I recognize I’m not going to become popular by writing this post. We Americans love our cars and I have fallen into this trap before. We love them so much that we will even defend having them at the expense of achieving other financial goals such as paying off high interest rate debt, building an emergency fund or saving for retirement.
I’m all about safety but let’s work through the rest of this article assuming that the vast majority of vehicles we all drive each and every day are safe. More so than ever before. I’m not suggesting that you start driving a car with broken windows and the bumper falling off to save a few bucks, but let’s be honest that we have overplayed the safety card to justify the ‘need’ for a newer car. It is clearly a ‘want’ and often is one that gets in the way of the rest of our financial plan.
Now, if you have no high interest rate debt, are saving appropriately for retirement, have an emergency fund in place and are working towards achieving your other financial goals, have at it. This article is not for you. However, the vast majority of us are still in debt with high interest rate loans OR are not funding our retirement appropriately OR do not have an emergency fund in place. Maybe even all of the above. This is the group that should evaluate whether or not their car is getting in the way of the rest of their financial plan.
In a recent blog post, “My Top 10 Financial Mistakes,” #7 was buying a car I had no business buying. Now that I have made that confession, I feel I can challenge others to look at this area as well. In 2014, while Jess and I were still trying to get rid of our student loans, I bought a really nice used Lincoln MKX when I had a perfectly functioning (and paid off) Nissan Sentra with less than 50,000 miles on it. I ended up re-selling the Lincoln 6 months later and learned my lesson.
According to Edmunds.com, the average monthly payment on a new vehicle in the US is $479. If you are struggling with debt and/or getting control of your monthly expenses, this is an area I would recommend you take a look at to see if cutting back may be worth it. You won’t miss your car as much as you think you will.
If the average monthly payment for a new car is $479/month and you could get rid of (or lower) that payment, what would that mean for reaching your financial goals? It certainly would mean doing them faster. And here is the thing Jess and I found out. When you make one cut, you start looking for other areas to make further cuts. If you have high interest rate debt, this savings from lowering this monthly payment for a car could make a dent in how long you have that debt hanging around and how much interest you end up paying over the life of that loan. No debt? How about taking the savings and building up your emergency fund? No debt and already have an emergency fund in place? How about getting closer to saving 15-20% of your income each month for retirement?
If instead of having a monthly payment that is the current average for a new car ($479), what if instead you paid cash for a car every 6 years. Let’s assume that car would cost $10,000. Remember, we are going for safe and functional. That would cost you, on average, $139/month ($10,000 / 72 months). If you took the difference ($479 average payment on a new car -$139 average per month if buying a $10,000 car every 6 years = $340 savings per month) and invested that money in a mutual fund within a Roth IRA earning 6% growth per year, that would be worth:
$55,721 in 10 years
$157,097 in 20 years
$341,541 in 30 years
$677,118 in 40 years
$1,287,665 in 50 years
There it is. The potential to save more than a million dollars by strategically buying used, yet quality and safe cars over a long period of time. Is your current car worth a million dollars to you? The great thing about this example is that it would all be tax-free growth since it is within a Roth IRA.
A million dollars you didn’t have before all because you bought used cars that were not fancy, but perfectly functional and yes, safe. No matter which way you look at it (paying off debt, saving for an emergency fund or saving for retirement), that is a better financial decision than buying an expensive vehicle that is going down in value.
The sweet spot is buying a used car and paying cash for that car. This will certainly go against the norm as 86% of all new cars and 55% of used cars have financing (Experian 2015 4th Quarter Report). One of my good friends role modeled this for me. Let me tell you how good it feels to pay cash for a car and walk off the lot without a monthly payment.
Now, people will argue that it is stupid to pay cash for a car when you can get a low interest rate loan. Two points to counter that argument. First, most used car loans are not as attractive as new car loans. On used cars, I have typically found interest rates in the 3-5% with good credit. The latest Experian Report shows an average new car loan rate of 4.63% and an average used car loan rate of 8.78%. Second, I can make a case that if you pay cash for a car, you will likely buy down significantly and ultimately save in the long term. It is easy to stomach buying a $25,000 car when the payments are divided over 60 or more months. It is a lot harder to throw down $25,000 at once. Therefore, you probably won’t and will save some money by buying a less expensive vehicle.
