Budgeting / Saving

YFP 377: 10 Moves to Make to Become Financially Fit

Posted on by YFP Media

Gathering wisdom from his own journey and those of many other pharmacists, Tim Ulbrich, YFP CEO, shares ten moves that are key in building a strong financial foundation.

Episode Summary

YFP CEO and Co-Founder, Tim Ulbrich, distills the lessons learned from his own financial journey and from speaking with thousands of pharmacists about their financial plans into a list of ten moves that are key in building a strong financial foundation.

Whether you’re just getting started and have the opportunity to build a strong foundation from the beginning or you’ve been at it for a while and sense the need to reinforce that foundation, this week’s episode is for you.

About Today’s Guest

Tim Ulbrich is the Co-Founder and CEO of Your Financial Pharmacist. Founded in 2015, YFP is a fee-only financial planning firm and connects with the YFP community of 15,000+ pharmacy professionals via the Your Financial Pharmacist Podcast podcast, blog, website resources and speaking engagements. To date, YFP has partnered with 75+ organizations to provide personal finance education.

Tim received his Doctor of Pharmacy degree from Ohio Northern University and completed postgraduate residency training at The Ohio State University. He spent 9 years on faculty at Northeast Ohio Medical University prior to joining Ohio State University College of Pharmacy in 2019 as Clinical Professor and Director of the Master’s in Health-System Pharmacy Administration Program.

Tim is the host of the Your Financial Pharmacist Podcast which has more than 1 million downloads. Tim is also the co-author of Seven Figure Pharmacist: How to Maximize Your Income, Eliminate Debt and Create Wealth. Tim has presented to over 200 pharmacy associations, colleges, and groups on various personal finance topics including debt management, investing, retirement planning, and financial well-being.

Key Points from the Episode

Financial Moves to Build a Strong Foundation [0:00]
Commitment to Living Off Less Than You Make [4:05]
Building an Emergency Fund [5:59]
Developing a Plan to Eliminate High-Interest Debt [10:17]
Determining the Best Student Loan Repayment Strategy [12:07]
Tracking Net Worth and Understanding Insurance Needs [14:53]
Starting to Invest Early and Often [19:03]
Refusing to Accept a Fixed Income [20:04]
Implementing Systems and Automation [21:30]
Conclusion and Encouragement [24:51]

Episode Highlights

“As I truly believe everything else we talk about, right the X’s and O’s, whether it’s investing, insurance, debt repayment, tax planning, whatever it may be, all that stems from understanding and improving our own financial IQ.” – Tim Ulbrich [4:07]

“Life happens, and you want to be prepared. I want to be prepared so that those bumps don’t derail momentum and progress in other areas. The last thing we want is that we feel like we’re finally making progress towards building wealth, saving, investing for the future, achieving the goals that we’ve desired to achieve, and all of a sudden, we haven’t prepared for an emergency, and something sets us backwards and disrupts that momentum.” – Tim Ulbrich [5:00]

“Your six figure income – it’s a great tool, but it is not a financial plan. Without a vision and a plan, that good income is only going to go so far.” – Tim Ulbrich [27:51]

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich 00:00

Hey everybody. Tim Ulbrich here and thank you for listening to the YFP Podcast, where each week, we strive to inspire and encourage you on your path towards achieving financial freedom. This week, I’m flying solo with an episode that is short and to the point. One that distills a lot of learning from my own journey and from speaking with 1000s of pharmacists about their financial plans. I’ve taken those experiences and narrowed it down to a list of 10 financial moves that are key in building a strong financial foundation. Think of these as the prerequisites to building wealth and living your rich life. So whether you’re just getting started and have the opportunity to build a strong financial foundation from jump street, or perhaps you’ve been at it for a while, and sense the need to reinforce that foundation, this week’s episode is for you. And if you’re looking to identify areas within your own financial plan that could use some love and attention, we’ve got a great free resource for you. We created a five minute financial fitness test so that you can learn about the areas of your financial plan that you may need to work on, where you’re doing well, and resources that can help along the way. So head on over to yourfinancialpharmacist.com/fitness and see how your financial health is tracking. Again, that’s yourfinancialpharmacist.com/fitness will also provide the link in the show notes.

Tim Ulbrich 01:25

All right, let’s jump right into our list of 10 moves to make to become financially fit. Number one on our list is be a sponge. Be a sponge. This is intentionally number one on the list as a consistent commitment to learning, I believe, is going to yield the greatest return on your investment. The earlier you learn, the higher the return on investment of your time. At most, some pharmacy schools offer a personal finance elective but the vast majority have little to no personal finance that’s embedded in the curriculum, whether that’s at the graduate or the undergraduate or even the K through 12, although we see that expanding more recently. While you don’t need a master’s degree in finance to be successful with your money, you should have the basic knowledge that helps you make good decisions and develop good habits. Read books, listen to podcasts, watch YouTube videos, whatever works for you. Some of my favorite personal finance books that have had the most impact on my journey include Rich Dad, Poor Dad by Robert Kiyosaki; I Will Teach You To Be Rich, by Ramit Sethi; The Millionaire Next Door, by Tom Stanley; Money: Master the Game by Tony Robbins; and of course, I’d be remiss if I didn’t mention the book that we wrote, Tim Church and I co authored, Seven Figure Pharmacist. These resources, as well as many other podcasts for me in my own journey, were instrumental to just developing that hunger and habit to learn, recognizing that there’s always an opportunity to grow, right? This is a journey. This is a marathon. This is not a sprint when it comes to long term financial success, and we have to put the work in to make sure that we’re upping our financial IQ over time. So be a sponge. When I think about some of the guests that have been on this show recently, right Brandon Gerleman on last week’s episode 376, that shared his debt free journey paying off about $160,00 of debt. Or Dr. Manny on Episode 375, a new practitioner that has opened up his own community pharmacy, is building his business. Or Mike Beyer from 365 who shared his story, going from a net worth of zero to becoming a Seven Figure Pharmacist. These are just a few of the stories, but one consistent theme and thread that I think of from their journeys is that they really believe there is no arrived. There is no arrive. When it comes to the financial plan, they are hungry to learn, to grow, despite the success that they have, they recognize there’s always an opportunity to learn, to improve and to grow. So that’s number one on our list. As I truly believe everything else we talk about, right the X’s and O’s, whether it’s investing, insurance, debt repayment, tax planning, whatever it may be, all that stems from understanding and improving our own financial IQ.

Tim Ulbrich 04:22

Number two on our list is make a commitment to live off of less than you make. Make a commitment to live off of less than you make. Outside of learning, outside of being a sponge, this is at the top of the list because other goals require cash flow. It’s that simple, right? If we want to pay off debt, if we want to save and invest for the future, if we want to invest in experiences and travel, whatever goals we have, they’re dependent on cash flow. And cash flow comes from living off of less than we make now, easier said than done. Many of you know that firsthand, but until we figure out ways to take off the cap on our income. We’ll talk about that here in a little bit. The cash flow will come from the difference between what you earn and what you spend. The financial plan is this simple and this hard right. Executing, of course, is the hard part. But without cash flow and without a monthly system, we’re going to talk about that here in a little bit as well. We’re going to find ourselves spinning our wheels financially long term, right? We want to implement a system that from the breathing room and the cash flow that we create, we’re able to fund our goals each and every month, and know that we have a process in place for those goals, the dreams that we have to become a reality. So that’s number two on our list. Make a commitment to live off of less than you make.

