza.
Some details of the fictitious case study we will be discussing today.
The first thing they would tackle with regards to this fictitious case study.
How Biden’s bid to forgive some loans will affect the power of PSLF.
How financial planners work with clients on massive life events such as marriage and children.
The importance of having an established emergency fund and focusing on savings.
Why clients struggle most with wealth protection and why it’s imperative.

Episode Highlights

“Figuring out a strategy is key to the plan.” — Angel Melgoza [0:11:48]

“Our clients need cash flow because – the goal is to pay off – the loans – sooner rather than later.” — Angel Melgoza [0:11:58]

“Clients do need to be candid about their goals and one of our objectives is to help clients do what they want to do within those realistic [goals].” — Kelly Reddy-Heffner [0:24:09]

“Layers of life typically influence how much [wealth] protection is needed and how comfortable you feel with what you have.” — Kelly Reddy-Heffner [0:30:36]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00.4] NH: What is up everyone? Welcome to our seventh installment of our case study series. I am joined by Angel Melgoza and Kelly Reddy-Heffner. Guys welcome back. We have a great case study to talk about today. How is everything going? Angel, Kelly, what’s going on in your worlds?

[INTERVIEW]

[0:00:18.2] AM: Trying to keep up with the heat, trying to stay cool here in Texas. We’ve hit triple digits though, making sure my AC is still working.

[0:00:25.9] NH: How about you, Kelly?

[0:00:27.5] KRH: Yes. I know, what’s up with all the weather and weird things? I am avoiding the outdoors due to smoke infestation and hoping some Canadian wildfires get put out soon.

[0:00:39.7] NH: Yeah, our very own Paul Boyle sent out some pictures of where he’s at in Ohio and some of the smoke that’s coming down from the Canadian fire. So definitely has some air quality issues here in Ohio and Angel, I am with you. I am not in Texas, our case study today is actually in Texas.

But our AC is on the fritz and right now, we are kind of battling with our home warranty people to try to figure that out. So hopefully, we get that figured out before the hot temperatures get here to Ohio but good to have you guys on, and looking forward to run in through the case study here.

So what we’re going to do is we’re going to kind of go through the case study and then obviously, if you’re listening on the podcast, we’re going to talk through this as best we can. If you’re watching this on YouTube, you’ll be able to kind of see the case study as we walk through it. So we’re really going through it.

This is a fictitious couple, they are an engaged couple living in Texas and Angel will kick us off, and then Kelly, we’ll kind of go through some of the goals. I’ll go through the balance sheet, and then we’ll just kind of look at this case study, what are some of the things that pop out to us, and how we would approach this from a planning perspective.

So, Angel, let me share my screen. So the people that are watching can see this. Let me see right here, share. So without further ado, Angel, why don’t you take us away as this pops up here?

[0:02:00.4] AM: Let me kick it up, these are my fellow Texans, right? Even though they’re a little fictitious. So we have Meghan Myers, who is aged 29, is a clinical pharmacist. Mathew Higgins, age 27, he’s an IT tech. You know, pretty typical age of current clients that we have, right?

Salaries for Megan, she’s earning USD 150,000 annually. Mathew’s earning USD 100,000 annually with supplemental income, USD 10,000. I’m guessing that may be some add-on work that they’re just taking on. Currently, of course, single. Filing single but they are engaged to be married.

See, they’re residents of Austin Texas, five hours north of me. Tell me you’re Texan by not telling me you’re Texan. You mentioned this in five hours and not by having on debate. So on a combined gross income front, they’re both earning, combined 260,000.

A little bit about their expenses, we try to divvy up fixed variable and poor savings as well. From expenses standpoint, the fixed expenses or about 32.50 monthly, USD 2,000 on variable, and about 1, 242 in just savings commitments that they have.

[0:03:11.3] NH: Awesome. Kelly, why don’t you go take us through Meghan and Mathew’s goals?

[0:03:15.6] KRH Sure, so I have reached out to do some financial planning because they’ve got a couple of things on the horizon. There are some student loans, which is not uncommon for our client base and we know there’s been a lot of chatter all summer about student loans and finally, some of the next steps are starting to unfold. So that’s often a prompt to reach out and start a conversation.

So they want to have a plan in place for Meghan, she does work for a qualifying 501(c)(3). So PSLF and a forgiveness strategy is part of the conversation. They are planning to get married so honeymoon, wedding expenses, we know one of the inflation items that’s still up is travel. So they’re planning a very fun honeymoon, it is good to plan ahead for that and as far and advance as possible.

They are looking to make sure that retirement’s on track and feel like they’re a little bit behind. Also, again, not an uncommon feeling. So that’s one thing we will want to dive into and see what that looks like, try to come up with a student loan plan that also matches a strategy for some of those other goals like wedding, marriage, and retirement and then of course, big things with life in general, often include that first home purchase.

We know that’s been an interesting environment as well, so we’ll kind of talk through what the home purchase environment looks like, what the resources are available to expand, and be knowledgeable about that big, that big purchase. Children, not too far down the road as well, and then of course, vehicles, open to the conversation about owning versus leasing but do identify having a new car need in the next couple of years as well.

[0:05:09.2] NH: Yeah, good stuff Kelly. Thanks for taking us through that. So I’m going to go through kind of the balance sheet, the net worth statement. So I’m going to start on the asset side. So they have about USD 5,000 in checking and joint checking. USD 20,000 in joint savings. When we look at their investment accounts, they both have 401(k)s. Meghan has about 10,000 in her current 401(k). Mathew about 15,000 they’re both in target date funds.

About 90% in equity, so probably goes 20, 60 target date funds that are out there. Currently, they’re both putting in 5% but Mathew actually gets a match up to 6%. Meghan’s is 5% so that’s a plan and opportunity right there. Meghan has a little bit of money in her HSA, USD 2,000. I mean, she’s contributing the max to that and Matthew does have access to an HSA because he’s got a high-deductible health plan but he’s not getting enrolled.

I believe Mathew has a Robin Hood account that has about USD 5,000 and he’s putting about USD 200 a month into that and then Meghan is not sure what to do with her old 401(k), which has about 5,000. So total assets of about 62,000. On the liability side, so these are the things that we owe, it’s a little bit of short-term debt there, about USD 5,000 on a credit card for Meghan, USD 3,000 on a credit card for Mathew.

They try to pay that off monthly, Mathew does have a car note that is USD 250,000 per month at an interest rate of 4%. So we’ve seen those obviously go up recently, so not terrible, right? In this environment and then the big, you know, monstrosity there I think are the loans. So she has about USD 425,000 in loans between her private and her federal loans. So total liabilities of 453,000.

So that puts their combined net worth at negative 391,000. So just to reiterate, they’re doing their own taxes now. So definitely, something that we would look at as we’re looking at the student loans, and then we do have a section here for like wealth protection. Meghan does have group life insurance coverage so two times her salary at USD 300,000. Mathew has one and a half times so $150,000.

They both have, you know, kind of a standard work term and long-term disability policies through their employers so own-Oc for two years and any-Oc after that and then professional liability, Meghan does have her own policy, which is good to see, and then no estate plan at this time, so definitely something to look at. So to kind of reiterate, Meghan hates the loans and wants to see them gone but is open to hear about PSLS.

So that would definitely be something that we would want to walk through and show her the math. Mathew again doesn’t have any loans, student loans. They are looking into stopping and funding the taxable account and put those dollars towards debt, and then as Angel mentioned, Mathew does have some contractor work that he makes on the side. So as we look at this, Kelly, what would you say is the first thing that you would tackle with this particular client as you review the case study here?

[0:08:08.7] KRH: Well, I’m going to assume that probably, the prompt was the student loans to get that plan in place. So there are a couple of little low-hanging fruit items but they all do work together like pieces of a puzzle to fit. So I guess that would be where I would start to just have an idea of what that monthly payment would be so that we can build the rest of the plan around that.

[0:08:35.9] NH: Yeah. I mean, I think, for a lot of our clients, you know, the tail that wags the dog for their financial planning is the student loans. So as the loans go, so does the rest of the plan. So if we’re talking about this amount of debt, I think again, it’s not necessarily a push to pay them off. But more of a push to have a plan to pay them off.

So I think you know, one of the things and I’ll skip over to this tab here and that kind of outlines the student loans, I think really with this particular client, you have lots of moving pieces here. You’re probably going to have a strategy that is related to the federal loans and then a strategy that is related to the private loans.

I think the thing that I often say is that the range of outcomes here with regard to the loans can be vast and if you’re looking at our tab here, the total amount paid, and this is kind of the rough numbers given the present student loan plans that are out there, is anywhere from 143,000 to 480,000.

So we really want to make sure that as we are approaching the loans, the idea is that we’re going through our process. So what we typically do and what we do for this client is that we’re going to inventory the loans and we typically do this through the NSLDS ugly text file that we have you retrieve.

With potentially, with private loans, look at the credit report. Sometimes, we look at promissory notes as well, and then from the inventory, now that we know where we’re at, we’re going to look at all of the different possibilities related to said loans, right? So we want to put the emotion that Meghan has with her loans with the math that supports it.

I’ve joked about this, Kelly and Angel, in the past, that I remember talking to a client that basically is working 20 hours at a for-profit job and 20 hours at a nonprofit job and didn’t qualify for PSLF because you essentially need to be 30 hours and they were like – and they had substantial debt. I don’t think it was up to this and now but they were asking like, “What was my advice for the student loans?” and I was like, “If I can push a broom in a nonprofit for 10 hours a week, I would do that” because it just unlocks a lot of the benefit that PSLF affords.

So the third part of this really is once we figure out what that strategy is, we want to optimize that, and that’s where you know, looking at the tax situation, looking at the investment strategy and the pre-tax situation, making sure you’re filing the taxes correctly, so I would obviously want them to talk to Shawn Richards, who is our director of tax and make sure that the tax situation is jiving, not just with the financial plan but specifically the student loans.

So that’s my take. Angel, would you add anything kind of in the student loan picture as you’re looking at this? Obviously, it’s a huge decision in terms of what they’re going to do and will hugely affect the balance sheet as they kind of start, you know, their careers and their lives together.

[0:11:44.9] AM: Absolutely, just like you said, just like Kelly said, that figuring out a strategy is key to the plan. What I would do also is really engage in budget. You know, we have to understand that our clients needs cash flow because if the goal is to pay off you know, the loans, more sooner rather than later but the cash flow just isn’t there, then we have to say, “Okay, what adjustments do we need to make as planners to our recommendation?” PSLFP in the strategy but the repayment plan may be a little bit different than what they may expect.

[0:12:19.5] NH: Yeah, and to that point, the B word, the budget word never goes away. I mean, even if you are looking at you know, a retirement picture, we kind of know, have to know like what we need to build out as a retirement paycheck. That all stems from the budget, right? So I think that is going to be consistent.

