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YFP 215: Know Yourself, Know Your Money with New York Times Bestseller Rachel Cruze

Posted on August 5, 2021November 2, 2022 by yfpadmin

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

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

About Today’s Guest

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

Summary

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

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

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Rachel, welcome to the show.

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

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

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

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

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

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

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

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

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

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

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

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

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

Tim Ulbrich: Absolutely.

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

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

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

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

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

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

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

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

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

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

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

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YFP 214: How Anna Got $127k Forgiven Through PSLF

Posted on July 29, 2021November 2, 2022 by yfpadmin

How Anna Got $127k Forgiven Through PSLF

Anna Santoro shares her journey of pursuing and receiving Public Service Loan Forgiveness.

About Today’s Guest

CDR Santoro received her Doctor of Pharmacy degree from MCPHS University and earned her Masters of Arts in counseling, specializing in emergency response and trauma from Liberty University. She is an officer in the US Public Health Service, assigned to the Federal Bureau of Prisons (BOP). In the BOP, CDR Santoro is a Mental Health Clinical Specialist at Federal Medical Center (FMC) Devens in Ayer, MA, and also serves as a Federal Bureau of Prisons’ (BOP) Regional Mental Health Clinical Pharmacy Consultant. CDR Santoro developed and implemented the BOP’s first Mental Health Clinical Pharmacy Program, and assisted with the expansion of pharmacy mental health services to >8 facilities with both inpatient and outpatient psychiatric pharmacist services as well as a national Mental Health Consultant program serving 122 institutions. Additionally, CDR Santoro is the Lead Consultant for pain management and for the Memory Disorder Unit at FMC Devens, the BOP’s only dedicated service for the treatment of inmates with dementia.

Summary

Finally, a real-life pharmacist who has received Public Service Loan Forgiveness! Anna Santoro, a pharmacist and officer in the U.S. Public Health Service, joins Tim Ulbrich to talk about her journey to PSLF. She talks about what it felt like ultimately receiving PSLF, her experience along the way, and lessons she learned that ultimately may help other pharmacists pursuing the same path to loan forgiveness.

In 2009, Anna had about $225 in loans, with approximately $145,000 of those loans classified as federal loans. She prepared to live on a shoestring budget and make huge payments, loan payments more costly than her rent payment at the time, to keep up with those loans. Luckily a colleague provided some information on PSLF and Anna was on her 10-year journey to having $127,000 of those loans forgiven. She explains that the feeling of having the balance on the loans as zero was surreal, but something that she had worked for diligently, and it was fun to see the outcome.

Anna shared two of her challenges along the way that may help other pharmacists. While making her payments toward PSLF, she enrolled in a Master’s degree program, which triggered her loan payments to go into deferment while in school. Because PSLF required consecutive, on-time payments, Anna had to request her loans be taken out of deferment and never go into deferment for the reason of attending educational programs in the future. After making this request in writing, she was able to automate her payments once again. The second challenge that Anna shared was regarding her tax filings and how filing “Married – Filing Jointly” affected her income-driven repayments, which had to be adjusted after she updated her filing information to “Married – Filing Separately.”

For those pharmacists pursuing PSLF, Anna says, don’t get discouraged. Ten years is a very long time but seeing the final results makes it worth it.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Anna, welcome to the show.

Anna Santoro: Hi. Thank you so much for having me.

Tim Ulbrich: I’m so excited to have you on to talk about your journey of reaching Public Service Loan Forgiveness, PSLF, something we talk often about on this show, but a real, live pharmacist who has actually gotten forgiveness and excited about being able to feature your story, your journey, as others I suspect may be interested in learning about that journey, what worked, what went as planned, what didn’t go as planned, and we’re going to dig into all of that here in a moment. And for those that are listening, you know that we have talked about student loans in depth on this show. And we have covered loan forgiveness before as well. So if you want to go back and revisit some of that material, Episode 018, we talked about maximizing the benefits of PSLF; Episode 078, we talked about is pursuing Public Service Loan Forgiveness a waste and we’re going to dig into some more of where that background came for that episode on this show today; and then on Episode 187, we talked about how another pharmacist, Stephanie, got $72,000 forgiven through TEPSLF program. And so the PSLF program has definitely had its share of bad press, but I think it’s exciting and hopeful to see someone in our community reach the finish line. So Anna, tell us about your journey into pharmacy, what ultimately drew you into the profession, where you went to school, and some of the work that you’re doing now.

Anna Santoro: Yeah, absolutely. So I actually kind of fell into pharmacy. I originally went to undergraduate to become a Spanish teacher and worked in pharmacy to pay my way through school and realized that I absolutely loved it. Transitioned into pre-pharmacy my junior year of undergrad, and then I went to Massachusetts College of Pharmacy in Massachusetts for my pharmacy school. I did their three-year accelerated program. And I had all intentions of working retail pharmacy, kind of translating within the Hispanic community and using my language background. And through their program, one of the things that they did was kind of really try to expose you to different types of pharmacy. And I met a pharmacist who worked for the U.S. Public Health Service with the Bureau of Prisons. And she really just kind of found a new passion for myself and for my ability to kind of help serve others after meeting with her and kind of learning about her work. And she introduced me to a program within the U.S. Public Health Service where you can sign on as a scholarship student called Senior Costep, and you’re able to receive an income your last year of pharmacy school and then you repay that back for two years after you get out of school. So I ended up doing that and just decided, you know, serving and being able to serve in uniform, helping those who need and helping our country in times of emergency was just something that I really liked, and I liked the fact that it was always changing. Plus, working within the federal pharmacy field, you know, you’re working at the top of your license. You can do a lot more than I had initially realized that a pharmacist could do when I went in with the hope to be a retail pharmacist.

Tim Ulbrich: And another benefit, which we’ll get to through the rest of this interview, is obviously working for a qualified employer that opened up some of the PSLF opportunities. So before we go down that path, Anna, tell us about your debt position, what that was like after graduating, how much you ended up paying for school, and how much of that did you borrow with student loans?

Anna Santoro: Yeah, so I ended up doing five years of undergrad because I changed my major so late and then three years of graduate school. So I was really lucky, I had a scholarship as well as some parent help for my first four years of undergrad. For my last year, I ended up taking about $8,000 in loans and then I paid $10,000 for my tuition there. I ended up financing 100% of my graduate pharmacy school loans. So I came out of school with about $225,000 or so in loans altogether. It was a mix of federal and private. I had about $145,000 within the federal system.

Tim Ulbrich: OK. And that was 2009, just to give our listeners a timeline, 2009 when you came out of pharmacy school.

Anna Santoro: Yeah.

Tim Ulbrich: OK. So before we talk about your PSLF journey, I want to take a step back and give some quick background and information about PSLF to our listeners that might be hearing some of this for the first time or for folks that also want a refresher. And we talk about this in much more detail in our book “The Ultimate Guide to Pay Back Pharmacy School Loans,” and so I’d encourage folks to check that out, available at PharmDLoans.com. And as I mentioned a little bit earlier, PSLF has certainly gotten some negative press along the way. And we’re going to talk about whether or not that may be fair. And I believe, we believe, that despite its rocky past and in some regards, some questions around what the future means for PSLF, I believe that it’s one of the best payoff strategies available for pharmacists and without question is often the most beneficial to the borrower in terms of the monthly payment. Obviously the goal with forgiveness is try to maximize forgiveness, minimize the monthly payment, and then what that means for paying amount over the life of the loan and then what you’re able to do in terms of moving other financial goals forward as well. And so there are really several key requirements that folks need to be thinking about that are pursuing Public Service Loan Forgiveness. And for those that have read some of that negative press and perhaps are intimidated by PSLF, I think it’s often one of these rules and these requirements that folks may feel like there’s a burdensome process. And some of the horror stories you hear around PSLF ultimately come from folks that may not have followed one of these important steps along the way. So quickly, No. 1 is you have to work for the right kind of employer. That’s a government agency, a 501(c)3 not-for-profit, as well as some other not-for-profit organizations. No. 2 is you have to have the right kind of loans, and those are direct loans. So in some cases, you have to go through an important step of consolidation if you don’t have qualifying loans. No. 3 is you have to be in the right repayment plan, and that’s an income-driven repayment plan. Also counts would be the standard 10-year repayment plan, although that wouldn’t make a whole lot of sense since you’d pay them off. No. 4 is you have to make the right amount of payments, that’s 120 monthly payments that do not have to be consecutive but 10 years worth of payments. And then finally, you prove it and you apply for and receive tax-free forgiveness. And so now that we have some of that background information or reminder on PSLF, Anna, tell us about ultimately how much was forgiven for you and forgiven tax-free through PSLF.

Anna Santoro: Yeah, so I ended up — like I said, I started out with about $145,000 in loans, and when all in all was said and done, I think I had a little over $127,000 forgiven, all of it tax-free.

Tim Ulbrich: Yeah, and that — so just thinking of the math right there, $145,000 in federal loans, $127,000 forgiven tax-free, a little over a 10-year period, that just shows the impact of the interest on these types of loans, right? Because you obviously were making some of those income-driven payments along the way but still had a big chunk of that that was to be forgiven because of what that interest accrues. And I think a lot of pharmacists are feeling that they’re at a crossroads upon graduation with trying to figure out if they should work with a qualifying employer and pursue PSLF or if they should pay off their loans in the federal system sooner or perhaps even refinance them with a private lender. And of course, some folks inadvertently end up pursuing PSLF because of the work that they’re doing with a qualifying employer. And so my question here for you is how and why did you make the decision to pursue PSLF instead of some of the other options that are out there for loan repayment?

Anna Santoro: Yeah, so I originally went into the standard repayment. I was making the extremely large payments when I first got out of school. And I had a coworker who was like, “What are you doing? No. Here’s this program,” and basically gave me the phone number to call, helped me consolidate my federal loans so that I would be into a qualifying program, helped me enroll. And as we kind of got farther down the road when I first graduated, the National Health Service loan repayment option and a couple of the other loan repayments weren’t available for pharmacists. And as those changed, I really kind of had to make that decision of like, do I stay with this? Do I move over to this program? And I think I just kind of said, “Well, you know, it’s going well. I’m getting closer, I’m getting closer. Let’s just keep my fingers crossed.” But I was really lucky. I had no intentions of doing anything other than just paying off my loans and living on a shoestring budget while I did so at the beginning. But luckily, I had some really good colleagues who were looking out for me.

Tim Ulbrich: Yeah, I too am glad you had the colleagues looking out for you because one of the things I share is that in 2021, the information I think available is a lot better for the borrower.

Anna Santoro: Yes.

Tim Ulbrich: You know, we have to remember this program was enacted legislatively in 2007, 10-year timeline at a minimum, so the first borrowers that were really starting to experience forgiveness, it’s not that long ago, right? And the information has gotten a lot better, and so I think sometimes some of the stories and so forth that we hear, it’s important that we have that context of what information available, folks had available. And when you graduated in ‘09, when I graduated in ‘08, I didn’t even know what Public Service Loan Forgiveness was, let alone the rules of what needed to be involved. And I think today’s graduate is certainly much better informed, of which I’m grateful for that. So $127,000 that was forgiven and forgiven tax-free. What was your journey like paying off these loans? Did you have any reservations or concerns about PSLF before you started or even during the forgiveness pathway?

Anna Santoro: So I think for me, it felt really similarly to like graduating from pharmacy school and taking the NAPLEX. Like I was working, and I was kind of doing all of the steps, but you just worry that until that — I mean, even up after I made my 120 payments — that the program’s going to shut down or I will have filled out a paperwork wrong or maybe even though U.S. Public Health Service has the words “public health” in it, they’re not going to accept it. So until I actually got the like, “Congratulations, your loans are forgiven,” and I saw that $0 balance, I think I kind of just always had a little bit of concern in the background. But you know, at the same time, I kind of said, “Well, it is the government and it is in writing, and so usually they have to uphold what they put in writing.” So I kind of said, “Well, let’s just do some blind trust and hope.” But luckily it worked out.

Tim Ulbrich: A little bit of trust there. And that’s one of the reasons I’m excited to share your story is I think it’s really helpful for folks to hear from another pharmacist, someone they can relate to, that has gone down this path that maybe had similar reservations and we’ll talk in a moment here about hiccups along the way. But some trust that’s involved as well in the process if you feel good about following those rules along the way. You know, one of the things, Anna, that I like to think about here is that it feels like everybody has their own PSLF story. And what I mean by that is we know the rules. I just listed them off one by one. But inevitably, everyone’s got some variation that happens, whether it’s with paperwork or dealing with the loan servicer or something unique to the employment situation or non-consecutive payments — I mean, there’s just a whole lot of different scenarios and situations that can come. So for you and your individual journey, were there any issues or hiccups along the way that yes, you got to that $0 balance but it also had some bumps along the road?

Anna Santoro: Yeah, actually two. So throughout my career, I work in clinical pharmacy and I decided to go back and get a Master’s degree to kind of further my education beyond just my PharmD. And when I enrolled in school, PSLF and the loan repayment program just automatically moved my loans into deferment because they said, “Well, you’re in school, so you don’t need to pay.” And I actually had to fight with them to say, “No, like I want to keep making my payments.” And with PSLF, one of the requirements is that it has to be an on-time payment. So even when they defer, I would have to call and say, “Please take my loans out of deferment, please take a payment today. I do not want this marked late.” And there was some question as to whether or not those payments that I even did make were going to count or not since I was having to do them manually. So I was a little concerned about that. But after my third semester of grad school, I actually reached — you know, sometimes you just get the right person on the phone. And they said, “Well, if you fill out a memo or send us an email saying you never want your loans to be moved into deferment because of in-school status, then this won’t happen again.” And so that was really helpful because then I didn’t have to worry OK, it’s August, or, it’s the beginning of a semester, double check that my loan — that my payment was taken out. So that was really helpful in being able to kind of finish my Master’s degree and not have to worry that those loans were being taken out. The other thing was when I graduated from pharmacy school, I wasn’t married, it was just my income. And then in 2013, I got married and didn’t even think about it, and I just started filing my taxes as married filing jointly. And my husband was in graduate school at the time. He actually went back to school to go to physical therapy. So the first three years that we were married, we had zero income on his income, so I just noticed that our total monthly payment went down because he was earning nothing, but now I had an extra person in our family size. But the year that he graduated and his loans came in and we sent our taxes in — or his income became factored in, I said, “Whoa, whoa, why is my payment three times what it used to be?” And I just kind of thought, OK, well this is how it is. Alright. It’s still better than if I was making the standard payment. And then I was actually listening to I think one of your podcasts, I think it might have been podcast No. 18 that you mentioned, and it said, don’t forget, file married filing separately. And I was just like, ohhhh. So luckily with PSLF, you can go in and adjust your income or say that you have an adjustment to a family size or adjustment to personal income really kind of at any time. So I went, I was able to refill out my income-based repayment and then did my taxes married filing separately from then on. And that made a huge difference in my payments. But I had about 18 months to two years where I paid probably double or triple what I should have.

Tim Ulbrich: I can tell you from sharing those, you’re going to have a positive impact on others. And thank you for sharing those because those are two common things I think pharmacists that might pursue additional degrees or training, right, that could be residencies that are combined with Master’s degree, I’m thinking of like Health System Admin, MBA, or even just Master’s, PhD programs that are independent of residency. So that probably is fairly common. And then certainly we know firsthand the tax situation is a common one and changes in tax situation. And I think this is a great example about why the tax part of the financial plan needs to be wedded and married to other parts of the financial plan and considerations that we make. You know, student loans and taxes in this case can very much go hand-in-hand, and we want to make sure we’re considering the implications here. So two great lessons that are learned along the way. Not glad that you had to pay a little bit extra along the way, but I am glad that we can help share some of that with other folks. What about the best moment or two that you had during this journey? I think so often we talk about the hassle and the hiccups and the bumps along the road, but some of the best moments on this journey in ultimating getting these loans forgiven.

Anna Santoro: So I had my loans forgiven earlier this year, so I was still paying through COVID, I knew exactly where I was on the payments. But I did not realize that the legislation because of COVID was going to — I know they said that we don’t have to make student payments, student loan payments. And I said, “Well, I’m just going to keep paying because I want to get my PSLF.” And I had no clue that it would change your payments to $0 payments and still qualify for PSLF. And I was actually having my check-in with Tim with Your Financial Pharmacist, and he was — I can still see his face on the computer — and he said, “Actually,” he’s like, “No,” he’s like, “This should be done.” He’s like, “So you have made your last loan payment.”

Tim Ulbrich: Wow.

Anna Santoro: And I remember thinking like, OK, no, like that didn’t just happen. How did I not get to enjoy my last loan payment? But then I said, that’s fine. And then once I hit my number of payments, I submitted all my paperwork, and I actually had three or four colleagues that were all — we all graduated together, we’re all within U.S. Public Health Service, we were all submitting and emailing. And we knew whose stuff had gotten submitted, like what day their applications were in. And one of my colleagues sent me an email — I knew her application was about two weeks ahead of mine — and she said, “My payments just went to $0. I’m good.” And so I started checking every day. And it was about 10:30 at night, I had logged on. I had logged on that morning and nothing, my normal student loan balance, and I remember checking in that night and all of a sudden it said $0.

Tim Ulbrich: That’s awesome.

Anna Santoro: And I looked at it, and I looked at it again, and then I hit refresh, and then I logged out, and I looked at it again. And it was just so like surreal to see nope, that balance is gone and it’s $0. So that was really fun, just finally seeing it go to the $0 balance. It’s what you work for. So it’s fun.

Tim Ulbrich: Yeah, absolutely. And I would have done the same — I would have logged back in, logged back out, logged back in. I probably would have hit “Print,” you know, make sure it’s real and I have record of it.

Anna Santoro: I took a couple of photos with my phone.

Tim Ulbrich: Yeah.

Anna Santoro: Yeah. It was funny.

Tim Ulbrich: That’s cool. Obviously there’s that emotional joy of hey, we’ve had these steps, we’ve been following this journey for over 10 years, we finally see the $0 balance and there’s been some hiccups along the way. What a cool way to end too. So because of, you know, the COVID provision that you mentioned that there were $0 payments. But those were counting as qualifying payments. So you got to the finish line through those COVID provisions out of the CARES Act. What was the timeline or estimated timeline between when the last qualifying payment — even though it was a $0 payment — was made, what was the timeline from that to actually when the $0 balance showed up in your account?

Anna Santoro: OK, so COVID delayed some of that. But there were a couple of steps along the way. So I should have met, based on my calculations, had my final payment in August. I was able to submit my application in the beginning of October because once you meet your final payments, you then have to send in another annual certification because they have to certify that yes, the payments that you made for that last few months, even though you had — like I had my annual certification in March. They wanted another certification in August before I could send in my application. So after I did that, then I sent in an application and got that done in October. The big thing is you also have to show within the application that you are also still employed, even in the months in between and while they’re processing your paperwork. Then in October, because of COVID and government budgetary changes and all of that, they had kind of a delay of processing within their system. So my loan I think finally got approved in February. So it took a long time. But part of that is I think they tell you 60-90 days to process your application. Once they process your application, they then go in and re-audit every payment you’ve made. And I got really lucky in that they determined that even though they said I had made 120 payments, I had really made 124. And that was counting some $0 payments. It must have been more than that. I ended up getting refunded.

Tim Ulbrich: OK.

Anna Santoro: For four overpayments that I had made. So instead of being done — I guess my last payment was in March. So I should have been done in December of the year before.

Tim Ulbrich: OK.

Anna Santoro: But they don’t tell you, “Hey, we approved these overpayments.” They just say, “Hey, your filing approved,” and then refund you random money into your account.

Tim Ulbrich: Happy day.

Anna Santoro: Right? So I had to call them and say, “OK, what’s going on?” And they’re like, “Oh, those were overpayments that you had made. You had actually made 124 payments, so you will get these refunded back.”

Tim Ulbrich: OK. And that makes sense. It takes a little bit for the reconciliation of that to catch up, but another good reminder to try to keep your own records as well if there ends up being a discrepancy for whatever reason. One of the things, Anna, that we often say is that if you’re going to be in the forgiveness boat, like be in the boat, right? Don’t be half in and half out. What I mean by that is I think there’s a strategy in terms of maximizing forgiveness, which ultimately means minimizing what you’re paying out of pocket, which then naturally leads to the conversation of might I be able to pursue and move other financial goals forward if I’m pursuing loan forgiveness because I can then use some of those dollars that might be going towards student loan payments and allocate those towards other goals? And so for your situation, did pursuing PSLF allow you to focus on other financial goals beyond debt repayment that might not have otherwise been either possible or as likely if you were down more of that traditional standard repayment path?

Anna Santoro: Oh, absolutely. So I kind of set up my payments — I had automatic payments, so it just automatically came out on the 2nd of every month, and I knew I didn’t really have to worry about it. So I set up a budget based on what my loan repayment was and I was able to kind of move towards other goals within my life and my career. I was able to buy a house 2.5 years out of school, which now looking back on it, I’m like, wow, that was really fast. But at the time, I just said, “You know, I don’t want to pay rent. I want my money to be worth something and kind of get that equity.” So I was able to buy a house, put a good amount down on the house because I wasn’t having to put extra money into the loans. And then like I mentioned, when my husband and I got married, he ended up going back to school. So his first year of school, we weren’t sure what the budget was going to be like so we did end up taking out about $60,000 in loans for his first year of his physical therapy program. But after that, we said, “You know, we have this cash. Our budget is set. We know what these loan payments are going to be,” so we were able to pay the next two years of his doctorate degree in cash at the time. You know, we didn’t have to take out any loans. We paid $120,000 on his. And then we were used to his $0 income on our budget, so when he did start working, we were able to take his income and pay off that $60,000 that we borrowed for him within like 9 or 10 months of him being out of school, which was really nice. So by the time he was out of school and earning money maybe six years into the program, that extra income he earned really was just like extra for us, which was nice. Now we have kids, so we’re paying for child care and that type of stuff. But it was really nice to just be able to say, “OK, this is my payment,” and just kind of put it on the back burner, automatically taken out of my account, and it wasn’t this huge, crazy amount of money that we had to try to — you know, it wasn’t a second mortgage.

Tim Ulbrich: Yeah.

Anna Santoro: When I was making those first payments the first few months, it was more than my rent at the apartment that I was in at the time. So I can’t imagine having done that for 10 years and still be able to do the other financial things I was able to do.

Tim Ulbrich: Yeah, and that makes a whole lot of sense. Going back to the beginning of your story, a little over $225,000 in debt, $145,000 or so of that was federal, so just rough numbers, we know that if you’re paying that over a standard 10-year period, those are big monthly payments. And so the PSLF pathway and maximizing forgiveness, minimizing payments, sometimes it opens up the door, as it sounds like it did here, to be able to pursue other financial goals and here, one being obviously being able to pay most of a degree for your husband in cash and then pay off the rest of that balance quickly. So two doctorate degrees with $0 in the balance of either, no debt anymore, that’s great.

Anna Santoro: Plus my Master’s degree.

Tim Ulbrich: Oh yeah, that’s right! Plus your Master’s degree.

Anna Santoro: Yeah.

Tim Ulbrich: Very cool. Now that your loans are out of the way — and the reason I want to ask this question is I talk with many folks that are graduating, within the first few years, and you know, I think sometimes the student loan mountain can seem so big that it’s hard to see what may be on the other side of it, right?

Anna Santoro: Yeah.

Tim Ulbrich: And now that your loans are out of the way, what other financial goals are you focusing on and are able to do so because you don’t have to worry about these monthly payments anymore related to the student loan?

Anna Santoro: So we had Murphy’s Law at our house. We got my student loans forgiven in February, and in April, we got a roof leak. So we have used all of the money that we would — well, not all — but we had to buy a new roof. So that has been kind of our big financial hit this year. But we have — the way we have our budget set up, we had a home repair budget, so we’re just working on kind of redoing that. Our goal over the next couple of years, we want to take a family vacation. But then I think we are going to be working towards kind of setting up a nest egg to possibly buy a vacation home or do a renovation on our house here, something like that. But we’re trying to kind of say, “OK, we’re used to making that payment, so let’s use that money in a thoughtful and meaningful way as we move forward,” versus just buying extra coffee or something small.

Tim Ulbrich: Yeah, that’s great. I think the intentionality of that and the planning process of hey, we were putting these dollars towards student loans, and now what are some other goals that we can shift it and put these in other buckets that we want to see forward with other parts of the financial plan? That’s great. Last but certainly not least, Anna, what advice would you have for other pharmacists that are out there that are either actively pursuing PSLF, maybe considering it, and might even be a little bit skeptical about whether or not that path makes sense for them?

Anna Santoro: So I think the two things are — so I take a lot of students, and I’m always big with my students on this is — if you at all end up in a residency, in any type of employment with a qualified employer, enroll. If you’re enrolled now and the program closes, you get to stay in it. If you are a resident and you have no income, your payment will be $0, and that still qualifies, which is less money that you’re going to be paying 10 years down the road when you’re on payment 120 and you have an income. So that I think is huge is getting enrolled as soon as you can. And if you are a qualified employer for 2-3 years, and then you leave and you come back, you’re still enrolled and those payments still qualify. So I think that’s huge. The other thing is, you know, not to get discouraged. Ten years is a very long time and the six months it took for that application process after that seemed like eternity. But you know, watching it change and seeing the final results makes it worth it.

Tim Ulbrich: Yeah, absolutely. And I think your comment about the timeline and being patient, if you will, is another reminder of the value of colleagues and community and other people that are going through this as well so you don’t necessarily feel like you’re on an island and hopefully being able to share stories or we’ve heard many frustrations from folks that are calling in asking questions and often don’t feel like those questions are getting fully answered. We’re getting ready to turn the page — I’m sure you saw the news over the past couple weeks where the loan servicing company for PSLF is about to change, and I’m sure that’s going to mean maybe some good things in the long term but probably a whole lot of frustration in the short term. And so having that accountability, having that coach, having somebody alongside of you I think could be very powerful on this journey and really keeping that end goal in mind. So really exciting stuff, and great wisdom that you have to share there. I really appreciate you taking the time to come on the show, for sharing your story about getting $127,000 in federal loans forgiven through PSLF and certainly wishing you the best of luck in the future. So thank you again, Anna.

Anna Santoro: Yeah, thank you so much. I appreciate you having me.

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YFP 213: 5 Investing Considerations for a Volatile Market

Posted on July 22, 2021November 2, 2022 by yfpadmin

5 Investing Considerations for a Volatile Market

Tim Baker shares five considerations for investing in a volatile market.

Summary

Recent media attention brings to mind the current state of the investing market. In this episode, Tim Ulbrich and Tim Baker discuss five considerations for investors in this volatile market.

Investors should consider and work to understand common biases, including but not limited to overconfidence bias, loss aversion, and others. Investors should also consider their personal goals and personal philosophies relative to building wealth and living a wealthy life. In gaining a better understanding of the personal philosophy, investors should consider their risk tolerance, long-term goals, and asset allocation. As investors approach their goals through investing, targets and strategies should be revisited and revised.

Given the volatile nature of the market and how easily it can be influenced by the news cycle in the short term, investors should be mindful of groupthink, herd mentality, and investing in a silo. While it may be fun to make high-risk investment choices, those boring choices of index funds and long-term strategies are often the best financially. Generally speaking, the market shows growth over the long term despite short-term dips and drops. Being aware of your asset allocation, making safe choices, and not over-extending yourself to the detriment of your financial plan benefits new investors. Tim Baker shares that even professionals in finance benefit from guidance from a coach to help prevent those missteps with exciting but risky investment choices.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tim Baker, welcome back to the show.

Tim Baker: Hey, Tim. How’s it going? Good to be back again.

Tim Ulbrich: Excited for this episode. Now, call me old school, Tim, but I get the Wall Street Journal delivered to my house every morning. I’ve shared with you before, I hear the car coming in the driveway, it’s a feel-good. But one of the things that I couldn’t help but notice and therefore led to today’s episode is in reading the Journal, the volume of attention that has been given to investing lately, whether that be the stock market, the bond market, inflation, the housing market, crypto, meme stocks such as AMC, GameStop, Wendy’s, and so forth, you know, could be that the market is going to come crashing down or folks that think there’s going to be sustained growth, what will the Fed do or not do? All this really goes on and on. And I think if you read that news any given day and make a decision, the next day you might be kicking yourself. And so I wanted to talk in this episode about how one can have that long-term investing mindset that we have talked about often on this show in the midst of a lot of noise and attention that is out there just in the time period and the volatility that we are in right now. And so we’re going to talk through five considerations for the investor that’s going through this time period. And Tim, this really reminded me of an important philosophy that you and I adhere to and preach when we talk about long-term investing, one of the things that I’ve heard you say before is that a good investing plan should be as about as boring as watching paint dry. And Tim, this is just really hard to do in a time period like this.

Tim Baker: It really is. I mean, even sometimes I like have that moment of pause and I have those doubts. Then I quickly get over that and realize that no, stick to your guns, you know, what the market does over long periods of time is actually sufficient. And it’s that singles and doubles approach to building wealth over a period of time. But it’s easy I think to get distracted because of the news and the news cycle, especially in the times that we’re living in today. When you think about like even in the last downturn, ‘08 and ‘09, the news cycle, even just the social media presence of like what is everyone doing, and then if you go back to the ‘90s where the dot-com, that stuff is not like always in your face like it is now. So it’s like really easy to compare and contrast of what you’re doing versus what everyone else is doing and really kind of derail your long-term plan if you have a long-term plan. So you know, more so than ever before I would say, it’s like really being disciplined and kind of sticking to your guns and allowing the plan to unfold as you’ve outlined. And for a lot of people, like I said, it’s a slog because of water cooler talk, you know, about, hey, crypto, or this stock or buying houses. I just was talking to a couple the other day, and they’re like, “Yeah, we have this timeline of buying a house in the next 3-5 years, but we’re seeing our friends buy a house and them being really happy and excited, and it’s tough not to compare or tough not to get sucked up with kind of that keeping up with the Joneses mentality,” so it’s a challenge.

Tim Ulbrich: Yeah, and it is. I mentioned I think it’s really had to stay true to that long-term approach in the midst of a time period such as this. And as we’ll talk about here in a little bit, you know, this isn’t unique. The circumstances may be, but what we’re going through in terms of volatility certainly isn’t unique, certainly is not unique. And so we’re going to talk through five considerations for folks, again, that are investing during this volatile time period in the market. Now I do want to be fair that while we’re going to talk about the long-term approach, you know, I do want to acknowledge the difficulty that is there considering the volatility that has happened. So for this show, I went and pulled the S&P 500 numbers, just as one indication that we can look at. And Tim, check this out: February 14, 2020, so that would take us back to pre-pandemic or at least our recollection of pre-pandemic before life had changed. And at that point, the S&P was 3380 on Valentine’s Day of 2020. Now, one month and one week later, March 20, 2020, it went from 3380 to 2304. And then today, it stands at 4350. So February 2020: 3380, March 2020: 2304, today: 4350. So it saw a 32% decrease in one month and a little bit of change. Then an 89% increase from that dip after the pandemic started to now. We saw an 89% increase. And if you look at the net change over the time period from February 2020 to now, it’s been up 28%. So I think it’s important that it’s perhaps a little bit easier to talk about this long-term investing approach and strategy but like these are real numbers. And you shared with me before you hit record that you individually did a nice job of ignoring some of this noise when the dips happened. I didn’t do as good a job as you did. But you mentioned logging onto that 529 account for the kids and having that “gasp” moment, right?