Tim Ulbrich 05:48

Number three, you’ve heard me say it many times on the show before, build an emergency fund. This is not just about the dollars in the account. It’s about the breathing room that this creates in your financial plan, getting out of the day to day, month to month, year to year, mindset, and ensuring that we can have the peace of mind. So if you haven’t already done this, open up a high yield savings account or money market account that is separate – keywords – separate from your checking account, and label it as your emergency fund. One of these, my partner, Tim Baker, often says is, hey, if you’re doing the mental accounting, do the actual accounting. What does he mean by that? He means that if we’re looking at our funds, let’s say you’ve got 20, 30, $40,000 that’s sitting in a high yield savings account, or perhaps in a checking account. Hopefully not the case. But if we know that, hey, about five or 10 of that is for an emergency fund. About five or 10 of that is for an upcoming trip, about 10 of that is for a future roof replacement in the home, right? That’s the mental accounting. So if we’re doing that, let’s create the buckets here. We’re talking an emergency fund, label it and do the actual counting of putting it in a fund that is earmarked specifically for the emergency fund. Now we’re going to want to work towards saving three to six months of essential expenses. That’s our goal. That’s our target, general rule of thumb. But don’t let that number overwhelm you if you’re just getting started, or perhaps you’re doing some cleanup work in other parts of the financial plan, because here’s the reality, if you’ve never had an unexpected car or medical expense or another emergency, it’s only a matter of time. Life happens, and you want to be prepared. I want to be prepared so that those bumps don’t derail momentum and progress in other areas. he last thing we want is that we feel like we’re finally making progress towards building wealth, saving, investing for the future, achieving the goals that we’ve desired to achieve, and all of a sudden, we haven’t prepared for an emergency, and something sets us backwards and disrupts that momentum. Now here are five questions that I think you need to answer for your emergency fund, just to get you started and hopefully to get you on track. Number one is adequately funded. We talked about that general rule of thumb, three to six months of essential expenses, not all expenses, essential expenses. So what does that mean? Housing, food, transportation, clothing, minimum debt payments, things that you would continue to fund, even in the event of a short term job loss or emergency add those up. Multiply them by three to six. That’s a general target we’re shooting for with an emergency fund. So that’s question. One, is it adequately funded? Number two, a problem, but a good problem to have is, do you have too much saved in an emergency fund? I’ve talked with several pharmacists that have done a great job saving, but big numbers in an emergency fund, and ideally, we would put these funds, probably elsewhere, to use in the financial plan now, right now, because of where interest rates are at, it’s not a terrible option to have money sitting in an account earning four to 5% in high yield savings account. But if we have other high interest rate debt, or we’re looking to build up our long term investing or savings, there is an opportunity costs that can come from having too much saved in an emergency fund. So that’s question two. Number three, are you optimizing your emergency fund? So what I’m talking about here is making sure it’s not sitting in a checking account, that we have it working for us, especially with where interest rates are at right now. Whether that be a high yield savings account or money market account. You know, right now, at the time of this recording, most of those are in the four to 5% range. So are we optimizing that fund. Number four is, does it need a boost? So this is something that we can set it but forget it, and we have to come back and look at this, right? So, you know, especially for those that are earlier in their career, where expenses creep at a rapid rate, right? Perhaps when you when you graduated, maybe you didn’t have a home, or you didn’t have a family, all of a sudden you wake up in 3, 4, 5, years, our expenses have gone up significantly. So we want to visit this, revisit this at least once a year, and maybe at one point you hit that target of three to six months. But do we need to look at it again? And finally, our fifth question here. Is, as I mentioned already, is it separate from our everyday checking account? Right? If we’re doing the mental accounting, let’s do the actual accounting. So that’s number three on our list, build an emergency fund.

Tim Ulbrich 10:11

Number four on our list of 10 moves to make to become financially fit, develop a plan to eliminate any high interest rate revolving credit card debt, or any high interest rate revolving consumer debt. Now, if you don’t have any revolving, high interest rate consumer debt, credit card debt, high interest rate, car loans, etc, great, right? Let’s move on. But if you do, baby steps, baby steps, this, along with the emergency fund, is really a top priority, given the interest rates this debt often demands, right, especially when talking about credit card typically north of 20% we have to plug this hole before we can start playing offense with other parts of the plan. Now, I know that sounds obvious, but I see this mistake commonly made, where because student loan debts there’s there’s an emotional burden there, or because there’s a feeling that I need to catch up and save and invest for the future, we can often get these priorities mixed up, right? So if I have high interest rate credit card debt that’s accruing interest north of 20% but I’m paying down debt at 5% 6% whether that be student loans, or I’m trying to save and invest in various retirement accounts. I may have those out of order, right? So we got to look at that. Now. Last thing I want to say here is, if you have credit card debt, know that you aren’t alone. Okay? We often think that, hey, all my other pharmacist friends have this figured out. They’re making a great income. I’m the only one with credit card debt, I can assure you that is not the case. This is a fairly common struggle that we see, especially with new practitioners. Although others are not immune to this, but there’s a lot of expenses that ramp up in that final year of pharmacy school, or those that transition into residency or fellowship. High cost of living areas. There’s a tendency to accrue some credit card debt at the end of that training program. So know that you’re not alone doesn’t mean or minimize that we have work to be done. Of course we do, but you aren’t alone, and we got to really start to begin to tackle this. So that’s number four, develop a plan to eliminate any high interest rate revolving consumer debt.

Tim Ulbrich 12:15

Number five is we have to get clear on determining what is the best student loan repayment strategy for you. Now, if you’re listening and you have no student loans, you’re further along in your career. Great. Keep moving on, right? But for those that do have student loans, this is often a huge piece of the puzzle that we have to figure out, given the magnitude of it so that we can then plan around it. Because what you’ll notice, if you’re not already aware, especially when it comes to federal student loan repayment, there are a variety of options that can result in either big, big, big monthly payments or much smaller monthly payments, depending on which repayment plan you choose. And so we have to understand what fits into the budget. What is ideal, what is optimal for your situation, so that we can then plan and budget around it. Now, the median debt load for a pharmacy graduate here in 2024 covering right around $160,000 and for many grads, this is one of the most important and overwhelming decisions that they’re going to make. And to be fair, this is way more complicated than it needs to be, both on the federal and the private side. For those of you that have private loans. And to make that worse, this is just a hot mess right now, right. There’s a lot of changes that are going on with student loan repayment, a lot of uncertainty. The Save program has been held up. We don’t know what’s going to happen with that in the future. And by the way, we’re in the midst of a presidential election where student loans are often discussed and used in terms of political jockeying, so there’s a lot of unknown, which means for a lot of borrowers, it’s kind of a wait and see. Right now, it’s a wait and see for many people. So if you’re not already plugged into Studentaid.gov, make sure you get plugged in. We’ll link to that in the show notes so that you can stay up to date. We’ll also try to bring information here on our channels with what’s happening with student federal student loan repayment. But again, given the size, given the magnitude, notice, I didn’t say debt free, and I was intentional there, because for some of you, this is going to be a loan forgiveness pathway. But what I did say is we have to get clear on what our strategy is. We don’t want to be wandering when it comes to how we’re approaching our student loan. So once we can determine what is the optimal repayment strategy, we can then figure out what does that mean for a monthly payment. And then, as I mentioned, we can begin to build around that. So that’s number five, determine your student loan repayment strategy. Number six is, start tracking your net worth. Start tracking your net worth now if you’re early in your journey, especially if you have student loan debt or credit card debt, you’re not going to like this number, right? Because it’s a number that’s going to highlight especially if we have a high amount of debt that hey. We make a good income, but we’re probably not at the point we would like to be in terms of our overall financial health. Net worth is your assets or what you own minus your liabilities or what you owe. And I believe this is a much better indicator of your financial health than is your income, right? Because your income a six figure income. It’s a tool, but it’s not a financial plan, and it’s a tool that we can leverage to grow our net worth by paying down our debts and growing our assets that are hopefully compounding over time, but net worth is really going to shine a light on are we or are we not making progress. And so understanding and respecting this calculation can propel your financial plan. I really think about this as the 20,000 foot view on what’s going on for Jess and I in our own financial plan. So this is something that we’re tracking monthly. Very easy to do. I’ll share with you the template that we use. If you go to your financial pharmacist.com/toolbox. You’ll see a network tracking sheet there. You can save a copy for yourself, edit it. Nothing complicated. You can set up your own sheet as well. It’s a simply a listing of all the accounts that we have, checking savings, retirement accounts, real estate accounts, etc. Add up all the assets, subtract the liabilities. Amount that’s due. That’s our net worth. We’re tracking that over time to make sure that we’re heading in the right direction. If you’re not already doing this, even if you don’t like the number implement a system a recurring task to track your net worth each and every month. That’s number six on our list of 10 moves to make to become financially fed.