I think to the sheet, I don’t know if we outlined it, I think there was a budget for like two to three thousand or three to four thousand for Meghan to apply towards the loans, and the strategy might be a compromise in strategy where we are aggressive with the private loans, try to get them into an aggressive payoff strategy because obviously, we know that those loans are not going to be eligible for PSLF.

But then we are doing what we can to maximize forgiveness on the federal loans and that’s kind of where the two-prong approach to the loans really stems from. Kelly, if we stay with the student loans, obviously, we’re still waiting for and waiting and waiting and waiting for the Supreme Court to kind of rule on Biden’s effort to forgive some loans and we think that based on that decision, the president or the government will try to put a plan out there that might be more favorable to borrowers.

Can you kind of elaborate a bit on what you’ve heard or what you’ve read about that and kind of how that could potentially affect PSLF and the power of PSLF in the future as we come out of the pause here?

[0:13:43.1] KRH: Sure. So, great, Tim, you were referring to that you know, one time, 10 to USD 20,000 discharge decisions. So you know for some clients, that’s a substantial part of their loans but for many pharmacists who have accumulated student loan debt, it’s not quite as big of a percentage.

So the kind of flip side to that that you referenced is, we’re still waiting to hear about new income-based repayment plan like new repay that would have a different formula to calculate the monthly payment. The goal with the PSLF program want us to complete it and be in it for the 10 years, 120 estimated payments but also to pay the least amount over time, which is why you see that 143,000.

I can understand Meghan’s concern about a 10-year period to have the loans in existence but referencing Angel as well with the budget, you know if you have USD 3,000 and you’re putting 20 – like 1,400 to 2,300 towards the private loans. One, there’s only going to be so much left out of that budget but two, why would you pay extra if you qualify and are doing the work in the nonprofit?

But you need to get the loans in the correct position. So if that new repayment plan comes out and is very advantageous, the formula, making that payment lower, will create a lower amount total paid over time, which is a win. It does feel like we’re continuing across a couple of presidential administrations to make PSLF as easy as possible. So sometimes, clients still have concerns, “Will the program still be in place, will I qualify?”

All the answers point towards yes based on what we know, you know across a couple of different administrations, there have been you know, programs put in place to make it easier but you do have to put the loans in the right position. So we’ve seen these wavers as well and there’s still one more waver until the end of the year to pick up as many payments as possible. Pretty much the key being that you did work for the nonprofit during the timeframe.

But if you had odd forbearances, if you were in the wrong repayment plan, if you were in the wrong loan type but that’s some of the work that we do as part of the planning processes. Making sure that every loan is in the correct position to qualify and to not have that outcome when you get a surprise. There’s no surprises, you’re keeping track of your cumulative account. You know, there’s – that’s what the issue was in the past.

[0:16:44.2] NH: Yeah, and shout out to Tim Ulbrick who recently held a kind of impromptu webinar about student loans and you know, what’s beyond the pause, I think we had about 600 people register for that webinar and there were a lot of questions about PSLF and there’s still a lot of misnomers out there about the program and is it viable, is it not viable.

To your point Kelly, there has been things that in the past, would lead borrowers to question the longevity. I would say that everything that I could have read about that has always been for future borrowers. I mean, if you’re in the program, I think they would grandfather it in. This is my belief and I think if you’re reporting a strategy of forgiveness, you know there’s a good case, especially if they put out this new payment plan that your balance is going to grow.

So to kind of take that away, you know, retroactively I think would be catastrophic, and even with tax law, they typically will write things and that’s why we have so many versions and layers of tax law. I will point out as we’re showing the slide if it is a pay as you earn, the numbers that we’re showing on the screen is, “Hey, in ten years, you’re going to pay off 143,000.”

There is two assumptions here that are, I think are wrong, one is if let’s say Meghan’s been at work for the last two years or maybe it’s the last year, she’s already a year in. So we’re projecting 10 years as if this were starting right now, so she potentially already has 12 to 24 months that are counted or potentially counted if we do the right things and then I think the other thing is that we’re showing a first monthly payment of a USD 1,080, which could also be a lot less given a new repayment plan.

So this again, so many advisors out there still to this day as I talk to a lot of prospects will say, “Hey, I’m working with an adviser and they say don’t worry about the loans, it will figure themselves out” which is the worst advice that you can give to many pharmacists that are dealing with six figures worth of debt or they’ll do a, “Hey, pay the highest interest rate off or pay the lowest balance.”

That quite frankly is subpar advice, so because the spectrum of outcomes is so why with regard to what you actually are paying out of your pocket for the loans, you want to make sure that you get a professional advice on this because it’s that impactful. So guys, let’s set the loans aside for a hot second and talk about the other parts of their plan.

Angel, obviously with wedding, honeymoon, first home, kiddo in the next two years, car in the next five years, how does a planner work with a client to kind of wade through all of these things that obviously are huge life events but obviously, from a planning perspective, hugely important to kind of road map? Walk me through how you would approach Meghan and Mathew in that instance.

[0:19:40.0] AM: Sure. I mean, I think firstly as we address the student loans, the second thing looking at their budget, what’s left over after we define a good repayment plan for them, and as a planner, we want to make sure that we are being very upfront, real, and having real conversations as to expectations, right? The last thing we’d want is to take out more debt when we don’t need to.

[0:20:04.7] NH: That’s right.

[0:20:06.2] AM: Just going through what their expenditures are, what’s left over, and coming up with a comfortable budget for all these things, you really can’t plan them for an additional family member but at least, you know jeffing up what does that look like on a nationwide kind of average scale. Typically, when I am working with younger individuals I like to throw in an extra two, three grand a month for raising a child.

You know, that is very subjective but that is very much kind of my flat conservative rule of thumb.

[0:20:37.5] NH: Yeah. I mean, I am a big believer in if I’m breaking this down with a client, and Kelly I’d love to hear your thoughts on this too, I’m a big believer in saying, “Okay, you know wedding, honeymoon, how much is that? Is that paid for? What other sources of income or what is the sources of savings for that?” “First home, okay, is it within the next year, the next two years? So what are we looking at for a down payment?”

Obviously, I want to put them in front of someone like Nate Hedrick, to help with an agent and finding an agent or even Tony Umholtz to look at First Horizon and potentially a PharmD loan and make sure that that is positioned and then you know, yeah, first child in the next two years, what does that look like from a daycare expense or just hospital bills, who’s and where are we funding that and then car.

You know, if that is a five-year, so kind of backwards plan into this and you know we talk about purpose-based investing. You know, kind of by proxy, I’m a big fan of purpose-based savings, so I would love to see a bucket for a house, I would love to see a bucket for a car, I would love to see a bucket for kiddos. Like I was joking around with someone, we have an ally account that is the kid’s account and the sub-accounts are Olivia, my daughter, Liam, my son, and Benji, our dog.

So, Benji, you know for his grooming and vet bills and things like that, Olivia for swim and other things like that. So it allows Shay and I to kind of break these expenses down when we throw all of these things against the wall, Kelly, it’s overwhelming, right? It’s just a lot of things one right after the other. So walk me through kind of like how you would approach that, how you would select buckets, how you would determine like, “Okay, overlaying the student loans” and maybe that’s where the student loans were like, “Well, maybe we need a little bit of extra discretionary income and go out.”

Not five years in the private loan but maybe 10 years to free up some income for us to do some things, so walk me through that in terms of the savings perspective.

[0:22:35.0] KRH: Right, because once we have like one set of numbers with the student loan, you want to build out, as you said Tim, those buckets but you need to run some estimates. So typically, you know I probably would start with the house but clients do need to be candid about their goals and one of our objectives is to help clients do what they want to do within those realistic like giving pros and cons and, “Well, that might take a little bit longer if you want to do it at that amount.”

So certainly it would be up to them, what the priorities are in terms of wedding, house, preparing for a child, and that new car but giving some context to those decisions. So like if the new house is in a year, you’d be looking at some estimates if you bought a USD 250,000 home versus a 450,000. Right now in the current environment, it’s super fun to do the two interest rates like this crazy but you know, are people still able to buy homes?

Yes, but you need to know what that’s going to look like in terms of a mortgage payment but then, I also like to run the numbers at like a 4% so in case the environment changes in the next year, it makes a big difference in the monthly payment. Are you doing a 3% down, a PharmD loan, or are you doing 20% down, something in between? So kind of run a couple of those numbers you can see a range.

You know, if this is what you want to do on the lower end or on the upper end, this is the amount per month in a year timeframe to do it and to get to the down payment. Definitely, childcare, one of the biggest parts of a child expense. So making sure that we have a good holding place in the budget for that. Looping back to the house, you know, it seems obvious but doing that amount for a year and knowing you can do it for a mortgage amount makes a lot of sense.

Like if your rent’s a thousand, you want to buy a house and the mortgage is 2,500, typically that USD 1,500 difference, can you consistently put that away for a year, one for the down payment but two, that’s becoming your new average monthly expense. So like if you can do it for a year that feels pretty good that you’re going to be able to sustain it and continue it. So yeah, putting some context, some hard numbers knowing they’re not going to be to the penny.

But this gets you or I say, we can calculate to the penny but there is going to be lots of things that happen in between, you know, anything. A job change, a new dog, all the things you know that help influence that monthly budget, you know, we need to have a placeholder for.

[0:25:33.5] NH: That’s right and I think one of the things that we haven’t really discussed that I think is important to discuss, you know typically when we talk about a budget, we’re always looking at where can we potentially cut expenses and things like that. The thing I would really dig in with Mathew, in particular, is, “Hey, you have supplemental income of USD 10,000, is there a way for us to grow the topline income that’s coming in?”

So can we push that 10,000 to USD 25,000 next year? Meghan, you know, if we do have pretty hairy audacious goals, are there ways for you to also make additional dollars by picking up extra shifts or whatever? So I think sometimes we always look at the expense side of the ledger and I want to grow the pie and make sure that’s looking healthy and we have other levers that we can potentially pull.

Angel, let’s shift to the wealth-building stuff real quick. They’re kind of just starting out, they had this one old 401(k), they’re in some target date funds in their current 401(k), we don’t have many IRAs established, which I don’t know if I would necessarily do that now. Mathew has a taxable account of USD 5,000, which again, I would try to apply like when we’re asking questions about, “Hey, how are we going to fund the home payment, home down payment, or the car?” That’s where I want to start drawing those lines but how would you approach the wealth-building portion of their financial plan with kind of the facts that we have?

[0:26:50.5] AM: With some of the facts that we have, wealth building, and what I’d like to look at first is, “Do you have an established emergency fund?” because we all know that things do happen and stuff. I want to make sure that our clients are prepared for that. More on the, “Are you on track with savings?” things of that nature. I would definitely start off by looking at the 401(k)s, making sure that they’re at least maxing out the amount that they would receive an employer match.