Tim Baker: Yeah, I mean, I think people think that I’m like joking, but I’m not. Like when the correction came — or not the correction but just the dip because of the pandemic came last year, I did not look at my accounts. I think because I know the reaction. It wasn’t until, I don’t know, maybe like May or June of last year when it hadn’t completely recovered where I logged into the kids’ 529s. And I did get that — I looked at the balance and kind of dip and I was like, I got that like pit in my stomach and I was like, oh my goodness, it actually did fall quite a bit. But the reason for that is that I know that — and we’ll talk about this a little bit more — but you know, investing is such an emotional thing. And oftentimes, what you want to do in investment is the opposite, right? So like let’s go through that roller coaster. When the market declines like it did and you’re seeing, if you’re logging into your account — and I’m sure there’s a lot of people listening that look at their accounts daily — when you’re seeing hey, I had $100,000, now I have $80,000, now I have $65,000, that plays with your emotions, right? So in that moment, the feeling that you have is — and I kind of say you want to take your investment ball and go home. You’re like, ‘Alright, I don’t want to play this game anymore. It’s not fun. I’m going to go home.’ And what happens is that that relates to basically people selling off their investments low and getting into cash where it’s really cozy and safe. And then when it rebounds and it goes back up 60%, 70%, 80%, 90%, you miss that upswing. Right? So then you’re trying to figure out when to get back in. You’ve missed a lot of the returns. So more often than not, if you know your risk tolerance and you set your allocation, less is more. The less that you kind of fiddle with it and look at it, probably the better off you will be. And I know that’s not like an exciting answer, right, because the sizzle that typically is involved in a financial plan if there’s any sizzle at all, but if you’re a financial nerd like us, like it is the investments. They’re interesting. They’re somewhat exciting. You see your wealth compounding as a result of an efficient long-term investment strategy. But typically, the most efficient and I think successful are just really boring. They’re not individual stocks, they’re not cryptos, they’re not all these things that you hear about on the news that may or may not be a fad — I’m not saying crypto is a fad — but it is index funds and buying the market and things that are not necessarily exciting to someone that might be reading the Wall Street Journal every day or in terms of like what is the — what are the things that are making headlines, what’s going to print so people will read that? That’s just the reality of it.

Tim Ulbrich: So since we just proclaimed this as boring, we might as well just send the episode right there and call it a day. So now let’s jump into these five considerations for those that really are trying to reaffirm, Tim, I think much of what you just shared. No. 1 — and I mentioned this a little bit earlier — is recognizing while the circumstances of today’s market are unique, market volatility is not unique. And so what I’m referring to there is of course, we all have lived through firsthand a global pandemic, we know the supply chain issues that has caused, we know that obviously there’s some issues that we see currently happening around inflation and of course with the housing market and lumber prices that were up crazy and now they’re actually going down the other way. And so circumstances may be different, but the volatility and the concept of volatility is not unique. And I think, Tim, this feels relevant because for those that are investing, I would say within the first — I don’t know — 10-15 years of your career, if you have maybe known only this bull market, like this might seem or feel like behaviorally that some of this volatility is unique. So tell us about just historically, the precedence of volatility and why this concept is important.

Tim Baker: Yeah. So you know, the markets are very fickle. And it’s interesting to see that something that a president might tweet or a jobs report or whatever can really swing what is happening on Wall Street. So it can be influenced, I would say rather easily. I think that again, even more so because of the news cycle, but it’s really not a new thing. So I think the status is that since World War II, I think there’s been 12 or 13 economic recessions where you’re seeing these things do come in cycles. You know, it’s very rare to have the expansive bull market that we’ve had, meaning that we haven’t had a major correction. But along the way, it has gone up and gone down. And it’s evident by what happened early last year with a lot of the economy shutting down because of the pandemic. So the long-term investors should know that along that road, it shall be somewhat bumpy. But you know, the more that we zoom out, if we look at an investment portfolio over a month or two months or six months or even a year, very, very volatile. Lots of swings. But the more we zoom back and we go to five, we go to 10, we go to 20 years, it’s actually very predictable. And that’s the comfort that I have when I start to doubt myself is to know that over long periods of time, the market is very predictable. And it takes care of you. It allows us to outpace things like inflation and kind of get ahead of the tax man, so to speak. So that’s the comfort that I have. But — and I try not to get too caught up in the week-to-week, month-to-month, day-to-day stuff because I know, you know, as a human being, it can be — the volatility can be very emotional. And it can lead to things that causes us to do irrational things. So I’m cognizant of that, and that’s what I try to preach to clients. But again, it’s in that moment, you have those feelings and reaction that compels you to do things. And again, most of the things — all of the decisions that we make in life, Tim, are really based on an emotion. And if it’s an emotion like loss, we typically — and we talk about things like loss aversion — we typically do things at the detriment of our long-term plan.

Tim Ulbrich: Absolutely. So that’s No. 1. No. 2 is understanding common biases. So Episode 124, I had the opportunity to interview Dr. Daniel Crosby, who wrote “The Behavioral Investor.” And in the book, he actually talked about 117 behavioral biases at the time — perhaps there’s more since he’s done more research and others — 117 behavioral biases in total that he has come across throughout his research. We’re not going to talk through obviously all of those on this show but some that we think are relevant to the time. We also talked about this in Chapter 1 of “Seven Figure Pharmacist,” where we talked about the concept of mind over money. And so Tim, the first one that comes to mind here is overconfidence. And tell us a little bit about what overconfidence bias is and ultimately what it may lead to so that we can be on the lookout for some strategies to prevent this.

Tim Baker: The overconfidence bias is a tendency for people to have just more confidence in their own abilities. So like one of the things I always think back on when I learned about this is that if you were to poll pharmacists out there and you would say, “Hey, how well do you think you’re doing your job?” the overwhelming majority of people would be like, “I’m great,” or “I’m average or a lot better.” But we know that like on a bell curve, you’re going to have people that are really outstanding, people that are average, and people that are kind of below expectations. But the way that we view ourselves is we never really — even though sometimes we are our hardest critic, we’re not saying that when we’re actually taking stock of our abilities. So I see this a lot in pharmacists. And sometimes I see this in pharmacists that we work with in a sense of we get through a portion of the financial plan, and it’s like, “Hey, I got this.” And I’m like, “Well, do you? Because three months ago or six months ago or 12 months ago, you said, ‘I have no idea what I’m doing with my money.’” And you know, I think it’s a good thing we’re making progress, but sometimes there is this feeling that ‘Hey, I’m good to go,’ or ‘I have it all figured out.’ And it’s untrue. It’s an inflation of our own ability to manage the portfolio, manage the taxes, or whatever that might be with regard to the area of life that we are looking at. To me, overconfidence can really come into play with how we react to our financial planner or where we’re placing money. Again, it could be to the detriment of the long-term direction of the financial plan.

Tim Ulbrich: Yeah, and I think this is one, Tim, you know, I kind of put myself in the bucket of guilty as charged here. Like I was looking at one of my 401k statements recently and giving myself the pat on the back, right, of what’s happened over the last year. Like I literally have done nothing except like, you know, the hard work of a plan up front, obviously you played an integral part in that, but doing that and rebalancing — like that is the market doing its thing. And I think it can be in times like this where it has been significant growth — I graduated in 2008, so I started investing after the dip of the financial crisis of 2008. So it’s only been up in my career, for the most part, outside of —

Tim Baker: Only been up, yep.

Tim Ulbrich: Only been up. So you know, again, my comment about newer investors, like history I think is an important lesson to learn in terms of the trends but also that when we think about something like overconfidence, you know, is success in one area, does that necessarily translate to other areas or not? And how much of this is the market doing its thing versus undue credit we may give ourselves for making certain decisions.

Tim Baker: Yeah, and this might be something — you know, I’m just thinking about this now as we’re talking about this. You know, you often hear stories about people that grew up during the Great Depression. And there was almost like this underconfidence bias, right? Not necessarily just in maybe themselves or just even in the system, and maybe it’s the sign of the times, but I just wonder if there was the inverse of that. And sometimes you see that with like, with when people do come out in terms of the job market and things like that, they are more conservative in that part of life that was really kind of down-and-out. So it’s like, ‘Hey, I don’t really want to take this job for granted or do a move because it’s safe here because when I came out, I was $200,000 in debt and I couldn’t find a job.’ So you know, I think we — I do see a lot of overconfidence. And you want to be cognizant of it. Like what you were saying, Tim, is like, you know, you set your asset allocation, and that’s the right thing to do. But for the most part, the right thing to do is probably just to keep on keepin’ on and not overextend yourself or do things that I think will ultimately lead, again, to the detriment of the long term.

Tim Ulbrich: The next bias, Tim, that seems really timely right now is herd mentality/bandwagon effect/groupthink, whatever we want to call it. So tell us about this one, maybe some examples in the moment of what we’re seeing and obviously why this can have some negative impact.

Tim Baker: Yeah, this also can be called like mob mentality. So like this is the tendency of like the individual in a group to think or behave in ways that kind of conform with others in that group rather as individuals. And you know, probably I see this more in like things like AMC or GameStop or even crypto. It’s like, it is kind of like that water cooler talk of everyone’s doing it and we were kind of talking about this off-mic of, you know, I might not really be interested in that, Tim, but because I kind of want to be part of the conversation and part of what’s going on, maybe I do invest, right? And we were kind of — the analogy somewhat is fantasy football. Like if my pro football team stinks but I am in a fantasy football league and maybe there’s a little financial incentive there to win it, there’s some sizzle there, right? There’s some incentive for me to kind of be plugged in and pay attention. And I think sometimes that’s true. And I think it’s also because it’s like the new, like at least with crypto, it’s kind of the new thing and it’s not really understood. And I think there is like a lot of promise and upside, but it’s really speculation right now. I think the thing that I get a little frustrated with is that a lot of the people that I see that are investing in crypto don’t really have business investing in crypto. But it’s really easy with some of the apps that are out there and things like that that kind of drive that forward. And it’s exciting, right? We do things that excite us. We’re talking about, hey, keep it boring, don’t do anything that there’s a lot of juice behind it. It’s like ah, it’s so boring, Tim, like I don’t want to do that. I want to do something that I can get excited about. But oftentimes, those are more expensive to the investor and again, not necessarily the best thing from a fee perspective or just in the long run in terms of the swings in the market.

Tim Ulbrich: Yeah, I mean, I think we just take a step back, Tim. Like opening xyz app and making an investment purchase, like there’s an endorphin rush that’s happening, right? Not looking at your account balance for three months, like you ain’t getting any endorphin rush from that. I mean, there’s just one that obviously tends to be a little bit more exciting, might attract us in that direction, and one that’s going to take some discipline behavior, perhaps a coach to kind of help keep us on track in that. And I want to be clear, as we talk about some of the current trends, we’re not saying in any way, shape, or form there’s not a place for cryptocurrency.

Tim Baker: Right.

Tim Ulbrich: I think you made a good point there in terms of like the priority of that or you and I have talked before about for folks that are interested in individual stock picking, we’re not saying nobody should ever think about that. I think what we’re suggesting is looking at the bigger picture, where does that fit? Are we putting the priorities in the right order? And then if we’ve got to scratch that itch, like OK, but let’s make sure we’re doing it within a reasonable way in the context of everything else we’re trying to achieve.

Tim Baker: And just know what you’re getting into. And for a lot of people, people don’t. And again, not investment advice, but we’ve talked about keeping it boring, low-cost, passive index funds. They’re about as boring as they can get. But for the most part, I think it’s kind of that building out a portfolio like that that buys the market, doesn’t try to make strides to beat the market. And you know, what we said about the market is that it takes — it does take care of you. If you can stick to your guns during those volatile markets, it’ll take care of you over the course of the long run. And some of these things that we talk about — and again, it’s not to say that these things don’t — some of these things don’t pan out.

Tim Ulbrich: Sure.

Tim Baker: Sometimes they do. It’s like hey, if you would have bought Amazon at this — you know, you see those clickbait articles: This guy bought Amazon at $x per share and now he’s sitting on a beach somewhere. Like those things do happen. But for the most part, if you’re looking at — if you’re a novice investor and you’re looking at building a robust investment portfolio that is going to see you through to retirement or whatever your goal is, that’s typically the being greedy instead of successful portfolio.

Tim Ulbrich: Tim, let’s talk briefly about loss aversion bias. Again, there’s many biases we could talk about. But I think these three in particular are really relevant right now. Talk to us through about what is loss aversion bias and what are some of the implications here.

Tim Baker: It’s a cognitive bias that kind of explains why individuals will act in a way that they avoid pain or they say that the emotions of pain are twice as impactful than the pleasure of a game. So the loss felt from money or an investment or in some type of valuable object or something like that can feel worse than gaining that same thing. So the example is that if you were to lose $20 reaching your hand in your pocket and pulling your keys out and that falls on the side of the road, you feel that a lot more than finding that $20 in your couch. Now, that’s pretty awesome if you find $20 in your couch, but to me — and the movie that I always think about, Tim, when I think about this bias is “Rounders.” And I think I’ve talked about this on the podcast before. But “Rounders” is about — Matt Damon’s character is an amateur poker player who’s studying I believe law. And he is trying to scrape together money to go to Vegas to kind of make a run at the World Series of poker. And his character describes I think early in the movie where it’s like, you don’t remember the huge pots that you rake or the huge hands that you win. What you really remember and what sticks to you are when you go bust and you really lose a terrible hand. And I even see this, even this week, Tim. And I found myself doing this is like, we’ll sign on two, three new clients, but the first thing that comes out of my mouth when the team congratulates me is like, “Well, we lost this one,” or, “This person didn’t show up to that meeting,” and I feel like I’m happy that we are growing YFP and people are coming on and working with us on their financial plan, but it’s almost this unconscious reaction of I feel that loss and I’m like, well what could I have done? What could I have done better? Or what could we have done to kind of win those too? So it is really a thing that drives us is that we will recall those negative losses and that will affect our behavior, and we overweight that more than any gains that we have. And I look at it in this market really from two sides. You know, you see people that look at the market, and they’re like, ‘Tim, this is kind of scary. It’s up and it’s down. It’s like super unpredictable.’ And I’m like yeah. And we look at the risk tolerance, and it’s super conservative. But you’re a 25-, 35-, even 45-year-old pharmacist. There’s a lot of time horizon there. Like there’s a lot of time before — and again, we’re talking about long-term investing for retirement. Over long periods of time, we should be somewhat aggressive because it’s just, again, you’re not going to remember what happened in 2021 when you go to retire in 2051. But we — because of the losses, that dictates our behavior. But the other thing too is from a loss aversion perspective, Tim, and I see this also where it’s like, ‘Hey, Tim, like how’s it going? Like financial plan looking good? A lot of people talking about crypto, a lot of people talking about this stock or that stock.’ Like it’s almost this FOMO, this Fear of Missing Out on this trend or this herd mentality that’s going on of excitement around these things. And this fear of missing out or this kind of the loss of missing out on this opportunity is driving people maybe to be more aggressive or more speculative, I would say, in investments they would not have otherwise thought about or even entertained. So I think it can play on both sides of the loss of if my portfolio does go down but also the loss of like a missed opportunity. And I think that, you know, I look at it, and I try to — I try to look at this with context, Tim. So like, you know, I hear a lot of people say like, “Ah, the country is going down the drain, blah, blah, blah.” And like I’m sure that they said during the hippie and free love movement. Right? Like it’s this bias that we have like right now, it’s — and maybe that goes into the recency bias — but like it’s this bias that we have that everything — and the same is true with things like crypto — is that like when the dot-com crisis was going on, people were insane in terms of what they were doing to take out second mortgages to buy — I always joke — cats.com or whatever or this.com or even in the subprime mortgage crisis where people were doing really aggressive and ill-advised things to buy real estate because the market was just so hot. And again, if you think about it from an emotional perspective, what you’re feeling, Tim, is probably the — what you should be doing is the opposite of what you’re feeling in a lot of ways. So to me, it’s just really interesting to see how these play out in real life. And it’s just, again, part of the value that I bring, even though I’m human and even though I feel a lot of the same things is that check. And you know, Paul has even said this, Paul Eichenberg who is our IRS-enrolled agent, leads the tax work, he’s like, you’re there to kind of be like the stopgap to my portfolio because there are things that he wants to do and he wants to tinker and I’m like that barrier, so to speak. So even people within the profession that are espousing this and talking about this with clients still have those biases or those emotions because we are human. And these are things that just are innate to us.

Tim Ulbrich: Yeah, and I would argue, Tim, just to drill that point home, sometimes the closer you are to it, the harder it is to keep your hands off of it.

Tim Baker: Yep.

Tim Ulbrich: Well, good stuff. No. 2, we could talk about biases certainly probably a whole separate episode and dig into that further. But the whole purpose of that as we think about these five considerations investing in a volatile market, this is all about knowing yourself. Right? So if we can understand the biases that we’re perhaps more tending towards or leaning towards, then we can start to think about some of the strategies to overcome those. No. 3, Tim, is understand your investing philosophy and goals. One of the things I think about often with investing, especially right now, is that we’re talking so much about the x’s and o’s, right, whether it be what stock am I investing in or what am I doing in terms of what account I’m putting money in? All important stuff. However, we might be doing that without taking that important step back to say, what’s the vision? Where are we going? What are we trying to achieve? What’s the purpose? And then from the vision, we start to derive, OK, what’s the plan in terms of how much we need? And then we start to think about the x’s and o’s, right? Where are we going to put the money? What accounts, asset allocations, all those types of things? So I think a time period like this where so much of the attention and noise is on the x’s and o’s, it takes some discipline to take a step back and think about the direction, the vision, where are we trying to go. So Tim, talk to us a little bit about the importance of this. And I’m thinking specifically from the planning perspective, how do we go about this in terms of working with clients to really make sure we’re defining that vision, that purpose, that why, for our investing side of the plan and then ultimately keeping that front and center as we make those decisions of how to execute?

Tim Baker: Oftentimes, this is something that’s like way overlooked, right? So with philosophy, a lot of people, they don’t necessarily know what their philosophy is or know enough to kind of verbalize what that is. But in terms of goals, I think people that do have goals, a lot of times what I find is that they’re very singular in nature or what I’m trying to say is like, ‘Hey, we’re just trying to pay off this credit card debt,’ ‘We’re just trying to get through the student loans,’ ‘We’re just trying to save $30,000 for our emergency fund,’ or, ‘We’re just trying to save 10-20% for a down payment on our house,’ or whatever that is. But — and it’s almost like when I think about fitness, it’s like the person that’s trying just to get like six-pack abs. Right? But we know that just like the financial plan and kind of like systems of the body, they’re all interconnected, right? So to me, I think those things are good. But I really want to look at when we’re talking about understanding where you’re at in the universe, at least financially, is what does the balance sheet look like? Because a lot of this stuff in investments — actually, we just signed on a client that were very really big into Dave Ramsey. And one of his big tenets is like, don’t invest even with a match, don’t invest until the debt is gone. And I’m paraphrasing here, but like, that’s what they were doing. And they recently just switched gears a bit because there was a pretty healthy match, and they wanted to get that going and they kind of stumbled upon the FIRE movement and x, y, z. So I think it’s really looking at that balance sheet because there are going to be some people — again, we see it. We see people that have massive amounts of credit card debt but they have a Robinhood account that’s investing in crypto. Like those things necessarily don’t compute. So I think it’s looking at, again, like what are the — we’re always talking about the baby steps. What does the emergency fund look like? What’s the consumer debt? Is there a plan for the other types of debt, whether it’s a mortgage or student loan? So really understanding where we’re at on the balance sheet, on the net worth statement, and then from there, you know, I think the big thing that people talk about a lot these days is like self-care. And I think sitting down — my wife and I, Shea and I, we did this last night. We went out, kind of an impromptu date night, got a babysitter, and it was just talking about where are we at and kind of where do we want to go and really kind of looking at, you know, the next couple years and what’s really driving us — and Tim, we’ve talked about this a bunch — is our daughter Olivia is 7 this year. And that means we have about seven or eight years before she no longer wants to hang out with Mom and Dad. So we’re cool. So like we really want to capitalize on those years. And that’s really what’s driving that emotion, that loss, is really what’s driving what we want to do today. And I think really taking that time to reflect yourself, reflect with your partner, I think it’s about as good as you can do from a self-care perspective. And unfortunately, because we’re so busy, we have all these screens in our face all the time, we don’t do that ourselves. And sometimes I even see this with clients just talking out loud or I just did this this week with a client that we reviewed their goals that they made 2.5 years ago, and they’re like, ‘Wow. We’ve done a lot of these things. There’s some things we’ve got to tweak, right, we’ve got to work on. But it’s amazing how well we’ve done, and yeah, and the numbers are looking good too.’ So I think once you get there and then we start diving into different pieces of the financial plan, a la investments, that’s when you’re really looking at what is your risk tolerance or what’s your risk capacity, how much risk can you take, what are the long-term goals, Tim? So for you, it’s maybe you want to retire at 50. Maybe you’re like, I just want to retire at 70. Maybe it’s I want to relocate. What are the things that are really driving you? And then I think that really sets things like the asset allocation — so the asset allocation is just how you divide up your portfolio into different percentages. And again, we’re going to be super boring with that. And then rebalance it over the course of time and then adjust it as you get closer to whatever that time horizon is. So it is a lot of moving pieces. Again, we haven’t really even talked about things like tax. But there’s a lot of things that we see that are not being fully fulfilled on the tax side — and Paul could probably come on here and he’s probably shared it — where it’s these are real dollars that we can save that we’re not realizing but we’re focused on speculating over here or doing that. And I get it because again, taxes are also super boring.

Tim Ulbrich: Boring.

Tim Baker: There’s no sizzle there, Tim. So yeah, so like but in terms of like real dollars and things like that, there’s a lot of things that are typically not uncovered or captured before we start doing some of these other things that, again, kind of catch all the headlines.

Tim Ulbrich: I know we’ve got some nerds out there listening because I’ve talked to them that got super excited when we started talking about tax strategy.

Tim Baker: Oh yeah.

Tim Ulbrich: But for the other 99% of the people, we lost them for a moment. Yeah, you know, Tim, I think what you’re saying here is a good reminder. You and I talked recently about why net worth matters. And we talked about the importance of the balance sheet, taking care of our future self, but it’s not just about that, right? And I think this is a good reminder that the balance sheet matters, right? But ultimately, like what’s the purpose? What’s the goal? Where are we trying to go? And I’m encouraging folks because I’m encouraging myself when I say in real time is that the balance sheet and what’s in your accounts and your net worth shouldn’t be the finish line and the measuring stick. Right? It’s an important thing that we’re going for, but ultimately, we’ve got to look at what else is of greatest priority and ultimately the concept that we talk about often, which is living a rich life along the way. Tim, No. 4, you know, you talked about the analogy of the financial plan being interconnected just like the body and the systems of the body. And I think that is a nice segue into No. 4, which is avoid investing in a silo. So you’ve said it many times, I believe it firmly as well, that investing is one, albeit an important one, one part of the financial plan. And so here we’re talking, again, in this time period of volatility, that we’ve got to take a step back. And you alluded to a couple things of the baby steps in terms of thinking about the emergency fund and paying off that high interest consumer debt, but give us that reminder, Tim, that investing is one part of the financial plan, an important one, but it’s just one part.

Tim Baker: I’ll say this caveat here, like I was going to say, the thing that’s capturing all the ink right now, it is the market. It’s the investments. And you’re not really seeing a lot of front page stories about life insurance or tax. I mean, you’re seeing a little bit more because like we’re looking at what does a Biden tax code look like versus what’s currently there in Trump and how is that going to affect everything? And I know we talk about the child tax credit, so that’s getting a little bit of press. Debt is getting a little bit of press, especially student loan debt, because of things like the PSLF shakeup and FedLoan servicing basically waving the white flag here. But for the most part, what you’re reading about are the markets. And you’re driven by the fact that you’re looking at your balances and you’re logging into your 401k and that’s affecting you. So again, it is a piece of the financial plan. But it is just that. And I will say that one of the big drivers of building wealth over long periods of time, over the course of a pharmacist’s career, is I look at it as really three main things. And there are other pieces of the financial plan. But it’s going to be the thing that really I think gets you to an inflection point where you really start to build wealth is that you have an efficient debt strategy, right? So I think the two big buckets for pharmacists are going to be student loans and your mortgage. You know, a lot of people are very willy-nilly, especially with the student loans — now we’re seeing a lot more people have a heightened degree of attention toward student loans, and I think we probably should take some credit for some of that, definitely the mindset and the knowledge of people that we talk to is completely different than when we started, when I started working with pharmacists years ago. So efficient debt payoff strategies, efficient investment strategies, and efficient tax strategies, which kind of overlay everything. And I think those are the big drivers that build wealth over time. So it is — those are ongoing things, but again, those things are not really worth anything, Tim, if your financial plan is not protected. So those are things like insurance and estate planning or if you don’t have the proper health insurance and you have a catastrophe or whatever that is. So these are all interconnected just like systems of the body that you are only as strong as your weakest link, to use a phrasing that people can relate to. So one client that I met with, they surpassed $1 million in net worth, but they still didn’t sign their — still didn’t get their life insurance stuff. It can be sometimes, ‘Oh, that’s not going to happen to me. I don’t need to worry about that.’ But that’s a big weakness of their financial plan. So investing is important. It’s not not important. It is part of the plan. And it is one of those things that’s going to drive your wealth-building over the course of your career. But you’ve got to make sure that all the other things line up and they’re kind of working in rhythm with driving your balance sheet forward, your net worth up, and allowing you to align the resources you have to execute to the goals — so these are the qualitative things, the things that are less about the 1s and 0s and more about what is a wealthy life to you, Tim? What is a wealthy life for Jess? And if you’re not doing those things, who cares? Like what’s the point? What’s the point of all of this stuff? What’s the point of paying down the debt or earning the salary or whatever? To me, it has to be this feeling of taking care of you today but then the future version of yourself. And for a lot of us because we’re not really introspective because of the busyness of life, we kind of fail to do that. And then we wake up 10 years later, and we’re like, ‘Oh. A lot of time went by, and I’m still exactly where I’m at with this goal that I want to achieve.’ So yeah, it’s definitely — it’s an integral part to the rest of the financial plan and important to recognize that.

Tim Ulbrich: Yeah, and I bring this one forward, Tim, not to suppress the importance of investing but rather to elevate the importance of the others that I think may get overlooked out of the exciting aspects that come with investing. We see this firsthand, right? If we run a webinar at YFP on investing, bam! People are excited. If I run a webinar on like long-term disability and life insurance, like nobody is coming to listen to me talk about that or, you know, few people will be there. So you know, I think it’s just a good reminder that we look at the financial plan in a holistic manner. And that’s why we talk adamantly about the importance of comprehensive financial planning and making sure that we’re getting advice and input across the spectrum of the plan because at the end of the day, they are very much interconnected. Tim, No. 5 — and you’ve highlighted this a little bit already, and we’ve talked about it on the show before on Episode 073 — and that’s to re-evaluate the priority for investing. And you know, on that episode, Episode 073, we talked extensively about thinking of the different buckets, of course that’s not investment advice but just some general considerations around the priority of investing. And we’ll link to that in the show notes as we’ve got a really great visual that people can look at as a way to further educate themselves on this. But Tim, you mentioned tax-advantaged opportunities and seeing some of that in tax season as one example of this. But this time, again, I think is another example when we’re seeing ourselves perhaps because of something we’re hearing about or what other folks are doing is we’re losing sight of that priority of how we might be want to be investing the limited dollars that we do have to invest.

Tim Baker: Again, a lot of this is influence of even growing up, my mom was like, “Hey, there’s this new thing, a Roth IRA, we need to open those and get money into that.” You know, there’s these things that are kind of impressed upon us even growing up or not, or not impressed upon us at all. But I think it’s because, again, the ease of what is in people’s face in terms of like what they should be doing. But again, I think if you have kind of the basics in place with you can pay your bills, you have some 3-6 month reserve set aside in an emergency fund, the debt kind of is in check and is manageable, and there is a surplus for you to work with, that’s really when — or if not even before things like a 401k match or retirement plan match is really the first place that you look at because, again, you know, what we always say, it’s free money. So if you have a — if you make $100,000 and your employer matches 5%, and you’re not putting 5% to get that match, so to speak, if that’s the way it rolls out, then guess what? You just got a 5% raise essentially. That is typically step one is that if there is free money available in a match, you definitely should do that. From there, it gets a little bit more muddied because people — and even if you don’t have the match, it’s a little bit more money — from there, it’s things like an HSA if you have a high-deductible health plan that allows you to open up to an HSA, you know, you want to look at that because of the triple tax benefit that we’ve talked about in past episodes. It’s one of the big things that regardless of how much money you make, you can escape tax and allow that money to grow tax-free similar to an IRA, which is unheard of. You know, from there, you kind of have to do a little bit of digging and it depends on the strategy that you have with things like students loans and what your 401k might look like. But it might be to go back to the 401k, it might be look at things like IRAs, Roth IRAs, that type of thing. A lot of times, not all the time, money in a 401k can be more expensive, meaning there’s a lot of fees and things attached to those accounts that are very opaque or just not transparent to you. Not always the case, but a lot of times the smaller the employer, the more — you know, that’s a good rule of thumb — the more expensive it can be. So you kind of have to do a little bit of research, does it make sense for me to go back into the 401k and try to max that out to that $19,500? Or do I look at trying to max out an IRA, Roth IRA, which is $6,000? And then from there, we kind of talk about this in visual, like if you have access to a SEP IRA, a lot of people, especially a SEP IRA is typically for a small business or things like that. But that’s another avenue that you could potentially sock away some money for long-term investment that has a tax break. But then it’s things like a brokerage account where you can put as much money into there. A lot of people use brokerage accounts when they exhaust all of these accounts that we just mentioned or there is more of a near-term, so not necessarily a long-term, a near-term need. So my wife and I, we use a brokerage account that has a more conservative allocation because it’s just not as much time for like a car purchase, right? So we’re not being done any favors in the interest rates in terms of a saver, so right now it’s .5% in a high yield, so we’re trying to get a little bit more than that in a brokerage account, but that’s a slippery slope, right, because we don’t necessarily know how long we’re going to have that money invested, and the market could turn south tomorrow. But then I know some people get into real estate and other things, but the thing that we typically see here, Tim, when we talk about the priority is that these priorities aren’t necessarily what would be advisable when we actually look at the balance sheet and we actually talk about what the goals are for that particular — sometimes, they are out of order just because of curiosity or ease of use. “Hey, I can sit on the couch and see a commercial on Robinhood and open that and put money into crypto or this stock or that stock.” It’s just that’s how it is. And again, it’s more exciting than doing some of these boring things of like — it’s not exciting, Tim, to put money into an HSA. It’s just not. Even though us nerds are like, ah, triple tax benefit, it’s awesome. It’s not exciting. It just isn’t. I get it. But again, that’s why I think having a coach or an advocate to kind of help ask good questions and line up are these the things that are important to you and let’s line up the resources in a way that maximize or give you the most efficient outcomes? That’s what we’re trying to do.