Tim Ulbrich 16:36

Number seven is determine what insurance policies you do and do not need and do not need is perhaps equally as important. And while there are a lot of different types of insurance to consider here, I’m talking in specifically about three that I see get overlooked most by many pharmacists: professional liability and having your own professional liability insurance policy independent of your employer. Term life and long term disability. With the latter two, term life, long term disability, we’ve got to be thinking about what coverage we need in addition to what our employer policies are providing, not only to plus those up if they’re not enough, but also we got to remember that those policies aren’t going with us when we transition jobs, right and so as time goes on, as we get older, these policies typically become more expensive. So if we can lock these in in terms of our own independent Term Life policies, long term disability policies, while we’re younger and we can get the coverage we need, that’s probably going to be the best action that we can take. Now, when it comes to long term disability, you put a lot of time, energy and effort to be able to become a pharmacist and make a good income, and that’s why it’s so important to protect it. Disability Insurance for pharmacists is really income insurance. It’s addressing what would you do and the event that you’re unable to work as a pharmacist, right on the term life insurance side, what we’re trying to do there is especially if we have dependents or someone else that relies upon our income, in the event that you were to prematurely pass away, and that income is needed. What is that term life insurance policy going to produce? What expenses is it going to cover both short and long term now, we’ve got more information and resources on all of this. You can check those out at our website, yourfinancialpharmacist.com, I’ll link to a couple resources we have specifically on term life and long term disability in the show notes; guides that we’ve written specifically for pharmacists, what you do need, what you don’t need. Make sure to check those out. That’s number seven on our list. Determine what insurance policies you do and do not need.

Tim Ulbrich 18:54

Number eight is we have to start investing as early as we possibly can. Now I know we’ve all been told this, but again, as with many of these items easier said than done, because when you’re flooded with things like student loans and other debt, it can be hard to balance prioritizing investing, and it’s easy to fall into the trap and perhaps feel that you can put off retirement savings for a few years, but the reality is that you want to take advantage of compound interest, time, value of money, and the earlier you start contributing, the better. And your investing strategy, it’s going to evolve over time. It’s going to get more complicated. But don’t succumb to inaction, because you’re overwhelmed with all the options. Start typically, what we’re focused on is starting with the employer match to a, 401K or 403B, 401 k, for those that you work work for a for profit, 403B for those that you work for a non profit, assuming that you’re there long enough to be vested, that’s a key factor we have to look at. And then we’re going to build from there, right? We’re going to look at things like IRAs Traditional and Roth IRAs, typically. Roth IRAs for pharmacists. HSAs health savings account and other investment vehicles along the way as well. We have talked extensively on the show about various investing strategies, long term retirement plan strategies, so make sure to check out those episodes for more information.

Tim Ulbrich 20:17

Number nine on our list of 10 moves to make to become financially fit is refuse to accept your income is fixed. Now, common misperception I see among many pharmacists is that there is a ceiling on their income, and that mindset can lead to stagnation. Stagnation. It can lead to career dissatisfaction, and it can really limit on what is possible. So whether it’s pursuing additional opportunities within your organization, or perhaps for some of you, it’s starting a side hustle or business or investing in real estate, these are just a few of the many examples of how pharmacists are taking the ceiling off of their income potential. Bob Berg, the author of the Go Giver, said that your income is determined by how many people you serve and how well you serve them. I believe that to be true, whether it’s people that start their own business, whether that’s people that get started in real estate and develop great collaborations and partnerships, or whether that’s folks within their own organization that really are able to demonstrate and provide the value that then unlocks additional opportunities for them. So that’s number nine, refuse to accept your income as fixed because,

Tim Ulbrich 21:25

as we talked about earlier, all financial goals stem from the cash flow that we create by living off of less than we make. One way to do that is cut expenses. The other way we’re talking about here in our ninth point is growing our income.

Tim Ulbrich 21:37

And finally, number 10 on our list of 10 moves to become financially fit, implement systems and automation as soon as possible. Now, if you’ve listened to the show for a while, you know that I love automation, and Ramit Sethi he talks about this in his book, I Will Teach You be Rich when he says, and I agree that automation can be the single most profitable system that you ever build. And as you’re getting started, it’s the process, not the outcome. It’s the process that’s most important. Remember, this is a marathon, not a sprint, and building and automating a system is ultimately what’s going to allow you to identify and fund your goals. You are directing your financial plan rather than reacting to it. That’s what we’re talking about here with automation. And it’s so apparent, so effective, so easy to implement, but it’s vastly underutilized. It involves essentially scheduling the transfer of funds to predefined goals, and doing so confidently, knowing that you’ve already accounted for it in your monthly spending plan. That’s what we’re talking about with automation. So whether it’s paying down your debt more aggressively through extra payments, whether it’s saving and investing money to an IRA or another type of investment account, whether it’s putting money towards a down payment on a home or investment property, whatever the goal is that we’ve identified and we account for in our monthly spending plan, once we identify that goal, automation, the next step here is to move those funds after we get paid, rather than waiting to see if there’s money left over, right? It’s proactive versus reactive. Sure, it takes a little bit of time to set up, but once it’s set up, it provides a long term return on your time, benefit and peace of mind, knowing that you have thought about, you’ve prioritized and you have a plan that is working itself to fund your goals. Do not underestimate how powerful that can be in terms of momentum and confidence. Now, what does this actually look like? So for my wife and I, we have a high yield savings account. We use Ally for all our online banking, this is not commercial for Ally, but in our high yield savings account within that, we have various buckets, and we name them according to the goals that we’re setting out to achieve. Now, of course, if there’s anything that I want to go directly to an account, not to sit in a high yield savings account, right? Perhaps this would be funding a Roth IRA or a brokerage account, or putting money into 529, those are going to be automated directly to that account. But for anything else, as I mentioned before, the mental accounting and the actual accounting, for example, this year we’re finishing, right now, a basement remodel project. So we have a bucket in our high yield savings account for a basement remodel. It could be a vacation. It could be the next car purchase. It could be gifts that you are funding throughout the year. It could be your insurance, homeowners or auto insurance that you pay once a year, twice a year, that you save up through throughout the year. Right? Any of these goals, we can create a bucket, and we can automate the contribution of the funds to that, and then we can see, and have a visual representation of what our goals are, and whether we’re not or not, we’re on track to achieve those. So this system, it took us about 15 minutes to set up, and could just as easily be achieved, probably through your own bank, or if they don’t have a bucket tool like that, through tracking in a simple spreadsheet. Again, resources I have that you can see more of our system. You go to yourfinancialpharmacist.com/toolbox, feel free to download any of those templates or resources and make them your own.

Tim Ulbrich 25:06

Now, if you’re someone that’s listening, that’s feeling perhaps financially stressed or stuck or overwhelmed or confused or anxious, whether you’re a new practitioner, mid career, approaching retirement, or maybe you’re wondering, why am I not further along? Right? I’ve earned a good income, or I am earning a good income. Why am I not further along? I want you to close your eyes for a moment, unless you’re driving, of course, don’t do that and imagine a scenario where you are regularly investing in time to enhance your financial IQ, whether that’s reading, podcast, whatever you’re consistently learning and growing in this area. I want you to imagine where you have a fully funded emergency fund, where you have the peace of mind knowing that you have a backstop in place. I want you to imagine a scenario where if you have any high interest rate revolving debt, that that’s gone, and for other debt, you have a plan in place for how that’s going to be paid off and where that fits in the budget. I want you to imagine a scenario where you’re regularly tracking your net worth over time each and every month. I want you to imagine a scenario where you’re saving and investing each month and hopefully growing that each month, taking advantage of compound interest and time value of money. I want you to imagine a scenario where you’re advocating and negotiating for your income to be commensurate with the value that you’re providing and the confidence that can come from that. And I want you to imagine for a moment that you have a system in place that is accounting for and automatically funding your goals each month. And as you imagine those things. How does that feel? What emotions are coming up, and how does that contrast against those feelings of feeling stressed or stuck or overwhelmed, confused, anxious, notice that there is nothing complicated about what I have shared today. Sure, there’s a time and place for more advanced strategies, many of which we have talked about on this show, but first we have to do the foundational work that will put us in the position to take some calculated risk. And this just this isn’t just new practitioner stuff, right? I know many pharmacists, myself included, that sometimes we have to go back to the foundations, whether we’ve been out five years, 15 years or 25 years. And while all of this is pretty straightforward, you and I both know that executing consistently over time is a different challenge. So let me wrap up by saying that if you could use some help and guidance, we have a team of certified financial planners and tax professionals at YFP that can help. Your six figure income. It’s a great tool, but as I’ve said already once on this show, it is not a financial plan without a vision and a plan that good income is only going to go so far. That’s why, in part, I started Yfp back in 2015 because at Yfp, we support pharmacists at every stage of their careers to take control their finances, reach their financial goals and build wealth through comprehensive fee only financial planning and tax planning. Our team of certified financial planners and tax professionals work with pharmacists all across the country and help our clients set their future selves up for success while living a rich life today, both are important. So if you’re ready to see how yp can help support you on your financial journey, you can visit your financial pharmacist.com, and at the top right, you’ll see an option to book a discovery call that will take you to a scheduling page to book a meeting with my partner, a 60 minute meeting. Tim Baker, fee only, certified financial professional, where we’ll talk and learn about your situation, your goals, what’s working, what’s not working. We’ll share more about our services, and from there, we can determine whether or not those are good fit again, yourfinancialpharmacist.com, at the top right, you’ll see an option there to click on book a discovery call. Thank you so much for listening to this week’s episode. If you found this information helpful, do me a favor. Share this with a friend and colleague and leave us a review on Apple Podcasts which will help others find the show. Have a great rest of your day, and we’ll catch you again next week. Take care.