Why used? Here is an example to emphasize how much the value of a car goes down as soon as you drive it off the lot. Cars are a terrible asset only going down in value (with the exception of some collectible cars).
Let’s look at a new 2016 Nissan Altima 2.5 S. Very nice car. The MSRP is $22,900. We know no one ever pays MSRP so let’s say you walk out the door with the car for $22,000 after taxes. In contrast, on www.cars.com within 30 minutes of my house, I can find a 2015 Nissan Altima 2.5 S with less than 20,000 miles for $14,500. If you were paying cash, you could get it for even less than that. Almost $8,000 saved by being OK with not driving something new off the lot and letting someone else put a few miles on it before you do.
If you are worried about driving a high mileage car, there are lots of cars you can get that are quality, safe vehicles under 50,000 miles for less than $10,000. Take a look on www.cars.com. I think the sweet spot is finding a good car to pay cash for between $5,000-$10,000.
It took Jess and I a while to get ahead of our car payments enough to be able to pay cash for the next one but we were able to do this for our last two car purchases. Even better yet would be to pay cash for a car and then start saving on a monthly basis for a future car. We aren’t there yet but are hoping to continue working on our budget to make this a reality in the next year. For example, if we think we may need a new car in 4 years (based on our current mileage and durability of the car) and we want to spend around $10,000 for that car, we could start saving $208/month. After those 4 years, we would be in a position to purchase that car and there would be no surprises!
Your Financial Homework: Is your car payment getting in the way of achieving your other financial goals? Do you have an opportunity to sell your current car and buy down so you can free up some money per month to pay extra on your loans, build up an emergency fund or increase your retirement savings?
On Episode 005 of the Your Financial Pharmacist Podcast, we interview Dr. Joey Mattingly from the University of Maryland College of Pharmacy regarding his recent research about the impact student loans are having on new graduates.
I’m coming off of a 5-day vacation with family and friends in Canada and have been itching all week to share 3 exciting announcements related to the Your Financial Pharmacist (YFP) Community!
After 5 days of no cell phone access, swimming across a lake every day, doing some rock jumping and trying to catch potatoes being launched from a potato gun (no joke; I almost broke my hand on one), I’m ready to get back at it!
Pictures from the trip Canada (left to right):
Getting ready for a short hike with Josh Workman, aka Best Dressed Dad.
View looking out from the cabin on the lake (tough life, right?)
My middle son (Everett) in shock and awe that he caught a small perch. Great memories.
Announcement #1 – The Your Financial Pharmacist Podcast Is (finally) Here! It has been a long time in the making (8 months to be exact) and I’m excited to announce that Episodes 1-3 of the Your Financial Pharmacist Podcast have been released in iTunes!
Episode 001 is all about the genesis of the podcast and episodes 002 and 003 go through why every pharmacist should become a seven figure pharmacist. In Episode 003, Tim Baker, CFP® interviews me to determine how much of a nest egg I need to achieve my financial goals. After listening to this episode, you should be well on your way to determining your own nest egg.
Coming up over the next month, episodes will be released related to student loan debt, ideas for maximizing your income and two interviews featuring pharmacists that have achieved a net worth of more than $1 million (both after starting in more than six-figures in student loan debt). You won’t want to miss it!
Episodes will be approximately 25 minutes in length (perfect for a work commute!) and a new episode will be released weekly.
Caption: Tim Baker, CFP and I recording the Your Financial Pharmacist Podcast.
Announcement #2 – Welcome Tim & Tim!
The YFP community is growing exponentially with Tim’s. If I had a dollar for every time I heard a joke about having to be a Tim to do something with personal finance related to pharmacists, I would be well on my way to early retirement (assuming a very generous rate of return and many years of compounding growth, of course).
I’m excited to announce that Tim Baker, CFP® and Tim Church, PharmD, BCACP, CDE will be joining me as regular contributors on yourfinancialpharmacist.com.
Tim Baker, CFP® is my co-host on the Your Financial Pharmacist Podcast. Beyond the podcast, you will be hearing and seeing a lot more from Tim Baker. He is a fee-only financial advisor and owner of Script Financial that has built a business centered on helping pharmacists meet their financial goals. As a fee-only advisor, he is doing the financial advising business the right way and has a lot to offer to the pharmacy community.
