YFP 073: How to Determine the Priority of Investing


 

How to Determine the Priority of Investing

On Episode 73 of the Your Financial Pharmacist podcast, Tim Ulbrich, founder of Your Financial Pharmacist, and Tim Church, YFP Team Member, continue a month-long series on investing by talking through the various retirement/investing options available, key principles for retirement savings, and how to prioritize investing. The figure below summarizes the episode and lists the 2019 annual contribution limits for the most common retirement accounts.

Summary

On this episode, Tim and Tim discuss the priority of investing in retirement and other accounts. Tim Church mentions savings accounts aren’t able to pay the amount that inflation rises each year (2-3%), so it’s important to think about other options on how to beat inflation while paying a minimal amount of taxes. This episode focuses on using disposable income to save for retirement.

Most listeners will be presented with the options of 401(k), 403(b), or TSP (Thrift Savings Plan) and will be offered matches that vary employer to employer. There are a number of different retirement options available. Traditional varieties, Roth, IRA, backdoor Roth IRA, HSA, and SEP-IRA are all potential options for investment. Details are given for each of these options, including how much you are able to contribute as an employer each year and the age in which you can withdraw funds.

When it comes to the priority of investing, YFP suggests that you first use the employer match as it’s free money and should be the priority in your financial plan. Then, use the HSA if it’s offered to you as it carries a triple tax benefit and is a powerful tool for investing. Roth IRA and Roth 401(k) can then be contributed to as they offer tax free savings over time. You’ll pay the taxes today, allowing your money to grow tax free. After that, max out your traditional 401(k) and then a SEP- IRA. If you’ve maxed out the contributions to everything previously mentioned, you can then consider investing in brokerage accounts.

It’s important to note that this is not a financial plan, everyone’s situation is different and therefore different options may work better for you than what is mentioned, and not everyone will agree with what we have suggested.

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 073 of the Your Financial Pharmacist podcast. Excited to be here alongside, in-person, with Tim Church to talk about prioritizing your investing for the future. Tim Church, how we doing?

Tim Church: Doing great, Tim. Glad to have you down here. How’s the weather feel?

Tim Ulbrich: It’s unbelievable. So here we are, mid- to end of October, came from northeast Ohio, below freezing weather, and they had to de-ice the plane before I got here. Came, landed, walked out, and I was overdressed, too warm for the day, saw the palm trees, so excited to be here. And Andrea has been an incredible.

Tim Church: Well, thanks. That’s basically why I’ve been down here the past seven years if you haven’t figured that out yet.

Tim Ulbrich: Yeah, for those of you that don’t know, Tim grew up in the Snow Belt and has made the wise decision of coming down south, where it’s a little bit warmer. So I get it now. I see what you’re doing here every day. So here we are, we’re talking about investing in and prioritizing in terms of the means in which people are investing. I think this is a long overdue topic. We acknowledge we haven’t done a ton on the topic of investing on this podcast, a little bit here or there. We did Investing 101 back at the beginning of the podcast, but that’s what this month-long series is all about. And probably one of the most important questions, most frequent questions we get is, so with all these options available, where should I actually be putting my money? And in what order? Especially for those that are coming out as new practitioners. So long, long overdue. Would you agree?

Tim Church: Yeah, definitely. I think so. And I think there’s a lot of great questions and things that come up with investing. And especially as you guys talked about in the Dave Ramsey episode, what comes first — investing versus paying off student loans and other debts. But I think this topic that we’re talking about just in terms of, OK, you’ve got these retirement investment options available. How do you prioritize and how do you say, OK, this is the first one I’m going to go after. And then after I do that, I’m going to go to the next one. And there’s a lot of questions that come up with that.

Tim Ulbrich: Absolutely. And I know as a new practitioner, new grad, I struggled with that myself, not only where does this fit within the other context of other goals, but also should I be maxing out my employer account? Everyone says Roth IRAs, putting money into those. I get emails about these brokerage accounts, what should I be doing and in what order? So we’re going to talk about that and give you our opinion on that topic. But I think it’s first important to start with what are the key principles of retirement savings? And as you and I were talking about this episode, we talked a little bit about inflation, taxes, and the power of investing early and often. So give us a little bit more information around those principles of investing.

Tim Church: Alright. So if you look at inflation over the years, over several decades, it’s typically 2-3% per year, which most savings accounts are not paying that, right?

Tim Ulbrich: Absolutely.

Tim Church: And so when you look at that, you have to say, OK, what are the other options that are available to me that I can use to not only get a better return to beat inflation, but the other consideration is how do you do that with paying the minimal amount of taxes that you can so you’re keeping most of that money that’s growing?

Tim Ulbrich: Yeah, and I think just to add to that, the one advantage that young pharmacists have is that you’re coming out with a great income, typically — many graduates are coming out in their mid- to late 20s, you’ve got lots of years ahead of you in terms of investing a significant percentage and portion of your income and allowing that time for compound growth. So I like to think of inflation as kind of this gnawing thing that is just always coming after you. And I think it’s important to do that. And I read a couple books several years ago that if you really look at the impact that inflation can have on your finances, it’s something we don’t think a lot about, almost like fees on investment vehicles and other things. So inflation, taxes, and starting early and often. Now, Tim, it’s important that we talk about for everybody listening to this podcast, their personal situation is going to be different. And here, we’re going to talk specifically — almost in a silo of investing, right? And we know that those listening, some are looking at $100,000-200,000 in debt, other people are out of debt, personal life situations that are very different, all types of things. And so here, we’re really looking at if somebody has disposable income and they’re looking to invest that for retirement, in what order are they going to do that, right? So when I say if somebody has disposable income, what are we referring to there?

Tim Church: Basically, you’re talking about money that you have after you’re paying your expenses every month. So anything that you have to pay for your bills, how much it costs to live, what is that additional amount of money that you have that could be going towards investment? Many people, like you said, are flooded in debt, and so you could be listening to this episode, and saying, ‘What disposable income do I have? I’m just trying to survive. I’m trying to make it.’ But that’s really where we’re getting at is let’s just assume you’re going into this episode that you have money to invest to put in retirement accounts. Now, if that’s who you are listening to this episode and saying, I don’t have any money to put in investments because of the bills and things I have, well, it’s a pretty simple equation. That in order to increase your disposable income, you’ve got to increase your earnings, get a side hustle, work more hours, or you’ve got to decrease your expenses. And so that’s where really budgeting comes into play.

Tim Ulbrich: Absolutely, yeah. And I think that idea of it’s a simple equation — you either increase your earnings or you decrease your expenses. And just a shout out to the work you’ve been doing with the side hustle series, giving people ideas. We’ve got more content coming there. And just before we jump into the buckets of investing, I think it’s important that we are not — and we’ve had this conversation multiple times on the previous episodes — but we’re not going to have a conversation about should I be investing or should I be paying off my debt? And as I mentioned before, one of my concerns with an episode like this where we talk about investing or even the month-long series in a silo is that this is one part of a comprehensive financial plan. And you’ve got to look at the whole picture. So if you want more information on our thoughts about investing while in debt and how does that fit in with emergency funds and other life goals, head on over to episodes 068, where Tim Baker and I tackle that, where we reviewed the pros and cons of the Dave Ramsey plan. And I’m sure that’s evoked a lot of emotional reactions because it usually does.

Tim Church: Yeah, that was a great episode. And I think you guys did a great job talking through some of the controversy, but also some of the positive things that are in that plan and some of the behavioral aspects of it. And so when we’re talking about these major buckets, things that you can invest in for retirement, one of the things that came to mind, Tim Baker, he recently did an investing webinar. And he showed this image of actual buckets, and he was naming the buckets and putting one in. And I don’t know if when you were a kid, Tim — do you ever remember that show, Bozo the Clown? Do you ever remember that?

Tim Ulbrich: Yeah, yes.

Tim Church: And in that show, at the end of the episode — I think it was at the end — they actually were throwing ping pong balls into buckets. And they progressively — but there was a specific order that you had to put them in. And for some reason, he really evoked that memory when he was showing that figure. But it’s cool because it’s really, that’s what we’re talking about here. We’re talking about, OK, what’s the first bucket that you’re going to put your money toward? And then how do you go to the next level and what do you do?

Tim Ulbrich: And I think the visuals he used as well with the buckets in that presentation, it was a good reminder that these are vehicles and not the investments themselves. That’s an important point. We’ll talk more throughout this month. But when we talk about 401k’s, 403b’s, IRAs, etc., those are essentially the tax advantage shield in which you’re investing. But within that, you’re going to be choosing the individual investments, whether that’s stocks, bonds or mutual funds, etc. So let’s jump into these buckets. So probably for the vast majority of our listeners, they’re going to be presented by their employer with an option of a 401k, a 403b and what’s referred to as a TSP, which is a VA employee, right, that’s you.

Tim Church: Right, that’s the Thrift Savings Plan.

Tim Ulbrich: The Thrift Savings Plan. So we’re going to group these together because I think we throw around these words like we assume everyone understands exactly the implications of them. So let’s review quickly — a 401k, a 403b, and a Thrift Savings Plan, these are employer-sponsored retirement plans. So obviously, in order to get this benefit, you’re working for somebody. They’re going to offer this. And at what level they’re offering this benefit in terms of a match and what they can contribute is all over the place. And I think one of the things that we’ll talk in future episodes is as you’re looking at different jobs and comparing benefits and things, it’s a key thing to be looking at what is the benefit that you have? And I know the VA, that’s a pretty lucrative benefit on your TSP, is that correct?

Tim Church: Yeah, through the TSP — a couple different reasons. No. 1, they do offer a match up to 5%. But one of the other things is that they have very low fees in the funds that they have available. And I know that, Tim Baker always talks about that when you’re looking at different options within your 401k, is that you have to pay attention to those fees because even if you’re not seeing that change in your accounts, like over time, it can really eat at the earnings that you have.

Tim Ulbrich: Absolutely. And so let’s talk first — we’ve got 401k’s, 403b’s or TSPs, let’s talk about the traditional variety first because what has complicated this whole equation is that — you know, I remember when I came out of school, we were looking at primarily a traditional 401k or a Roth IRA. And now, we’ve got hybrids of these vehicles such as a Roth 401k or a Roth 403b, which I think has made this very complicated and probably make it even difficult to talk about it on the podcast in something like this. It’s good for a visual. So when we talk about a traditional 401k or 403b, essentially what we’re referring to there is that you are deferring the payment of taxes to the future. So those are a deductible in terms of income taxes today. You are not paying taxes on the contributions today. But when you go to withdraw those funds, no earlier than the age of 59.5 without penalty — and there’s a required minimum distribution at the age at which you’re beginning to have to force to take out that money — the maximum amount that you can put in as an employee into these accounts in $18,500 in the year of 2018. We’ve seen that climb each year by $500 or so. Now, there is an additional amount that you can put in after the age of 50. And that is $6,000, which essentially is a catch-up provision that allows you, if you’re behind in savings, to be able to save more beyond that $18,500. Now, what this does not include, which is a really critical, important piece here, is that $18,500 does not include the portion in which your employer would provide in the form of a match. Now, if you’re not familiar or haven’t heard of that term, match before, as Tim gave the example with the VA, it’s a 5% match. Essentially, 5% of his salary that he contributes, the VA will contribute dollar-for-dollar. And this is all over the place with employers. Some will do a 3% match, some will do a 6% match, some will do a dollar-for-dollar, some will do 50 cents on the dollar. But essentially as you’ll see when we get into the priority of investing, the match is free money. And that’s really the critical piece here. So why is this number important? Because what we’re referring to is that you obviously are growing money tax-free for a period of time. But ultimately, when it comes to being pulled out, you’re going to be paying taxes on that money. But if you make $100,000 — just out of simplicity — $100,000 per year, and you contribute $15,000 into your 401l, essentially you are going to be paying income taxes on $85,000. So it’s reducing your taxable income today. That money is growing all along, and you’re not going to pay taxes until the point you distribute it. And obviously depending on the income tax bracket you’re in and what the income tax bracket rates are at the time, you’re then going to be slapped with an income tax bill in the future.

Tim Church: Yeah, and I think that’s a good point to bring up is that when you’re looking at those account balances, somewhat really of an illusion when you’re looking at that bottom line if all of your contributions are traditional because it’s going to get taxed eventually, it’s just at what level is going to depend on where you are at the time when you’re making those withdrawals. Versus the Roth version — so many employers now offer the Roth version, and that’s even for the Thrift Savings Plan, where basically, you’re going to make contributions after-tax. So you’ve already been taxed on your income, and you’re going to allow those contributions to grow tax-free. So when I say tax-free, it basically is at the time at which you’re eligible to make the withdrawals, you’re not going to be taxed on that money. Now, that’s a whole separate animal in terms of determining what is best for you. Should you do traditional contributions? Should you do Roth contributions? And there’s a lot of different factors that can play into that, such as what your projected tax bracket’s going to be at the time of retirement or eligibility. And that could be a couple different things there. Does the government change the tax brackets? But then also, what is your projected income going to be? And things could obviously change with your job, so it’s really sort of difficult to predict everything. But there are some simulations out there online where you can kind of go through that.

Tim Ulbrich: And I think your point earlier about considering the tax implications is so critical to retirement planning because we often — and we’ve talked before on the podcast about a nest egg, how much you need at the point of retirement. Well, that number, if a majority of that’s in a traditional 401k, for somebody else that’s maybe saved a lot in a Roth IRA, which I’m going to talk about here in a minute, how that’s going to play out when you’re in retirement is very different in terms of the total amount that you have and how it’s going to be taxed. So I say that because I think the tax implications are a key planning piece as you’re thinking about exactly how much do I need at the point of retirement, and what’s going to be taxed? And what’s not going to be taxed when you get to the point of withdrawal? So again, 401k, 403b, TSP, max contributions in 2018 are $18,500 for the majority of people that will be listening to this podcast. And that number I think will be important because you often hear people say generally, to meet your retirement goals, you’re probably looking at somewhere around maybe 15-20% of your income that needs to be saved. So if you figure out the numbers, a pharmacist making $120,000, obviously you’re starting to get that point with the 401k, 403b, but there’s other vehicles that we’re going to talk through right now. And let’s go to that next one, which is an IRA. So Tim Church, IRA, Individual Retirement Arrangement, this one has different figures, different numbers, but also has a traditional form of it as well as a Roth form of it. So talk us through that one.

Tim Church: Correct. So this is something that anybody with an earned income is eligible for. They can contribute up to the max, which as of 2018 is $5,500. And there’s an extra $1,000 if you’re 50 or olders, so $6,500 if you’re 50 or older. But anyone who is earning an income can contribute to this. And what’s important is this is something outside of your employer. So this is something that you set up on your own, either through a brokerage account — but the other thing here too is besides what you’re able to contribute, if you’re a married and you have a non-working spouse, they can also contribute up to that limit. So technically, if you’re less than age 50, your household if you’re working and you have a non-working spouse, you can contribute up to $11,000 per year.

Tim Ulbrich: Yeah, and I think that’s an important provision. I know for Jess and I, so Jess is at home with the boys, she’s not working. But to your point, a non-working spouse, so for us, when we talk about a Roth IRA, we both contribute that $5,500 per year to be able to make that contribution. So this has both a traditional version as well as a Roth version. And again, I think that’s where it gets confusing when people hear Roth 401k, Roth IRA. So traditional IRA looks very much — obviously the numbers are different, the $5,500 per year — but looks very much tax-wise like a 401k or 403b in that you are — if you meet the income qualifications — you are deferring the payment of taxes to a later point in time. You know, many pharmacists don’t qualify in terms of the income limits for a traditional IRA.

Tim Church: Right. And if you look at the IRS has some different rules depending on whether you are covered by a 401k or whether you’re not covered by a 401k. But if you are, the phase-out if you’re single is $73,000. And for being married filing jointly, it’s $121,000. So if you make above those limits, you actually can’t deduct the traditional IRA contributions. And so that kind of leads into well then why would I ever do that, right?

Tim Ulbrich: Absolutely, yeah. And I think that we’ll talk in a minute about the back-door Roth IRA, and we’re going to actually in our upcoming Q&A episode even talk a little bit more about it. But when we talk about a Roth IRA, and I think why Roth IRA’s have all the rage these days, rightfully so, is that you are paying taxes today, that money is growing, but you are never paying taxes on that money again in the future. So if I were to contribute up to the max, $5,500 per year in a Roth IRA, and Jess did the same, that’s money that is being contributed that we’ve already paid our taxes on. So got my paycheck, paid taxes, then I make the contribution into the Roth IRA. I invest that money, it grows at some percentage every year, hopefully that compounds, let’s say that turns into a half million dollars, I’m at the age of 70, I start to withdraw that money, I’m no longer paying taxes on that money because I already paid taxes on the money before I put it into the account. Now, this gets into the whole debate about, well, would I be better off putting money in a Roth IRA or a 401k, and that gets back to the point that Tim Church made in terms of the tax brackets and what’s going to happen in the future, and largely, I think most people would agree we probably don’t know at this point in time. Now, this also has income limits to directly contribute. So for those that are single, the phase-out of contributions at $135,000. For those that are married filing jointly, there’s a phase-out that’s at $199,000. And so this is where you’ll hear people and you’ll hear pharmacists say, ‘Well, I really like that idea of tax-free growth, I pay taxes now, I’m not going to pay taxes in the future. But I exceed that income limit,’ and insert the back-door Roth IRA. Now, we could have a whole separate episode probably about the back-door Roth IRA. There’s some great tutorials, resources online. I know the White Coat Investor — just shout out to what he’s done — he’s got some great tools and resources about how people can go through that process. But essentially, what you’re doing in a back-door Roth IRA is you’re contributing to a traditional IRA, and then you’re converting that to a Roth component. And so we’re going to come back to that in our Investing Q&A. But all that to say if you’re somebody that exceeds the income limits of a Roth IRA, that does not mean you cannot take advantage of the benefits of a Roth IRA because of that back-door components.

Tim Church: Right. And I think the key is to keep in mind that it really is about the timeframe at which you make that conversion and whether there’s any gains on the money when you make the contributions to a traditional IRA. So if there’s any gains in between that conversion, you’re going to pay taxes on it. The other thing is too is that if you’ve already had past traditional IRAs, and you didn’t convert them, there can be some tax implications with that as well.

Tim Ulbrich: You know, the other thing I love about Roths, which I don’t think is talked about enough is that they do not have the forced required minimum distribution that come with the 401k or 403b. So if somebody’s out there thinking, you know what, maybe I’m going to be working until I’m 75 or 80 or maybe I have other sources of wealth, real estate investing, businesses, whatever, and you think you may not need that money at the required minimum distribution age in the early 70s that you’d be forced to take in a 401k or 403b, to me, that’s one of the great advantages of a Roth IRA, that you continue to let that money grow, and you don’t have to take it out. Alright, we’ve got another big bucket here, Tim, in terms of the HSA or the Health Savings Accounts, which we talked about in Episode 019 in details for those that want to go back and look at those. But give us the down-low on HSAs. I know you have this benefit through the VA, but this has the lethal triple-tax benefits, which are talked about often. So why are HSAs so powerful?

Tim Church: Well, exactly just like you said. It has the triple tax benefit. But yeah, this is one of the cool things that I started for my wife and I for this year for 2018 because I didn’t really know much about it before and what the implications were. But just going through as we talked about through YFP, I mean, it really has a lot of power. And the name itself is really a misnomer because you look at that and you say, Health Savings Account, so it’s just a regular savings account that I can use to pay health expenses, right? Well, not exactly. It can actually be an investment vehicle. It’s really an investment account in disguise. It really depends on your intentions or how you’re going to use it. And for some of these accounts, you have to have a certain amount before you can unlock those investment options. So for example, for me, is I had to have $2,000 in the account before I was allowed to contribute anything towards an actual investment.

Tim Ulbrich: Does that vary by who offers the accounts?

Tim Church: Yeah, I think it does. I don’t believe that that is an IRS stipulation. I think it does depend on the bank that is servicing the HSA.

Tim Ulbrich: I thought I saw that on the Facebook group, people were talking about, well, ‘with my employer, that number is different,’ so yeah.

Tim Church: Right. So like we were talking about is, how you’re going to manage this account really depends on that intention. So you could be using this account to strictly pay for medical expenses, and the benefit of doing that is you’d be paying for them pre-tax, which is not a bad thing. I mean, that’s a great way if you have anticipated medical expenses and you want to be able to pay for them with some tax efficiency, then that’s great. But you can also look at this from the perspective as I’m going to use my HSA as an investment vehicle. So you’re going to say, I’m going to pay for all of my medical expenses out-of-pocket, and I’m just going to invest the rest, and I’m going to treat it like an IRA or I’m going to treat it like my 401k in that my goal is to beat inflation to actually get some compound growth.

Tim Ulbrich: And is the thought here if you’re going to pay for your medical expenses out-of-pocket now and really let that grow, it sounds like it’s got the benefits of a Roth IRA plus you’re not paying taxes now. It’s got that, you know, the highs of the 401k, 403b and also the highs of the IRA. But at some point, are you forced to use those on medical expenses?

Tim Church: No, so it’s really kind of interesting about the account. So just to jump into that triple tax benefit. So the first one is that it will lower your adjusted gross income. So you can — any contributions you’re making to the account are tax-deductible.

Tim Ulbrich: Like a 401k and 403b.

Tim Church: Correct — if they’re traditional, correct.

Tim Ulbrich: Yep.

Tim Church: And then that account, any contribution that you put in are going to grow tax-free. Now, the withdrawals are tax-free as long as you can prove that they’re being used to pay for a qualified medical expense because otherwise, you’re going to pay a 20% tax if you take the money out before age 65 for a non-qualified expense. Now, if it’s after age 65, to my knowledge, there’s no additional penalty, there’s no additional tax. You basically, it’s like a regular retirement account. Now, here’s the caveat. So — and this is one thing that I didn’t know until I really got into it is that let’s say you contribute to an HSA over 20-30 years. And those accounts are growing, you’ve been investing them aggressively, and you’ve got some great growth on them. And let’s say you’re 60. Can you pull out some of that growth that you’ve had, some of that money that’s in there, but without paying taxes on it? And you can because the caveat is that if you keep track of all of your medical expenses you paid over that time that you’ve been contributing and can prove that you’re essentially reimbursing yourself, you’re not going to have to pay those taxes. But the key is really, you have to keep a good record of those receipts. What I’ve been doing is basically putting anything I have into the cloud, into Google Drive, and doing that for every year so I know exactly what I’ve paid and what I can technically claim as being a reimbursable expense.

Tim Ulbrich: Sounds like you need to develop like an HSA tracking expense app.

Tim Church: Yeah, there’s probably something out there.

Tim Ulbrich: Maybe it’s the next business project. But so unfortunately, not everybody has these available. But for those that do — and we’ll get into this prioritization — you often hear people putting these at the level of, OK, take your match, and then you think about an HSA. We’ll come back to that, but the reason that is and why they are so highly regarded in terms of priority investing is because of the tax benefits that you were just talking about. But not everybody qualifies. I know I haven’t with the employers I’ve worked with. In the state benefits, we didn’t have what was considered a high-deductible health plan. So to qualify, you have to be enrolled in a high-deductible health plan. What basically is a high-deductible health plan? Well, this year, for an individual, it’s having a plan with a deductible of at least $1,350. And for a family, that deductible is at least $2,700. Now, I think what we’ve seen with health insurance benefits pushing some of the costs back into the consumer and obviously increasing deductibles, we’ve seen more people being eligible for these. And I think it’s a great time to talk about this because of the time period around open enrollment. So if you’re somebody saying, do I have a high-deductible health plan? Do I not? Does my employer offer an HSA or not? Now is the time to look to see where this may fit in the context of your prioritization of investing.

Tim Church: And I would say that the two major reasons that my wife and I, we decided to switch from a traditional PPO health plan to a high-deductible health plan, really for the opportunity to contribute to the HSA but also the other benefit is that high-deductible health plans typically have lower premiums. So with the old plan, I was paying a lot more each month, but I wasn’t using any of the insurance that I was paying for. So if you’re relatively healthy, I think it’s a great option. So if stuff comes up, you might be paying some money out-of-pocket, but again, you wouldn’t have had that option otherwise to even contribute to an HSA. And you have to really look in the context of what your premiums are.

Tim Ulbrich: That’s a great point. And I think what you just said too speaks to the power of the emergency fund and having an emergency fund because if you can afford to take on that risk of, you know, maybe I’m healthy now, something comes up unexpectedly, I get slapped with a huge payment. Then ultimately, you’re ready to take that on, and you can afford it without feeling that risk of that. So what we didn’t talk about here with HSAs is the max contribution amount. So we talked about it with 401k’s and 403b’s or the TSPs, we’re looking at $18,500. We talked about with the IRAs, $5,500. What about the HSAs?

Tim Church: So as of 2018, if you’re single, it’s $3,450. And then if you’re self plus one or family, it’s $6,900. And an additional $1,000 if you’re 55 or older for catch-up. And this — just like the other accounts — this typically changes every year, every couple years.

Tim Ulbrich: So what I like, if you start to string these together between a 401k, a 403b, a Roth IRA or a traditional IRA, if you qualify as well as if you have access to an HSA, you can start to get to a point where you’re saving a significant percentage of your salary, probably more than many listening, especially in the contest of other goals. But nonetheless, you have the option to be saving a significant portion of your salary that has tax advantages. And I think that’s key because one of the last things that we want to talk about here is the taxable or brokerage accounts. And so with the taxable brokerage accounts, why I said that previous point I think is important is that I see a lot of new graduates getting ads and promotions for some of these apps and tools and things that are out there. But they’re investing outside of the tax-advantaged accounts. And so I think as we talk about taxable or brokerage account, where we see this fit in is once you’ve exhausted all your other tax-favored retirement plans, this probably is the final option that you’re looking at because of the loss of tax-shield capital gains taxes that you have to pay, etc. So good news here is if you get to the point where you max out everything and you’re looking for options, there’s lots of options out there in which you can invest. But don’t get too far ahead of yourself if you’re not taking advantage of the match or other tax advantages that we’ve talked about previously. So last one quickly before we talk about prioritization of these buckets would be the SEP IRA. And I think this is timely because of your side hustle series. And so maybe we have people out there that own their own business, are starting their own business, want to, and to me, when I see information about a SEP IRA, that makes me want to start some businesses because you’ve got some really good advantages with retirement options. So what is a SEP IRA? And what flexibility and freedom does it give you in terms of retirement?

Tim Church: So a SEP IRA stands for a Simplified Employee Pension. And basically, if you’re self-employed, you own your business, you have this opportunity, this benefit available to you. And this could be in addition to a 401k that you have available. So this could be something that you’re doing on the side, an additional business you own. But one of the advantages is that there’s a lot more money you could potentially contribute versus what’s available with a 401k or IRA. I mean, it’s a huge difference. But obviously, you have to be making that much money up to that certain point to be able to. So right now, what the guidelines are, is that you can contribute up to the lesser amount of either 25% of your compensation or $55,000. But when I see those kind of numbers — like you’re shaking your head here, Tim — that just gets people fired up, I think, to say, hey, what if I was able to bring in an additional amount of income that I’m no longer capped out at this 401k, this IRA max that’s there.

Tim Ulbrich: Yeah, reason No. 403 to start a side hustle, right? I mean, when you see those numbers, and it gets me fired up even for the work that we’re doing that to your point, it’s dependent on compensation, obviously, you mentioned the lesser of those numbers. But in addition to other retirement vehicles, you can obviously make some great headway if you’re in a position to do that. OK, let’s jump in now. We’ve set the stage, we’ve spent a decent amount of time talking about the buckets, which is important because before we can talk about prioritization, we have to know what we’re talking about. What is a 401k? What is a 403b? What is a Roth? Now, a couple disclaimers here that I think we have to talk about because we’re probably going to take some flack regardless, which is OK. But not everyone is going to agree with the prioritization that we’re talking about. Not necessarily that there is one right way in terms of order of investing. Now, we’re going to give a framework on that that we think many listening will follow, but to my point earlier, everybody has different personal situations in terms of income earned, in terms of other financial priorities, in terms of other goals, when you want to retire, all types of variables that may come into play in terms of how you actually execute this.

Tim Church: Yeah, and I think like there’s a lot of people out there that are really into real estate, and they look at that as even taking priority over some of these retirement accounts because either they’re all-in or they’re confident that they’re going to get good returns there. And I think that’s great. I think for some people, that is an awesome option. But I think here, like you said, we’re talking in the context of, OK, let’s focusing in on these retirement accounts and just really try to figure out, well, what is the best order?

Tim Ulbrich: Yeah, and I think the other situation I think about, Tim, is those that are on fire about the FIRE moment, the Financial Independence Retire Early, waiting until 59.5 to access your accounts may not be the goal they’re after. And so you know, obviously again, this to me really speaks to the power of sitting down with somebody like Tim Baker and financial planning and talking about what are your goals and then putting out a map to be able to achieve those. The last thing I have to say here as a disclaimer before we jump into the prioritization — if Tim Baker was here, he would make me say this — is what we are saying is not financial advice, right? So we don’t know of the thousands of you listening, we don’t know what your own personal situation is. So we’re looking, again, down the lane of investing. If you have disposable income to invest, this is the priority we think you should consider. But we’re not saying, run out and do this tonight. You’ve got to think about the context of the plan. OK, No. 1 — I think everyone agrees with this. I mean, maybe there’s a person or two out there, maybe? I don’t know.

Tim Church: I haven’t seen — so what I was looking at to see what else is on the Internet and some of the other bloggers, I think this is one thing almost everybody I think actually agrees on.

Tim Ulbrich: For how much disagreement there is.

Tim Church: Right.

Tim Ulbrich: So No. 1, as you may have guessed it, is the employer match, right? No surprises here, most people agree on this. You are getting free money from your employer. If you don’t take it, you’re leaving it on the table. And so we even believe, we talked about this in the Dave Ramsey episode, Episode 068, the match has to be a priority in your financial plan, even in the context, I think, of student loan debt — maybe a different conversation depending on personal situations, but you have to take that money. Now, for you, you mentioned that 5% match. So let’s just use a hypothetical. Somebody’s making $100,000, they put in 5%, they get 5%, that’s $10,000 of tax-deductible retirement savings that are going to grow over time. You’re putting in 5, your employer’s putting in 5. And again, as I mentioned earlier, you’ll see this in different situations in terms of the percentage of salary match. It may be 5%, 6%, 3%, no percent, dollar-for-dollar, $.50-per-dollar. And so it’s all over the place.

Tim Church: Or what you get. What have you gotten at schools? You’ve gotten like 14%?

Tim Ulbrich: Well, I’m unemployed right now.

Tim Church: Oh, OK.

Tim Ulbrich: But you know, yeah. So you know, I’m lucky to work in the state teachers’ retirement system, which we actually are forced to put in. I remember when I was in the grinding out of paying off debt, it was painful. But we are forced to put in 14%, and there’s some fees and things that shakes out to that they match around 10%. So it’s kind of a forced combined contribution of about 24% total, which is really nice. But the downside is I actually don’t get any Social Security, so I won’t receive that Social Security benefit in the future if it’s there. But we’ll see. So No. 1, employer match. Now, No. 2 is HSAs or Health Savings Accounts. Take the employer match, and I think what often, people do right after the employer match is they just go up and maybe max out their 401k. I think what you’re making a point here is maybe after that match, move into the HSA if you have it available.

Tim Church: Yeah, and I think — but even going back to is that a bad option of putting more money in your 401k? So I think like in the context, which is interesting here is that really, even if you’re switching up the order on some of these, like really, it’s still not a bad decision. The decision to actually put money into the accounts to grow is a good thing. But I do think, you know, the HSA with that triple tax benefit, it’s hard to argue against that, right?

Tim Ulbrich: Absolutely.

Tim Church: I mean, it’s such a powerful tool. I think Dr. James Daly of the White Coat Investor, he calls it the Stealth IRA, which is pretty cool.

Tim Ulbrich: I love it.

Tim Church: Because it’s basically like you’re getting the opportunity to contribute to another IRA if that’s your intention behind it. But it can really be a powerful way to get some additional retirement savings.

Tim Ulbrich: I do have HSA envy. I don’t have access to an HSA, so unfortunately, yes, great match, but I wish I had that HSA option. So No. 1, we said employer match. No 2, HSA triple tax benefit makes a whole lot of sense.

Tim Church: If available, right? Because not everybody’s going to have that.

Tim Ulbrich: Right. High-deductible health plan, you may or may not have it. Now, No. 3 here, we’re getting into the IRA. And really what we’re getting at is the Roth IRA component. And obviously, for those that don’t meet those income qualifications, they would have to do a back-door Roth IRA. But what we really want to take advantage here is the tax-free savings that are going to happen over time. You’re paying taxes today, you put the money in, it grows tax-free, you go to pull it out, you’re not paying taxes anymore. So even though this doesn’t have the same maximum as the 401k, 403b’s, you’re not going to be able to have these be equally weighted, pre- and post-tax, right? $18,500, $5,500. To me, I see this as the way that you’re balancing out getting to the point of retirement, you’ve got some free and post-tax savings. So if I’m maxing a Roth IRA at $5,500 per year or back-door Roth IRA to get there, and then I’m putting in $18,500 in a 401k or 403b, of course I’m going to have more in accounts that are going to get taxed than I am in accounts that are not going to get taxed. But I’m balancing those out a little bit.

Tim Church: It also depends too if you have a Roth 401k, then also that could be after-tax contributions, so it’s possible you could have both. You could do the Roth IRA and a Roth 401k and basically putting everything in after taxes and then letting your accounts grow tax-free. I think going back to what we talked about is that since most pharmacists are not going to get the deduction if they contribute to a traditional IRA, it sort of makes sense to always go to the back-door Roth. Well, I think one of the interesting questions — and this has come up before — is why would I not just go up higher on my 401k versus contributing to an IRA? And really, you know, the way I look at that is either one is still a great option in terms of the contributions. The difference, really, is that with the IRA, this is outside of your employer, which means a lot more options.

Tim Ulbrich: Yeah. And that’s why you hear — we won’t get into it here — but that’s why you hear when you switch employers, there’s value in rolling that over into an IRA where you can unlock those options. And one of the things I’ve seen with Tim Baker’s help is the variety of what people have available to them in an employer-sponsored 401k or 403b, both options and fees, good or bad, is all over the place. Some have very limited options, very high fees, and maybe their employer doesn’t even really recognize or acknowledge the value. Others are maybe working with a Fidelity, Vanguard, whomever, have tons of options, can get low-fee accounts. So this really is an individualized decision.

Tim Church: I totally agree because when I look at the Thrift Savings Plan, one of the benefits of a Thrift Savings Plan, like we talked about earlier, is there’s such low fees on that. And so with a situation like that, I mean, you could make the argument that either one is going to be fine. But if I’ve got really low-fee options that are getting great growth, then I may go and try to max out my 401k or increase prior to going to the IRA.