Tim Ulbrich: So Tim, have you officially relabeled yet your brokerage accounts for the Swagger Wagon? Because it’s going to happen, the minivan, right? I mean…

Tim Baker: Oh, man.

Tim Ulbrich: If Shea’s listening, she’s like, “Heck no!”

Tim Baker: Yeah, well, she’s not listening. She’s not impressed with me at all. But no, it is not labeled. It needs to be. I’m on the wagon. I just don’t think she is yet. But maybe eventually.

Tim Ulbrich: Great stuff. So we talked about five considerations for investing in a volatile market. And you know, one of the themes I think of throughout this topic, Tim, is the obvious value that can come from accountability. You know, you mentioned in the form of coach, obviously we’re biased and firmly believe in the value of one-on-one comprehensive financial planning and coaching that we do with our team at YFP Planning. So for folks that have been thinking about that for some time and are listening and want to see if that’s a good fit for them and their financial goals and their plan going forward, you can book a free discovery call with us if you go to YFPPlanning.com, you can book that call right there. We’d be happy to talk with you further about our one-on-one planning service. As always, thank you for joining us on this week’s episode of the Your Financial Pharmacist podcast. And we could use your help in getting other pharmacists to find this show as well. And you can do that by leaving a rating and review on Apple Podcasts or wherever you listen to the show each week. Thanks for joining, as always, and have a great rest of your day.

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YFP 212: Checklist for Building a Strong Financial Foundation

Posted on July 15, 2021November 2, 2022 by yfpadmin

Checklist for Building a Strong Financial Foundation

On this episode, sponsored by CommonBond, Tim Ulbrich shares his checklist for building a strong financial foundation.

Summary

Tim Ulbrich shares insight from one of his most popular talks for pharmacy students and recent pharmacy graduates, Preparing to Be Financially Fit. In this episode, he walks the listener through his checklist of five items and actions necessary for a solid financial foundation.

Develop and automate a monthly system: Not only is it a good idea to create a vision for success with tangible goals and a budget for each month, but it is also equally important to automate when possible to get out of your way when it comes to saving, investing, and planning.
Knock out the baby steps: Work to eliminate high-interest credit card debt and build your emergency fund.
Have a student loan repayment plan: Inventory your student loans and determine your starting point. Work on a strategy to pay loans down. Your repayment options may include tuition reimbursement or repayment, loan forgiveness, or refinancing.
Prepare for the catastrophic: This checklist item is referring to various types of insurance. Pharmacists should plan for potentially catastrophic events by ensuring that you are aptly insured both professionally and personally.
Develop a plan for long-term investing: Lastly, a long-term investing plan is key to your financial independence and freedom however that may look for YOU.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, everyone. Tim Ulbrich here, and I’m flying solo this week as we talk about a checklist for building a strong financial foundation. Now, we’re a little bit over the halfway point through the year, and perhaps if you were like me for this year, you set some big, audacious goals, hopefully some of those financial goals, at the beginning of this year in December or January. And here we are, and maybe those goals have fallen by the wayside or we’ve forgotten about them. And this is a great time of year to bring those goals back, dust them off, and see where we’re at and adjust and see what we need to make for the second half of the year. And that’s what we’re going to talk about today when we talk about a checklist for building a strong financial foundation. My hope is that whether you’re listening and you’re someone who’s got $300,000 in student loan and feel like you’re spinning your wheels with trying to figure that out among other goals or whether you’re listening and you’re someone who’s got a net worth of $1 million or more, my hope is that everyone can take at least one or two things away from this episode.

You know, it dawned on me that one of the most common talks that I give to a group of pharmacists or pharmacy students or residents is preparing to be financially fit. And in that talk, I talk about five things that I believe make up a strong financial foundation. And the way I describe that financial foundation is if we think about our financial plan as if we’re building a home, right, before we can talk about or even think about the upgrades or the remodel of the kitchen or finishing the basement or adding on that patio or deck or even upgrading our landscaping or lighting, we’ve better make sure we’ve got good foundation in place from which we can then grow and make some of those decisions. And the same is true with our financial plan. And so sometimes, we’ve got to go back to the basics no matter where we are at our financial journey and make sure that we’ve got a good, solid foundation in place, one that doesn’t have any cracks or if we identify cracks, we fill some of those cracks in so that we can build and walk confidently in our financial plan, knowing that we’ve done the hard work to put that foundation in place. And one of my key takeaways and hopes for this episode is that we can all recognize that building wealth, achieving financial independence, living a rich life, whatever we want to call it, is really dependent upon having a good, solid foundation in place. So I’m going to walk through five areas that I believe make up this foundation, a checklist for building that foundation and within each one of these, I’m going to provide some additional resources and more information that you can dig deeper on any one of these topics.

Alright, so let’s jump in. No. 1 is Developing and Automating a Monthly System. Developing and automating a monthly system. Now what I’m talking about here — and you probably figured this out — what I’m talking about here is a budget, right, is a system, is a playbook that we can follow each and every month. And then we automate that system and really get ourselves out of the way so we can ensure we achieve our goals. I often don’t lead with the term “budgeting” because it’s not flashy, it’s not exciting, but it’s so foundational to the financial plan, no matter what budgeting method or process that you use.

So in this first step of developing an automated monthly system, you know, a few things that we need to think about. No. 1 is we’ve got to have a vision. We have to know where we want to go before we can take some steps forward. So before we get into the weeds of what budget system or template or method or tool or app, we’ve got to know where we’re going, right? We’ve got to take a look up and see what’s the vision? What’s the path? What’s the guiding light for our financial plan and the decisions that we’re going to make and ultimately the goals that we want to achieve? And we do this by asking ourselves some big, yet important questions, questions like what does financial success look like for you? For you individually, what does financial success look like? How would you define that? You know, why do you care about this topic of money to begin with, right? Money is simply a tool. So why don’t we care about this topic of money. Or perhaps another question may be one that I ask to many folks. You know, if you were to fast forward 25 years and look backwards, what would need to happen that you would think to yourself, you know what, well done, really good job with that whole topic of personal finances? You know, we believe at YFP Planning that really good financial plan takes care of your future self but allows you to live a rich life today, right? We’ve got to have this balance of the future, we’ve got to be looking ahead. But we also need to be prioritizing the things that are most important to us today. So when we’re talking about developing an automated monthly system, we’ve got to first start with the vision.

You know, next from that vision, we’ve got to set some tangible goals, right? So we’ve got to come away from the clouds, come down from the clouds and that dream and vision we have, and let’s set some tangible goals. You know, what are three or four things that we want to achieve over the next 6 or 12 months such that if we achieve those, we’re on the path towards achieving our long-term vision. So we’ve got to set some tangible goals and the more specific, the better.

Then we’ve got to track our spending, right? We’ve got to look backwards and say, ‘OK, I’ve got this vision. I’ve got these goals. Am I actually spending in a way that’s going to allow me to achieve these goals?’ I always encourage folks to do a 90-day lookback at their spending. This can be humbling. This can be eye-opening at times. Often, we may underestimate our true expenses in any given category. And perhaps for some of you, that’s not the case. But this is a good snapshot, 90 days. We’re not necessarily just looking at one month, which may be an outlier for any reason, but getting a good average over a 90-day period of how we’re spending in any individual category of the budget.

Then once we’ve set the vision, once we have some tangible goals, once we’ve looked back at our spending, now let’s jump into the budget, right? And a good budget I believe is one that we’re really proactively thinking about how we’re going to direct our dollars and how they’re going to be spent and allocated toward the goals we want to achieve. It’s that proactive intention in addition to then tracking the expenses throughout the month. And then finally, we want to implement a system that can automate the process. You know, one of my favorite interviews on the YFP podcast was when I interviewed Dr. Daniel Crosby, who’s the author of “The Behavioral Investor.” And he studies how we think and behave around this whole topic of personal finance. And one of the things he said, which really resonates with me and his research supports, is that we often individually, ourselves and the decisions we make are often some of the biggest barriers that we put in front of our financial plan and achieving the goals that we want to achieve. And so automation, Ramit Sethi does a great job of talking about this in his book, “I Will Teach You to Be Rich.” Ramit Sethi talks about how automation can be one of the most powerful and profitable systems that you can build when it comes to your financial plan, right? So once we’ve done the hard work of setting the vision and we have some tangible goals and we know and can track our spending and we’re then able to set the budget, let’s put on automation, let’s fund our goals first, and let’s feel confident in knowing that we’ve developed a system that’s going to help accelerate our financial plan.

So that’s Step No. 1 here is Developing and Automating a Monthly System as we work towards this checklist for a strong financial foundation. Some resources here I would point you to is we’ve got an Excel budget template at YFP that we’ve developed. Certainly not the only way to do budgeting. At the end of the day, a good budget is one that works for you. But if you’re looking for a place to get started or perhaps to take a new, fresh look at the budgeting system you have, you can go to YourFinancialPharmacist.com/budget and download that Excel template. Another resource here I would point you to is Episode 057 of the podcast. We talked about the power of automation in your financial plan. And so that may be another one to visit if you want to learn more about that concept of automation and how to implement that in your own system. So that’s Step No. 1, Developing and Automating Your Monthly System.

Step No. 2 is Knocking Out the Baby Steps. Now, if we think about the foundation as five physical bricks that’s making up a foundation, these five things that we’re talking about, I tend to think of this one, No. 2, Knocking Out the Baby Steps, as if it’s really the foundation of the foundation, if you will. Brick No. 1, right? And so we’re talking about the things here that for some of you that are listening, if you’re thinking, Tim, I just feel overwhelmed with multiple goals that I’m trying to achieve, I don’t know where to start. Perhaps I’ve got six figures of student loan debt. You know, I’ve got decisions that I need to make around some credit card debt. And I want to build an emergency fund or grow my emergency fund. I’m trying to purchase a home or I’ve got expenses for the family. I really want to accelerate my investing plan, and I just don’t know where to start and how to prioritize this. Knocking out the baby steps, this Step No. 2, is really meant to be the first step from which you then build even further. And the two things I’m talking about here are high interest rate credit card debt and emergency fund. So these are the two baby steps that we need to think about as we walk into our financial plan. Now I think these are fairly obvious, two things we’ve talked about on the show before, high interest rate credit card debt, we’re talking about here not any credit card expenses or bills that you pay off each and every month but rather that revolving credit card debt that’s accruing double digit interest, cards that are accruing 15-25% interest. And for obvious reasons related to that interest rate and the impact that that can have on the rest of your financial plan, we’ve got to knock that credit card debt out, that high interest rate consumer debt out as soon as possible. So think of this as really the piece where we need to stop the bleeding, right? We need to stop the bleeding before we can then begin to take some of these other steps forward.

The second part here of the baby steps is the emergency fund. We’ve talked about this before on the show, Episode 026, we actually talked about both of these things of baby stepping into your financial plan. And emergency fund, you know, some general rules of thumb that I think about are 3-6 months worth of expenses, 3-6 months worth of expenses. There’s some determination and of course decision-making in there. Is it 3 months? Is it 6 months? Is it somewhere in between? And that depends on several factors. We’re looking here, in my opinion, at an emergency fund as a place where we’re not necessarily very excited about the growth or the interest or the accrual of that account. This is the place where we want this account to be liquid and accessible, where we can get to this money when an emergency happens without disrupting the rest of our financial plan. So we’re going to be doing our investing elsewhere in the financial plan, right? So we want this to be liquid, we want it to be accessible, perhaps it’s going to earn a little bit of interest, nothing too exciting in the moment based on what rates are at on things like long-term savings accounts and money market accounts and so forth. But the purpose here is really more about the liquidity and the accessibility of this fund. So that’s Step No. 2 here, Knocking Out the Baby Steps, high interest rate credit card debt and the emergency fund.

No. 3, Having a Student Loan Repayment Plan. Now, notice I did not say being debt-free. Right? For some of you, perhaps that is the case. Maybe there’s an aggressive debt repayment. But for others of you, it may be loan forgiveness. And that might be 10-year Public Service Loan Forgiveness. That might be a longer time period of non-Public Service Loan Forgiveness or 20-25 years. This might be a federal plan that’s going to take a little bit longer or, again, could be an aggressive payoff. So it’s about having a plan. You know, so many folks that I talk to — and I felt this very much in my own journey, sometimes it’s about the intentionality of knowing that you’ve evaluated the options that are available to you — here, we’re talking about student loans — that you’ve weighed those options, you’ve considered those in the context of the rest of your financial plan and your goals, and you’ve made a decision and determined a path forward and have a plan for how and when this debt is going to get paid off, whether that debt getting paid off is 10 years from now, whether it’s two years from now, or whether it’s even longer or shorter than either of those. So this group listening knows very well, whether it’s those that are in the weeds of those or just been aware of the conversation around student loan debt and pharmacy education, but we’re facing a significant challenge right now. Today’s graduate is the median indebtedness of a pharmacy graduate right now is $175,000. Ten years ago, that was $100,000. We’ve seen a $75,000 increase in the median indebtedness of a pharmacy graduate over a 10-year period. That is what it is. Right? And if you actually look at that stacked up against what a pharmacist is making as reported by the Bureau of Labor Statistics, you know, pharmacists’ income generally speaking have been relatively flat, right? We’ve seen some rise that you could argue accounts for some cost-of-living adjustments. But really, outside of that, we’re not seeing a significant bump up that would account for anywhere near what we’re seeing in terms of the rise of student loan debt.

And so we’ve got some work to do to put this plan together. And Step No. 1 is we’ve got to inventory our loans. We have to know exactly where we are at today. And I suspect many of you have already done this. This is knowing a list of my federal loans, a list of my private loans if applicable, who’s the loan servicing company, what’s the type of loan, what’s the interest rate on that loan? We’ve got to know everything about these loans so we can then determine what might make the most sense from a repayment option and strategy. And the reason why the inventory is so important is that often the loan type is going to direct, especially as we talk about federal options, is going to direct which repayment options may be available to you. And so sometimes — great example would be Public Service Loan Forgiveness — sometimes there’s some work that we have to do to consolidate those loans to then open up repayment options that allow us to pursue certain paths such as Public Service Loan Forgiveness.

So there are three main buckets — when we talk about student loan repayment, there are three main buckets that we want to be thinking about. And I encourage you to think about them in this order. No. 1 is tuition reimbursement repayment. No. 2 is forgiveness. And No. 3 is just paying them off. And that could be paying them off either staying in the federal system or paying them off by moving those loans with a private company through the process known as refinancing. So when we think about these three options, if I had to go from those that would have the least number of listeners probably pursuing it, it would be probably tuition reimbursement payment, a little bit more would be forgiveness, and probably more would be that third bucket where you’re going to pay them off either through a refinance or through staying in the federal system. That first bucket, tuition reimbursement repayment, is referring to those pharmacists who enter employment situations where typically in exchange for some type of service — so think like military pharmacist types of positions, Indian Health Service and so forth, some VA locations through the Education Debt Reduction program — typically in exchange for some type of service, you’re going to have a portion or maybe in some cases all of your student loan balance that might be forgiven. And more often, we think here of federal programs. There are some situations where there are state-based programs. So for example, here in Ohio, there was a program for a period of time for pharmacists that were working in qualified healthcare clinics that were serving patients that were adversely impacted by the opioid epidemic, so think of pharmacists that might work in like federally qualified health centers, could be charitable pharmacy organizations and so forth. More often than not, though, we’re thinking here about federal programs. But it is worth looking into anything that might apply on the state level. So that’s the first bucket. The second bucket is forgiveness. Now within forgiveness on the federal level, there’s two options: one that is better known, Public Service Loan Forgiveness. We’ve talked about extensively on this show. It’s gotten a lot of national attention, some good, some bad, more bad. But I think that probably hasn’t been necessarily fair to that plan. And then the second option, which is not as well-known, is what we call non-Public Service Loan Forgiveness. And there’s some key differences, three things that I really think about differentiating PSLF and non-PSLF. No. 1 would be who you work for. So with Public Service Loan Forgiveness, you have to work for a qualified employer. Typically this is going to be a 501(c)3 not-for-profit organization for most pharmacists. Some also would be a federal agency or organization. So think of pharmacists that are working in a hospital or health system setting, perhaps an academic environment and so forth. So that’s the first main difference between the two is who you work for. So PSLF, you have to work for a qualifying employer. Non-PSLF, it doesn’t matter who you work for. Second thing would be the time period. So with PSLF, it’s 120 payments, does not have to be consecutive, but 120 qualifying payments until you can apply for and receive tax-free forgiveness. So minimum of a 10-year period. With non-PSLF, you’re looking at a 20-25 year timeline. Third main difference is related to the taxes and the forgiveness. So with PSLF, if we cross our t’s and dot our i’s, that’s tax-free forgiveness. And with non-PSLF, it is taxable forgiveness. So let’s say 20 years from now, you go to — you’re at the point of forgiveness for the non-PSLF option with an income-driven repayment plan. Let’s say you make $100,000 in that year and you’ve got $100,000 that’s to be forgiven. And that year, your income would be taxed — or you’d have a taxable amount that would be $200,000, not $100,000 because that $100,000 that’s to be forgiven would be treated as taxable income. So this is referred to in the student loan groups as the tax bomb, right? So something we’ve got to be thinking about, we’ve got to plan for if we’re going to be pursuing this option. To many pharmacists that don’t qualify for PSLF and especially those that have a higher debt load, this is something that may be a viable option. And then the third bucket, as I mentioned, is we’re just going to pay them off. So we’re not going to have someone else reimburse/repay, we’re not going to have forgiveness, we’re just going to pay them off, either in the federal system or moving with a private lender through refinance. Now lots of logistics to think about here if you do refinance, different terms, different rate considerations, companies have differences between them. We’ve got lots of resources available on this at YourFinancialPharmacist.com on refinancing, fixed v. variable rates and so forth. And then not all the benefits and considerations are the same in the federal system as they are in the private. So things like income-driven repayment plan, forbearances, forgiveness upon death or disability, these are things that you want to be thinking about if you’re going to move your loans from the federal into the private system.

So I’m just scratching the surface here as we work through this checklist of a strong financial foundation and we talk about having a student loan repayment plan here in No. 3. I would point you to a great resource that was written by Tim Church, “The Ultimate Guide for Pharmacy Student Loan Repayment,” where it’s a blog post, really more of a mini e-book. He did an awesome job of going through a comprehensive, in-depth look at student loan repayment. And you can access that for free at YourFinancialPharmacist.com/ultimate.

OK, so that’s No. 3, Having a Student Loan Repayment. No. 4 is we have to Prepare for the Catastrophic, perhaps the least exciting part of the plan to be thinking about. So here, we’re talking about insurance, right? And while there’s many types of insurance that we want to be thinking about, of course health, auto, home, renter’s, etc., the ones I’m mainly spending time here on in No. 4 is professional liability, term life, and long-term disability. Now we’ve talked about these on the show before, Episode 155 we talked about the importance of professional liability insurance, what it is, why it’s important, who needs it, what to look for when shopping for a policy. So I’d check that out. We also have a great resource on term life and long-term disability. If you go to YourFinancialPharmacist.com main page and click on “Insurance,” you’ll see that information there. And my encouragement for you in this section as we talk about insurance briefly is please take the time to really understand these policies, as non-exciting as it may be, these are incredibly important. And I think this is an area where it’s easy to either be under- or over-insured. And both of those are things that we want to try to avoid. Right? Of course, under-insured, if we have a need for something like term life insurance or long-term disability and we don’t have that policy, that could perhaps be catastrophic to the financial plan, especially as we’re doing the hard work in the other areas that we’ve already talked about. But the other side of the equation also has a cost associated with it, right? If we have a policy which perhaps is more than we need or is not a best fit for our current needs in our financial plan, then that means those are dollars that are going towards a certain part of the financial plan that perhaps we could allocate elsewhere, whether that be investing or debt repayment or another part of the financial plan. So both are important. And this is an area I talk with pharmacists commonly about. And this is an area where I think that someone like a fee-only financial planner can really help provide objective advice and really be able to point someone in the right direction where they don’t necessarily have a vested interest in terms of how those policies are being sold. So make sure to check out some of the resources here on professional liability, Episode 155, and then term life/long-term disability by going to YourFinancialPharmacist.com, clicking on “Insurance.”

No. 5 here is Developing a Plan for Long-Term Investing. And we have talked extensively on the show about investing, from some of the basics, you know, in terms of what are the different accounts, whether that’s a 401k, a 403b, a Roth IRA, a traditional IRA, HSAs and so forth, and you can find all of that on previous shows. We’ve got more information on the website. We’ve also talked about things like the priority of investing. So you know, if we know we need to save each and every month, well, how do we begin to think about the priority? Right? We’ve got considerations around employer-sponsored retirement accounts, individual accounts, perhaps some other investment opportunities like real estate. And so how do we begin to think about the priority of investing? Very important topic. We’ve also talked about things like fees and how do we keep fees low? And if at the end of the day we’re going to be doing the hard work to save, how do we make sure we’re doing that in a way that is tax-efficient and we’re doing that in a way that is minimizing the fees that might eat away at that investment. So I would encourage you to think about at least the beginnings — remember, we’re talking about the foundation here — the beginnings of your long-term investing plan in three stages. And that is setting the vision, Part 1, then determining what the need is or how much to achieve that vision, that’s Part 2, and then we get into the x’s and o’s in Part 3 of actually determining how much are we going to save every month and where are we going to allocate those funds? And within those funds, how are we going to determine what we’re investing in, which aligns with our goals, which aligns with our risk tolerance and all of the other things that I’ve previously mentioned.

And so this is an area that I think for folks that are really at the beginning of their financial journey or even folks that maybe are listening and you’ve amassed a half a million a million dollars of wealth just through consistent, regular contributions into tax-advantaged retirement accounts but necessarily haven’t dug into the details or thought about how to take that to the next level, right? Both of those could apply. And so my encouragement for both groups and folks that are in between there is to really take a step back and ask yourself, what is the vision for my long-term investing plan? I mentioned at the beginning, money is simply a tool. What’s my vision for retirement? What does that look like? What do I want to do? What do I want to accomplish? Because that’s going to then inform how much do I need? Once I know what the vision, once I know what I want to accomplish, I can then start to determine OK, how much am I going to need to be able to make that a reality? Now, for those of you that have done this step, how much you need, you might have run some numbers in a nest egg calculator, it’s a topic that I often talk about when we’re speaking and sometimes I’ll even have folks that will go through that in real time. And inevitably, anytime we go through a nest egg calculation, you can see kind of that glossed-over look when you punch in the numbers and you hit “Calculate,” and you see that number that’s $3, $4, $5, $6 million. And it becomes number one, very overwhelming and number two, it feels very abstract in the moment. Whether retirement is 20 years away, 10 years away or 40 years away, that can be a big number that it’s hard to say, what does that actually means today? What do I do with that number, right? And so I think a good financial plan will really take that information and distill it down to OK, let’s discount that information back to today’s numbers, what does that mean for how much we need to be saving each and every month, and then let’s begin to put a plan in place and automate that plan so we’re contributing in a tax-efficient manner, we’re keeping the fees low, and we’re allowing compound interest to do its magic and time value of money to take its course. Right? And so we’ve got to bring it into terms that allow us to digest this and make it real or otherwise we’re going to get some of that paralysis analysis, five years goes by, 10 years go by, and we feel like we’re trying to play catch-up on our investing plan.

So as we walk through these five steps, we talked about developing and automating a monthly system, No. 1. We talked about knocking out the baby steps, No. 2. We talked about having a student loan repayment plan, No. 3. Preparing for the catastrophic, No. 4. And then No. 5, developing or perhaps accelerating your long-term investing plan. And for those that are listening, I want you to imagine for a moment, I want you to imagine for a moment that you’ve got a sound monthly system in place that accounts for all of your goals. You’ve thought through the things that are most important to you. You’ve looked at your current expenses. You’ve built in those goals into a monthly system, and you’ve automated the savings to begin to realize those goals. Imagine that just for a moment. I want you to imagine for those that are struggling with ‘I need to really flesh out and build out the emergency fund,’ or ‘I need to knock out that credit card debt,’ what would it feel like if you no longer had any credit card debt? What would it feel like if you had a fully-funded emergency fund? What’s next after that? For those that are thinking about their student loans, right, it’s hard to often look at other things when you’ve got a huge balance of student loans. As I highlighted earlier, yeah, you know, getting that to $0 is a goal, of course. But what would it feel like if you had a plan, knowing that you’ve evaluated all of the options, all of the federal options, forgiveness, non-forgiveness, private, etc., you’ve looked at the numbers, you’ve thought about the other considerations, you’ve determined a path forward that is best for you personal situation, and you’ve determined a plan that now allows you to look at your monthly expenses knowing that you’ve put a plan in place that that repayment option is best for your personal situation and you know exactly what that’s going to cost each and every month to achieve that goal and when you’re going to have that debt paid off? What would it feel like for those that are thinking, you know, ‘Am I underinsured when it comes to things like long-term disability or term life?’ or perhaps folks that are feeling like, ‘You know what, I bought a policy awhile ago that maybe wasn’t a good fit.’ What would it feel like if that got shored up? If we really looked at making sure we’ve got the right amount of insurance, not too much and not too little. And what would it feel like if we had a sound vision for the future of our financial plan in terms of what retirement may look like? And how much we would need to accomplish that goal and what it would take on a month-by-month basis — and of all of the financial lingo of 401k’s and IRAs and HSAs and brokerage accounts and all of these other options that we had a plan and path forward, knowing that we’re saving x per month with this goal, and we’re going to do it in this account with this strategy?

So I think as we think about those, even as I’m reflecting on those in my own personal journey, you know, there’s always work to be done. Right? Whether, as I mentioned at the beginning, whether you’re listening and have a net worth of $1 million or net worth of -$500,000, there’s always work to be done. And while there’s always work to be done, wow, what a different position and mindset to be in when we can operate from a place knowing that we’ve got a strong foundation upon which we can build the rest of our financial plan. And so I’d be remiss here if I didn’t highlight that what we do at YFP Planning, one-on-one comprehensive financial planning, this is it, right? We’re looking at every situation on an individual basis to determine what does this foundation look like for you or for a pharmacist who’s really trying to focus on accelerating the second half of their career, is approaching retirement and wants to really think about more of the distribution phase and what’s involved in that from a tax standpoint. One-on-one financial planning allows us to really dig deep and really evaluate your situation on an individual basis. And so I would encourage folks if that’s something that you’ve been thinking about, you can schedule a free discovery call to determine whether or not what we offer is a good fit for you. You can do that at YFPPlanning.com, you can schedule a discovery call and learn more about what that looks like.

As always, I appreciate you joining for this week’s episode of the Your Financial Pharmacist podcast. And I think we have an exciting second half of the year ahead. If you’ve liked what you heard on this episode or previous episodes, please do us a favor and leave a rating and review on Apple Podcasts or wherever you listen to your podcasts each and every week. That’s how more pharmacy professionals can help them to find this show and ultimately help us on our mission of helping as many pharmacists as possible achieve financial freedom. Have a great rest of your day.

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YFP 211: The Ins and Outs of the 529 College Savings Plan

Posted on July 12, 2021November 2, 2022 by yfpadmin

The Ins and Outs of the 529 College Savings Plan

On this episode, sponsored by Insuring Income, YFP Co-founder and Director of Financial Planning Tim Baker takes a deep dive into the 529 plan. He discusses a framework for how to project and save for kids college along with the construct of 529 plans including what they are, tax advantages, what are qualified and non-qualified expenses, and considerations when investing money within a 529.

Summary

Pharmacists are well aware of how expensive college costs and that paying for it is no easy feat. The average student loan debt load pharmacists graduated within 2020 was $175,000 and the cost of college will likely continue to rise. The 529 college savings plan is a tax-advantaged account that is an option families are using to help get in front of the cost of college.

Tim shares that he and his wife are saving an education nest egg for their two children, however, they are not going to forgo saving for their own retirement or other priority financial goals. When it comes to advising YFP Planning clients, Tim mentions that it really is a personal preference; some clients want to completely fund their children’s education expenses, some want to support in a small way, and others aren’t interested in putting money away to pay for it. Tim shares a framework that folks can follow if they are interested in helping their kids pay for college but aren’t sure where to pull the money from. The framework follows a three-bucket rule where the first third of the money for college comes from your current salary (which is really your future salary at the time your child is in college). The second third is made up of money that you’ve saved in the past such as from a 529 plan, brokerage account, savings account, Roth IRA, etc. The final third is money from scholarships, grants, and loans that your child will/can receive.

Tim also talks about the ins and outs of the 529 plan and answers some questions asked in the YFP Facebook Group.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tim Baker, deep dive on 529s. Are you ready?

Tim Baker: Let’s do it. Yeah, excited.

Tim Ulbrich: So this is a follow-up from Episode 195, so we talked about saving for kids’ college in that episode. And we’re going to link to that in the show notes. But we wanted to dig deeper on 529 given that a number of our clients and the YFP community members are at various stages of kids’ college planning, some perhaps on the front end, just getting started, others on the back end, you know, distributing those funds or maybe even some further along that are helping with the grandkids or other family members’ college savings. So we want to dig deeper into the 529. We also had a recent blog post by Dr. Jeff Keimer on seven things to consider before starting a 529 plan on the YFP blog. Make sure to check that out. We’ll also link to that in the show notes. And here, we’re going to dig into some common questions that come forward as it relates to college savings. Now, we don’t need to tell this group about why college savings is necessary. I think many pharmacists are well-versed in student loan debt, unfortunately. Average graduate in 2020 faced about $175,000. This is a $1.7 trillion problem that we have as a country. And so obviously the goal with 529 savings is to try to get out in front of that. Tim, tell us from your perspective, obviously a parent of young children yourself, what is your personal thinking, your framework for saving for kids’ college. And not only how you think through this for your own children but also ultimately guide some of our clients at YFP Planning.