Tim Church, PharmD, BCACP, CDE is my co-author of Seven Figure Pharmacist. Tim is a clinical pharmacy specialist in primary care at the West Palm Beach VA Medical Center. In addition to being one of the smartest guys I know and living the dream in Florida while I bear the winters of Ohio, Tim is a Ramsey Solutions Master Financial Coach. He is super passionate about helping people with their finances and will be bringing great content to the community.
Announcement #3 – A New Web Site!
When I started yourfinancialpharmacist.com back in October 2015, I developed the site on my own. While it has served its’ purpose, my talents are certainly not in web site design and this has been an obvious hindrance to you being able to get the most value out of the site as possible.
The new web site is easier to navigate, makes it much easier for you to ask your financial questions, and features resources recommended by Tim Baker, CFP® and myself.
With the blog, podcast and new web site, I’m confident in saying that yourfinancialpharmacist.com is now the go-to resource for pharmacists and pharmacy students when it comes to all things personal finance.
Have ideas for how to make it even better? Shoot me an e-mail at [email protected]
Your Financial Homework
Subscribe to the Your Financial Pharmacist Podcast and e-mail [email protected] with ideas you have for future episodes. If you like what you hear in the first 3 episodes, please leave a review in iTunes and let your pharmacy colleagues and friends know about it as well.
Like the Your Financial Pharmacist Facebook page. While you will see and hear from YFP in various social media outlets, this will be the go-to place on social media where the most up to date information will be posted.
Continuing the conversation from YFP Episode 002 regarding why every pharmacist should be a millionaire, Tim Baker, CFP, interviews Tim Ulbrich, PharmD to help him determine his nest egg and the monthly savings plan needed to achieve that goal.
Have you ever articulated your “Why” for saving for the future? In this episode, co-hosts Tim Baker, CFP and Tim Ulbrich, PharmD discuss the importance for finding your “Why” for building your wealth and the power of compound interest.
In the very first episode of the YFP Podcast, Tim Baker, CFP discusses his path to the launch of Script Financial and helping pharmacists achieve their financial goals and Tim Ulbrich, PharmD talks about his experience of being broke and working to become debt free.
This post was written by Justin Cole, PharmD, BCPS. He is a 2006 graduate of Ohio Northern University. Dr. Cole recently accepted an appointment as Vice Chair and Assistant Professor of Pharmacy Practice at the Cedarville University School of Pharmacy. Over the previous 10 years, he served in various roles at Nationwide Children’s Hospital in Columbus, Ohio, where he continues to practice. Professionally, he is passionate about pediatrics, pharmacy leadership development, and medical care of underserved populations. You can follow him onTwitterfor content related to these passions. He and his wife, Michelle, have three children and enjoy music, hiking, biking, and just about anything done outdoors. If you have any questions about this article, feel free to contact Justin directly at[email protected].
For most of us, a home is the largest purchase we will make in a lifetime. As a result, our homes are a symbol of status and wealth. We are slaves to comparison, defining ourselves by the number of square feet we occupy or the status of our neighborhood.
Pharmacists may also feel pressure to buy a “bigger and better” home similar to or better than the ones owned by our parents. These factors can lead to taking on mortgages that hinder us from achieving other financial goals. We give ourselves little wiggle room for changes in our financial situation and fail to account for all the costs of home ownership. Mortgage delinquency rates, even though improved today, remind us of this. Five percent of homeowners in the US are at least 30 days behind on their mortgage payment, and more than two percent are at least 90 days late (Ref: Forbes, 2017).
I felt many of these home-buying pressures shortly after graduating from pharmacy school. After having our apartment broken into, my wife and I decided to leave renting behind to buy our first home in a nice, safe neighborhood. We desired to have children in the future, so we looked for homes that we felt would be ideal for a family. During our first showing, we walked into the home and quickly felt it was our “forever home.” We ended up purchasing the beautiful four-bedroom home in a developing area. We knew it was a stretch for us to afford at the time, but we could not imagine passing up the opportunity.