From looking here, I believe that Mathew’s more deferring 5% but the match is 6%, maybe trying to get him up to that 6% is the next step for him. On the HSA fronts, it looks like they don’t put any money into an HSA. I think that is a very good tool for young healthy couples, right? That you traditionally just have your physicals, your checkups, and maybe a couple of doctor visits because of a cold or flu, what have you, and making sure that those are maxed out.

You end up saving on the payroll tax front, you end up saving on the federal income tax front, and to the point of going back to the student loans, Meghan can also reduce her adjusted gross income and that will even save her on the back end to know but yeah, to your point on the taxable account, seeing what’s that account for, right? You have a lot of goals that you want to achieve and maybe putting some purpose behind it.

We have it here listed as a play account but to me on a scale, if we have a pyramid of what’s important, play accounts would be at the tip. That’s the cherry on top for me, right? I would definitely want to address the menial things like again, your emergency fund. Are you putting into your 401(k)s and are your current savings do they have a purpose?

[0:28:33.5] NH: Yeah, that’s right and I think to circle back, I think Meghan is contributing the max HSA even though it is not showing, it is just showing in text there and she has about USD 2,000. I’m assuming it’s in cash and not invested. I think the discussion I would have about that is, “Are we planning on using this for the birth of a child or do we see this as like a long kind of that stealth IRA?” and maybe it’s, “We’re going to use it for the birth of a child then afterwards, build a backup and then it will be a self-IRA” or something to that effect.

You know sometimes, it is good to be able to cash flow health expenses when you get to that point. So for the current 401(k)s, I think you know looking to make sure that those target date funds, Kelly, look good. You know, often times we like to get out of the target date funds because they are a little bit more expense and basically pick the allocation ourselves, and then probably the last thing that we haven’t really talked to is just what do we do with the 401(k), the old 401(k)?

Do we roll that over to a rollover IRA for YFP to manage on behalf of Meghan or do we move that over to a current 401(k) to be able to assess that? Let’s chat Kelly, really quickly about the wealth protection stuff. My initial gut on this is probably, they’re probably okay at this point in time and I would want them to focus on the debt and wealth building but probably phase two, phase three might be looking more closely at the wealth protection stuff.

What’s your thought on that? Do you kind of differ in your opinion or would you say, “Hey, let’s kind of get through some of these other things that are on fire and then kind of pivot to life disability, estate plan” et cetera?

[0:30:10.0] KRH: Right. I mean, certainly the wealth protection piece, you know as much as some of the other things feel overwhelming and the volume is to tackle this actually is probably the area where our clients struggle the most just to see like how much to prioritize and what they really want to have and to figure that out. So right, I would agree, you know layers of life typically influence how much protection is needed and how comfortable you feel with what you have.

I do like that Meghan has enough coverage to cover her private student loans. That’s an area that’s a bit grey depending on the loan’s officer. So she’s got that covered, so really we try to look at liability need like if there’s something that needs paid off, that would be a big one. From there, we do, do that as part of our planning to do a very thorough assessment, see what they have, but I would agree.

You know, the estate planning we can do some conversation and work on that during the protection meeting like checking your beneficiaries, making sure the titling is correct on accounts. That’s one layer ahead of getting a will and formal documents in place. So yeah, I would say that something that we work on, you know, as we move through the financial plan, it is important but the amounts of coverage do look fairly reasonable.

I probably would address at some point the own occupation for two years on those disability policies. Our gold standard is typically to recommend own policies for clients in that area but again, they do have coverage. That would be just a note that I would just check into further.

[0:32:08.8] NH: Yeah, I think in this regard, what I’m doing as I am going through the wealth protection part of the financial planning is I’m looking at what the baseline coverage is and I’m planting seeds. I’m saying, “Hey, it probably makes sense in the future to look at your own life insurance policy. It probably makes sense in the future to look at your own disability policy. It probably makes sense in the future to have an estate plan that’s drawn up by an attorney.”

You know, I think these are typically most important and I say this a lot when you have a spouse, a house, and mouths to feed and we know that Meghan and Mathew are kind of treading in that direction. I think anybody needs an estate plan if they’re a human and they want to kind of, you know, their care and be able to pay their bills if they’re unable to but I think the ante is upped when you have other people that are kind of relying on you for their livelihood and we want to make sure that we take care of the family.

So in my mind, I’m kind of planting those seeds that say, “Hey, this is important now, it’s going to be more important in the future. So let’s take steps when we kind of get the dust cleared and settled on the student loans and the investments and things like that, a budget can make moves here in the future.” So great stuff guys, I really appreciate the conversation. I feel like we could go on and on about this particular client.

So thank you for kind of going through this with me in the seventh edition of the case study series. If you are out there listening to this and you’re thinking, “Hey, this sound vaguely familiar to my situation” don’t be shy, reach out to us, book a discovery meeting, and you know, let us know if we would potentially be a good fit to work together. So Angel and Kelly, thank you once again and looking forward to doing this next time.

[0:33:47.9] AM: Thank you for having us.

[END OF INTERVIEW]

[DISCLAIMER]

[0:33:51.8] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information on the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog post, and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 316: Real Tips From Recent First-Time Home Buyers

Posted on July 13, 2023 by Tim U

Neal and Kaitie Fox join Nate Hedrick, The Real Estate RPh, to reflect on the lessons learned as first-time homebuyers.

About Today’s Guest

Neal and Kaitie travelled from their hometown of Coshocton, OH to attend Cedarville University in 2011. A year later they married at age 19 and began their joint financial adventure. Kaitie began working at the University food service contractor and eventually became the Head Baker, supporting the family through pharmacy school and until the birth of their second son. Now, Kaitie is home raising Timothy, 5, and David, 1, while Neal works. Neal completed his PharmD at Cedarville and a PGY1 residency at Premier Health Miami Valley Hospital, a Level 1 Trauma Center with over 950 licensed beds and over 110 adult ICU beds. He currently serves as one of the Medical ICU Clinical Pharmacy Specialists and the Research Project Coordinator for the PGY1 pharmacy residency program. He occasionally gives lectures or hands-on training at Cedarville University while also taking APPE students from several pharmacy schools throughout the year.

Episode Summary

Buying a home can be a daunting, exciting, and overwhelming experience. On this weeks podcast, sponsored by Real Estate RPh, we are joined by Neal and Kaitie Fox to discuss how they went about buying their first home. Neal is a pharmacist and Kaitie is a stay-at-home mom, and in this episode, they tell us what made them decide to buy a house when they did, what they would say to someone wanting to purchase their first home, and how interest rates and other aspects played a role in their decision. They delve into how they chose a financial lender and why they decided to change who they financed their house with at the last minute before explaining how YFP assisted them in this process. When looking for a real estate agent, it is important that you find someone who takes your needs into consideration and communicates effectively, and Neal and Kaitie explain why they decided to change agents early on in their journey. Finally, our guests remind us to use our resources wisely and ask as many questions as possible when buying a home.

Key Points From the Episode

Introducing today’s guests, Kaitie and Neal Fox, and a brief overview of their careers.
What made Neal and Kaitie decide to buy a home when they did.
Their advice on a starting point for someone wanting to buy a home in the near future.
Why interest rates were a barrier for them when buying their first home.
Things to consider when choosing an area to look for a house in.
The importance of moving fast when you find a house you’re interested in.
How Kaitie and Neal navigated financing a house and what that process looked like for them.
Their home-buying team, changing agents, and why YFP was so helpful to the Fox family.
The importance of having clear and responsive communication with your real estate agent.
Why you must utilize your resources and ask questions when closing on a house.

Episode Highlights

“The biggest thing is to find that person who is your trusted expert in home buying.” — @ThePharmFox [0:05:10]

“Have at least two, maybe even three [financing] options because as long as your pre-approval is still valid, you should be able to pick the best option that fits you.” — @ThePharmFox [0:16:44]

“Utilize those resources that are right there [and] are helping you through the process anyway.” — @fox_kaitie [0:29:06]

“Expect the unexpected because it is a very long, complicated process and you will almost certainly run into something that you didn’t think about before.” — @ThePharmFox [0:33:51]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00.4] TU: Hey everybody, Tim Ulbrick here, and thank you for listening to the YFP Podcast, where each week, we strive to inspire and encourage you on your path towards achieving financial freedom. Today, I pass the mic over to Nate Hedrick, founder of Real Estate RPH and cohost of the YFP Real Estate Investing Podcast, where he welcomes Kaitie and Neal Fox to talk about their journey as recent first-time home buyers. They discussed the lessons learned along the journey, including common pitfalls to avoid that will be helpful to anyone that is looking to buy a home for the first time. So let’s hear it from today’s sponsor, Real Estate RPH, and then we’ll jump into Nate’s interview with Kaitie and Neal Fox.

[SPONSOR MESSAGE]

[0:00:39.2] TU: Are you planning to buy a home in the next year or two? With the state of current home prices and mortgage rates, the home-buying process can feel overwhelming but what if you can leverage the knowledge and ongoing support of someone who has worked with dozens of other pharmacists through their home-buying journey, all at no cost to you? I’m talking about Nate Hedrick at the Real Estate RPH. Nate is a pharmacist who has been a partner of YFP for many years now and offers a home-buying concierge service that can help you find a high-quality agent in your area and support you throughout the entire process. So head on over to realestaterph.com or click on the link in the show notes to schedule your free 30-minute jumpstart planning session with Nate.

[INTERVIEW]

[0:01:26.1] NH: Hey, Neal, Kaitie, welcome to the show.

[0:01:28.1] KF: Hi, thank you.

[0:01:29.2] NF: Yeah, thanks for having us.

[0:01:30.4] NH: Yeah, absolutely. I knew when we had first talked that you guys are going to be fun to work with and I’m excited we get the opportunity to talk all about home buying today with a couple of recent home buyers, it’s going to be great. So maybe for our audience, just kind of give us a brief introduction on yourselves and a little bit about your pharmacy career and we’ll take it from there.

[0:01:49.7] NF: Yeah, sure. So I’m Neal Fox, I am a 2018 graduate of Cedarville University. I practice as a clinical pharmacy specialist in the medical ICU at a large level-one trauma center in Dayton, Ohio with just over 900 licensed beds and just over 110 adult ICU beds.

[0:02:15.5] KF: I’m Kaitie, I’m Neal’s wife, and I am currently a stay-at-home mom with our two boys and I’d previously been a baker for about eight years.

[0:02:24.7] NH: And we got connected, gosh, it was back in late 2022, talking about you guys are ready to buy your first home and we wanted to help you with that and so you know, what we thought we do today is get together with you guys, talk a little bit about first time home buying with someone who has recently gone through it and you know, talk through any pitfalls or words of advice. Things you guys learned along the way because I think a lot of our audience is sitting out there looking at current market conditions, looking at the current financial situation, and saying, “I don’t know if I can do this” or “I’ve got questions but I don’t even know where to start” or, “I don’t even know enough to ask questions” right?” I think if we talked through a couple of things, talk through the process, it might help a lot of the audience out there that might be trying this for the first time. So if you’ll indulge me, I’ll be firing off the questions and you guys just give me your hot take on what it was like and we can learn from each other. So does that sound good?