Tim Baker: Yeah, so it definitely is a — it definitely is a personal preference, Tim. So like I can kind of share with you my own and then kind of what I hear from clients. So you know, when I grew up in the great state of New Jersey, the Garden State, way back in the day, my mom was a teacher, my dad worked for a chemical company, Rohm and Haas in Center City, Philadelphia. And basically, the message to us was, ‘You’re on your own, kids. Like figure it out.’ And that kind of — I think it was partly to light a healthy fire under our rear end to make sure that we were good in school and we got scholarships and we just put ourselves in the best position to pay for school. They ultimately I think did help my siblings. So I think a lot of it really stems back to like how you were kind of raised in terms of your own parents and how they brought you up. So some people, they — it’s par for the course, they do the exact same thing that their parents did. And some people are the exact opposite. Or if you overlay kind of the horrid state of higher education and what it costs and what it’s doing to a lot of pharmacists coming out of school, that also plays a part. So I’ve heard everywhere from, ‘My kids are on their own,’ to, ‘I don’t want my kids to ever have to go through what I’m doing.’ So I would like a 100% solution for undergrad and also postgraduate school. Because a lot — you know, unfortunately, a lot of the pharmacists that we work with, I hear this — I don’t know if you hear this, Tim, when you’re speaking to prospective clients of YFP is — ‘Yeah, I didn’t really have many loans coming out of undergrad but then when I hit pharmacy school, now I have $150,000, $175,000, $200,00.’ So a lot of people are like, ‘Yeah, I would just like to get through my kids’ undergrad, but that doesn’t necessarily solve the problem. So me personally, Shea and I when we look at our kids, Olivia and Liam, Olivia who’s 6 and Liam who’s about to turn 2, it is definitely an exercise too that we want to help them as much as we can. And we want to be able to have a good education nest egg, so to speak, there for when they do go to school if they decide to go to school. But we are not on the one side of the spectrum where we’re going to forgo things that we want to do today, our own retirement, etc., just to hit that goal. So it’s a personal preference, though. I’ve actually heard of clients say like, ‘We’re just going to have the one kid because of the education and we want to basically put them in the best situation as possible.’ That’s a preference. What I’ve found in most cases is that clients have a semblance of kind of like what they want to do, but they have really no idea of how to actually go about like setting up an account or funding it or all of kind of the ins and outs of that. And that’s obviously some of the things we’re going to talk about today.

Tim Ulbrich: Yeah, and one of the things that I like — and again, we’re talking just basics here in a general framework. And a shoutout here to Kelly Redy-Heffner, one of our lead planners at YFP. You know, she mentioned a framework, a third, a third, a third, which to your comment, you know, there is no one right answer when it comes to kids’ college savings. So keep in mind as we talk about these buckets, but I think this is a good just general framework that folks can wrap their arms around and begin to think about alright, I like that, I don’t like that, or how do I modify that for my own personal situation. So tell us about what those buckets are, Tim, when we say a third, a third, a third for college savings.

Tim Baker: Yeah, so you know, one of the components of education planning is the funding aspect. We’ll talk about the vehicle with the 529 here more so. But the funding aspect is super important. So what the 1/3 Rule states is essentially that — and these are, this is typically like what we put in front of clients if they don’t really know what they want to do. But then once we have this as kind of our rule of thumb, then this is how we basically design the plan around it and actually show them the numbers of what they need to do. So the ⅓ Rule states that when you look at the tuition and fees and all the expenses related to going to college, we want to basically divide up where that money is coming through by really into three buckets. So the first bucket or one-third of the money is going to come from current salary. So what that — so we say current, but we actually mean future salary. So example: When Olivia, my daughter, is 18, so 12 years from now, whatever money I’m making and Shea is making, one-third of that we would cash flow to wherever she’s going in terms of tuition. So that’s the first bucket. The second bucket is basically what we’re going to be talking about today is what’s saved, you know, in the past. So this is like the 529 account, this is maybe a brokerage account, a Roth IRA, a savings account, a piggy bank, maybe an investment property that you invested in, so all the different kind of creative ways that we’ve basically saved and invested money over the course of the child’s life. So that’s the second bucket. And then the third and final bucket would be the scholarships, the grants, the financial aid or even the loans that that is student receiving as they’re going to college. So one-third for kind of cash flow in the moment, one-third from what we save and invest in over the course of the child’s life, and one-third from grants, scholarships and aid and debt — aid and loans to kind of basically put that picture together.

Tim Ulbrich: So let’s jump into the 529 plan, Tim, a little bit further.

Tim Baker: Yeah.

Tim Ulbrich: And give us the high-level, 101 definition of a 529 plan.

Tim Baker: So the way that I look at a 529 plan, a 529 plan is basically, it’s like a 401k or an IRA for your education. So the idea here is that you set money aside into an account that you typically fund with after-tax dollars — now, some states allow deductions and even credits to fund a state plan. So you fund it with after-tax dollars. Those dollars grow tax-free. And then when you distribute them for the purposes of higher education or even K-12 now, they come out basically tax-free. So one of the big things that we often throw around is like, what’s this whole thing of growing tax-free? So some people are like, ‘Well, why wouldn’t I just invest this or save?’ So to kind of just illustrate this point, if you are in a tax-advantaged account like a 529, when you invest — say you buy inside of that account a XYZ mutual fund. So you buy that at $100, Tim. And over the next — so you buy that right in the year of your kiddo’s birth. So that particular mutual fund over time, over those 18 years, is going to go from $100 to $200 to $500, whatever the share price is. And then say in 18 years, you sell it for $500. If it is outside of an account like an IRA, like a 529, and it’s in a brokerage account, a taxable account, you have to pay tax on those capital gains. So in this case, $400 per share times the amount of shares that you have. So the tax bill on that can be pretty prohibitive in terms of like what is actually left for you outside of paying Uncle Sam. So obviously if it’s held for a long period of time, you have long-term capital gains, which for most pharmacists is going to be about 15%. So inside of a 529, you don’t have capital gains. You basically — that’s the tax advantage, that it can grow from $100 to $200 to $500 — and that $400 gain, as long as it’s inside of that account, you don’t pay tax on. That’s the beauty of the 529. Now, the problem is a lot of people are like, ‘OK, what’s the catch?” Right? So for retirement plans, you can’t take it out unless you’re a certain age and all of these other things. And for education, there are some drawbacks. One is if you distribute it that are not for education costs, there’s a 10% penalty. You know, you do have to pay the taxes on it, etc. But if you do use them for qualified expenses, then that tax advantage holds true.

Tim Ulbrich: Good breakdown. I think sometimes we just throw around terms like tax-advantaged and so forth. So that’s really helpful. And I’m going to jump into some common questions I think that come up that folks may have about 529 accounts. And some of these are going to be coming from YFP community members who have posted questions in the YFP Facebook group. And I think these questions all fit into one of two areas. When I think of 529, there’s really two phases for saving for kids’ college. And this feels very similar to how we think about saving for retirement. And that’s the accumulation phase where we’re trying to fund the future need. Here, we’re talking about the cost of college. And then there’s the withdrawal phase, and then we get into different concepts and perhaps questions around there as well. And you already outlined some of the tax advantages, and I think that’s probably one of the most common questions, and you mentioned how the taxes can work in terms of that tax-free growth. And then as long as we’re using them for qualified expenses, we can pull them out without penalty. And then you also mentioned that many states offer some type of state income tax deduction or credit. And I just wanted to give folks one example of that. Here in Ohio, in the great state of Ohio, Ohioans can deduct their Ohio 529 contributions from their Ohio taxable income up to $4,000 per year per beneficiary. So you know, when you’re talking about that from a state savings, is that huge sums of money? Not necessarily, but you know, every little bit helps in terms of what you might be able to save on some of your state taxable income. So Tim, let’s talk about qualified and unqualified expenses. So we want to make sure, of course, that if we’re saving this money — you mentioned what’s the catch? — if we’re saving this money and it’s growing and we’re ultimately going to put it to its best use and not have to pay penalty, we want to make sure that we’re thinking about what is qualified and what is not qualified. So walk us through some of the common qualified expenses and some of the common nonqualifying expenses.

Tim Baker: Yeah, so you know, typically the things that you think of that are qualifying are kind of the common things. So that’s going to be like tuition, room and board, fees associated with tuition, that type of thing. And it could be food, it could be textbooks, transportation, those are — actually transportation is not. Sorry, transportation is not typically part of that. But these are books and supplies. It could be expenses for special needs. A lot of the computer and technology and internet, those are all under that. And that has kind of changed over time. So a lot of it is — and I suspect, so like one of the things that people kind of get tripped up on, Tim, is like, ‘Well, you know, I would like to do this, but I feel like it’s too restrictive..’ And even in our lifetime, you know, in really the next last 10 years, they’ve become more — or they meaning the government — has become more and more less and less restrictive in terms of what these dollars are for. So like as an example, you used to not be able to use it for trade school and things like that. Now you can. You used to not be able to — which is crazy, and they even still cap it, which I’m not sure why they do this — but you used to not be able to pay — if you had money in a 529, you couldn’t use it to pay your loans without — that was an unqualified expense, which is crazy. Now you can. I think the cap is $10,000.

Tim Ulbrich: $10,000. Yep.

Tim Baker: So the use is broad, and I expect it to be more broad in the future. The other big thing that has changed with the 529 that has really allowed to open up other doors is you can now use it for K-12 expenses. So Tim, if you ever were to decide to send the boys to private school, you can actually use that. In a lot of cases, it’s less of an accumulation, it’s more of a pass-through because obviously your boys would be going through school now. But if you were to — if you wanted to set up a 529 for grandkids for K-12 or even their college, it would be more of an accumulation. So in terms of qualified expenses, it’s fairly broad, and I think it’s going to continue to broaden as we go, even as more nontraditional ways of education sprout up. I think that the 529 will be — I anticipate that they’re going to continue to try to find ways to mitigate this issue with just rising expense and debt levels, etc.

Tim Ulbrich: Yeah, I agree with you. I think if anyone’s been following along in the national conversation around student loan debt, I think it feels like we’re in a direction towards, ‘What can we do to try to minimize that?’ And I think one way might be to loosen up even further, although to your point, it’s come a long way in terms of 529 qualifying expenses. Tim, what are some other downsides — if any — to the 529 that folks might want to consider beyond potential penalties for nonqualifying expenses. We’ll talk in a moment about, ‘Hey, what if my child doesn’t end up going to school?’ and using this. Any other downsides that come to mind that folks would want to at least consider and evaluate as they’re making this decision?

Tim Baker: Yeah, so some of the downsides would be, you know, not being able to use the dollars for like what we would consider unqualified expenses, which might be like college application and testing fees, which we know can be fairly high. It could be you can’t use them for transportation, health insurance, extracurricular activities, and some room and board costs, which again can add up. So that’s one of the things that’s a downside. I think the other thing would be the fact that, you know, because you have to use it for higher education and if your kid doesn’t go to college, like what do you do with the money? So I think that you don’t lose the money. I think some people think like, if I put that in and they don’t go to college, I can never get it back. At a minimum, you would take a haircut, a 10% penalty and pay the taxes on those gains, and that wouldn’t necessarily be ideal. But you could think really beyond traditional college. So again, I think as the government continues to look at this, whether it’s helping another college with K-12 or re-assigning the 529 or basically changing the beneficiary from one kid to another, you can do that. You can transfer it to another account. It could be going back to college yourself. Like if you decide — if a kid decides that they don’t want to do this, you can use it for that. Or at a minimum, you can withdraw it. So I think if there is an iota — and again, not advice — but if there is an iota that your kid is going to do something post-high school, I would plan for it. And a lot of the — I think it also depends on the state because of the state deductions will incentivize that. But even like the tax benefit of growing it tax-free, if you’re looking at 18 years, if you’re looking at 10 years, that’s a real period of time where you can get a lot of gain out of an investment account and to be able to direct. And it could be a legacy, Tim. It could be a legacy thing, Tim. Like Liam, like if Olivia doesn’t want to go to school or say she gets accepted to West Point and we don’t need it because there is no tuition, it’s just time service, we would basically shuttle that off to Liam. Liam would get the account. But then if he decided he wanted to start a business or things like that, I think what I were to do in that moment — unless I really needed to use the cash — I would look at my nieces, my nephews, I would potentially look at it as a legacy thing to send my grandkids to college.

Tim Ulbrich: Yeah, let it ride.

Tim Baker: Yeah, let it ride. Just let it do its thing. And you know, allow that to be a legacy thing for me that I know we have clients that — the lucky few that get through pharmacy school that’s like, ‘Oh, my grandma and my grandpa sent us.’ Like I would love to be able to give that gift. I’m not thinking about that, that’s chess right now. I’m really trying to think about our kids. But if that situation would arise, I would take that one-third pool of money that we’re working towards and either repurpose it for the other child or look at the next generation.

Tim Ulbrich: Tim, you know, I often say when I’m speaking with a group about kind of Investing 101, that when it’s something like a 401k or an IRA, Step No. 1 is you actually put the dollars in. Step No. 2 is then you actually figure out what you’re going to do once those dollars are in the account. Same thing here, right? We’re talking about money that hopefully is going to grow over time, which means we’ve got to have some thought and intention to how we’re investing that money. So clearly, this is not meant to be investing advice inside of a 529, but just talk to us about how you think through that or how you work through that process with clients of, you know, it’s great we’re saving. But now we’ve got options. And how do we evaluate that and is that just a very similar process to what we’d be thinking about as we would in a 401k or in IRA or even in a brokerage account?

Tim Baker: So yeah, so this is another big piece of like now that we have — like we’ve identified what we want to save and in this case, we’re talking about the 529 so that’s kind of the organization of the account. The second piece is kind of the contribution/funding of it. But really, the last piece is kind of the allocation. And this is kind of how we break down recommendations for clients. And again, it’s going to dependent on their situation, their goals, the state they live in, their tax situation, etc. The allocation piece is just like retirement plans, 401k’s, the by-and-large most popular thing that we see is the target date fund. The target date fund says, ‘OK, if my kid is going to go to school in 2030,’ it basically has an allocation that changes over the year. So it goes from more equity-focused the further out and then basically changes and alters itself as it gets closer to that 2030 timeline and becomes more bond-focused. So the target date fund for 529s, you know, that’s basically how it works. Personally, I don’t like target date funds, not because they don’t work. They do. But more so because they’re more expensive. So you know, for our kids, we just use like a total market. So the Maryland 529 — we’re moving everything over to Ohio now — you know, there’s a total market fund that we use that we want to be super aggressive and then as Olivia gets closer to her, I’ll just do that manually. Now I do that because that’s what I do for a living. Some people, if it’s kind of out-of-sight, out-of-mind, they’re not working with an advisor, they maybe should look at a target fund. But just know that dollars are going to be a little bit higher in terms of expense ratio and things like that because they’re doing that work for you. So I think the other thing too from — the reason I don’t like target date funds in particular with regard to retirement is that a lot of people, the retirement date is a little bit more — it’s more of a moving target whereas not so much with college. Most of the time, a child graduates high school and they’re going to be off to college the next year. But that could be another reason that you don’t necessarily look at the target date fund. But yeah, when you look at most 529s — and again, the 529s are not created equal. There are some that are really good, meaning they offer good — or they offer an array of investments that are out there that are cheap. Some, there’s a lot of fees and higher expense ratios that are not necessarily great for the investor. So a lot of that is dependent on the type of plan that you’re in and where you’re at.

Tim Ulbrich: Hey, that sounds like an episode we just did recently on not all investments are created equal in terms of fees.

Tim Baker: That’s right.

Tim Ulbrich: So same thing here.

Tim Baker: That’s right. Yep.

Tim Ulbrich: Tim, one of the questions we had from the Facebook group, Ernesto asked, “Can you start these for nieces and nephews?” as one example. I guess others may think of the same thing for grandkids. We talked about the transfer of them, so you used the example if Olivia or Liam doesn’t use it that you might be able to transfer it to your nieces or perhaps in the future grandkids. What about actually starting or opening an account for a niece, nephew, grandchild, etc.?

Tim Baker: Yeah, you can absolutely do that. And I think maybe a downside is how it affects financial aid. So you know, the — it does affect financial aid when it’s owned by a parent. But the benefits that you receive, it’s going to be very slight how it affects financial aid. For a child, you definitely don’t want to have it in — the ownership in the child’s name. But for someone like an uncle or a grandparent, I don’t even think it’s on the radar. So yeah, you can absolutely do that, get your tax deduction too as you go, which is nice. In terms of like changing ownership, you know, you can do — I think you can do a rollover, so I can move money from Olivia to Liam. I think you can do that partially. You can do a partial rollover, or you can just do a straight beneficiary change where you’re saying that this account is no longer for Olivia, and now it’s for Liam. So I think there’s a wide variety of how you can kind of manipulate that, which gives you kind of maximum flexibility to kind of get the most out of the plan.

Tim Ulbrich: Another question we had was from Casey, which is one that I have heard before. So I know this comes up often. And in addition to giving a shout-out to Kelly Redy-Heffner, which was pretty awesome, Casey asked, “Main question is 529 v. IRA. Should I instead put the money in an IRA so I can have more options to invest, also more flexibility if continuing education is not desired and take out only the amount that would not give a tax penalty, i.e. after five years? Are there percentages to manage the accounts or are 529s and IRAs usually similar?” So this question I think often comes up of like, why not just use something like a Roth IRA when you think about kids’ college?

Tim Baker: Yeah, I mean, again, just like IRAs are not created equal, obviously I know that the IRAs that this client has are very efficient, you know, because we want to make sure that we’re not paying any fees that we don’t need to. I still — I think because of the — from a tax perspective, they’re still going to be very similar in terms of growth. But I think especially because if you’re in a state that gets a benefit, I think it’s worth it. So you know, what most people forget is like with a Roth IRA, if you contribute to a Roth IRA, any dollars that you put into a Roth IRA, you can get out of the Roth IRA penalty-free and really tax-free. So like your basis really for any purpose — so if I wanted to buy a sports car, I can move money out of my Roth IRA without penalty or tax as long as that is — it’s not the earning. It’s just that. And the savings really too for the education accounts, like you know, if it’s used for — when it gets penalized is the earnings. So they don’t want you to have any kind of that unfair advantage. So I still like for if there’s an option for if the education stuff is on the table, I still like that — even given this idea that I think it’s going to be broader in terms of what it can be used for — I still like the 529, even though typically they can be a little bit more expensive. But the thing that most people don’t know is that you can basically open a 529 in any state. So if you look at the state of California, which unfortunately does not offer any type of deduction or credit for California taxes, you know, you can go out and look at what are the best 529s that are out there? Two of the ones that are typically popular are Nevada, which is run by Vanguard and we know why, Vanguard is very efficient and affordable, and then typically the Utah 529, which is also another good one. So you can go and open those. I still think that the benefits you receive inside of the 529, even with a little bit more expense compared to the IRAs, is worth it.

Tim Ulbrich: Yeah, the other thing I think about, Tim, here too in addition to the state income tax benefits, if that is applicable, is I do think there’s something powerful just about the behavioral separation.

Tim Baker: Yeah.

Tim Ulbrich: Like, you know, you and I have talked about this because I asked you this question several years ago as we were just thinking about this with the boys. And I think it’s true. Like you know, maybe the math doesn’t necessarily change, but there’s the kids’ college bucket and then there’s the retirement bucket. We’re thinking about long-term savings. And I think there is something valuable for having that focus where you’re budgeting and thinking about one and you’re budgeting and thinking about the other. Not to say you couldn’t get to that same outcome if it was all in one bucket, but I think that value of separating them sometimes and having fresh attention on each of those and their individual goals can be really important.

Tim Baker: Yeah, what I think too is like, you know, people that can contribute to an IRA or a Roth IRA, they have to have earned income. So if we are trying to open one for your son Sam, even though I think they’re going to building this multimillion-dollar company with the Ulbrich Brothers LLC, he has to have earned income to be able to fund that IRA and use it in the future for education or you carve those dollars out of your own contribution that you and Jess are putting into the IRAs and then it’s kind of like bucket confusion, which again, I’m a big believer in clearly delineating what is this account for, what is that account for, because it can get lost in the shuffle. ‘What are we doing? What are we not doing?’ type of thing, so I think the benefits are similar, but I think yeah, when you go down to the behavioral and drawing clear lines of OK, what is this money for? and not get it kind of confused with your retirement assets, then I think that’s a plus as well.

Tim Ulbrich: Last question I have for you here I think is a good one because it probably will come up in this situation but perhaps also others that might be thinking about K-12 education. So question here from Katie in the YFP Facebook group is, “Cash-flowing husband’s grad school. Is it worth it to put it into a 529 prior to tuition being due? Then pay it via the 529.” So she says, “In Illinois, there’s a significant state tax deduction. We would not be using it for the investment options since we’re only saving one semester ahead.”

Tim Baker: Yeah, so yes. So in this case, you would think of the account less as an accumulation and more as a pass-through. So you know, you would basically seed the account with what you would need for that semester of tuition and then basically get the deduction for Illinois and then kind of rinse and repeat until you’ve really maxed it out for the year. So if you lived in California, as we previously stated, that doesn’t have a state deduction — I don’t think Kentucky or North Carolina do either — you would — I think Maine is the last state that doesn’t either — there would be no reason for you to do that because if you did, if you were trying to get like gains, then the gains would be so minimal because as soon as it goes in, it goes right out. So it’s kind of like also sometimes when you fund an FSA for dependent care, it’s to get that money into the account so you can get the deduction. Then you’re basically paying your daycare or whatever, it’s kind of the same idea. But it’s a great benefit because it — every little bit helps on the tax side. So you know, and I know Illinois state taxes can be somewhat brutal.

Tim Ulbrich: Great stuff, Tim. Really appreciate the deeper dive into 529s. As I mentioned at the beginning of the episode, if you haven’t yet done so, check out Episode 195 where we talked a little bit broader about kids’ college savings and we included some of that discussion on other options beyond the 529 as well as the recent posts from the YFP blog, “Seven Things to Consider Before Starting a 529 Plan.” And for those that are in the midst of saving for college in a 529, whether you’re in the beginning of that journey, whether you’re in the withdrawal phase of that journey, or perhaps, again, even saving for other family members, we’d love to talk with you to see how this fits as one part — an important part, but one part of the overall financial plan. And so if you’re interested in that conversation and evaluating the fee-only comprehensive financial planning that we do at YFP, make sure to book a free discovery call at YFPPlanning.com. As always, we appreciate you joining. And hope you have a great rest of your day.

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YFP 210: Why Net Worth Matters

Posted on July 1, 2021November 2, 2022 by yfpadmin

Why Net Worth Matters

On this episode, sponsored by APhA, Tim Baker discusses why net worth matters, how to calculate your net worth, and why net worth, not income, is the true indicator of your financial health.

Summary

Net worth can be the most critical data point for determining your financial health. Tim Baker explains how to calculate your net worth, detailing that it can be as simple as the value of your assets minus your liabilities. Tim shares that many people do not know their net worth because few tools available to the general public can quickly aggregate that information. Years ago, you would take out a pen and paper and compare assets to liabilities. Now, you might do that same work in a spreadsheet, but the document wouldn’t be a living document like your net worth truly is. Tim also details which items to include in asset and liability columns and why certain accounts or property might remain off the balance sheet.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tim Baker, good to have you back on the show.

Tim Baker: Hey, Tim. Good to be back. Glad to chat with you for a full episode here. Excited to dive into today’s topic.

Tim Ulbrich: Yeah, really excited to talk about net worth in detail, a concept, a term we’ve mentioned many times but I don’t think we have thoroughly explained, really dug into how is net worth calculated? Why is it so important to the financial plan? And why do we choose to use net worth as one factor in terms of how we price our financial planning services? And so we’re going to talk about all of that and much more on today’s episode. I want to start briefly and mention to our listeners that net worth for me individually is something that is really important when I think back to my own personal journey and financial plan. So 2012 — short story here — 2012, four years after I graduated with my PharmD, my wife Jess making a good, decent, six-figure pharmacist income, and realized at the moment after hearing about this term of net worth, realized that I had a net worth that was -$225,000. And we’re going to talk in a little bit about how to calculate that. But that was a very pivotal moment for Jess and I and our financial plan to say, wait a minute. Income looks good, we don’t feel like things are necessarily off the rails in any way, but mathematically, the net worth is not necessarily showing that we’re in good financial health and good financial position. And so that was a key moment for us to really turn the ship in terms of our financial plan and ultimately led us to paying off the rest of our balance of a pretty big amount of student loan debt and then obviously able to move on to other financial goals from there. So Tim, for you, when did you realize that net worth was not only important to you individually but also really such a primary factor that you built it into the financial planning model that in terms of how we charge clients, that one factor of that is net worth.

Tim Baker: Yeah, it’s a great question, Tim. And I think like you talk about your personal story, like same. Like I’ve gone through phases of my life, I look back even growing up and when I was in high school I was really a good saver. You know, we were kind of told that we had to pay for college and if we wanted to drive and all that kind of stuff that we were kind of on our own. So I kind of went through this period of being like a really good saver. And then when I was at West Point, my first year at the academy, you know, 9/11 happened and our view of the world drastically changed. And I think my spending kind of changed with it. I was kind of more of like a YOLO, not necessarily worried about tomorrow but really focused on today. And from a spending perspective, that didn’t really help me, my balance sheet. So I’ve definitely gone through times in my life where my net worth was not growing. And I don’t know that for a fact, but I just know that some of the debt that I was taking on and that my savings was not growing, that was the case. And I think part of the problem or part of the reason that a lot of people when they hear “net worth,” they’re like, “I don’t even know what mine is,” because there’s not really an app for that, so to speak, where it ties everything together. So we know that hey, we can kind of see what our credit card bills are, and we can kind of see what’s in our checking account and we might look at our 401k from time to time and our home value and what’s left on the mortgage, but really to tie that together, it takes a bit of work to do that. But then I kind of evolved and got into financial planning and really my mindset around money has really changed and really even has changed even more so so I’m less — you know, I kind of went from YOLO to being a financial planner and kind of believing a lot of the things that a lot of the gurus in save, save, save. But I think I’ve also softened on that a little bit in terms of like having a strong financial plan is important and making sure that the numbers are moving in the right direction, the 1s and 0s with regard to your net worth. But that ain’t the end-all, be-all, Tim. And I know we talk about this obviously a lot. It really is an exercise in trying to thread the needle between again, taking care of yourself today, so YOLO, but also making sure that we can retire comfortably and we want to plan for tomorrow. So in terms of planning, you know, when I started Script Financial way back in the day before YFP Planning and our work together, you know, I was looking at what a lot of financial planners were doing, and I came across this income and net worth model. And the more I thought about it, I’m like — and this is as I was trying to, even before I launched my firm that was really dedicated to helping pharmacists with their financial plan — I was like, I really like that because it’s kind of — it captures everything. Like everything financially typically touches the balance sheet, right? So you know, so if you’re thinking of like, what is net worth? Net worth is really, it equals your assets, the things that you own, so think checking, savings, investment accounts, the value of your home, minus your liabilities, which are the things that you owe, so student loan debt, credit cards, the mortgage left on your house, the loan to your crazy uncle Steve for whatever, like those are the things that are the subtractors. And that’s your net worth. And for a lot of pharmacists, especially starting out, that can be super negative. So we’ve had clients that have come on that their net worth is almost -$1 million, but then we also work with clients that are multimillionaires. So to me, it made sense to really focus on the net worth because we can’t control everything about the financial plan, but there are a lot of things that we can control, and I think the net worth kind of encapsulates a lot. And I think it’s the biggest, it’s the best number to focus on as you’re trying to view progress and improvement with regard to the financial plan over time.

Tim Ulbrich: So Tim, as you mentioned, simple calculation, right? Net worth is assets, what you own, minus liabilities, what you owe. Some common questions I think that I know I’ve gotten and I’ve thought myself when people actually start to put pen to paper here are, you know, what assets might I include or not include? I know there’s some thought about like depreciating assets such as a car. Is that something I should include as an asset or not? And then on the liabilities side, things like revolving credit card debt or obviously that could be ongoing with interest accruing but things that pay off each month or those types of things. So when you’re actually getting in the weeds on assets minus liabilities, is this worth really starting to get into ah, is this truly an asset or is this not an asset? This has this tax and so forth. How do you think about what actually falls into these or does not fall into these buckets?

Tim Baker: Yeah, I mean, it goes back to that whole idea of like garbage-in, garbage-out, right, Tim? So the better the data is, the more accurate and the more empowered you can potentially be to make good decisions. Something like a 401k and the value of your home, that’s a no-brainer because for most people, that’s typically the largest assets that is on the balance sheet.

Tim Ulbrich: That’s right.

Tim Baker: The home is going to be a little bit of a moving target because, you know, you look at the Zestimate, you might say, “No way that I can get that for my house,” although, right now everything is en fuego. A home — and yeah, something like that, what people will pay for is, that’s the value. So that can be a little bit of a moving target, but I think it’s worth tracking over time. The question about a car, you know, like when we talk about that, we typically don’t include that because in most cases, the value of the car depreciates as the note does in a lot of ways. Now if you buy a car cash, then maybe that’s a different story. But things like a credit card, yeah, I mean, if you have a balance that you’re carrying, I would definitely include that. If you don’t, maybe not, if that’s your behavior. But I think like — so back in the olden days, Tim, this would be like a pen and a notepad, right? So you would put all of your liabilities on the left side, big line down the center, put all your assets, add those up, and then basically what’s the difference, and that’s your net worth. Now, you know, either with Excel or something like that, you can do it a little bit — that’s still manual because you still have to look at these balances. But there are lots of tools out there that you can actually aggregate all of the different financial institutions that you’re using. So for our tool, basically when a client comes on board, once they become a client, the first thing that they do is we send them a welcome email and they get links to their client portal, and they link their checking, their savings, their credit cards, their student loans, their mortgage, basically all of their financial accounts. And for a lot of people, Tim, if you think about it, it’s the first time they’ve seen all of their stuff in one spot. So like how can we plan for things if we don’t really know what we have or we know kind of in the abstract of what we have. But then especially for couples, right?

Tim Ulbrich: That’s right.

Tim Baker: It’s the first time that they see all of their stuff in one spot. So you know, and that’s because we bank over here, we invest over here, our student loans are over here, so to have that on one platform, that is so powerful just to see like where the heck are you? Where are we at? Which is a big component of — it’s half of the equation of when I say, “It depends,” that’s one of the big components is like, where are we at, so that we can advise you on where we want to go. I think the net worth, again, and what you include in that, by and large, you want checking and savings, your cash accounts, investments, the value of your house, student loans, credit cards that you’re carrying, personal debt, mortgage, etc. Some of the other stuff might be if you have like fine art or things like that, you can include that all in there. But you know, depending on how big that is in your portfolio, I know there’s some people that their business is one of their biggest assets that they would account for on their net worth or maybe a cash value life insurance. So it’s going to depend, but I would say don’t get lost in that minutia. I think the act of just going through it and doing it and just seeing — it’s just like budgeting, right? — just seeing what works, what doesn’t work. If you don’t think that tracking x number is important, then don’t do it. So that’s my thought.

Tim Ulbrich: Yeah, no fine art in this house, Tim, with four boys. So that would get trashed for sure.

Tim Baker: Yeah.

Tim Ulbrich: You know, I was just logging on, we use, as you alluded to, we use a tool for our planning clients called eMoney. And one of the things I love about that is, you know, I just logged onto my account, front and center is net worth. Right?

Tim Baker: Yeah.

Tim Ulbrich: And you know, we talk about in the book “Seven Figure Pharmacist” that net worth is really your financial vitals check. It’s a great indicator of your financial health. And I find this helpful because there’s times — and it can be days, sometimes it’s within a month — where you’re like, man, things are going really well or the opposite, I feel like things are falling off the rails financially, right? And then you log on and this allows you to take a step back and say OK, what is the direction that things are going? And what’s happening in the asset column, what’s happening in the liability column? And I think having this front and center and tracking the progress over time and obviously through growing assets and paying down the liabilities, we want to see this number tick up over time. And of course, that’s going to be a big part of what we’re trying to do with the financial planning process. Tim, talk to us for a moment, you know, Sarah Stanley-Fallaw, who we had on, author of “The Next Millionaire Next Door” on Episode 200, in that book and I also remember discussion of this in “Rich Dad Poor Dad,” this idea of income-affluent versus balance sheet-affluent. Talk to us just a little bit at a high level, you know, what those two things are referring to and why this mindset is so important.