To make it work, we ended up putting 10% down at closing and chose to take a second smaller mortgage at a higher interest rate for the additional 10% of the down payment (which I would never recommend doing). We paid off this second mortgage within a year by trimming costs in other parts of our budget. Over the next few years, we were able to refinance our home and were on track to pay off our mortgage years early. We felt incredibly blessed with our house and our three children that made it a home. We had hosted family gatherings, hosted a small group for our church, developed great relationships with neighbors, and made many fond memories in our home. It seemed that despite some of our financial decisions, things were working out well.
After 10 years in hospital practice as a clinical pharmacist and coordinator, I accepted an academic appointment at a school of pharmacy. With this career change, we decided to relocate and were suddenly in the housing market again. During our search for a new home, we initially went into the process thinking of making a lateral move into a similar-sized home. After all, we were comfortable in our previous home and enjoyed the space it provided. We put offers on two similar-sized homes, but neither worked out. Because homes were selling quickly at the time, we had to rethink our strategy. My wife and I decided to consider homes that were smaller than the one we previously lived in.
In the end, we moved to a wonderful home that was less than half the size and cost of our previous home.
I did not fully realize the impact that home ownership had on our overall financial picture until our move. Through the process, we have learned a lot about ourselves and experienced many unexpected freedoms through downsizing.
Freedom to pay down debt. We were already on a path toward financial freedom, but much of my income was going toward our mortgage payment each month. Moving to a smaller home allowed us to pay off all of our non-mortgage debt including my student loans and an auto loan for a used minivan. Without the move, it would have taken us many more years to achieve debt freedom despite our best planning!
Freedom to save, spend, and give. We desire to be good stewards of all that we are given. Moving to a smaller home allowed us to bolster our emergency fund and gave us the flexibility to save more for retirement. Shortly after moving and paying off our non-mortgage debt, we also decided to take a family vacation that previously seemed like a distant dream. Most importantly, we were in a position to be more generous. While we had always budgeted to give to our church, mission work, and a handful of non-profit organizations we supported, we found ourselves with the ability to meet other needs around us.
Freedom from anxiety. It still pains me to admit this, but I did not realize how much time and energy I spent worrying about our financial situation until after the move. While we weren’t living paycheck to paycheck and had an emergency fund, I still spent a lot of time dissecting our finances, much of which went toward our mortgage payment. After the move, it was as if a burden had been lifted off our shoulders. I found myself thinking a lot less about our financial situation, and my sleep even improved as a result. I had never thought of myself as an anxious person but realized that concerning finances I was. Sometimes it takes a change in circumstances to reveal faults in our own mindset.
Freedom from the desire for more. No one likes empty rooms. The bigger the house, the more you have to buy to fill it. In moving to a smaller home, we began to reevaluate what we really need. We have sold some items, donated others to second-hand stores, given items away, and even trashed things that we had been holding onto for too long. For purchases, we now consider space carefully and evaluate the real need for something shiny and new. In essence, we have learned to live with contentment. We are now more debt-averse than ever before. Our spending habits have changed; we now spend less on possessions and more on experiences that our family can turn into memories.
While living below your means makes complete sense, it took an unexpected change to help us truly realize its blessings. We can confidently assert that freedom comes from making financial independence a higher priority than status symbols. While this may not be the last home we buy, we are content with all of the unexpected blessings that we have through it, and are prepared to make solid financial decisions because of the lessons we have learned.
So what is the way forward for someone who desires to achieve financial freedom and purchase a home? How do you determine what home you need rather than the home you want? Can you have both? Look for more posts this summer related to how home buying fits into your overall financial plan!
The following post was written by Deeb Eid, PharmD. Deeb is a 2016 graduate of The University of Toledo College of Pharmacy and Pharmaceutical Sciences. He recently completed an Executive Residency at the Pharmacy Technician Certification Board (PTCB) in Washington, D.C. and is transitioning to Ferris State College of Pharmacy as Assistant Professor/Experiential Coordinator in July 2017. Dr. Eid’s vision of social and interactive education for all audiences about the profession of pharmacy has led to an ongoing startup development of Facebook, Twitter, and YouTube pages branded as Pharmacy Universe (Feel free to Follow/Like, but still under construction). For any questions, please contact him at [email protected].