Tim Ulbrich: And I think your point is a good one. At the end of the day, we’re splitting hairs, right? If you’re having this debate, there’s lots of opinions, lots of nuances, but at the end of the day, you’re doing a good job, you’re being intentional, you’re saving for the future. I tend to favor the prioritization of really maxing out the Roth component before I go back to max out the traditional 401k because of what I mentioned earlier and having that balance of pre- and post-tax, but again, people have different answers on that based on what they think is going to happen in terms of the tax component. So just going back in order here — your employer match, HSA, IRA component, we talked specifically about the Roth component of an IRA or a Roth 401k, right? And then going back to your traditional 401k, maxing that out to the $18,500. Now, if you get to this point, and you’ve taken an employer match, you’ve maxed out an HSA if you have it, you’ve maxed out the IRA, and you’ve maxed out your 401k, you’re crushing it.

Tim Church: Yeah, I mean, that’s pretty awesome. I mean, I’m not quite there yet. But it really is encouraging to see those numbers as a goal, really, to say, hey that’s where I want to be.

Tim Ulbrich: When you put those numbers together, we’re talking about $18,500, another few thousand, another $5,000 — you’re saving a significant percentage of your salary, looking at several million dollars with compound growth over 30-40 years. Now, after we max out the 401k or the 403b or the TSP, then obviously, if people have access to a SEP IRA, they’re going to take advantage of that. Now, after Step 5 here…

Tim Church: Right, that would depend if they have some kind of additional income or potentially they don’t work as a W2 employee, and their main business or their main job is as an employer or a small business. So that actually could be somewhat reversed depending on the situation and depending on what kind of job you have.

Tim Ulbrich: What you have available, yes. I think what we’re doing here is — before we get to the last one, which we’re calling them brokerage accounts, which as I made the point earlier, these don’t have the same tax advantages that all these others do. So what we’re advocating for is really maxing out the opportunities you have to save in tax-advantaged vehicles and then ultimately if you’re still looking to save more, personally I’d probably advocate for maybe some real estate investing, some business stuff, other things before even brokerage accounts. But you’ve got lots of options available.

Tim Church: You’ve got lots of options. And the other thing too is as long as you’re not continually trading fees and different things like that, I mean, capital gains tax is actually still tax efficient versus some other things that are out there that you’re going to get taxed ordinary income.
Tim Ulbrich: Absolutely. Fun stuff. We covered a lot here, packed full of information. I think this is one we’re going to hopefully go back and say, ‘Hey, you got questions about the different investing buckets, prioritization, go back to Episode 073, we’ve got some great information.’ And this is a reminder, for those of you that haven’t yet done so, if you could leave us a review in iTunes, if you like what you heard, or whatever podcast player that you’re listening to, we would greatly appreciate it. Also, if you haven’t yet done so, make sure to head on over to YourFinancialPharmacist.com, where we’ve got lots of resources, guides, calculators, that are intended to help you as the pharmacy professional on your path towards achieving financial freedom. Tim Church, this has been fun and looking forward to coming back and finishing up the series.

Tim Church: It’s been great, Tim.

Sponsor: Before we wrap up today’s episode of the Your Financial Pharmacist podcast, I want to again thank our sponsor, PolicyGenius. Now, you’ve heard us talk many times before on the show about the importance of having a solid life insurance plan in place. And while we know that life insurance isn’t the most exciting or enjoyable thing to think about, actually having a life insurance policy in place is a really good feeling. And PolicyGenius is an easy way to get life insurance online. In just two minutes, you can compare quotes from the top insurers to find the best policy for you. And we know that when you compare quotes, you save money. It’s really that simple. So if you’ve been avoiding getting life insurance because it’s difficult or confusing, give PolicyGenius a try. Just go to PolicyGenius.com, get your quote, and apply in minutes. You can do the whole thing on your phone right now. PolicyGenius, the easy way to compare and buy life insurance.

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YFP 072: Investing Mind Tricks: How Behavioral Bias Affects Our Decisions


 

How Behavioral Bias Affects Our Decisions

On Episode 72 of the Your Financial Pharmacist Podcast, Tim Church, YFP Team Member, and Tim Baker, YFP Team Member and Founder of Script Financial, discuss how behavioral bias can impact investing decisions and why they are so important to have on your radar.

Summary

Tim and Tim talk through 6 major behavioral and financial biases that have an impact on making investment decisions.

  1. Overconfidence bias refers to our subjective belief in our skills. Our ability to invest is typically greater than the actual objective reasoning behind it leading us to think that we have control in the stock market. An example of this can be seen in the 2006 study by James Montier, Behaving Badly, in which 74% of fund managers believed they delivered an above average job performance and the remaining 26% believed they delivered an average job performance. This shows an irrational high level of confidence. It’s also important to note that timing the market is impossible as you don’t know where the market is going to go.
  2. Confirmation or Hindsight bias shows that people pay more attention to information that supports preconceived ideas about a subject and they ignore or rationalize a way to the rest. The hindsight bias shows that passed events were predictable and completely obvious.
  3. Loss aversion is where people value the gains and losses differently. Losses have more of an emotional impact on us and we act irrationally to avoid loss and it’s one of the biggest reasons people don’t invest.
  4. Herd mentality means an individual conforms to the behavior of a larger group and is typically based on emotion. An example of this can be seen with Bitcoin or the .com crisis. It also happens inside mutual funds due to the actions of share owners.
  5. Hyperbolic discounting, or present bias, shows that we have a tendency to prefer rewards today that may be smaller or similar and give up on something greater in the future. This bias is the main reason why people don’t contribute enough to their retirement funds and discount the future reward.
  6. Overreaction bias is when new information is reflected instantly and investors overreact and create larger than appropriate affect on the stock market.

Mentioned on the Show

Episode Transcript

Tim Church: What’s up, everybody? And welcome to Episode 072. I’m here with Tim Baker and excited to dive into today’s topic. Tim, this is something you and I have talked about many times and really appreciate the impact it has on our financial decisions. Behavioral bias related to investing has been studied a lot under the umbrella of behavioral finance. And Tim, why is this something that people really should know about?

Tim Baker: Yeah, Tim, I think it really can be summed up in three words. People are irrational. So we often think that a lot of our economic theory is based on the premise that we act as participants, as humans, as rational beings when it comes to the money and really economic theory. But oftentimes, the opposite is true. And really, some of the biases we’re going to talk about today illustrate that point, and hopefully we can get some examples out there to kind of paint the picture. But yeah, I think this is one of the things, one of the topics that really fascinates me because obviously I can see myself in a lot of these things, and I can see my clients in a lot of these biases. And you kind of shake your head, well, why do we do that? Why do we behave this way when the probabilities really aren’t different? Or whatever the case is. And I think it’s really — we have to shine a light on it to make ourselves better when it comes to not just investing, but just behavioral finance in general.

Tim Church: Yeah, I think what’s interesting is that you and I have talked about that even though we’re aware of these biases going on and how they influence our decisions, that still, we’re able to make the same mistakes based on how they play out. And so that’s what’s really tough is that even though you know about them, they still can happen. But I do think it plays so much into our day-to-day decision-making and really can have a huge impact not only today but just on your long-term outlook of your financial plan, your financial health in general. So we’re going to go through a couple of these biases and kind of talk about what they are and really kind of to focus on how they impact investment decisions. Now, they can impact other parts of the financial plan, but really, we want to focus on in terms of investments, how that happens. So let’s start out with the first one, overconfidence. So as pharmacists, we’re pretty confident because of the training and things that we have and how we make our clinical decisions. And most pharmacists that I’ve met in my career, they’re very confident in how they practice and what they do. And a lot of times that we see this actually tip into investment and personal finance — and it kind of goes back that just because you’re confident and you’re knowledgeable in one area doesn’t always mean that that’s going to be the case for finances. But Tim, talk a little bit about how overconfidence impacts investment decisions.

Tim Baker: Yeah, so overconfidence I think fits under the miscalibration bias. So you know, basically, the overconfidence bias states that subjective belief in our skills and our ability to, say, invest is typically greater than the actual objective reason behind that. So sometimes, we view that we have this illusion of control when it comes to investment. And I see this sometimes with clients today where with the markets really doing well — and I actually had a client recently reach out to me, saying, ‘Hey, I’ve been licking my wounds from the recent downturn in the market.’ And I think he’s probably suffering from a little overconfidence that you can have this illusion of control that you can control, really, the uncontrollable. And the uncontrollable really is the stock market. There are so many things that go into where the price of the market or of individual security goes that you as the investor play little role in that. But it’s interesting to kind of outline this study that was done in 2006. It’s called — a landmark study called “Behaving Badly.” And the researcher, James Montier — I believe is how he pronounces his name — basically surveyed a bunch of professional fund managers. These are the individuals that sit on top of the mutual funds and basically buy and sell investments out of that fund. And when he surveyed 300 of these professionals, he found that 74% of them believe that they had delivered above average job performance. And really, the remain 26% believed that they were at least average. So essentially, that means that 100% of those 300 surveyed believes that they are either average or above average when it comes to basically managing their mutual fund. And of course, we all know that in statistics, that can’t be the case. We have a bell curve that basically has distribution of where everyone falls. But the discrepancies really stress that many of these fund managers displayed an irrationally high level of confidence. And I would, when I saw this, when I was at West Point and even some employers since that, we had a grade essentially on a forced distribution that you’re always going to have people that are exceptional, average and then below average. So it’s the same that holds true is that for many investors, especially in this type of market, Tim, that we say, hey, I’m really killing it here. I’m doing a great job with my portfolio, I have this idea of the hot-hand falacy where I can’t lose. And you know, over time, it can be very humbling if you are in this space of being overconfident with your investments. And really, it’s an illusion of that you can actually control where the market goes because, really, you can’t.

Tim Church: So a lot of this with this bias, Tim, would — basically timing the market would fall under this bias. Is that correct?

Tim Baker: Yeah, absolutely. So there will be some people that — and I’ll give you an example, Tim. Like I had a lot of people after the last election say, hey, where do you think the market’s going to go? And I’m like, to me, my gut was that the market was going to go down for whatever reason. And I would have been wrong. So if I was trying to time it then, I would have been severely off. So again, I think what I know, I think the truism that I know about investment is that I don’t know where the market’s going to go. And I think any advisor, really investor, that tells you otherwise is lying to himself or herself. So you know, it’s the timing — you might get it right once or twice, you might read that story in the Wall Street Journal and make that investment, and it turns out right for you, but I think over time, what studies have shown is that you can’t time the market. And I think getting it right on an occasion or two leads to that overconfidence. And it’s the same thing with the fundamental analysis. You might analyze a stock and say, hey, I think this is a great buy opportunity and you buy it, and you’re right. And I think it kind of balloons your confidence a little bit. But I think more often than not, the house wins, in a sense — that the market is going to do what the market does. And really, your ability to assess and market time are going to be a distant second.

Tim Church: So basically, to heed the advice of Matthew McConaughey in “The Wolf of Wall Street,” right?

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Tim Baker: Yeah, we don’t know if you’re Warren Buffett or Jimmy Buffett, if the stock is going to go up, down, left, right or in circles. So yeah, it’s true. I think it’s one of the things that I think people sometimes come to advisors on this and say, hey, beat the market. But more often than not, that’s not what an advisor should be doing or can do. So yeah, I think maybe one of the secrets of the financial planning industry is that that really shouldn’t be the reason why you are hiring someone.

Tim Church: So the second bias that we want to talk about is confirmation bias and also hindsight bias also kind of plays into that. So talk a little bit about what that one is.

Tim Baker: Yeah, so as humans, what we do is we often introduce bias when we process information, when we process events. So you know, if we break down confirmation bias, it’s typically that people pay more attention to information that supports preconceived ideas about a subject, and they basically ignore or rationalize away the rest. So one of the confirmation biases, Tim, that we probably have as a community is that we believe that passive indexing is the proper way to build an asset allocation that is low-cost and typically that’s best for the investor. Now, if I’m reading studies or I’m reading information that confirms my thesis, my belief, then I highlight those, and those carry a lot more weight as I’m reading. And then when I’m reading maybe in the same session, I’m reading something that says, “Active investment is the way to go, and you get what you pay for in terms of the investment, so you pay a little bit higher in terms of the expense ratios.” So when I read that, my bias is to kind of like, I don’t think so, I basically rationalize that away. Or I’m ignoring it and say, thanks but no thanks. So I’m not buying that. So what confirmation bias is it kind of closes my mind in the sense that I’m discounting away the counterpoint to the information. And then sometimes, that can be dangerous. So the other bias that we look at hindsight bias, and this typically occurs when people believe after the fact that past events were predictable or completely obvious. And in fact, the event couldn’t be predicted reasonably. So many events seem obvious in hindsight. So I kind of look at this as like the Monday morning quarterback where something happens and you’re like, of course that happened. These are all the things that basically led to that event. But in the moment, really, we couldn’t have predicted that. So one thing when it comes to the investing and the stock market, it’s really the subprime mortgage prices and how all of the lending standards and kind of loose actions of the bank really led to the collapse of that part of the investment world and then obviously led to the Great Recession.
Tim Church: Yeah, and that sounds very similar to overconfidence because it kind of goes back to thinking that we were really able to predict that. Even though we didn’t say it at the time, but we really felt like yeah, we knew that. So one of my favorite behavioral biases is loss aversion. And that kind of falls under this umbrella of something called prospect theory, but it’s basically where people value gains and losses differently. And really, losses have more of an emotional impact, and so we’re less likely — we do whatever we can to avoid losses. And even though we could lose some amount or gain the same amount, we would rather gain than lose, basically.

Tim Baker: Yeah, and basically, Tim, what we’re saying here is that we act irrationally just to avoid loss. So that’s essentially — and I love the quote from — if you guys have ever seen “Rounders” out there, Matthew Damon’s character, who’s a poker player, he basically says that few players recall big pots that they have won, strange as it seems. But every player can remember with remarkable accuracy the outstanding tough beats of his career. So what this means is that we, the bad beats or the losses that we take with our investments, we feel that much more than, hey, the market has been en fuego that past seven or eight years. So the example is, would you rather receive $50? So I have $50 in my pocket, and I’m good to go. Or would you rather receive $100 and then lose $50 for some reason or the other? In both instances, the net gain is $50, so I’m still walking away in both of those situations with $50, but I’m like, ah, well I had $50 more, and now I don’t have it, and that kind of stinks. And that’s kind of what we’re talking about in a very granual way. I think the status quo bias, Tim, that you talk about sometimes is really not leaving your perch, kind of where you are, because of the fact that there is choice overload or there’s the fear of maybe the unknown or fear of if I make a move, I could lose. And this is typically where you are leaving retirement savings and that default asset allocation or default contribution — we talk about the 401k inertia that I know I need to get the match, which is at 5%. But I really don’t want to do any more than that because I’m comfortable with the status quo, and I don’t really want anything to change. So the loss aversion theory, which is kind of sometimes called prospect theory, is fundamental to us as humans. And it’s not just with just investment or money. It’s just how we will shell ourselves and protect ourselves from losses, even if it’s irrational or if the probabilities tell us otherwise.

Tim Church: Yeah, and I think that this is one of the biggest reasons why people will say, I’m not investing in the stock market. I’m not going to go in and lose all of my money because of things that have occurred previously. But mainly, it’s that I don’t want to lose money, so a lot of people will justify and say, I’m going to keep it in a savings account or something that is barely probably not even beating inflation. And so that right there can play a huge impact just in that decision itself.

Tim Baker: Yeah, exactly right. And often to the detriment of just your overall financial picture.

Tim Church: So the next one we want to talk about is herd mentality. And this is an interesting one because it basically goes with the old adage that if everybody’s going to jump off a bridge, you know, would you do it? You probably heard that as a kid, right?

Tim Baker: Yeah, exactly. Yeah, well, it’s like everyone else is doing it. And that’s the question you get back. Yeah, yeah. I don’t want to hear that, though. Yeah, really, what we’re talking about here Tim is again, for the individual to kind of conform to the behavior of a larger group. And it’s typically based on emotional — it’s largely emotional rather than on a rational basis. So this could be where you hear — and I always bring it up — you hear people always talking about, bitcoin or cannabis or whatever it is. And you do that because that’s what the greater, that’s what your friends are doing, that’s what your colleagues are doing it. And as an individual, you probably would not make that same choice. But it’s a little bit of the FOMO, Fear of Missing Out, that sometimes drives this. So we saw this in the subprime mortgage crisis where people were just buying real estate, they were mortgaging their house, putting second mortgages on their house, they were putting as much into the mortgage because their neighbor did this. Or same thing with the .com crisis where everyone, if it had a .com after it, people were following each other and saying, we’ll put $100,000 into cats.com or whatever it was. So actually people taking money out of their retirement to buy stocks in this. So typically, this is where you kind of want to hit the pause button and say, does this really make sense? Am I conforming to the social pressures? Is this where it’s strength in numbers? And sometimes the contrarian view, in a lot of ways, is a better view. And this often happens with inside mutual funds. So like when you have a mutual fund manager that is managing billions of dollars of stocks and bonds inside that mutual fund, sometimes he or she is subject to that herd mentality, not because of him or her, like of their behavioral bias, but because of the herd mentality of the shareowners that he’s basically trying to manage their money for. So if people are exiting from that mutual fund and they’re basically redeeming their shares, he has to essentially cash out of his investments or her investments to make sure he gets the cash for that mutual fund person that’s exiting. So the herd mentality can be rampant up and down the investment world. And it’s just important to know if you’re caught up in that. And then again, it’s kind of why we believe that index funds that basically diversify the market where you have exposure across the market is the best way to go because you get less caught up in this herd mentality.

Tim Church: Right. And if you’re going for that buy-and-hold strategy for the most part, then you’re just basically going to ignore a lot of this news when people, masses, are changing their positions or holdings on something like that.

Tim Baker: Right, exactly right. And again, sometimes with — oftentimes with investing, less is more. So a lot of times, inaction is much better than overaction and constantly — and this is something that Ulbrich and I talk about is sometimes he talks about he just wants to meddle more, meddle in the investments. And typically, that’s not the best way. And often, that’s because you’re reacting to some of what other people are doing or the news or something like that.

Tim Church: So one of the things that always comes up in personal finance, and really, you coudl sum a lot of this up, is how you determine how much you spend today versus how much you spend tomorrow for savings, for retirement, and in your investment. And when we talk about this bias of hyperbolic discounting, also referred to sometimes as present bias, that you have this tendency to prefer rewards today that may be smaller or similar and giving up something that could be much greater down the road. And really, this is sort of the main reason why people don’t contribute enough to their retirement or possibly even anything because they want to spend and get that pleasure today because the perception is that the pleasure and emotional satisfaction of that today is going to be greater than what they could have later on. So how do you see sort of this play out, Tim, with some of your clients but just in general with investing?

Tim Baker: Yeah. I think hyperbolic discounting is typically, when I say, hey, Tim, if you’re my client, we have to make sure that we’re taking care of the Tim Church today but also the Tim Church of 30-40 years in the future. So and I feel like if you’re not feeling that push and pull between those two ideas, then you’re probably doing it wrong. So typically, with hyperbolic discount is given two similar rewards, people prefer the one that comes sooner rather than later, right? It makes sense. Time value of money teaches us that as well. And we typically discount that future reward by factoring in the delay in getting it. So it would be that, hey, Tim, if I offered you $100 today versus $300 next year or $600 in four years, those are all things your mind automatically calculates that and says, well, I really could use the $100 today and I don’t really want to wait for that $300. So that’s kind of what’s going on. I see often that when we combine this with loss aversion that we talked about previously, this can easily lead to that 401k inertia that we talked about. So there was a study that employers who were automatically enrolled in a default retirement contribution at 3%, after two years, 61% of those employees didn’t change from that 3% contribution, despite the fact that their employer matched those contributions up to 6%. And a little of this probably plays into the status quo bias as well that we talked about. So I think that it’s hard for us to — I often talk about this with prospective clients and even clients. It’s like, I hear you, Tim. I know I have to save for my retirement. I know I have to do these things, but I’m really under the gun with this credit card debt or with this student loan debt. And these are the pains — that’s a future Tim problem. Like I’m really trying to focus on what’s in my face. So the hyperbolic discounting, this bias is really what is in play when we’re having that struggle against, OK, how do I make sure what I need to do today and really for the future?

Tim Church: Yeah. I think you just have to figure out what that percentage to what you’re going to spend today, but also make sure you’re on track. And so I think having goals and milestones that you’re trying to hit, especially for investing, your net worth, those are really good to have so you can always keep that at the forefront of your mind. But also being able to enjoy some of the money that you can spend today and have available.

Tim Baker: Yeah, and I will say, like, if we’re doing that more consistently — and I think some of this, we saw this with Tim Ulbrich and Jess Ulbrich where TIm is definitely looking into the future, and Jess is really more like, well, let’s enjoy our family, enjoy our life. I think there’s a good push and pull between that because I think if you’re always looking into the future and you don’t do the things that you want to do, then that’s not a wealthy life either. So I think those are important things to keep in mind.

Tim Church: So what else do we have, Tim? What’s next on the behavioral bias?

Tim Baker: Tim, I think the big one that I’d like to kind of go through is the overreaction and availability bias. I think these are fascinating. And with the overreaction, in particular, because I think this will be eye-opening to some people when they’re looking at picking investments. So the overreaction bias basically means that new information is typically reflected instantly in the price of the return. But what typically happens, investors overreact, creating a larger than appropriate effect on the stock price. So as an example here Tim, would be Walgreens or Amazon or whoever releases their earnings for the quarter, and people automatically overreact, like this is either the apocalypse or we should buy. And the stock market will change accordingly. And sometimes it’s too much, and the market can be very fickle. One of the studies I thought was really interesting, it’s called the winners and losers study that was basically released in 1985 by Debaunt and Richard Thaler, who’s a well known behavioral finance guy. He’s really interesting. The study was published in the Journal of Finance, called, “Does the market overreact?” What they essentially did is they looked at the New York Stock Exchange over a three-year period, and they separate the 35 top performing stocks into a winners portfolio and the 35 lowest performing stocks into a losers portfolio, essentially tracking each portfolios of performance as compared with the appropriate index. And as it turns out, over the three-year period, the losers performed actually better. They actually beat the market index consistently. And then secondarily, the winner portfolio consistently underperformed the market. So the cumulative difference over that three years between the two portfolios was actually 25%. So what essentially happened is that the original winners portfolio became the losers, and the losers portfolio became the winners. And this typically happens because investors tend to overreact. So for the losing stocks, investors overreacted to the negative news, driving the price of the shares down. And over time, we saw that the pessimism was outsized. And then the losing stocks actually began to rebound. And the same is true in reverse with the winners and that the enthusiasm over the winners was overblown. And you kind of see this as a reversion to the mean and oftentimes, so when we talk about using things like MorningStar ratings. You’re typically, if you’re a four or five MorningStar rating, you’re more likely to be a one or two MorningStar rating. So these are just how MorningStar funds — they basically look at mutual funds and ETFs to see if they’re good or not. You’re generally looking at past performance, which is not a good indication of future performance. So that’s really what the overreaction bias. And then quickly with the availability bias is we’re really looking at where individuals tend to heavily weight decisions that are most recent. So in the real world, if I’m driving, and I get a speeding ticket, I’m more likely to drive the speed limit soon after that ticket because I’m still feeling the burns of that. And this is not necessarily rational because I’m still just as likely to get another speeding ticket or not. So that would be really availability. And we can apply this to the way that the stock goes up and down in more recent times. So those are two biases I think that are really interesting to kind of take a look at and see how they play into our own investor profile and how we look at our portfolios and that part of our financial plan.

Tim Church: So Tim, I think we talked about a lot of the core biases around investments and personal finance in general. And I think that they’re something that is so important to be aware of just because of the irrational behavior that we have. So I guess, what practical advice would you give people just to kind of sum up everything that we talked about in terms of, you know, why should you care about these? And how can it help you be better with your finances and make better decisions kind of ongoing?

Tim Baker: Yeah, I think practically speaking, I think a lot of these things can be solved with having a portfolio that is well diversified and low cost and where you don’t have to do a whole lot of meddling outside of the rebalancing of basically locking your percentages back into focus. I think practically speaking, that is typically the best way to go. I think also, if you do feel overconfident, I think that will naturally happen where you’ll probably be humbled. I think it’s happened to all of us that have dabbled in kind of individual stocks and thinking that I’m really the smartest guy here and I can be the next Warren Buffett. I think also, being aware of if you do have confirmation or hindsight bias and to be more open to outside opinion and see if it’s actually based in fact and things like that. From a loss aversion, understanding that I think in the investment world, you have to take intelligent risk to get in front of the things like tax and inflation and that the probability or our thoughts that losses feel more painful is really an irrational — it’s just how we’re built. So I think it all points back to having a passive portfolio that you don’t have to do a lot of work with. And I think also — we’re talking about investment a lot in this month — is have a second opinion. Whether that is a friend, a partner, a parent, a financial advisor that’s going to look at your particular case or your particular investments and give you objective advice. And I think that, obviously, I think that is something that I think is very valuable because sometimes, we can get in our own heads, and we don’t really see the benefit of an outside opinion. But I think that’s often the best way to make sure that you’re sound as part of your financial plan.

Tim Church: Yeah, absolutely. I think you’ve got to take the blinders off. And especially when you’re going to make some really important or key decisions is get someone else’s opinion. You know, that could be a financial planner, it could be a spouse, significant other, or friend that you trust in. But just to get away from that. And I think just to highlight what you had mentioned about your strategy around your investing. If you’re somebody that’s buying and holding, and you’re really trading or changing your funds, you’re just either increasing your contributions or trying to do some rebalancing, is that if you’re somebody that is very emotionally responsive to the news or changes in the market or things that you hear, I mean, one of the best strategies, maybe don’t put your account balance readily available. As it can ebb and flow day to day, I think sometimes, like it’s so accessible with technology, with Mint apps, that you can see what happened to my account and what happened tomorrow? And if you’re somebody that’s really, that can’t take that emotional roller coaster, that maybe you make it very difficult to even get access to that.

Tim Baker: Yeah, so much with investment is less is more. And you can apply that to a lot of different parts of your investment strategy, but just like looking at it and messing with it is probably better. The inaction is probably better than overly concentrating on that. And like I said, when there are downturns in the market, although I preach to clients that the market will take care of you over long periods of time, it’s very predictable over long periods of time, it’s not fun to be in that down market because although the losses aren’t realized, meaning that we’re not cashing out in that moment because a lot of us have many years left until retirement, you still feel that loss. You still feel that loss, and it still can be a cloud that hovers over you. So even though I preach that, I feel that. I still feel the weight of the client assets that I’m managing. But I have to just remind myself that over time, the market will take care of us. And a lot of it is less is more when it comes to your investment strategy.
Tim Church: Definitely, totally agree, Tim. And I think it was a great topic to get out there are really is a great way to kick off this series we’re doing for the whole month on investing. So please check out the future episodes we’re going to do this month. We’re going to talk about how to get your 401k on track and how to analyze that, and then also some of the priority around investing, and then also some of the ways that you can do the investing either yourself or through some of the roboadvisors or hiring a financial planner. So be sure to check those out.

Sponsor: As we wrap up another episode of the podcast, I want to again take a moment to thank our sponsor of today’s show, CommonBond. CommonBond is a on a mission to provide a more transparent simple and affordable way to manage higher education expenses. There approach is no big secret…lower rates, simpler options and a world class experience…all built to support you throughout your student loan journey. Since its founding, CommonBond has funded over $2 billion in student loans and is the only student loan company to offer a true one-for-one social promise. So for every loan CommonBond funds, they also fund the education of a child in the developing world through its partnership with Pencils of Promise.Right now, as a member of the YFP community you can get $500 cash when you refinance through the link YourFinancialPharmacist.com/commonbond. Again, that’s YourFinancialPharmacist.com/commonbond. And one last thing if you could do us a favor, if you like what you heard on this week’s episode, please make sure to subscribe in iTunes or wherever you listen to your podcasts. Also, make sure to head on over to YourFinancialPharmacist.com, where you will find a wide array of resources designed specifically for you, the pharmacy professional, to help you on the path towards achieving financial freedom. Have a great rest of your week!

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YFP 071: Ask Tim & Tim


Ask Tim & Tim

On Episode 71 of the Your Financial Pharmacist Podcast, Tim Ulbrich, Founder of YFP, and Tim Baker, YFP Team Member and Founder of Script Financial, tackle 10 listener questions that were posed in the YFP Facebook Group, covering a wide array of topics like investing, refinancing student loans after pharmacy school, taxes, and more.

Have a question you would like answered on a future episode of the show? Make sure to join the YFP Facebook Group to pose your question to the YFP community or shoot us an email at [email protected].

Summary

Tim Ulbrich and Tim Baker field 10 questions from the YFP community. The first question asks about the pros and cons of a traditional 401k versus a Roth 401k. Tim Baker explains that “Roth” means after tax (Roth 401K, Roth 403B, Roth IRA) and a traditional 401k means pre-tax. He explains that there are different participant contribution amounts to 401Ks and that you are able to have a traditional IRA and Roth IRA that you can put aggregate money in each year in separate systems. Question 2 asks, what is something you wish you would’ve started in pharmacy school based on what you know now? Tim Ulbrich says first become educated, especially around student loans, work in school to help set yourself up for a career to to form connections and skills, and, lastly, look at the amount of money you are borrowing as real money that you’ll need to pay back. Question 3 asks how to start earning interest on monetary gifts a child has received. Tim Baker responds that first you need to know the goal of the money. From there, you can put it in a high yield savings account or CD or put it in an index fund. However, a 529 is probably the best vehicle for the money to be put in, as it offers tax advantages. Question 4 asks about unconventional pharmacy jobs. Tim Ulbrich says that 45% of jobs are in community pharmacy and 30-40% are in residence training, however there are still many different avenues of unconventional pharmacy jobs to explore. The best advice is to find a mentorship, either within your college or outside, to help you see other possibilities. Question 5 asks about online banking and suggested companies other than Ally. Tim Baker says that it’s important to gauge the ease of use, customer service, and fees charged. These online bank accounts are best used for separate emergency funds or storage accounts.

Question 6 asks if there is any benefit to staying with the same home and auto insurance or switching companies for a better rate. Tim Ulbrich suggests that you should assess the price with the service you receive. Nickel and diming policy coverage over a company you are happy with should be avoided as it’s important to put value over relationship. However, if there is a significant savings, then, of course, switching makes sense. Question 7 asks what should be taken for an initial appointment with a financial advisor and what questions should be asked. Tim Baker says it’s important to ask good questions, such as how would we interact and how often, are you fee only or fiduciary, how is the fee calculated and how are you compensated? If you are going to a financial advisor strictly for guidance with student loans, be aware of how much knowledge they have. Question 8 asks if anyone has repaid their student loans through the federal government with income based options, such as IBR or PAYE, and if the better option is refinancing student loans after pharmacy school. Rim Ulbrich says that you have to assess what the best repayment option is for you. Run the numbers, look at the feelings you have toward carrying student loan debt for 20-25 years, assess your financial goals, and lay our all of your options. From there, you are able to make a decision. Question 8 asks if it’s better to file taxes married filed separately when a spouse is eligible for PSLF. Tim Baker explains that there are situations that married filed separately is the right way to go, however, it depends on the repayment plan. He suggests to do a tax projection and student loan analysis to see if you’re approaching the situation in the best way possible. Lastly, question 10 asks if someone should stick with federal loans to keep a minimum payment down or refinance to lower their interest rate. Tim Ulbrich suggests that as the interest rate market rises, refinance offers may not be as attractive. If you refinance on $100,000, a 1-2% interest rate change in refinancing may largely affect how much you are repaying. Regardless of the math, refinancing is off of the table if you are pursuing PSLF.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 071 of the podcast. Excited to be alongside Tim Baker as we dive into an Ask Tim & Tim episode where we take a wide array of questions, 10 from the YFP community that were posed in the YFP Facebook group. So Tim Baker, how you doing?

Tim Baker: Doing well, how about you, Tim?

Tim Ulbrich: Good. So you’re back from Iceland. Welcome back. How was the trip?

Tim Baker: Oh, it was awesome. Yeah, it was great. You know, I feel like the last few weeks has been crazy, but it was good to get away. I think I literally didn’t touch my phone for about a week. So now I’m trying to get back into the swing of things, but Iceland is an interesting place to visit for sure.
Tim Ulbrich: It seems like I’ve noticed a lot of friends from college and coworkers are taking that trip, it seems like on the East Coast here. I know Cleveland has direct flights over to Iceland, I’m guessing something similar by you guys. Seems like a popular destination to begin to see that part of the world.

Tim Baker: Yeah, it’s funny because like prohibition ended like for beer, I think in like the late ‘90s — don’t quote me on that — which was interesting. But I think since then, the tourism has become the biggest staple in Iceland, moreso than fishing. But you have a combination of just like incredible scenery, like almost where you’re on a different planet. And of course, beer drinking and things like that. So yeah, it was great. It’s one of those vacations where you’re out in the country, but it’s somewhat affordable. It’s expensive when you get there in terms of like food and things. But oh man, it was great. Just good to get away and reset and, you know, I’m ready for the final quarter of the year.

Tim Ulbrich: Yeah, welcome back. We’re excited to jump into this episode. And we’re actually getting together end of this week in West Palm Beach, Florida, where Tim Church lives. We have a YFP retreat, so excited to be jumping into all things YFP. And actually, as a part of that time that we’re together — to our listeners, we’re going to be recording an episode that’s taking all questions related to investing. So if you’re listening to this episode and you have a question, all questions investing, shoot us an email at [email protected] or jump on the YFP Facebook group and pose your question and we’ll make sure to feature that on the upcoming episode where we do that Q&A session. Alright, so here’s the format. We’re going to go back and forth. We have 10 questions, great questions from the community. We’re going to read the question, we’re going to answer them between the two of us, and then we’ll jump in with some feedback that the community has provided as well. So Question 1, Tim Baker, comes from Nidhee (?), and he asks, “What are the pros and cons of a traditional 401k versus Roth? Currently, I’m trying to maximize my traditional 401k. Any suggestions would be helpful.” What do you think?

Tim Baker: Yeah, such a great question. And you’re starting to see more and more 401k’s offer a Roth component. So just kind of to break this down for listeners who are kind of a little murky about this, anytime you see “Roth” before 401k, 403b, IRA, you’re going to think after-tax. So the money that gets thrown into that account is after-tax. Now, if you see a traditional 401k, traditional IRA and traditional 403b, you’re going to think pre-tax. So the money goes into that bucket pre-tax. And typically, the opposite is true when the money comes out. So it goes in pre-tax, it usually grows tax-free, and then it comes out taxed. And then the opposite is true if it goes in after-tax, it grows tax-free, and it comes out tax-free in the after-tax world. So to get back to the question, I think the Roth component is actually a great component to the 401k because a lot of pharmacists because of their salary, they make too much to actually contribute directly to a Roth IRA. So when you sign up for your 401k or when you’re adjusting your 401k, you’re going to want to see if there is a Roth component and if that makes sense for your particular situation. In our last episode, we kind of talked about all the different levers to pull when it comes to, you know, should I pay the tax now? Should I defer the tax? What does that look like? And this is actually one that you can do. So a lot of people get confused by kind of the Roth 401k because it really, you can’t commingle those accounts. So it actually looks like you have two accounts when you’re funding this. So basically, you go in and you would see a balance for your traditional 401k. And if there’s a match, that’s where all your match dollars are going to go from your employer. But for your Roth, if you’re deciding to fund that, you know, those are basically funded with after-tax dollars. So you would go in and you would set up an allocation similar to your 401k, your traditional 401k. And essentially, the difference would be just if those dollars are taxed or not. So that’s essentially the basics there.