Tim Baker: Yeah, so I think so many — and we talk, we actually talked about this or around this, Tim, in terms of like YFP and the growth of the business where like we have these revenue goals and things like that and we really want to grow YFP and really touch as many pharmacists as we can. But that’s an ego metric, right? You know, to say, hey, we grew this many in terms of in revenue. It’s the same with income. What really matters from a business perspective is profitability. And it’s kind of the same on the individual side is — and we’ve talked about it, although we kind of do talk out of both sides of our mouth. So like one of the things that we’ve said, especially with pharmacists that are coming out that may have bought into the mantra of like, hey, don’t worry about your student loans, don’t worry about your finances, once you get that six-figure income, everything works itself out. And we know that that is not necessarily true. But the flip side of that, Tim, is one of the most valuable things that a pharmacist has with regard to their finances is their income, right? So without income, nothing moves. I think when we look at income affluence versus like balance sheet affluence is that we also know that there’s a lot of people and listeners out there, you can be one of them, I used to be one of these people, you could have friends and family that are like that, is that if you earn $100,000 and that’s the money that comes in the door, $100,000 goes out or $120,000 goes out because it’s kind of an exercise in keeping up with the Joneses. And the whole idea behind “The Next Millionaire Next Door,” which was following up on “The Millionaire Next Door,” is the whole idea is that most millionaires that you come across are not flashing it around. Right? So they’re not driving the $80,000 sports car, they’re not living in certain neighborhoods. So the idea is that this is more about what you keep, right? So to grow wealth over time is to kind of steer clear of some of those more ego things and really direct resources to what matters most. So like I don’t have a problem with a client spending money on a luxury sports car if that lines up with their goals and what their view of a wealthy life is. But we also know that money is a finite thing, so we can’t necessarily have our cake and eat it too in every part of our financial plan. So there is give-and-take. So what we try to do is really shift the idea behind, hey, this is the amount of money that we make to really focus on the net worth and show how that really drives progress and drives the conversation of what is a wealthy life. Because there’s a lot of people that make seven figures worth of income and have nothing to show for it. They’re not necessarily achieving their goals of travel and being able to take care of loved ones and giving and being able to be on track at a certain retirement age. So that is really what financial planning is designed to do is to align this great resource that pharmacists have and direct that towards the goals that they have to make sure that we’re maximizing or optimizing what a wealthy life is for that particular individual.

Tim Ulbrich: Yeah. And Tim, I want to talk about that further because I think that concept of living a wealthy life, you know, I suspect many pharmacists like myself might be of the mindset of, hey, I can squirrel money away and I can save it for the future, but I think there’s balance when it comes to the financial plan. And I think this is one area, to your credit of the model that we’ve built at YFP, that our planning team does an awesome job, and that’s ensuring that one’s financial plan is considering both the now and the future. As you say, it can’t just be about the 1s and the 0s in your bank account. So we’ve got to find this balance between taking care of your future self but also living a rich life today. And that really comes down to quantitative and qualitative factors of the financial plan. And I think financial planners are known for focusing on the numbers, right? And we’ve really built a process I think that is so important that we’re also covering some of the things that aren’t numbers-based. And certainly they could be number-based if we’re going to determine how we’re going to spend and allocate money, but in terms of goals and things we want to achieve, it’s not about, again, the 1s and 0s in the bank account. So tell us from the planning perspective, what does this actually look like? You know, I’m a new client, I’m meeting with you, like how do I actually begin to tell that story and what are you doing to extract this information so that we can then weave that into the numeric part of the financial plan?

Tim Baker: If we start with the balance sheet, Tim, right, so the net worth, we’ve got to know where we’re at, right? That’s the vital check that we’re really looking for. So that’s really our first data point. The second part of that is now that we know where we’re at, where the heck are we going? So that is where we actually slow down and ask clients some introspective questions about like what is, what do you want out of this life? What is a wealthy life for you? Like if today was your last day, what would be things that you haven’t yet done that you want to do? Or if you had 5-10 years left or if money were no object, what would be the thing that — how would you build your day-to-day schedule? So like really kind of going through a series of questions and extracting information so it really paints a picture of now that we know where we’re at, at least financially, where do we want to go? And those two things, Tim, is what changes the whole answer of like, ‘Hey, well, should I do this or that?’ Before I know those things, it’s like, ‘Well, it depends.’ Now that we know these things, where are we at and where are we wanting to go, we can actually advise clients on their financial plan. So how we do that really is to look at all the different pieces. So like once we figure out that picture, our job, which ultimately, our job as a planning team, which ultimately supports our mission at YFP which is to empower a community of pharmacists to achieve financial freedom, our mission in the planning team is a little bit different. It’s a little bit more granular. Our job with clients is to help clients grow and protect income, which is the lifeblood of the financial plan — without that, nothing moves — grow and protect your net worth, which is essentially what sticks, while keeping your goals in mind. That’s our jam, right? So that’s how we feel that we can best help pharmacists achieve financial freedom. So we do that through all the different pieces of the financial plan, which is fundamentals, which might include savings plan and debt management, cash flow and budgeting, insurance, investment, the tax piece, the estate plan, and then all of these other supplemental pieces like credit, salary negotiation, the home purchase and real estate investing, education planning. It might be ‘I’m an entrepreneur, I want to start a business.’ All of that stuff basically are the — those are the processes that get us to really refining out the financial plan and then the quantitative, and then we kind of observe the quantitative and qualitative results and then adjust from there. So the quantitative results, the one that we focus on most, is the net worth. So the idea is that when you become a client, we’re going to say, “Hey, your net worth, you’re starting at -$50,000. And our hope is in a short amount of time, we go from the negative to the little bit less negative to the positive to that multi, that seven-figure pharmacist status.” Or if you’re already positive, it’s to kind of keep that rolling and make sure that we are efficiently growing the net worth. I think the other thing, which I think often gets lost with other financial planners, is the qualitative. It is really that, the things that are outside of the 1s and 0s, which for pharmacists, sometimes that could be tough, Tim, because you guys are scientists, you want to say, “OK, what’s — if I pay this amount in fees, this is what I want to get back.” I completely get it. But to me, it’s the qualitative stuff that really is typically the things that when I get off of a call or I’m here and Robert and Kelly talk about their interactions with clients, that I want to run through a wall because I’m just so jacked up about like what we’re doing and how we’re transforming clients. Like that’s the special stuff. And I really, what I really like to say is that we want to build out a life plan that is supported by the financial plan, not the other way around. Right?

Tim Ulbrich: Yes.

Tim Baker: That’s our jam.

Tim Ulbrich: So important, the life plan that is supported by the financial plan. I just think that’s a completely different way of thinking. You know, I’m going to overgeneralize the industry for a moment, but I think that, again, it’s easy to focus on the numbers, and we’ve talked extensively on the show about why often that may be the case, you know, all the incentives in terms of why the dollars. So if you’re sitting down with a client, you know, and this is one of I think the beauties of a fee-only model where you’ve got their best interests in mind, if something is more experience-based, Tim, sometimes that might be let’s spend some money to make this happen because we said it’s important, and we’ve accounted for it in the rest of the goals and what we’re trying to do. Now, again, it’s a balance. We need to take care of our future self while taking care of ourself today and living a rich life. But you know, that traditional model would be take that money and stuff it into an IRA because that might be a greater percentage of fees — you know, we talked about fees recently on the show. So I think that is so important when folks are looking for financial planning, whether that’s with us or somewhere else, is is that life plan being connected and have a strong connection thread with the financial plan? And I’ll say from personal experience, Tim, for Jess and I working with you, like it just feels like life goes by at lightning speed. And part of that may be phase of life, you know, young family, whatever. But just to slow down and not only think about these goals but then to have somebody actually put these back up in front of you every so often and say, “Hey, Tim and Jess, you guys said this was important. Like what are we doing about it?”

Tim Baker: Yeah.

Tim Ulbrich: You know, “What are we doing about it?” And I need that because I am the person that I’ll try to squirrel away $4 instead of $3 million. And I know, like I know in my head, that when it’s all said and done, I’m not going to care if that was $2.5 or $3 or $3.5 and $4. Like there’s a point where enough is enough, but it’s the experiences and the other things that I think are really going to matter.

Tim Baker: Yeah. You are going to look back and be like, ‘Ah, I wish I would have done this with Sam and Everett and Levi. Like I wouldn’t — and Ben and done all these things.’ And we’ve talked about this, and I’ll cite a personal story. You know, my wife and I, we’ve been saving money really to kind of look at the next level from a real estate perspective, and we kind of just took a pause and we had this extensive conversation of like, do we really want to do this? You know, Olivia is our 6-year-old, we have Liam who’s turning 2. And we really have a window of time, right? We have a window of time where we have them as a captive audience, right? Maybe 10 years before Olivia is like, ‘Dad, get out of my face.’

Tim Ulbrich: Yeah, you’re going to be still cool for awhile. Yeah.

Tim Baker: Yeah, like so I look at that like my dad — actually, my dad jokes do not land with her. She’s like, ‘Daddy.’ So I’m already losing that a little bit. But in terms of being able to spend time and have those experiences, that’s a small window. It is a very small window. And the discussion is really around should we put this into an investment, which from a number perspective is going to be probably the best thing that we can do, right? There’s no guarantees, right, with real estate or any investment. But to put this chunk of money there or do we do what my vision was in my life plan — so I’ve recently completed the Registered Life Planning designation, and when I was life planning, I still remember it like it was yesterday. You create this vision, and you create this energy behind this vision sometime in the near future. And for me, it was buying an RV and having the freedom in the summers and on the weekends or long weekends and maybe weeks at a time to go and travel and adventure and see national parks and things like that. But part of me, Tim, is like — the financial planner in me is man, if we purchase an RV, that’s a use asset that’s depreciating over time, I can’t rent that — I guess I can kind of rent it out. And it’s kind of nonsense, right? It’s kind of like a no-brainer. And it’s a struggle, right, even for me where I’m pushing, we’re pushing clients to really achieve that wealthy life. This is the thing when I talk about it, I get excited and passionate about. And for some people, it’s starting a family, for some people, it’s playing in a band. For some people, it’s horseback riding. These are examples that we’ve had with clients that, you know, they were like, when they talk about it, they just light up. And I’m like, this has to be in your financial plan. Like when you talk about becoming a mom or you talk about before you were in pharmacy school, these were the things that you were passionate about. I know we have, and I know we have some credit card debt, and I know we want to get the investment game rolling, but we’ve got to stop and smell the roses along the way and make sure that we’re taking care of ourselves today. So it’s just a passion of mine, and these are the things, like when you kind of look at a situation that clients think — and we know this with millennials in particular but we’re seeing it with like sandwich generation and Gen X and even Baby Boomers in terms of how they can retire, with millennials, it’s everything is going to the right. Like marriage, home purchase, kids, and I want to challenge that. I want to — if you work with a professional, I want to challenge that. And I think if we’re doing things — and sometimes, we as a team, we don’t necessarily think about all the things that we do technically, the things that most people expect about an efficient debt payoff process, an efficient investment process, efficient tax plan, like we don’t really think about those as much as we should, and we should pat ourselves on the back in terms of what we do with clients. But that to me is like table stakes. It’s the next level of things to then challenge the client of like, ‘Well, maybe that timeline of 5 years is not accurate. Maybe we can do a little bit more.’ And I think if you then couple that with an efficient budget and spending plan, I mean, really the sky’s the limit. And that’s what I really get jacked up about. You know, I get jacked up about the pharmacist that says, “Hey, here’s my 4-month-year-old, this is your fault, Tim,” in more of a conversation like, we thought that we would have to wait so much longer, not because we paid off our loans or we did this or that, it’s because we have confidence in our plan. And that to me is what continues to drive me and jack me up and really push forward, and that’s why we get up in the morning to really push forward that mission, again, to empower pharmacists to achieve financial freedom. It’s a great job, it’s a great position to be in to be able to influence that in such a way.

Tim Ulbrich: Tim Baker, great stuff today. Loved the discussion on the importance of net worth and setting both quantitative and qualitative financial goals. And throughout the episode, several times we mentioned and referred to specific parts of our planning process at YFP Planning. So for folks that are listening to today’s episode and are interested in learning more about our one-on-one comprehensive financial planning services, you can head on over to YFPPlanning.com, you can schedule and book a free discovery call and determine whether or not our services may be a good fit for you. As always, we appreciate you joining us for this week’s episode of the Your Financial Pharmacist podcast. Please do us a favor and leave us a rating and review on Apple podcasts or wherever you listen to the show each and every week. That helps other pharmacy professionals find out and learn about this show. Thanks again for listening, and have a great rest of your week.

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YFP 209: Three Real Estate Investing Lessons Learned from Fellow Pharmacists

Posted on June 24, 2021November 2, 2022 by yfpadmin

Three Real Estate Investing Lessons Learned from Fellow Pharmacists

On this episode, sponsored by Insuring Income, Nate Hedrick and David Bright discuss the growing interest in real estate investing among pharmacists, common barriers that pharmacists face that may prevent them from getting started, and three real estate investing lessons learned from fellow pharmacists who shared their stories and journeys on the YFP Real Estate Investing Podcast.

Summary

Cohosts of the YFP Real Estate Investing Podcast, Nate Hedrick and David Bright, return to the show, sharing some of the lessons they have already learned from their new podcast in the short time since its inception. Nate and David discuss three stories, in particular, lessons learned about real estate investing from those pharmacists featured on the show and running themes in the YFP Real Estate Investing Podcast that listeners will notice and can anticipate in the future.

As a guest on the YFP Real Estate Investing Podcast, in episode two, Jared Wonders shared his real estate investing story and how a foundation of financial strength enabled him to make investments by reducing financial risk. In episode three, Zac Hendricks and Blake Johnson provided insight on streamlining your real estate investing and rehab process for investment properties. Blake and Zac further highlight the power of partnerships and networking, leveraging their network to help turn difficult situations around and grow exponentially as investors. The third pharmacist investor story shared was from episode five, featuring Jenny and Myke White. Jenny and Myke’s journey demonstrates the power behind education in real estate, but equally important to learning is taking the leap and buying your first property. The jump from none to one can be intimidating, but having a great team around you will help reduce risks.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Nate and David, welcome to the show.

Nate Hedrick: Thanks. Great to be here.

David Bright: Hey, thanks.

Tim Ulbrich: Well I appreciate you guys taking time. I know you’ve been busy with your own show, with the YFP Real Estate Investing podcast. And really excited about the momentum that we have there and an opportunity here to talk about some of the lessons that I have heard as a listener of that show, some of the lessons that we’re hearing from fellow pharmacists around real estate investing and hopeful that some of these items we talk about tonight will be things that folks can take away, whether they’re thinking about investing, just getting started, or looking to continue to build out their portfolio. So I know that you’re just a handful of episodes into the YFP Real Estate Investing podcast, but very excited to see the interest from folks that we have in the community, activity that we have in the YFP Real Estate Investing Facebook group, and it’s really affirming of the initial thought that we had of the thirst that is out there for pharmacists to learn more about this topic. So Nate, why do you think we are seeing that growing interest among pharmacists that are interested in real estate investing?

Nate Hedrick: Yeah, it’s a great question. I think it’s probably a couple different things. One is probably just an awareness bias. Right? Like we are interested in, and so now all of a sudden more people are coming out of the woodwork. And I find that that’s the case because I’m talking to people that are 28, 29 units deep and they’ve been doing it for 10 years and it’s not like I thought of it first and just found them. They’ve clearly been doing this a lot longer. So I think some of it is that. The other thing is that I think as pharmacists start to get their feet under them financially, they get their student loans kind of in a good spot, they get a really steady job, really steady income, they start to pay down some of that bad debt, they start to look at well, what are my other opportunities for growing my finances and building wealth? And a lot of them are starting to turn to real estate as a great opportunity to do that. And so I think that’s part of where we’re seeing that community kind of flexing from.

Tim Ulbrich: It’s interesting to think of, you know, the time that you guys launched this podcast, so you know, mid-April, arguably we’re in one of the wildest real estate markets that many of us have seen, at least in our recent memory. And so not necessarily the easiest time to jump into real estate investing. And so the fact that we continue to see pharmacists that are active in their investing, pharmacists that are wanting to just get started or even use this season as an opportunity just to learn more, right, and absorb information and perhaps act when the time is right for them and their personal plan. David, with that in mind, you know, in terms of the interest that we’re seeing, growing interest among pharmacists, there are certainly barriers that pharmacists are facing as well that might be preventing them from getting started. One of them I mentioned might be the market right now. What else comes to mind for you?

David Bright: Yeah, I think the market is an interesting one because we haven’t talked about that as much on the podcast, but I know it’s certainly come up on the Facebook group. And I think that’s kind of a head-scratcher for a lot of people because you could look to almost any season and say, if you were to think back to like 2004-2005, ‘Oh, the market’s rising really fast. I don’t know if this is a good time.’ You could look at it in like 2010 and say, ‘The market just crashed. I don’t know if this is a good time.’ Like you could be suspicious of just about any market, and so I think that some of that is just market hesitation. Part of that is just kind of getting through that and knowing that you can never really time the market just like with stock market investing. So I think that timing is one factor that causes a lot of heartburn. I think another one is just time in general to learn about real estate investing, to feel like you’ve got enough confidence, particularly for pharmacists that spend a ton of time in school and a ton of time learning about our trade. And as we get good at what we do, it almost feels like you’ve got to put that much time into real estate investing to know what to do. But I think we’ve had a lot of guests on that have showed that you can get started a lot faster than that. It’s maybe not quite that complicated. And I’d say money or at least a plan with money is another barrier as people are looking at trying to save up for a down payment or something like that with a house, that does take a plan, and it does take some effort. And then once you’ve worked to save up that money, that can also cause some hesitation. So there’s a lot of these common hesitation pieces, but one of the things that I really enjoyed about the first few episodes is we got a chance to talk with several investors who were a little bit newer and all had taken that plunge, and so that was really, really fun to see folks that had just said, ‘You know what, I’m going to figure it out, and I’m going to dive in.’

Tim Ulbrich: Yeah, and I think that Nate and David, both of you have I think taught me this either directly or indirectly. But so much of this feels like momentum, momentum to get started. And one of the things I’ve heard among the guests was the importance of that first move, right? And we’re going to talk more about that as we highlight one of the episodes here in a moment. But I think one of the things I love about what you guys have done with this show as well as what we’re seeing in the YFP Real Estate Investing Facebook group is really holding true to the mission that you guys had for the show, which is pharmacist first, real estate investing second to that and making sure that we’re able to develop a plan around the careers that we love and around the careers that we invested a lot of time and money to do and obviously to be able to serve the patients that they serve as pharmacists. And I think the stories that you’ve featured — and we’ll talk about a couple of them here on this episode — of pharmacists that aren’t necessarily way off in the distance of massive portfolios but that took that first step or maybe that second step, and it wasn’t all perfect, and there was some learning and some growth and some development, and I think that makes it relatable. Right? That makes it to me as a pharmacist listening that is saying, ‘You know, I’m interested in this,’ to Nate’s point, ‘I’ve tidied up certain parts of my financial plan. I may be ready to dabble in this thing of real estate that really excites me for a variety of reasons.’ And hearing other pharmacists that I can see myself in their shoes and really see myself in their position where yeah, there’s some excitement, but there’s also some anxiety and some fear and some unknown. But at the end of the day, there’s a lot of learning to be had through the process. So kudos to you guys for I think a great start to this show and really holding true to the mission that you guys set out before you even recorded Episode 01. So I want to spend our time on this episode really highlighting three lessons that I have heard come through the show from fellow pharmacists that have been guests. And you know, I shared with both of you guys before I hit record, we hit record, and I meant it, like I’ve become a fan of the show. And I’ve been listening, taking away some key points and information as I suspect many of our listeners have as well. And so I wanted to hit some of the main themes and key points and use some of the stories that we’ve heard thus far on the show to highlight those key points. First one I want to talk about here is Episode 02. And I had the opportunity to interview Jared Wonders on the YFP podcast, you had him on Episode 02 of the YFP Real Estate Investing podcast where he talked about long-term versus short-term rental property investing and his perspective. Nate, give us a quick summary of Jared, his story, what him and Jess are doing, as well as what you guys talked about on the show.

Nate Hedrick: Yeah, so Jared was our first true guest. And I thought he’d be a great target just because of the diversity of real estate that he’s involved in, right? He has a partner, and they own a multifamily together. He has a single-family that him and his wife bought by themselves. He just bought his first short-term rental. So like he’s dabbled in all these different areas that really highlight the various ways that you can get into real estate investing as a pharmacist. And so Jared is just a really great guy when it comes to explaining what’s going on, and he’s very eager to share that education with others. So he was a natural target for Episode 02 and just bringing on that first guest. He was great.

Tim Ulbrich: Yeah, and I really like what he shared, Nate, about — I had the chance to meet him and Jess when they were here in Columbus at a Buckeye football game and really could see the passion that they have for this topic and also their appreciation for the work that they do as pharmacists. But I think he said maybe three times on that show at least — I’d have to go back and listen — the importance of getting on the same page with your significant other or spouse, right? And I thought he did such a nice job of articulating that, and I know that’s something, Nate, that you’ve articulated as well, right? I mean, how important is that?

Nate Hedrick: Yeah, I mean, honestly, I never would have been able to pull the trigger on that first property without Kristen being on board and being able to talk through that. And still to this day, like we don’t do a deal without talking it through together. You know, I tend to be the overly excited one. I see a deal and I’m like, ‘Oh, we can totally make this work.’ And Kristen is the one that sits back and looks at the numbers and says, ‘Well, but hold on. The numbers don’t work and here’s why.’ So we need each other to balance each other out, and again, I agree. Jared talked a lot about how him and Jess do that together and how that makes them more successful, which is really cool.

Tim Ulbrich: The other thing I really appreciate about Jared — and I’ve had a chance to know him a little bit more on a personal level — is I feel like he very much has a passion and a heart for teaching others and helping others. And so that came through on the show, you know, in terms of his desire to help other pharmacists in this area and really appreciate the contributions he has made to the Facebook group and excited to see where his portfolio goes in the future. David, one of the things — when I listened to that episode, and I think you penned you guys right away, I also messaged Jared when I heard it because it resonated with me thinking about the financial plan and where this fits in — and this is our first lesson learned — is he talked I thought so profoundly about the importance of being able to make moves, speaking of real estate investing, from a position of financial strength. Tell us more about what he was trying to communicate there and why in your experience as well as what we heard from Jared, that is so important when it comes to real estate investing.

David Bright: Yeah, I think one of the things that we’ve seen in talking with a lot of different pharmacists, pharmacists are inherently wired to play it safe and in doing that, one of the best ways to invest with greater safety is to invest from a position of financial strength. And he talked a lot about that, how having cash reserves and having a plan for debt and all of that figured out just makes it so much less stressful so that when a water heater goes out or when there’s a roof leak or when there’s an eviction or when something happens, you handle it. You’ve got a plan in place. And doing that from a position of financial strength rather than I hope there’s margin left on the credit card or something like that. And so that can be really, really helpful and help particularly pharmacists sleep better at night in their investing. I think the other piece of that is investing from a position of financial strength, when you have your finances cleaned up and in order, pharmacists tend to have a much more solid W2 income, and that can be a real piece of strength for when you go to borrow money with a conventional lender for a mortgage. And so that can be a real just critical piece of purchasing property and having it go much, much more smoothly.

Tim Ulbrich: Yeah, and I know, David, our planning team here will be very happy to hear Jared’s advice and some of your comments here because one of the things I say on the show all the time is that every part of the financial plan has value and that it’s so important when you’re making a financial decision that you’re not making that decision in a silo, right? So here, we’re talking about investing as one part of the financial plan. We’ve got debt management, we’ve got insurance, we’ve got obviously a whole host of other parts of the financial plan. And within investing, we’re talking about one subset of investing, which is real estate investing. And I think that’s a theme I’ve heard from many guests and knowing the folks and their individual stories of you know, thinking about things like the emergency fund. Where is that at? What’s the game plan for that? What’s the debt position? You know, Nate, you and I talked about this recently on an episode related to buying a home with student loans is it doesn’t necessarily mean there is no debt. Obviously that’s an individual decision. But what’s the plan around that debt, right, in terms of being able to put this piece of the puzzle around that? And then the other thing I would add here that I heard loud and clear, guys, throughout all of the episodes we’ll speak about this evening as well as others is really having a purpose and a vision and a why for what you’re trying to accomplish when it comes to real estate investing. You know, what is the motivation? What’s the goal? Not necessarily because you heard a coworker or you heard it on the show and it sounds interesting. Hopefully it does. But what does that mean individually for you and your financial plan? And how does this ultimately fit into what you’re trying to accomplish with the rest of the financial plan? So that’s Lesson No. 1, which is really being able to make a move when it comes to real estate investing from a position of financial strength. And I think Jared did such a nice job with talking about that in Episode 02. Next one I want to move to is Episode 03, which was Blake Johnson and Zach Hendricks, two great guys. We’ve had them on the YFP podcast as well talking about some of their real estate investing journey. You guys did a nice job building upon that. They talked about in Episode 03 running the rental numbers and really digging deep into their individual roles and the partnership that they have. So David, give us a quick summary of Blake and Zach and their show. And what were some of the takeaways that you had being able to interview them for that show?
David Bright: I really had a great time talking with Blake and Zach that night. I know Nate and I ended up staying on after we turned off the record button, we stayed on to talk to them for awhile too. They were just a lot of fun to talk to. And you can tell that they are just, they’re just loving life as they’re doing this. This isn’t creating some major stress where they can’t sleep or anything like that. Like they’re just enjoying this. And so I thought that was just really encouraging to kick off with. But they talked about kind of how they get started, some different projects they’re working on, even with running the numbers, one of the things that impressed me so much as they were talking about running their numbers is they just have a really simple way of doing it. They’re doing advanced calculus pharmacokinetic kind of stuff. Like they just figured out some pretty simple math. And even when Nate and I threw some questions of thinking about it in a slightly more complex way, they’re like, nah. It was just the beauty of simplicity, and I feel like that can help get past that analysis paralysis. And they just had a really, really great model there. And I think the other thing that they hit on well is clearly, they have a partnership in doing this, which for their goals since you talked about that purpose and vision and why, for achieving their goals, they knew that they wanted to go bigger than just having one or two rental properties each. They wanted more than that. And so it just reminds me of that quote of, “If you want to go fast, go alone. But if you want to go far, go together,” how they just really found a great partnership opportunity and leveraged that in order to achieve their goals.

Tim Ulbrich: Yeah, and David, the other thing that stands out as you speak about partnership is how clearly defined their roles are. Right? So I remember Blake talking about really his value in being able to analyze the properties, find those that may be a good investment, and Zach really plays a significant role because of his background and what he does and a lot of the rehab, estimating those costs as well as overseeing that part of the project. So yeah, I think the value of their partnership stood out. I thought the clear purpose and vision and why behind their investing was a strength and certainly appreciate the comment you made on the value of that partnership. Nate, the other thing that I want to spend a few moments here on, which is the second lesson I want to talk about this evening that came out from this episode was the power of networking. And I remember Blake talking about this when we had him on the YFP podcast. He talked about it again on this show. It really seemed like they have been intentional in building relationships. Now, they’ve got a couple things going for them, right? They’re in a small town in Arkansas, Blake’s got some great relationships that are coming from his role of working with an independent pharmacy. But it seems like those relationships and the intentionality of building those and also conducting their business in a high integrity way that furthers those relationships really have played a big role in the success of their investing. Tell us more about the power of networking and what you took away from this episode related to that.

Nate Hedrick: Yeah, I agree. That’s a really powerful point for them that a lot of their deals, a lot of their — some of their best deals and some of their saves, things where it may not have been going right but they turned it around and kind of fixed it came because they had good networks and good individuals to speak with. You know, one of the main things they talked about was the first couple deals were MLS deals, meaning they were listed properties, anybody could see them. But as the market became tighter and tighter, they started finding new ways to find opportunities. And some of those simply became just because they knew somebody who knew somebody or they talked to the right person at the right time. And it just goes to show that truly building that network in advance and giving away things up front so that you can hopefully get back later in the future, it has really paid dividends for them. So again, they gave several examples on that episode, and I think again, like David said, after the fact we were chatting with them. It’s just incredible to hear the number of people that they interact with and how that helps their business.

Tim Ulbrich: Yeah, and I remember some of the relationships they talked about with agents, with obviously the lending and what that gave them in terms of they now have some of that smaller town relationship and being able to have some more flexibility and be nimble in some of those deals. David, I want to put you on the hot seat for a moment because this is one of the things I noticed when I started really getting into a little bit more about what you’re doing on the investing side of how valuable it was and is the team that you have built up around you. And I know this is a process that has taken time, but I think for somebody that is hearing whether it’s Blake and Zach’s episode or hearing stories such as yours or others that have really taken some time to build up these relationships, it can still feel overwhelming with like, where do I even start? Like is this a meetup of investors? Is this a Bigger Pockets type of thing or the YFP Real Estate Investing Facebook group? Like as you reflect back on your own journey where now you’ve got all these relationships with folks that you trust, that are looking out for you and your investing plan, like how did you get started with that? And what words of advice would you have for folks in this area of building up their team and then ultimately the power and value that comes from networking?

David Bright: Yeah, that’s such a good question because I agree, that’s a big thing that can get in people’s ways if I don’t have a trusted contractor, a trusted realtor, a trusted lender, like all these different people, that can be really stressful. For me, I know a lot of that started with a great referral to a great agent. And that agent knew great people who I was able to meet. From there, there was local networking with a meetup where I met more really good people. And so for me, it was a lot of just networking and trying to learn more from local people but all stemming out of some of those just natural first relationships.

Tim Ulbrich: So we’ve talked a little bit about being able to make moves from a position of financial strength. We’ve talked about the power of networking. And I want to shift gears now and focus on Jenny and Myke White, awesome episode, Episode 05 that you guys had them on the show, “None to One: How to Get Your First Investment Property.” And shoutout to Jenny and Myke, I’ve known Jenny for a couple years. I had a chance to interview Jenny and Myke on the YFP podcast. Love what they’re doing in terms of their investing but also love their passion for helping others and love their willingness to be honest with how they got started, some of the mistakes that they made along the way, some of the things that they’ve been learning along the way. And I think for those that are just beginning to think about what might be the first move, I would highly recommend you check out Episode 05 as I thought it gave a great insight into some fellow individuals that may be in a similar path to what you’re looking for. So Nate, give us a quick overview of Jenny and Myke, their background, what they’re doing from an investing standpoint, and how they got started that you featured on Episode 05.