[0:03:14.1] NF: Yeah.

[0:03:14.1] KF: Right, yeah.

[0:03:15.0] NF: No problem, happy to share.

[0:03:16.5] NH: Awesome. So I think, you know, one of the things we focus here a lot at YFP is kind of the “why” behind the financial decision and it could be putting money in your 401(k) or paying off your student loan or in this case, you know, buying a home. Did you have a particular “why” behind you know, buying a home like when you felt you were – you felt like you were ready to do that?

[0:03:34.3] KF: Frankly, at this point, we have outgrown our current living space. We’re currently renting a two-bedroom apartment and we have two young children and then ourselves and it’s getting very, very cramped very quickly.

[0:03:49.6] NF: Yeah, home ownership had always been an intermediate to long-term financial goal for us. We definitely were not in a position to do that coming right out of residency but over the last few years, we’ve been able with YFPs help a lot to get into a better position and now for us, the living situation, the space, you know, we’ve been room sharing with our 14-month-old for 14 months.

[0:04:16.4] KF: 14 months.

[0:04:17.8] NF: So we don’t really have anywhere else to put him. So the “why” for this year was kind of that, like we didn’t feel like we had the option to wait much. So in some ways, that made it easier because we had the resolve to get it done, to go all the way through the process.

[0:04:33.4] NH: Yeah, I love that and I am sure there are many people resonating with that of like, “I am out of space” and sometimes it’s kids, sometimes it’s pets, sometimes you know, whatever it is, right? It’s time to make that move, so I think that totally resonates. What about you know the getting started process, right? So you have this “why” and you say, “Look, we’re out of space, we got to move, it’s time to buy” but how do you get started? Like, now that you’ve done this and kind of looking backward, you know, we talk about ways to get started all the time but for you guys, specifically, like what would you recommend as a decent starting point for somebody who is thinking about buying a home in the next, let’s say six months?

[0:05:07.7] NF:1 Yeah, for sure. So I think, the biggest thing is to find that person who is your trusted expert in home buying. So obviously, I’m not that person, that’s not what I went to school for and if you’re listening to this podcast, you’re probably not that person either, right? So you know, what I’ve always said, what we’ve always said working with YFP is they’re like our money mechanics. So in the same way, that I go to a mechanic for my car because I know nothing about my car, because again, that’s not what I went to school for, I need a trusted person, a trusted expert who can tell me what’s wrong, explain it to me in simple terms and then help me make a decision very similar to how they teach healthcare professionals that you know, we need to explain things in patient-friendly language. You know, I need that same person when it comes to money, financial decisions and that’s what YFP is for us, and then home buying is another like sub-specialty within that. So that’s why we immediately went through YFP to find a point of contact, which started with you, Nate, to guide us through the first part of that process.

[0:06:21.9] NH: Yeah, I think that makes a ton of sense and again, we’re biased here, right? At YFP because we like what we offer but I think you’re totally right, you don’t know where to start, getting a great expert on your team is a great place to start, you know? We’ll talk about this more in detail but we use the home-buying concierge services with you guys, getting you connected with a great real estate agent and then getting off and running. We even had a couple of bumps at the beginning, which I think I like to talk about here in a bit but you know, having that point of contact is how you get passed those bumps. I think that will resonate really well. So I appreciate you sharing that.

[0:06:49.9] NF: It was a really good way for us to initiate a process that we felt like we had studied and talked about but didn’t really know what to do and had never been through before.

[0:07:02.8] KF: Right.

[0:07:03.3] NH: Makes a lot of sense, I like that. One of the things that I think people are talking about right now that I think is kind of scary, especially when you’re thinking about getting started is that “current market” right? High-interest rates, lower inventory, do you feel like those were a factor, a barrier to you guys buying your first home?

[0:07:18.8] KF: To some degree, especially the higher interest rates right now because you know, we had this idea of you know, we have this wide range that we are able to buy from and so then looking at our interest rate and talking to our realtor, we were able to decide like, “Okay, we need to look at this you know, lower end spectrum” to say, “You know, we’re comfortable with this monthly payment” because of the interest rates. I feel like we didn’t really run into like low inventory in our area. I mean, hundreds of houses that were for sale but again, it was making sure that they were within our budget, that we had kind of decided on, that we were comfortable with paying like every month.

[0:08:01.4] NF: Yeah, and we’ll talk about this more in a moment but there was definitely, Kaitie was doing more of the house watching and there was a decent amount of turnover even though there were constantly houses up, they weren’t staying on the market in general for very long and what we realize, so what Kaitie was alluding to is we kind of had a number for total purchase price that we thought we would be able to get to. And then we realized that it was less about total purchase price and more about what our monthly payment would be because you know, we’ve worked with YFP for years on thinking about like a zero-based budget and you know, you can have whatever purchase price you want but if that monthly payment doesn’t fit within what you can reasonably do and right now, we’re a one-income household, you know, that was the number that we needed to focus on more.

So once we realized that, the thing about the market in our area that I came to realize was that it’s not homogenous, that different neighborhoods, even different sides of the same highway, obviously different school districts and things like that, there is a wide variety in terms of what you were going to see in price per square foot and stuff like that and thinking about us, for our family, you know we’re thinking about possibly private school for the kids. So public school district wasn’t as important in considering these things, we actually shifted our focus to a different area within our geographic region that’s really only like, five minutes away or so from – at least, in terms of distance – from my work from where we are now and where we had been looking and that made a big difference in terms of the length of time that houses were staying on the market and their cost per size.

[0:09:48.8] NH: It totally shows how local real estate is, right? It can be different 20 minutes away, 10 minutes away sometimes. Just like you said, you know if you shift that locust of search from a five-minute geographic area to a different five-minute geographic area, you’re going to get totally different results. So that’s good to hear that you know, I think you guys went into it with the right mindset but were able to shift as you started to learn more and see what made sense in terms of the areas you were looking in and the numbers and ultimately, that monthly payment is what made that determination, so that’s cool. Did you lose out on any houses? I know you said that the inventory was turning over quickly, did you lose out on any houses or anything? I mean, I know a lot of people are struggling with that right now.

[0:10:26.8] KF: The first couple of houses that we looked at were super early in our process. We kind of went into them thinking you know, we probably aren’t going to put an offer on these but we want to get the feel for actually physically going with our agent to a house and looking at it and seeing what that feels like but I think both of those houses went off the market that night. Like, the night that we looked at them, they went off the market.

[0:10:49.2] NF: And both of them, we went there and either someone was already showing when we got there or someone showed up to show before we left. So that was in the initial “hotter market” near our geographic area but even though we weren’t planning necessarily to make an offer that early in the process, it did give me some trepidation. This feeling like, “Oh man, when we find the right house, we have to move really, really fast or we’re going to lose out on it.” You know, that’s how it made me feel, that was my initial impression to the market, these houses just gone.

[0:11:29.1] NH: I think a lot of people feel that way and it can feel more overwhelming, especially if you’re like, looking at a house and someone shows up and you know, waiting for you to leave so they can go look at it. That feeling is like, I’m with you. I totally get it.

[0:11:39.2] KF: It was a little scary there first, you know, not knowing if we were going to be able to get the house that we wanted.

[0:11:44.5] NH: But I like your approach of you know, even though we’re not maybe a hundred percent ready or these aren’t houses that we’re a hundred percent certain on. It’s nice to go through the process, walk through the steps, and understand that, what that looks like so that when you were ready, when that house did pop up and come along, you can make the action point very quickly. So I think that was a smart move, that makes a lot of sense. You know, so talking about looking at houses then the big thing that I think people run into at that point too is, “Okay, well now, I’m ready to look at homes, I figured out my budget, you know, all these pieces are in place but what about financing?” I think that paying for a new house is a pretty overwhelming part of the process. How did you navigate that I guess and what did that look like for you guys?

[0:12:20.1] NH: So through our local realtor contact, we first were talking to her about – we had talked with YFP over the years about the different options available to healthcare professionals like pharmacists, you know the “physician style loans” or healthcare professional loans, whatever and particular institution chooses to call them and we’d said, “Hey, you know, this is something we’re interested in because we’re pretty sure we qualify and do you know anyone who does this?” and she got a contact that she was pretty sure did. So that was the first bank loan officer that we talked to and separately, through YFP, we had a resource that let us look by our state and my degree, which is pharmacy, PharmD, and see what banks have the pharmacist included in their physician-style loan programs. So we kind of had that list and then we had this contact and we worked through the process of pre-approval and kind of talking about some of the things and we actually found out that that bank didn’t routinely include pharmacists. The loan officer was super great, she felt like she could get us an exception and essentially get us one of those style loans, and then the week that we went to get that pre-approval all the way through, get that loan kind of nailed down was the week that there was some kind of like banking crisis, some bank in California.

[0:13:53.0] NF: Collapsed?

[0:13:53.4] NH: Collapsed. Yeah.

[0:13:54.4] NF: Something like that.

[0:13:55.6] NH: I remember.

[0:13:57.1] NF: And so that bank institutions were not doing any exceptions right now.

[0:13:59.7] KF: Yeah, they completely locked on exceptions for all of their loans.

[0:14:02.4] NF: So she put together the best custom loan that she could do for us and we went ahead and got that pre-approval but even she said like, “You should talk to another lender and see what they can offer you.” So then we went back to that list that we had through the resource from YFP and talked to one of those lenders and they, who did explicitly include pharmacists in their healthcare professional loan program and we went through the process with them as well of getting pre-approved. Now, their pre-approval was a little more vague in terms of what the interest rate would be in things. It was a lot of like, “You’re pre-approved but you won’t know any details until you give us like a purchase price and a date” kind of thing.

[0:14:49.3] KF: Yeah.

[0:14:53.1] NF: So we actually ended up going all the way through the process, getting to the point of making an offer, starting off with bank B, and then when we got the final numbers, it was not good.

[0:15:04.3] KF: They were terrible.

[0:15:05.6] NF: They were not good compared to bank A, and so we ended up switching lenders in that final week of between putting in the offer and having the offer accepted. We ended up switching lenders because everything across the board between the two offers was better for bank A, even though it didn’t end up being explicitly like a physician-style loan program. So that was surprising to me, it definitely wasn’t something I was expecting. I also didn’t fully realize before the process that pre-approvals only last for a certain period of time and because they’re a hard check on your credit, you obviously don’t want to go and get pre-approved at like 10 different places. It was definitely a process but we started with our local realtor to get someone that she was familiar with and had worked with before and that’s ultimately where we ended up back and so that ultimately was a good experience but there was definitely some angst. Once we started getting –

[0:16:06.4] KF: To put it lightly.