Tim Ulbrich: Tim, one of the questions I often get here — and I think it’s good just to clarify for our listeners because the term “Roth” gets confusing when they see it as a Roth 401k versus a Roth IRA. Does the Roth contribution towards a Roth 401k go towards or impact the total of the $5,500 that you can contribute in a Roth IRA? Or are those completely separate buckets?

Tim Baker: Yeah, to kind of draw the lines around the 401k and the IRA. So you as a participant in the 401k, you can put in $18,500 — these are 2018 numbers — per year in aggregate between a traditional 401k and a Roth 401k. In the same breath, you can also have a traditional IRA and a Roth IRA that you can put an aggregate $5,500 per year. So these are, they’re essentially separate systems. So if you put money into a Roth IRA, it doesn’t necessarily affect how much money you can put into a Roth 401k.

Tim Ulrich: Got it, thank you.

Tim Baker: So the next question for you, Tim, is a great question from the Facebook group. “My name is Steven. I recently joined the group, and I really enjoy all of your posts about business and financials. I am in my third year in pharmacy school and wanted to ask you this question. Knowing what you know now, what is something you wish you would have done or started in pharmacy school?” That’s a great question.

Tim Ulbrich: Yeah, great question, Steven. And first of all, kudos to you for being proactive as you’re in pharmacy school. I think so many in this community — and I think some even commented in the feed of the question that you posed saying, “Hey, I wish I would have been thinking about this sooner,” and I know that’s something, Tim, that I often think back of, wow, what would have happened if I would have actually dove into this topic, been a little bit more proactive instead of reactive where looked up, had a ton of debt and then tried to figure it out and felt the pain. And that was the beginning of trying to figure this out. And I think that gets to the point of my answer to Steven’s question. If I had to go back and do it all over again — and this is not a sexy answer — to me, it’s all about being educated, specifically probably around student loans for many of the students that are listening. You know, I think as I look back, I was trying to dabble in the Roth IRAs and learn some other things here or there. All the while, I had student loans that are accruing above $152,000 at 6.8% interest, I didn’t have really a solid emergency fund, and I was just doing things out of order because I didn’t have a good education and understanding of what it meant to have a solid financial base. And that even, to me, trickled into new practitioner life where I was getting ahead of myself in some areas around kids’ college saving and other things at the expense of having, again, a solid emergency fund, the right life insurance protection, making sure I had end-of-life planning documents, all the things that we’ve talked about before around having a solid financial plan. So Steven, the one thing I would do, which you’re obviously doing, is getting involved in this topic, being educated. And hopefully you can inspire your peers and your friends and your coworkers to do the same. The other thing that I would do — and I know a couple people had responded, and actually, we had a response from Steve, who is another fourth-year student. And one of the things he mentioned was definitely work in school. And I would advocate for that. And I know I had a lot of faculty members who would tell me, “Hey, don’t work in school. You’ve got to focus on your academics.” Of course you have to graduate, otherwise your degree and not having one is counterproductive. But many students who can balance these things — I’m not saying you need to work 30-40 hours a week. But obviously a little work experience is going to, you know, provide a little bit of a financial component. But probably more important, it’s going to set you up for career components, going to allow you to begin to form those connections in your network, and I think as I now see new practitioners coming into the workforce, I think it gives you those skills that you just aren’t going to get in school, right? Dealing with difficult customers and time management and coworkers and understanding all of the things beyond the books and what you’re learning in school. So Steve, if you haven’t yet too, make sure to take a look at the responses from your peers and some of the group because there was some great feedback around — you know, I really like what Vbar (?) had to say about “borrow only what you need for tuition and fees because these student loans are killers.” And we say this over and over again on the podcast that if you look at the average indebtedness of a pharmacy graduate, those numbers are often double what are the numbers for tuition and fees. And that’s because of the borrowing that’s happening for cost of living expenses. So do everything that you can, especially in the interest rate market we’re in for student loans, everything you can to minimize the costs you’re borrowing while in school.

Tim Baker: And I think just to piggyback on that, Tim, one of the things that I think I hear quite a bit is it’s almost like Monopoly money, you know, like the loans you’re taking out. So I think if you can, you know, in your mind, make it real. And I think the best way to do that is to, you know — I know that with the average debt load being $160,000, I know that a standard — that equates to a standard payment of like $1,800 and change. So if you have loans that are $320,000, then you’re looking at a $3,600 payment. So obviously listeners, if you’re P3, P4, you’re going to know more or less where you’re going to fall in that, so I think — like you said, if you can work — anything you can do to kind of make it more real. And I think once it becomes more real, then you’re more likely to actually be intentional, I think, with what you’re trying to do, whether it’s working or just being more frugal as a student. I think the sooner you do that, I think the better you will be as you enter into repayment.

Tim Ulbrich: Great advice. Great advice. Our third question comes from Rachel in the Facebook group, who says, “My husband and I just had our first child and want to start earning her interest on the monetary gifts we have received for her. Any advice and suggestions?” So Tim Baker, I’m guessing maybe there’s a question behind the question here around college savings for kids or just investing money long-term for a child. What are your thoughts? And what do you do with clients typically in this arena?

Tim Baker: Yeah, I think the question with the question would be like, well, what’s the goal? What are we thinking we want this money for? If we want something that’s a sure thing and we want to be able to access this when the child is growing up for whatever reason, then something like a high-yield savings account or a CD might be the best bet. If it’s more of a long-term goal and we don’t really have an education goal in mind, maybe it’s just sticking the money in an index fund. But more acutely, I think the 529 would probably be the best vehicle to put money into that these monetary gifts, even some of these 529s are getting pretty creative. Like I know the Maryland 529, you know, I can send out links to grandparents and aunts and uncles and say, “Hey, contribute to Olivia’s 529.” I think the big advantage there is you typically, most states will give some type of tax deduction. And even with the new tax code we talked about a little bit last episode, you know, the 529 can now be used for kind of secondary school, high school, middle school, that type of thing. So you can actually use it as a pass-through to get a state tax deduction. But then longer term, you can invest it similarly like you would your 401k, your IRA, where you’re putting money in there and as it accumulates over 15, 16, 17 years, it provides a return on the investment that you can apply towards your child’s education. So you know, there’s a lot of I guess different sides to the answer. And same thing with 401k’s and IRAs and things like that, not all of them are created equal. So you’re going to want to really pay attention to fees and the investments that are there for you. But obviously, your state is going to play a role in that. But those would be kind of the top things that I would rattle off in terms of advice and suggestions.

Tim Ulbrich: Yeah, just a couple things to add there, you know, especially knowing where we are in the year and coming up on the month of November, if Rachel, if her and her husband are thinking 529 — and I don’t know, I’m guessing this is every state in terms of the income tax deduction, I know here in Ohio I think the limit to that is $2,000. And so depending on the amount that they’re looking at doing, there may be a play there to divide some between the 2018 and some between the 2019 year rather than going above that $2,000. And I think you and Paul did an awesome job last week talking about that in the context of tax. The other thing I think about here, Rachel and to the broader community that’s listening — and Tim Baker, you helped I think Jess and I realize this, that not only the why of what the goal is, what you’re trying to do, what you’re trying to achieve, but I think for those of us that graduated with tons of student loan debt, we tend to probably be compensated a little bit too much on the other side when it comes to kids’ college because we want to avoid that, naturally, for our own kids, right? And so I’m not suggesting here that Rachel, you and your husband take your child’s money that was received for your child, but I am just bringing up the point that as you and your husband talk through this going into the future, making sure that college savings for children is done so in the appropriate context of your own financial plan. And I’ve seen a lot of new practitioners, myself included, who, again, to my point earlier, maybe don’t have those foundational items like the right insurance and emergency fund, etc. but are running off saving for kids’ college, and that’s 18+ years away. So again, just thinking about the priority and the order of things within a financial plan.

refinance student loans

Tim Baker: Yeah. I’ve actually had some clients like stop at a certain amount of kids because their goal was to pay 100%. And I mean, obviously, it’s a personal choice. But there’s different ways you can go about funding education, it’s important to kind of talk with your partner and maybe a planner to kind of work through that. So great question by Rachel. So Tim, next question for you is — this is from Elise. “With the ever-changing pharmacy job market, I’m starting to think more about unconventional pharmacist jobs, i.e. not in hospital or retail. I think in school, we’re kind of programmed to believe that those are our only two choices, so it’s hard to even know where to begin looking for what else is out there. I’m wondering if anyone has experienced doing something other than hospital or retail that they really enjoy and is financially stable, offers good perks and benefits. Thanks.”

Tim Ulbrich: This is a great question, Elise. Thanks for taking the time to pose it. And I got fired up when I saw this question, Tim, because in my former day job at Neomed, I did a lot of career counseling, advising with our students. And I cannot tell you how often I heard from our own students, even as a P1 or a P2, even before they’ve really been getting along that path of looking for jobs, there tends to be this mindset that Elise is describing of, I’ve got one of two options, right? I’ve got retail community pharmacy, and I’ve got hospital pharmacy, which more often than not means residents to train.

Tim Baker: Right.

Tim Ulbrich: And really, if you look at the workforce data, the reason people think that is valid. If you look at the last workforce survey that was pushed, 45% of all pharmacists’ jobs are in the community pharmacy sector. Now, that can be obviously retail chains, CVS, Walgreens, etc. It could be independent pharmacies, but that’s almost half of the workforce. So that’s why I think you see — and depending on the school that graduates, you’ll see these numbers upwards of 50, 60, 70% depending on the region and the job that they have available. And then I know at Neomed, we saw 30-40% of our grads every year would go into residency training. So you put those two together, and that’s 80% or so of a graduating class. And so I think it’s easy for students and new practitioners to think these are my only two options. And for those listening that also have this question, please make sure to go check out the Facebook group and look at the answers because there’s some great examples out there that were highlighted of people that are doing different things. Somebody’s working for a hospice, pharmacy benefit manager on the side. People that are in pharmacy informatics. Nate Hedrick, who we’ve had featured on the show, the Real Estate RPH, during our September series on home buying, talks a little bit about his job working for a pharmacy benefit manager as a sales team clinical liaison. So very unique, niche position. And he actually I know did an in-patient hospital residency. So there’s many different paths and options, and I think the advice I would have to somebody asking this question is begin to find the mentorship and the people that are going to offer you this viewpoint, if you don’t feel like you can get it as a student at the college that you’re at. So are there new practitioners, are there people with an organizations, associations that you’re connected with that have these positions that are the “nontraditional” or unconventional positions that you can begin to form those relationships and networks and get them to help you along this process because the reality is we all know pharmacy’s a small world and we know that when it comes to these niche markets, it’s all about networking and building those relationships. So if you want to find something beyond the hospital, community pharmacy world, go find those practitioners who are out there. You know, you’ve talked before on this podcast, Tim, the 1,000 cups of coffee. You meet with people, have them introduce you to three more people, and keep going and going and going. And it may take 10 or 20 or 30 conversations, or it may take two, but doors will open over time. And you’ve just got to put the work and effort into doing that. The other thing I would just highlight, Elise, in response to your question, is if you haven’t done so already, check out the side hustle series that Tim Church has been doing on this podcast, episodes 069 and 063, also in episode 038, we had Alex Barker from the Happy PharmD on talking about his journey. He’s got some great context — or excuse me, he’s got some great information on the unconventional jobs that are out there. And then Tony Guerra, pharmacy leader and podcast host, we had him on in episode 053 as well, did a great job of talking about some of these other options. So Elise, thanks for your question. Alright Tim Baker, question 5 here comes from Lane inside the Facebook group. “What other banks do people use besides Ally? A Google search showed Northfield Bank offers higher APY.” And I think maybe we’ve brainwashed our audience unintentionally about Ally because you and I are Ally users, and we get giddy when we get the rate increase emails that come. I think they usually come on Friday afternoons.

Tim Baker: Yeah, and I think I missed the last one because when I was researching a bit for this question, I saw that Ally’s now at 1.9%, so I think I missed that last bump, which I’m pretty excited about.

Tim Ulbrich: So what — and maybe, so Lane is asking here what other banks do people use? But maybe there’s a better question here — not to hijack her question — is what should people be looking for when they’re choosing a bank specifically for more of that long-term savings, you know, emergency fund and whatnot.

Tim Baker: Yeah, so I think that having a bank set aside for kind of your long-time savings like emergency fund and storage account, which might be like a travel fund, a car maintenance, a home maintenance fund, I think what you’re really trying to find is something that there’s ease of use, there’s an app, there’s a website, that doesn’t charge fees, that you can move money in and out fairly easy. And for me, like when I started kind of recommending, I found that when I started working with clients, this was kind of a topic that came up over and over again. Where should I bank? And where should I put money? And again, it’s not something that most financial planners I think even think about because it’s very much investment-centric, and we’re not really thinking about budgeting and debt and things like that. But this was kind of a key question that came up over and over again, so when I did research on this topic awhile ago, those were some of the things that I was trying to figure out. OK, where is the best bank to park money and get a little bit of return and not be charged fees and all that kind of stuff. So I actually tested out Ally, Synchrony Bank, Capital One, and I think Barclays was the fourth one I looked at. And although Synchrony at the time was kind of providing a little bit more return, I just found that from a great experience across the board, Ally was far and away better in terms of opening accounts, moving money in and out of it, just the app, all that stuff. To me, I think Ally was head and shoulders, even I think above Capital One 360, which obviously is a huge bank. So again, I’m a big proponent of kind of keeping this type of banking kind of separate from your everyday kind of monthly expenses. So if you bank with BNC or Chase or something like that, I like kind of a separate entity that is going to park kind of your emergency fund and kind of those storage accounts for those particular goals. So that was just my experience in testing these out. And obviously, you know, it’s a little bit of an arms race because these companies are putting money into their apps and things like that. But at the same time, I think Ally — and even for me, I know, Tim, you and Jess are using Ally. And again, we don’t get any type of benefit from talking about Ally. I just think that they have a great solution.

Tim Ulbrich: You know, it’s funny how far we’ve come in this online banking. Do you remember when Ally came out and it was kind of like, really? Are we going to do banking online? I remember those days. And you know, great customer service and I think you can obviously find that with other banks as well, but I think looking at some of the components you mentioned is great advice.

Tim Baker: OK, so next question comes from Kara. “Home and auto insurance question. Is there any benefit to staying with the same company? We have had the same company forever, but I called MetLife to get quotes because I can get a corporate discount through my employer. For the same exact coverage, auto policies are almost half as much. Switch and save money?”

Tim Ulbrich: Yeah, this is a great question. And actually, I just went through this in the move of getting a re-quote on home and auto. And you know, obviously as Kara mentions, the number half as much, it’s hard to not say, switch. But I think you always have to consider this in the context of price versus the service that you receive. And obviously, there’s a point where you’re going to be able to save a significant amount of money. But don’t — I guess what I’m trying to say here is don’t nickel and dime policy coverage for a company that you’re happy working with that you have a quick connection if you need it and that is responsive, obviously, in the times that you need them to be responsive. And Nate Hedrick really highlighted this for me as I asked him for his input as I was shopping around on home and auto. And that was his advice back to me is, you know, look at the total cost of the policies. And if you’re talking about saving $20 or $30 and you have somebody that’s an email or a phone call away that you have a relationship with, you have to put value to that relationship. Now, obviously if you’re talking about a policy that’s half as much, unless it’s just atrocious customer service and you’re not going to be able to get that same coverage, then obviously there’s a point where switching makes sense to save some money. The other thing I always encourage people to do is make sure you look side-by-side, whether it’s a home or auto insurance policy, look side-by-side to see the coverage that you’re getting is the same because if your deductibles are changing or coverage isn’t as good, obviously that may explain the price difference. But if you loko side-by-side and say, “OK. All coverage is equal,” now you’ve got to really weigh this against what is the level of the relationships and the customer service and how much am I going to save on this? Kelsey also makes a good point. In responding to Kara, she says, “I think it depends on the company. Some will now give you money back after x amount of years you don’t have a claim. My sister is an insurance agent, and the company she had me switch to will give us back 25% of our payment if we have no claims for three years.” So obviously, that policy is built in a way that incentivizes that relationship over time. So different factors that you have to consider as you’re looking at these different companies. Alright, Tim Baker, question No. 7, Devin asks, “Hello everyone, I’m meeting with a financial advisor tomorrow, and I was wondering if there was anything I may forget to bring them that you all think would be helpful. I’m a recent graduate.” So recent graduate, going to meet with a financial advisor, what information should they be bringing? Or what questions should they be asking? What do you think?

Tim Baker: I think typically when I meet with a kind of a prospective client, I don’t have them bring anything except for questions. I know some people’s process is different. They might start kind of getting down to some of the details of kind of the work they would do and everything. But for me, I think it’s just a matter of like do I have a connection with this particular person? Do I see myself working with them for a long period of time? And in Devin’s case, it might not be a long period of time. It might be I’m just trying to get a few questions answered and then I’m going to move on. So that would be kind of the question that I would ask first is how would we interact? And how often? I think the big thing is — and again, I’m biased here — is are you fee-only? Are you a fiduciary? You know, how is your fee calculated and compensated? Can I clearly see what I’m paying you? And nine times out of 10, these will send financial advisors squirming. And I think if you see that, then it’s probably a good indication to kind of go in the other direction. You know, just a lot of financial advisors, they have minimums. So you have to have — it’s kind of like, hey, I can help you, but only if you have a quarter million dollars or something like that.

Tim Ulbrich: Right.

Tim Baker: Or I don’t have minimums, but typically when you don’t have minimums, typically that particular client is maybe ignored more so than someone who does a quarter million dollars. So I think there’s a variety of questions. I think some of my FAQs that I would give a person to ask their financial planner — and I think a big one is around like what are the conflicts of interest? Are you a fiduciary? Are you fee-only? And from my experience, the majority of financial advisors out there — and I can say this with confidence that the majority of financial advisors out there are not going to be keen on a lot of the issues that pharmacists deal with, and the big one being student loans. A lot of — one of the reasons that I decided to kind of move on from my last firm was because there wasn’t a whole lot of understanding or process around student loans, which obviously is a major pain point for pharmacists. So if Devin, if this is one of the big things that you’re going to talk with a financial planner about, ask good questions because I would suspect that a lot of people in our Facebook group, a lot of our listeners, know more about student loans than some of my counterparts, sad to say.

Tim Ulbrich: Mhm. Yeah and Devin, make sure to check out YourFinancialPharmacist.com/financial-planner if you haven’t yet done so. Again, YourFinancialPharmacist.com/financieal-planner. We built out an entire page really getting to the gist of your question. We have a free guide that answers a lot of what to look for in a financial planner. We have a list of questions that you can ask inside of that document. What are the qualifications you should be looking for, some of the things that Tim talked about there. And then also on that page, we have referenced episodes 015, 016 and 017, where Tim Baker and I talk through a lot of this as well. And on that page, for those that are interested, you can also schedule a free call with Tim Baker if you’re interested in learning more about working with a financial planner and the value that he can provide. Alright, Tim, I think we’ve got three more, right?

Tim Baker: Yeah, let’s do it. So this question is from Sabina. So the question is, “Has anyone repaid student loans through the federal government and utilized the income-based options such as PAYE or IBR, both of which list forgiveness after 20 years as an option. Any recommendations on that approach versus refinancing with private companies?”

Tim Ulbrich: Yeah, thank you, Sabina, for your question. And what really she’s asking here about is what we called in Episode 062 “the other forgiveness.” So we’ve talked a lot on the show about Public Student Loan Forgiveness, PSLF. In Episode 018, we talked about that. I think we’ve mentioned it probably in 15 other episodes, right?

Tim Baker: I think so, yeah.

Tim Ulbrich: And I’m glad we did because I posted in the group last night, there’s a lot of negative news coming out about PSLF, and I’m not going to get on the soapbox right now. News article that 99% of borrowers that applied for forgiveness didn’t get it. And while you and I think we both agree that the federal government and the loan servicers could do 1,000,000% better job than what they’ve done in terms of the PR or the press and all of this, if you really dig into the details of why people aren’t Public Student Loan Forgiveness, most of it if not all of it really isn’t a surprise. It’s either they haven’t consolidated to the right loans, they’re not in the right repayment options or they’re not working for a qualifying employer. So as I mentioned on that episode, dotting your i’s, crossing your t’s is critical. If you have questions, let us know. But what Sabina is asking is about the other forgiveness, non-PSLF forgiveness. So if you stay inside the federal student loan repayment system, and she mentioned two of the income-driven repayment plans, PAYE and IBR, after a certain period of time, 20 or 25 years, depending on the plan, there is an option for forgiveness. And the key here is you do not have to work for a qualifying employer, which is different than PSLF. However, the amount that’s forgiven is taxable, unlike PSLF, where it’s tax-free. So there’s some planning that has to be done with tax. All that we covered inside Episode 062. And so I’d reference our listeners to Episode 062, Sabina the same. And also, she’s asking about refinance. And I think the question here behind the question is what is the best repayment option for Sabina? And I know many of our listeners and followers have that question. Should I refinance? Should I stay in the standard 10-year repayment program? Should I choose one of the income-driven repayment plans? Should I go PSLF? Should I not? If I do refinance, is it five years? Seven years? Ten years? Fifteen years? And we talk a lot about choosing the best repayment option, and we’ve got a full course around that topic, specifically that I would point our listeners to as well. So Sabina, without being able to dig into the numbers, this really comes down to lots of different factors such as running the numbers on each of these options, what’s the math? What are your feelings towards having these loans around for 20+ years? What are other financial goals you’re trying to achieve? What’s your progress in those goals? And I think at the end of the day, what I’m trying to encourage you and our listeners to do is to lay out all of the options, refinance, no refinance, forgiveness, no forgiveness, PSLF, non-PSL Forgiveness — and then from there, look at all the numbers, consider some of the non-math factors, and you can move on and make that decision to ensure that you’ve got this big decision and you’ve made the best decision for your financial plan. Tim Baker, question No. 9 is from Blake, who asked, “My wife is a PA, and I’m a pharmacist. She’s eligible for PSLF, and I am not. She’s set up on an income-based repayment plan, but this will be the first year where we both have a full year of income when we go to file our taxes. We’re wondering if there is a best way to file taxes to keep her payments low to maximize the amount that’s forgiven. I didn’t know if we filed our taxes as married filing separate, would it be more beneficial than filing together?” What do you think?

Tim Baker: Yeah, it’s a great question. And it’s kind of similar to our last question. It’s kind of difficult to dig into without all of the nitty gritty details. But you know, I would say that I think that there are situations where with student loans and spousal income that married file it separately is the right way to go. And I actually have a few clients that are doing that. It also depends on what repayment plan you’re in. So if you’re in a REPAYE — and if you’re in PSLF, those are going to be the two that you are really going to want to look at is Revised Pay as You Earn and Pay as You Earn. One of them, REPAYE, it doesn’t matter how you file. It’s going to count both spousal income. Pay as You Earn, it does matter how you file, depending on if you do file married filing separately will only account for the one spousal income. So I think you have to actually sit down and maybe do a tax projection, so we talked about that last time. If you’re interested, YourFinancialPharmacist.com/tax, we’re doing tax projections right now. And maybe actually couple that with kind of a student loan consult, student loan analysis, just to see am I approaching this the most efficient way as possible. Now, it is a pain in the neck to file with your spouse to file separately for 10 years. That’s not fun. And for nine out of 10 scenarios, just strictly from a tax perspective, married filing separately offers few benefits. But if you look at it, and your benefit or your payment is hundreds of dollars a month or even equate to thousands of dollars per year, the tax benefit might not equate to that in terms of married filing jointly. So again, I think that your question, it does, Blake, it does have legs. And there are scenarios where it does make sense to actually not file jointly with your spouse, especially if you’re looking at PSLF. And it kind of just depends on some of the income and the underlying numbers with the loans themselves. Alright, Tim, last question here is question No. 10. This is from Joshua. So Joshua says, “I’m on course to pay off student loans in a relatively short period of time. I noticed that refinancing my federal loans to a private lender would decrease my interest rate, as expected. But because I’m set to pay off the loans in a small period of time, the amount saved in interest is relatively small for a pharmacist’s salary. Would it be wise to stick with the federal loans with the option of utilizing a graduated repayment option to keep my minimum payment low in case something unexpected happens that doesn’t get paid for by insurance, like having a baby, etc.?”

Tim Ulbrich: Yeah, this is a great question, Josh. And Tim Baker, I don’t know your thoughts on this, but I have a feeling we’re going to get more of this question as we see the interest rate market rise. You know, I think a year ago, we had our student loans that were hovering around, what, 6-7% fixed rate? And some of our listeners were getting refinance rates in the 3-4% and obviously some a little bit higher depending on your credit and all those types of factors, debt-to-income ratio, etc. But I think as we see the interest rate market rise, then obviously we’re going to see refinance offers become maybe still attractive but not as attractive. Would you agree with that?

Tim Baker: Yeah. Absolutely. I mean, the interest rates on here are a huge thing that’s hanging out there. I think it will always be competitive in the five-year or the seven-year, but if you’re doing like a 10-year and you’re at 6%, I think eventually that market will dry up.

Tim Ulbrich: Yeah, I mean, obviously when you’re talking about potentially refinancing $150,000-160,000 and you look at 1-2% interest rate change, that can be huge, you know.

Tim Baker: Yes.

Tim Ulbrich: And we’ve done the math before on some fairly conservative numbers, and we estimate that somebody who has the average indebtedness can definitely save around $25,000-30,000 in refinance, depending on your individual situation. So and I like the way Josh asked this question because I can tell he already did the math. And that was the first suggestion I would have for our listeners is go to YourFinancialPharmacist.com/refinance, shoutout to Tim Church, who worked hard to build out a refi calculator, so you can look exactly to see as you get quotes from different lenders exactly what is the difference? How much are you going to save? Is it worth it? And based on those savings, you can then make the decision — or projected savings — you can make the decision to switch or not. Now, I must clarify, any time we talk about refinance, you know, regardless of what the math says, if anybody’s pursuing loan forgiveness, obviously refinance should be off the table because once you refinance, you’re taking yourself out of the federal system into the private system. You’re then making yourself ineligible for a refinance — or for forgiveness, excuse me. So for those who are not pursuing forgiveness who are then doing the math on a refinance, now the question becomes what am I giving up by getting out of the federal system? And how much am I saving? And is it worth whatever I am giving up? And you’ve talked about before several times on this show that 10 years ago or so, there was some vast difference between the benefits of the federal program and the private system. And those really have gone away because as you’ve made the point, when you have such a lucrative market, those private companies have to be competitive against whatever the federal system is offering. And so I think as we now look at some of these major lenders that we have, obviously pumped on our page as well, SoFi and LendKey and Common Bond, etc., you know, they really are becoming apples to apples with the federal system, with of course the exception of the forgiveness clauses. Now, there’s a couple lenders that are still out there that do not offer a discharge on death and disability, so of course you need to look at that as a factor. And if you’re going to get a much better rate from them, you have to weigh that against the risk that you’re taking on there. But for me, it’s starting with doing the math, seeing what the savings are, and then making the decision as to whether or not you’re going to switch. And again, YourFinancialPharmacist.com/refinance, we’ll give you the information to get started. The other thing I want to add here, which is the second part of Josh’s question, is would I just be better off with a smaller minimum payment in an extended or graduated plan in case something unexpected comes up? Now, I think this goes all the way back to budgeting and financial planning and really trying to get a feel for what are you locking yourself into month-to-month. And the thing I would say here to Josh is don’t forget that you can refinance more than once. So if you’re looking at your monthly budget, and you’re saying, “Oh, I’d be really squeezed by a five-year refinance, but I feel really comfortable about a 10-year, and then I’ll reassess in 12 months or 18 months or whatever,” you can always refinance into a 10-year, and then you could reevaluate that into the future. Or you choose a lender that allows you just to make those extra payments, right? Which are all of the ones that we have listed on our website. So don’t feel like you’re locked out of that because of a refinance. You could choose a longer term period and then you could obviously make extra payments or you could reassess and re-refinance at a later point in time. Alright, Tim Baker, good stuff. This was fun to take on these 10 questions. I think we’ll be doing more of this. So again, as a reminder to our listeners, if you have a question that you would like featured on the show, shoot us an email at [email protected] or jump onto the YFP Facebook group if you’re not already there, join the 1,700 other pharmacy professionals, great conversation, great community, and certainly you ask a question, you’re going to get a lot of good feedback in addition to Tim and I — Tim, Tim and I jumping in as well. As we wrap up another episode of the podcast, I want to again take a moment to thank our sponsor of today’s show, CommonBond. CommonBond is a on a mission to provide a more transparent simple and affordable way to manage higher education expenses. There approach is no big secret…lower rates, simpler options and a world class experience…all built to support you throughout your student loan journey. Since its founding, CommonBond has funded over $2 billion in student loans and is the only student loan company to offer a true one-for-one social promise. So for every loan CommonBond funds, they also fund the education of a child in the developing world through its partnership with Pencils of Promise.Right now, as a member of the YFP community you can get $500 cash when you refinance through the link YourFinancialPharmacist.com/commonbond. Again, that’s YourFinancialPharmacist.com/commonbond. And one last thing if you could do us a favor, if you like what you heard on this week’s episode, please make sure to subscribe in iTunes or wherever you listen to your podcasts. Also, make sure to head on over to YourFinancialPharmacist.com, where you will find a wide array of resources designed specifically for you, the pharmacy professional, to help you on the path towards achieving financial freedom. Have a great rest of your week!

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YFP 070: Pre-Planning for Tax Season


 

Pre-Planning for Tax Season

On Episode 70 of the Your Financial Pharmacist Podcast, Tim Baker, YFP Team Member and owner of Script Financial, talks with special guest Paul Eikenberg. Paul works alongside Tim at Script Financial and handles all of the tax planning and preparation for Script clients. On this episode, they discuss the new changes to the tax code and tips you can use for pre-planning for tax season.

Summary

In this episode, Tim and Paul discuss changes to the tax code that will affect your tax preparation for this year. There are several changes that have been made. The 1040 form is 23 lines and has new schedules. Standard deduction amounts are changing from $12,700 (couple) and $6,350 (individual) to $24,000 and $12,000, respectively. Personal and dependent exemptions are going away, meaning that those who have itemized before will probably take the standard deduction. Other changes include the amount that’s able to be deducted for medical expenses (now 7.5%), limits for local and state income taxes, child tax credit (now $2,000/child), student loan discharge due to death or disability is not taxable in the future, and the 529 is now available for primary and secondary education in addition to college. Paul also discusses how tax brackets have changed. There are the same number of brackets, however, the rates have been lowered. Paul suggests that most people will get a tax reduction between higher standard deductions and lower tax rates.

Tim and Paul then talk about the differences between tax planning and tax preparation. Tax planning involves long term strategy matching with your personal goals. Tax preparation is more mechanical where you plug in what happened financially from last year.

Paul offers tax review services through Script Financial. In a tax review, Paul uses your tax return from last year, current paycheck stubs, and payroll statements to project what your tax bill will be, assess if you are withholding enough from your check, and walk you through different options. Paul is still offering tax review services.

About Today’s Guest

Paul Eikenberg has been involved in starting and selling 4 businesses, has worked in the IT field as a franchisee and executive, as VP of Franchise Operation for a 500 unit Franchise System and is currently is serving as Vice Chairman of the Board of APG Federal Credit $ 1.4 billion asset Federal Credit Union. He has a wealth business operations and financial experience. In addition to being a licensed Maryland Tax Preparer, he is scheduled to completed the IRS’ Enrolled Agent exams by year end.

Mentioned on the Show

Episode Transcript

Tim Baker: What’s up, everybody? Welcome to Episode 070 of the Your Financial Pharmacist podcast. Paul, thanks for joining me on today’s episode. How’s it going?

Paul Eikenberg: It’s great, Tim. Thanks for having me.

Tim Baker: Yeah, of course. So Paul, why don’t we take a step back before we kind of get into all of the exciting things that are tax. And we don’t spend enough time on taxes, which is a very important part of the financial plan. But before we kind of do a deep dive into discussing the different changes to the tax code and what our listeners can do to prep for the upcoming tax season, why don’t you tell us a little bit about yourself and how you came to be the tax guy at Script Financial?

Paul Eikenberg: Sure, I’ve had several careers now. I’ve owned two businesses. And most recently, I was working with a network service provider. When that job got eliminated, I decided that I’d go back to tax preparing and got my Maryland certification, and I’m working on the enrolled agent program with the IRS, which I’ll be completing in December. And was looking to work real hard for part of the year and not so hard the rest of year has been my life. So that’s when you and I sat down together and started talking about our financial plans, and I wasn’t ready to retire, but I wasn’t ready to go back to work full-tilt. So you and I came to an understanding that Script Financial needed a tax practice and that it was a good fit for me at the right time.

Tim Baker: Yeah, and I think for me, you know, I think tax is so important because it really permeates every part of the financial plan. And I think a good understanding of one’s own tax situation and how you can practically plan for your tax situation I think is super important. So like I said, I’ve really enjoyed working with you and Anne over the years, and I feel like when I think back on the first time we met, I think we talked a lot about finances, but especially with Anne, we talked a lot about just life and just experiences and things that you guys have experienced and my experience, and it was more about the human element, I think, that we connected. And it’s been a good ride so far, and I’m lucky to have you as part of the team. So yeah, thanks again for coming on the podcast today. So let’s hop right in. So Paul, last year, the new administration passed the new tax code. The Tax Cuts and Jobs Act was signed by President Trump on December 15, 2017. What has that done to the tax system from where you sit as you’re looking at preparing taxes for 2018? What are some of the big changes?

Paul Eikenberg: Oh, everybody’s still working on figuring it out. The forms, the 1040’s changing. And the IRS has released drafts of the 1040s and all their forms, but they’re still in draft form. None of it’s been finalized. But one of the big changes you’ll see is that form 1040, which was 79 lines last year, is going to be 23 lines this year, postcard-sized, which sounds great until you find out there are six new schedules to support the 1040.

Tim Baker: Right.

Paul Eikenberg: And those lines really haven’t been removed, they’ve been moved to other schedules. So from a complexity of doing your taxes, it is I expect to be every bit as complex as last year. We will have a lot more people this year will be itemizing than previous because of the changes in the standard deduction.

Tim Baker: Yeah, it’s funny because I think the rhetoric behind the tax changes were that we want people to be able to basically file their taxes on the back of a napkin. And obviously, the 1040 itself is smaller, but it looks like they just moved the information to these new schedules, which I understand are actually numeric. So if people are familiar with the tax forms, you know, you have Schedule A, which was typically for your itemized deductions, Schedule C for business income. And now we actually have Schedule 1-6, so it actually makes it a little bit more confusing, in my opinion. Obviously, we haven’t seen kind of the final product of what the forms will actually look like, but interesting that I think it’s still going to be as complex as it was before. So let’s talk about some of the meat of some of the changes that we’re seeing. So you mentioned the new standard deduction. So walk us through some of the big — what is the standard deduction compared to the itemized deduction? And how has that changed for this upcoming year?

Paul Eikenberg: Well, in 2017, the standard deduction for an individual was $6,350. For couples, you were looking at $12,700. This year, it’s going to be $12,000 for single and $24,000 for couples.