Tim Ulbrich 29:14

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

[END]

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6 Financial Moves for Mid-Career Pharmacists

Posted on by Caitlin Boyle

Are you a mid-career pharmacist who’s tackled some of the financial planning basics but is left wondering, “What’s next?”

You’re not alone!

Whether you’re feeling confident in your current trajectory or are wondering if you need a financial tune-up, we’ve got you covered with six financial moves to make as a mid-career pharmacist.

1. Recast the Vision of Your Financial Plan

This point in your pharmacy career (10-30 years after graduation) is the perfect time to reflect on financial (and personal!) goals you previously set, take note of where you currently are with those goals, and reset the vision of them if needed.

The truth is that this phase of life often brings a lot of transition. Depending on your age and when or if you had children, you may be beginning to think about them moving out of the house. Maybe you have elderly parents that you’re trying to prioritize or plan for their future care. Perhaps you’re beginning to think about retirement and are wondering if you’re on track. Or maybe you’re still in the thick of trying to take care of yourself prioritizing the needs of your children.

No matter what you’re facing, this is an opportunity to take a step back and look at the vision and the goals for your financial plan, how those goals changed over time, and reset your goals and how you’re going to fund them if needed.

2. Savings, Savings, Savings

This step of the checklist includes your emergency fund and taking a pulse on your retirement savings.

Let’s dig in.

Emergency Funds

We recently released a podcast episode that took a deep dive into emergency funds, including how to determine if it’s adequately funded and optimized.

If you haven’t recently revisited your emergency fund and the reserves you have on hand, now is a good time to do so as there is a possibility that your needs have changed.

For an emergency fund, what we’re looking for is three to six months of non-discretionary monthly expenses. These are expenses that have to be paid whether you are working or not, including mortgage or rent payments, utilities, insurance premiums, and food. After you add up all of your non-discretionary expenses, multiply that by three if you have two household incomes or by six if you have one household income. This gives you the number that you should have saved in your emergency fund.

Typically for Your Financial Pharmacist planning clients, we see anywhere between $15,000-%50,000 that’s needed to be saved in an emergency fund.

Retirement

Have you recently wondered if you’re on track for retirement?

Pharmacists we talk to at this mid-career stage often feel like they are getting hit in every direction.

Between kids’ expenses, kids’ college needs, retirement savings, caring for elderly parents, and paying off remaining debt, there are a lot of financial and personal priorities. Because of all of these different pressures, sometimes the retirement piece falls to the side or wasn’t a top priority for a while, and now, as you get to a point of being able to visualize retirement more, you may be wondering if your retirement savings are on track.

Check out these podcast episodes in our retirement series that dig into retirement savings, how to determine how much is enough for retirement, nest egg calculations, and how to build a retirement paycheck:

Don’t miss downloading this free guide: Retirement Roadblocks – Identifying and Managing 10 Common Risks

3. Social Security

If you haven’t looked at ssa.gov to see what your social security statement or projected benefits look like, now is the time to do so.

Having an understanding of your projected social security benefits at retirement and how that fits into your nest egg calculation and overall financial plan is crucial.

To learn more about social security and mistakes to avoid making as a pharmacist, take a listen to these podcast episodes:

4. Estate Planning

Number four on our list of mid-career moves to consider making as a pharmacist is all about the estate plan.

We dug into this in detail on YFP 310: Dusing Off the Estate Plan.

Unfortunately, estate planning is a part of the financial plan that’s often ignored or isn’t given enough attention. Doing a beneficiary check and ensuring that you have estate planning documents in place so that your dependents and family are protected is so important.

The reality is, getting these documents in place isn’t fun to think about and it’s so easy to push this task to the side. This is your call to action to either update, take a fresh look at your estate planning documents, or get them created.

5. Conversations with Aging Parents

It’s not uncommon to see mid-career pharmacists entering a new stage of caring for their elderly parents. This is not only an emotional and time investment, but can also be a financial expense that you need to consider.

On top of that, knowing if your parents have the right estate planning documents in place or even having a deeper understanding and transparency of their financial situation can be valuable.

But how do you have these sometimes very hard and awkward conversations?

We had Cameron Huddleston, award-winning journalist and author of Mom and Dad, We Need to Talk, on YFP 321: Navigating Financial Conversations with Aging Parents. This one is a must-listen.

6. Insurance Check-Up

We often talk about term-life and long-term disability insurance at the front end of someone’s pharmacy career, but it’s important to re-evaluate these policies in your 30s, 40s, and 50s.

For example, if you bought a 20-year term life policy in your early 20s or 30s and now you are in your 40s or 50s, does it still provide adequate coverage for your family if something were to happen to you? Do you need to supplement your policy in any way because your earnings have continued to climb?

Other items to consider is looking into long-term care insurance, especially in your 40s or 50s, and property and casualty insurance.

We dig into long-term care insurance in this podcast episode:

5 Key Decisions for Long-Term Care Insurance (YFP 296)

Conclusion

If you’re a mid-career pharmacist interested in how working with our team of CERTIFIED FINANCIAL PLANNERS™ at Your Financial Pharmacist can support you on your personal financial plan, which would touch on these six areas as well as many more, click here to learn more.

If you’re ready to take the next step, click here to book a free discovery call with our team.

YFP 346: Developing a Budget That Works…And You Don’t Hate with Tim Ulbrich

Posted on by YFP Media

Tim Ulbrich shares the importance of setting a budget for achieving your financial goals and five steps to help you get started.

Episode Summary

In this week’s episode, we learn all about one of the key first steps to mastering your money: creating a budget. You’ll learn how to implement a budgeting system that not only works, but is also enjoyable. Tim Ulbrich, YFP Founder and CEO shares a practical five-step process to help you get started. A budget isn’t a restrictive tool, but an important instrument that can empower you on your journey toward financial well-being and help align your money with your vision for a rich and fulfilling life.

About Today’s Guest

Tim received his Doctor of Pharmacy degree from Ohio Northern University and completed postgraduate residency training at The Ohio State University. He spent 9 years on faculty at Northeast Ohio Medical University prior to joining Ohio StateUniversity College of Pharmacy in 2019 as Clinical Professor and Director of the Master’s in Health-System Pharmacy Administration Program.

Tim is the host of the Your Financial Pharmacist Podcast which has more than 1 million downloads. Tim is also the co-author of Seven Figure Pharmacist: How to Maximize Your Income, Eliminate Debt and Create Wealth. Tim has presented to over 200 pharmacy associations, colleges, and groups on various personal finance topics including debt management, investing, retirement planning, and financial well-being.