[0:16:08.0] NF: Once you started getting those final numbers from the second place that on paper, should have been better.

[0:16:13.4] KF: Better for us.

[0:16:14.1] NF: But again, we’re really focusing on like, “What is that monthly payment going to be?” Of course, we were talking about like PMI, we were going to like have to have PMI with the second place and I don’t really know why. One of the big distinctions with those healthcare professional loans is the amount that you need to put down in a down payment and we’re going to have to put down a lot more for Bank B. So like all of these things, again, just everything across the board ended up being better for Bank A. So I’m so glad that we talked to them first and had the option. That’s the bottom line is have at least two, maybe even three options because as long as your pre-approval is still valid, you should be able to pick the best option that fits you.

[0:16:56.0] NH: So many good nuggets in there and I want to make sure we highlight a few because I think you guys hit the nail on the head on all that stuff, right? So point one that I want to highlight is shop the lender, right? Talk to multiple lenders, don’t just buy into one person and lock into it. I am notorious for this. I will like, convince myself that once I’ve had a decision that like, I’m just going to stick with it because I’ve already made a decision, and even if it’s the bad one, I don’t care like I’m in, right? Don’t be me on that, right? Shop lenders upfront, that’s super smart.

Then, what I loved too is that you mentioned about changing the lenders along the way. So many people don’t realize you can do that, right? Even when you’ve put an offer in already, with the pre-approval letter, you can go back and get a different lender after the fact, right? You can’t be a week away from closing and change lenders but if it’s still early enough in that process even after the contract’s been accepted, you can change lenders. So definitely approach it for you guys on that and then the other thing you mentioned too was the hard credit checks. I advise my clients, any time they’re shopping around, try to do all of your pre-approval shopping within a two-week period that will ensure you only get one credit check. It will basically you know, trunk it down to one credit check across all those lenders, and then if you have to re-up your letter in three months, you know, you can do that for another poll but at least it won’t hurt your credit nearly as much.

So really, really good stuff you guys mentioned in there, I love that.

[0:18:10.4] NF: Well good, because we learned it by doing it.

[0:18:12.7] KF: As we were doing it.

[0:18:14.5] NH: It wasn’t that we knew it going in, which again is the point of this conversation.

[0:18:18.6] NF: Yeah, that’s exactly why I wanted to talk about this stuff because it’s those things that you don’t even know to ask those questions until you’re in the middle of it and then you learn it, you’re like, “Oh, wish I would have known this.” So yeah, I’m glad we’re covering this. Talking a little about the lender piece, you’ve mentioned your real estate agent a few times. We talk a lot here at YFP about using a team, right? Especially when making a financial decision, especially in the world of pharmacy, you know just about everything can benefit from that team approach. Were there other people on your team or were there key pieces of your team that you felt like were essential that maybe we haven’t mentioned or anything you want to highlight within the team that we’ve already touched on?

[0:18:51.0] NF: When you think that you know, it started with our YFP financial planners and so we’ve worked with YFP for three and a half years about. We started early 2020, actually just pre-COVID, which was a really fun time.

[0:19:04.3] KF: Yeah.

[0:19:04.9] NF: To get started, we were actually a week away from refinancing our student loans when the lockdown hit and everything. So I mean, we were on the cusp. So all that to say just to give people some context, so we’ve had three different people that we’ve worked with as our one-on-one financial planner and we actually started with Tim Baker, which is a ton of money.

[0:19:25.7] KF: Yes, it was.

[0:19:26.6] NF: And so along the way with all three of them, we’ve talked about our goals and we’ve talked about home buying, so it always started there and we definitely went there first to get in contact with you. You got us in contact with our local real estate agent. Our local real estate agent got us in contact, like I said, with our loan officer. Those were really the main people. They kind of facilitated most of the communication with all of the other, to use medical lingo, all the other consultants, if you will. We did a little bit of emailing back and forth with like a title agent and some things like that but I don’t feel like I knew those other people the way that I feel like we knew and talked a lot with our loan officer and our realtor.

[0:20:14.4] KF: Yeah.

[0:20:15.0] NH: Yeah, that makes a lot of sense and I know we touched on this a couple of times but you know, you guys used the home-buying concierge service that we offer here at YFP, and for those who haven’t heard about it maybe, basically it’s a free service that we offer, not just to planning clients but to anybody who’s interested. You can go right to our website, yourfinancialpharmacist.com, and click on “buy a home” and right there, you can sign up for a call with me. A 30-minute phone call or less, we can talk about your goals, we can talk about what you want to achieve, kind of home you want to buy, and then we’ll get you connected with a great real estate agent and something we really like to be upfront on here, right? Is like it’s not always perfect, right? So we’re pretty good at what we do, matching people up with great agents but sometimes the communication isn’t there upfront. So when we connected with you guys with the first agent, somebody that we’ve actually used in the past for other clients and has been fantastic the communication just wasn’t there, right?

[0:21:05.2] KF: At very first, things were fine. You know, we email back and forth, we were trying to set up a date to have a not really face-to-face but –

[0:21:12.9] NF: A more in-depth.

[0:21:14.1] KF: Like a more in-depth –

[0:21:14.8] NF: First conversation.

[0:21:15.6] KF: Conversation to get to know each other a little bit and what we’re kind of looking for and I had told her, “You know, we’re free at these three or four days the following week” and I never heard back from her and two weeks go by and I still haven’t heard back from her. I’ve reached out a couple of other times and so then we reach back out to you, Nate, and we’re like, “We don’t know what’s going on. We hope she’s okay but she’s not responding to anything. So what do we do?” and you were like, “You know, I’ll reach out to her, see if we can get you guys back in contact. If not, let me know and we’ll move on from here.” I was like, “Okay, great” and then we still didn’t hear from her.

So then you got us in contact like the very next week with our current real estate agent and she has been absolutely amazing. You know, she’s been very responsive, she’s been easy to communicate with, almost overly so. You know, there have been a couple of times that she’ll email us back and you know, “As soon as I get back from the gym, I’ll call you and do this, this, and this” and like, “Wow, you do not have to email me while you were working out but okay, thank you.”

[0:22:26.2] NH: Yeah, that’s good and it just shows that like you know, real estate is like any other business, right? There are good people and bad people within every business and there are good times and bad times for those same people, right? These are agents that we’ve worked with in the past and it just maybe there is something going on with their life that doesn’t work and this isn’t the right time for that connection to take place. So one of the things we really try to focus on with the concierge service is not just giving you an agent and walking away but being part of that team, right? YFP stays a part of your team the whole way so that if you do have that, we can come back, get you reconnected, and get you on the right path.

So again, I like to be really transparent with these conversations and tell people exactly what it’s like because it’s not as easy as picking up the phone, calling the first agent with the most highest reviews and then you get off and run, right? It doesn’t always work out that way, so I’m glad we get to share that story a little bit and it sounds like once you guys got off and actually looking at houses, it was the right fit and you guys were able to close, right?

[0:23:20.5] KF: Yeah.

[0:23:20.8] NF: Yeah, absolutely. Everything went well from there and honestly, like probably would have been fine because we were starting very early in the process but just again, with so much uncertainty and ignorance, for lack of a better term, on our part we wanted to start really early because we didn’t actually even know if that was early. We thought maybe six, seven months from our target buy date might have been late. We didn’t know and so that’s why we were really keen to start having conversations with someone and so that’s why we’re willing to go ahead and make a connection with someone who’s going to be able to interact and respond to us right then. So it was really nice, like you said, to have that lifeline of being able to come back to you, Nate, and say, “Hey, is there another direction we can go?”

[0:24:09.3] KF: Yeah.

[0:24:09.7] NH: Happy to do it. I mean, now that you’ve worked with an agent and again, gotten to the closing process. Are there tips you have for people out there that might be vetting their own agents or maybe not using our concierge service, like things that you think are super important to have as part of – as a good real estate agent?

[0:24:24.0] KF: I mean, I think we already said it a couple of times but I mean, being able to have clear and responsive communication.

[0:24:31.3] NF: Yeah, reasonably responsive, you know? I don’t need my realtor text if I send an email at midnight because I’m up just worried and thinking about something, I don’t need you to respond at 1:00 in the morning that kind of thing but you know accessible was certainly a thing, especially because there were times, there were parts of the process that we were working through on weekends, in the evenings. That week of like putting in the offer and getting the offer accepted was a very hectic four to six days and it felt like we were emailing and communicating and doing stuff –

[0:25:08.6] KF: Phone calls, texting.

[0:25:09.5] NF: Finding any paperwork, getting the paperwork signed.

[0:25:11.8] KF: Scanning stuff.

[0:25:12.7] NF: Doing all of this stuff nonstop for that whole week.

[0:25:16.4] KF: For that six days, yeah.

[0:25:18.0] NF: So you know, that’s important but I’d say the other piece and you can speak to part of this honey, is like having an agent who’s really listening to what it is that you’re looking for in a home not just in terms of price and that’s the piece you can speak to but also you know, if you’re saying or you’re finding, that was something we found things that were important to us that we didn’t realize were important to us once we started looking at homes and actually picturing our self living there with our family. You know, so the simple example for us is like we really wanted a fenced-in backyard, you know, just the idea of like being able to tell the boys, “Okay, go outside and play” and not have to worry about wildlife or somebody’s dog or whatever, you know?

As I started looking at different houses, some that had it and some that didn’t, I found that that was important to me and we were able to communicate to our realtor that. And then when you see that they’re responsive and they start then bringing you homes that match what it is that you’re saying that you want and what you’re finding that you want, I think that is really key. You know, if you are working with someone and they’re continually bringing things to you that are outside of your price range or not matching what you say you’re looking for, then that person for whatever reason may not be the right agent for you to find your home because it’s about you finding your home.

[0:26:48.7] KF: Right. Our agent said that to us a couple of times. She goes, “Well, this is not my home. So you know, if you like this that’s great.” That was really fun to hear her say that. What Neal was eluding to earlier was when we had initially talked to her, we had this really broad price range that we were looking at and you know she’s like, “All right” so she put it into her system and was able to email me houses to look at. Once we got closer and we were seeing, “Okay, these houses are probably way out of our comfortable price range” I emailed her and I said, “Hey, let’s change that filter to this price range” and she did it that day and I never received a house after that that was over that price range. So that was really, really nice to see her be responsive in that way, especially that quickly.