Tim Baker: So essentially, it’s doubled.

Paul Eikenberg: It would seem that way except that your personal and dependent exemptions are going away, which was $4,050 per individual.

Tim Baker: So it looks like a little bit of the same stuff with kind of just rearranging the numbers, similar to the lines in the 1040.

Paul Eikenberg: It is. You’ll have, you know, you’ll have a higher standard deduction. So a lot of people who were itemizing last year will be taking the standard deduction this year. There’s estimates all over the board as to how many people will be affected. But you know, we saw a lot of them in our practice that were maybe $2,000-3,000 over the standard deduction last year that it made sense to itemize. This year, they’ll be taking the standard deduction.

Tim Baker: So just to back up, typically, what you want to do as a taxpayer is you want to look at what the standard deduction is and then what you’re itemized deduction is and then you want to take the greater one of those. So last year, if you were single, and you had itemized deductions of $6,500, you would have took that over the standard deduction of $6,350 because it was a greater number. So Paul, quickly, what are some examples of what would constitute an itemized deduction?

Paul Eikenberg: Mortgage interest is one of the big ones. Property taxes, state taxes, charitable contributions, employee business expenses, medical expenses can be if you have a significant amount of medical expenses. In the past, it had to be the amount over 10% of your adjusted gross income. This year, it’s dropped to 7.5%. But for the most part, unless you had a major health factor, you’re not — most people aren’t getting to itemize the medical insurance, I mean medical deduction.

Tim Baker: OK.

Paul Eikenberg: Last year, one of the big changes, state and local income taxes were deductible. They’re still deductible, but there’s a $10,000 limit on the amount of state taxes that can be itemized, and that is withholding taxes and property taxes. So higher income earners, that’s going to be a reduction in what you can itemize.

Tim Baker: So that’s big for high income earners and if you live in a part of the country where your mortgage and state and local taxes are higher, so say in the San Francisco area, that’s going to obviously affect those areas more than, you know, if you live in more of a rural area. How about, Paul, how about with kind of the, you know, if you have kids — how does the tax code change if you have kids?

Paul Eikenberg: Well, the biggest change there is the child tax credit goes from $1,000 per child to $2,000 per child. And the amount that’s refundable goes from $1,100 to $1,400. So that is the biggest change. The other change is that credit was phased out at $110,000 last year for a married couple. The phase-out has been raised to $400,000 this year.

Tim Baker: Which is huge, especially for our listeners, you know, probably as a couple are making more than $110,000. Now if you make up to $400,000, you get that $2,000 tax credit. And really good point of emphasis here is a credit is actually a dollar-for-dollar reduction from your tax bill, whereas a deduction just kind of decreases the income that you’re taxed on, so it’s not necessarily a dollar-for-dollar. And I think for the child tax credit, I believe if you’re single, I think it’s you can make up to $200,000 and still get that $2,000 credit per child. So just like you were talking about, it’s changed but the personal exemptions have gone away, but you’ve increased the child tax credit. So it’s a little bit of a — I don’t want to say bait and switch, but not a huge change. OK, so what about the — in terms of like education? We’re talking like the 529, the student loans and forgiveness. Are there big changes for that? Because that would obviously be something with listeners who have kids that are trying to avoid maybe the student loan hell that they’re in, so they’re saving for 529 or, you know, if you are a borrower and you’re trying to navigate your student loans, are there any big changes to the tax code in those two areas?

Paul Eikenberg: One of the big changes is the student loan discharge due to death or disability is not going to be taxable in the future.

Tim Baker: OK.

Paul Eikenberg: The interest deduction, the phase-out earnings have been raised a little bit but not significantly. I guess the biggest change is the 529 is going to be available for use for primary and secondary education.

Tim Baker: Yeah, so from what I understand, Paul, the 529, you can actually use for kind of your grade school, middle school, high school, which was a change because the 529 was really — before, it was just locked into just college. They did, for you homeschoolers out there, there was supposed to be a benefit that was stripped out at the last minute, so unfortunately, the 529 is no longer good for homeschooling. And so you know, from what I’m hearing more about people that work with clients that use 529s, it could actually — you could use it as a pass-through. So if you’re paying for private school, make sure you’re funding a 529 because you get a state deduction in most states. But then you can also use a 529 almost like you would use a retirement account where you’re accumulating, you know, so if you have a child and they’re going to go to school in 18 years, you’re investing that money and you’re accumulating it over time so you have a bucket of money for your child in the future to apply towards college. And then to circle back, the student loan interest deduction, it remained intact. I think it goes up a little bit, but not enough to really affect a regular pharmacist. Maybe for residents out there, the 2017 phaseouts were I think $65,000-80,000, so anything above $80,000, you didn’t get a deduction. So obviously for residents, for those maybe your PGY1, PGY2 year, you’d probably get a deduction for those years. But you know, beyond that, not necessarily. But the fact that the loans are discharged due to death and disability and not taxable because of death and disability is a big win for those people that unfortunately have to deal with that situation. So I guess, Paul, before we kind of talk about what we can do to prepare for the 2018 tax season, just about I guess the brackets. You know, I think everyone would like simplicity, but with the new tax code, do the tax brackets, how did they change? Did they change? What does that look like?

Paul Eikenberg: It’s pretty much the same number of brackets, but the rates are a little lower. The base rate is still 10%, but the next bracket down from 15% to 12%. The bracket above that went from 25% to 22%. 28% to 24% and then the next bracket, 33% to 32%. The others are pretty much the same or higher. So you know, we’re looking at overall, most of us are going to get a tax reduction between the higher standard deduction and the lower tax rate should have a positive effect on most of us out there.

Tim Baker: Yeah, and I think, you know, the number of brackets, again, like it would be nice to pare those down. I think essentially, though, moving forward with this tax plan, I think it is going to be better from a taxpayer perspective. Most people’s taxes are going to be lower. So that’s something to consider as you plan, you know, for the future. And that’s a good segway into kind of our next discussion is, you know, the difference between tax planning and tax preparation. So Paul, for you, how would you separate those two things?

Paul Eikenberg: The preparation is just more mechanical. We’re taking what happened last year, plugging it in, selecting maybe a couple options, whether itemizing or standard deduction works best for you, should you make an IRA contribution up to April 15 that you didn’t make before the end of the year. But you know, that’s working in the past with a lot of things you can’t change. Tax planning is really taking a long-term strategy, kind of matching your personal goals with your tax strategy. So you know, if your goal is to pay off student loans now, you may not want to defer as much retirement income as somebody without that. It’s just kind of putting all those pieces together and, you know, when we look at planning, like a mid-year plan for somebody, we’re going to look at where you are now, have you had enough taxes withheld that you won’t have a surprise come April? And are you taking advantage of the HSAs? Are you definitely getting the matches in your IRA, in your retirement programs?

Tim Baker: Sure.

refinance student loans

Paul Eikenberg: You know. If you have a business, rental property, are you doing everything you can? Are you planning out your expenses for those to mitigate your taxes as much as possible?

Tim Baker: Right. Yeah, and the way I look at prep versus planning, tax prep versus tax planning is the prep I think is the very reactive in nature. You’re like, ope, this is what happened for 2018. Let’s plug in the numbers and see what pops out. And sometimes, it’s a surprise, you get a refund. And sometimes, it’s where you’re writing Uncle Sam a check. And that can’t be fun.

Paul Eikenberg: I know from preparing a lot of taxes that the most painful thing is to be doing your taxes, waiting and being surprised with a big tax bill instead of a small refund you were expecting.

Tim Baker: Yeah, so maybe the approach we take is maybe self-preservation too because it’s tough to sit across the table and say, ‘Hey, you owe a lot of taxes.’ So obviously, what we’re trying to do from a tax planning perspective is get out in front of it, be proactive, and actually, you know, don’t let really the tax situation control you. You’re controlling your — whether it’s, like you said, deferring the taxes or avoiding the taxes, whatever that looks like.

Paul Eikenberg: If you’re proactive, you have a lot more options.

Tim Baker: Yes. Yeah. And for some people, you know, we talk about having funds set aside, whether it’s for home maintenance, emergency fund, a vacation fund, a lot of people don’t have a tax bill fund that they can just write a check and say, ‘Here you go, Uncle Sam. I didn’t pay you enough over the year, so here’s a sum of money.’ So that definitely could be painful. So Paul, let’s break down. You kind of talked through it a little bit, but when you sit down and you do a tax review with a client, what does that look like? How does that play out?

Paul Eikenberg: Let’s say we’re doing one for you now. You know, what I’d want to see is the most recent paycheck stubs. You know, we’d want to look at your last year tax return, and we’d really take your payroll statement and look at where you’re earning are, what type of retirement program you’re in, what other type of health insurance — are you pre-tax, HSAs — and project all the contributions through the end of the year for earnings and withholding, withholding taxes, and pre-tax contributions. From there, kind of review the tax return from last year, look for other sorts of income, deductions, project those, and then we’d sit down for a half hour conference and kind of go over the assumptions that I make projecting your situation through the end of the year, be sure that if you had capital gains last year, rental income, any of those other type of items, that we’re working on the proper assumptions.

Tim Baker: Right.

Paul Eikenberg: You know, are there estimated taxes or anything we’re missing that you’ve already paid Uncle Sam. And from there, we kind of project what we expect your tax bill to be, what your withholding’s going to be, if nothing changes, are you going to have a refund or owe money? And then we kind of walk through your options. To me, the HSAs are a great tool. Everybody should be getting their matching retirement, whether that’s pre-tax or a Roth 401k. If your employer’s matching it, that’s something you want to be sure you’re taking advantage of. And we’d kind of walk through your options of is there anything you should be doing to mitigate the taxes? Have you had too much withheld? Should you lower it? Have you had not enough withheld? Do you need to increase it? You know, are you going to be subject to penalties if nothing changes? Maybe you need to make an estimated tax payment. So there are a lot of things we look at.

Tim Baker: Yeah, and it’s great stuff. What I really like about kind of your review is that, you know, you take the pay stub — and it’s funny because when I used to work for a company, I would get paid with a paper check, I’d rip the check off, I’d deposit it, and I’d throw the pay stub on a pile. And I’d never really look at it. But actually, there’s a lot of good information, a lot of good nuggets on the pay stub about what you’re actually paying into. And it could be your retirement fund or long-term disability or whatever that is. And what I really like about your system is, you know, you use that information to kind of set up where we’ve been throughout the year and then extrapolate that forward to where we expect you to be. And what I like is is that you generally say, ‘Hey, if nothing changes, you’re going to owe $2,000. Or you’re going to get back $2,000.’ You’re going to be basically equal. You won’t owe or get anything back.’ And then if there is an imbalance, then we kind of discuss some of the levers that we can pull. So you know, you mentioned the HSA, increasing a contribution into your 401k, whatever those things are. And I think another one that probably we could talk about is just, you know, changes to your payroll withholding, the W4 form. A lot of people, when you begin a new job, you fill out the W4, and you don’t really look at it. But that W4 form basically dictates to your employer how much tax should be withheld from your paycheck. And then if you owe more taxes than what is withheld, then that’s when you actually have to write a check to Uncle Sam. So it’s kind of important to really understand that form itself and what that does. And sometimes just changing that is one of the levers that we pull. So instead of paying at the end of the year, you just pay a little bit more throughout the course of the year. So these are I think levers that I think are important to look at and go through and be able to, again, be more proactive in your tax situation than just say, ‘Well, this is what happened last year. Cross my fingers, hopefully I don’t get any surprises,’ and go from there. So Paul, are you still doing the reviews for this year? I know we’re into October. What does that look like?

Paul Eikenberg: Yeah, we’ll probably continue doing them until the Thanksgiving holiday is the plan right now.

Tim Baker: OK. So I think, you know, for listeners out there, if you’re interested, some people, you know, really enjoy to do a great job of analyzing your own tax situation. But if you’re not one of them, and you can think of a million other things to do to spend your time, you know, we can definitely help. Paul can definitely help. I think he does a great job with my clients. So you know, if you’re interested, sign up for the Script Financial tax review, and it basically includes a lot of the things we talked about, you know, analyzing your current pay stubs, you know, doing an income projection, you know, for the rest of the year, reviewing last year’s returns to see if there’s any discrepancy. So you know, if there’s big changes like you got married, you bought a house, you had a baby, those are going to affect, you know, obviously your tax situation. And at the end of the review, really to project out kind of your year-end tax status. And with that, basically Paul delivers that in a 30-minute video conference where, again, you review all the assumptions and projections and kind of go over the steps that you need to take to kind of, you know, pull the levers and say, ‘If we want to get money, this is what we would do. If we want to not owe the government money, this is what you should do.’ And I think it’s of great value. So normally, a tax review like this, it would be priced at $99. Between now and Nov. 20, so this episode will be released on Oct. 18, so about a month, we’re running basically a promo for 20% off. So that just brings it down to $79. So if you go to YourFinancialPharmacist.com/tax and use the coupon code YFP, you’ll get that 20% off the $100 price. So it’s YourFinancialPharmacist.com/tax to get that — to sign up for the review and use the coupon code YFP for the discount. So Paul, you know, good stuff today. We kind of talked about changes to the 2018 upcoming tax year, changes to the 1040, it looks like we’ve added some numeric schedules, the standard deduction has increased, and we talked about some of the changes with, you know, with the new tax code with deductions and credits, and then really what you can do for your own tax situation to kind of get in front of the ball and make sure that you have really no surprises for, you know, this upcoming tax season. So Paul, anything else to add before we kind of sign off here for the day?

Paul Eikenberg: Yeah, one more thing to think about that we think we’re going to see a trend with this year with the standard deduction going up. In the past, people have tried to pay their property taxes on December 31, made charitable donations so that they got those in in time to be deductible in the current year. I think the trend’s going to be that a lot of the people will be doubling up on those. They’ll be looking at their tax situation and instead of making donations in 2018, they may make twice as many in 2019. And think about your property taxes as to whether it makes sense — like in Maryland, you’d pay your property taxes from July to July and you have an option of breaking it up. So it may make sense to pay more in one year and then take the standard — alternate your itemized deduction one year to the standard deduction the next year. So that is one of the things we anticipate being a good strategy for quite a few people out there.

Tim Baker: Yeah, and I think just a tip in kind of the direction of doing some proper planning and being as efficient with your tax situation as you can. Like I said, if the listeners are interested in working with Paul and doing a tax review, it’s YourFinancialPharmacist.com/tax and use the coupon code YFP for the 20% discount. So Paul, good stuff today. Thanks for coming on the podcast, really appreciate it. And to the listeners, thanks again for listening. And we’ll catch you next time.

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YFP 069: Carissa Explains it All: How One Pharmacist is Accelerating Her Financial Goals Through Rodan & Fields


 

Carissa Explains It All: How One Pharmacist is Accelerating Her Financial Goals Through Rodan & Fields

On Episode 069 of the Your Financial Pharmacist Podcast, Tim Church, YFP Team Member, hosts another edition of the Side Hustle Series featuring an interview with Dr. Crissy Mahl, a pharmacist and entrepreneur from Yuma, Arizona. Crissy talks about her pharmacy career path and how she became interested in entrepreneurship. She started working for Rodan and Fields and has created a significant side income.

In the Side Hustle Series, Tim talks about ways you can create additional streams of income to reach your financial goals faster and highlights pharmacists who are doing this to help you get inspired.

About Today’s Guest

Crissy graduated with her Doctor of Pharmacy from the University of Findlay in 2012. After living in Ohio all her life, she moved to Yuma, Arizona and completed a PGY1 residency. She has a passion for acute care and hospital pharmacy and is now is one of her hospital’s biggest influencers and leaders. She also has a passion for empowering and inspiring others which is what lead her to become an entrepreneur.

Summary of Episode

On this episode, Dr. Crissy Mahl speaks about her pharmacy career and urge to travel which ultimately moved her from Ohio, where she lived all of her life, to Yuma, Arizona. She carries a passion for acute care and hospital pharmacy and currently works in a position where she is able to help create pharmacy jobs. To supplement her pharmacy income, Chrissy took on an entrepreneurial side hustle and started a business selling Rodan & Fields. In doing this, she’s learned how to fit her side hustle in with her full-time pharmacy career, allowing her to make larger payments on her debt and save for the future.

Crissy says that there are certain personality traits and characteristics that aid to the success this type of work. Her leadership skills as a preceptor to PGY1 students and Family Med residents matched with her personality and work ethic allow her to help navigate and balance her busy schedule. Crissy manages her time wisely, prioritizes well, and is incredibly focused on her business. She stopped watching television and even uses the “spare” time she has while walking or on an elevator to send emails and text messages that help fuel her business. By hustling around the clock, she has a goal set to retire by age 39.

Mentioned on the Show

Episode Transcript

Tim Church: Crissy, thank you so much for taking the time to come on the show and for being part of this side hustle edition.

Carissa Mahl: Thank you for having me, Tim. I’ve never done anything like this before, so I’m pretty excited about it.

Tim Church: Awesome. Well, we’re glad to have you on. And I was really excited when you reached out to me on LinkedIn to inquire about Your Financial Pharmacist and just to talk about some of the ways that you’ve been working towards financial freedom.

Crissy Mahl: Absolutely. Honestly, I felt like your page was everything that I wish that I knew when I was in pharmacy school. Honestly, there’s so much when it comes to finances and student loans and all this other stuff, and it’s super overwhelming. And it’s even more overwhelming when you come out of school and you’re not really sure what way to turn. And so this side hustle topic is very dear to my heart, and I think it’s something important for people to consider and kind of learn about too.

Tim Church: Yeah, I couldn’t agree more. I thought it was really cool when we were talking that we actually share a similar background in that we grew up in Ohio, lived there our whole life, and then we said, hey, let’s go ahead and take off to a state pretty far away and really kind of go from there. So I want to — can you share a little bit about how that happened and why you made such a big move?

Crissy Mahl: Absolutely. So I lived in Ohio all my life, moved to Yuma, Arizona about a little over five years now. So I went to pharmacy school in Ohio, the whole nine yards. I didn’t move until a few months ago after I had graduated pharmacy school. Ohio is where my whole family resides. It’s literally the only thing I know, honestly, because we didn’t have a lot of money when I was growing up. So traveling really wasn’t something that I had ever done before, you know, venturing outside of my little heart of Ohio State was a little bit nerve-wracking, but it was something that I felt I really needed just, you know, for my own push to get outside my comfort zone. And that’s exactly what happened. I was definitely outside my comfort zone, but honestly, I love it here in Ohio — or in Arizona! And I mean, the weather is awesome. I am constantly cold, all the time, so Ohio was really not my jam when you get like nine months of winter. So yeah, this heat is — this is my jam.

Tim Church: I hear you, I hear you. That’s how I got — I moved down to Florida, and for me, it was kind of a temporary situation. But after I was here, it was kind of like, you know, this is it. This is where I want to be, at least for awhile.

Crissy Mahl: Yeah.

Tim Church: So what was the main driver for you to get out there? Was it for a particular job? Or did you know people out in Arizona?

Crissy Mahl: You know, to be honest with you, I had always felt this inner — I don’t know what you would call it — this calling, if you will, to just explore the world. And like I said, I’d never really been able to travel when I was younger or even in school, to be honest with you. In pharmacy school, I had an internship, I worked all the time, so I really didn’t travel even while in pharmacy school. But I always had this inner feeling of just wanting to explore the world and get out there and try something new. And when I had first graduated pharmacy school, I actually had applied for pharmacy positions in both Ohio and Arizona. And I just kind of picked Arizona because I’d been to Orlando once before in my life, and my hair doesn’t quite agree with humidity, so I knew that humidity couldn’t be a thing in my life. And so I was like, oh sure, yeah, Arizona. Like their licensure requirements are similar to Ohio and I could totally pull off getting a license there if I needed to. Kind of a long story short, I actually got a job at a hospital where I had done a lot of my last year of pharmacy school rotations at. And I felt very comfortable with it. I was doing something that, you know, I thought that I wanted to do, which was work as a pharmacist at a acute care hospital. But honestly, I was a little bit scared because I felt like I was too comfortable with what I was doing, and I had only worked there for a couple of months. And it kind of gave me this feeling of like is this really it? Like you know, is this the challenge? Is this what I’m going to do my whole life? And you know, I don’t know. I’m kind of weird in the fact that I like constant change. And I don’t do well with monotony. So I actually had went to Midyear in Vegas that year and met up — just to say hey — to the director of pharmacy and the assistant director of pharmacy at a hospital in Arizona that I had done a phone interview for. And I don’t know if you and anybody listening to this right now have encountered this situation, but I feel like whenever you’re applying for a pharmacy position, they want to fill it pretty much immediately. So that was kind of a problem I came across while I was putting in applications, just before actually graduating is that they wanted to fill the position quickly. And so a lot of the positions I had applied for were already taken by the time I graduated. And I said hey to them, and they were like, “You know what? We have a position, and we want to bring you out to Arizona just to see the place and have the experience.” And I was like, “Oh no, I’m fine. I have a job, it’s cool.” And they were like, “Well, we’ll bring you out and you can see what it’s like.” And I was like, “You know, actually, I’m thinking about going back and doing a residency. I feel a little bit too comfortable with what I’m doing, and I really want to get more clinical.” Long story short, they flew me out to Yuma, Arizona, in the month of February where it’s like hell froze over in Ohio and gorgeous in Yuma, Arizona. It’s like 70 degrees during the day and then in the morning, it’s like 50. Like it’s perfect. And so they probably set it up purposely that way. But essentially, I did my residency there for a year in Yuma, Arizona. Yes, I moved to Yuma, Arizona, after going to Midyear and meeting them. And ended up staying on as a pharmacist after residency.

Tim Church: Crissy, was that a tough transition between working as a pharmacist and then actually going back to do a residency?

Crissy Mahl: You know, honestly, it was so much easier. I feel like the first year that you have after graduating and you are a licensed pharmacist is when you learn so much, regardless of if you’re doing a residency or you’re going straight into a new position as a staff or clinical pharmacist. I just learned so much because you — I mean, I guess you do those things ishish to a degree in your last year of school, you know, during your rotations. But when you have to sign your name to all these things and you are now an independent, licensed pharmacist, there’s like this heavy weight on you to constantly overthink everything and all this stuff. But to be honest, I felt like doing a full year as a pharmacist before going into residency — while I understand how unconventional that is — it actually almost prepared me even more for the residency, giving me more of an advantage because honestly, I felt like I was actually training some of the pharmacists that I ended up being a resident under. Not to like an extreme degree, but I was able to actually like cover vacations for people. It was kind of weird. But I’m glad that I did it, and I’m glad that I went back.

Tim Church: I mean, I think that’s just, that’s a cool story because you don’t hear too many pharmacists who are actually working, practicing as a pharmacist and decide, you know what? I am going to go back and do that residency. And so I just really commend you for doing that because I think that when you’re set in a position, as you said, you kind of get comfortable to some degree. And for some people, that’s not the way that they like to feel and they like the challenge of learning new things.

Crissy Mahl: Yeah.

Tim Church: And I totally get that you were much more prepared because you had that experience under your belt. But one of the things that often comes up — and I’ve heard some of this from my colleagues is that you go from making a full pharmacist’s salary, and now you’re taking a huge pay cut for a year. Was that tough having to do that?

Crissy Mahl: Honestly, it wasn’t too terribly tough. And that doesn’t — probably doesn’t make a whole lot of sense, but I will start off by saying that I make much more working in Yuma, Arizona, than I did in Sandusky, Ohio, per hour. So the move alone pay difference, you know, there was that. Also, I had a lot of perks going to the residency here in Yuma, Arizona. They actually have — the hospital owns an apartment complex. And so I was able to stay in their apartment complex for the full year of my residency. And I think I paid like $300 a month in rent, which was like squadoosh. It’s like nothing. And then our residency here in Yuma, Arizona, actually compensated residents a lot more than almost any other residency I looked at. I can’t remember off the top of my head right now what it was, but honestly, I think it was not quite — it wasn’t even half of what I was making as a pharmacist in Ohio. Like it was more than half. And you know, I just — it’s one of those things where if you’ve ever just made a serious commitment in your life, whether it’s I’m going to pharmacy school and you get that acceptance letter and you just like, you’re all in and you are going to make this work and you’re going to do this. And you’re going to see it out until the end, it was something like that. I knew that residency was something that I needed to do if I wanted to be able to work in the position that I wanted. And I knew I had to just go all in, regardless. And you know, I was already kind of used to being a student and having no money, so you know, the one year that I actually was a pharmacist and making a pharmacist salary, it was kind of like a vacation, if you will. And then it was like, OK, go back to student mode.

Tim Church: Did you have to make any sacrifices for that year during the residency? You know, compared to the previous year when you were making the full salary?

Crissy Mahl: You know, I did share wifi with your neighbor. So the wifi was a little bit horrible. I didn’t update my phone every year like I was used to. Like if it fell on that year, I didn’t do it. Actually, the year that I moved to Arizona and was a resident, I just, I did a lot of quick trips to like Sedona and Page and just stayed at cheap hotels. So I mean, I totally made it work. Like I said, it’s like student living. You just know that you can’t go all out with vacations and stuff. And honestly, I feel like our compensation wasn’t too terribly bad. So I felt like I didn’t have to make too many compromises when it came to, you know, the normalcies of life as far as finances.

Tim Church: Sure. So talk about a little bit about your current position and what you’re doing at your full-time job.

Crissy Mahl: Sure. OK. So right now, I am a clinical pharmacist at a 400-bed hospital here in Yuma, Arizona. I literally do a little bit of everything, and most of that is due to the fact that I did my residency here. So as a PGY1 resident, I every month did a different rotation, including oncology, ICU, internal med, infectious disease, like you name it. And so literally, I mean the goal at the end of any residency, in my opinion, should be that once graduated, you should be able to fit in any of those roles confidently. And that’s what I was able to do. So they kind of fill me into almost any position in the hospital, in and outside of the hospital, that is needed. And I’ve actually created a lot of the positions that we have here at the hospital now, including our Tower 2, which is our cardiac unit. We now have a pharmacist position there, so I helped create that. I also helped create an additional staffing position for the evening shift. And let’s see — now it’s been almost two months — about two months ago I helped, me and my coworker created an IV room pharmacist position. And I was actually a IV technician back in my day, so I kind of already know 7.7 and compounding chemo and things like that. So today, I work in the ICU. And yesterday, I was the quality and safety pharmacist.

Tim Church: You’re doing it all.

Crissy Mahl: I know. When I was mentioning that I get a little bit of pharmacy ADD and you know, I don’t like monotony, this is pretty much like, this is pretty much best case scenario as far as getting to dabble into a little bit of everything. And you know, we’re talking now about starting a ER pharmacist position. And actually, our ER here in Yuma is the busiest ER in all of Arizona. So the fact that we don’t have a pharmacist down there yet is pretty surprising to me. So within the next couple of months, I’ll be rolling that out. And I’m super excited about that.

Tim Church: Wow, well you are just doing everything there. And you’re doing a lot. And it’s pretty cool because it sounds like you’re taking on a leadership role as well and helping to get these positions created and just advocating for pharmacy in the hospital.

Crissy Mahl: Yeah, yeah. I mean, I guess I could consider myself — I don’t know if you’re like a Game of Thrones guru or anything — but I’m kind of like Tyrion. I don’t necessarily rule any kingdoms, if you will. But I’m kind of like the hand of the kings and give advice and help make things happen, which is kind of more my passion rather than being a boss, if you will.

Tim Church: And would you say that your going and doing the residency, do you feel that that was critical to be able to do a lot of what you’re doing today?

Crissy Mahl: You know, I do because one of the things that I really tried to make sure that I did during my residency was have experiences that I knew I wouldn’t be able to get as a staffing pharmacist. So for example, when I was doing my ICU rotation as a resident, I made sure that I asked to sit in on a open-heart surgery and then also be in the room when the patient comes up to the ICU and how the nurse handles all of the drips and you know, patient assessment scales and everything. I also followed respiratory therapy and how they adjust ventilation settings. And I even got to sit in on a patient who had a Passy Muir valve put on, which was pretty interesting and gross at the same time. I am so glad that people think that respiratory therapy is the bomb because I cannot handle that stuff. So I really feel like I got to not just get an angle of what a pharmacist does in a hospital setting, clinically, but also what the team approach and what they bring to patient care so that I can understand the process in a holistic manner rather than just constantly looking at it from my angle.

Tim Church: Sure, sure. I think that’s awesome, and thank you for sharing that story and just kind of how you got into that role with the residency. So before we kind of move into your side hustles, I want to ask you one more question. And that is, you know, in our profession, there seems to be a lot of negativity — and I know it depends on the job setting — but a lot of negativity around job satisfaction, just the profession. So I want to know, what do you like about being a pharmacist and about your job in general?

Crissy Mahl: Sure. So honestly, pharmacy wasn’t something that was on my radar when I was 5 years. When I was 5, I wanted to be a tornado chaser. When I was 8, I wanted to be an astronaut. And when I was 10, I wanted to be a veterinarian. You know, I don’t know if it’s because I just never really like knew anything pharmacy existed, but it got into my radar when I was in high school and had to sit down and be realistic about what a career required as far as schooling goes and how much to expect to get paid at that job. And for me, going to school for six years — and now they have the fast-track programs and everything where you can get done even sooner — but more or less, six years, and it paid $100,000+ per year, depending on where you work and what you do, obviously. But you know, I feel like there were other professions at the university that I went to. They obviously paid a little bit less than I did to go to that school because we had that College of Pharmacy tuition tacked on, but you know, at least I feel like I’m not in a position where it’s 100% impossible for me to pay off my student loans if I had only had my pharmacy job, but also pharmacy is growing in a lot of different ways, and one of the biggest things is outpatient services, so you know, oncology is huge right now. Anticoagulation, hypertension, diabetes, all of these clinics, they want to have pharmacy involvement. It’s big right now. And I have a hard time believing that we’re ever going to necessarily run out of different things to do. I know that there has been a concern regarding how many pharmacists are graduating every year and how many positions are available between those graduates and people transitioning in and out of jobs, but honestly, if you keep yourself competitive in a way of always learning and just kind of — I don’t know — having a personality where you are open and willing to work and go above and beyond, then I don’t know that you’d ever have a problem finding a job. You may have to, you know, go outside your comfort zone as far as location — that’s definitely something that I’ve seen, especially coming out of Ohio where we have — oh my gosh, I don’t even know how many.

Tim Church: Seven schools. There’s seven schools now, the last I checked, that’s how many. I don’t think there’s eight yet.

Crissy Mahl: Right. Yeah. And so you know, I remember it being rather competitive trying to find a hospital position in Ohio when I graduated. So I can only imagine how much harder it is now, especially if they’re doing any kind of cuts in the way of hospitals and retail and all that.

Tim Church: I think you’re definitely right, though, that it is competitive and that there are certain markets that are saturated, and there is concern with the number of pharmacy schools. But I think that’s even more incentive just to always keep yourself ahead of the curve in learning new skills and really making yourself incredibly valuable to the organization, the institution that you work for but also learning different ways on how you can provide value in patient care. So I think you really hit that. And I think it will be important too to see as there’s a lot of legislation going through to get provider status, to get more opportunities for pharmacists to bill, so that will be interesting to see kind of how that plays off. Well, let’s switch gears a little bit. So you’re working as a pharmacist, you’re creating all these positions, you’re loving it after you got through your PGY1 residency. How do you transition or how did you say, ‘You know what, I’m making pretty good money. I’m working as a pharmacist. But I’m looking for something else.’ What was your main motivation for pursuing a side hustle?

Crissy Mahl: That’s a really good question. So to be honest with you, my very first side hustle was something that was brought up to me by a coworker. You know, he had mentioned that he worked at a physical rehab hospital where he hooked up a couple of hours every weekend or holiday. It was super chill, he did patient interaction. And it was pretty low-key. And honestly, I wasn’t looking for anything super intense. I was just in my brain thinking, you know what? I could use a couple extra bucks, you know, like thousands of dollars every month going towards student loans and just not really seeing that number go down very much was a little bit depressing. So I was like, OK, yeah, like maybe I could do that. So I actually, that’s why I got into it. My very first side hustle was working as a PRN pharmacist at a local physical rehab hospital. And you know, honestly, at first, it was super chill. I knew half of the pharmacists who were working there, so it was easy and familiar. It was different than what I was already doing because it was a outpatient facility with a different workflow, so my job was essentially to literally face-to-face talk with patients about their home medications and what they were going to get discharged on and make sure that they have the education that they need and whatever paperwork is helpful to them in understanding, you know, what the plan of care is once they go home. So it felt very purposeful and, like I said, it was not very stressful. So it was just kind of nice to make that extra money.

refinance student loans

Tim Church: Sure. How many hours were you working there? What was typical when you were doing that side hustle?

Crissy Mahl: Typically, in the beginning, it was around probably six hours, which wasn’t bad because I got to sleep in, you know. Sleeping in is until like 7 o’clock. And then I would go in sometime around 9 o’clock and leave sometime around 3:30 and then, you know, maybe catch a movie or something with some friends afterward. But the problem came when we doubled in size and they were doing cuts left and right. Like they got rid of our HR department, they actually let go the technician that we had for — he worked there for more than 10 years. It was heartbreaking. And then — so literally I was doing technician, which means I was packaging medications, I was doing outdates, I was doing narcotic inventory, all these like things that are just not fun for me. And not only was I in charge of doing that, but I was also now taking care of twice as many patients. And the facility was now accepting patients at pretty much all hours of the day. So I would literally — I remember one time, I got a phone call from a physician — or no, it was from the nurse, bless her heart. She caught me at a bad time. But it was like 11:30 at night, and they needed Levaquin. And I’m just like, are you serious? You’re going to make me get up and go in and get you a Levaquin? When they probably already had a dose before they left the hospital that morning. And in that moment, I was just like, oh my gosh, I don’t want to do this anymore. Like, I was literally — I probably had one or — no, that’s a lie. I probably had two or three days off each month between those two jobs. And at the end, I was probably working 10- or 12-hour shifts every time I went in there. So it went from chill, six hours, you know, doing my thing to over the course of a year or two, now double the work, 10 to 12-hour shifts, getting yelled at for putting in so many hours and just stress, like ugh. I was crabby. Nobody liked me.

Tim Church: So it started out like it was a pretty good position starting out, but then it sounds like with all the extra work and the stress that it wasn’t worth the extra money that you were making in order to kind of accelerate the goals that you were looking at.

Crissy Mahl: Exactly. Yeah.

Tim Church: So how long did you work at that facility?

Crissy Mahl: I am not good at quitting. So I stayed at that facility longer than I wanted to, to be honest. I was there for probably close to three years. And it was probably halfway through there where I actually wanted to quit. And I didn’t have necessarily a backup plan because I was already used to that double income and couldn’t really afford, based on my plan for paying things off loan-wise, I couldn’t afford to just dip out. And so that’s kind of when I got into my second side hustle.

Tim Church: Yeah, so talk a little bit about that.