Nate Hedrick: Yeah, what we realized early on, David and I just planning out some of the shows we wanted to have, we recognized that a lot of our audience is someone that has never invested in real estate before and may not have even thought about doing it up until this point. And so our thought was, you know, for both of us, one of the hardest things was getting that first property. And so how do you go from no properties at all to that very first one? And Jenny and Myke were in the perfect position to kind of share that because they had recently done it, and they have exactly one property. So they are about as relatable as you can possibly get while still being a real estate investor. And so Jenny and Myke’s story is amazing where they’ve really worked together as a couple to kind of figure out what is in their best interests. One of the things I love about their story is that Jenny talks about how it was kind of her idea first, this whole idea of real estate, and how she brought Myke along, which I think, again, a ton of people can resonate with where one spouse gets interested and then brings the other along for the ride and just how that worked and how they played that out. And again, I think overall, their story is about moving across country, relocating at where they were going to invest, and then leveraging their capital from that move into their first investment property and how that worked. It was a great story.

Tim Ulbrich: Yeah, I agree. And I love their passion, Nate, for learning. I know Jenny hosts a real estate book club on Facebook, and she talks so much about the learning process and for those that have ever met Jenny — and a shoutout to her — like she’s one of those people you talk to in a half hour or 60 minutes and you feel motivated and inspired to like get after learning more because she’s just so on fire with learning and also wanting to provide value to other folks and the conversations and the interactions that she’s having. David, to the point of learning, do your homework, this really stands out to me as the third lesson that I heard across multiple episodes, but really highlighting the interview with Jenny and Myke, and that is do your homework and learn, learn, learn, keep learning, but at some point, you’ve got to jump even if you don’t have all the answers. So talk to us about how important that is, when folks might decide when they’re ready to actually make that move, and how they ultimately avoid becoming paralyzed through the analysis phase.

David Bright: Yeah, I think that they had a really good balance there where Jenny in particular was doing a lot of that homework and learning and reading and all of that. Myke created a lot of accountability there in that coming on board together, kind of approaching this as a team. And then when it came time for them to jump, one of the things that they did that I really liked is they didn’t try for like crazy advanced strategies of they got a realtor, and they went on the MLS, and they found a listed property, and they bought it. And so they didn’t — by just jumping in with something that’s a tried-and-true method that you can read a lot about, you can learn a lot about, and it’s probably something very similar to what most everyone that owns their own home has already done. You find a good realtor, you go on the MLS, you find a house, you buy it. So jumping became easier because they had a strategy that helped for that. And by learning through that, that kind of decreased the anxiety and I just really liked how they were able to do that by surrounding themselves with a really solid team and a really solid strategy.

Tim Ulbrich: Yeah, again, that was Episode 05, “None to One: How to Get Your First Investment Property.” None to one, I love that concept, Nate. I think you mentioned it as well, but we should do more of those into the future. I think highlighting more folks because that is the biggest barrier, right? It was for me, I suspect for you guys as well and others that are listening. And maybe you go none to one and you realize it’s not for you. That’s OK. Likely you go none to one and you realize alright, I’m still on my feet, I learned some things, could have done it better, and what does that mean for the next deal going forward and also being able to help others. So “None to One: How to Get Your First Investment Property,” that was Episode 05 with Jenny and Myke White.

Nate Hedrick: And yeah, I would agree. The none to one story I feel like is the most authentic, right? Those people, they come on the show, they have just done this recently, and again, they’re the most relatable investor we can possibly provide. So I really like those stories. And you’re right, I’m hoping to bring more of those to light here with David as we go forward.

Tim Ulbrich: One other theme, David and Nate, that I’ve heard from guests throughout the episodes that you guys have done already is the value of community and learning from others, the value of community and learning from others. You know, that provides accountability, obviously it provides support, being challenged, making connections. We talked about several of these key points here tonight. And I think this is an opportunity for folks, if you’re not already in and aware of what we’re doing with the YFP Real Estate Investing Facebook group, I hope you’ll join us. We’ve got a few hundred pharmacists already that are engaging with one another, sharing some pretty awesome stories, the good, bad, and the ugly, connecting with other pharmacist investors in their community. That’s really what this is all about, hopefully that we can educate, inspire, empower, and ultimately be able to connect you with other investors that are pharmacists and also an opportunity to learn from one another. David, speaking of getting started, I think one of the challenges here is that folks that come on the podcast, even though you guys have done a nice job of asking them questions that may highlight some of the challenges along the way, we’re probably hearing some of the best of the best in terms of their deal stories or examples that they’re providing when you’re asking them to provide an example. And that might not be necessarily something that everyone listening looks at and say, ‘That worked out so well, I’m still nervous that it may not work out for me.’ So tell us about why that’s important folks consider that as they’re hearing guests come on the show.

David Bright: Yeah, I definitely want to caution when you hear things that are just like, ‘Oh, that was an amazing deal. I don’t know how I could ever do that,’ like I don’t want that to be this intimidating thing by featuring some folks where this worked out. Like it definitely doesn’t work out in every situation. Blake and Zach had a nice story that kind of showed some of the other side of that of how things don’t always work out but also how they were able to turn that around and still prevent it from being a disaster. Jared had a very similar story as well. So one of the things that when you have a good team around you, again, since pharmacists are so wired for safety, when you have that good team around you, they help you to not really get super hurt. And so you mentioned a minute ago this ‘none to one’ concept, and that’s one of the nice things about real estate is if you ever go from one back to none, it’s kind of like when you sell the house you live in. You go get a realtor, you put it on the MLS, you sell the house. So if you buy $100,000 rental property and after a few years it’s not really working out for you, hopefully if you’ve surrounded yourself with a good team and bought well, it’s not going to hurt so bad. It’s different than if you would have put $100,000 on Blockbuster 20 years ago or something like that. You could really be in trouble now. So there’s a lot of safety in team and in real estate in general.

Tim Ulbrich: Yeah, great reminder, David. And I know you and Nate have done a great job and will continue to of featuring the good, bad, and the ugly, right? I think it’s important as we talk about this as one option of investing that pharmacists may consider in the context of their financial plan, really understanding what is the benefits, potential benefits, what are the risks, who might this be for and who may this not be for and really trying to present a fair perspective on real estate investing. So Nate, I know we’re just a handful of episodes in, but am I itching as I suspect our listeners are as well, like what’s ahead? What should we expect from the show coming forward?

Nate Hedrick: Yeah, I think more of what we’ve already provided, right? I talked about sharing stories of people that are just getting started. We don’t want to move away from that because I think that is I think a lot of our audience. We’ve got some ideas coming away where we’re going to interview some members of those people’s teams. So property managers, contractors, maybe a real estate agent, financial planning, all the different pieces that go into supporting real estate investing. So taking some looks at that aspect. And then I think too, we’re just trying to share more stories of pharmacists doing this while being pharmacists. You know, that really was kind of the core mission that David and I looked at and making sure that our show was different and our show was relatable to specifically our audience. And so that is one of our big goals as we move forward is to keep sharing those stories of success as pharmacists but having that same success in the real estate side as well.

Tim Ulbrich: Yeah, and I hope you’ll join Nate and David each Saturday, new episode, what a better way to start the weekend, get a cup of coffee, put on the show. For those that are working weekends, you can listen to it on your car ride. Great opportunity to kick off the weekend. And if you have a question or story to share, feel free to reach out to [email protected]. We’d love to hear from you. Again, [email protected]. David and Nate, I’m going to put you guys a little bit on your own hot seat. So one of the things you do at the end of your episodes are some final infusion questions, which I love the pharmacy connection there. And a really cool opportunity to hear from folks about resources and things that are helpful among other things. Question I have for you guys — I do want to ask you for a resource or something that you’re finding value in right now — but first, I want to ask you, as you reflect on the journey thus far, you know, one of the things I share with folks is one of the greatest joys of doing this podcast has been able to meet so many different pharmacists and while I am helping to share their story, I feel like I leave each and every one of those learning something myself and hopefully finding an opportunity to improve. So as you reflect back on the journey thus far, David, we’ll start with you: One thing you’ve learned from the guests that have challenged or inspired you in your own real estate journey.

David Bright: Yeah, one of the things that has really hit me in the first several episodes that we’ve recorded is I’m realizing how most of my personal investing has really just been buy-and-hold investing, long-term rentals, kind of consistent and boring. And I like that because I’m able to do that without it interfering with my work as a pharmacist. One of the things that’s been inspiring to me is seeing pharmacists that leverage multiple strategies. Like I really thought I had to just do the one thing in order for it to be manageable. But seeing other pharmacists that are able to work multiple strategies at the same time and do short-term or medium-term rentals as well, and so it’s opened my brainstorming to maybe there’s other things that I could do, and if I follow in the footsteps of what some of these other investors have been doing, there’s got to be ways that I can also do that without distracting from my work as a pharmacist.

Tim Ulbrich: Very cool. And Nate, what about you?

Nate Hedrick: Yeah. To get really specific, I think it’s actually similar to David. I have not considered short-term rentals before as something that I wanted to get into. But after talking with both Jared and with Rachel, I thought immediately, like I’ve got to look into this more. This is something that I think is really interesting. You know, I’ve stayed at an Airbnb before, but I’ve never owned one. And so you know, again, taking that actual discussion and putting it into practice, right? Kristen and I within the last couple of weeks actually went out and looked at a property we were evaluating as a short-term rental. And that only happened because I had those conversations with Jared and with Rachel. And it was funny, an extra shoutout to Jared Wonders because I texted him the night before we were going to go look at a property, and I’m like, “Alright, man, I need to know everything about buying an STR like tonight.” And he was super helpful. He was like, “OK, well, what do you actually need?” And so he’s giving me all these great resources right over phone. So it’s just really cool to expand what I thought was possible and then have a community to go along with me for the ride. So again, it’s not like I have to go re-learn all this stuff from scratch. I can go right to people that are doing it, living it, and have a great relationship with me already and tap right into them, which is awesome.

Tim Ulbrich: And what a cool example there, Nate, right? I mean, that’s a great example of like going from textbook to application, right? I mean, you talk about short-term rentals, but you actually go out, you look at one, you run some numbers, you talk with somebody else about it, get another opinion. Like that makes it come alive, you know? So I think that’s a cool example of the value of making those connections. Another final infusion question you guys ask to your audience is, you know, what’s one resource, could be a podcast, could be a book, could be a guide, a quiz, a calculator, a form, whatever, that you’re currently drawing value from when it comes to your own journey as a real estate investor. So David?

David Bright: So one of the things that I think we keep making jokes about on the podcast because every week, at least once, “Rich Dad Poor Dad” gets mentioned, right, like if not multiple times. Like I don’t know, that book has changed so many people’s lives. And so kind of going through this, asking these questions and hearing that perpetually come up has actually caused my wife Heather and I to go back through that book —

Tim Ulbrich: Oh, cool.

David Bright: — as the two of us to just kind of talk through some of that, the fundamentals and foundations and mindset from that book because it is so good, and there’s a reason why everybody mentions it. So it’s one of those where I think you can go back and read it for the 13th time or whatever time you’re on, and some of that is just really helpful to continually get your mind in gear for where you’re trying to go.

Tim Ulbrich: Yeah, David, I think that’s one of those books — I haven’t read it 13 times yet, I think I’m only three times through — but it’s one of those books that hits you in a different place like where you are, you know, partly in probably your own personal investing journey mindset-wise. But I kind of have put that among some other books of like I need to revisit this book every couple years because it is that transformational. And I would even argue for those that are listening that are like, I’m not even sure the whole real estate investing thing is for me, I think it’s still that important of a resource just to get you thinking a little bit different in terms of mindset and money. Nate, what about you?

Nate Hedrick: Yeah, the resource that I keep going back to — and I’m stealing from my first answer — is the other pharmacists that we get to talk with, right?

Tim Ulbrich: Yeah.

Nate Hedrick: It starts with David and I, like David has been a fantastic resource for me, but also the other pharmacists that we’re talking to. And just being able to tap into that network, learning from people that are doing this, you know, I’ve always had some sort of community with Bigger Pockets and with my real estate activities, there are other agents I can talk to, but it hasn’t felt like this level of fit where I can just go to those people and we immediately connect and it’s on a different level than I’ve had before. So that for me has been a big change, and it’s a resource that I am fully tapping into. So apologies to all those I’ve already texted and bothered with questions, but it’s a great way to learn and again, we come at this as experts in what we do. But there are so many things that we are not experts in yet, and there are so many ways that I can still learn. And so this has been really fun for me to tap into that and continue to grow and learn.

Tim Ulbrich: Yeah, and the power of networking, right? We talked about it earlier on the show, but I believe that this is another great example, what you just said there, Nate, that there’s enough of this to go around, right, for folks that want to get — this is about other people helping each other, whether that’s in your own community, whether it’s in other communities, and we’re just a handful of episodes in, but I’m starting to see come to shape this concept of pharmacists connecting with other pharmacists in a variety of different ways, being able to encourage and motivate each other on their own journey and perhaps collaborate in some cases if that makes sense. So again, YFP Real Estate Investing podcast, each and every Saturday on this channel. If you have a question that you have for Nate and David or a story to share, please shoot us an email at [email protected]. And for those that are listening and thinking, where do I get started with real estate investing, Nate and David have written a great resource, “The Pharmacist’s Guide to Real Estate Investing.” It’s a quick read, a lot of tangible takeaways. You can get a copy of that for free at YFPRealEstate.com. Again, that’s “The Pharmacist’s Guide to Real Estate Investing.” You can grab a copy for free at YFPRealEstate.com. David and Nate, thank you so much for the contributions on the show as well as taking time this evening.

Nate Hedrick: Thanks, Tim.

David Bright: Thanks so much.

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7 Things to Consider Before Starting a 529 Plan

Posted on June 18, 2021March 12, 2024 by yfpadmin

The following is a guest post from Dr. Jeffrey Keimer. Dr. Keimer is a 2011 graduate of Albany College of Pharmacy and Health Sciences and pharmacy manager for a regional drugstore chain in Vermont. He and his wife Alex have been pursuing financial independence since 2016. Check out Jeff’s new book, FIRE Rx: The Pharmacist’s Guide to Financial Independence to learn how to create an actionable plan to reach financial independence.

Let’s face it, paying for college stinks. Whether you are in school, you’re trying to keep up with your child’s tuition which tends to increase by twice the rate of inflation every year, or you’ve graduated and are facing paying back student loans, the cost of higher education can be a tremendous burden.

So what can you do about it?

Well, the first, and most obvious answer here is you need to save for it. Sure, there are other things you can do to reduce the cost of college such as scholarship hacking (i.e., applying for every scholarship under the sun in the hope you get some) or taking a job with a college offering tuition reimbursement as a benefit, but those kinds of silver bullets aren’t the norm. No, chances are you’re going to need to start thinking about college expenses well in advance and start saving sooner rather than later.

Thankfully, the government gives college savers a helping hand in the form of tax-advantaged savings vehicles; the two most popular choices are the Coverdell Education Savings Account and the 529 plan. In this post, we’re going to do a deep dive into the more popular latter option: the 529.

What is a 529 Plan?

In a nutshell, a 529 plan is simply an account that allows money to be invested and grow tax-free for future education expenses. This is similar to other tax-advantaged accounts like an IRA or 401(k). Unlike those plans, money in a 529 plan can only be withdrawn (without penalty) to pay for qualified education expenses. If the expense qualifies, the money coming out of the plan also comes out tax-free. What’s more, contributions made to 529 plans can have some tax benefits too depending on your state (more on this later). In this respect, the 529 falls somewhere in between a Roth IRA and an HSA in terms of preferential tax treatment.

Before opening one, there are several things to consider; and most, if not all, will depend on your situation. What follows is a brief overview of seven main considerations before starting a 529 plan and it is not an all-inclusive list. As always, if you have questions about how best to incorporate these concepts into your financial plan, make sure to reach out to a financial professional like those at YFP Planning.

Let’s dive in.

What to Consider Before Starting a 529 Plan

1. Which Type of 529 Plan is Right for You?

Like many things in life, even those trying to save for college can find themselves facing the tyranny of choice. Case in point, as of when this post was written, there are 150 different plans considered to be 529 plans. But fear not! We’ll help you sort through it.

First off, you need to decide on the general type of 529 plan you want. While the term “529 Plan” is sometimes used as a catch-all for these savings vehicles, there are only two distinct types of plans governed by section 529 of the Internal Revenue Code: prepaid tuition plans and savings plans.

With a prepaid tuition plan, you do just that: pre-pay tuition. The idea here is that since the price of college tuition tends to increase quite a bit over time, it’s better to prepay to lock in tuition prices at today’s rates. In addition, by using a prepaid plan, there can be far less guesswork in the planning process. Sounds good, right? There’s a catch.

As you may have guessed, when you pre-pay tuition, you’re pre-paying at an institution’s (or institutions’) going rate. As such, you may be limiting where the funds in the account can be spent. After all, you can’t pre-pay 4 years’ worth of tuition for an inexpensive state school and then expect Harvard to say you’re all paid up for there as well. What happens with prepaid plans is that the pre-payment is based on the tuition rates at schools either in a particular state or within a private network of schools outlined by the plan; and to use the prepaid plan as intended, the beneficiary would need to attend one of the covered schools. If the beneficiary chooses to go somewhere else (or doesn’t get into a prepaid school) options are generally limited to changing the beneficiary of the account, rolling the account value into a 529 savings plan, or getting a refund (usually with fees applied).

On the other hand, 529 savings plans offer much more flexibility. With a savings plan, you’re able to use account funds for qualifying expenses at thousands of colleges and universities in the US and abroad as well as private/religious K-12 tuition (up to $10,000 annually). In addition, money added to a savings plan can be invested, similar to a workplace retirement plan, allowing you to grow the account faster when compared to a prepaid plan. Finally, unlike prepaid tuition plans, where participation can be restricted depending on the beneficiary’s state of residence, 529 savings plans are generally open to anyone.

However, not all 529 savings plans are created equal and some are, objectively, better than others. Separating the wheat from the chaff here can be a kind of daunting process too as savings plans comprise the vast majority of available 529 plans and there are several variables to consider for each; such as state-specific tax breaks, plan fees, and investment choice. What’s more, unlike a prepaid tuition plan where the amount you need to save is explicit, market returns (which are relatively unpredictable) are going to play a more central role in the plan’s success. Given the added uncertainty, a savings plan might not work for everyone.

Finally, I should note that while many people choose to use one type of plan or the other exclusively, there’s no law saying you can’t use both. For some, combining the greater certainty of the prepaid plan with the flexibility of a savings plan by investing in both can be a good fit.

2. Should You Use an In-State 529?

Once you’ve decided the kind of 529 plan you want to use, it’s time to start narrowing the list of available plans to the one best suited for the plan’s beneficiary, and you! Generally, the next step here is to decide whether or not to use a plan specific to your state of residence.

Unlike other tax-advantaged accounts such as IRAs and HSAs, the federal government doesn’t offer any tax incentives for 529 contributions. However, depending on your state of residence, contributions made to a 529 plan can have state income tax incentives such as deductions or credits. Here’s where things can get a little challenging. The rules surrounding state tax incentives are, much like state pharmacy laws, kind of a patchwork across the country.

For instance, in my home state of Vermont, my wife and I get a 10% tax credit on up to $5,000 worth of 529 contributions per beneficiary per year as long as we make those contributions to the official in-state 529 plan. If we lived in Pennsylvania though, we could get a tax deduction on up to $30,000 worth of contributions per beneficiary per year and it doesn’t matter what 529 plan we use. But on the flip side, if we lived in California, it doesn’t matter how much we contribute or what plan we contribute to because California doesn’t offer any tax incentives for 529 contributions.

As you can see, the relative value of these tax incentives can vary a lot from state to state. You could live in a state that heavily rewards saving for college…or not so much. When choosing a 529 plan, paying attention to how your state treats contributions can help you avoid leaving money on the table allowing you to save for college much more efficiently.

3. Is Your In-State Plan a Good Investment?

A saying in the investment world is “don’t let the tax tail wag the investment dog” and I think it’s extremely relevant when choosing a 529 savings plan. When it comes to investments, 529 savings plans share a lot in common with workplace retirement plans such as 401(k)s. They both limit your choice of investments to a short menu of options and tend to offer the same types of investments no matter where you go. Typically, this means an age-based allocation strategy (similar to a retirement plan’s target-date fund) and some stock, bond, and cash choices for those who want a more custom portfolio.

So if there’s not much difference between savings plans in terms of what they offer, why should an investor care about which plan they choose?

Fees!

Just as I said in an earlier post on investing basics, fees can have an enormous impact on your overall investment returns. Their effect on the performance of a 529 savings plan is no different. While many plans offer solid low-cost investment options, some do not. And worse yet, some plans charge high admin or advisor fees on top of those already charged by the funds you invest in. Yikes!

So going back to the old investing adage “don’t let the tax tail wag the investment dog,” the presence of high fees within your in-state options is a good reason to think twice before investing. After all, getting a couple of hundred dollars back in taxes but losing thousands due to fees over time is the very definition of penny-wise, pound-foolish.

It’s for this reason that many people who choose to use a 529 savings plan opt for an out-of-state plan. Once you’ve decided to invest outside the limited options provided by your state, you’re free to choose whatever plan you want; some of which explicitly market themselves as low-fee options.

In addition, depending on your state, it may be possible to invest in the in-state option, get a tax break, and then later, move the investment to a more fee-friendly out-of-state plan (so-called “deduct and dash”). Yes, it’s possible to have your cake and eat it too. This sort of thing isn’t allowed in all states though, and doing so in the wrong state might cause tax penalties. Be sure to check first with a CPA or another qualified tax professional before pursuing such a plan.

4. What Types of Expenses are Covered?

When I was in college, I spent a whole lot of money on a variety of things that were loosely affiliated with my status as a full-time student. However, a number of those expenses that I would’ve considered to be “college-related” wouldn’t have been considered qualified higher education expenses covered by a 529 savings plan. Here’s a short list of what would’ve made the cut:

Tuition and fees
Room and board (limited to the costs published by the college attended)
Textbooks
Computers (related to schooling only, sorry no gaming or crypto mining rigs)
Student loan repayment ($10k lifetime max per beneficiary as of 2021)
Tuition for private or religious K-12 education (up to $10k per year)

But what about other things such as transportation or the cost of an internet connection for the apartment? Surely those are “education-related expenses” and would be covered, right? Wrong! This is where people trying to pay for everything related to a child’s schooling can get into trouble when using 529 funds.

So what happens if money from a 529 savings plan gets tapped for a non-qualified expense? First off, relax, no one from the government is going to come and break down your door about it. However, you will owe ordinary income tax on the portion of the withdrawal that comes from account earnings as well as a 10% penalty; very similar to what would happen if you withdrew from a Roth IRA before age 59 ½.

5. What are Your Plan’s Contribution Limits?

So just how much money can you squirrel away in a 529 savings plan? Well, the most accurate answer here is “it depends.” Contribution limits are set not by the federal government, but instead by the states, and it ends up being another legal patchwork across the country. In addition, contribution limits are not based on some yearly amount that you can put in, but by a limit on the balance of the account. Once the account’s value reaches the prescribed limit, no more contributions can be made until the balance falls back below it.

On the other hand, even states boasting the lowest allowable balances let you build up quite the war chest before the limits are reached. For example, as of 2021, even the strictest of state-sponsored plans have a limit of $235,000 per beneficiary; quite a bit if you ask me. And if that weren’t enough, some states will even let you have over half a million in a 529. At that point, if you can’t pay for college, you’re doing it wrong.

6. Is “Front Loading” Contributions the Right Move?

Another question often asked about 529 plans is whether you should front-load the contributions (aka. lump sum invest) or spread them out over time (aka dollar cost average). Fortunately, there’s some guidance on this and generally speaking, it’s better to invest as much as you can as early as possible. As the adage goes “time in the market beats timing the market.” The more time your investments have to grow, the better chance you have for those investments to grow.

In addition, the IRS makes a special exception for 529 contributions when it comes to gift taxes. Normally when you give money to a child, there’s a $15,000 per year cap per person, per child ($30,000 for couples filing jointly). However, the IRS makes an exception for gifts going to 529 accounts, allowing you to front-load 5 years of contributions into one. This could mean up to $150,000 going into a 529 account in a single year! Now I know what you’re thinking, that sounds pretty baller even on a pharmacist’s salary, but hear me out. Given the exception, front-loading a 529 account like this can be a very good play for those receiving an inheritance or other significant windfall. While it won’t keep you from paying taxes on the money you get, it can keep that money growing tax-free and for a good cause.

7. What if My Kid Doesn’t Use It?

Finally, when thinking about using a 529 as part of the financial plan, you should consider what to do with it if the original beneficiary doesn’t use all the money in it to fund their education. Or who knows, maybe they don’t use any of it! What happens then?

Fortunately, the 529 isn’t a use-it-or-lose-it type of savings vehicle like the flexible spending account (FSA) you may have at work for healthcare expenses. The money saved in one will continue to be there regardless of what your kid chooses to do in life. So if they don’t use it all does it make sense to just cash it out? Maybe, but transferring the account to someone else will probably make more sense when you consider the taxes and penalties you’d have to pay on such a move.

So how does that work? Well, it could be as simple as just changing the name of the beneficiary on the account. First kid not going to use the money? Now that money belongs to the second kid. Done. You could even name yourself as the new beneficiary to help fund yourself going back to school, something that may become necessary in the future. As Yuval Noah Harari points out in his book, 21 Lessons for the 21st Century, the speed at which new technologies are disrupting old industries these days may make it difficult for anyone to stay in the same profession for 40 years; especially those in highly specialized ones such as pharmacy. Given that, utilizing a 529 account to fund not just your childrens’ but further your education by taking advantage of their ease of transferability can help protect you and your family from this kind of uncertainty.

But what if the person you want to name as a beneficiary already has their own 529 account? No worries, you can just combine the accounts once a year through a rollover. A rollover can also be a good choice if you move states and the new state you’re in has a better plan.

Conclusion

Overall, 529 plans can be a solid choice as a savings vehicle for future education expenses. With their preferential tax treatment, high contribution limits, and ease of transferability, choosing to use a 529 plan versus alternatives such as a taxable brokerage account can make a lot of sense.

529 Plans aren’t without their drawbacks though. The quality and tax benefits of 529 plans can vary from state to state, with some states making investments in their 529 almost a no-brainer and others…well, not so much. In addition, the requirement to spend 529 money on “qualified higher education expenses” only without incurring a significant penalty, can definitely be a turn-off for those who don’t care for restrictions on their savings.

Need help determining how to best save for your child’s education?

In the end, the suitability of a 529 plan as a savings vehicle is going to come down to your family’s financial plan. The seven considerations I’ve spoken to above are good for getting an appreciation of these types of plans and how they might fit into your plan. But it’s no substitute for doing in-depth research or working with a financial professional. If you think you need more help deciding whether a 529 plan is a good fit or which one to choose, feel free to reach out to the team of fee-only, comprehensive CERTIFIED FINANCIAL PLANNERS TM at YFP Planning. They can walk you through all the ins and outs of saving for college and getting the most from your customized financial plan.

You can book a free discovery meeting with our team to see if YFP Planning is the right fit for you.

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YFP 208: Why Minimizing Fees On Your Investments Is So Important

Posted on June 17, 2021November 2, 2022 by yfpadmin

Why Minimizing Fees On Your Investments Is So Important

Tim Baker digs into the f-word we want to minimize when it comes to our investments…FEES! When you do the hard work to save money, you should be interested in keeping as much of that investment intact by minimizing the fees that can take away from your long-term gains. Tim discusses various fees, the impact these fees can have on achieving your long-term savings goals, and strategies you can take to evaluate the fees related to your own investment plan.

Summary

Tim Baker discusses the many types of fees associated with your investments and their impact on your financial plan, including expense ratios, platform fees, trading fees, and advisor fees. He also breaks down the ABCs of mutual funds: A shares, B shares, and C shares and the types of fees each of these investments may include. Tim further details how these fees can impact your investments over time, affect growth, and impact your financial plan overall.

Tim discusses his experiences with clients, sharing that many do not know they are being charged various fees or do not understand the full impact the cost can be in the long term. While many fees may be challenging to uncover, Tim shares the importance of asking questions about fees, whether you are just getting started or are farther into your investment history. Investors should be asking what their fees are, why they are paying them, and the benefit – if any – they have on the investments.

Tim mentions that it’s okay to pay a fee for professional help but be wary when advisors are charging commission because there may be a conflict of interest. Tim also suggests you ask what you are getting for your fees across the board, with professional services as well as the investments themselves. Typically, the expense that you pay does not equate to increased benefits for the investor, so trimming those fees whenever and wherever possible may benefit the investor over time.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tim, back-to-back episodes. Good to have you on again.

Tim Baker: Yeah, good to be back. I’m excited for this episode. I think it’s going to be hopefully valuable for those that are listening.

Tim Ulbrich: Yeah, I think so. And we talked last week about common financial errors or mistakes, some that we’ve made, some we’ve seen other pharmacist clients, colleagues, make. And today, we’re talking about one that was not on that list of common mistakes we discussed last episode but certainly can have a major impact on how much wealth you’re able to build. And we’re going to talk really big numbers at the impact that fees can have, fees on the investments is going to be the focus of today’s discussion and hopefully shedding some light on a topic that maybe folks have heard about but haven’t really thought about and evaluated for their own investing plan. So Tim, one of the things I share when I talk on the topic of investing is that if you’re going to do all of the hard work to save money each and every month, take advantage of compound interest and the time value of money, then we want to do everything we can to maintain as much of the pie as possible. And I often think that there’s really three big things that can eat at our investment pie: that’s taxes — and we’ve talked about that on several episodes on the show of things that we can do from the tax-advantaged investing standpoint — inflation — obviously can be out of control to some degree — and then the third is the one we’re going to be talking about today, which is fees. And something I’ve heard you say before is that you need to follow the “Three F Rule” of 401k management. And that’s Figure out the Fees First. So that’s what we’re going to be digging into today, and that’s even beyond just the 401k when we talk about fees. So Tim, before we get too far into the weeds about this discussion of fees, let’s back up a bit as some may be thinking, fees on my investments? What fees on my investments? So talk to us a little bit about the common fees that are out there when it comes to one’s individual investment portfolio.

Tim Baker: Yeah, if I could even back up further, Tim, I would even say like the importance of this — like it shouldn’t be understated. And I think that, you know, when we — kind of like when I talk about baby stepping the financial plan, we look at things like what does the emergency fund look like, what does the consumer debt look like.

Tim Ulbrich: Yeah.