[0:27:39.3] NH: That’s great, I love it. I appreciate you guys giving that synopsis because I think those are all super important pieces and things that, like you said really well, it’s the things you don’t realize until after you’ve gone halfway down the process, you’re like, “Oh man, this is important and I didn’t know it’s important.” So that’s really key. So I want to go back really quickly to one other thing you mentioned about that crazy six days that you mentioned, right? So after the sort of like place is under contract, now what? Anything really stick out in there, things like tips you would give to people? I know it’s a ton of hurry up and wait and 30 people are emailing you that you don’t know any of them and they all need documents from you, right? I always know that process is hectic. Any tips or words of advice you can give to our audience that like, “Hey, do this upfront so that the six days aren’t as crazy.”

[0:28:23.8] KF: Well, it’s something that we did really early on in the process with our agent before we had even looked at a house at all was ask her for all the papers that we’d be seeing at closing. So she emailed us all the blank documents, we were able to read through those. We were kind of half-familiar with them by the time we were actually signing them so that we weren’t totally drowning in all that information all at once. So that was something really good that we were able to do but then I feel like something else that we were able to do was utilize our real estate agent and say, “Okay, what does this mean? Why are we doing this? You know, is this reasonable to ask the buyers for this or the sellers for this?” or whatever. Just utilize those resources that are right there that are helping you through the process anyway.

[0:29:11.2] NF: Yeah, I’d say, you know, it’s really easy to get overwhelmed and one thing that you definitely should do is actually sit down ideally together if you’re a couple and read the documents that you’re about to sign because sometimes, there might be things in there that you don’t either understand or didn’t expect. You know, if they say that they’re taking all the appliances out of the house and you didn’t know that –

[0:29:36.3] KF: That’s a big deal.

[0:29:37.6] NF: You need to know that. So that’s like a really simple thing, it’s very easy to skip over that and there were a couple of times where we were like, “Wait a minute, why is this number this? Shouldn’t it be different?” you know, we add a lot of communication about that. I didn’t realize our final closing cost changed multiple times because it’s like a projection and it had things in the projection and then they took them out and then they put them back in.

[0:30:03.7] KF: We thought they were a different price when they put them back in.

[0:30:05.6] NF: And we actually ended up scheduling our wire transfer for amount X and then it changed like 48 hours later and we had to call the bank and change the wire amount again, change it, and that was a little stressful, you know? Because we’re talking about a lot of money so you really don’t want to mess it up.

[0:30:22.5] KF: Right, that is where our loan officer came in. You know, I talked to her three or four times on the phone a week of closing and she was very, very good about walking me through like, “Okay, this is what’s happening right now, this is why the amount says this. This is what it should be closer to actual closing” and again, communicating with her and having her be accessible as well was really good for us not to get lost in the process.

[0:30:50.5] NF: Yeah, if you see something weird or you have a question, you should ask. If you don’t feel comfortable asking, you should take a big step back if that’s a big red flag. It is too big of a decision to go into it not knowing and understanding a lot of it. Now, that being said, I felt like when we actually finally signed our documents electronically, there was like a whole set. I mean, we did a physical signing part too, that was fine.

[0:31:16.4] KF: That was it.

[0:31:16.8] NF: There was like this whole section that was basically like, what is a home loan for dummies, and all this terminology. I was like, “Why isn’t this the first thing they send you?”

[0:31:26.7] KF: Yeah, why isn’t this the first thing that you read?

[0:31:28.6] NF: Somebody take these last 20 pages and just send it to me at the beginning and that would have made things a lot easier but overall, you know because we felt very comfortable asking questions and we just did, we just asked questions all the time.

[0:31:42.0] KF: I sent so many emails and so many text messages.

[0:31:45.2] NF: That helped. I mean, being organized, you know we had a lot of our documents saved like in a folder on the computer for like home purchase documents. That made it really because you’re going to have to upload a million things. Even something as simple as if you have the ability to scan documents, if you are printing them manually, signing them, or you have the ability to sign things electronically, you will make that process go a lot faster. If you have you know, a touch screen device and a PDF editor that you can sign right there, you know, like that is so much faster than printing and signing and going to the library and faxing it to yourself, so whatever.

[0:32:23.2] KF: Yeah, you know whatever you have to do.

[0:32:25.1] NF: You know, whatever you have to do to get all that paperwork done, it’s quite a process. Yeah, so it was fun for lack of a better word and we got all the way to the physical signing and it really was what everybody tells you like you’re going to sit there for an hour and a half and sign documents and get a cramp in your hand. Something that was interesting like we never ever saw our sellers. Like they had done everything ahead of time and just have like their representatives there.

[0:32:49.8] KF: Yeah, they’d pre-signed.

[0:32:51.4] NF: Kind of wasn’t expecting that but it did made a difference. There was even like a little hiccup at our closing, where the title company wasn’t sure that we had actually given them earnest money and we had and so then there’s –

[0:33:04.9] KF: Well and our loan officer was at our closing and she was like, “We definitely have this on file, we sent this to you.”

[0:33:10.7] NF: You know, so and if the title company, you know they have just like someone that they’ve hired, a third party like be there to do all that process so –

[0:33:18.8] KF: She has no idea, she doesn’t know us at all. She doesn’t know anything.

[0:33:21.9] NF: Yeah, she just has a file that’s like four inches thick with all of their documents and these notes in it, so then she’s talking to the title company people and they’re talking to the realtor and you know –

[0:33:34.5] KF: And they’re talking to the bank and we’re just sitting there like, “Okay, better run snacks to the boys.”

[0:33:40.4] NF: It all worked out but all that to say, I think that’s to say you know, do as many preparations as you can but don’t be surprised when –

[0:33:48.5] KF: Surprises come up.

[0:33:50.2] NF: Unexpected that you know, expect the unexpected because it is a very long complicated process and you will almost certainly run into something that you didn’t think about before or you haven’t heard that term or whatever.

[0:34:04.5] KF: Yeah.

[0:34:04.9] NH: Well, I really like the expectation setting, right? Like this is going to be a little crazy, be prepared for that and all the other prep work, the tips that you guys gave and I think creating a file in your computer that’s a great one. Being able to save documents because you might have to send them multiple times, referencing them, right? In case you did send the earnest money, you’ve got a document that says, “Hey, look, this is here” just in case someone else didn’t have access to that. So again, really great tips and it’s very clear that you guys have been through the process because I’m thinking about all these pieces like, “Oh yeah, I remember that. Oh yeah, that’s a problem. Oh yeah, I see my clients running into that.” So you guys are not alone and again, it’s nice to hear hopefully for some of our audience just how overwhelming it can seem but how you can make it through with a little bit of prep work and access to good resources.

So I really appreciate you guys hearing your story today, giving some first-time homebuyers out there some confidence that they can make it through and get to where you guys are now and again, just congrats on the new home, and seriously, thank you for sharing your story. It’s been awesome.

[0:35:01.6] KF: Yeah, thank you for having us.

[0:35:02.2] NF: Hey, thanks for having us.

[0:35:03.2] NH: Yeah, take care guys.

[END OF INTERVIEW]

[0:35:04.3] TU: Nate and I have covered a ton of information in this podcast. So imagine working with Nate one-on-one through your home-buying journey and having his support to give you much-needed peace of mind. We know many pharmacists want to feel confident about big financial decisions including a home purchase. So if you have fears of being house forked, concerns about the impact a home purchase might have on your other financial goals, Nate and his home-buying concierge service can help all at no cost to you. You can visit realestaterph.com or click on the link in the show notes to schedule your free 30-minute jumpstart planning session with Nate.

[DISCLAIMER]

[0:35:43.6] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information on the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. Furthermore, the information contained in our archived newsletters, blog post, and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 315: An Interview with Rachel Cruze (YFP Classic)

Posted on July 6, 2023July 3, 2023 by Tim U

Know Yourself, Know Your Money with New York Times Bestseller Rachel Cruze

Rachel Cruze discusses her new book, Know Yourself, Know Your Money.

About Today’s Guest

Rachel Cruze is a two-time #1 national best-selling author, financial expert, and host of The Rachel Cruze Show. Since 2010, Rachel has served at Ramsey Solutions, where she teaches people to avoid debt, save money, budget, and how to win with money at any stage in life. She’s authored three best-selling books, including her latest, Know Yourself, Know Your Money: Discover WHY You Handle Money the Way You Do and WHAT to Do About It. Follow Rachel on Twitter, Instagram, Facebook, and YouTube or online at rachelcruze.com.

Summary

National best-selling author and financial expert, Rachel Cruze, joins Tim Ulbrich to discuss her newest book, Know Yourself, Know Your Money: Discover WHY You Handle Money the Way You Do and WHAT to Do About It. Tim and Rachel delve into various portions of the book, highlighting specific lessons and concepts relatable to pharmacists, parents, and anyone interested in learning more about themselves and their relationship to their finances.

Rachel walks listeners through “Discovering Your Personal Money Mindset,” including how we form our ideas about money and how we learn to handle money as we do through “Your Childhood Money Classroom.” Rachel goes through the four money classrooms. She reminds us that regardless of the quadrant that you grew up in, you can choose your quadrant from this point forward. Rachel outlines seven money tendencies, how they not only impact your financial picture, and how these tendencies affect interpersonal relationships with significant others. Tim and Rachel share an earnest discussion about money fears, detailed in Chapters 5 and 6 of the book. They close with an eye-opening discussion on part 2 of the book, focusing on the “Power of Contentment.” Rachel shares how contentment changes your motivation for spending. She explains a practical exercise for determining what brings you joy and demonstrates how learning where and how you find happiness allows you to focus your spending on what is truly important to you.

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich: Rachel, welcome to the show.

Rachel Cruze: Yeah, thank you so much for having me. I appreciate it.

Tim Ulbrich: It’s really an honor to have you on, and I’m excited to talk about your latest book, “Know Yourself, Know Your Money.” And for those listening in the YFP community that are already familiar with the Ramsey baby steps, I think this book does an excellent job covering much of the mindset, the behaviors, the beliefs that are the foundation to ensuring your goals and dreams become a reality. So Rachel, in Part 1 of the book, which is “Discovering Your Personal Money Mindset,” you talk in Chapter 1 about your childhood money classroom. And you make a strong argument that this is the first step in understanding why we handle money the way that we do and that “there are really two ways we learned about money: what our parents communicated emotionally and what they communicated verbally.” Tell us more about these two modes of communication and why it is so important to dig into our past for some honest reflection before we chart our path forward.