Crissy Mahl: So my second side hustle was something completely unexpected. Honestly, so I got into it because I wanted an eye cream. I was 29 years old, almost turning 30, and I wanted an eye cream. And I was talking with — this is going to sound so ridiculous — I was talking with a friend of a friend who was also a pharmacist. She’s from Arizona and lives in Wisconsin, and she was talking to me about, you know, what this particular side hustle did for her. And for her, she really, really wanted to be present for her kids at home. And she worked at a retail pharmacy location, and I know that the hours can be long and exhausting and just draining overall in retail in particular, and in my opinion. Maybe it’s just because retail isn’t my jam and it stressed me out more than maybe other people. But she was actually able to go down to only working two days a week with this side hustle. And so that impressed me, and I was like, I know how much a pharmacist makes, and you’re telling me that this side hustle is bringing in enough money that you can go down to working two days a week? That’s intriguing. So I joined the business with her. And within a couple of months, I think it was like less than three months, I was able to make back my initial investment in the business. After that, it was gains. And by, again, I suck at the quitting thing. So I could have quit at the rehab hospital a lot sooner than I did because I was actually to make more with this side hustle, with this business, after only five months than I made at the rehab hospital. So I was making more with this business than I was at the rehab hospital, and I was able to do it from home.

Tim Church: So talk a little bit about the actual business that you’re working for and what you’re actually doing.

Crissy Mahl: Awesome. I would love to. OK, so I am essentially paid to have conversations with people about the No. 1 skincare brand in North America. So I talk with people about their skincare concerns, and I also talk with people about the business opportunity. And I make a commission off of the skincare that people purchase through me, and I also make a commission off of the team that I build under me. So with this particular company, there are certain standards. You can’t just make money by sitting back and not doing anything. You actually have to be physically present in the business, working and like I said, building and coaching your team. Skincare isn’t necessarily something I was passionate about at all. Like literally, you’re talking to the chick who used a Neutrogena face makeup cloth before going to bed every night, and that’s it. Like that’s all my skincare routine included. And so once I got into this, it was kind of opening a whole new door of, you know, what skincare actually is and people started noticing my skin just after a couple of weeks. And that’s really when I saw the value in working with this particular company.

Tim Church: And what is the company that you’re working for, Chrissy?
Crissy Mahl: It’s called Rodan & Fields. Have you ever heard of it?

Tim Church: I have heard of that. And is it slang within the biz or is just on the street as R&F, also known as?

Crissy Mahl: No, R&F is like a thing. It’s their logo, it’s their — yeah.

Tim Church: OK.

Crissy Mahl: So that’s legit.

Tim Church: OK. I just didn’t know if you guys typically use that or you use the full name because I’ve kind of heard it both ways.

Crissy Mahl: Sure. So usually if somebody, if I’m bringing it up for the first time, I usually say Rodan & Fields because most people if I just say R&F are kind of like what? But sometimes, people will say, ‘Oh yeah, that sounds familiar. Tell me more.’

Tim Church: Right.

Crissy Mahl: And so that kind of opens up the door to me chatting with them.

Tim Church: So when you were talking about the different ways that you’re serving people and getting additional income, where is most of the income coming from? Is it from the products that you sell? Or is it from getting other people to work for the company?

Crissy Mahl: Sure. So to be honest with you, most of my personal paycheck comes from the products, the skincare products that I sell. However, with this business, that is not the same story for everybody. I know people who really were only interested in building a team. And so they made all their money through commissions on their team’s sales instead of, you know, necessarily selling product themselves to clients. So you can really work it either way. And I’m currently trying to find a balance between the two because I was very comfortable with the talking with people about the products in the beginning rather than the business. And so that’s kind of where I started. And the commission that we get for the products is always retail profit. And then after that, based on your position in the company, you can make, you know, 30%+ commission from product. As far as team-building, it again depends on your promotion within the company, but essentially, you can make 5% of your team’s sales up to six generations below you. So that’s where your residual income comes in. And that’s how people can make six, seven figures doing this business and literally retire them and their spouses in — I think most people like somewhere between like four and nine years. So it’s not a get-rich-quick scheme, it definitely takes work, like anything other business building would. You definitely have to get uncomfortable and push yourself to do things that you normally wouldn’t do because entrepreneurship isn’t something that I ever saw myself doing necessarily. So this is definitely outside my comfort zone, but it’s really been just so rewarding because it’s so different than pharmacy. So much more different than pharmacy.

Tim Church: Was that hard, making that transition into something completely different and kind of shifting your mindset?

Crissy Mahl: You know, it wasn’t that much. It sounds really weird, but I think that because of my natural want to help other people make something extraordinary, whether that’s a pharmacy position or building their own business, that kind of ties in together. And then also, I kind of like to have things that I can call my own, whether that’s a project or whatever, whatever it is. So this thing that is my own is my business. And so I have — give or take — full control over where my business goes. If I put a lot of work into it, I’m going to see a lot of gain from it. If I don’t put a lot of work into it, you know, it can slide backwards. So I have some control over it as far as that goes and that kind of give me a feeling of — I don’t know — safety, if you will.

Tim Church: And I wanted to ask you, Chrissy, because a lot of these business models, sometimes there’s negative connotations with them. And there’s a lot of stories out there of people who are very unsuccessful actually when they’re in these kind of businesses. But what would you say has led you for you to be successful in doing this? Because clearly, you’ve mentioned that it is bringing some additional income and is helping you achieve your financial goals quicker so that you were able to really quit the rehab facility position that you had.

Crissy Mahl: Sure. Yes. So my story in this business is unique to me. I don’t think I’ve ever come across two people with the same story in this business. Some people go super fast, some people are a little slower. You know, some people literally don’t do anything. And honestly, it kind of depends on your mindset — and when I say kind of, it’s like it depends completely on your mindset. So are you willing to do the uncomfortable? Are you willing to put in the work? Are you willing to be coachable? You know, things like that. And honestly, pharmacists have a bit of an edge in this kind of business because we’re already viewed as a trusted resource to people. And so for me, I mean, people would — before I even joined this business, people would come to me all the time, specifically to me, and say, ‘I have this patient. I need your help. What should I do?’ Or, ‘I’m going to Spain, and I need to know what restaurant to go to. Which one do I go to?’ You know, they look to me because they trust my opinion is going to be honest and is going to be helpful and accurate. And so, honestly, the relationship that you have with people in general and the, I guess the personal brand that you have on yourself does impact how well you’ll do in the business, especially in the beginning. So again, pharmacists having that trustworthy, you know, reputation kind of really puts you at a good spot because again, people are going to come to you with their problems. And they expect that whatever you tell them is going to be true and honest.

Tim Church: So besides just being a pharmacist, kind of being a trusted figure, are there any other skills or experiences that you’ve had in pharmacy school or just throughout your professional experience that have helped you be successful?

Crissy Mahl: You know, some of it I probably knew and had experienced throughout pharmacy, and I just didn’t realize it and it hit me more head-on in this kind of business. So for example, different personality types, different learning styles. Even though I am a preceptor to the PGY1 pharmacy residents that we have now as well as I help out with the family medicine residents that we have at the hospital here too, you know, everybody learns a different way. But when you are coaching somebody on how to utilize this system and how to run a business and what works for me, it doesn’t mean that they’re going to do what you tell them to do. And that part can be a little bit frustrating, and you just have to know that it’s going to happen. Like, there’s going to be somebody who wants to do it their way, and you have to just let it happen. There is that — I have encountered that negative connotation about, oh, you’re in direct sales, like what are you doing? And to be honest with you, their opinion doesn’t pay my bills. And if it did, then I would care. But it doesn’t, so I don’t. And you have to have that mentality to get through it because if you care too much about what other people think of you, and if you don’t have a place that you can go to reset your mind and bring you back to you, then you won’t get through it. You have to be able to say, again, ‘I’m all in on this. This is going to work for me. I will make this work. These are my goals. This is my timeline. You know, this is exactly what I want to do.’ And you have to kind of make yourself a plan. Like with pharmacy school, you know you’re going to be in school for six years. You plan it out. Year one, year two, year three, done. So with this, I’m like, OK, personally, my goal is to retire myself at the age of 39, which is a huge goal. It’s scary. It sounds audacious because it is. But you know, you have to believe in yourself enough to know that if you have the grit and the persistence, the coachability, you can literally do whatever you want with this business.

Tim Church: Have you ever considered leaving pharmacy and doing this full-time? Or does pharmacy still have something that’s very central to you?

Crissy Mahl: You know, I have thought about that, which is flipping crazy to think about, honestly, because it’s like, are you serious? Like you just went to school for six years and did a residency, and you’re telling me that you would be willing to drop it and do this business. Like are you nuts? But to be honest, like, once you find that thing that makes you, that fills all the holes from a perspective of career, you know, you kind of just have to go with it. And again, if you have a plan, and it’s a legitimate plan, and you’re moving along with it, it’s hard to turn down. Like if and when I hit that goal of, you know, matching my income as a pharmacist through this company, when I’m 39 years old, how could I not consider it, you know? Like when you have an e-commerce type business — I love to travel now. I don’t think I mentioned that. But instead of working in a pharmacy on holidays and weekend — like I still work holidays and weekends at the hospital because hospitals never close. But I travel so much now, so much. And it’s something, as I mentioned before in the beginning of our conversation, that I really, really, really, really, really wanted to do. I wanted to explore the world and just, you know, take in the cultures and take in scenery and experiences and with this business, I’m able to do that. And so I feel like I have such a better work-life balance, which is honestly pretty much anybody I know would love to have.

Tim Church: Well, that’s what I was going to ask you, Chrissy. I mean, it sounds like, you know, in order to be successful, obviously you have to actually do work. You can’t just sit back and expect to get this residual income that you’ve been. But how do you practically manage your side hustle with your full-time job and your personal life?

Crissy Mahl: Yes. So to be honest, it was really hard at first because I didn’t quit that rehab hospital position right away, you know. So I was literally working two jobs with 2-3 days off every month, in addition to this business. And honestly, it’s just having the focus and utilizing your time wisely. So literally, every nook and cranny that I had in my day, I was doing my business. So if — this is going to sound dangerous, and I don’t recommend that anyone does it — but if you’re walking down a really long hallway in a hospital, I would literally be sending text messages to people and catching up on my messages because, you know, my business is pretty much virtual for the most part, so that’s how I kind of kept up with that. Also, I stopped watching TV, except for Game of Thrones, you can’t take away that. But I stopped watching TV. And my other half, he loves watching TV. So I would literally still be in the same room as him, but I would have my computer in front of me, and I would be doing work. So you know, instead of being I guess nonproductive with my relaxing time, I was actually working my business. I stopped saying no to things that didn’t really benefit me in achieving my goals. So honestly, there’s always a baby shower, there’s always a birthday party, there’s always something going on. And unless there was a legitimate networking opportunity for me or it was, you know, a best friend or an immediate, really close family member, I said no. If I had work to do, then I did work. You know, like any other job, if you don’t get your work done, then it doesn’t get done, and there’s nobody else there to do it, so you have to make the time. I also stopped doing a lot of extra overtime at my full-time position, which now I guess isn’t so much of a problem because when I was first there, we were extremely understaffed, and I was doing a lot of overtime. But I don’t really do overtime anymore. I come home, and I work my business. I mean, also, not only like texting when I’m walking down the hall of the hospital, but you know, texting on the toilet is totally a thing. Just make things work. I was going to make this work. If I am sitting and eating, then I am sitting, eating and texting or emailing or having a conversation with somebody quickly over the phone. You can make it work. And that’s one of the reasons why I really loved this particular company’s business model setup, that it works for busy people. People who are in this particular company, I mean, they excel. And by excel, I mean they’re amazing. They’re like the top of their company amazing at their primary breadwinning position at their careers. It’s pretty astounding because I just got back from New Orleans at our convention, and just seeing all these amazing people and what they’re accomplished, it’s pretty cool that they were able to accomplish something so extraordinary with a business, you know, when they had so much else going on.

Tim Church: Wow, so you basically, you’re not wasting any time going all in in order to really drive this income and get to that goal. But I think that’s cool that you’ve cut out TV and you’re really prioritizing all the things that are really important to you. And I think that’s something that I’ve even struggled with in my side hustles is trying to figure out, you know, what is the process or system that works?

Crissy Mahl: Yeah.

Tim Church: And one of the things that I thought was kind of interesting when I read in this book called, “The One Thing,” by Gary Keller and Jay Papasan is talking about that whole work-life balance and how it’s really not the best way to view something that you actually should do. And I thought that just kind of blew my mind, like when they talked about that because it was basically saying that if you want to be completely balanced and equal in what you’re doing, then that really is how you’re going to be mediocre, that it actually leads to mediocrity. But rather what the reality is is that to be successful in something, sometimes you have to go all in. You have to be willing to do things that are uncomfortable to sacrifice some of the time that might be spending with family members or friends but then kind of shifting back at other times or different periods or seasons and kind of rebalance that in that sense. So it kind of sounds like that’s what it’s taken for you in order to do that. I mean, would that be something that’s fair to say?

Crissy Mahl: Yeah. I would say that’s totally fair to say. And actually, after you mentioned that, I remember reading this quote, and honestly, I can’t remember where I saw it or whose quote it was, but it said something to the effect of, if you are not obsessed with the process of what you’re doing, then you will be average. And it’s kind of true. Like I know people who are literally obsessed — and I call them nerds — with pharmacy. Like literally, I know a guy who on his honeymoon in Hawaii, read like I think it was a BCPS book or something. I’m like, are you flipping serious? Like you’re sitting on a beach in Hawaii, and you’re reading.

Tim Church: Was he still married after that?

Crissy Mahl: Yes. Oh my gosh.

Tim Church: Oh, OK.

Crissy Mahl: Right? She knew what she was getting into. But you know what I mean, and he is like somebody that I can ask any pharmacy question to, and he knows the answer right off the top of his head. I mean, he could probably literally tell me word-for-word, oh, well that study called blah blah blah said on page 3 that this that and the other thing. I’m like, oh my God, what? But if you’re obsessed with what you’re doing, like, you don’t even think about it. You just do it. And it shows, like you can tell when somebody is really into what they’re doing.

Tim Church: I totally agree. Well, Crissy, thank you so much again for coming on the show, talking about your story and your side hustles and some of your goals and aspirations. I think people are going to be better off hearing that, and hopefully that inspires some people to kind of pursue some of the things that they’ve always wanted to do or just really look at that. So again, we thank you. And if somebody wants to reach out to you or learn more about what you’re doing, how can they do that?

Crissy Mahl: Yes, so the best way to get ahold of me honestly is email. Email works perfectly, and you can reach me at [email protected]. So it’s Crissy Mahl at gmail.com. And I’d be more than happy to send you some information about what it is that this company is about, what I’m doing. Honestly, I’m not in the business to convince anybody of anything because I wouldn’t want anybody to do this business if it wasn’t right for them. And I want you to pick the side hustle that fits into your life and your family life best and what you’re trying to pursue.

Tim Church: Thank you, Crissy.

Crissy Mahl: Absolutely. Thank you so much for having me, Tim. This was so fun.

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YFP 068: Pros/Cons of Dave Ramsey’s Baby Steps


 

Pros/Cons of Dave Ramsey’s Baby Steps

On Episode 068 of the Your Financial Pharmacist Podcast, Tim Ulbrich, Founder of Your Financial Pharmacist, and Tim Baker, YFP Team Member and owner of Script Financial, discuss the pros and cons of Dave Ramsey’s Baby Steps and how they apply to the pharmacy professional.

Summary of Episode

Tim Ulbrich and Tim Baker discuss Dave Ramsey’s baby steps in this week’s episode by sharing their own experiences and answering questions from the YFP community. Dave Ramsey’s 7 steps include:

Step 1 = Save $1,000 for a starter emergency fund

Step 2 = Pay of all debt using the debt snowball

Step 3 = Save up 3-6 months of expenses in savings

Step 4 = Invest 15% of household income into Roth IRAs and pre-tax retirement accounts

Step 5 = Save for kids college

Step 6 = Pay off home early

Step 7 = Build wealth and give

Overall, Tim and Tim feel that Dave Ramsey’s baby steps lay out are a great framework for an individual or family to follow and then iterate to their own needs. However, these steps aren’t a financial plan and shouldn’t be used solely as one. There are so many scenarios and possible financial goals and plans that differ from person to person. For some, it might make more sense to follow the steps in a different order or to adjust the amount of savings or contribution toward retirement. Often times steps 5, 6 and 7 are happening simultaneously instead of consecutively following one another once the previous one is completed. It’s important to weigh the emotional part of your financial journey, your attitudes, and feelings toward debt and your goals, and what time frame you are working with when thinking about paying off your debt. These steps don’t include other important aspects of creating a financial plan, such as obtaining disability insurance, potentially using the avalanche method when paying off debt, or really take into consideration the amount of student loan debt a pharmacist graduates with.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Welcome to Episode 068 of the Your Financial Pharmacist podcast. Tim Baker, excited to be back together on the mic. I think it’s been awhile, right?

Tim Baker: It has been awhile. I feel like we cultivated this baby in the podcast and I’ve, like, been absent for the last few weeks. So I’m excited to be back on.

Tim Ulbrich: Yeah, we had a great month in the month of September doing home buying, all things home buying. Nate Hedrick, the Real Estate RPH joined us. Excited about the partnership with Nate. Excited also to jump into the topic we have today, discussing the 7 baby steps that many are familiar with, recommended by Dave Ramsey. We’re going to talk about the pros and the cons and how we think they do and don’t fit to a pharmacy professional. And we’re going to weave in throughout the show feedback from you, the YFP community, that we’ve gotten via email, the YFP Facebook group and via LinkedIn as well. So Tim, it’s my understanding you’re out at the XYPN meeting right now, correct?

Tim Baker: Yeah, I’m in St. Louis for XYPN Live. I think this is the fourth annual meeting. So XY Planning Network is a group of fee-only CFPs that are trying to bring financial planning to kind of the Gen X, Gen Y generation. So yeah, it’s been good to, you know, rub elbows with some of my colleagues and just get good ideas and bring them back to Script Financial and see how I can better serve clients. So it’s been a good week so far.

Tim Ulbrich: And you’re rocking your YFP T-shirt today? Is that right?

Tim Baker: Yeah, I’m flying the flag, Tim. So you know, we’re going to be talking to a lot of different vendors and things like that. Actually, it’s funny. I was telling you before we started recording that people, you know, my colleagues have kind of noticed what we’ve been doing on the YFP side of things and have taken interest in that. So it’s kind of cool to see that, and yeah, so definitely rocking the YFP T-shirt today.


Tim Ulbrich: Exciting time. So let’s jump into this topic. You know, when I think of the Dave Ramsey 7 Baby Steps — and we’re going to link to them in the show notes, and I’ll talk about them briefly — but for those that are not familiar, we’ll go through them quickly and link to more information. This is such an emotionally charged topic, and so when we posted this week, I said, ‘Hey, YFP Facebook group, YFP community, we’re going to do a podcast recording on the Ramsey 7 Baby Steps. What do you think the good, the bad, how does it work? What are the pros and cons? How does it apply to a pharmacist or not? And for our community personally, those that have walked through this step, what are some success stories or challenges they’ve had?’ So I think based on the response that we got in that post, we’ve got lots to talk about. So you ready to do this?

Tim Baker: Let’s do it.

Tim Ulbrich: Alright, so onto the show. Here’s what we’re going to do. I’m going to walk through briefly the 7 baby steps, so for those that haven’t heard of them before, are not familiar, I’m going to talk about them very quickly. Then, I’m going to get Tim Baker’s thoughts on his opinions at a high level. What does he think about the baby steps? Where do you they work? Where are maybe some areas that need more flexibility? And when it comes to advising his clients, where has he seen these work in both the success route but also in maybe areas that he may disagree with. Now, we’re going to weave in some comments and feedback from the YFP community throughout. So Dave Ramsey’s 7 Baby Steps. If you haven’t heard them before, here they are in order:

Step 1 is save $1,000 for what he calls a starter or a baby emergency fund. Now, we’ll come back and talk about this. We talked in Episode 026 baby stepping into your financial plan, two things to focus on first, which an emergency fund was one of those. We’ll link to that in the show notes. And we also have a blog post on why having an emergency fund matters, so if you want to learn more about this topic, we’ll link to that as well. So Step No. 1, baby emergency fund, $1,000. This is all about getting a quick win and making sure you’re starting to build some protection into your financial plan.
Step No. 2, probably the step, Tim, that causes the most debate — pay off all, all debt using the debt snowball.

Tim Baker: Right.

Tim Ulbrich: So this is referring to credit card debt, student loan debt, car debt. The only exception here to the word all is mortgage, the primary residence, which we’ll talk back and we’ll come back to this in Step No. 6. So Step No. 2 is pay off all debt except for the mortgage using the debt snowball. And we’ll talk about what that means and we’ll dig into that further.

Step No. 3 then is save up 3-6 months of expenses in an emergency fund. So we mentioned Step No.1 is save $1,000 for a starter emergency fund. Step No. 3 is to build up a full emergency fund, which is 3-6 months of expenses. Now, one that he doesn’t publish on his website but he talks often about is Baby Step 3b. And this, I think, Tim, is codeword for “Woops, I didn’t really think about a home. Where should I put it?” So it’s Baby Step 3b, which is save 10-20% down for a home. And I’ve actually heard him reference 10% in some areas, his Financial Peace University class, but also 20% on his podcast. So that’s Step No. 3 and 3b.

Then Step No. 4 as we’re working through these one by one is invest 15% of household into Roth IRAs in pre-tax retirement accounts. So invest 15% of household income into Roth IRAs and pre-tax retirement accounts.

Step No. 5 is save for kids’ college.

Step No. 6 is pay off the home early.

And Step No. 7, probably the most nebulous one, is build wealth and give.

OK, so those are the 7 Baby Steps, and I think it’s worth noting that his recommendation that I’ve heard throughout the podcast and listening to it over the past several years is that steps No. 4, 5, and 6 are actually happening together. So of course you’re not going to invest in 15% possible income into Roth IRAs and pre-tax retirement accounts and be done and check it off. That’s going to be ongoing. Saving for kids’ college is going to happen over a period of time. And paying off the home early will happen over time as well. So steps 4, 5, and 6 are happening over time. So there you have it, the 7 Baby Steps. And I can speak a little bit from personal experience. My wife and I used the 7 Baby Steps in our journey paying off $200,000 of student loan debt. And we worked through them, we made some modifications along the way, which I think is going to lend itself nicely as we get some questions and feedback from the YFP community. So Tim Baker, your thoughts and opinions at a high level on the 7 Baby Steps. Where do they work? And in your experience working with clients, what are some of the successes you’ve seen in clients using these seven baby steps? And where do you think they maybe have a little bit more downside or maybe points of contention?

Tim Baker: Yeah, I think that as a framework, I like it. Now, I think that’s part of the problem with financial planning — because this is essentially like a framework of a financial plan. And I think a lot of people will throw some shade towards Ramsey because, you know, they say, well, it’s not a one-size-fits-all. And I think financial advisors will sometimes give him some backlash because of, you know, he’s too focused on the debt. And if you remember me talking through like, you know, a lot of advisors are paid based on investments. So they’re not incentivized for you to work through your credit card debt or things like that. And then I think there’s just some disagreements about like his particular investment choices. But as a framework, and I think in some of our engagement with the Facebook group and LinkedIn and things like that, there are people that are identifying, saying, ‘Hey, we’re in Step 2. We moved to Step 3, and then we had to move back,’ things like that. So it is more or less a working financial plan that people can identify with and at least benchmark off of. So I’m in favor of that, and I think it’s good to kind of get the blood up a little bit and talk about these things. But I think there are some people that maybe are a little bit more financially savvy that, you know, have their ducks in a row. And they say, ‘Well, this isn’t necessarily how I would do it.’ But for a lot of people that aren’t in that position — and I come across a lot of them, and they eventually become clients, which is a good thing. Where should I put an emergency fund? How much? Why 15%? And what’s a Roth IRA? That type of thing. And I’m not really being facetious, I think some of these things are, they’re true. So for people that go through Dave Ramsey stuff, you know, there’s an assumption, I think, afterwards that they’re going to know more or less which direction they need to go. And from a financial advisor’s standpoint, they don’t necessarily make good clients because they feel like they’re set. But I do think that there are some strengths but also limitations to me overall to the 7 steps. So for example, you know, if I look at the first one, save $1,000 for your emergency fund. You know, I do have clients that are in this position where they have, you know, hundreds of thousands of dollars of student loans, but they have $30,000 or $40,000 worth of credit card debt. So you know, we’re just trying to dig our way out of, you know, paying through the credit card debts but then, you know, having a buffer of like $1,000, that’s a huge step in that direction. So even — you know, some people might look at this like eh, this isn’t for pharmacists. I would say not so fast. There are some situations where that’s going to be true. So like the way I talk about, and I think we talked about this in Episode 026 of the podcast is, you know, let’s baby step our way into that kind of the foundational part of the financial plan, being the emergency fund. So I look at it as kind of look at it in phases. So maybe Phase 1 is $1,000. And as we work our way through some of the — and I think about more the consumer, not predatory debt, but in that where you’re 16-17% — to focus on that first and really not tend too much to the emergency fund. But as you work your way through that, Phase 2 might be to get that to $5,000 because the fact of the matter is, if you’re a single pharmacist and you have a good amount of credit card debt and student loan debt, that alone with your rent could put your emergency in the $20,000-25,000 because you’re multiplying that monthly number by 6, essentially. So for a lot of people to get to that number, they’re going to default on their credit cards before that happens.

Tim Ulbrich: And I think that’s probably the most common thing we hear from pharmacists is they look at this and say, ‘OK, Step 1 is I need a $1,000 baby emergency fund. Step 2, I have to pay off all my debt.’ And so they may be looking at who knows? $200,000 in student loan debt, $20,000 in credit card debt, a $20,000 car note. Then I need to get a full 3-6 months of an emergency fund and then I start thinking about investing. I think that’s the piece where people are like, wait a minute. I’m not going to be investing for 10 or 15 years? And we’re going to come back to that because I think that, you know, the framework, as you mentioned, obviously — and Dave would admit this — is that mathematically, this is not the most advantageous framework to operate from. It’s really a behavioral framework to help people really get the motivation and the mindset and to have some structure around the steps they’re working through. And if we have a thousand people listening to this podcast when we release it, at the end of the day, we have a thousand different financial situations. And I think that speaks to — to your point — that speaks to that this plan by itself probably should not, in my opinion, stand alone but could be paired with the work of a financial planner, could be customized. And I think that if you look at the plan in and of itself, it’s not meant to be a standalone. It doesn’t deal with issues like insurance, end of life planning, investing strategies. You know, we got some feedback from the Facebook group, which I thought was cool. Matt said that he agrees with a lot of the baby steps in terms of them being introductory and getting yourself on track. They’re a good blueprint to getting out of debt. The only problem is what to do after the steps are complete, so they’re not wealth-building steps. And so if you look at Step 7, this idea of building wealth and giving, obviously that’s not necessarily a blueprint for what you should be doing in terms of investing and saving and strategies and end-of-life planning and all those other things that come along with it. However, I will say for those that are listening — and my wife and I just experienced this firsthand — if you feel like you are extremely overwhelmed, don’t know where to start. If you and your spouse maybe where applicable are having difficulty getting on the same page, I think that these steps or it could be another stepwise approach, but having a stepwise approach that you’re working together and achieving and feeling like you’re getting momentum forward, even if that’s not necessarily the most mathematically advantage approach, you can’t speak enough to the value of getting momentum and getting those wheels going forward. Because Tim, how many people do we talk to that say, ‘I’ve been spinning my wheels for seven years, and I feel like I haven’t made much progress,’ right?

Tim Baker: Right. And we’re proponents of — I think there’s some weight to the emotional side of the — we talk about this in the student loan course over and over again. It can’t be just about the numbers. And of course, we’re talking about, you know, for a lot of people, does it make sense to look at PSLF versus not? And in this scenario, in these seven steps, PSLF I don’t think would even be entertained because if you’re trying to pay off in Step 2, the non-mortgage debts as quickly as possible, it’s not even a thing. So if you’re someone that has a lot of student loan debt, and you have the emotion behind it that, hey, you’re anxious or you’re concerned, you can’t sleep at night, these are all things that people have said to me. Then we weight that somewhat heavily because it doesn’t make sense to take a more maybe of a reactive approach, say from a Public Student Loan Forgiveness, and you want to just be more reactive to that. But I think to your point, Tim, that people get riled up about this because potentially in some situations, especially for pharmacists, you might be waiting 10+ years to start putting any money towards retirement and not, you know, capitalize on match and things like that. And I think that’s where I fundamentally disagree with this model.

Tim Ulbrich: So before we go into some of the more detailed questions, let me read off some of those that commented from the Facebook group that talk about the support of this model and I think some of the positive aspects of the success that it can lead to and the behavioral aspects of the model. And then we’ll dive a little bit deeper into maybe where tweaks could be made to this model, depending on individual situations and scenarios.

So Scott says, “The plan is great. It teaches you to focus on just a few things and do them with intensity. You also need to keep in mind that he only teaches very low-risk strategies. If you lost everything like he did, I’m sure you’d have a similar mindset.” So what Scott’s referring to there, if you haven’t heard his story before, Dave essentially — I think it was in his mid-20s — got pretty deep in real estate investing, kind of lost everything. But I do think to his point, as I think through Jess and I going through this approach, intensity is a good word, right?

Tim Baker: Yeah.

Tim Ulbrich: Because when you’re going all in on one step and you’re singularly focused — and yes, to the comments we received, yes that may be at the expense of other things — but that singular focus has to be factored in somewhere into the equation with the mathematical components as well.

Tim Baker: And I think he uses — what does he use, like gazelle-like? You want to be gazelle-like. I think that’s his term. And I see that, you know. I have clients that come in, I want to buy a house, I want to travel the world, I want to start saving for my kids’ education. There’s I want to pay for my wedding, there’s a million different things. And part of my job is to cut through some and say, OK, what’s most important? Because you can do a little of a lot of things, or you can do a lot of one or two things. Typically, the latter is a better prescription for that.

Tim Ulbrich: Dalton says, “You can’t really argue with its effectiveness. The number of people who have gotten out of debt and built wealth through his plan are incredible. He even acknowledges that the plan doesn’t necessarily make mathematical sense all the time because the benefits of compound interest and retirement savings but always follows that up with the fact that being in debt doesn’t make mathematical sense either because if personal finance was all about math, people wouldn’t spend more than they make. I think that it makes sense for pharmacists mostly if they live like a college student still after graduation. You could actually pay off your loans decently fast, as long as lifestyle creep doesn’t happen.” And then he goes on to talk a little bit more about Baby Step No. 2. So let’s jump in there because I think we had a couple questions from the group about Baby Step 2, which makes sense, right? Because pharmacists are facing average debt loads of $160,000. So Dave Ramsey, in speaking to whatever, 5 or 10 million listeners every week, obviously their average debt load is not $160,000. So that is a unique piece to our audience. And Cole asks the question, “I’d love to hear your thoughts about stopping retirement investing and losing the match while in Baby Step 2.” So talk to me about your thoughts as you’re working with clients, typical pharmacist, $160,000 of debt, maybe you’re thinking about this in the frame of these baby steps. We’ve talked before about the match being a no-brainer, let’s take it. But how do you balance this retirement and student loans or at least looking at the match component while in Baby Step 2.

Tim Baker: Yeah, so just a comment on Dave and like the student loans. Like, I think when I first started hearing some of his stuff about the student loans, like he would almost fall off his chair when like a doctor — I think for awhile, I think a fair criticism of him was that he was a little out of touch. And I’ve seen some things where he’s like almost browbeat people, and that’s not productive. But I think in more recent times, he’s come around and he understands a little bit more about the student loan picture. So that’s the first thing. I think the third thing for me personally is — and I say this when we speak to pharmacy schools and, you know, different organizations is — you know, they say the two certainties in life: death and taxes. And I would add that you should, for the most part, match your 401k or your 403b. I think that is for the majority of people the thing to do because it’s one of those things that the whole thing, it’s free money. Unless you’re in dire, dire straits from a predatory or some type of debt, I wouldn’t do it. If it’s student loan debt, absolutely. You need to be doing the match.

Tim Ulbrich: So death, taxes, and the match are three certain things in life?

Tim Baker: I think so. That’s Tim Baker’s amendment to that. So I think by and large, if you’re not doing that — because most of the time, especially because it comes out tax-free, you’re not missing it. So if you’re an employer — and most employers, it’s 3%, 5%. It’s not like you’re asking to give up 10%. Some are structured like that to get the full match, but to get the full match is typically a small percentage of your income. So that would be my thoughts there. And you know, I kind of with the invest the 15% of household income, I kind of say as a general rule of thumb, which these are, to start getting it in your brainpiece for newly minted pharmacists and new practitioners is a race to 10%. Because what often happens is that you do get the match, you get 5%, and you have the 401k inertia. I talk to you years later, and you haven’t increased it at all. So in their mind, I try to plant the seed. It’s a race to 10%, so if you couple that with the match, you know, you are in that 15% range. And that’s typically, when we do the nest egg calculations, which we did on the APhA webinar here recently, the Investment 101 and 102, the nest egg is going to show that that is, more likely than not, true to be in that range.

Tim Ulbrich: Yeah, and I think this is a great example as you think through Baby Step 2 and this question that Nicole throws out there is that this is not a black and white framework, as we’ve already talked about, especially with everyone’s customized situation. So if you’ve heard Dave talk on the podcast or taken any of his courses like Financial Peace, I think he uses an average time range of debt repayment too of about 18 months or less. So again, a pharmacist with $160,000 as a graduate does not match the national average of somebody coming out from undergrad with $25,000-30,000. Now of course they have a higher income potential, but he’s then under the assumption — when you think about steps 3, 4, 5, 6 and so on — that that debt in Step 2 is going to be gone quickly. Now, if you’re somebody listening that’s got $30,000 or $40,000 of debt, maybe that’s the case. But if you’re somebody that has $200,000 of debt, you know, unless you’re hustling like Adam Patterson-style, Tim Church-style, that’s probably not going to be happening. So now, you have to have this discussion and balance and work with somebody like you as a financial planner to say, OK, what is this timeline of debt repayment? Not that we’re going to carry this on forever, but what is the debt repayment strategy? And then how do we now fit retirement savings into there. Because you and I would both agree that if somebody’s paying off their loans for 10 years, probably not contributing to retirement is not a good idea. Not probably — it’s not a good idea.

Tim Baker: Right.

Tim Ulbrich: But if somebody’s hustling for 2-3 years, that conversation is very different, especially if there’s some behavioral momentum that’s going to be happening. Now, I would agree with you 100% that that match is a given in all of those situations, it doesn’t matter whatever the debt repayment period is in my opinion. I think that that should be there.

Tim Baker: Yeah, and I think the other thing to take note of, call out here that I commend for him is, you know, he’s talking — again, I’ve listened to him talk to doctors that have a truckload of debt. And he’s like, “Oh, you’ve got to hustle.” Even though the make hundreds of thousands of dollars, he’s encouraging them. He’s like, you’ve got to take up, you’ve got to get extra shifts. So he’s not resting on your laurels just because you make a six-figure income. So you know, the people that we’ve highlighted, the Pattersons, the Churches, they’re trying to hustle. They’re thinking of additional ways to increase income, which I think is something that kind of falls by the wayside because we’re always talking about how can we cut our expenses? But it’s a two-sided equation. So I would say that that is something to focus on as well.