Tim Baker: When we dive in particular into the investment part of the financial plan, one of the first things I look at is fees. And you know, outside of the asset allocation, which the asset allocation being like how do I divvy up in a broad sense between like stocks versus bonds and you can actually get more granular than that, outside of the asset allocations, the fees probably play one of the biggest roles in your ability to kind of build wealth over time and really the fees, just like you mentioned along with tax and inflation, is it can really be in a factor that erodes that ability to build wealth. So it’s super important. And you know, when I look at the fees, one of the problems in the industry is that the industry is not super transparent with regard to what the investor pays. A lot of these can be wrapped up in products that are sold to investors or not necessarily appropriately disclosed on a statement. So you’re really up against it when you’re trying to figure out, OK, what exactly am I paying? And the fact that it can be a little bit opaque in that regard is frustrating. I think that’s one of the things that we work with our clients is to show them, ‘Hey, did you know that you’re paying this in your 401k?’ And most people are like, ‘I had no idea.’ Then the question is, ‘Is that good or bad?’ And I’m like, ‘Well, it’s typically higher than what we see,’ or something along those lines. So to me, the name in the game is really trying to understand — to answer the question, what are the things that you could be charged? And then like what is that exactly for your particular case? So if we look at the things that we typically see, if we look at the 401k first, you know, the things that are typically in the 401k are things like platform fees. So this might be where Fidelity or Schwab or someone might charge you a fee just to really have an account with them. And that’s less common in a 401k. You typically see them more in brokerage accounts, more in IRAs. When I was in the broker dealer world, we would charge — the custodian would charge clients just to have an account open. And a lot of this is in also response to like lower entrance environments. You know, they’re trying to make money where they can. And sometimes these additional line item fees are created. Things like trading fees and transaction fees. So this is like anytime that you buy and sell, again, typically you don’t see these inside of a 401k, but you do see these outside, like a brokerage account, an IRA, you know, if you buy stock ABC, sometimes you’ll be charged anywhere from $7 to $50 a trade. Now, these have kind of become less and less common as a lot of the custodians want to be competitive and they’ll waive fees and things like that.

Tim Ulbrich: Race to 0 here, right?

Tim Baker: Exactly.

Tim Ulbrich: Yeah.

Tim Baker: Yep. The other thing that you would see are things like advisor fees. So these can be both within inside and outside of a 401k. So these are things like, ‘Hey, I work with an advisor, and they charge me a flat 1% on the investments that they’re managing.’ It could also come in the form of commissions, and that’s a whole other ball of wax in terms of how an A share, a B share, a C share mutual fund, you typically don’t see commissions inside of a 401k, but you do see — sometimes you see C share, which are commissions, inside of a 401k. But you typically see those more in brokerage accounts, IRAs, and such that. And then probably the last one that basically permeates just about every investment is expense ratio. So the expense ratio is the money that the fund takes to kind of run the fund. So if I’m a mutual fund manager, Tim, and I’m in charge of a large cap mutual fund, you know, I’m managing billions of dollars, so I’m pulling a bunch of investors’ money together to buy large cap stocks and the like. Then I need to pay myself, I need to pay for the fancy office on Wall Street, I need to be able to pay for information. I might even need to pay sales people to go out and market my fund. So those all are basically captured in an expense ratio. So the expense ratio basically, you know, takes money out of that fund and it’s shared, that expense is shared, with the rest of the investors that are invested in it. So those are typically the broad strokes. You also see other ones I would say outside — and these kind of can get wrapped up into platform fees — but you’ll see like administrative or like bookkeeping fees in a 401k. And this could be like record keeping and all of the laws that are surrounding 401k plans and 403b’s. These can be pretty prohibitive. Sometimes they’re a flat fee, sometimes they’re a percentage. But these are kind of just administrative fees that, again, that are not listed on a — they’re not listed on a statement anywhere. It’s just part of the plan and what the plan takes to make sure it runs within the laws of the United States.

Tim Ulbrich: Tim, when I hear you say, you know — and obviously it depends on the account, you mentioned some of these may be more applicable to like an IRA, brokerage, others across the board, but several different types of fees you mentioned, right? Platform fees, advisor fees, trading fees, sometimes commission fees, expense ratios perhaps is the one that folks may be most aware of. My follow-up question is transparency and understanding of these fees. So those are two very different things to me. You know? Even if something is transparent, how it’s disclosed or how somebody may be informed of it or how easy it is to find that information obviously can lead to whether or not they may have an understanding of it. So in your experience working with clients and really more specifically our clients at YFP Planning, is this something that you find folks are surprised by? And how transparent and accessible is this information to either the individual or you as the advisor trying to work with them?

Tim Baker: Yeah, Tim, so I think it is a surprise. And what I typically try to do to kind of make it a little bit more real is put it in real dollar sense. So you know, one of the things that when we talk to pharmacy schools and we’re trying to like drive home the point that this isn’t Monopoly money, that when you graduate, you’re like at with the average student loan debt that graduates are coming out with, it’s a $2,000 payment for 10 years. And when most people think about it in that terms, you’re like, ‘Oh, OK, that becomes more real.’ So I try to do the same thing with the fees. So yeah, like when we go over this, I think at first, it’s like, ‘Oh, OK, well that doesn’t sound that bad.’ You know, so like I’m looking at this independent pharmacist, their 401k, and typically the smaller the employer, the worse the 401k is or the most more expensive it is per each participant. So like this particular pharmacist, their all-in when they look at the administrative fees and the average investment fees, it’s about 1.27%. So you’re like, ‘Wow, that doesn’t sound too bad, 1.27%.’ But if you have $100,000 in that 401k, that’s $1,270 per year that the 401k and the funds inside of the 401k basically absorbs. So with this particular client, they have $250,000 in that, so that’s a lot more. It’s a lot more money. It’s more than double that every year. And again, it’s not like it’s a line item on the statement anywhere. It’s what the 401k takes to run and the investments take to basically run the funds that they’re in. So what we really try to do is, again, look at it — and we have tools that can assess that information. But even to do it yourself — and I’ve tried to do this even outside of the tools that we use — it’s hard to find. You have to find basically the plan. Every year, they have to file what’s called a Form 5500 with the IRS that basically outlines how much money is in the fund and what are the assets, what are the liabilities, if there’s any loans, what are the admin expenses. And a lot of those are just a dollar amount that’s populated in there. So like sometimes you might see like, ‘Oh, my administrative fee is 1.2%.’ And then the next time we log into our tool, it’s 1.4% just because there’s new data that’s been filed with the IRS. So it’s a little bit of a moving target as well. And I think the — you know, I think I read a stat somewhere that the average 401k all-in expense is about like 1.68%.

Tim Ulbrich: That’s wild.

Tim Baker: So — yeah. And again, when I look at our 401k that we’ve set up at YFP, I think it’s less than .2%. I think the fees have changed a little bit for ours, but I think when you look at the expense ratio and everything, it’s less than .2%. So it’s a factor of 8. So if I’m paying $1,000 — and again, that’s a pretty large 401k with that, then I don’t want to pay $8,000 a year. So those are some of the things that most people when they say, ‘Oh, like 1.2% is not bad,’ but then when we actually put in dollars — and then if we compound that year over year, it really adds up. So to me, the fees are so important. And I think another discussion to have is like OK, but like are the fees worth it?

Tim Ulbrich: That’s right. Yep.

Tim Baker: And I would say in a lot of the cases, no. I mean, with some of these fees, you have to pay the fees to be able to like have the fund run and things like that. But in a lot of cases, if you’re paying 10x the amount in terms of an expense ratio, you’re not getting 10x the performance or it’s not 10x safer for the same amount of performance. So every type of fee is going to be different in why you would pay this versus that, but in most cases, the name of the game is to kind of shave that down as much as you can to really the investments unadulterated so it can grow and really allow you to build wealth over 10, 20, 30 years, whatever the time horizon is.

Tim Ulbrich: Yeah, and I think one of the things, Tim, I’ve heard you say often is that our job, your job, and the planning team’s job, one of the roles is to really try to keep as much of that contribution intact as possible and allow the compound growth to do its thing, right? So really minimize the fees that are coming out of that. And I think that’s so important. You know, again, back to my earlier comment, if you’re already doing the hard work, right, to put away whatever percentage of your income each and every month towards long-term savings, then why do we want to give up anything in terms of the fees? And that example you gave is really powerful, that independent pharmacist who’s got $250,000 in that account with a 1.27%, which is, as you mentioned, is lower than the average 401k. You know, that’s a little over $3,000 this year. But as that account continues to grow and compound, that $250,000 is eventually going to turn into likely $300,000 and $400,000 and $500,000 and so on. And that fee obviously will continue to go up over time. So let me ask the big and nebulous question. Like yeah, maybe a 10x fee isn’t worth or justified that you’re going to have that value, but is there a place where the fees are justified? You know, such that whatever would be the net return inclusive of fees makes the fees worth it? And how do you evaluate that decision?

Tim Baker: Yeah, I mean, I think with — so it’s going to sound a little self-serving, but I think if you’re paying an advisor, a fiduciary, a fee-only advisor, and you’re paying them say whatever percentage out of your investments to be able to do financial planning or investment management or what we do, which is very comprehensive with the tax work and really a lot of different components there, I think that the return that you get far exceeds what you pay. The idea is that our focus is on more of wealth building, not necessarily just the investments and everything else but it kind of is beyond that. When I think of the — if you take things like expense ratio as an example, I’m looking at a client who — you know, and that same client that was at 1.27%, I think when we first started working with them, it was close to 2% because there are things that you can control and there are things that you can’t control with regard to the 401k. So things that you can’t really control are things like administrative, record keeping fees. Like that’s just — you know, I always talk about with the investments in a 401k, that’s the sandbox. Like those are the toys that you can play with. There’s only 10, 20 mutual funds in there. And it’s the same thing, like with some of the fees, you can’t really effect change unless you’re small enough that you can, you work for an independent pharmacy, you can say, “Hey, boss, this 401k is pretty terrible. Can we replace it?” For bigger organizations, that’s a harder thing to go about. So you’re kind of stuck with those fees. But things that you can control somewhat are things like the expense ratio. So this particular client’s, her average investment fees are .06%. So that’s her expense ratio. But when we started, it was closer to .8%. So again, a $100,000 portfolio, just for this part of the portfolio, she’s paying $60 per year whereas before she’s paying over $800. So the reason that we did that — or how we got there is that the funds that she was in, she was selecting a lot of the funds that she heard of like American funds or I think there was like a Morgan Stanley here and JP Morgan. And these funds are more expensive as in comparison. So I’m in this particular portfolio, and I’m looking at the mid-cap fund that she was in, it’s called a Touchstone mid cap, and the ticker is TMPIX. That costs .9%. So if I had $100,000 just in this, I would be paying $900 per year. What we replaced that with was an iShares fund that basically is .05%. So .9% versus .05%. So $50 on $100,000 or $900. So like those are things that you can control. And for the most part, there’s going to be differences, especially as you get to mid and small and international funds. Like there will be some differences in performance and some differences here and there, but for the most part, you know, like if I look at those same funds and I have the data that says over the course of a year, the mid cap iShares that we put her in is up 56%. The one that was more expensive is up 33%. You know, five years, it’s pretty close, 17% with the one that we put her in, 16%. So the performance, these are things you have to look at: since inception, 10% versus 9% for that. So like there are things that you have to look at, but typically the expense that you pay is not worth it. And for things like large cap, when you click into those and you say, ‘OK, what am I actually invested in?’ So like what are the underlying funds, it’s the same stuff, Tim. It’s things like that we know about. It’s Apple, it’s Microsoft, it’s Amazon, Facebook. It’s just that if you wrap it in a more expensive wrapper, you charge 5, 6, 10x just because it’s a known entity, even though Vanguard and iShares are pretty known, there is — like from a large cap fund, it should be very cheap because everyone is invested in the same stuff. So I don’t like paying high administrative fees. I don’t mind paying like a flat dollar amount, so like there’s sometimes you see like, oh, it’s $80. OK. That’s better than .8%. Expense ratio, I don’t like paying a high expense ratio. I don’t like when advisors charge commission. I just think that there’s a conflict of interest there. So these are typically outside of the 401k. So I think it’s OK to pay a fee for professional help, but it just depends on like what do you get for that? And you know, and all of the associated fees that come with that, what do you get for that? So if there are 401k’s that charge you .2% or less and then there’s some that charge you close to 2%, that’s a big range over the course of — and are you getting 12x more value there? And I typically say the answer is no.

Tim Ulbrich: Yeah, I think it’s just a really good reminder, you know, Tim, that No. 1, not all fees are created equal. Right? So really asking yourself, what may or may not be justified with this fee? And then you know, I think really evaluating and understanding what your current fee situation is and recognizing that some of that may not be in your control, to your point, that especially for those that work for a larger organization, unless you’ve got the ear of HR and can influence those decisions, that 401k plan is probably what it is in terms of some of those fees. But within the fee options, might you have some control when it comes to expense ratio and then obviously in other accounts, IRA and so forth, then you can leverage other options to reduce those fees. Tim, I suspect that many of our listeners, especially those that are listening today that have been saving for some time, might be investing in mutual funds through various institutions to be unnamed and are paying substantial fees and, as we’ve discussed, aren’t even aware of it. So I want to take a few minutes to just break down the A, B, Cs of mutual funds. And that’s A shares, B shares, and C shares. So can you quickly define the difference between A shares, B shares, and C shares and then talk to us a little bit about what is the fees or could be the fees associated with those types of shares?

Tim Baker: Yeah, so whenever you see A shares, B shares, C shares, what you typically — think commission. So that’s — it’s a sales commission for that intermediary, the intermediary being the financial advisor, that is selling you a product, i.e. a mutual fund, in exchange for a commission. And I’ve sold these in the past, so like I’m a big proponent of fee-only. I haven’t always been a fee-only advisor. I started in the industry in fee-based, which is often confused for fee-only. A lot of the fee-only people want advisors that are fee-based to identify as fee and commission. So when I was in this model, I thought, again, I thought we were great because we didn’t have to sell a proprietary product that was with one of the big financial institutions. We could basically sell whatever we wanted. But the reality is that you want to really work with someone that is not selling on commission, in my opinion, because I think there’s a conflict of interest there. So anytime that you have the sale of a product with advice, there’s a conflict. So when you hear or see A, B, C shares — and you can typically see this, you can see this on the statement, but it’s not necessarily as intuitive as you would want it. So like I’m looking at a statement from a very big institution that I know goes and markets to pharmacists, talks to pharmacy schools, but on the statement, I see the mutual funds that this particular pharmacist was in was a Washington Mutual Investors Fund, CL A. So CL A. So that’s Class A, which that’s an A share mutual fund. So what that means is that for an A share mutual fund, these are up front basically fees or commissions with lower expense ratios. So these are typically better for long-term investors. I would say they’re not necessarily good for anybody. But the idea, Tim, is that if this particular — say you opened up an IRA with me and I basically charged you an A share commission, this particular fund I think basically charges 5.75%. So $5,000 times 5.75%, that’s a $287 commission that goes straight to me. So basically, when I look at my statement the next time, my statement is going to be like $4,700. It’s going to be $300 short. A lot of advisors don’t necessarily like to sell those because it can be very, you know, abrupt for clients. The other way to basically sell these — and I’ve never sold a B share, and I’m not sure how prevalent they are, but a B share, it’s basically, it has high exit fees for when you sell and higher expense ratios. But they convert over to A shares over basically the course of many years. So the idea is that you don’t get that kind of abrupt fee, but if you hold the investment long enough, it basically converts into an A share. And I don’t have as much experience with these and I haven’t seen these much, even on statements. But the one that I do see fairly often is called a C share. So these have higher expense ratios than A shares and a small exit fee that’s typically waived after one year. So the idea is that in that same example, if you were to basically buy, put $5,000 into a C share mutual fund, you wouldn’t necessarily get hit with a big commission up front, but what’s basically on there is — and it’s kind of built into the total expense ratio — is 12b1 fees. So this is like a marketing fee. So as the advisor, I would be making say like 1% as long as you held that investment. So it’s more of a trailing commission that you pay versus an up front commission. And these could be very prohibitive to an investor. Lots of fees that you really don’t understand how you’re paying. And the advisor is basically getting paid that marketing or that service fee over the course of however long you’ve held that investment.

Tim Ulbrich: So Tim, let me ask the question that I suspect many of our listeners are thinking, that I’m thinking individually as you describe A shares, B shares, C shares on the heels of our discussion of today’s day and age where we can obviously have an option to reduce some of those fees, whether that be up front trading fees or even ongoing expense ratios. There’s other options that are out there. What is the role, if any, for these A shares, B shares, and C shares? Like are these ever in the best interest of a client? And I say that dramatically knowing it’s not a black-and-white answer, but why would I invest in an A share, B share, or C share?

Tim Baker: So in my experience in this world, you would charge a client — and this is going to be very true for many kind of new practitioners and pharmacists that are out there that are maybe seeking help and a lot of people that are listening to this. So the industry and really why I’m here sitting in this seat and why, Tim, we’re partners, it kind of is derived from the story or the way that the industry basically operates. So when I was in the fee and commission, the fee-based world, it was — and I started working with a lot of pharmacists — the going advice was — you know, and I remember, I actually remember, I have this pivotal memory where I was talking to my mentor and I think the pharmacist couple that I was working with, they had something like $300,000 in student loans. And I was like, ‘Hey, mentor, like what do you think that we should do with this client’s?’ And basically, the advice was, to me, to how to advise the client was to say, “Hey, just tell them the loans will figure themselves out. Either a snowball or something like that, focus on the highest interest first,” which is terrible advice, Tim, as we all know, that the student loans are going to be more nuanced. And then you know, because this client maybe had like $20,000 to invest, that’s not a lot of money. So like it was sell them insurance that they didn’t need, so whether that was life or disability insurance, and then invest their IRA or something like that and then just touch base with them every couple years until they have $50,000, $100,000, $250,000, and then you can actually ‘help’ them. The problem with this model, Tim, is that it’s not a planning issue. Like we work with clients that are in their 30s that there is a lot of need there to get their investments, their debt, their cash flowing budgeting, their insurance, their credit, their taxes, all humming and working in a unified fashion that we’re really trying to take the resources that the client has and apply them in a way that is a wealthy life to them. It’s not a planning issue. It’s a pricing issue. And unfortunately, the way that the industry is set up is that, hey, unless you have investments, I can’t really do anything for you. And it’s because somebody with $20,000, that’s $200 a year on a 1% AUM versus if someone had $200,000, 1%, that’s $2,000. So money talks, right? So that’s where A share and C share and those types of commissions come into play is like typically if it was less than $50,000 or typically less than $100,000, you would charge these commissions, especially the A share, because it was a higher upfront or a C share because it was more — I want to say it was more undetected, under the radar. And then you would couple that with a crappy insurance product or disability that they might not need. Or maybe they do need, but you’re still making commission on that. And that was a way for you to help the client and make a little bit of money, feed yourself at the same time. And I don’t want to — so I also don’t want to paint a picture, sometimes especially in the fee-only community, there is this picture that’s painted that like people that charge commissions are evil. They’re not. They’re not. It’s just the difference in model. And you know, I was early enough in my career that I recognized — in financial services — that I recognized that there was a better way, and that’s being fee-only and that’s not charging these commissions. So I was able to pivot away from that. It’s not that they’re evil, it’s just that I think the model or the system that they’re in doesn’t necessarily suit itself for a lot of clients. You know, typically — we talk about this with insurance — typically the better the insurance product is for the person that’s selling it, the worse it is for the person that’s basically buying it. So there is this kind of 0-sum, so to speak. So if you’re out there and you’re like, ‘Hmm, I’m listening to Tim and I’m going to look at my statement and see,’ if you see like A’s and C’s next to your mutual fund that says Class A or just I’m looking at one that says Investo Equity and Income Funds C, I know that that particular — at that particular time, he’s being charged kind of an ongoing trail that’s eating away. And again, if he’s being serviced for that, maybe that’s worth it. But in most cases, it’s not. I wouldn’t say that there’s ever — there’s never a time — but I would say, you know, again, there are advisors out there that will work with you in a fiduciary capacity and that should be divorced from the commissions that you would make from selling a product. So one of the things that, you know, kind of longer story longer, Tim, one of the things that I talk about, when I was in the broker-dealer world, the fee-based, fee and commission world, this is the story that I tell prospects and clients is you know, I would show up to the office and I would see on my counter, I’m like, ‘Oh, this mutual fund wholesaler is going to come a-knocking.’ And that wholesaler would show up to our office in a fancy suit, he would take basically the advisors in our office, which was me and my mentor, he would take us out to a fancy dinner or a fancy lunch, I should say, he would show us fancy glossies about why his funds were so — or her funds were so great. And then he would basically say, “Hey, when your client Tim Ulbrich, when he leaves his job or if he has money on the side and he wants to roll over that Fidelity 401k, like use our funds.” And —

Tim Ulbrich: Sounds like another industry I know, Tim.

Tim Baker: Yeah, it sounds like drug rep, right? And when I say that, most people are like, ‘Oh yeah.’ But here’s the difference, Tim. Like in the medical world, my understanding is that it’s illegal for physicians to get kickbacks from pharmaceutical companies because it taints their ability to prescribe medication without the strings attached, right?

Tim Ulbrich: Absolutely. Yep.

Tim Baker: But if we compare that to my industry, the financial services, not only is it legal, it’s prevalent. So like 95% of advisors out there operate in this manner. So like now, like no one takes me out to lunch, Tim. No one takes me out to lunch because I’m not incentivized to put someone in these mutual funds because I don’t make a commission from that. So what I’m incentivized to do is to put the client in the best situation across the board, but particularly for the investments we’re talking about where they’re paying the least amount for the most gain. So like, I would get through those lunches — again, they’re not all bad. You would learn something. But you kind of felt like you needed to take a shower because you kind of — you know, they gave you something. They gave you a nice lunch, so you’re kind of like, alright, well, if this client rolls it over, you kind of feel beholden to them. And I just hated that feeling. And by the way, if you’re putting those sales rep out in the field, that costs money.

Tim Ulbrich: That’s right.

Tim Baker: Who pays for that? The investor does. And that typically means that fund that you’re investing in is going to be more expensive. So I remember having this conversation, you know, and I was talking to this old wholesaler, this experienced, I should say, wholesaler, and I’m like — and I found the kind of story to really dig deeper, and I’m like, “So how can you guys justify charging 1.5% on your large cap when I could put the client in a Vanguard fund that’s .05%?” And he started talking about like, you know — and again, there was nothing about that when I was buying because it’s literally 10x more — like it’s so much more, and I just don’t think that you get that return. So I know a little bit — kind of on a tangent there — but to me, it’s one of these things that I think as a pharmacist, these are things that you probably aren’t looking at that over the course of years really have a compounding factor, either from a negative perspective or if you can remove those, it can be very positive. So it’s important to maybe dust off your statement and look at it and really understand what you’re paying.

Tim Ulbrich: Yeah, and as we zoom out for a moment, Tim, to that point coming full circle here, don’t underestimate the long-term impact of these fees. You know, any one year, especially for those that are maybe getting started with investing and haven’t built up that large portfolio, you might look at 1%, 1.2%, 1.5% and say, ‘Eh, what’s the big deal?’ But if you look at 1.5%, as an example, versus .2% as another example and perhaps even an opportunity to get lower than that, over the long range of 30 or 35 years, that’s a big frickin’ deal.

Tim Baker: Yeah.

Tim Ulbrich: Big deal. And I wrote a blog post a couple years back that we’ll link to in the show notes really showing two side-by-side examples of somebody who’s investing over 35 years, another person same timeline, 1.5% average annual fee versus .2%, and it ends up being the difference of $1 million. And the title of that article is “Are You Making this $1 Million Mistake?” And you know, for some, maybe it’s larger. For others, maybe it’s a little bit smaller. But I think it’s so important that we uncover, understand, and begin to put a plan in place that can minimize these fees if possible wherever you have control of doing that. Tim, two perspectives I want to talk about as we wrap up this really important: And that’s first, from the perspective of, ‘Hey, I’m listening and I’m at the beginning of my investing journey. What can I do?’ And then somebody who’s listening that says, ‘You know what, I’m more in the wealth-building phase. I’ve been investing, maybe I’ve got a loose understanding of some of these fees but I’m not exactly sure. And what can I do and pivot now? And is it perhaps too late or not?’ So what would you say to those two individuals, one who’s just getting started, what tangible steps that I can take, and somebody who’s maybe a little bit later on in their journey and wondering is it too late and are there steps that I can take to help reconcile some of this issue around fees?

Tim Baker: Yeah, so I think for both of those buckets of people, I think it really goes back to what are your goals, right? So I think some people, they work with an advisor because they think that’s the right thing to do. And the advisor, you know, unfortunately sometimes it’s like every solution is the same. So everyone needs insurance and I need to make that commission. And that’s not true. I think it’s really understanding what your goals are, and that’s the first and foremost thing. And I think from there, if you’re at the beginning of the journey, I think it’s ask questions. You know, if I’m looking at my 401k statement, I want to understand why am I paying these fees? A lot of 401k’s, they have these managed solutions, and I’m like, well what do you get for that? And most of the time, it’s not a whole lot. Same thing like if you’re at the beginning and you maybe, you were contacted by an advisor in pharmacy school, chances are if you started working with them, a lot of those in mutual funds and IRAs and even — we just signed on a client that was sold this recently, and we’re like, it’s kind of a process of unwinding them. It’s really being cognizant of this and don’t sweep this under the rug. So like it’s definitely something that can compound over many, many years. So you want to get it right out of the gate. And it isn’t ever too late. So for the second, for the wealth-building phase, people that maybe have been working with an advisor for a long time or maybe their advisor is someone that’s been in the family, things have changed. So like even 10 years ago, what was offered in terms of high expenses and commissions and things like that, that day is thankfully dying with the advent of Vanguard and really trying to drive fees down and things like that. But I look at some of these well-known institutions that a lot of pharmacists work with, there’s just a better route. So like, you know, I’m looking at this particular statement, and the all-in for what this particular client was paying on commissions and everything like that was something like 1.75%.

Tim Ulbrich: Sheesh.

Tim Baker: You know? And if I compare that to like what we do, like if we were to move that into an IRA, it’s like .05%. And it almost sounds like fake. It sounds like it’s not real. But the reality is it’s like if you can get your money in a position where it’s unadulterated by those kind of hidden — and I could say they are kind of hidden because if you look at the statement and I search like “commission” or “fee,” it’s nonexistent. There might be like a fee disclaimer in the small print, but again, it’s not a line item that’s very obvious to the investor. So I would just say, like I would question, again, if you’re in a wealth-building stage, I would question what you’re currently in and if there’s a better way, just like we do with car insurance and things like that. There are opportunities out there to potentially be in a better position to again, really allow you to build money and grow wealth over time.

Tim Ulbrich: Yeah, and Tim, I would wrap up here by telling our listeners and community, whether you’re at the beginning of this journey, whether you’re in that wealth-building phase, whether you’re somewhere in between, I think this obviously is such an important topic. And we would love to have the opportunity to talk with you to see if what we offer at YFP Planning is a good fit for you and your individual plan and situation. And folks can find more by going to YFPPlanning.com, they can schedule a free discovery call. And I’m going to toot our own horn for a minute, but I’m so proud of what we have built — Tim, really what you have built starting back in the days of Script Financial, which is a fee-only comprehensive financial planning model. And one of the things I so appreciate about that model is it’s fully transparent, the fees are the fees in terms of what we charge for our services, and the client is paying our financial planning team for the advice that they’re giving related to their financial plan as a whole. So you know, whether that means we’ve got to spend a boatload of time on the investments and the retirement side of the plan, whether that’s we need to spend some time on the tax side or the insurance side or the student loan side or the home buying side, whatever would be the aspect of the financial plan, by nature, because of how that client is transparently paying for the advice and the transparency of those fees, we can spend the time where we feel like it’s most needed for the client and their financial plan and ultimately is in their best interest. And so that’s a model that I’m really proud of that we offer to the YFP community and for folks that are looking for a financial planner or perhaps re-evaluating the relationship they have currently, head on over to YFPPlanning.com and you can schedule a free discovery call. Tim Baker, great stuff, as always. And appreciate your time and expertise here as it relates to the discussion of fees and looking forward to upcoming content we have for the second half of 2021.

Tim Baker: Yeah, thanks, Tim.

Tim Ulbrich: As always, a thank you to the listeners for joining us on this week’s episode. And as we wrap up this first half of 2021, we appreciate you listening but also would appreciate if you could leave us a rating and review on Apple podcasts, which ultimately helps other people find this show. Our mission is to help as many pharmacy professionals as we can on their path towards achieving financial freedom, and one way we can do that is by reaching more people with this show. So if you haven’t already done so, please do us that favor, leave us a rating and review and ultimately that will help others find the show in the future. Thanks for joining us and have a great rest of your week.

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YFP 207: How to Avoid These 6 Common Financial Mistakes

Posted on June 10, 2021November 2, 2022 by yfpadmin

How to Avoid These 6 Common Financial Mistakes

On this episode, sponsored by Insuring Income, YFP Co-founder and Director of Financial Planning, Tim Baker, discusses common financial errors ranging from those made with investing, insurance, credit, and more. Whether you are just getting started with your financial plan or looking for a tune-up, this episode will help you avoid the most common financial blunders so you can maximize your financial plan and achieve your financial goals.

Summary

Tim Baker and Tim Ulbrich discuss six common financial mistakes and how to avoid them. While financial mistakes may seem inevitable, Tim and Tim speak from their own experiences with financial errors and share ways to prevent these mistakes from impacting your financial plan and financial goals.

Common financial errors discussed in this episode include:

1. Not taking advantage of employer match

When you don’t take advantage of your employer’s match, you essentially turn down free money. Many people don’t take full advantage of employer matches because they are not auto-enrolled to do so. Getting the maximum amount out of your employer match increases your compound interest over time.

2. No budget or no financial plan

Without a budget or financial plan, it is increasingly difficult to reach your financial goals. The budget is not a one-size-fits-all and should custom fit your personal experience and what works for you.

3. No insurance or inadequate insurance

As a pharmacist with a spouse, house, and mouths to feed, you should be aware of your insurance needs and insured for an event that will require insurance ranging from life, disability, or professional liability insurance.

4. Failure to monitor your credit reports

Tim Baker recommends checking your credit reports twice a year – he pulls his reports with the changing of the clocks for daylight savings. With the increase in the digital nature of personal information, it is critical to monitor your credit for errors and identity theft.

5. Not investing or not having the right attitude when it comes to investing

Being risk-averse may impact your long-term financial plan. Building and maintaining an appropriate asset allocation that matches your goals, risk tolerance, and time horizon while avoiding impulse purchases or hunches is a more intelligent way to positive investment returns.

6. Not utilizing professional advice

Financial professionals know what they are doing, and hiring someone allows you to have more free time to do the things you want to do.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tim, welcome back to the show.

Tim Baker: Hey, Tim, thanks. Thanks for having me back. It’s been awhile.

Tim Ulbrich: What’s new and exciting from YFP Planning’s perspective?

Tim Baker: It feels like a lot, Tim. I feel like this year is full of change and we’re excited. A lot of things going on in the background. We’ve had our lead planners out in Columbus to do some planning. It was good to kind of meet up and now that people are getting vaccinated, to be able to meet up and do some planning and talk about our goals. And that was exciting to kind of show the new office, which people may or may not know that YFP has bought headquarters in Columbus. And we’re in the process of kind of renovating a little bit and getting that ready for us to move here in — move in here shortly. And that’s been exciting and having to deal with contractors, maybe not as exciting. I think the team has continued to expand. We finish up tax season here, which is always hair on fire, and we had a lot of good help to go through that. But we actually welcomed back a former team member, now current member again, Christina Slavonik, who worked with me a year or so ago and decided to kind of come back into the fold. And we’re super excited to have her as part of the team. And yeah, so lots of changes, but all good things I think.