Rachel Cruze: Yes, well whenever you talk to any great psychologist or counselor or therapist, they will tell you that so much of who you are today is from how you grew up, whether that’s coping mechanisms, defense strategies, all of that. Learning to kind of survive really in your childhood is something that’s engrained in all of us. And so when I was writing the book, I wanted to go in and say, “OK, I want to understand why we handle money the way we do.” Like you said, it’s not just the what — you know, we talk about the how a lot around Ramsey Solutions, how to get out of debt, how to invest, how to refinance, how to give, but I wanted to answer that question, why? Why do we do the things we do? And it always stems back to that classroom that you lived in, which is your home growing up. And there’s a lot of lessons in those classrooms that we grew up in that you want to unlearn. As an adult, you’re like, I don’t want to take that with me. And there’s a lot of lessons that you do want to take with you. And so being able to just pinpoint, hey, my money habits, the way I view money, part of that is because of my environment growing up. And so those two modes of communication, like you said, the verbal, what is said out loud, and then that emotional state, is really important. So as I was writing the manuscript for this book, you know, kind of coming across these two things, and I remember thinking, oh, OK, it’s like a quadrant. God gave me a graph to explain this, and I’m so happy because it ends up being this four quadrant where that verbal communication and emotional communication intersect. And it ends up really showing these four different money classrooms. And so for you to be able to identify OK, I grew up in Classroom No. 1 or Classroom No. 2 there, and to understand that really will show you why you handle money the way you do today.

Tim Ulbrich: Yeah, and this was really a gut check for me, Rachel, as a father of four young boys, you know, I feel like I do a decent job in communicating verbally about money. It’s something I talk about daily, but it was a gut check on like the emotional part and what are some of the messages that we’re sending to our kids? And so part of this as I read it is unlearning in part or reflecting upon your past but also for those that are out there that are parents, thinking about some of the money scripts and messages that we’re sending in our own homes as well.

Rachel Cruze: That’s right. Yeah. And even that nonverbal, you know, in the classroom, Classroom 1 is the anxious money classroom. And that’s where it’s verbally closed but emotionally stressed. Classroom 2 is the unstable money classroom where it’s emotionally stressed but verbally open, so it’s lots of conflict, lots of fighting. That Classroom 3 is the unaware money classroom, which is emotionally calm but it’s verbally closed. So it’s not talked about, but it’s also not felt. Like it’s a stress point, so you don’t really even — your head is kind of in the sand, if you will, about money until you leave home and realize, oh wow, there’s a lot to do with this subject. And then Classroom 4 is that secure money classroom. And that’s where it’s verbally open but emotionally calm. So that fourth classroom, kind of like what you’re saying, I really wanted the readers to think about their current nuclear family to say, OK, if I do have kids or if I want kids in the future, how am I going to do this on the verbal and emotional scale? And so moving to that Classroom 4 is really important for people because the thing about that is you don’t have to be a perfect parents by any means to be in that classroom. You also don’t have to have a ton of money, right? You don’t have to be like a millionaire to be in that. It’s these habits that you create. And what’s funny is when you’re emotionally calm about money, usually there’s a plan around it, usually there’s a level of healthy control. There’s some safety nets in place like an emergency fund, you know, there’s these habits that you do in the how-to of money that set you up to create that emotionally stable home around this subject where for so many people it’s not safe, it’s not emotionally calm, it is very stressed. And when you look at the statistics of the average American today, I’m like, yeah, I would be stressed too, right? Living paycheck-to-paycheck, having $16,000 of credit card debt, all of it. So I understand why that is, but getting yourself in a place financially where you’re more under control, you’re naturally going to bring in that emotional side in your household, which is amazing. And then the verbal side you pointed out too is talking about it. And I think it’s less taboo today than it was even 20 years ago. I think parents engage their kids in more conversations maybe than the Boomers did for their kids, you know, like when you look at the different generational differences. But again, engaging it and showing the mechanics but also the other side of it of hey, here’s what contentment looks like. Here’s what generosity does to your heart and your viewpoint in life. I mean, you know, bringing in those hard and soft subjects of money are important to talk to about with kids.

Tim Ulbrich: Yeah, and I love, Rachel, how you take folks through this journey of understanding these four different classrooms you mentioned in the quadrant. And it can be heavy to kind of walk through and reflect on some of this. But you end Chapter 3 where you talk about calm money classrooms, you end Chapter 3 by reassuring us that our childhood does not define us. You say, “Your childhood may have given you a rocky start, but it doesn’t make or break you, regardless of the household you grew up in. You get to choose your quadrant from this point forward.” What an awesome view, right? We learn from the past, but we’ve got an opportunity to chart a new path going forward.

Rachel Cruze: That’s right, yeah. I mean, there’s so much hope and I think even in the money piece of my messages that I communicate with people is like no matter what mistakes you’ve made, yeah, maybe you do have a ton of debt. So on a more logistical side, yeah, maybe you have a deeper hole to dig out of than the person next to you, but no matter what, you get to make the decisions to say, no, I actually want to change how I view something or the habits around money. And the same is true with your classroom. Some people, a lot of people I would say, grew up in a hard environment when it came to money with their parents. But yet you don’t have to just mirror that story, right? You can take charge of your life to say, you know what, I’m not going to sit here and bash my parents, but I’m also not going to defend them. I’m going to just tell the truth of what happened, and here’s the truth. OK, there’s some good stuff, and there’s some bad stuff. And the bad stuff I can forgive, and I’m going to move forward though to choose something different for my life and my family. And I think it’s powerful. And I think we have to do that in all of parenting. I’m not a parenting expert by any means, but I’m like, you know, my husband and I have said, OK, this is our family. What are we going to choose to do in this? And so the money pieces is part of that.

Tim Ulbrich: Absolutely. And give yourself some grace along the way, right?

Rachel Cruze: That’s right. Oh, absolutely. There’s hope in grace. Absolutely.

Tim Ulbrich: Absolutely. Rachel, in Chapter 4, which is “Your Unique Money Tendencies,” you introduce seven major money tendencies. And we’re not going to go through all of these, but I’ll read them off quickly. And those seven are save or spender, nerd or free spirit, experiences or things, quality or quantity, safety or status, abundance or scarcity, and planned giving or spontaneous giving. And I want to break down one of these further that I suspect our audience has heard of before, and that is the concept of being a nerd or being a free spirit. And so this as one example of these different tendencies, tell us more about the difference between these two and why each really has its own benefits and challenges and we want to think about these on a scale.

Rachel Cruze: Yes. Well, when I did these seven tendencies, I didn’t want one to be right or wrong because I feel like that can happen a lot. You know, it’s just no, these are naturally where you’re bent, and if you go to the extremes of any of these tendencies, that can get unhealthy. Kind of that middle ground is to say, ‘OK, I’m naturally bent towards this, but I can actually have a little bit of both,’ which makes you I think more well-rounded, honestly. But yeah, the nerd and free spirit, that was kind of a phrase that was coined, two terms that were coined by my dad, honestly, about probably 20 years ago talking about the budget specifically and how I make it a little bit more broad in just the idea of how you view money, but one of you — or if you’re married, usually opposites attract. But you either lean toward a nerd, which is the one that yeah, you’re just organized, you probably have Excel spreadsheets all over the place, you love to budget, you love to feel in control, you know what’s going on, you keep up with everything, numbers are your friends, it feels great to know what’s going on. And so that nerd is naturally going to be bent one way towards money, which obviously is more the control factor. Sometimes more the scarcity mindset, they want to just know what’s going on. And then the free spirit is on the opposite end, and that’s the person that is more hey, everything is going to work out. It’s fine, it’s fine. A budget to them, it feels restrictive. It feels like there’s no fun in life if I have to live on a budget, that means I have to say no a lot, and I don’t want to say no. I want to say yes because you only live once, you know? It’s a little bit more of that mentality. And what’s funny is I actually lean more free spirit in who I am, so this money stuff and budgeting, some of it was hard for me to say, OK, I have to learn this because I don’t have to become a nerd to be good at money. That’s not the reason behind this. But it is to say, “Hey, there are qualities that I need to pick up,” because if I’m a free spirit on the extreme of the free spirit side, I’m probably going to be broke. I’m probably going to have lots of debt because I’m not keeping up with anything, I’m just doing what I want in the moment, what feels good. And that’s not wise. But I also don’t have to absolutely love numbers like my husband. He is more of the nerd. Like I mean, he has spreadsheets. He’s like all about the five-year goal and what’s going in each month, looking at the mutual funds. I mean, he just loves it. And I’m like, I’m the money person that talks about this every day, and I don’t love it that much. Like I’ll do the budget and track transactions, but that’s about it. So again, it’s just pinpointing hey, here’s where I lean, here’s places I can learn, and here’s some really great things about that side of the nerd or great things about the free spirit. And then if you’re married, again, it’s good to call that too because I think in marriage, money can be such a difficult subject. But to be able to say, “OK, you’re not my enemy in this. You’re just more of a nerd in that or you’re more of a free spirit, so how can we come together and work as a team?”

Tim Ulbrich: Yeah, you do a great job in the book going through each one of these sets that I mentioned and not only what they are and some of the differences and where that balance might but also some great exercises at the end of the chapter where folks can reflect upon those, and I think it would be great conversation starters as well for couples that are going through this together. Rachel, Chapters 5 and 6, it gets real, right? You start to talk about your money fears, six of them in total. And I want to pick apart the fear that you say is the most common one you see, which is not having enough. And essentially, this is if something bad happens, the fear that I won’t survive financially. And as you talk about in the book, this could be job loss, this could be a huge health bill, this could be a major house issue. And really, the list can go on and on of all of the things that might go wrong. And it could be a today thing, a today fear, or it could be a future fear. For example, will I have enough when it comes time to retirement? And I think this quickly becomes overwhelming and for many can become paralyzing. And as you say in the book, the “what if” question, it’s a scary question. And so tell us more here, how can we face this fear head-on without it ultimately paralyzing us to take action with our financial plan?

Rachel Cruze: Yeah, when we talk about fear — for this book, I did a lot of research around it because usually fear is just seen as a 100% bad thing, right? Face your fears, don’t let your fear hold you back, all that. Well, some of that, yes, is very true. I remember talking to Dr. Chip Dodd about this, and I loved what he said because he said, fear can actually be a gift. Fear is your body’s response that you are in need of something. Now, again, when that fear becomes paralyzing or turns into anxiety, like any of that, we don’t want that. But just that initial fear, OK, what is that telling you? Because it actually could be telling you something that you need to listen to to diminish that fear. So for a lot of people — and gosh, we just walked through 2020, right, which was just the craziest year I think of all of our lives, around this. And so you could say, OK, my fear is that if something happens, am I going to be OK? If we lose a job, am I going to be OK? Well, you look at your situation and again, just pulling in just stats that I know that 78% of Americans live paycheck-to-paycheck, the average car payment is around $548, the average family owes $16,000 just on their credit cards. So you put all that together and if something happens, are you going to be OK? Well yeah, you’re going to be able to literally survive. But financially, you’re going to be in a mess. You’re going to be in a mess if you don’t have another paycheck to pay these bills. So let’s look at the reality of what’s going on. Again, it’s not to paralyze you, but it’s to say, OK, what can I do now to get in better control of my money? Am I budgeting? Am I living on less than I make? Do I have an emergency fund? And do I have a goal that I’m working towards that actually puts my money towards something, right? Am I giving? Like am I doing these things? And for a lot of people, if they say, “No, I’m not,” hopefully it’s a little bit of a motivator. I don’t think fear has to be the only motivator, but I think it’s a good jumpstart to it of OK, let’s get some things in place so that we can say, OK, maybe you look up in 24, 36 months, three years down the road, and you’re completely debt-free, you have a fully-funded emergency fund of 3-6 months worth of expenses. You now have retirement planned out, you know how much you’re putting in each month, like you actually have a plan in place. And what caused that may have been that fear of wow, if I lose one paycheck, this entire thing just implodes is what it feels like. So again, let that fear drive you. And again, it’s a big one, that fear of am I going to be OK? And what’s interesting is prior to 2020, it was women’s top financial fear. So for some men, it was oh, there’s a dream that I have that I can’t get to because of my life or you fill in the lank. But women day-in and day-out, consistently when surveyed, it was am I going to be OK? And then I think you fast forward to 2021, I don’t have hard data for this, but I would say a lot of people now are in that bucket.