Tim Ulbrich: Yeah, and just to wrap up this Baby Step 2 and how do you balance the loans with the investing and what’s your time period, I would say that, you know, for many listening, the answer’s going to be different. We’ve talked a lot on the podcast before and live events that we’ve done about how do you make this decision between investing and paying down loans. I don’t think we need to get in the weeds here, but this really comes down to the factors like interest rates, what is your feelings toward the debt? How is your investing style? All of these things, and for everyone listening, that answer’s going to be a little bit different, which will obviously help determine where you’re going to go with that. Tim, Tyrell asks that he says that he’d like to hear pros and cons of paying off house versus student loans if working toward PSLF or towards PSLF or other forgiveness components. So he’s talking about working for a qualifying company, pursuing Public Student Loan Forgiveness, and obviously then that changes your strategy about paying off your loans, correct?

Tim Baker: Yeah, because, you know, typically, the way to optimize that strategy is to take, you know, Step 4, which is invest 15% of Roth IRA and pre-tax retirement accounts and really cross off the Roth because the Roth is after-tax and put as much money as humanly possible into pre-tax retirement because what that effectively does is lower your adjusted gross income, which affects how much you — which is the number that calculates your payment for student loans. So the lower that your AGI is, the lower that your payment is, and the more that you potentially will be forgiven. So there’s a lot of moving pieces to that. So I would say if you’re weighing paying off a house versus student loans, to me, the picture is are we getting the $18,500 into the 401k or the 403b maybe since it’s a nonprofit. Are we maxing that out? You’re probably not afforded a pre-tax IRA deduction because pharmacists typically make too much. But are you maxing out the $3,450 or the $6,900 if you’re a family in the HSA to get that if you have a high deductible plan. Once those things are checked off, then I would say, OK, you know, what are the goals? And maybe paying off the house is that. But if that house is, you know, if the rate’s 3.25, I don’t know. I don’t know if that’s the best way to go. Some people, again, I know Leah Donnells made a comment on this, and she’s a client of mine, and her mantra is, their mantra is they want to get through the debt as quickly as possible. So they, regardless of what the mortgage or interest rate is, they want that out from underneath them. And I can’t blame them because if you think about, hey, we’re striving for financial independence, what is a greater measurement of that when you don’t have to pay the bank your rent or mortgage anymore? So Tyrell, that’s a good question. But again, there’s a lot of moving pieces and I would say focus on the pre-tax accounts and max those out before, you know, throwing more money towards the house.
Tim Ulbrich: So Tim, you know Dave’s a big advocate in Step 2 about the debt snowball. And Ryan in LinkedIn says, you know, as he’s talking about the pros and cons of this model, he says, “Why should I use the debt snowball method? It works great for those people who really benefit from the psychological impact and reward of paying off small debts. But for those who don’t benefit from it will potentially spend more money in the long run.” So give us the quick overview of the debt snowball, how that contrasts to the avalanche method. And as you’re working with clients, how do you guide or advise them in terms of which of those methods may work best for them?

Tim Baker: So the debt snowball method is basically where you write out all of your or you have all of your debts laid out: what kind of debt it is, what the interest rate, what the minimum monthly payment is, and what the balance is. And the idea is to pick the debt that has the lowest balance and pay the minimums on all the other debts. And then for the one that has the lowest balance, you want to pay as much toward that as humanly possible. So when that one falls off, when that debt is paid and dead and gone, then you roll that payment into the next lowest balance. And then when that one falls off, you roll that payment into the next lowest balance. So this is really trying to clear liabilities from the balance sheet. And the idea is that that gives you, if you focus on the lowest one, it gives you a psychological advantage, it gives you momentum, that type of thing. The avalanche method, in contrast, is where you do the same thing except the priority payment is based on the interest rate, not on the lowest balance. So you want to focus on the highest interest rate — this is typically credit card debt and that type of thing — and you pay the minimums on everything else. And then when the highest interest rate falls off, then you direct your attention to the next highest interest rate. So from a math perspective, this makes the most sense because you want to clear those debts off that you’re paying the most interest on. So that’s really the difference between those two. Now, working with clients, theoretically, I coin flip. It’s one of those things where from a math perspective, yes, it does make sense to do the avalanche. But it’s the same thing with everything else. If you’re doing this on your own, don’t get into the paralysis by analysis. Just pick one method and go. For a client that I have, you know, $30,000 of credit card debt with that’s spread out across 20 different cards, to me, it’s just about clearing the balance sheet so she can, you know, work through those effectively. So now, it’s more of an organizational thing. So in that situation, we’re employing the snowball method because it’s almost unwieldy to handle. So it just really depends on where your mind is, if you’re running the math and you’re maybe less emotional towards it, avalanche. If you’re thinking that, hey, it’d be really nice to log into your credit card account or if I plug my client portal that you can sign up for on my website, Script Financial, you can see all of your, you can link all of your accounts and see a dynamic net worth statement. If you see a list of liabilities there that’s $10,000, $12,000 deep, and you really want to log in in six months and see $6,000, then I would say probably the snowball method would be the better route to go.

Tim Ulbrich: Yeah, and I think the time period is critically important here as well, right? So if you’re talking about a wide array of interest rates over a long period of time, say 10 years, obviously the math on that is going to become more advantageous toward the avalanche method. If you’re talking about I’m going to pay off whatever debt we’re referring to in a short period of time, and the interest rate’s aren’t that different, or some combination of that in a couple years, then obviously the math doesn’t matter as much. Does it still matter? Yes, of course. But you have to, again, make this determination about your own behavioral patterns and choices and how important that momentum is or is not. And as I think back to the journey that Jess and I took, that momentum for us was critical, even at the expense of paying a little bit more interest because as we were going through whatever step, let’s use Step 2 as an example, if we were going through a snowball method, if I knew we needed $2,000 more to pay off this loan to get to the next one, we were that more motivated to stay on budget or to look for additional opportunities to earn income, whatever it be, that I’m not sure for us collectively as a couple, we would have been as motivated if we would have been working that through the avalanche method. So did we spend a little bit more interest? Yes. But did we get it paid off faster? For us, I think we probably did. But again, back to the point of customization for somebody else listening, somebody else commenting, that may be a very different situation if for them, it’s very black-and-white, and they can work the system going through the interest rates. I want to encourage for a minute. Amber posted on the Facebook group that, “My spouse and I follow these baby steps, and they are great for getting out of debt. Our problem keeps showing itself on Step No. 3, which is the full 3-6 months of emergency fund. We complete it and are ready to move on, and we have somewhat. But then, wham, something happens and we are right back on No. 3. We’ve been stuck like that for several years now, but living without debt is really freeing and wonderful.” So I think again, it speaks to the power of getting out of debt. But I think is something Jess and I felt as well is that when you talk about something like paying off debt, it can be very exciting to see that balance come down. When you talk about investing, it can be very exciting. Building an emergency fund is not necessarily super exciting. And so obviously, they’ve had some things come up that have derailed them from doing that. But I think for those that are in the grind of building an emergency fund, to your point earlier about how much that could be, $15,000, $20,000, $25,000, $30,000, $35,000, that’s not super exciting. But it’s certainly a critically important step and a foundational part of a financial plan. Tim, wanted to get your thoughts on this. This I think speaks to I think maybe where you have some customization to this seven-step plan. Katie says, “After graduation, we DR’ed our way to becoming debt free.” I love that he has his own DR.

Tim Baker: Yeah, when do we get YFP’ed?

Tim Ulbrich: Seriously, YFP our financial plan, right?

Tim Baker: Can we hashtag YFP’ed? Get that trending on Twitter maybe?

Tim Ulbrich: I like that. Be a trademark, yeah. “The main tweaks we made in the beginning were splitting steps 2 and 3 equally, so equal amounts going toward the emergency fund and debt reduction until we had enough saved, and then we maxed out our own tax-preferred accounts before kids college. It’s not a perfect system, great for debt elimination, not ideal for investing, but it’s simple and gives a roadmap for those starting out. It worked well for us.” So what do you think about that idea of balancing the savings for emergency fund with paying off student loans or other debt?
Tim Baker: Yeah, I mean I think that’s exactly what the point is is like, this is a template for then people can iterate off of. And this is what I was talking about with like having, you know, Phase 1, Phase 2, Phase 3 in terms of, you know, Phase 1, it might be get the $1,000 or $2,000. Have a emergency fund that probably covers 80% of emergencies in your situation. And then from there in Phase 2, now maybe go through and start paying off debt and apply maybe little. I think this is a perfect example of how, you know, they looked at the situation and said, well, this doesn’t work entirely for us, so we’re just going to iterate. And again, bias, you know, I think they did it well themselves working off the two of them, but this is where I think a financial planner can come in and provide a little bit of guidance and objective opinion and say, this is what I would do and these are the recommendations. So I think that’s the power of this is people look at it as a benchmark and then they can iterate off of it and apply it to their own lives.

Tim Ulbrich: Absolutely. And so just to build on this a little bit more, Mark asked and has a comment in the Facebook group, and I can speak to this one. I dealt with this last year. He says, “I’m on Baby Step 2 and I’m really concerned about this idea of not having a credit score. Has anyone used manual underwriting to buy a house? And probably because I don’t fully understand a credit score, but I’m a little concerned about not getting a job because of it.” So I think what he’s referring to is that Dave’s a big advocate for no credit cards, cut them up, get rid of them, pay off all your debt, etc. And obviously, there’s some concern about having no credit when it comes to purchasing a home. If you currently are paying a mortgage, Mark, what I learned throughout this process is that that mortgage payment will still provide you with a credit score. Now, if you don’t have a mortgage and you have no credit cards, then obviously after a period of time of having no credit cards and not making mortgage payments, your credit score will effectively be reduced to 0, which could present problems when it comes to purchasing a home. You certainly could do manual underwriting. There is lenders that are out there that do that, just give yourself some more lead time. It will probably take more time. And we didn’t experience this or get to this point, but I’ve heard — Tim, I don’t know if you’ve heard — that sometimes in a manual underwriting process, you may end up paying a little bit higher of an interest rate.

Tim Baker: Yep.

Tim Ulbrich: So something to balance and think of throughout that process. Tim, want to get your thoughts on this. Lisa says, “I definitely don’t think Step No. 4 should be No. 4.” So No. 4, again, is 15-20% into retirement savings and tax advantage accounts. She said, “It should be closer to No. 1. I have always been taught that saving for retirement as early as possible is a necessity and you should think of that 10-15% money as unusable for anything else. So whatever your net income is, write 10-15% off, and that is your new net income. It’s very easy to push that kind of saving off.” So here she says, “For me, it was more like year one post-graduation, it was Baby Step 2 was immediate, very high interest debt like credit cards.” Then she went to Step No. 4, setting up 401k. Then went to Step 1 and 3 of saving an emergency fund. And then as she went into year two post-grad, she further went into Step 4, saving enough to put max in a Roth IRA, into retirement. And then year three post-graduate, she went back into Step 2 to pay off student loans. So I think the risk that I would have with this — I certainly fundamentally agree with what you talked about before of getting that race to 10%, right? Getting that behavior set up for retirement. But doing that at the expense of any emergency fund, I think you’re putting yourself in a risky situation. Would you agree?

Tim Baker: Yeah, I would. I mean, I probably would put it as, you know, maybe 1a. So I think — you know, I was talking to a prospective client the other day, and I was asking him, you know, if something were to happen from an emergency standpoint, what would you do? And the answer is kind of like, eh, credit card or bank of mom and dad. And I think those are two habits that we probably need to wean off of and break. So I’m always — you know, it’s not the sexiest thing, although I get jacked up every time, you know, an interest rate happens. We’re both Ally proponents. Whenever you get the interest payment in your emergency fund, I think that’s cool. But I’m a big proponent of having some cash set aside for those emergencies and then get serious about at least getting the match. That’s kind of how I view it.

Tim Ulbrich: So as we wrap up this episode, Tim, I think that as we look at this framework, I think you and I would both agree that it’s meant to be exactly that. It’s meant to be a framework, it doesn’t apply to everyone’s personal situation, there’s caveats. And again, I think that speaks to the power of individualized, customized financial planning. And I would highly encourage our listeners, if you’re not a part of the YFP Facebook group, head on over, join the group, there’s great conversation going on on this topic as well as many other topics related to your personal financial plan. And that group is really all about encouraging, motivating and inspiring each other in this community of pharmacists, all committed to being on this path towards achieving financial freedom. So Tim, any last thoughts here on the Ramsey plan as we begin to wrap up the episode here?

refinance student loans

Tim Baker: Yeah, I would just say, we didn’t focus too much on 5, 6 and 7. You know, I would just say that, you know, the whole saving for kids’ college, that’s not a given for a lot of people, even pharmacists that have gone through kind of student loan hell. That doesn’t necessarily mean that they’re in a position or even there’s a want to do that. So that might be something that we can, you know, address a little bit more in the future about different strategies to do that. And I would say paying off the home early, we addressed that a little bit. It also depends, and finally, I think No. 7 is kind of like, you get to the end of this and you’re kind of released out into the wild and to build wealth and everything is good. But you know, for build wealth — for what purpose? You know, I often say that typically the way that I price my services is based on income and net worth, which is great because I’m incentivized to kind of help you grow income and help you grow net worth over time. But if we fast forward 20, 30 years, and you’re sitting on $10 million but you’re miserable because you haven’t done the things that you’ve wanted to do, then that’s not a wealthy life. So I would say build wealth, but to what end. So last year, you know, you did an episode on giving, which is part of kind of 7b in the build wealth and give. But not everyone has that same worldview, so you know, some people are, they want to give 10% right off the bat of their income, you know, even if they have debt. Some people are even if they don’t have debt, they don’t really feel inclined to give. So it’s just different. But I would say that a big one that’s probably missing from here, especially from a pharmacist’s perspective is disability insurance. If you don’t have any coverage at all from an employer, the ability to work and earn really needs to be protected. So that would be one of the things that I would probably edit from a pharmacist’s perspective. But I think it’s a great list, it’s a great template to look at and to build off of and to iterate for your own purposes. So I think this is a great episode because we had a lot of engagement on the Facebook group, and I hope it keeps going because I think people learn when we shine a light on it.

Tim Ulbrich: Yeah, and to your point, I think we’re going to come back and do a lot more on all of these topics, but especially in 5 and 6, you know. We haven’t done a ton on college savings. And that’s an interesting one because I think especially as we think about pharmacists coming out with such high debt loads, I think there’s a tendency, myself included, to maybe put that one at a different priority than it should be because you’re compensating from your own experiences, and you don’t want to put your own children through that. So you know, 529s, ESAs, what’s the strategy? What’s the timing of that? How do you balance that with retirement, your current debt, all those other things? And then as you mentioned, even in Step 6 and the home, how you prioritize that, what’s your interest rates? What’s your other goals related to real estate? What’s your motivation? Do you care about the debt? Do you not? How do the new tax laws impact all of that? We’re going to come and talk more about that into the future. So I think there’s lots of people that are out there listening today, Tim, to this episode, that are thinking of the Ramsey plan, thinking about the framework but are finding themselves spinning their wheels with their own financial plan, lots of competing priorities coming at them, not sure in what order and how this applies to their own personal situation. And as we talked about, this plan is not intended, the Ramsey steps are not intended to be a standalone financial plan. And so I know personally, you have lots of clients who know these steps, maybe some are following them to a T, others are not. But they still value the one-on-one approach in terms of working with you and working with a financial planner. So for those that are listening that want to take that next step, get engaged with you as a financial planner to learn more, what’s the best next step they can do to do that?

Tim Baker: Yeah, Tim, it’s super easy. You can either go to the Your Financial Pharmacist website and click on the “Hire a Planner” tab at the top and then you can schedule a free call on that page. Or just go to ScriptFinancial.com and on the homepage, you’ll see a “Schedule a Free Call” button there. So those are really the two ways to find me and schedule a free call.

Tim Ulbrich: So again, that’s YourFinancialPharmacist.com. You can click on “Hire a Planner,” and then from there, you can schedule a free call with Tim Baker to discuss next steps. So Tim, great to be back on —

Tim Baker: Yes.

Tim Ulbrich: the podcast with you. Have a great time at the XYPN conference. And we’re certainly looking forward to having you back as we continue with some great content coming forward.

Tim Baker: I’m going to be YFPing this conference. Trending on Twitter.

Tim Ulbrich: Awesome. Love it. Love it. So as we wrap up today’s episode of the Your Financial Pharmacist podcast, I want to take a moment to again thank our sponsor, Splash Financial.

Sponsor: If you’re looking to refinance your student loans, head on over to SplashFinancial.com/YourFinancialPharmacist, where in just a few minutes, you can check your rate. Splash’s new rates are as low as 3.25% fixed APR, which can literally save you tens of thousands of dollars over the life of your loans. Plus, YFP readers receive a $500 welcome bonus for refinancing with Splash. Again, that’s SplashFinancial.com/YourFinancialPharmacist.

Tim Ulbrich: Thank you so much for joining Tim Baker and I on this week’s episode of the Your Financial Pharmacist podcast. Next week, Tim Church and I will be tag-teaming some updates related to student loans, including the latest on the Public Service Loan Forgiveness program. Also, for those graduates that are getting ready to come out of the grace period and enter active repayment, we will talk about repayment options and strategies. If you like what you heard on this week’s episode, please make sure to subscribe in iTunes or wherever you listen to your podcasts. Also, make sure to head on over to YourFinancialPharmaicst.com, where you will find a wide array of resources designed specifically for you, the pharmacy professional, to help you on the path towards achieving financial freedom. Again, thank you for joining us, and have a great rest of your week.

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YFP 067: Rapid Fire Home Buying Q&A


 

Rapid Fire Home Buying Q&A

On Episode 067 of the Your Financial Pharmacist Podcast, Tim Ulbrich, Founder of Your Financial Pharmacist, is joined by Nate Hedrick, the Real Estate RPh, to wrap up the month long series on home buying by taking questions from the YFP Community in a rapid fire Q&A format.

Summary of Episode

Nate Hedrick answers questions from the Your Financial Pharmacist community covering various facets of home buying process. Nate shares advice, resources, and parts of his financial, real estate, and home buying journeys to help answer these questions. The first question asks how to save for a down payment. Nate recommends using a savings account if the home will be purchased soon, otherwise he suggests to use a higher interest rate investment. The second question is in regards to comparing rates from different lenders without committing to them. Nate shares that it’s best to be upfront with lenders upon your initial conversation and let them know you are shopping around for a mortgage lender. During this process, you’ll receive a GFE (Good Faith Estimate) which is a document you can use as a comparison tool. Question three asks about tax advantages for home buyers. Nate discusses potential tax advantages for home buyers, such as buying down the rate or mortgage points, as well as property taxes. When asked about the process for building a home, Nate suggests asking pointed questions to the builders and to be wary of perks and additional up-sells they may pitch. Nate then talks about real estate crowdfunding sites which pull money together from different investors to leverage larger investments. Finally, Nate discusses buying a home while in debt with student loans.

About Today’s Guest

Nate Hedrick is a 2013 graduate of Ohio Northern University. By day, he works from home as a hospice clinical pharmacist for ProCare HospiceCare. By night, he works with pharmacist investors in Cleveland, Ohio – buying, flipping, selling, and renting homes as a licensed real estate agent with Berkshire Hathaway. This experience has led to a new real estate blog that covers everything from first-time home buying to real estate investing. Nate’s blog can be found at www.RealEstateRPH.com

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Welcome to the Your Financial Pharmacist podcast. This is Tim Ulbrich, and I’m excited to have again Nate Hedrick, the Real Estate RPH, back on the show to do a rapid-fire Q&A to wrap up this month-long series that we’ve been doing on home buying. So Nate, welcome back to the show.

Nate Hedrick: Hey, thanks for having me again.

Tim Ulbrich: So for our listeners, we’ve been all over this topic of home buying during the month of September. And if we have anybody listening who’s just jumping in at the end of this series, I’m going to quickly recap where we’ve been before we jump into the Q&A because I think that will help set the stage and hopefully give you an opportunity to go back and listen if need be. So here we are in Episode 067, and at the beginning of the month in episodes 064 and 065, Nate and I covered the six steps of the home buying process. And I think for those that are just getting started or want a refresher on home buying, that’s a great primer, and I’d highly encourage you to go back and check out episode 064 and 065. In 064, we cover three steps. In 065, we cover three more in detail. And then in Episode 066, last week, I talked through 10 home buying lessons that I have learned over the past few months, maybe some hard lessons, mistakes, lessons reinforced as my family gets ready to make the move from northeast Ohio to Columbus. And just as a reminder, along with this series, we have developed a YFP first-time home buying quick start guide that you can download for free at YourFinancialPharmacist.com/homeguide. Again, that’s YourFinancialPharmacist.com/homeguide. Nd if you’re looking to buy or sell or home or you want to get started in real estate investing or you just have a question that you want to have answered by a licensed real estate agent that is also a pharmacist, head on over to YourFinancialPharmacist.com/realestaterph, where you can get in touch with Nate, the Real Estate RPH. So Nate, you ready to do this rapid-fire Q&A?

Nate Hedrick: I’m ready. I’ve got my coffee, so I’m good. Let’s do it.

Tim Ublrich: Me too. I’m ready to go. So an early morning, here we go. And here’s the format. We’ve done several of these before. We’ve done one on student loans, insurance, and just like those, we’ve taken questions from the YFP community via email, via our Facebook group, and I’m literally going to throw them off one-by-one to Nate, and we’re going to hammer some of these. And then if we have time, I’ve got a couple at the end that are ones that are of interest to me and I know that have been asked out there before. So first question, Nate, comes from Austin via the YFP Facebook group. He says, “What is the best vehicle for saving towards a home purchase? Putting 20% down means holding onto a significant amount of money until finalizing a home purchase? So do you feel it is best to invest that money or save it in a low-interest savings account?” What do you think, Nate?

Nate Hedrick: Yeah, that’s an awesome question, Austin. So it’s funny, I’ll tell you the safe plan. And I’ll tell you what I did. The best bet is honestly to put that in a high interest savings account or some sort of rotating certificate of deposit, something that’s going to be able to basically meet or get near to inflation so that all those dollars you’re saving are basically protected and that your money is worth as much as it was when you put it in. Because if it takes you two or three or four years potentially to get that full 20% down, hopefully not that long, but depending on how long it takes, you want that money to be still worth as much as it was when you put it in. So the safe plan is a high interest savings account or a rotating certificate of deposit. But what we did when I was saving for our down payment, we didn’t have a high interest savings account. I think my savings account made .065% annually. It was a joke. So you know, I knew I was getting beat up by inflation every year that we basically didn’t pull the trigger. So what my wife and I did at the time was I took half of the money that we saved for a new home and put that in a savings account. And the other half for that down payment went into basically a short-term investment account. And I basically, the goal was to make about 6% on that investment, which isn’t outrageous. And if I could do that, basically and inflation was 3%, then I’m basically beating inflation with all that money. And so that was kind of the idea behind it. And it worked pretty well. It’s a riskier play, obviously, you can easily lose money that you’re investing, even in short-term investments, especially. So it’s a risker play. But again, at the time, I didn’t really have a whole lot of options. I suppose if I were just doing it today, I would look for some aggressive certificate of deposits, some of those online banks like Ally and whatnot are fantastic for that.

Tim Ulbrich: Yeah, and it’s nice that some of those higher yield savings accounts, the interest rate has come up a little bit, you know, so I think the last statement I got from Ally, it’s up towards 1.8% or something like that, which is nice from the .5%, .4%, .6% that we were living in. You know, to me, Nate, when I hear this question — and you alluded to this — I think about what’s the time horizon, what’s the appetite for risk? And then also just thinking about some of the tax implications and things along the way as well because if somebody’s looking at, you know, I really want to buy a home in six or 12 months, does the math on getting 6% in an account versus getting, you know, 1.5-2% in a savings account, you think about the potential risk that you’re taking out in an investment account versus a savings account, is it worth it with that time period when you really need the cash? Probably not. But if we have listeners out there that are thinking, you know, I’m in a position to start saving or maybe I have a gift from a family but I’m thinking about buying in five years or six years or seven years. When you think about that type of time horizon, to Nate’s point about the impact of inflation, I think that’s where you then start to think about, OK, how could I leverage these funds? Where yes, I’m investing them so they’re growing and beating inflation, but ultimately, I don’t necessarily want to be losing these moneys or at least minimize the risk of losing those moneys along the way. So for somebody that is thinking about investing, any other details you can provide? So you alluded to a little bit of a CD. When you talked about putting that money into a fund, were you just investing it in mutual funds out in the open market? Obviously you’re not doing that in a retirement account, I assume, correct?

Nate Hedrick: No, no. This was basically open market. Basically, you sign up with an online brokerage. I was doing individual stocks and bonds, I was doing larger investment vehicles like mutual funds, like you said, high dividend stuff. And obviously, like you said, there are tax implications to doing that. So this isn’t something you do lightly. But it’s something I had experience with and felt comfortable doing. And it was something that was, again, successful for me at that time. But I also had a larger time frame to look at. You know, we kind of started looking at that while I was still finishing up college, so I totally agree with you. If you’ve got a short-term play, you’re looking at a year, just throw it in a savings account, just protect that investment. And know that that money’s going to be worth it here in the next year, and you can use that down payment.

Tim Ulbrich: Yeah, and I think this is another good place too to think about, you know, the peace of mind variable, which often gets lost in the math and the weeds of this, right? So if you and/or a significant other or a spouse or somebody really wants to have the peace of mind that that money’s there and I’m not going to lose it, you’ve got to factor that into the equation.

Nate Hedrick: Definitely.

Tim Ulbrich: So Nate, I’m guessing some people are hearing this and thinking, 20% down? Do I really have to do this? I know we’ve talked about this on previous episodes, and you know, you do the math on this. On a $300,000 house, you’re looking at $60,000 down. On a $400,000 house, you’re looking at $80,000 down and so forth. And so we got a follow-up comment to this in the Facebook group where somebody alludes to, well, maybe you don’t need to put 20% down. So the comment here was, “I would consider weighing the option of not paying 20% down. Local credit union offers a first-time home buyer with 0% down. This avoids the PMI without having to save a boatload of money for down payment. Although credit scores were high, we were still approved, even with a pretty high student loan-to-income ratio. Keep in mind that the fixed rate was around 1% higher than going mortgage rate at the time. But with enough equity put in, we may explore refinancing to a lower percentage down the road if possible.” So we’ve talked before about in episodes 064 and 065, we talked a little bit about, OK, if you don’t have 20% down, you’re going to be paying Private Mortgage Insurance. However, there are some instances, and it looks like this is the case, where somebody’s not putting 20% down, and there’s no PMI, in fact 0% down loans. But the implications here are potentially a higher interest rate and obviously not having equity in the home. So what are your thoughts here and what are some variables for people to think about that may be leaning towards, you know what, I’m not going to put 20% down. What are your thoughts?

Nate Hedrick: Yeah. I think it all comes down to your priorities. You know, if your priority is to get into a home quickly, then yeah, I think it’s a really reasonable thing to not put 20% down. You know, before I started this financial journey, you know, our home, we didn’t put our full 20% down. We just got to the point where we had saved a good, I think we were at like 15%. And I said, look, this is the time, we’ve got to move. Our rental lease is up, and we just need a home for a couple of reasons. And so we just went for it. So it’s not for everybody, you kind of have to take that emotional side sometimes, which is harder to think about with a financial decision, and know that now, as we’re getting much, much further. We’re 10 years out now — well, almost 10 years out from the financial collapse of the housing market in 2008. There are a lot more options available to you now. I’m seeing a lot of 10% down conventional loans that have no PMI and the rates are pretty comparable. So there are products becoming more available. I think that the 20% down is very good in terms of being very financially stable and starting off with a lot of equity, but it’s by no means necessary.

Tim Ulbrich: Awesome. Next question comes from Mac via email. He says, “They say nowadays, your best off to obtain multiple loan quotes when buying a home. Sometimes it can be hard to compare rates when you are comparing apples to apples and fee structures, rates and commissions. What’s the best way to compare rates without going too far with one lender and then feeling committed to them? Or depending on how far down the road you are buying a home, is it too late to switch lenders and not put your purchase at risk in the market that we are in these days? What do you think?

Nate Hedrick: Yeah. That’s a great question. And there’s a couple aspects to it. So the first thing is I would go in with the expectation when you go to these lenders and tell them up front, I’m shopping around for a mortgage lender. My wife and I or my spouse and I or whatever are going to buying a home. And we wanted to find the appropriate mortgage lender for us. So help us make that to be you. And if you set that stage from the beginning, it’s going to be a little bit of an easier conversation. So they should be able to walk you down the road of OK, what kind of home are you looking for? What’s your budget? So on and so forth, which you have when you go in. And they should be able to give you a good faith estimate. This is a GFE document, it’s a very, very common thing. A good faith estimate shows you all of the numbers that they expect a loan to basically take. So an interest rate, it’s going to be all the fees, it’s going to be all the terms of that loan. So how long the loan is going to last, you know, are there prepayment penalties, are there escrow charges, what are the — all the aspects that go into the loan process. So that good faith estimate is that comparison tool because if you get three of those, one from each of your lender, although the individual loans may be a little bit difficult to compare, you’re going to have all that information in front of you, and you can do the math yourself to figure out how those stack up. So really once you get those good faith estimates, focus on the big numbers, APR or annual percentage rate, not just interest rate is a good way to do that. APR basically takes into account a lot of those fees. So if two loans are 4.5%, but one has $5,000 in fees and the other one has $0, that one with the fees is going to have a larger annual percentage rate, basically the effective interest rate is what they really should call it based on those fees that are built in. So you can use an APR to get a better estimate of what that loan is going to look like. The other big thing is you want to watch for — especially on your GFE — are things like rate locking and the ability to lock your rate at a certain time. That can be really beneficial. What the lender fees actually look like because these are one of the most negotiable aspects of a loan. You can basically take one lender’s fees and throw them at another lender and say, ‘Look, they’re not charging for this. I don’t think you should either.’ So that’s a good option. Watch for prepayment penalties. And then also watch for things like mortgage insurance. We’ve talked a lot about private mortgage insurance, but different loans require different amounts of it. And the GFE will basically show you exactly what those are going to look like.

Tim Ulbrich: I think that’s great advice, and the GFE, the good faith estimate to me was kind of the Aha! moment as Jess and I were going through the process. Once you can see that document, you’re like, OK, I can look at this, I can understand it, I can break down all of these costs and you can really start to get that full picture and not just focus on the interest rate, which I think is the common practice when you just get started and you’re getting quotes that are out there. So I love the recommendation of the practice of getting two or three different GFEs from companies, then you can really compare, as Mac’s question, is kind of apples-to-apples. Couple thing that I’ve learned as we’ve gone through this process here over the last month is that I think it’s very easy to just get locked in with a lender really early. And once you’re far enough down that rabbit hole, it’s hard to come back out of it. So I think really starting up front and being clear that you’re getting quotes, get those multiple quotes because I think what we’ve experienced actually on the side of those that are buying our current home is they actually did switch lenders, as Mac’s question is about, can you switch lenders? And how far down the road are you putting things at risk? And the thing you’ve really got to be careful about is that really restarted the whole process and put our sale about two weeks behind. And so you know, documents had to be transferred and how willing is a mortgage company — I mean, how readily available are they going to be to give documents over on a loan they’re no longer doing? And all of these things, and so it can certainly delay the process, so I think shopping up front is really key. And then you can go forward with one lender before you’re too far down the process. To your point, Nate, about the rate lock, I’m actually paying for this right now, this week. So I don’t know if this is something I could have negotiated up front, I think it was one of those things I looked at and said, ‘No big deal. We’re going to close on time, so why does this matter?’ Well, guess what? Closing got delayed, now the rate lock — I’m actually having to pay a few hundred dollars to get an extension on that rate lock.

Nate Hedrick: Yeah, that’s fairly common.

Tim Ulbrich: And I think that if that was something I would have played out and thought, well, what if closing gets delayed? Then I think we could have hopefully prevented that in advance. So great question, Mac. And actually, Mac had a follow-up question via email, unrelated, but on this topic of home buying. He asked, “What should be considered when buying a home to help maximize your tax advantages?” So the dos and don’ts in terms of home buying and tax advantages. And obviously, this is a big question. What are some of your thoughts, Nate, around home buying and tax advantages?

Nate Hedrick: Yeah, that’s a great question. And I’ll try to just hit on a couple of things here because like you said, it is a fairly big question. The first thing I think is important to talk about is what can you do up front? Like what can you do kind of as you’re buying that home to reap some tax benefits? And there are a number of things from, you know, first home buyer tax credits that are available depending on a number of factors. But one of the easiest things you can do is actually — it’s called buying down the rate. And you’ll hear this referred to as mortgage points or buying points. And this is something where if you have extra capital to put into a home purchase, you can actually percentages of that loan to lower your effective interest rate. So if you are buying a $100,000 home, just for easy math, every point on that loan is 1% or $1,000. And every point that you buy, every $1,000 that you spend, drops your interest rate by a certain amount, you know, whether it’s .25% or whatever. So you can put extra money on a loan to effectively lower your interest rate, which is great for the long term, right? If you had that home for 30 years and your interest rate is now a full 1 percentage point lower, let’s say, that’s going to make a big difference over the life of that loan. But in the very next year, basically as soon as you file those taxes for that year that you bought the home, you can also deduct all of that mortgage interest as a deductible on your taxes. So there’s a really cool kind of tax benefit right up front. So that’s one big thing to look at, at least early on. The other thing that you want to look at is — and this is really kind of a thing that’s changed. If you had asked me this question a year ago, it’d be a little bit of a different story. But with the new tax laws, you want to probably know, are you going to be taking the standard deduction next year? Or are you going to be doing the itemized? And with the standard deduction being raised to what it is, a lot of the individual benefits we used to get from homeownership have kind of fallen away. They’re still there, but they’re just not something that you’re going to get any benefit from. The example I have is that basically now that the aggregate amount of state and local sales and property tax is capped at $10,000 a year, people that are buying in New York and California and Hawaii, all these expensive places, they’re not going to see that benefit. You know, you’re no longer really itemizing that deduction anyway. So that cap at $10,000 is not enough to be worth it. So things like that you want to consider: Where am I buying? How am I going to be filing my taxes next year? You know, an accountant can really help with that because that may change your decision a little bit as well. And then the last piece I guess I’ll talk to is that you want to watch for the individual taxes for that area, so the property taxes. And this isn’t something that you can deduct or something that you have to worry about. It is one way to maximize your advantage, right? If I live in a township that has much higher taxes but much better schools, or do I live in a township that has much lower taxes but less amenities and maybe it’s nearby to the things that I want. You know, so that location aspect can be really important as well when talking about tax advantages.

Tim Ulbrich: So Nate, quick question for you on the buying of points, the first tax advantage that you mentioned. You know, I struggled a little bit when I got that offer on the table during the process we’re going through now. And the way I was trying to think about it — and I didn’t think about the deduction side of it, so I’m learning here right alongside the listeners as well — but what I was thinking about it from what’s the break-even point. So if I — just as an example — if I have to spend $2,000 to get my rate down whatever, .4%, you know, I can do the math on that to see that over how many months of saving that interest paid, why recuperate those dollars, and what if I would have just had that cash up front and done something else? So is that the right approach? Or how do you help your buyers evaluate whether or not that purchasing of points is worth it? Or whether those funds could be used elsewhere for other priorities that they’re working on?