Tim Ulbrich (Your Financial Pharmacist) and Deeb Eid have no financial tie to either one of the applications mentioned in this article.
From Your Financial Pharmacist (YFP): There are lots of apps out there that can help you automate your savings goals and invest your money (such as the ones noted below in this article). While automation is a great idea to help you achieve your goals, don’t forget about (1) appropriately balancing investing with your other goals (e.g., debt repayment, saving for an emergency, etc.) and (2) maximizing the use of tax-advantage retirement accounts (e.g., 401k, 403b, Roth IRA).
When smartphones were first introduced, I recall being fascinated with many mobile applications and the usefulness in daily activities. While some were very practical and useful (eBay®, Gmail™), others were simply entertaining and handy for those long car rides (Paper Toss, Temple Run). I found myself excited to learn about applications that made everyday life tasks more efficient. It was even more refreshing to refer friends to certain apps, if it felt like the “right fit” for their scenario. Somewhere along the way came bank accounts, personal finances, budgeting, and many other financial responsibilities that we all deal with each day.
During pharmacy school, I observed that many of my classmates, colleagues, and personal friends loved using their smartphones, but were often unfamiliar with many of the great personal finance mobile applications available. After reflecting, two common areas I’ve identified that we as pharmacy professionals commonly ask about or struggle with include saving and investing. The following mobile applications are both easy to use and provide alternative tools to utilize. They will help to address some of these commonly asked about areas and hopefully make your financial success that much easier!
Acorns
Acorns is a seemingly effortless tool to help with saving as well as investing your money. On initial setup, you’ll be asked to connect to a checking account and a series of questions (since you are setting up an investment account, this is the usual). Don’t worry, Acorns encrypts and protects all of your data with bank level security. One of the main concepts within this app is to round up each purchase you make with the linked debit card/checking account. For example, say you go to get a cup of coffee and the total is $3.50. Swipe or pay with debit or the linked checking account and you will get charged $4 to your account, but $0.50 of that that will go into your Acorns account and be saved/invested. Some will find it necessary to turn this feature to “manual” which allows you to only round up those purchases if you choose to within the app.
My personal favorite feature is recurring investments. This allows the ability to schedule a daily, weekly, or monthly investment from your checking account into your Acorns account. You would be surprised how quickly saving and investing $10 every Friday could add up! Acorns also simplifies investing. It allows you to pick an approach (1 of 6 available) to your portfolio with how you’d like to invest (from Conservative to Aggressive) (Figure 1). In addition, you can view the projection charts for each portfolio approach to gauge the predictions of how much money you can potentially save/earn based on the amount you put in over a period of time. If you are interested in exactly where your money is invested, Acorns also breaks down the percentages, funds, and sectors in simple and colorful fashion. Overall, Acorns provides a simplistic and easy way to start investing and saving, without all of the complicated financial terminology!
Figure 1
Robinhood
Finally, a stock brokerage that does not charge those pesky commission fees on every trade! For those of you looking to invest your money or who already do and are looking for an alternative broker, this app is worth checking out. Contrary to most other brokers (Schwab, Scottrade, E*Trade..etc.) Robinhood does not require a minimum deposit to get started, but does need your bank account to be linked for transferring money. The interface of the app itself is clean, colorful, and easy to navigate.
Additionally, Robinhood has two upgrade options (Instant and Gold) that have some friendly features for more experienced investors, including the recent addition of margin accounts. The app itself does not feature many of the extras you will find with other brokers (such as in-depth data or news) but serves more as a platform to trade instead.
When you click on a specific stock or EFT, you will find some basic statistical information, a trend chart, and a short informational piece on the company (Figure 2). You are not able to transfer funds from another brokerage account into Robinhood, but can transfer them out for a $75 transfer charge. In addition, with the regular account, funds from transfers and trades take around three days to process, which can be limiting. Robinhood Instant has included a feature to eliminate this waiting period, but you might have to be placed on a waiting list to be upgraded.
Figure 2
Overall, Robinhood is a simple way to get started with investing or an option for more experienced investors, looking to for an alternative platform with no commission or account minimum. I’d recommend giving it a shot!