Key Points from the Episode

Budgeting for financial freedom. [0:00]
Pharmacist financial success and budgeting. [3:51]
Financial health check and budgeting. [7:32]
Setting a financial vision and budget. [11:40]
Budgeting methods for personal finance. [16:04]
Budgeting and financial planning. [20:54]
Budgeting and financial planning for pharmacists. [26:06]

Episode Highlights

“So I think it’s safe to say that most pharmacists didn’t spend six to eight plus years training to get into this profession, to work hard to find themselves living paycheck to paycheck.” – Tim Ulbrich

“So, if we can identify in advance what our goals are, and we can identify how much we have to allocate towards those goals, then the next step we’ll talk about is how to actually make sure we distribute them accordingly. All the sudden, we’re thinking in a way that we are pre funding our goals, right really important, rather than waiting to see what’s left over at the end of the month.” -Tim Ulbrich

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich 00:00

Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week, I’m digging into how you can develop a budgeting system and process that works and is one that you don’t hate. During the episode, we’re walking through five steps that you can follow to implement your own budget. But before doing that, we’ll discuss why it’s crucial to do a financial vitals check along with some vision setting to get clear on what it looks like to be living your rich life.

Tim Ulbrich 00:32

Alright, YFP community, I’m really excited to invite you to our next webinar on March 7, at 8:30pm/Eastern: Budgeting Blueprint, What Zero Based Budgeting Is, Why It Works and How to Start One. This webinar is different than webinars we’ve done before. Not only am I gonna dive into the ins and outs of the zero based budget and the power behind assigning each dollar a job, but I’m going to be doing a live demo of a zero based budget using the YFP budget template. And we’re going to be anonymously featuring real pharmacists’ budgets for you to see. So here’s the deal. First, I want you to register for the webinar. It’s free, visit yourfinancialpharmacist.com/budgetwebinar to save your seat. Again, that’s yourfinancialpharmacist.com/budgetwebinar. Second, we’re gonna be giving away three $50 amazon gift cards to pharmacists who submit their budget to be featured and who attend the webinar live. Here’s how you can do that: you go to download your FREE zero based budgeting template at yourfinancialpharmacist.com/budget again, yourfinancialpharmacist.com/budget, then go ahead and fill out your budget with your numbers. If you’ve never used a zero based budget before, don’t worry instructions are included in the template that will help you walk through the process. Make sure to save your budget, send us an email with that budget attached at [email protected]. And make sure to include the word “budget” in the subject line so we can quickly identify your template. In the email, I would love for you to also share any additional information that would be helpful for me to know, whether you’re a single income earner, whether you have dual incomes in the household, if you have any children, where you live. And of course, if you have any other questions that you’d like me to answer as it relates to your budget template. Then make sure to attend the webinar live for your chance to win one of the three $50 amazon gift cards. If you don’t want to turn your budget, no problem make sure to register for the webinar and we’ll send you the replay if you can’t join us live. Can’t wait to see you there and see the real life budgets from pharmacists in the YFP community.

Tim Ulbrich 02:37

Hi guys, Tim Ulbrich here. This week, we’re gonna be talking all about how to develop a budgeting system that works and hopefully is one that you don’t hate. Now if we’re being honest with ourselves, who gets a little nauseous when the topic of budgeting comes up? I mean, besides the future financial nerds out there, not many are a fan of the whole budgeting thing. Quote, “It takes too much time.” “I already know how much I spend.” “I don’t know how to make one and follow it.” “I’m afraid of what I might find when I track my expenses.” “I don’t like to be so restricted.” “I make enough money so I don’t need a budget.” These are just some of the most common reasons that I hear for all of the hate surrounding budgeting. So in that light, what if we thought of the budget instead as a mechanism by which we achieve our financial goals? It’s simply the roadmap. It’s the execution plan that we have for the vision for living our rich life. It’s the way that we’re going to achieve what we set out to achieve. Now what are the most common things I hear pharmacists say is, “Tim, I make a great income. But I don’t feel like I’m progressing financially.” And one of the greatest threats to a pharmacist long term financial success is believing that a six figure income equals financial success. That mindset I can guarantee you will hinder progress. And here’s why if you take the average pharmacists salary, a reasonable take home pay after taxes after health insurance premiums after any type of employer retirement contribution is about $7,000 per month, right, give or take. And if you assume the average student loan debt on a 10 year standard repayment, plus let’s just say a $400,000 home and interest rates today that adds up to about $4,500 per month or 65% of a pharmacist take home pay. Let me say that again. Between the average student loan debt and a $400,000. home on a 30 year mortgage. Right. I know some people live in higher cost living areas, some people live in lower cost of living areas. That adds up to about $4,500 per month of committed expenses or looking at it another way about 65% of that take home pay number that I just mentioned. That means we have about $2500 left each month for everything else, right all the other home related costs, property taxes, homeowners insurance, upkeep, of course food, clothing, car payments, gas, other debt payments, insurance premiums, additional savings, and not to be forgotten the more enjoyable discretionary expenses like vacation, experiences, eating out, giving, and so forth. So I think it’s safe to say that most pharmacists didn’t spend six to eight plus years training to get into this profession, to work hard to find themselves living paycheck to paycheck. Now, obviously, some pharmacist households have more than one income, so we have to factor that in. But regardless, we can see that the take home pay of a pharmacist only goes so far. And that’s why it’s critical that we shift the mindset that pharmacists make a great income. Yes, it’s a good income, one that is more than $50,000 higher per year than the average household income in the United States. So it’s a good income, objectively speaking. And so it’s a tool and it’s a pretty good one at that. But without a plan, it is going to have significant limits. So shifting your mindset around how much you make, and how far that income will go is the most important thing that you can do for your financial plan. Why? Because everything else will flow from that mindset, how you save, big purchase decisions, how you handle your debt, ideas for growing your income, and so on. So with that in mind, with the plan that we need to have one, right, we need to have some direction to make sure that we’re achieving our long term goals.

Let’s talk to you five steps to developing and automating a budget that works and hopefully is one that you don’t hate. Step number one is we have to do a financial vital check. Alright, before we get into the vision, before we get into the budget, we have to assess where we are at today. And sometimes this is painful. Sometimes this is exciting, right? Depending on the progress that we’ve made thus far. We need to really honestly assess are we on track? Are we ahead? Are we behind? And what does that even mean? And we don’t want to start running forward until we know where we’re at. And we want to find out what path we want to be running on. And a great starting point, certainly not the only place to be but a great starting point for the financial binos check is to really be tracking your net worth on a regular basis. Now, if you’ve been listening to the show, you’ve heard me talk about net worth many times before. Net worth is simply your assets or what you own, minus your liabilities or what you owe. And as I’ve shared often in my journey, paying off $200,000 of student loan debt and coming out of a significant amount of debt really into a period of trying to grow that net worth. This was a significant part of our journey, really shifting that mindset from income to being a tool, right income not being the end all to really being able to move that income to growing assets, paying down liabilities, and therefore growing net worth.

Now Dr. Tom Stanley in the book, The Millionaire Next Door, which if you haven’t read before, I’d highly recommend it. He says that one of the reasons that millionaires are economically successful is that they think differently. One of the reasons that millionaires are economically successful is that they think differently. And part of what he’s talking about here is this concept of income versus net worth . They recognize that income is a tool, but income by itself does not mean financial success. Now, what should be our net worth? Right? That’s an interesting question, what should be our net worth? And of course the answer that is it depends. But Dr. Tom Stanley in the book, The Millionaire Next Door gives us a calculation for expected net worth. And he says that your expected net worth is your age times your gross annual income divided by 10.

For example, if we had a 45 year old pharmacists making $140,000 per year, if we took 45 as their age, we multiplied it by $140,000 of income, we divide that by 10. That’s $630,000 would be their expected net worth for that 45 year old pharmacist making $140,000. Now in addition to net worth, that’s just one calculation. We certainly don’t want to hang our hat on that. There are other areas inside of this financial vitals check that we should be thinking about. Things like, where are we at with the emergency fund? Is that a box you’ve already checked? Is that something we need to focus on? Perhaps you looked at that several years ago, and now we need to update that because expenses have gone up. So where are we at with the emergency fund? That’s one part. Do we have revolving credit card debt? If so, typically, because of where those interest rates are we going to focus on that before we look at other parts of the plan. Have we landed on, for those that have student loans, have we landed on an optimized student loan repayment strategy? Critically important, many different pathways we can go. We know that certain strategies can be more advantageous than others in terms of cash flow, what we pay out of pocket, potentially forgiveness. So have you critically evaluated your loan repayment strategy? Other areas of the financial vitals check are we set with things like own occupation, Long Term Disability Insurance, or for those that need life insurance, we have a good term life insurance policy that’s going to cover the needs that we have, are we on track with retirement savings? Right?