Nate Hedrick: Yeah, and that’s a great point. So think about — there’s a couple aspects, and one is how long are you going to be in that home? That’s kind of the first decision. And how long do you expect to pay off that mortgage? If the answer is I can’t wait to buy this down and pay this off in 10 years or less, then buying points is probably not worth it. I think the break-even point is something around the 15-year mark or something like that.

Tim Ulbrich: Yeah, that’s what it was for us. Yep.

Nate Hedrick: Yep. And it varies based on the individual lender, but that’s usually where it’s at. So if you plan on having a true 30-year mortgage, then points can really be worthwhile. But if you plan on buying down your mortgage quickly or paying it off quickly, it’s usually not as beneficial. The other aspect to consider is that as soon as you pay that off, as soon as you put those monies in, it’s harder to get them back out, right? So that money is immediately tied up. So unless you’ve got a real excess of capital, which is obviously harder to find, it may not be worthwhile to tie up that extra money in the property.

Tim Ulbrich: Yeah, I’m especially thinking maybe for some of our listeners that are buying a home, and maybe they don’t yet have a fully funded emergency fund or they have high interest rate credit card debt or other things. So really, it sounds like buying points is an ideal scenario for somebody who is in a great overall financial position, has extra capital, and plans on being in the home for a long period of time.

Nate Hedrick: Yeah, if you’re spending 5% on your student loans every month or every year, you don’t want to be paying, you know, a couple thousand bucks to get a couple of miniscule percentage points off. It’s not worthwhile.

Tim Ulbrich: OK, good stuff. Mac, thanks for your contribution, great questions. Mindy has a question that actually came in via the Real Estate RPH contact form, which is over at YourFinancialPharmacist.com/realestateRPH. She asked, “I’m building a house, second-time home buyer. Wondering what I need to know about the process, things to watch for, etc.” So thoughts for those listeners that may be thinking about building and whether they do or don’t currently own a home, what does that building process bring in terms of new factors and items that people need to be thinking about?

Nate Hedrick: Yeah, yeah. Besides the regular aspects of buying a home, it does add a couple things to the mix. The nice thing is is that you know you’re getting kind of — you know what you’re buying upfront, right? They’re building the home new. You’re not going to find any lagging issues that the home’s been there for 60 years and now the foundation’s starting to crumble, right? As long as everything is done quality upfront, you’re going to get everything brand new, which is a really big advantage. So I think the first question you want to ask if you’re considering building a home is you know, question around the idea of quality. And I think you don’t want to go to them and say, ‘How nice are your homes? Like what’s your quality?’ Like that doesn’t tell you anything because they’re just going to say, ‘They’re fantastic.’ And then you’ve learned nothing. But you want to ask some pointed questions, you know, things like, ‘Talk to me about some of your building standards. Talk to me about how energy-efficient your homes are.’ Because those are things that are going to show you yes, they follow code, but how close do they get to modern building standards? How close do they get to really high energy efficiency standards because those are much more better indicators of quality than just, oh yeah, we always follow code. Like you wouldn’t be a home builder if you didn’t follow code. So asking the right quality questions is a really good place to start, and that will help you know that what you’re getting when you put all that money in is going to be worthwhile. The second part is really the additions or the amendments or the kind of the perks, right? So you’re going to sit down when you’re building a home, and they’re going to walk you through and they’re going to say, ‘OK, the base model that you’ve selected is $400,000. Now let’s get to some of the upgrades.’ And these upgrades can take you — I’ve seen them honestly double the price of a home from that base value. So be careful when they say, ‘starting in the $300s.’

Tim Ulbrich: Starting at…

Nate Hedrick: Yeah, exactly. Like you’ll see that advertised on the big signs for the new developments. ‘Starting in the $200s,’ and realistically, no one’s walking out of there for under $300,000. So the upgrades, the things I would caution you on or draw your attention to is that take the upgrades that you find beneficial. Don’t let them talk you into things that, oh, this ups the resale value. So if you sell this home in five years, this is what people are going to want. If you’re building a home, in all likelihood, you’re building it for you. And so you should buy the upgrades that you want. One of the things I just had a client walk into it and was working through is that they said, ‘Well, we can do your upgraded kitchen cabinets. And right now, the popular thing is to do dark cabinets on the bottom and light cabinets on the top. And that’s only going to be $10,000 more, and you get this super modern kitchen.’ Well, if they sell that home in 10 years and that’s not popular, they may have to redo that. So if you don’t want that, don’t buy it. And that’s I think a good addage for all the upgrades that go with building a home. If you don’t want it, don’t invest that money because you’re the one that you’re building it for.

Tim Ulbrich: So Nate, one of the things that I’ve always wondered about building a house — we’ve never been through the process — is how does the cash flow needed differ from a buying a existing home? So if I’m in a current home, and I’m looking at building, how does that work in terms of selling and the timing? Am I having to put down money earlier where I necessarily can’t wait until the sale of my home? Or is it very similar to buying an existing home that those things are all ironed out?

Nate Hedrick: Yeah, it’s a little different because a lot of times, you have to buy the lot or you have to put in some sort of down payment to secure the lot. And sometimes, you have to buy the lot like upfront. Like it’s a $28,000 or a $50,000 piece of land that you have to basically buy upfront, and then you move forward. Or sometimes they can say, ‘OK, well it’s a $50,000 plot. We need $5,000 to secure this.’ But generally, it’s a lot more. It’s usually on the higher end of securing that location. So depends on the popularity, it depends on how they want to structure it. But there’s really two sides to it. One is basically securing that land and buying that land, and then the second is getting the mortgage on the home itself. And you can often wrap those things together so that everything’s kind of one piece, but the builder and the developer usually wants a lot more upfront to secure that property to begin with.

Tim Ulbrich: You know, one of the things that I’ve seen in our neighborhood, and we don’t actually have a homeowners association, so this may be different in areas that have a little bit tighter regulations, but we’ve actually seen several houses go up where my guess is maybe they didn’t anticipate all costs involved where six or 12 months later, like the yard is still not in or something’s not fully finished, you know, in terms of a porch or something else. So I think just things to consider, to your point earlier about, you know, what is the starting out price? What’s the actual price? And going back to you really defining your budget before you go into those conversations with the builders or else I think it easily could be a conversation where you start at $250,000 and you end at $400,000, you know, depending on what you’re looking at. So Lauren via the Facebook group asked, “What are your thoughts about real estate crowdfunding sites like FundRise?” So talk to us a little about what are real estate crowdfunding sites and what are your recommendations on these for those that may be interested in doing some real estate investing?

refinance student loans

Nate Hedrick: Yeah, this was an awesome question from Lauren. I actually answered it on the Facebook page because I’m in the middle of writing an article about it right now. My wife Kristin actually found FundRise — I had never heard of it before — and said, ‘What is this? Like what’s going on with this?’ And I said, ‘I’m going to find out.’ So I’m actually in the middle of writing this article right now because it’s super interesting. The basics is this: So it’s a REIT, which is Real Estate Investment Trust, but they’re calling it an e-REIT, or an electronic or online or whatever they want to define it as. But the idea is very simple. The idea is that they’re a group of individuals who buy real estate — and this is many aspects. They’re buying rental properties, they’re buying commercial development, they’re buying land, they’re buying all sorts of stuff. And you yourself wouldn’t be able to buy those pieces, you wouldn’t be able to buy the land, you wouldn’t be able to buy the commercial buildings, but if you could buy a very, very small chunk of that, you could still reap some of the benefits. So if you put in, you know, a couple thousand dollars, and 50 people do that, now all of a sudden, they’ve got the capital they need to go forward and take on these big investment and real estate investment properties and projects. So you’re basically crowdfunding a investor group to do these things. So it’s kind of like a mutual fund where you’re buying small chunks of a larger company, but instead, you’re buying small chunks of a larger real estate investing group. And I’ll say a couple of things about FundRise in particular. And I don’t have any personal experience investing with them, so I’ll say that upfront, but the reading that I’ve done and looking through their fine print, I think there’s a couple of aspects. One is that I think that their model is very good in terms of what they’re investing in, where they’re doing it. I think they’re a little ahead of the game. They’re kind of targeting areas that are still not quite on the rise but will be on the rise soon. So I think they have good investments. People in the industry that are talking about them, they’re investing in the right areas. And their current return on investments in the 10-12% area are indicators that they’re doing the right things. So that’s a good sign, right? That they’re investing in the right areas. The problems I think come in when you look at how that money that you’re giving them is being used and how you get it back. They are not a publicly traded entity. They are a publicly available entity. And those are two very different things. If I go into my brokerage account and buy a REIT, a buy a portion of an investing property, I can sell that at any time. It’s publicly traded, so a broker will take that off my hands as soon as I am ready to sell it. Just like a stock — if I buy Apple stock and then go sell it tomorrow, someone’s going to buy that. That’s publicly traded. But if it’s publicly available, I may not have someone available to buy that investment whenever I need to sell. So I could say, ‘Hey guys, I want to cash out. I’m done with FundRise. I want my money back,’ and they would be like, ‘Well, nobody’s buying right now at the price you’re offering. So I’m sorry, we ahve to hold onto your money.’ And if you read all the fine print, they actually really talk about how illiquid the money really is. They can hold onto your money almost indefinitely if it benefits the group of investors. And really, I want you guys to look at that on your own terms because it’s pretty interesting to see how that breaks down. But the idea is simply that if they find it to be in the best interests of the investor group, they can hold onto that money for a long period of time, so it’s pretty difficult —

Tim Ulbrich: That’s interesting.

Nate Hedrick: Yeah, it can be difficult to get that money back out. And I’m sure people are — right now, at least it’s fine. But who knows what it’s going to look like five years down the road? So that’s one of the big concerns that I have. The other one is that even though there have been great returns — and again, 10-12% is fantastic returns for something like this — their fee structure is a little bit high. They talk about only charging about 1% upfront, but if you really break down the fees that are built into the back end, fees can be upwards of 3% a year. So the fees can be quite high, and that’s something that you really want to take into account because that’s taking away from your gains. So all of a sudden your 12% is down to 9%, and if they start dropping and they go to 8-10%, now you’re talking about gains that are less than the S&P. And so is it really worthwhile to have this illiquid money making less than you make in a general just brokerage account. So there’s a couple of pieces to consider there.

Tim Ulbrich: Yeah, those are great points. And I would encourage to our listeners that are thinking about this, don’t forget about your tax advantage retirement savings account. So your 401k’s, 403b’s, Roth IRAs, obviously there’s inherent tax benefits of being involved in those accounts that you may not see with something like a FundRise. So don’t forget to factor that into the equation. And certainly I know in my 401 account, I certainly have the option to invest in REITs, and so is there a way that you can get involved in diversifying your investments into real estate while still taking advantage of those tax advantage retirement accounts if you’re not already doing so. Couple other questions that I want to throw out there briefly because I think they’re ones that I get often. The first one is, Nate, probably the most common question I get. And I was surprised we didn’t get it on the Facebook group is, where does home buying fit in with student loan debt? So is buying a home appropriate when I have $150,000-200,000 of student loan debt? If so, is there an ideal or a right time? And what are some of the principles I should be thinking about? And so I wanted to get your thoughts on this one.

Nate Hedrick: Yeah, it’s a great question. It’s actually a really large question. And I think the simplest answer is it fits in wherever your priorities say it does. And that’s almost too simple of an answer, but it really is the truth. If you need a home right now. If your family or your personal environment says that I need a home right now, then you’re going to make it work with your student loan debt. It’s certainly possible. If you are someone that just hates being in debt and hates the idea of owing somebody more than your salary, you’re probably going to wait. You’re going to pay off those loans first before tackling the home buying process. But it really depends on that priority set. In fact, Tim Church and I — Your Financial Pharmacist Tim Church and I have been working on an article that will be coming out probably around the time this podcast is launched. It talks all about how to buy a home with student loans and what that can look like. So it really comes down to your personal journey and where you’re at and trying to fit that in. I mean, I’ll be honest. I’ll tell you, when my wife and I bought our home, we were well into the negatives in our net worth at the time. But it was something that for us, we wanted a home, we needed a home at the time. So it was worth doing. And it really depends on your own situation.

Tim Ulbrich: Yeah, Jess and I were right there with you. And I think for me, this is such a personal, customized question that the answer to this is different for everyone, right? So you know, I think this is a great example of sitting down and really looking at all of your financial goals in terms of things we’ve talked about before on this podcast: emergency funds and how much debt? And is there credit card debt? And where are you at with retirement savings? And what other financial priorities are on the table? And I think the thing I would encourage the listeners to think about is on a month-to-month basis, depending on your student loan payment, as you look at evaluating the home purchase, you know, you really want to be cautious and not put yourself in a situation where you feel like between your student loan payment and your mortgage payment, you really got no margin to do anything else or a little margin where you’re feeling super stressed each and every month. Now, that can also be tricky because some people may say, ‘Well, I’ll opt into income-driven repayment plan, I’ll minimize my student loan payment, I’ll free up cash, and I’ll then be able to purchase a home.’ But obviously, that has limitations as well, being in student loan debt longer. So I think really taking a step back, working with a financial planner like Tim Baker or really looking at all of your financial goals to say, ‘OK. Where does home buying fit in with all these other priorities?’ And then if it fits in at this point in time, what’s the best next step in terms of how much down, what’s the overall purchase price of the home, location, all of the other factors we’ve been talking about this entire month. Nate, one last question I have here. We’ve gotten a lot of action in the YFP community about real estate investing. And I think there’s a big interest out there, rightfully so, especially while the market’s hot, of course. But we had Carrie Carlton on in Episode 009 that talked about real estate investing, which is one of our most popular episodes. For those that haven’t listened to that, I would check that out. But I think many people are thinking about, OK, where is the job market heading? You know, I want to think about an alternative revenue stream. Real estate investing may be that alternative revenue stream. So for those that are thinking about investing in real estate, whether that be for a side income, a business, diversification of investments, what is the best first step they can take? And I think with other financial priorities also in mind, such as emergency funds, debt, etc., is there a right time to jump into real estate investing? So I know this is a huge question. We could do a separate series in episodes, we probably will in the future. But I know we have listeners that are thinking about real estate investing. I want to give them something to hang onto as the next step. What do you think?

Nate Hedrick: Yeah, no, I think that’s great. And you’re right, it’s a huge question. This is why I have a website, right? This is why I have the Real Estate RPH because this is exactly where I was. I remember reading “Rich Dad, Poor Dad,” learning about passive income and real estate investing and thinking, how do I jump into this? What’s the next step I can take? So if you’re looking for the next step, I think the very first thing you should do no matter what is educate yourself. Listening to podcasts like this, checking out blog posts for our site and for Real Estate RPH, that can be a really great tool. And there are so many other resources out there. There are books, there are blogs, there are podcasts. But educating yourself about the types of investing can be a really great first or next step. And then once you’ve done that, and if you want to take a tangible action, you know, I want to do something and see what this actually looks like, I really encourage people to assess some deals in the area that you’re considering. I work with a lot of pharmacist investors here in Cleveland, and the very first thing if they’re new investors, they say, ‘Well, where do I start? What do I do?’ I say, ‘Well, I need you to assess some deals first. Understand the market in which you’re looking in so that you know what a good deal looks like.’ And there are a number of tools that can help you do this. But really, the best thing is just go pen and paper and a calculator. But seriously looking at what available homes are there on the market right now? What are rents looking like if I’m going to rent that? Or what are flips looking like? Or comps looking like if I were to flip that home, depending on the type of investing you’re going to do? And just figure out if that is a good deal, a bad deal or something in between. And then once you have that pulse on the market and you understand it and you’re doing the education and the background, it becomes that much easier when a good deal comes along, you can actually pull that trigger and look at seriously putting an offer on that home.

Tim Ulbrich: So for me here, I think it’s all about learning. Reading, blog posts, books, listening to podcasts, engaging in communities like this one. And I love your advice of really looking at deals and doing the math on them. And I think when I think about real estate investing, Nate, I think all of us have either a family member or a friend or somebody who’s doing this and who is encouraging us to get involved in real estate investing and talks about all the upside of real estate investing. And of all the things I’ve read, for every good, positive return on investment story when it comes to buying homes, there’s probably five that have gone bad that maybe you’re not going to hear about. So really doing your homework, doing the math, making sure you understand all of the costs, everything involved. But we’ll definitely have more content coming on this topic in the future, so stay tuned in the YFP blog, podcast and Facebook group as well. So Nate, this month has been a ton of fun. We are super excited about the partnership between YFP and Real Estate RPH. So thank you so much for taking the time to come on the podcast, contributing to the blog. And for our listeners, again, we continue to bring you content around real estate investing, buying and selling homes. If you have a question that you’d like to get answered by Nate, head on over to YourFinancialPharmacist.com/realestateRPH, and Nate will get back to you in regards to your question. As we wrap up today’s episode of the Your Financial Pharmacist podcast, I want to take a moment to again thank our sponsor, Splash Financial.

Sponsor: If you’re looking to refinance your student loans, head on over to SplashFinancial.com/YourFinancialPharmacist, where in just a few minutes, you can check your rate. Splash’s new rates are as low as 3.25% fixed APR, which can literally save you tens of thousands of dollars over the life of your loans. Plus, YFP readers receive a $500 welcome bonus for refinancing with Splash. Again, that’s SplashFinancial.com/YourFinancialPharmacist.

Tim Ulbrich: Hey, thank you so much for joining me for this week’s episode of the Your Financial Pharmacist podcast. Next week, Tim Baker and I will be talking about the pros and cons of Dave Ramsey’s seven baby steps and how they do and don’t apply to the pharmacy profession. This is a good one, you’re not going to want to miss this episode. If you’ve liked what you’ve heard on this week’s episode, please make sure to subscribe in iTunes or wherever you listen to your podcasts. Also, make sure to head on over to YourFinancialPharmacist.com, where you’ll find a wide array of resources designed specifically for you, the pharmacy professional, to help you on the path toward achieving financial freedom. Have a great rest of your week.

 

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Three Strategies for Buying a House with Student Loans

Buying a House with Student Loans

Each month, many pharmacists throw thousands at a seemingly endless mountain of student loans often making it difficult to contribute to other financial goals such as savings and retirement. In addition, the dream of owning a home can seem completely out of reach. In fact, according to the National Association of Realtors, 83% of people aged 22 to 35 with student debt who haven’t bought a house yet blame their educational loans. This leads to the obvious question: How do I buy a house with student loans?

If you’re a pharmacist with typical student loan debt, you probably started or are starting your career with a significant negative net worth. Terrifying, I know, as this was exactly the position I was in. I pulled up my old budget while writing this post and although I cringe to admit it, my wife and I actually bought a house with a net worth of negative $262,000. Looking back, we probably could have prepared a little better, but at the time our top priority was buying a house even with our student loans. I’m happy to report that 4 years down the road we are in a much better position and buying our house at that time ended up being a great decision. Although you may be feeling like home ownership is far out of reach and years down the road because of student loans, you can still make it happen.

This post will explore the different strategies on buying a house with student loans and the advantages and risks of each. Because there are many factors that go into this decision, the goal is to help give you some tips so you can identify the strategy that best aligns with your goals.

Three Strategies for Buying a House with School Debt

There are three main strategies for buying a house with school debt. The first is to simply accept that you are going to be in debt up to your eyeballs for several years anyway and buy regardless as soon as you can. While certainly not the most conservative approach, the appeal of owning instead of renting can be a powerful motivator. The second tactic is the opposite of the first. Pay down ALL of your debt including student loans before jumping in and buying a property aka the “Dave Ramsey” method. The third and final strategy is a hybrid of the first two. The idea is to really assess your finances and pay down your student loans to some amount and then purchase. We’ll explore each option but let’s discuss some fundamentals first.

buying a house with student loans

Renting vs Buying

Beyond answering the question of “how do I buy a house with student loans?”, there’s another common related question. That is: “Is it better to buy or rent?”

Many people make the argument that buying is always better than renting because you aren’t “throwing away money” and you get the opportunity to build equity. In addition, the statement of “if the mortgage payment is the same as the rent payment then buying makes sense” is commonly made.

Because of the way mortgages are structured with the amortization schedule, you actually don’t build much equity at all in the first few years as the majority of the payment will be going toward interest. Also, owning a home is hardly just making the mortgage payment. There are taxes, insurance, some communities have HOA fees, and stuff tends to break.

This question of buying or renting rarely has a simple answer and there are a lot of factors that can go into a comparison. These include the details of a potential mortgage, years you plan to be in the home, speculation of the home price growth and rent growth rate, inflation, your income taxes, as well as maintenance costs and fees.

While this topic could easily be it’s very own post, this is something to keep in mind even before getting into the different strategies. If you really want to crunch the numbers with considerations in your location, consider using the NY Times Rent vs. Buy Calculator.

Are You Ready?

Regardless of the strategy you choose, buying a house with student loans is a big decision and you need to be ready to take on that responsibility. Certainly, you have to have your finances in order to make it happen, but you also want to be emotionally prepared. That means being on the same page with your spouse or significant other and being able to devote time and energy to the entire process. That also means having your priorities and goals in place. Before getting into the numbers here are some key questions to answer:

  1. Are my student loans and other debt causing significant stress?
  2. When do I want to be free of student loan debt?
  3. Am I adequately contributing to my retirement fund on a regular basis?
  4. Have I built an emergency fund?
  5. How will buying a home impact achieving my other financial goals?
Know Your Budget

Knowing your budget is key in this process and something you should establish before even getting preapproved or meeting with a mortgage lender. If you don’t do this, the lender will try to set it for you. Remember, the more debt you take on, the more you will pay in interest and if your mortgage takes up a huge chunk of your budget (a situation known as being house poor), it could put a strain on achieving your other financial goals.

Some people brag about how their mortgage is less than they would be paying in rent. However, they often forget to take into account things like home repairs, property taxes, maintenance, and insurance. Don’t ignore the full costs of a mortgage when setting up your budget. Check out our free guide on home buying for pharmacists if want to review all costs associated with buying a home.

Even if you think you’re ready to go all in and buy a home even with a large student debt load, you will have to meet some minimum financial requirements in order to get approved for a mortgage.

Debt-to-Income Ratio (DTI)

When a bank calculates how much they can lend you, they use the “28/36 rule” for conventional financing. This means that no more than 28% of your gross income may go to your total housing expenses. Furthermore, no more than 36% of your gross income may go to all your debts. Keep in mind these are maximum limits the banks set and stretching your budget to these rules could make it difficult to afford.


home buying for pharmacists

Let’s see what that looks like using an average income and debt load for a new pharmacy graduate. Let’s assume you make $115k in gross income. You have $160,000 in student loans with a 6% interest rate and a repayment term of 10 years ($1,775 per month). You also have a car loan and pay $350 per month towards that debt. The bank starts by calculating your 28/36 maximums.

28% rule = Max monthly housing expenses

$115,000 x 0.28 = $32,200 per year or $2,683 per month

Using the 28% rule, your total housing costs (Principle, Interest, Taxes, Insurance) cannot exceed $2,683 per month. (This equates to around a $450,000 house loan for a 30-year term) Assuming you pass the first test, they move to the 36% rule.

36% rule: = Max monthly gross income going to debt

$115,000 x 0.36 = $41,400 per year or $3,450 per month

Remember, the bank will not extend a loan that requires payments in excess of the 36% rule maximum of $3,450 each month. Your total debt payments each month with student loans and car payment currently sit at $2,125.

$3,450 – $2,125 = $1,325

(Maximum Debt)-(Current Debt) = Housing Allowance

This changes things quite a bit. Your $450,000 house loan was just reduced to $185,000. And remember this is the maximum the bank thinks you can afford but not necessarily what your personal budget may be able to handle. Your own financial situation will dictate whether these limits will become an issue for you or not. If you do find yourself over or very near the limit, there are a few things you can do:

1. Raise your income. Remember, it’s a ratio based on your debt AND your income. Starting a side hustle or a second job can give your top line the boost it needs to get you out of the red.

2. Lower your debt. If you pay off a credit card, sell your car for a cheaper one, or refinance student loans, you can adjust the debt side of the equation in your favor. If you don’t plan to use a loan forgiveness program, definitely consider refinancing your high-interest student loan debt through one of our partners. You can lower your DTI, pay less in interest over the life of the loan, and get a nice cash bonus!

If you are pursuing the public service loan forgiveness (PSLF){ program, then your goal should be to pay the least you can over 10 years. You can lower your monthly payments by decreasing your adjusted gross income (AGI) with pre-tax retirement contributions (i.e., 401(k), 403(b)). Lowering your payments in this way will also affect the numbers in your 36% rule.

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3. Consider a different loan product. While conventional loans use a 28/36 rule, there are many government-backed loan options that have looser requirements for DTI. FHA underwriting, for example, allows for limits up to 31% of your gross income and 43% of your total debt load. If you want more information on multiple loan options, check out our free guide on home buying for pharmacists. It’s also worth mentioning that these limits are in place to protect you from buying outside your means and it’s usually not in your best interest to try to work around them.

4. Reassess the size of your mortgage. This might seem obvious, but if you get to this point and still can’t make the numbers work, you might simply trying to buy too much house. In fact, the harder you have to work to get around your DTI ratio, the more likely it is you need to reassess your overall budget. This can be a hard pill to swallow if you’ve already located a house you really want. If you need a reminder for why these limits are important, just look back at 2008 when the housing market collapsed. A good portion of that failure came from people who owned too much house and too much debt for their income to sustain.

Credit Score

Next up, get your credit score up. There are countless reputable sites for obtaining your free credit score without it affecting your report. Most banks and credit cards even provide monthly credit reports so you can track things over time. Most lenders want your credit score to be above 750 for the best rates possible. Pulling your own credit score allows you to review the report for errors before heading to the bank. According to the FTC, more than 20% of consumers found errors on their credit reports that could be affecting their score.

Speaking of credit, regardless of the strategy you choose, you should knock out any existing credit card debt. The average APR for a credit card is 17%. This means that any gains you make with a good investment elsewhere are going to be eaten up by the interest costs of your credit card.

Down Payment

Often, saving up enough cash for a sizable down payment is one of the toughest parts of buying a house with student loan debt. With retirement contributions, other debt payments, rent, emergency funds, and everything else, it can be quite a challenge to save the thousands required. Although it’s easier said than done, try to use the process of accruing your down payment as a test for your new budget as a homeowner. Unexpected costs are going to come up and learning to live off a leaner budget now can help to ensure your success down the road. If you’re still struggling but have a generous family member, monetary gifts can also be used as your down payment without penalty. Don’t forget, while most conventional loan products require 20% to avoid private mortgage insurance (PMI), there are a number of options available with down payments as low as 3.5%.

All of these factors will be used by your lender to determine the loan products you are eligible for and the size of payments you can expect to make. Once you’ve crunched all the numbers and done all the homework from above, you’ll want to go ahead and get pre-approved.

Consider a Professional Home Loan

You’re well aware that student loans can make it challenging to save a 20% down payment (or else you wouldn’t be reading this post), especially if you live in a market where home prices are high and you have other competing financial priorities.

Additionally, getting approved for conventional loans can be tough because most lenders will count your student loans when determining your debt to income ratio as I mentioned earlier.

YFP has been on the hunt for another possible solution for you when a large down payment or conventional loans are out of reach.

pharmacist home loan

We partnered with IberiaBank who offers a Professional Home Loan (aka Doctor’s Loan) that is available for pharmacists.

The Professional Home Loan product offers a 3% minimum down payment without PMI and is available in all states except Alaska and Hawaii.

Learn more about this loan product and the 5 easy steps you can take to get a home loan even if you don’t have 20% down.

 

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Another Tip Before Moving Forward

Something that’s often overlooked as part of the home buying process is having good disability and life insurance policies in place. Your ability to pay for your home and student loans is dependent on you earning an income each and every month. If you became disabled because of an accident or illness and are unable to work, disability insurance will provide you with money to help replace your income. If you were to die unexpectedly, your mortgage will usually pass on to your spouse if he or she is on the loan. A strong life insurance policy could pay off the remainder of the mortgage or be enough so that your significant other could continue to make the monthly payments.

Ok. Now that you have your priorities in place and have done some due diligence, let’s explore some of the pros and cons of each of the strategies I mentioned above.

Strategy 1: Buy a Home ASAP

Let’s face it, a great deal of the decision to buy a home comes from your heart and not your head. Of course, you want to make a sound financial choice, and most homes are just that, but sometimes you also just WANT TO OWN A HOUSE.

My wife and I have owned our current home for a little over 4 years now. It’s very difficult to beat the feeling of security and peace of mind I have knowing that my daughters have a safe place to sleep every night. I never have the threat of a landlord deciding to sell the property, or raising the rent, or simply kicking me out with only 60 days notice. I can put effort into my home and enjoy the benefits of that effort. This is something that connects us to the property in a way a rental never could.

This strategy is for people who are looking for that feeling and are looking for it right now. You may also choose this strategy if you are someone who is confident in your housing market and feel that you can take advantage of the projected appreciation and resale opportunity.

There are some compromises of course if you choose this path. For starters, you may not have enough saved up for a full down payment. This means a larger mortgage payment in addition to paying private mortgage insurance (PMI), which will ultimately increase the total cost of the house. Depending on the size of the mortgage, you could put a strain on your budget making it harder to pay off other debts or to contribute to savings and retirement.

Also, if you pursue this strategy with very little equity, it could be very difficult to move if there was a dip in the housing market and your upside down and you owe more than the home is worth. Therefore, you have to be comfortable with this risk.

This strategy could definitely make sense if your student loan strategy involves one of the federal forgiveness programs, especially PSLF since you are anticipating having student loans for 10-25 years and will be making income-driven payments. Because there is a standard term to get the full benefits of forgiveness, it doesn’t make sense to make extra payments since you can’t accelerate the process.

getting a house with student loans

If you choose this strategy, consider building a decent a down payment and a mortgage size that doesn’t cause too much stress on your monthly budget and make it impossible to make progress with your student loans and other financial goals.

Strategy 2: Pay off all student loans then buy a home

If the thought of your student loans makes you sick to your stomach, adding more debt by buying a home may be the last thing on your mind. This strategy focuses on paying off your biggest debts before adding more to your plate. This is the true Dave Ramsey philosophy and is a strategy for people who can handle delaying their gratification.

The advantage here is all about flexibility. You have the ability to move relatively easily if you experience a job change or life event. Renting requires far less in upfront costs compared to buying so you retain more flexibility in your budget for paying down other debts faster. The costs of renting are also much more predictable given you won’t have repairs or capital expenditures to worry about.

The tradeoff is you will miss out on the benefits of being a homeowner until later. Namely, building equity and tax benefits. Interest rates are also increasing at the moment and if trends continue, they could be significantly higher in just a few years. Missing out on a lower interest rate now could mean spending quite a bit more down the road. Plus, depending on the size of your student loans and potential mortgage it could take several years to clean that up and then save enough for a down payment.

Many people who follow this approach simply hate the idea of being indebted any more than they have to be or fear the possibility of defaulting on payments with a sudden change in income.

how do I buy a house with student loans?

Strategy 3: The Hybrid Approach

The third and final approach attempts to mix the best aspects of the initial two. The basic philosophy is this: Pay off a portion of your student loans and lower your debt to income ratio, save up a sizeable down payment, and buy a home when you are more financially stable.

If you use this approach, what percentage of your student loans should take out prior to pulling the trigger on a home? It really comes down to what your comfort level is and how long you want to delay the homebuying process.

Similar to the last strategy, you will miss out on some of the benefits of being a homeowner for a period of time potentially missing out on market appreciation and locking in a lower interest rate.

Like strategy #1, this hybrid approach would definitely make sense if your student loan strategy involves one of the federal forgiveness programs.

buying a house with school debt

Conclusion

Buying a house with student loans can certainly feel overwhelming. There are emotional and financial points to consider that are often at odds with one another. There are three basic strategies to consider and what works best for you will be dependent on your situation including your priorities, emotions, financial position, and risk tolerance.

Have more questions about buying a home with student loans? Nate Hedrick, the Real Estate RPh, is a full-time pharmacist and licensed real estate agent. Head on over to yourfinancialpharmacist.com/real-estate to get in touch!

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YFP 066: 10 Home Buying Lessons Learned


 

10 Home Buying Lessons Learned

On Episode 066 of the Your Financial Pharmacist Podcast, Tim Ulbrich, Founder of Your Financial Pharmacist, talks through 10 home buying lessons that he learned over the past few months as his family makes the move from Northeast Ohio to Columbus. He shares the good, the bad, and the ugly and hopes these lessons learned will help you in your home buying journey.

Summary of Episode

Tim Ulbrich shares the top ten home buying lessons he’s learned.

  1. DIY route
  2. Read, re-read and understand the fine print
  3. Set your own budget
  4. Ask lots of questions
  5. Put 20% down
  6. Shop around
  7. Consider the total cost of buying a home by including all of the fees
  8. Long-term hidden costs can make a difference
  9. Value of an emergency fund
  10. Have a great team around you

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Welcome to Episode 066 of the Your Financial Pharmacist podcast. I’m excited to be here, and this week I’m flying solo, following up on the two-part episodes that we did in episodes 064 and 065 with Nate Hedrick, the Real Estate RPH. And he’s going to be coming back on next week in Episode 067. We’re going to be doing a rapid-fire Q&A all about home buying. So if you have questions related to home buying, make sure you get those questions answered and ask them. You can head on over to the Your Financial Pharmacist Facebook group or shoot us an email at [email protected], and we’d love to feature your question on the podcast next week in Episode 067.

So this week is all about lessons that my wife, Jess, and I have learned and in some cases, to be frank, mistakes that we’ve made during the home buying process. So we are in the thick of it right now, actually getting ready to move next weekend from northeast Ohio to Columbus, Ohio, so I’m in transition from my job at Northeast Ohio Medical University to Ohio State University. Go Buckeyes! Excited about the opportunities ahead and with this transition, of course, comes selling and buying a home. And so just a few weeks ago, when we were planning this episode, believe it or not, it started as five lessons learned. And it quickly grew to 10. And to be honest, it probably could be many more than that. But that’s just sometimes how it goes. And so this episode is about being transparent, it’s about being honest — I’m not going to hide anything from our listeners — and the reality is, even here, a topic that I feel like I know fairly well, I think this just shows that anything related to personal finance, we’re prone to making mistakes. There’s something to be learned in everything that we do. And obviously, I’m hopeful that these lessons can be passed on to you all in the community and can even help Jess and I as we go through this process again in the future.

So to be honest to the listeners, this process of home buying — and for those of you that have gone through it recently, you know that it can be exciting, it can be emotional, it can be stressful — all of which have a tendency to throw us off of our financial game. And I think when we’re talking about such a large purchase and a home buy, and obviously, the selling aspect of it as well, there’s lots of emotions that can be flying around, lots of excitement, lots of highs, lots of lows. And all of those I think are the more reason that we have to have our financial guard up when it comes to home buying and making sure we’re educated and ready to make the best decisions in this area.

And so a couple reminders that I have before we jump into some background about the move that Jess and I are going through and then I’ll jump into the 10 lessons learned. And if you listened to Episode 064 and 065, we reference that all of the month of September is about home buying. And so along with this month, we’ve developed a YFP first-time home buying quick start guide that you can download for free at YourFinancialPharmacist.com/homeguide. Again, that’s YourFinancialPharmacist.com/homeguide.