Tim Ulbrich: Yeah, certainly excited to have Christina back, what that means for our team. Pumped up about the new office and it’s an open invitation to any of the community that’s in Columbus or finds their way traveling through Columbus, we’d love to host you and have a chance to meet up with you. Please reach out to us. And a shoutout, as you mentioned, Tim, to our tax team. I mean, over 250 returns that we filed this year, lots of wrenches that were thrown their way with extensions and delays in state extensions and legislative pieces that were being passed in the middle of tax season. And I thought they handled it well, and we’re ultimately able to serve the community, and we very much believe tax is an important part of the financial plan. So excited to see that continuing to grow. So today, we’re talking all about common financial errors. And you and I know that financial errors seem inevitable. We’re all human; we all make mistakes. And one of our goals with YFP is to help you, the YFP community, and certainly our clients as well, to avoid as many financial mistakes as possible. And certainly we have lots of resources that are here to help in this, whether it be this podcast, blog posts, checklists, calculators, and certainly our one-on-one comprehensive financial planning services as well. And just to be clear, this is not about shaming by any means. This is about learning and hopefully avoiding a repeat of making the same mistakes. So if you’ve already made some of these mistakes, certainly Tim and I have. We often talk about these between the two of us. We’ll that here again today. So if you’ve made some of these mistakes, certainly this is not about beating yourself up. Take what you’ve learned and certainly apply that information, and hopefully that can help with avoiding future mishaps or help you to spread the word and encourage and teach others along the way as well. So Tim, let’s get to it. We’re going to warm up with what many consider low-hanging fruit. No. 1 financial error/mistake I’m going to list here is not taking advantage of the employer match. So talk to us about the employer match and why not taking advantage of it is a significant financial error.

Tim Baker: Yeah, so I think this is where often we say, it’s free money. So not often do you ever come across a situation where there’s money to be had, you know, without anything in return. So I think in a lot of cases — and I know there’s some gurus out there that say like if you’re in debt, you shouldn’t even do this, and I would probably disagree with that. I think there are some exceptions if you have lots of high interest like credit card debt, consumer debt, then this might be a situation where you don’t want to get the match. But I would say for the most part, if your employer has a 401k or a 403b match or whatever that is, you want to make sure that you are taking full advantage of that. Most employers are going to have matches that are going to incentivize you to put anywhere between 2-6% to get the full match. There are some that are designed to push you a little bit further. But for the most part, if you’re in that sweet spot of putting in 2-6% of your income into a 401k to get a full match, I would say to do that. The reason that you want to do this is because if you can get that dollar, those dollars deferred and into that retirement account, this all goes back to the concept of time in the market versus time in the market. And really taking advantage of more compounding periods to take advantage of the compound interest. So if you’re out there and you have — you’re looking at your student debt or if you have sizable consumer debt and you’re like, man, I just feel like I put money in and it stays the same, that’s compounding interest kind of taking advantage of you. And what we want to do is flip the script a bit and get that to where your money is making money. So Albert Einstein has said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” So the idea here is that you can get your money to work in the investment world and keep it working and allow those dollars to make baby dollars and they make baby dollars. That’s the idea here. So it’s really about time in the market. We see this as less and less of an issue now that I think it was the Obama administration, you know, has really pushed 401k plans to have an auto-enroll feature. So based on studies on this, if we are the variable that gets in the way, meaning people, that we typically are going to go with whatever is the default. So if the default is not to enroll and you have to actually take steps to do that yourself, we’re not going to do that. If the default is that we’re already auto-enrolled, then that’s what we’re going to do. So a lot of these plans — and Tim, our plan has this — is that after a certain period of time, we auto-enroll participants and we say, “OK, we’re going to auto-enroll them at x%.” For ours right now and for — speaking of the YFP 401k — we auto-enroll at 3%. The maximum match is if they put 4% in. So they would just have to go in and make that determination that they would like to do that. So auto-enroll features on 401k’s have made this a little bit less of a common mistake, but they’re still there, nonetheless, and we still come across more than you would think of those that are not putting in at least to get to the company match. And just to kind of put a bow on this, think of this in this light: You know, if you’re a pharmacist and we use round numbers here — if you’re a pharmacist and you’re making $100,000 and your company offers you a 3% match, think of that — and you’re not taking advantage of that right now, think of this as like a 3% raise where you are making $103,000 because $3,000 of that is going into your company 401k. And it’s surprising, you know, I think if you — dependent on the 401k — and I know we’re going to talk about the fees in an upcoming episode — but dependent on the 401k, it’s surprising how quickly those types of accounts can grow if you are deferring dollars out of your paycheck so you’re hopefully not missing it too much, it invested in the right way, and it’s not being eaten away by fees. It’s surprising how quickly those accounts can grow. This is a big, big miss if you’re not necessarily taking advantage of a match.

Tim Ulbrich: Great stuff, Tim. And I think just to further highlight time value of money, and I think for those that are listening that are especially getting started on the employer contribution side and perhaps aren’t leaning into that match yet, there is some trust in the momentum in compound interest, right? You can run the calculations, see the numbers, but it does feel like early on that you’re putting money in and you’re not seeing that growth until obviously those funds get to a certain balance and then you start to see the momentum of the growth on the growth. But to take your example, Tim, of somebody making $100,000, 3% employer match, $3,000, I would encourage folks to also think about it’s not just that $3,000. It’s what would that $3,000 be worth in 25 or 30 years? Right? So you know, that $3,000, if that were to grow at let’s say 7% average annual rate of return over 25 years, that $3,000 in 25 years is worth more than $16,000. So time value of money is not just what does it mean in today’s dollars, but what would it also mean in the opportunity cost of not investing those dollars? So that’s No. 1, not taking advantage of the employer match. No. 2 is no budget, no financial plan. Harsh words, Tim Baker. What do you mean by that? And you know, budgeting, spending plan, whatever we want to call it, why is it so critical to the financial plan?

Tim Baker: And some people would disagree with this. But I guess some people, especially if they might lend credence to like, you know, if you’re starting out, if you’re a new practitioner, definitely budget. If you get to a certain inflection point, you don’t need to budget. I would disagree in a sense. If you think about this in terms of like if you think about your household and the salaries you make as like revenue, if you’re a household and you’re making $200,000-250,000 as a household and you equate that to like a business and a business making that revenue, businesses are going to have budgets, they’re going to have projections, they’re going to bucket money for certain — just like we do, Tim, at YFP. You know, we have ‘this is the amount of money we want to spend on marketing, and this is the amount of money that we want to spend here and there.’ Like that’s a budget. And I would say that if you treat your household as a company, like you’re going to earmark those for different purposes. So I think this is a way of how you go about and do that. So I think where budgeting kind of gets a bad rep is the $0-based budget where every dollar has a job and you basically assign a purpose for every dollar that kind of flows through the household. And for some people, that can be super arduous, that can be super over-the-top. But I don’t necessarily think it’s an exercise that doesn’t have merit or value. But I think typically as you go, you find the flavor of ice cream that works for you. So there’s lots of different types of budgets out there. You know, you have the $0-based. I’ve seen a line item budget, I’ve seen a pay yourself first budget. There’s a lot of different ways to go about it. I think at the end of the day, a budget goes back to what is the intention of the resources that you have.

Tim Ulbrich: Absolutely.

Tim Baker: And applying that to — and by intention, we typically mean like goals. So what are the goals that you have? What are you intentionally trying to achieve with the six figures of income that you’re earning? And how do we go about that? So the budget is typically the structure or the steps to go from ‘Hey, I want to travel,’ or ‘I want to be able to give back,’ or ‘I want to be able to take care of an aging parent.’ The budget is typically the mechanism that allows that to kind of come to be. So I would say that this is typically lockstep with the savings plan. Most financial planners, in my opinion, they’ll say, “OK, your savings plan is your emergency fund, and that’s it. So you need to have $20,000 in your emergency fund as an example or $30,000 in an emergency fund,” and then it stops there. I think it needs to go further. So I think your budget and how you’re spending needs to kind of be in sync with how you’re deliberately saving for different things that are basically on the docket for goals. So — and I wouldn’t even call this a step, Tim. It’s a process. I’m a big Sixers fan, trust the process. Hopefully JoJo is going to come back —

Tim Ulbrich: I was going to say…

Tim Baker: No, but it’s a process. And I think what people do and where they get hung up on budgeting is that it’s more about striving for improvement and not perfection.

Tim Ulbrich: Yeah, that’s right.

Tim Baker: We want everything to be balanced, we want everything to kind of line up. And in most cases, that’s not going to happen. So depending on the budget and what flavor that suits you best is going to really allow you to kind of figure out how it works. So to me, this is really about being more intentional with spending, being more intentional with kind of top-line revenue. So this is not just an effort in kind of an exercise in scarcity of like, hey, this is what the pie is. I want to challenge you to grow the pie. So to me, it’s looking at both sides of that equation and really striving for improvement of what you’re trying to accomplish and not perfection. So I think that if you can kind of wrap your arms around that and not be wed to one way of doing things, then I think you’re going to see improvement. So and there’s lots of different tools out there, technologies, Mint, YNAB, some people use good old-fashioned spreadsheets, some people use envelopes, like physical envelopes to do this. At the end of the day, you know, I think the question you should be asking is, am I intentional with how I’m spending? Am I intentional with how I’m bringing money into the household? And does this align with the goals that I have set out for myself. And if it doesn’t, then I think that’s where you kind of need a little bit of a gut check to make sure that you’re on track.

Tim Ulbrich: Yeah, intentionality really stands out there to me, Tim, whether someone’s listening and they’ve got a net worth of -$400,000 or a net worth of $4 million. The process may look different, the intensity of the month-to-month might look very different, but at the end of the day, like budgeting, whatever you want to call it, to your point about looking at it from the point of a business, it’s about what are the goals, what are we trying to achieve, and then what’s the plan to make sure that that’s a reality. And the buckets might look bigger or smaller, the process might look more or less intense. But it’s about being intentional with the goals and the plan. For those that are looking for a starting point, a template, a process, you can go to YourFinancialPharmacist.com/budget. We do have a spreadsheet that you can get started with, certainly not necessarily the ending point. You can implement technology tools and evolve it from there, but that can be a good starting point. So that’s No. 2, no budget, no financial plan. No. 3 is no or inadequate insurance. I’ve mentioned before, Tim, on this podcast that insurance I think is an often overlooked part of the financial plan for obvious reasons. Thinking about something like a death or a disability or a professional liability claim isn’t necessarily the most exciting thing to think about when it comes to financial planning, especially when we can think about things like investing or saving for the future or getting rid of that student loan debt. So tell us here about what you see as some of the common pitfalls around inadequate insurance coverage.

Tim Baker: I think what a lot of people default to, a lot of pharmacists default to, is that what their employer provides as part of their compensation package is the plan for their insurance. And it’s not. It’s typically — we view it as a benefit that should be taken into consideration as we’re building out an insurance plan for your financial plan. And we’re really talking about the protection here, so like what we talk about with our YFP planning clients is how are we helping them growing and protecting — so protecting being the operative word in this step — their income and growing and protecting their net worth while keeping their goals in mind? So protection here is what we’re talking about. And typically, you know, what we focus on is things like life, disability, and professional liability. So your employer might provide you different coverages based on the employer. And that’s going to mean different things to different people, depending on their life situation. But oftentimes with pharmacists, you need to take more action in this or you run the risk of exposing yourself to a loss that could potentially be catastrophic. So you know, health insurance — so I would say that the one thing that is a plan and not necessarily a perk is health insurance. So health insurance, you’re typically best to go with the group policy, although that could change in the future. That could change where the way that employer compensation packages are designed in our country is that if the government isn’t providing that, it’s health insurance the employer does. That could change in the future, and we’ve seen that with things like pensions and 401k’s where pensions have gone away and they’ve been more robust, and a lot of it put the onus back on the employee for saving for retirement. So that could change in the future. But if we break down the insurance piece, a big miss is if we say not having adequate insurance is knowing what to have, knowing what you think that you need from particularly a life and disability insurance policy. You know, I typically say with regard to life insurance — and another piece of the protection of the financial plan is estate insurance — is that typically when you have a spouse, a house, and mouths to feed, those are typically going to be the opportunities to make sure that you are protected from a life insurance perspective and from an estate planning perspective. So more often than not, pharmacists are going to need a lot more of a benefit than what their employer can provide. So that’s typically where you want to go out into the individual policy world and make sure that you are fully protected. That’s one of the problems in the financial services industry too is like we come across a lot of pharmacists, Tim, that they might be 27 or 28 and they’ve been sold a crappy insurance policy, life insurance policy, that they don’t need, right? Because they don’t have a mortgage, they don’t have other dependents relying on them, their loans are going to be forgiven upon death or disability, so it’s just a policy that they probably don’t need right now. So it’s kind of like you have a hammer and you see a nail and it was a good cookie-cutter solution for everyone. One of the mistakes here is not understanding the need. So like we’ll have clients that will come in that will have young kids and things like insurance are not even brought up. And I look at that and I’m like, that’s a big risk. Like the student loans are important, and you’re talking about real estate investing and some other things, but like we probably need to address this first. So — and it’s typical, right? We don’t want to — we typically think that it’s not going to happen to us, a premature death or disability. So it’s very natural. So that’s part of the planner’s job is to kind of bring that to the forefront and make the proper recommendations. The other thing we’ve been talking about is disability insurance. So these are typically more likely to happen and typically more expensive because you typically have medical bills that are going to pile up as a result of a disability. So having the proper insurance there, whether that is through your employer or your own policy or buying a supplemental policy to kind of make you not whole but make you to — indemnify you to a certain threshold that you feel like you can continue the household, that’s a big thing. And a lot of these policies, the way that they’re written don’t provide a lot of protection. So it’s really looking at does it make sense to add a policy for yourself? So the idea here is that the sooner, the better. Whether it’s life, disability, the younger that you can get these policies in place, typically the better from a cost perspective. A lot of the policies that you have through your employer, the group policies, they’re not portable. Or if they are, they’re not great compared to the individual policies. So I think if you can have these separate from the employer, it makes a lot of sense with regard to protecting your financial plan.

Tim Ulbrich: Yeah, and I think you’ve covered a lot here, and there’s just a lot to think through. And we’ve only talked through very briefly three different areas. You mentioned professional liability, life, disability. But questions of like, what do you need? What do you not need? Based on what you do need, how do you shop for those, looking for policies that — and getting advice that really has your best interests in mind to make sure you’re not underinsured or overinsured? What does your employer offer? What do they not offer? What’s the gap? What are the tax implications? So important part of the plan. I think our planning team does an awesome job of weaving this in and for folks to consider, are they underinsured? Do they have adequate insurance or not? And how does that fit in with the rest of their financial goals and plans? So that’s No. 3, no or inadequate insurance. No. 4, Tim, failure to monitor credit reports. Wow. When I think of checking a credit report, I think of boring, No. 1. No. 2 is necessary, right? So you know, why is this such an important step? How often should one be doing it? And why do they need to monitor credit reports over time?

Tim Baker: Yeah, and I would definitely chalk this up to like to stage of life. So you know, if you’re more Gen X or Baby Boomer, this might not be as important because you might not be making the big decisions, although you could be sending kids to college, there might be some loans that you’re taking out. But I would say that if you’re — a lot of the clients that we work with, you know, especially as they’re starting their careers, there’s a lot of decisions that are being made that credit granting is on the table. So that’s like home purchase, car purchase, things like that. Naturally, because of age of credit, your credit is going to become stronger and stronger as you go because that’s the way that the factors that kind of go into your credit score, age of credit is a big one. But I think the big thing that is kind of universal here that is becoming more and more of a thing is just the identity theft stuff. So as our lives become more and more digital and there’s more exposure to theft, it’s kind of this cat-and-mouse game. It’s not really a question of if, it’s really when. Having kind of eyes on this is really important. So I like to typically recommend that we check credit at least twice per year. So I kind of do it when the clocks change, so when we spring forward and fall back. I myself have gone through this exercise. I’ve found large enough mistakes on my credit report that drastically changed my credit score. And this is even — like when I first started advising clients on credit, this was before the days of like banks learning kind of suspicious behavior. A lot of these banks, a lot of these institutions, they’ve come a long way to alert you and kind of give you some structural things to look at, you know, if you have expenses that are out-of-state or whatever. Even in that environment, there were some things that were from my credit report that should not have been there, that drastically changed my score. So typically, you see differences in scores because you have different formulas that every Equifax, Experian, Transunion are using to calculate your score. Different creditors are going to report differently. So if you buy a Toyota, they might be really good about reporting to Equifax but not Transunion for some reason. Or Mastercard is really good, but this other company isn’t. So you’re going to have different inputs. And really, that’s going to be the big factor that will see why your scores are different. But I think the big thing for all those that are out there listening to this is going to just be from an identity theft. And I’ve looked at client credit reports, and I’ve made comments about hey, these are things that we can do to improve this or these are different factors to consider, but I can’t look at a credit report and know that hey, this doesn’t belong there. So it’s really kind of home cooking that is really important here. So the Fact Act that was enacted I think in 2003 allows you to access your credit report for free one time per year from each of the three reporting agencies for free. So you go to annualcreditreport.com. It sounds fake, it sounds kind of hokey, but that’s the way to — the site that you want to go to is annualcreditreport.com, and pull your credit score from each of the reporting agencies. I would just kind of rotate them through and take a glance at it, see if there’s anything fishy or — and then you can always dispute things that are inaccurate, and it’s pretty easy to do that on the website there. So that would be a big thing that I would make sure that you want to build into your practice.

Tim Ulbrich: Yeah, I think to your point, this is a good maintenance part of the financial plan, right? It’s like periodic oil changes, like we’ve got to be doing this. I like your rhythm of when the clocks change, twice per year, again, annualcreditreport.com. We talk about tax being a thread of the financial plan, credit is a financial — is a thread of the financial plan, impacts so many different areas, whether that would be home buying, real estate investing, business purchases, you mentioned identity theft, so something we’ve got to stay on top of. We did an episode, Episode 162, where we talked all about credit, importance of credit, improving your credit, understanding your credit score, credit security practices, so I’d encourage you to check that out. Again, Episode 162. Tim, No. 5 here on our list of common financial errors is not investing or improper attitude towards investing. Now, I think we’ve talked a little bit about not investing when we talked about not taking advantage of the employer match. So obviously time value of money, compound interest, we’ve got to be in the market. Talk to us more about the improper attitude towards investing. What do you mean there?

Tim Baker: Yeah, so I think there’s like two extremes here when I would say that typically doesn’t necessarily align, which I think with what I think is a healthy investment portfolio. So one is not wanting to dip your toes into the market. So I kind of hear like, ‘Oh, I don’t want to take risks. I don’t want to lose any money.’ And I think for us to kind of stay in front of things like the inflation monster, like taxes, you can’t just stuff your mattress full of dollars and hope to one day be able to retire comfortably. You know, so it’s kind of like if you want to make an omelet, you’ve got to crack some eggs. So the idea here is that we need to build out a portfolio that takes risk intelligently but that is over the course of your career in line with what you’re trying to achieve. And most people, you know, if you’re in your 20s, 30s, 40s, and maybe even 50s, they typically are more heavily weighted in bonds than they need to be, in my opinion. So you know, a lot of people when the market crashed at the beginning of the pandemic, they’re like, oh my goodness, Tim, like I want to take my investment ball and go home, meaning like I want to get out of this investment. And the idea is no, like let’s keep going. Either let’s put more money in or let’s hold the course. So you want to do exactly what the opposite of how you feel. So you know, the big drivers in your ability to build wealth over time from an investment perspective is that you have the appropriate asset allocation, so the mix between stocks and bonds, and really driving your fees as low as possible with regard to the investments. In a lot of cases, when we look at our clients, there’s a lot of opportunity for improvement there. And one of the things we talk about in webinars and even in our presentation with clients is that you look at all the variables in investing, and we have conservative — we talk about Conservative Jane. So Conservative Jane makes $120,000, she gets 3% cost of living raises, she works for 30 years, but she doesn’t invest the dollars. She basically keeps them in cash or like a Money Market. At the end of that time period, she has $600,000. But then we look at Aggressive Jane, who does the exact same thing except the only thing that she changes — and I think the big thing is she puts 10% into her 401k — the only thing that Aggressive Jane does differently than Conservative Jane is that she trusts the market in the long run. So the market returns about 10% year over year, and we adjust it down for inflation to about 6.87%. And Aggressive Jane is not saving harder, she’s not working longer, she’s not making more money, she’s just trusting in the market over that amount of time, and the swing is about — I think it’s $1.2 million. So Aggressive Jane at the end of those 30 years will have $1.8 million. So that’s very impactful if you can internalize that and bake that into your investment strategy is really trust the market. Over long periods of time, it’s very predictable. The only other thing I think I’ll say about this is the other side of that is that people have maybe unrealistic expectations of their investments. So they think that if they invest a certain way for four or five years that they’re going to have this portfolio that it can live off the interest. That’s not the case, you know. And I think that there is a lot of speculation and things like that where you’re heavily invested maybe in crypto or these certain stock that can get you into trouble. And I typically say that it’s not that there’s no room for that, it’s that the overwhelming majority of your investments should be super boring and bland and not exciting at all. And typically the more exciting that the investments are, the worse it is for you, the investor. Keep that in mind as well.

Tim Ulbrich: Tim, I would argue — and you probably see this with clients and our planning team does as well — I’m not sure there’s a harder time than right now to trust the market over a long period of time and stay the course. You know, you mentioned that a good long-term investing plan — I’ve heard you say before — should be as boring as watching paint dry, right?

Tim Baker: Mhmm.

Tim Ulbrich: And I have that head knowledge, like I agree with that and I suspect many of our listeners do as well, but pick up any news cycle for 24 hours, right? I mean, whether it’s — and I’m not saying any one of these alone, to your point, is necessarily a bad thing or that folks shouldn’t be doing them — but whether it’s news around crypto or NFTs or ESGs or think of what happened with GameStop and Robinhood and others, like and I think it really challenges like the philosophy and you really have to be disciplined in like tuning out the noise for long-term investing strategies. Now again, I want to highlight, I’m not saying any of those things doesn’t necessarily have value or doesn’t have a place in one’s plan, but if the vast majority of an investing plan should be boring and should be over a long period of time, we’re trusting the market, it’s hard right now. I mean, it’s hard. Are you feeling that pressure not only individually but I sense from clients you’re probably seeing some of that as well.

Tim Baker: I kind of don’t listen to it. I don’t really read much — I mean, I try to read into it just to have an understanding of what’s going on, but I guess for me, I don’t feel the pull like I used to back in the day. One, because it’s a very humbling experience, and sometimes my clients haven’t been humbled. But like I kind of equate this, Tim, to kind of go a little bit off topic here, it’s like have you ever been around someone that’s like, man, the world is going to heck, this generation, whatever. And I think back on like well, what did they say about like the hippie, like free love? I feel like it’s always — like they probably were saying that about the dot-coms when before that, so there’s probably always been things like that that have tempted people to kind of go awry. And maybe cryptocurrency is a thing that does ultimately shatter our traditional way of looking at money and investments and things like that. I don’t know. I mean, I think that it’s really too soon to tell on that. But yeah, I mean, I think so. I mean, I think it is tough. I think if you’ve been humbled enough, it can be a little bit easier to drown it out. But to me, I think of this as like singles and doubles, singles and doubles, to use the baseball analogy is that if you’re going up at every at-bat and you’re trying to hit the cover off the ball, you’re going to strike out a lot. And you might hit a few home runs, but we’re really looking at consistency. And if I know that there is this — the S&P 500 returns this, and it’s never been, we’ve never had a rolling 20-year period that’s been negative, even through the Great Depression, I’m going to bank on that unless told otherwise. So like, that can be hard for people to hear because they think of investments and they think sexy and exciting and things like that, but that’s not what I think a healthy investment plan makes. I think you want to keep the speculation low. And I’m not saying that that’s not — I still from time to time will go to a casino and play Blackjack or play poker. I still gamble just because I don’t do it as much as I did when I was younger, but just because I’m out and I’m with friends or I’m doing whatever. But if that’s the bulk of what your plan is to get to financial freedom, so to speak, I would caution you.

Tim Ulbrich: Yeah.

Tim Baker: And it could work. I mean, it could work. You could put all your proverbial eggs in the Amazon bucket and be completely OK, but you know, the way that people view Amazon — maybe not now but you know, 5-10 years ago, was very similar to how they viewed Sears back in the ‘70s, ‘80s, and ‘90s.

Tim Ulbrich: That’s right.

Tim Baker: And that company was this behemoth and they sold everything and would never go away. And then all of a sudden, it’s not a viable company anymore. So — and I can say this, I used to work for Sears back in the day, so I can say that not everything lasts. But I think that the U.S. stock market has been very predictable over the long run.

Tim Ulbrich: That’s a great example, Tim. We might be dating ourselves a little bit, but you think of — I can remember when it was the lesser known at the time Walmart and Amazon entering into the KMart and Sears world. It’s hard to even think of that in today’s day and age. I think your point about being humbled is a really interesting one. You know, we’re talking about common financial errors. So I’ll throw one out here. 2008, I was humbled by thinking I could pick individual stocks. Thankfully, I didn’t invest a whole lot of money. Circuit City, how did that work out? Right? So you know, I think your point about being humbled and again, there may be a portion of the portfolio where this makes sense for many folks, especially if they want to scratch that itch. The other thing you mentioned here, which I want to highlight we’re going to come back to next week is you mentioned fees. And we’re going to talk next week about how important it is to really understand the fees of your investment portfolio and really understand the impact that those fees can be having on your long-term returns and the importance of holding on to as much of your investment pie as possible. So stay tuned with us next week as we talk about fees. Tim, I want to transition into our sixth and final error, which is not using professional advice, not having a coach in your corner when it comes to the financial plan. And I think this is a good segue to what I just mentioned of this day and age, there’s a lot of noise. And so having somebody who’s keeping you accountable, who’s really reflecting back to you what you said were important and the goals, helping you look across the financial plan and really helping to direct you towards those end goals that you had articulated and to keep you on the path when human behavior may suggest that we want to go off the path from time to time. So obviously we’re biased, full disclaimer, we wholeheartedly believe in the value of a financial planner, otherwise we wouldn’t be doing it. So Tim, tell us why you think this is such an important part of the plan and why it’s perhaps a mistake if folks leave out a coach from their plan.

Tim Baker: Yeah, so I think if we look at it like our mission of empowering pharmacists to achieve financial freedom, I think we both agree that in a one-on-one engagement with a fiduciary, a fee-only planner, is the shortcut to that. And I think we’ve seen that a lot with our clients where we see kind of the before picture and the after picture, and those are typically because of I think that relationship that a planner has with a client and the way that is forcing them to think differently, right? So like I often joke that I’m a financial planner, but I need a financial planner because I need someone to — a third party to objectively look at our financial plan and say like, am I insane? Or are we nuts? Or are we on track? Right? So I like I know the technical piece of it, like I know what it is to be a CFP and what — just like you’re a pharmacist and you need to know the technical piece of it or a doctor, they’re still going to go to like other health providers to kind of provide that insight and those opinions. But so I think the third party is a big thing. I think the other thing that we don’t necessarily trade on that much is, you know, like for a lot of people, when’s the last time you actually sat down and talked about goals with yourself or like with a partner? So like, you know, I kind of equate this to like I’ve been in periods of my life, Tim, where you are so — I don’t want to say like zoned out but like you ever get into your car and you’re going to work, and it’s 6 o’clock in the morning or whenever you go into your work, and you drive that 30-minute commute, and then you get to work and you don’t even remember any of that drive. It’s just —

Tim Ulbrich: That’s right. Yep.

Tim Baker: You’re on like autopilot. I think that the danger of not utilizing a professional in some regard is that you get into that where you like wake up 10 years from now or 20 years from now and you’re like, what the heck did I actually do? Or like is this a wealthy life for me? And you’re not having those critical conversations with yourself or out loud, which I think can be so powerful. So where are we going? Are we sure that’s where we want to go? Is this insane? And having that kind of, again, objective third party to make sure that we’re outlining goals and we’re being held accountable to that. And then I think the other thing that like is really important is that guidance, is that knowledge, is that technical expertise with best interests in mind. So to me, like if you’re talking to a financial planner, the two things that I think need to be there and if they’re not I’m going the other way is are you a CFP? So unlike a PharmD or JD or MD, like this is a designation that there’s an ethics requirement, there’s an experience requirement, there’s an education requirement that most financial advisors don’t need to kind of do what they’re doing. So like the barrier to entry to become a financial planner is very low. So you want to make sure that the CFP designation is there. And I think the other thing is are you a fiduciary? Are you going to act in my best interests? Or can you put your interests, meaning the planner’s interests, ahead of mine? And what most people don’t know is that 95% of advisors out there are not fiduciaries. And typically if you know the names of those types of firms, they’re not fiduciaries, meaning that they can put their own client — put their own interests ahead of their client’s. So you know, I think that the technical expertise and that is, those are just table stakes. Like I think that that’s going to come with the territory. It’s really I think overlying the human element and to me, I think what we try to do from a planning perspective is make sure that we’re taking care of clients today, say in 2021, but we’re also taking care of clients in 10, 20, 30 years from now and their future self and really threading the needle between taking care of what’s going on today and then that future version of yourself. And I feel like if you don’t feel like that push and pull, if you’re always saving or if you’re always spending, that can lead to some problems. And I think that having that objective third party to kind of guide and hold you accountable, give you some tough love, give you some encouragement, give you some idea of where you’re at compared to peers, for example, I think that’s vitally important.

Tim Ulbrich: Yeah, and Tim, what you said about the human element just really resonates with me and I think will with our community as well. I mean, I think we often may have a perception of financial planners or advisors, whether that’s from movies or books we’ve read or parents that have worked with an advisor, whatever it be, but we tend to think I think of more of that tactical type of moves that folks are making, right, whether that’s certain investing decisions and insurance decisions, maybe it’s Roth conversions, things like that, tax decisions, etc. All of those are important and to your point, that’s table stakes in terms of an expertise that they’re going to provide. You want that knowledge, experience, and expertise. But it’s the human element. I think so much of the value you’ve provided to Jess and I has been in the conversations that have been initiated and the constant revisiting of what are our goals? What did we say was important, and are we actually living the wealthy life that we said we wanted to live? And the answer to that is not always yes, but we need that compass that we’re moving towards and we need that reminder, we need some accountability, we need a coach to make sure as life is racing by that we’re ultimately stopping, pausing, and getting back on the direction that we said was so important. So for those that are listening to this, if that is resonating with you, we’d love to have an opportunity to talk with you to see if what we offer from a financial planning standpoint is a good fit for you. You can go to YFPPlanning.com, you can schedule a free discovery call. Again, YFPPlanning.com. Tim or I would love to have a chance to talk with you further. Tim, great stuff. We’ve covered six common financial errors, and as always, we appreciate the community listening in to this podcast. If you liked what you heard on this week’s episode of the podcast, please do us a favor and leave us a rating and review on Apple podcasts or wherever you listen to the show. That will help other pharmacists be able to find this show as well. Thank you so much for joining, and we look forward to this episode next week. Have a great rest of your day.

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