Tim Ulbrich: Absolutely.

Rachel Cruze: Because of what we walked through. So again, I want this fear to not turn into something that’s super unhealthy, but I want it to be a little bit of that jumpstart to say OK, is this rational? OK, maybe it is. So maybe I need to change some things. But then also I’ll tell you this too: It could be irrational. I mean, my husband and I have been doing this plan for 11 years of marriage, so we are, we’re debt-free — I mean, we’ve done it to the t. And it works, No. 1, I can say that. I’m the proof. But No. 2, even during the pandemic, I had a few nights where I went to bed thinking, oh my gosh, are we going to be OK? But what allowed me a little bit to have that safety is realizing No. 1, black-and-white on paper, the numbers, yes, we’re going to be fine because we’ve been doing this, we’ve been diligent. But also No. 2, Rachel, it’s a little bit of a wakeup call for me emotionally to say why am I so fearful that this foundation that I’ve set, this financial foundation, that if it was shook, who am I? Right? And it made me do a gut check, honestly, to say OK, where is my identity? Where have I been putting value? Because money, while we need to be responsible with it and we want to be able to do things like get out of debt and build wealth and change our family tree and be generous to others, all of these wonderful things, money is not our God. And if it’s the thing day-in and day-out that you’re looking toward, it’s not going to fulfill you. And I kind of got to a place where I had to do a gut check on myself last year to think, OK, who am I emotionally on that side, right, if that foundation is shaken? So again, this fear conversation I think is a really important one to have. And I think it’s a really good one to have.

Tim Ulbrich: I do too. And I think it can be motivating for the reasons that you mentioned. Our listeners have heard me say many times about really building a strong financial foundation and think about what the building blocks of that are. But there are challenges that can be had in the security of that foundation and what you’re ultimately putting that security in. So I think a great reminder. And this section of the book, as I mentioned, really powerful. You talked through several other fears. We’re just scratching the surface here. You talk about the fears of not realizing your dreams, of not being capable, external fears, past mistakes, repeating the past, you know, all types of things that we want to be considering. So I hope folks will pick up a copy of the book and check that out. Rachel, Part 2 of the book, “Discovering What You Do With Money and Why,” you connect the information the reader learns in Part 1 so that it can then be applied to their personal situation. And one thing that stood out to me in this section was the concept that you talk about, the power of contentment. And you say that “contentment is a process that changes your motivation for spending money.” Tell us more about that.

Rachel Cruze: Yeah, contentment I think is a huge piece of this financial conversation that has to be in place because money is like a magnifying glass. It makes you more of what you already are. And so if you are a discontent person and you think — and it’s all of us, you know, at different times in life for sure and maybe different parts of the day too, so I’m not speaking out of that I have found the answer to it all — but realizing though if we live in a discontentment state, which usually results in OK, if I can just make x amount of money, if I can just buy this kind of car, if I can go on that kind of vacation, if I live in this kind of house, then everything is going to be fixed. And we think that in our culture in our country that our problems are fixed by stuff. And that discontentment is just magnified, and the problem is that if you build wealth and you actually have the money to go and get these things, you get the things, and it doesn’t fulfill you and you’re discontent again with just more stuff around you. And so there’s that heart piece that I think is important to keep in check. And for me, it’s calling out to people, OK, what are the things in your life that money — there’s not a price tag towards. And this was kind of my journey even just last year, I thought, Rachel, what are the things in my life that I can’t pay for. Well, that’s a great marriage, having children that I am trying to raise in the best way possible, my health, my spiritual walk, my family, you know, my friendships, like relationships. So kind of mapping those things out and realizing OK, if I can invest my time and my energy in those things, life is so much richer, right? And again, not that it doesn’t mean you can’t have a great house or go on a great vacation. My husband and I just got back on Saturday from a fun trip that him and I just took, you know, for a few nights. It was fantastic. It was wonderful. But those things don’t fulfill you, right? It’s the fact that I was with my husband. And we got to have that time together. That is what was fulfilling. And so all of that I think stems to that contentment, and that contentment piece, again, I think is — we tried to find it in stuff, and I really push people to find it in things that money can’t buy.

Tim Ulbrich: My favorite part of the book, Rachel, is that you make a really good case for the importance of connecting saving and dreaming. Saving and dreaming. And we talk a lot on this show about having a strong financial why. And this chapter reminded me of that concept. You say that, “Not having any savings is a worrying sign for two big problems. The first problem is that your house isn’t in order. You’re not prepared. But not having savings is also a worrying sign of a second problem: that you’re not tuned into your dreams.” What do you mean by this?

Rachel Cruze: Well, when I did this part of the book, you know, I wanted to kind of walk through OK, why do we spend the way we spend? Why do we save the way we save? Why do we give the way we give? And so when I was in that saving section, I was like, OK, why do we save the way we save? And I’m like, well, what are the things we save for? What are the — I’m like, well, it’s because we have these dreams. Is it to build a house one day? Is it to be debt-free? You know, whatever it is, and that gives purpose behind our dollars. It gives us purpose to say OK, when the money comes in, I actually know where it’s going. It’s going to something that I value in life. And that’s what makes things rich, right? That’s what brings joy. And people that just live life and they’re not intentional, it’s just kind of that paycheck-to-paycheck, I go to work, I get paid, I just keep doing the same thing. And you look up in five years and not much has changed about your life, I bet your savings hasn’t changed either because you don’t have a goal, you don’t have something you’re saving towards. And so that dreaming portion, it is, it’s so, so critical. I mean, any great book motivator that shows you how to be better in certain parts of your life, goals are always in there. Those dreams are always in there. And so there’s the short-term dreams, have something that you’re working towards five years and less so that you can get to it quickly. And then have those dreams that are five years or more that you say, OK, out there in the future, what do I want? And then also have shared dreams. If those two dreams don’t coincide with your spouse, then have something you guys are working at together. I mean, all of this is going to be a partnership if you’re married. But I think having those dreams together is so crucial where yes, we are individuals, so my husband may have a dream to go on a hunting trip, you know, to South Dakota. That’s not my dream. That’s great if that’s his dream. It’s not my dream. So what are the dreams that we have together? And so all of that, it gives you such motivation. And it was funny, that trip we just went on last week, we had an agenda. We had like four things we wanted to talk about. But one of them was we literally set our financial dreams. One of ours was to build a house, and we moved in November of ‘19. And honestly, since then, I mean, we went through 2020, which was crazy. Now, we’re kind of on the other side saying, OK, what do we want? Besides just a number, what are the things that we’re shooting for? And just having those conversations, it’s so fun. I mean, it just brings life to you or again, if you’re married, to your marriage, just to have things that you’re working towards together. Again, it gives you purpose. It gives you purpose to save. And if there’s not purpose to save, you’re more than likely not going to do it.

Tim Ulbrich: Yeah, I think shared dreams, it’s so important. Great wisdom. I think especially for folks that are in the weeds and maybe frustrated with the budget or feeling like a goal is taking forever, I think some of those dreams can lift folks together and get excited behind the vision, you know, especially while there’s other things that are happening along the way. Rachel, I want to wrap up our time by talking about giving. And you make the case that giving is ultimately the antidote to fear. Why is that the case?

Rachel Cruze: There’s something about living life with an open hand where you say, “You know what, I’m actually going to give things,” because I think the opposite of that is that closed fist mentality where you’re going to just control everything and it’s all yours and it’s just all right here, and there’s a level of that that just, it gets exhausting. And there’s not joy in that. And so when you actually open your hand and give, which sounds counterintuitive, right, if I’m trying to put money towards a dream or I’m trying to put money towards getting out of debt or building an emergency fund, but I’m giving some of it away, like that just seems so backwards where in fact what it does is it fuels you. Because when you live a life that you move on the spectrum from being selfish where it is all about you to selfless where you actually see other people and you see OK, the needs that are out there, things that your money can do, even if it’s not a lot of money, but using it as a tool to help people, it changes you. I mean, it really, really changes you. And there’s nothing like it. It’s cliche to say, but it’s true. The joy that you get from giving is unlike any other joy that you can have in life. Like it gives something to you, to your soul. Because I think we were created to be givers. And when you’re living in that, it changes your perspective. And I also think selfless people have a better quality of life. I think they’re better spouses, better parents, better coworkers, better friends. You know, people that actually care about other people, it’s an amazing thing, but I think it does, it gives you a quality of life that’s so deep. And I think that it can be — obviously you can give all different kinds of ways, but your money is one of those. And when you live that life with an open hand, it does something to your soul that I think is so, so healthy in a world that is so self-centered.

Tim Ulbrich: Rachel, great, great stuff. Where is the best place that our community can go to connect with you and learn more about your work?

Rachel Cruze: Yeah, you can go to RachelCruze.com. The book “Know Yourself, Know Your Money” is anywhere books are sold. And I’m also — I have a podcast, “The Rachel Cruze Show” you can check out as well.

Tim Ulbrich: Awesome. So to the YFP community, make sure to pick up your copy of “Know Yourself, Know Your Money,” available really anywhere, also available at RamseySolutions.com. We’ve just scratched the surface during this interview. I’m confident you’ll gain so much more from digging into the book and completing the activities at the end of each chapter. In the book, you’ll discover what’s at the root of your money tendencies, including how to overcome your biggest money fears, how your childhood impacts your money decisions today, and what really motivates your spending, saving, giving, and more. Rachel, thank you again for taking time to come on the show. Really appreciate it.

Rachel Cruze: No, thanks for having me. Really, really thankful. Thanks.

[END]

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Month: July 2023

YFP 318: Midyear Tax Planning and Projections

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YFP 317: YFP Planning Case Study #7: Balancing Student Loans, a Wedding, Home Buying, & Saving for Retirement

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YFP 316: Real Tips From Recent First-Time Home Buyers

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YFP 315: An Interview with Rachel Cruze (YFP Classic)

Know Yourself, Know Your Money with New York Times Bestseller Rachel Cruze

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