We’ve talked about all these topics on the show before these areas, why it’s important to start here with the financial vitals check is all of these areas are going to potentially impact cash flow, and give us insight into where we want to prioritize and focus with the budget because you’ll see here in a moment, then we talk about how to execute on the budget. One of the things we need to know is what are the goals that we want to include in our budget? What are we focusing on? What are we prioritizing on in doing this vitals check is going to help us in part, identify what those areas are. Now if you want more information on this concept of financial vitals checking, you want to do your own financial vitals check, we have a neat tool available for free. If you go to yourfinancialpharmacist.com/financial-fitness-test. That’s our financial fitness test, again, yourfinancialpharmacist.com/financial-fitness-test that will take you to a quick interactive tool, and it’ll help you identify what some of these areas are to focus on. Again, we’ll link a link to that in the show notes. So that’s step one, doing the financial vital check.

Tim Ulbrich 11:40

Step number two, again, we’re not even in the budget yet, right? Step number two is setting the vision. I firmly believe, we firmly believe, that without a compelling vision, the budget will feel restrictive, right. Without a compelling vision, the budget will feel restrictive. And I can almost guarantee you as well that you will run out of gas at some point in time, if you don’t have a compelling vision, only to find yourself and the whiplash between, in and out of being intentional with your finances. Like we tend to approach other areas of our life, right, such as fitness, such as our diet, and so forth. If we have a compelling vision, think of that as the engine for the financial plan, especially if you are in a season of grinding it out or cutting back, which hopefully is temporary. But especially in those seasons, we want to have a very compelling vision that’s going to drive us forward and keep us motivated. So first things first, what does your rich life look like? What does your, keyword there, your rich life look like? I love this quote quote from Roy Bennett. He says, “Dream your own dreams achieve your own goals. Your journey is your own and unique.” That’s so important here, when we think about setting the vision for living a rich life. When we talk about our financial plan and our goals. It’s so easy to get caught up into what are other people doing or the comparison game. What does it mean for your family to be living a rich life. If we can get clear on that -something we’ve talked about on this show before – that’s gonna help us really have a strong plan when it comes to how we’re not only going to implement the budget, but how we’re also going to be able to achieve other financial goals like long term savings, and retirement. Don’t underestimate this step. Step number two, setting the vision think of this really as the window in which we’re looking through as we’re making any of the individual financial decisions.

Tim Ulbrich 13:44

Alright, step number three, is I want you to track back your spending 90 days. So before we get into the spreadsheets, before we start to set the budget going forward, I want you to track back you’re spending 90 days right? This is the audit of the expenses to identify how have we been spending our money before we set what the goal is going forward. Now, this is really easy to do. Thankfully, in 2024. Many banks, many tools, software options that are out there, that we can quickly pull statements from credit cards, from debit cards, from various accounts, and be able to aggregate these and many of them even automatically will categorize them for you. Sometimes you gotta clean that up. But this is a process that we think is really important before we set the plan going forward. Now 90 days, I believe is an important window of time, because in any given month, right in any 30 day period, we can have some anomalies with the budget that might not be “normal.”, right to the month that we would have throughout the year. And so 90 days is going to help to average that out a little bit. That’s one of the reasons we want to look back 90 days but also by looking back 90 days we’re going to start to identify some patterns of things that we might want to adjust or at least be aware of as we set the budget and plan going forward. So that’s step number three is we’re going to track back 90 days categorize those expenses, really look at what is our spending patterns, what’s the spending behaviors? And there, we’re going to quickly identify what’s the difference between our expenses, and what’s the differences between our take home pay, right, and that’s going to help us identify what we have to work with for the budget.

Tim Ulbrich 15:21

Alright, step number four is then actually setting the budget. Now, this is intentional that we don’t start here, right, I firmly believe from experience from working with many pharmacists on this that if we start with a budget, we tend to lose that momentum that I’ve been talking about. And especially if we have two people that are working on this together, where maybe they’re not on the same page financially, we want to first get clear on the vision, right? If we can have the shared dreams, the shared vision, I’ll never say the budgeting process is easy. But it’s more palatable when we’re working then from that mindset where, okay, now the budget is simply the execution of the vision that we’ve agreed upon. Right. So we don’t want to start here with a budget.

Of course, there are many ways to budget, some of you might be familiar with budgeting methods, such as the 50,30, 20 budget, which is about 50% of your expenses should be for essential, or excuse me, 50% of your income for essential expenses, about 30% of your income for discretionary expenses, those are the things that are the nice to haves, but we could cut them if we needed to cut them, and then about 20%, that’s going to go towards savings or investments. So there’s different models and frameworks of that. But many of you may be aware of something like that. There’s also budgeting methods that are known as like the no budget budget, which simply means that you identify, you know, what are those critical expenses that you have to fund each month, and then you just don’t overspend your income beyond that, right. And so that’s a method that we see people that are a little bit further in their career, that have a more significant rhythm and cadence to what they’ve been doing over a long period of time. They have a good handle on their expenses and their goals and whether or not they’re on track, that might be something that they’re not tracking in such a granular way. Okay, so lots of different ways to budget I’m going to focus though not on the 50-30-20 budget, not on the no budget budget, I’m gonna focus on the zero based budget, because I believe that while this isn’t for everyone, I believe that for many people that are trying to get either on track, let’s say you’re just getting started in your career, and you’re trying to develop a system that makes sure you’re setting yourself up for a good long term plan and that you have a good foundation, I think this is a great way to get started. And then you can pull back over time, or for those listening saying, hey, maybe you need to get back on track, or I’ve kind of lost my way. And I want to have a season of really getting refocused. I think the zero based budget method can be a way to do that.

Now, as a reminder, if you want to download the YFP budget template, so you can work along side as you’re listening, hopefully, you’re not driving as you’re doing this, you can go to yourfinancialpharmacist.com/budget to get that Excel template for free. Okay, so inside of this step of the zero based budget, I’m gonna walk you through five steps of how to complete the zero based budget. Step number one is you have to know your take home pay. Now, as obvious as that sounds, this can be challenging sometimes, right, especially for folks that are just getting started. You know, I see this often from a transition where someone’s going from student to resident or student to fellow and then they’re going into the first job, right? There’s that change that’s happening, or individuals that are going from one income to two incomes in the household, that certainly can be a season of change as well, or for those those seen that variable income. Right? Whether that be you know, side hustle income, additional income, or you don’t work consistent salary types of positions. This can be sometimes challenging, but we have to know on average per month, and for those of you that have variable income, we want to be conservative in this estimate. We have to know on average per month, what is our take home pay, right? This is the amount that you’ll be working with each month to cover your expenses and to put to work to achieve your financial goals. The take home pay or net pay is the amount that shows up on your paycheck, every pay period after taxes after health care insurance premiums that you pay after any retirement contributions and any other deductions that are withdrawn from your base pay or your gross pay. Okay, so for students, any students that are listening, right, this could also potentially include things like student loan disbursement money, plus any earned income that you would have in internships and so forth. So that’s step number one is that we have to determine our take home pay.

Step number two is we then want to account for and subtract our necessary or essential expenses. Now, the definition of necessary can be debated but for the purpose of this activity, let’s include the following as necessary or essential expenses. These would be things like housing, transportation, food, utilities, insurance premiums -if that’s applicable-and any minimum payments on your debts that you need to make. Now in this step, consider your food expense as what you need as an essential right, anything else that would be dining out, we’re going to include in discretionary in step number three in this budgeting exercise. Okay, so that’s step number two is we account for all of our essential or necessary expenses. And we’re working down from our take home pay.

Step number three, then is we’re going to determine how much we spend on discretionary expenses. Think of discretionary expenses as the nice to haves, but in a true financial emergency, they could be cut, if you needed to cut them, right, these would be things like eating out, you know, trips, extra trips, or shopping, extra payments on debt, clothing, expenses, beyond the minimum, you know, housing upgrades, and so forth. Right, it’s very easy to justify any one of these as essential. So it’s important here to be honest with ourselves, when evaluating this category. If you have no idea how much you spend on these types of expenses in a month, a good place to start is to review these from again, as we did earlier, looking back 90 days to review what you’re spending in these areas in various statements and categorize these whether that’s credit card statements, debit card statements, whatever might be the source of those expenses. Now, I want to emphasize here that discretionary expenses are not bad, right in any way, shape, or form. I think sometimes we get to this step, and we start to have some self judgment, and a little bit of questioning, Well, should I be spending money here? Should it be spending money there? Discretionary expenses, and of themselves are not bad, we’re just separating them from essential expenses as we look at this exercise. In fact, they’re an important part a very important part of living the rich life that we want to live, right? Yes, we’ve got to pay down debt. Yes, we have to save and invest for the future. But we also want to enjoy some of these things along the way. So that’s step number three is determining how much to spend on discretionary.