OK, so here’s the background. Jess and I have been living in northeast Ohio since 2009, actually neither of us are from this area. I grew up in Buffalo, New York — go Bills — and Jess grew up in the Toledo-Bowling Green area in Perrysburg she spent most of her life, and we’ve been in our current home in Rootstown, Ohio, for eight years. And we actually rented for one year prior to that, so we made the move directly after my year of residency. We came up to northeast Ohio, we’ve been here for nine years. Eight years, we’ve lived in our current home, and we had one year that we rented prior to doing that. Now, when we bought in 2010, we bought with an FHA loan — and you’ve heard us talk about that in episodes 064 and 065. And the main reason we did that is because we didn’t have 20% down for the home. And I’m going to talk about that as we do go through these 10 lessons that are learned. So we only put 3.5% down, which is standard with an FHA loan. At the time, we had lots of student loan debt, as you’ve heard me chronicle my journey before, had no significant emergency fund and had no clue, no idea of the process that’s involved. And ironically, as I look back on that, there was very little stress that was involved with that purchase when in fact, there probably should have been a lot of stress. Very little down, lots of student loan debt, no significant emergency fund, and having really no clue of what was going on and the papers that I was signing. Now, here we are in 2018, we’re moving to Columbus, exciting new job, going to be starting at Ohio State. I have no student loan debt, we’re able to put 20% down, we have a fully funded emergency fund, we’ve got a great retirement account and to start on that retirement. And I think we have a decent, solid understanding of the process. But to be honest, I’m finding it incredibly stressful. And I don’t know if that’s because I’m more aware of what’s going on, I’m more concerned about the places where things can go wrong, maybe I have a little bit of post-traumatic from 2010 and thinking of the things that I could have done better. Whatever the reality is, what I’m fearing right now in the moment as we’re about to close in the next week is I’m feeling a little bit stressed, a little bit anxious and obviously, there’s so many moving parts that go along with this process. And hopefully, we’re going to cover many of these in these lessons learned.

Now, the big difference here in 2018 is that we are both buying and selling. And obviously, all that comes with that and the timing of that can be incredibly stressful. So here’s the deal. At the end of the day, home buying, like any other part of your financial plan, it’s all about being intentional. Being prepared, putting it in the context of the rest of your financial plan, and giving yourself from grace when you make a mistake here or there, and learning from those mistakes and being willing to share those mistakes with others. The only difference here is this is arguably the largest purchase that you’re ever going to make.

And so here we go, 10 lessons that I’ve learned or maybe a better word here would be mistakes or maybe even things that have been reinforced for me as we went through the process back in 2010 and I’m reliving here in 2018.

No. 1, the DIY route, the Do It Yourself route, has saved us a lot of money. BUT, capital B-U-T, is that wow, it has been a lot of work and to be frank with you, I’m not sure if I would do it again. Now, what am I talking about, the DIY route? So No. 1 here, the DIY route has saved us a lot of money, but it’s been a lot of work, and I think it’s added a lot of stress along the way. So what I’m referring to is in terms of the DIY of the sale of our home. Now, the only reason we are doing a for-sale-by-owner is because we literally have somebody in our neighborhood that was interested in buying the home. And so long story short, a few months ago when we were just getting ready to think about putting our home up for sale, we have a Facebook community group that has a, somebody sent out a message and said, ‘Hey, we’ve got somebody in the neighborhood that’s been renting. They’re looking at buying. Is anybody looking at selling their home in the next year?’ Saw the message and said, ‘Well, in fact, we are.’ And so I reached out to them and said, ‘Hey, we’re looking at selling. If you’d love to see the home, we’d love to have you come over and check it out.’ They came over two days later, came back and saw the home another week later, and they said, ‘Hey, we want to buy the home.’ And so obviously at that point, I didn’t feel like we needed to have a realtor in the process to be giving up 6-7% of commissions on the home. And so ultimately, by not having a realtor in the process, that saved approximately $12,000-15,000 if we were to assume a 6-7% realtor fee on the sale price of the home, which is pretty standard. Now, that sounds great, $12,000-15,000, but as I’ve alluded to in the intro to this No. 1 DIY route saved us money, but is it’s been a lot of work, a lot of stress and a lot of ups and downs all the way. And so because we had a neighbor that was looking to buy it, it made sense, we didn’t have to go through the process. We have three young children, so going through that process of listing the home, showing the home, we’ve been through that before and we know how much work that could be. However, as I look back and as we work through the process of making sure the language in the purchase agreement or the contract was in line, looking and finding a title company that we felt comfortable with, being in constant communication between the parties, the different lending agencies, the title company, the sellers — or excuse me, the buyers that are looking at the home, you are that central glue to the process. And really, the thing that I think has got me the most is the uncertainty that can come with this process. And things have literally been in flux from the second we started working with these buyers. And nothing that necessarily is on their back, but they ended up switching lenders because they were having difficulties with one lender, which re-started the entire process, which meant that there was paperwork that had to get re-filed, and ultimately, we are now running up against potentially not having our closing dates align — fingers crossed we’ll hopefully figure that out tomorrow if that’s going to happen. And ultimately, we are so far along the process with them and we have been along the way, and it’s a great opportunity to have them involved so early, but where ultimately it’s at some regards at the whim of what’s going on in their situation, and so that can make things quite different. And now I will say if I did not feel comfortable with working a title company that we had a good connection with, being able to reach out to the Real Estate RPH, Nate Hedrick, with a question here or there, working with my financial planner and YFP team member Tim Baker, obviously all those really help support me along the way. But I think that as I look back on this journey, I’m not sure that I would do it again, although ultimately, it did save us money in the process, so what’s the lesson learned to be here? If you are somebody that is selling your home and you’re looking at the DIY route, make sure that you feel comfortable and understand all the pieces and parts of the process and not just look at what am I going to save by not having a realtor fee, but do you feel comfortable with everything that’s behind you and how might that also impact you on the buying side of things? So that’s lesson learned No. 1.

Lesson learned No. 2 is the importance of reading, re-reading and understanding the fine print. Now, this sounds like common sense, and you’re probably thinking, Tim, come on. You do this all the time, how do you not read the fine print? Now, it’s not that I didn’t read the fine print, I’m actually quite obsessive about reading the fine print. But it’s making sure that you don’t assume things along the way in the fine print and you re-read the fine print. And obviously when you’re going through this process, you’re excited about buying a home, you’re excited about selling a home, you want things to naturally work out, so you have an optimistic lens in which you’re reading things. And so I think that tendency there, at least it was for me, is to not really read to the detail and understand to the detail that you’re asking the tough, probing questions and you’re not making assumptions that somebody else is taking care of it. And so there’s lot of fine print to read. You have the purchase agreement documents, you have a loan estimate documents that will show you as you get closer to close what are all the different fees involved and what you need to bring to the table as you are selling your home, and as you’re buying your home, what you need to bring to the table at the point of close and what are all those fees that are involved and do you understand exactly what that 85-page document says. And if not, are you willing to ask the questions along the way? You know, what a couple examples that I’ve run through along the way here is actually in a home that we were looking at purchasing in Columbus, that ended up falling apart is that there was something in the contract, which come to find out is actually pretty standard in Columbus contracts, that essentially gives the sellers a three-day, 72-hour clause, almost like a seller’s remorse clause. So if for whatever reason within 72 hours the seller decides, you know what, I really don’t want to sell my home because of reason A, B or C, they can pursue that if they issue an attorney letter explaining exactly why they do not want to pursue that, and that ultimately gives them a right out of that contract or at least to have to offer a counter to that, but of course, they could offer something that is egregious and ultimately, you’re not going to be interested in anyway.

So I’m going to give you an example of this is that we were looking at a home in Columbus. And I never knew that a washer and dryer were something that would be such a big deal to a seller. So long story short, in Ohio, it’s pretty standard that your appliances are going to stay with the home, the washer, dryer, that was going to stay, that was in the contract. We were on vacation, we get a call from our real estate agent, who says, ‘Hey, you know what, the buyer — excuse me, the seller really didn’t want to give up their washer and dryer, they didn’t mean to do that. Can they pull it out of the contract?’ And without even thinking much about it, not really objectively thinking, you know what, now we’re going to have to spend money to buy a washer and dryer, wasn’t trying to be a jerk but said no problem, they can keep the washer and dryer. Just add $1,000 toward close and we’ll go out and buy a washer and dryer. Well, that apparently sent the seller off the deep end, and I guess if you love your washer and dryer, you love your washer and dryer, that’s how it is. And they decided to pursue that clause, issue an attorney letter, spent $300-something dollars to do that, and came back with a counter offer that was $20,000 above what we had originally agreed on, which obviously, we were not interested in at that point. And so the lesson there was I read the purchase agreement. I read every detail of it more than once. But I never caught that section and the detail that obviously until it plays out, I thought maybe you can’t even necessarily do that. And so making sure you’re asking questions where you’re confused, you have people around you that can help and support you, and I think what I’ve learned is that by reading the fine print and showing a commitment to your real estate agent if you’re working with one, to the title company, to the lender, the more you are reading, you’re learning, you’re asking questions, I think the more informed buyer that you are, and it keeps all parties accountable and they’re ready to answer your questions because they know they’re probably coming. So No. 2 is the importance of reading the fine print.

No. 3 is a key one. And Nate and I talked a little bit about this in episodes 064 and 065, but I want to reemphasize it here is that you as the buyer set your own budget. Do not let the bank or the lender set your own budget. And I can speak here from firsthand, going through this right now, is that it’s easy to look at a certain range and then you start looking and you think, that would really be nice or this area would be really nice, and all of a sudden, you’re creeping up. And if the lender is setting the budget for you, you’re not going to necessarily really evaluate does the purchase of this home fit within the context and the other financial priorities that I have? It’s a great example that’s right now is that when Jess and I started working with our lender, Wyndham Capital, who has been outstanding, they’ve done a great job, is that they essentially — and this is in part because I think the lending is fairly loose right now because of how good the market is versus where it was, say, 10 years ago after the crash — they pretty much said, I hear what you’re saying, I know what you want, but you can have double that. Or are you sure that you need to or want to sell your current home? Because you know what, you don’t necessarily have to from our end. And so remember, and Nate talked about something called the 28-36 rule that will be used by the lender in determining what they will allow you as a maximum, what they will allow you as a maximum, to take out or to loan. And the 28-36 rule basically says that a household should spend a maximum of 28% of its gross monthly income on total housing expenses, total housing expenses, and no more than 36% on total debt, including housing and other debt such as car loans and other debt that you have as well. So the 28-36 rule, which may be used by a bank to determine what they will allow you or what they will give you in a pre-approval, $400,000, $500,000, $300,000, isn’t necessarily what you should be purchasing in the context of your other financial goals. And this is where it’s really critical to take a step back and say, what other financial priority goals am I trying to achieve? Maybe it’s paying back student loans, maybe it’s paying off credit card debt, saving for retirement, kids’ college, whatever the other things that you’re working towards, and how can I purchase a home in a way that allows me to achieve these other goals? And what is the maximum I am willing to do in terms of that purchase, not what the bank is willing to give to me.

So just quickly, a couple rules of thumb that I really like that you may have heard of before. If you’ve listened to or read any of Dave Ramsey’s stuff, he refers to a mortgage payment — and there’s different variations I’ve heard of this — a mortgage payment — it could be the mortgage alone or it could be the mortgage and insurance, it could be the mortgage, insurance, taxes and interest, so you’ll hear different versions of this — that is no more than 25%, no more than 25%, of your take-home pay. So if your monthly take-home pay is $8,000, this rule of thumb would say that your mortgage payment, and if you want to be conservative, with taxes, with insurance, with interest, your total monthly payment would be no more than $2,000 if you had an $8,000 take-home pay. Now, what that’s trying to do is prevent you from becoming or feeling like you’re house-poor. So if you have other goals that you’re trying to work on and achieve, you know then that no more than 25% of your take-home pay is going toward your home. Therefore, you’ll be able to achieve your other goals. Now, that’s a great general rule of thumb, but some of you maybe listening have no student loan debt, others of you may have $200,000 of student loan debt plus credit card debt plus very little progress on retirement, and obviously, those two situations would be very different. And so you need to evaluate this on a case-by-case basis.

Another rule of thumb is from the book, “The Millionaire Next Door,” by Tom Stanley says that no more than 2x your household income on the purchase price of a home. So if you have a household income of say $150,000, no more than $300,000 on the purchase of your home. Again, that’s trying to get to this idea of preventing you from becoming house-poor. And I cannot emphasize right now for those of you that are looking at buying in this moment, the lending right now — and I’ve experienced this firsthand — is pretty loose, meaning that you as a pharmacist with a good income, a good, stable earning potential, I think you’re going to find that the bank is willing to give you much more home than you probably need to have and that you probably want in terms of the other goals that you’re trying to achieve. And so what I really encourage you to do is zoom out of the lens of just the monthly payment and look at the total payout of what this home is going to cost you. So as one example, if you were to have a purchase price of a home around a $350,000 with mortgage, taxes, insurance, assuming a 30-year home with about a 4.5% interest rate, it’d be about a monthly payment of $1,900 a month for 30 years. If you do the math, that $350,000 home over the course of 30 years, you’re going to pay out about $684,000. Now, it doesn’t mean it’s a bad decision. It may be a great decision, depending on the other financial goals and what you’re trying to achieve, but looking beyond just the monthly payment also helps you look at this in a different way and evaluate how does this fit in with the other goals that you’re trying to achieve.

So No. 3 here is set your own budget, it’s a great reminder. Jess and I had this reminder this year, especially as the lending is loose. Don’t let the bank set the budget for you.

No. 4 is ask lots and lots and lots of questions. And I alluded to this a little bit in No. 2, but Jess and I have experienced this firsthand is that you want to be respectfully annoying. Be respectfully annoying because I think asking questions and showing a desire to learn, as I mentioned before, keeps all parties — the title agency, the loan officers, the lenders, everyone that you’re working with — let’s them know that you have a desire to learn, let’s them know that you’re ready, you’re invested, and I think it keeps people more accountable along the way. And I’ve had several individuals in this process, everyone from the loan officer to the title agency say, ‘You know what, I can tell that you’re really interested in this, and I usually don’t get these types of questions.’ And I think ultimately, I want them to know that I’m probably going to be asking questions. I think that helps them give me a more detailed and thorough response, also helps keep them accountable to make sure that they are giving the attention due to the process that is going along the way.

And I think this is really true of anything, whether it’s a home, a car, any major purchase that you’re making, an educated buyer, I truly believe, is going to get the best value along the way. And so just a few examples that we have in the lesson learned of the value of asking lots of questions is by asking lots of questions along the way, this has allowed us to negotiate and reduce title fees that actually identified an error in a property tax calculation that got corrected — and maybe that would have probably been identified anyways, but that question really helped identify that, and obviously that led to a reduction in what will be our future monthly payment. And for us, most importantly, as those two examples I just gave you are short-term savings, is that it helped us ensure we understood the process and we know exactly what we’re paying for. So whether it’s cost at closing or whether it’s when we send in that monthly payment each and every month, I know exactly where that money is going each and every month. And I think obviously that is powerful in and of itself, but I think it’s valuable just to know going into the future when we do this again or as we’re helping guide others in the process as well, knowing where that money is going, I think obviously is going to help motivate us to eventually get this paid off and turn this liability into an asset.

OK, so No. 4 is asking lots of questions.

No. 5, I’ve hit on this many times on the podcast and in blog posts, is the importance of 20% down. Now, no judgment here. I’m speaking from making this mistake back in 2010, I alluded to that at the beginning of the episode. Jess and I put 3.5% down through an FHA loan, and to be frank with you, we were paying for that for many years — really up until probably the last year because the reality is the way the mortgage is constructed with interest, it takes so long to build up equity in a home. And so to me, there’s lots of reasons to have 20% down on a home. Instantly, you have equity in the home. So if something like 2008 were to happen and the housing market would flip, you’re not likely to be underwater on your mortgage. Or what if you go to sell unexpectedly in two years because of a job change? And maybe you thought you’d be there 10, 15 or 20, you could build up equity, but you’re not for whatever reason or something unexpected happens. Now, you may not have enough equity in the home to cover all the costs associated with selling that home. And obviously then, you’re going to need additional funds to bring to the table to cover those costs.

Other advantages of 20% down — obviously, no Private Mortgage Insurance, we’ve talked about that, PMI, which is foreclosure insurance. You don’t have restrictions that are associated with loans like an FHA loan, which is in terms of how that PMI is structured and how you’re going to pay it, more stringent inspections and appraisal processes. And I think obviously, 20% down just keeps it simple. No PMI, no restrictions on how that loan is being structured, a cleaner inspection, appraisal process, you’re not trying to buy points in the process and trying to eventually get your PMI reduced. It makes a conventional loan purchase process incredibly simple, and I think it makes you an attractive customer to the lender. That’s something I heard over and over again from the lender that we’re working with, Wyndham Capital said, ‘You know what, you’re a great buyer. And we’re glad to be working with you,’ and I think it’s because of that 20% down, they obviously feel very comfortable with that conventional loan.

Now, the other thing I think 20% down really does — and again, I’m speaking here out of a personal mistake — is that it forces you down in the expectation of the home that you’re buying. It forces you down in the expectation of the home that you’re buying. Now what do I mean by that? If Jess and I right now were to say, ‘You know, we really want to buy a $500,000 home,’ if we stayed committed to 20% down, that would mean we have to come up with $100,000 in cash to be able to go to closing at that home plus the closing costs on top of that. Now, if we don’t have $100,000 equity in our current home or we’re buying for the first time, that obviously is going to take a lot of time to build up $100,000 of cash to be able to close on that home. So I think what that does if you stay committed to 20% down, you say, you know what, maybe that’s a $250,000 home. Maybe that’s a $300,000 home. Maybe less than that or maybe slightly more than that, depending on the market that you’re living in, will allow you to potentially buy down on the home, whereas if you go into a 0% down loan or a 3.5% down loan where you have to bring very little, if any, cash to the table, obviously I think it’s much easier to buy up on home and find yourself in the situation where you feel house-poor.

refinance student loans

So 20% was the lesson learned No. 5, and I think here, this is an important point where you really have to evaluate, am I rushing to buy a home? Should I stay in a rent situation for longer? Should I buy? We have talked about this at great length, and what I would reference you to and will link to in the show notes is the New York Times has a great rent v. buy calculator that really helps you look at this in an apples-to-apples way in the best that you can to make the comparison. Because I know the trap that I fell into was well, I’m paying $1,100 a month for rent, my mortgage with taxes and with insurance is going be $1,100 a month. Why wouldn’t I buy a home and build up some equity? And the reality I learned, which is an obvious one now looking back is that I was really building very little, if any, equity because of how the loan was structured and because I had almost nothing down and I forgot to include all those other fees on top of that in terms of the maintenance and everything that comes with the home that easily is upwards of 30-50% of the mortgage payment by itself.

So before we jump into points 6-10, I want to take a quick break and just re-emphasize something we talked about in episodes 064 and 065 is that if you are looking to buy or sell a home, get started in real estate investing or have a question that you want to have answered by a licensed real estate agent that is also a pharmacist, make sure to head on over to YourFinancialPharmaicst.com/realestateRPH to get in touch with Nate Hedrick, the Real Estate RPH. Again, that’s YourFinancialPharmaicst.com/realestateRPH. And you can submit your question. We have a few details and information to fill out, and he will respond to you as soon as possible. Again, we’ll have him back on in Episode 067 for the rapid-fire Q&A on home buying.

OK, so points 1-5, we covered lessons learned. No. 6 is shop around. Shop around for title companies that you’re working with if your contract allows that, shop around for the lender that you’re going to work with, but be careful how you do it. So lesson learned No. 6, shop around, but be careful how you do it. Now, why am I saying be careful how you do it? So I made a mistake — and I alluded to this on Episode 065 — I made the mistake of saying, I’d really like to see this tool that’s out there now advertised called Lending Tree becuase if it’s a good tool to compare for lenders, rather than just depending on the local bank or a lender that I’ve worked with previously, I’d love to be able to share that with the YFP community. Now, I’m glad I tested that first because honestly, I would not recommend that you use a tool like Lending Tree because I submitted my information, and literally for about a month-long period of time, I was getting phone calls and voice messages all day long of lenders trying to get ahold of me, even long after I selected a lender. And so I think that the point here is a good one is shopping around and not just depending on one lending quote or one title company, whatever you’re working with, one real estate agent, is really shopping around will allow you to look at multiple options just like you would with any other major purchase. However, do not just focus on the price when it comes to a title company or an insurance quote that you’re getting or a commission that you’re going to pay a real estate agent or a rate that you’re going to pay a lending company on your loan. That certainly is a critically important factor, but you need to make sure you’re looking at the other components like are they easy to work with? Are they communicative? Are they responsive? Do they have a good reputation? Because I can tell you from this process over the last month, all of these individuals I’ve been in touch with, on some weeks on a daily basis. And so working with one lending agency that’s going to give you a 4.55% rate versus another that’s going to give you a 4.6% rate, but one’s not going to respond to you as much or not going to close on time, they’re going to cause you a lot of headaches, you have to really evaluate is it worth it? And obviously, if you can get the best of both worlds, that’s the place to go. And so making sure you’re shopping around for all these different areas, making sure you know what is and is not neogtiable, I think is a great lesson to be learned, certainly one that I’ve learned. But be careful how you do it in terms of getting multiple quotes.

Lesson No. 7 is make sure to consider all of the total costs and fees that are associated with buying a home — and if you’re selling a home, obviously that’s associated with the selling as well. And to be fair and to be honest, don’t be surprised by a few more that come along the way. And there was sometimes I would look at documents, and just this past week, I was looking at our loan estimate closing documents, and all this laundry list of title fees and no explanation of what they are. And they ended up being legitimate fees, but again, back to being an educated buyer, making sure you’re asking questions, making sure you’re trying to compare one of these to another if you’re looking at shopping around with two different companies, but I think what tends to happen when you’re buying a home is you hone in on the sale price of the home alone. So ooh, that home’s at $350,000, it’s within our budget. Great, that is certainly an important factor, but what about all of the other fees that are involved.

Now, if you’re just buying a home, as Nate mentioned on the previous episodes, there’s really no realtor fees that are involved because of how they’re absorbed by the seller, so that’s simplified somewhat. However, when you’re on the selling end, you obviously have the realtor fees, which can be 5-7%, roughly, of the sale of the home. And depending on the purchase agreement, you may be responsible for some of those at the buyer’s expense. And obviously, that can vary from state to state, region to region, purchase ot purchase. You’ve got the down payment on the home, you’ve got the appraisal cost, you’ve got inspection, you’ve got title fees, you’ve got prepaids at close in terms of homeowners insurance and mortgage insurance if you don’t have 20% down, and property taxes and HOA fees. You’ve got moving fees, right? So if you have to pick up and move across the state or across the country, are you going to hire a mover? Are you going to do it yourself? Are you going to have them pack? Are you not going to have them pack? And of course, you have the transitionary fees. So as you’re in the pack-up phase, you’re probably eating out more, you’re taking trips to Lowe’s to fix things on your current home before you sell if that’s the case or when you’re buying a home, when you get there to do some quick home improvements. So really set out and not just look at the purchase price and say, ‘OK, we got to 20% down or whatever our goal is.’ But look at all of the costs that are involved with the purchase along the way.

And prior to this episode, I sent a note out to our Facebook group to say, hey, what are some of the lessons that you’ve learned along the way when it comes to home buying. And I like what Wes said in terms of ‘be wary of what’s called a special assessment fee in a new neighborhood. Typically, it’s a fee being applied to each homeowner for the cost of development of the new neighborhood. Think bonds taken out by the municipality that include interest that then are being applied equally to each new homeowner for a period of time, say it’s 10 years.’ So Wes, thank you for contributing. For those of you that are not yet a part of the YFP Facebook group, we’d love to have you join. And I think that’s just an example of this laundry list of fees and miscellaneous fees and more fees that can come along the way. And I think the lesson that Jess and I learned is we are so focused on the sale price and so focused at getting that 20% down, thankfully, we had some buffer beyond our six-month emergency fund, our 3-6 months emergency fund to cover some of these other costs. But making sure you’re really looking at the entire picture of all fees that are involved. So that’s No. 7 is consider all the costs.

No. 8, the lesson learned here is the long-term “hidden costs” when buying a home that can make a difference. Now, I’m not talking about the transactional cost, I’m talking about the long-term hidden costs beyond what I just covered in lesson No. 7. So here, we’re talking beyond the sale price, beyond the transaction costs. So what I’m referring to here are things like property taxes, homeowner’s insurance, HOA fees, local income tax if that is applicable or not. And so I think here that again, another area you tend to focus, I know we tend to focus, on the sale price of a home. But in reality, from one neighborhood to another in the same city, your property taxes could be different by $2,000-3,000 a year. Well, that has a huge impact on your monthly payment. Or homeowner’s insurance that you’re going to be paying each and every month, each and every year. Or does the development have HOA fees or not? Does the city have a 1-2% local income tax or not that you’re going to be paying each and every year? These are the long-term, what I call hidden costs that — not saying you necessarily wnat to avoid these because there could be great reasons for being in an area that has these: great schools, great community, great neighborhoods, etc. — but making sure you’re aware of these and how they’re going to contribute to your monthly payment and making sure you’ll be able to stay within budget and to achieve your other financial goals.

And Brittany from the Facebook group here says that, ‘Upkeep costs of one home versus another for sure. So we have two acres and a pool. Upkeep is quite pricy.’ And I think that’s great is if you’re looking at two very different styles of home that’s on land, a home that’s not on land, a home that has a pool, a home that does not have a pool, or any other factor like that, what is going to be the upkeep differences and making sure you’re acounting for those and how that may fit into your monthly budget, obviously those factors being beyond your monthly payment.

No. 9, Jess and I have learned this firsthand, we are feeling it right now, is the value of having a solid emergency fund in place when you’re making these big purchases. So we’ve talked many times before on this podcast and the blog, 3-6 months of expenses in a long-term savings account set aside to cover a job loss or some other emergency fund, and I think it goes without saying that here, when you’re making a massive purchase, you’re in a transitionary period of time, a solid emergency fund in place gives you peace of mind that if something goes wrong on either end, if you’re buying or selling, or you have some backup there during a transition, if you have a gap of employment, as I mentioned, something goes wrong, the peace of mind here can not be traded in terms of what a solid emergency fund will bring. And so I’m a big advocate of, again, 20% down, a solid emergecny fund, neither of which Jess and I did on our first purchase, both of which we’re doing now, brings an incredible amount of peace and I think reduces anxiety during that transitionary period.

And finally, lesson learned No. 10 is the importance of having a good team around you. Now, I mentioned at the very beginning, lesson No. 1, that we’ve taken the DIY for-sale-by-owner approach because we had essentially a buyer approach us in our neighborhood. And so we don’t have the real estate agent involved in the process. However, as I alluded to, if I had to do it all over again, even with a known buyer, I would question that decision, although it’s had great value. And so here, a great team around you, I’m referring to a real estate agent that is transparent, that is acting in your best interests, that you know and that you trust; a good financial planner that knows your situation and that can keep you accountable in this process. So for Jess and I, Tim Baker is a phone call away, and I called him just a couple weeks ago because we were having some potential issues and still are potentially with closing dates to say, hey, what are the options? Help talk me through this. What am I not thinking about? What are my blind spots? And I think for such an emotional, big decision, having a financial planner on your team that can say, hey, does this fit in the context of all these other things that we talked about? Or what if we waited three more months? Or maybe it’s the right time, but what about this or that? Somebody to keep you and/or a spouse accountable through this process is incredibly important. Obviously, you have the lender, the title company, this team is one that you’re going to be communicating with regularly. And Nate alluded to this on previous episodes, making sure you have this team ready to go and knows exactly what your priorities are before you get started in the process.

So there you have it, 10 lessons learned that are reinforced or in some cases, mistakes that we’ve made through this process. And we’re not fully through it yet. So we’ve got a couple weeks. Hopefully at the end of this month, we’re going to be moving into the home in Columbus. We’re in the final processes of getting paperwork signed, closing date’s hopefully this Friday, early next week. And so stay tuned; I may have more stories to share — successes, mistakes along the way. Again, that’s what this is all about, hopefully helping you learn through the process as well and I’m hoping through these lessons, you can save yourself some headaches and do this in a better way or potentially even share some of your own stories with others as well.

So as a reminder as we wrap up here, again, along with this month-long series, we have a YFP first-time home buying quick start guide that you can download at YourFinancialPharmacist.com/homeguide. Again, that’s YourFinancialPharmacist.com/homeguide. And as we wrap up this episode of the podcast, I want to take a moment to again thank our sponsor of today’s show, Common Bond.

Sponsor: Common Bond is on a mission to provide a more transparent, simple, and affordable way to manage higher education expenses. Their approach is no big secret. Lower rates, simpler options, and a world-class experience, all built to support you throughout your student loan journey. Since its founding, Common Bond has funded over $2 billion in student loans. This is the only student loan company to offer a true one-for-one social promise. What that means is that for every loan Common Bond funds, they also fund the education of a child in the developing world through its partnership with Pencils of Promise. So right now, as a member of the YFP community, you can get a $500 cash bonus when you refinance through the link YourFinancialPharmacist.com/commonbond. Again, that’s YourFinancialPharmacist.com/commonbond.

Tim Ulbrich: Thank you so much for joining me today. I look forward to next week’s episode where we’ll bring Nate, the Real Estate RPH, back on to do a rapid-fire Q&A on home buying. Have a great rest of your week.

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A New Practitioner’s Perspective on House Hacking

A New Practitioner’s Perspective on House Hacking

By: Dylan Koch, PharmD

In my second year of pharmacy school, I was introduced to Dave Ramsey. Dave Ramsey is a personal finance coach who is most known for his book, “The Total Money Makeover” and his podcast, “The Dave Ramsey Show.” Mr. Ramsey boils down his path to financial freedom through seven baby steps. Those include:

  1. Save $1,000 for an emergency fund
  2. Pay off all personal debt with the exception of your mortgage via debt snowball technique
  3. Save 3-6 months of expenses for an emergency fund
  4. Save 15% of your income towards retirement
  5. Save for kids’ college
  6. Pay off your mortgage
  7. Build wealth (and give)

As a pharmacist, you may consider re-prioritizing paying off student loan debt to baby step #6 instead of baby step #2. However, this is only relevant if your student loan debt is comparable to your mortgage payment.

These baby steps can definitely work to move you out of debt and into financial freedom. With an average pharmacist’s income, everyone should be able to retire a millionaire, at the minimum. The “Seven Figure Pharmacist” book dives into this in detail so I won’t go into that here.

During my own personal finance education, I came across another book titled “Rich Dad Poor Dad” by Robert Kiyosaki. Mr. Kiyosaki states that rich people buy assets and poor people buy liabilities. The most common examples of assets include stocks, bonds, and real estate. The most common example of a liability is a new car. The main difference between the two is that assets increase in value over time whereas liabilities decrease in value over time. Multiple streams of income are important and allow people to leave the “rat race”. After reading “Rich Dad Poor Dad”, I started researching real estate as an investment opportunity, and that’s when I first discovered the concept of “house hacking”.

House hacking is buying a small multi-unit property (either 2, 3, or 4 units) and living in one unit while renting out the others. House hacking appealed to me because it would lower my living expenses, while creating equity at the same time. This would allow me to save more money in order to pay off my student loans quicker. I will go over my personal journey of how I purchased my duplex and dramatically lowered my monthly expenses.

home buying for pharmacists

I downloaded several real estate apps on my smart phone (such as Zillow, Trulia, Realtor, and Redfin) and changed my search criteria to “multi-family” properties inside a specific mile radius where my girlfriend and I wanted to live. You can be as specific as you want with the various filters including the number of bedrooms, number of bathrooms, square footage, etc., but I really just wanted to see what was out there.

After a few months of filtering and searching, I ended up looking at five different properties – two of which I made offers on only to be outbid by someone else.

A couple weeks later, I got a notification that a two-unit, two bedrooms/one bathroom duplex just came on the market, which fit the criteria we were looking for. I called my real estate agent that day to tour the property as soon as possible. After the showing, I made an offer that was accepted the same that night! I was overwhelmed with emotion. Excited that my offer had been accepted, but also fearful at the same time. Did I do all my calculations correctly? Was I making a mistake? What if the roof leaks a month after moving in?

The property was listed for $270,000. I was using an FHA loan, a loan that is used often for first-time homebuyers, that allows for a 3.5% down payment (versus 20 for a conventional loan). After closing costs, inspection costs, and appraisal, I needed just under $13,000 to make it to closing.

Here is where the fun began. At $270,000 with a 3.5% down payment, the loan balance was $260,550. I financed this property on a 30-year mortgage at 4.5%. That means my monthly mortgage payment would be $1,320.17. Considering each unit in the property I was buying was a 2 bed/1 bath unit and the average rent in the same area was $1,600/month, this seemed like a no brainer.

The other expense that needed to be factored in was property taxes. You can find information on property taxes for a home you are thinking about purchasing on the county auditor’s website. My property taxes are high and equate to an extra $400 each month. The lender I used put my property taxes, home insurance, and private mortgage insurance (PMI) in an escrow account. This just means that the lender will pay my principle and interest, property taxes, and insurance for me in one monthly statement instead of billing me separately. Add this all up and my monthly bill is now $2,000/month. *

*Because of the low down payment option, lenders (banks) require private mortgage insurance (PMI) on properties. If a conventional loan is used (20% down), then you would not have this expense and the total per month would then be $1,875/month and would also be abbreviated PITI vs the PITI(I) that I have listed. You can also re-finance out of this at a later date once you have at least 20% equity in your property. FHA loans require that you live in the property for at least one year before refinancing.

Multi-family properties (2-4 units) are treated like single family homes in regard to lending and tax purposes. When a property has 5+ units, then the lender (bank) looks at the property more like a business.

As mentioned above, I should be able to rent out the unit I’m not living in for $1,600/month. I advertised this unit on Craigslist and Facebook Marketplace and I had renters sign for $2,000/month just two days after posting. This covers the cost of utilities which is not separated for my specific duplex. I am now living in a nice area for free!

house hacking

I can take the money I’m saving (by not having a housing payment) and apply it towards other expenses, whether that be a car payment, student loans, credit card debt, or something else. Additionally, when someone pays rent, that money is going into someone else’s pocket. With house hacking, the money is at least going towards equity into the property that you own via paying down the mortgage. There are additional tax benefits to owning real estate as well, but that is beyond the scope of this blog post.

Personally, I have transitioned from a Dave Ramsey philosophy to more of a Robert Kiyosaki philosophy. With that being said, following the Dave Ramsey approach while in pharmacy school and during my first year post-pharmacy school put me in a better position to make myself more lendable. Banks look at certain key metrics (such as debt-to-income ratio, loan-to-value ratio, other assets, credit score, etc.) to see if you qualify for a home loan.

For more information regarding house hacking, take a listen to Episode 130 of the Your Financial Pharmacist featuring Craig Curelop, the Finance Guy at BiggerPockets and author of The House Hacking Strategy.

If you have further questions, please don’t hesitate to reach out to [email protected].

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