Step number four, then, is calculating what we call disposable income. Remember, we started with take home pay, we subtracted essential expenses, we subtracted discretionary expenses. And now what we’re trying to determine is what is the disposable income. So this is the amount that we calculate by taking, again, the take home pay, subtracting essential and discretionary expenses. This number is the amount that you have to put towards other financial goals, whether that’s building an emergency fund, whether it’s saving for kids college, whether that’s additional retirement savings, down payment on a home, second property, whatever might be the case. So for example, if you have a take home pay of $7,000, you have necessary expenses of $3,000, discretionary expenses of $2,000, you would have leftover $2,000 of disposable income that we can identify and work with and put towards other goals. Now, why this budgeting method, I think works well and hopefully is one that you don’t hate is we are doing this proactively, before we actually earn the income. Right? We’re doing this proactively before we actually earn the income. So, if we can identify in advance what our goals are, and we can identify how much we have to allocate towards those goals, then the next step we’ll talk about is how to actually make sure we distribute them accordingly. All the sudden, we’re thinking in a way that we are pre funding our goals, right really important, rather than waiting to see what’s left over at the end of the month. And that is what we typically see is sure this takes time to get set up. But when we have this system humming, when we see that we have disposable income, or we thought about that to assign to our various goals, and we know that we’re funding those goals, we can really see some feelings of momentum and progress that are taking place. So that’s step number four, calculating your expense, disposable income.

And then step number five is allocating that disposable income to your goals, right. This is where I really feel like the magic happens: allocating your disposable income to your financial goals. And again, we’re doing this proactively before we earn the income, or at least preparing for this. And then once we earn the income, we’re going to allocate accordingly. So if the amount of disposable income, right, in step number four, when we calculated that disposable income, if the amount of that disposable income isn’t enough to meet the goals that you’ve set and the timeframe that is desirable to you, or you find out that you have a deficit here, well, this is where really where the rubber meets the road. We’ve got some work to do. Right, we’ve got two options. We can adjust our goals, I guess three options, we can adjust our goals, we can cut our expenses, or we can try to grow our income and perhaps it might be a combination of those three, but this is really where we shine a light on the reality of where we are at and so often with the financial plan. The stress comes from living in the dark, right wondering, I hope, I wish, I dream are we going to be able to do this? And we’re going to be able to do that? Really, this system is telling us where are we at? And what are the areas that we want to focus on? And what are the dollars that we have available to do that if we can’t meet those two things? What adjustments do we need to make? Do we need to adjust our goals? Do we need to cut our expenses or, and or are their options to grow our income? Now, the reason why this is called a zero based budget is because at the end of step number five, where we’re allocating our disposable income to our goals, we should have “spent”, “spent” because we’re doing this proactively, our entire income, meaning that every dollar has been assigned, and we have a $0 balance remaining, right, because we’ve allocated every dollar to essential expenses, discretionary expenses, and then ultimately, to the goals that we’ve determined are most important.

Alright, so those are the five steps of creating the zero based budget. Now, if we zoom back out, remember, where did we start? We started with doing a financial vitals check. Where are we at today? What what is our net worth position? What are the areas of the financial plan that we want to focus on? We then talked about setting the vision, right? What does it mean, for us? Our unique plan and vision for living a rich life? How are we spending our money? How are we spending our time? We then talked about tracking back 90 days, so we can get an idea of what our spending is in various categories of the budget on average each month. And then we talked about setting the budget, right. And that was the five steps I just reviewed with a zero base budget.

Tim Ulbrich 26:31

Now the final step of all this part number five years really tracking and automating this system. Now how you choose to track this really doesn’t matter to me, at the end of the day, it’s the system that works best for you. And is the system that is feasible for you to keep going, at least for the foreseeable future. So when I asked a group of pharmacists, hey, what system do you use to track? You know, some people use some of the fancy softwares and tools that are out there, such as YNAB, or Every Dollar, just a couple examples, some use a tool that’s provided to them through their bank or the credit card that they use. Most people I would say, use probably a Google spreadsheet or some type of Excel template. So how you track it to me, doesn’t necessarily matter. But the second part of this final step, right, I mentioned, track and automate. Track and automate when it comes to automating your financial plan. It is so obvious, so effective, so easy to implement, but so many people aren’t optimizing this.

Think of automation as the mechanism by which you’re going to put your budget that we just said, we’re going to put this to work for us each and every month, because we’ve already done the hard work to proactively define what are our goals? And how are we going to prioritize and fund those goals. Now, I cover this in detail at length in Episode 341, where I talked about five financial moves to make in 2024, I talked about the concept of automation, I talked about exactly what the system looks like for Jess and I and our own financial plan. So make sure to go back and listen to that and how you can begin to implement automation as a part of your financial plan. Alright, so there you have it. Five steps that you can use to implement a budgeting system and process that not only hope, hopefully helps you achieve your financial goals. But I also hope makes this topic just a little bit more palatable. So we talked about the importance of doing that financial vital check, setting the vision, tracking back 90 days, setting the budget, and then developing a process to track and automate that along the way.

Alright, as we wrap up today, an important reminder about our webinar coming up on March 7 at 8:30pm/Eastern, Budgeting Blueprint, What Zero-Based Budgeting Is, Why It Works, and How to Start One. I’m really excited to walk you through in a visual manner how you can implement your own zero based budget as well as to anonymously feature other real pharmacists’ budgets for you to see. So to get started, you can register for the webinar for free again, you visit yourfinancialpharmacist.com/budgetwebinar again that yourfinancialpharmacist.com/budgetwebinar to save your seat. We’re gonna be giving away three $50 Amazon gift cards of pharmacists who submit their budget to be featured and who attend the webinar live. So as a reminder to have your template, your budget template featured, you can download that free zero based budget template yourfinancialpharmacist.com/budget, fill it out with your own numbers, send it back to us attach it [email protected], in the subject line make sure you note budget and then if you have any questions in your own budget template you want me to address during the webinar make sure to include those in the email as well. Alright, thanks so much for listening to this week’s episode of the YFP Podcast. We’ll catch you again next week. Take care.

Tim Ulbrich 29:51

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

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6 Boring Financial Moves Worth Making

Posted on by yfpadmin

6 Boring Financial Moves Worth Making

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.

Today’s the day.

You’ve spent the better part of a decade getting your PharmD, passed your boards, and got the job. But today’s the day it’s supposed to all pay off; for today, you finally get that sweet first paycheck as a pharmacist.

Welcome to the club!

But now what?

Well…whatever you want, right? After all, the world’s your oyster now that you’re making good money. Live it up! And even if you don’t have the money on hand to do what you want right now, you’ve got a big income to support a big credit limit. Charge it!

Unfortunately, a lot of us (myself included) buy into this mindset and fall into a financial quagmire because of it. What starts as something innocuous like “I’ve worked hard for a long time and now I’m going to treat myself” has a funny way of becoming “Wow, I make six figures and live paycheck to paycheck!” And if you don’t believe that’s a thing, tell that to the majority of high-earning Millennials who report living that life.

It doesn’t have to be that way though. There are moves you can make to protect yourself from such first-world problems. But here’s the rub, most pharmacists (and people in general) don’t like making some of these financial moves because they can be boring, tedious, and might be outside your comfort zone. If you can get past that though, these moves could pay off in the long run.

So with that, let’s dive in!

1. Make and Keep a Budget

This one’s probably the most essential thing you can do to keep your finances on track. Knowing how much money’s coming in, how much is going out, and what can be saved is elemental to the financial plan. If you aren’t budgeting, I’d dare say that you’re going to find it very difficult, if not impossible, to meet most of your bigger financial goals.

So why does this one top our list?

In truth, budgeting can be one of the most boring activities that fall under the broad umbrella of things considered “adulting.” It requires you to take an accurate accounting of not just the money you have coming in, but the money that’s going out and where it’s going. Poring over pay stubs, bank statements, and credit card bills to get all this data isn’t just recommended, it’s required. Oh, and you’ll probably need to make a spreadsheet or two.

Sounds like fun, doesn’t it?

And that’s just what goes into making an initial budget. To make budgeting work for you, you need to get in the habit of sitting down with all these numbers regularly (usually once a month, if not more often). Like a diet, success with budgeting is only going to occur when you practice it consistently for the long run. Fortunately, budgeting isn’t that hard to do and there’s even more than one way to do it.

For most of us, the thought of budgeting invokes a picture of sitting down with your finances once a month, going over your income and expenses, and seeing if there’s money left over to put toward goals. This kind of process, known as “zero-based budgeting,” is the most basic form of budgeting you can do and will likely be the first budgeting style you try. It can also be a pretty tedious process as you need to dissect each month’s spending and see how it compares to the goals you set for yourself ahead of time. For instance, say you want to set a budget of $150 a month for clothes, and this month you only spent $135. Great! The extra $15 can be added to the amount you can save this month. Conversely, if you went over budget in that category by $15, hopefully, you underspent in another category. If not, you’ll need to dip into existing savings to cover the shortfall.

Given the fact you need to repeat this process for every spending category, month after month, it’s not hard to see why many people don’t care for it. Still, it must be done. Don’t fret though, there are plenty of tools available to help you out along the way. For starters, you can avoid having to make a budget spreadsheet yourself and get one for free right here at YFP. This template will walk you through the steps required to make your first budget. Beyond that, there are some excellent platforms available to keep you on track. I was a big fan of the app Mint when I was getting started as it automatically drew all the data I needed from my accounts, aggregated it, and presented it to me on a clean interface.

Using that app, I was also able to get a handle on my spending trends over time and better predict my spending in the more variable categories (ie. food, clothes, entertainment, etc.) which allowed me to pursue a more convenient budgeting style. By knowing what I usually spent in those variable categories and seeing a consistency over time, I could also (in theory) treat the whole lot of them as a single line item. This led me to create a budget for myself which is sometimes referred to as a “reverse budget” in which money for savings is taken out first (in my case every pay period), and then you live off what’s leftover. It’s kind of like living paycheck to paycheck, but without worrying about how you’re going to pay the rent. For me, this style has worked very well as it involves little work beyond the initial setup. I get paid, my spreadsheet tells me how much extra I should have, and I send that money toward goals. The only time I revisit the numbers on the spreadsheet is when they change. That’s it! If you’ve been using a zero-based budget for a while or happen to have a few years of data showing relatively consistent spending, migrating over to a reverse budget might help you keep things going long term.

However you decide to do it, the bottom line here is you need to budget. Full stop. All of the other things we’re going to talk about in this post can be crucial to the financial plan, but they pale in comparison to the importance of budgeting. If you’re not already doing it, get started today!

2. Protect Thyself!

Ok, I tried to give this one a more exciting title, but this section encompasses the most boring things you can do as part of the financial plan. In this bucket, you’ll find riveting topics such as insurance policies, designating a power of attorney, and even writing a will! Hoo boy!

Pumped? Yeah, I didn’t think so.

But the truth is, taking steps to secure yourself against life’s uncertainties is never a fun exercise, and sometimes the process can even be a little uncomfortable. It’s worth it though, and you really should consider taking action here. After all, stuff happens in life and even the best-laid plans can get torn to shreds by the unforeseen.

When it comes to insurance, most of us are pretty familiar with health, home, and auto policies, and these are all essential and may even be legally required to have in some cases. But what about insurance that protects your income and those who depend on that income? Life and disability insurance policies typically aren’t given the kind of attention and essential label that the above do, but for many of us, they probably should. After all, your income is the lifeblood of you and your family’s financial plan, and securing it is important! It’s tough to think about dying prematurely or losing the ability to work, but preparing for the worst is always a good move.

Life insurance can be a pretty complicated topic, especially when you consider the fact that many policies out there combine insurance with investing. Rather than getting into the weeds on the pros and cons of different types of policies (for that, check out my other post Life Insurance for Pharmacists: The Ultimate Guide), I’ll just say that the most important thing to consider here is getting a death benefit sized to your situation for the lowest amount of premium from a reputable insurance company. And given the importance of getting that sizing right, it’s probably not a bad idea to work with an advisor or agent when getting a policy.

Be forewarned though, policies that have investing components such as whole life or universal life tend to have MAJOR financial incentives for the agents selling them. As such, those agents (who may also call themselves financial advisors) may not be acting in your best interest when pitching them to you. For most new pharmacists, these types of policies are rarely the best option. In general, term life policies that meet your basic need for insurance are what to look for.

If life insurance is a good fit for your financial plan, then you’ll want to consider getting disability insurance as well. Thankfully, disability insurance is a little more straightforward. At a basic level, you need to choose how long you want to receive benefits, the amount you’d receive, and how long it will take before benefits kick in (also known as the elimination period). In addition, you may want to get a policy that’s specified as “own occupation” disability insurance because receipt of disability insurance otherwise is predicated on the idea that you can’t work, period. Unless you have an own-occupation policy, disability payments can be denied if you could reasonably work in a different capacity, even at a much lower rate of pay. For more on disability insurance, be sure to check out this must-read on the YFP blog, Disability Insurance for Pharmacists: The Ultimate Guide.

Finally, when it comes to protecting you and your family in the event of the unthinkable, having other plans in place such as a durable power of attorney, will, and/or estate plan can go a long way. These things can make your wishes known in the event you’re unable to say them yourself. For more on this, be sure to listen to YFP Podcast Episode 222: Why Estate Planning is Such an Important Part of the Financial Plan.

3. Tackle Debt

Once you’ve started to budget, getting out of debt tends to be one of the first financial goals people set for themselves. After all, being debt-free is pretty awesome.

So why does this one make the list? Because while being debt-free can be exciting, getting there can be a pretty boring process. On top of that, if you have student loans you are trying to pay off, an optimal strategy may involve a suboptimal amount of paperwork to boot.

For most of us, eliminating a substantial amount of debt boils down to following a budget and applying the savings from that budget consistently. Put in the work, grind it out, and the debt will eventually be gone. That said, there are ways to optimize the process.

There are two main strategies for straight debt pay off: the avalanche and the snowball. The avalanche strategy involves you paying off debts in order of smallest to largest. With the snowball method, you’ll pay off the debt that has the highest interest rate first, eventually working your way down to the lowest interest rate. There probably won’t be much of a difference between the two in terms of how quickly you’ll pay off the debt, but these strategies do provide a roadmap to get you from start to finish.

But while the path to get rid of most types of debt can be straightforward, the best path to get rid of your student loans can be a little less clear. Depending on the type of loans you have, your employment status, and your level of discretionary income, you may find that the optimal strategy for addressing your loans is a lot different than simply grinding them away. For more on that, be sure to check out Tim Church’s comprehensive book, The Pharmacist’s Guide to Conquering Student Loans as well as the excellent post The Ultimate Guide to Pay Back Pharmacy School Loans.

If, after carefully considering all of the payoff strategies available to you, you decide that simply paying them off is the best course of action, visit the refinancing hub at YFP so you don’t pay a dime of interest more than you need to. You might be able to get some extra cash too!

4. Avoid More Debt

Once you get out of debt, it’s only natural to feel that your financial picture has relaxed a bit. After all, these are bills you’ve likely eliminated from your life forever. But now that they’re gone, it’s incredibly important that you don’t replace them with new ones. Believe me, keeping up with the boring grind that got you out of debt after paying everything off is easier said than done.

There’s a theory in economics known as the “wealth effect” which shares that as the value of people’s assets rise, they tend to spend more. I would argue that the same can be said when you get rid of debt. Your net worth rises and the cash flow available from your biggest asset (your income) increases. Taken together, the pressure to upgrade your lifestyle goes up as well. After all, you can afford nicer things now, denying yourself these pleasures would be on you alone, not the fact you have a loan payment due.

This is something I started to struggle with once the only debt I had in my life became my mortgage. With all the other big monthly bills gone, the amount of extra cash available every paycheck seemed to give me license to spend a lot more than I had previously. While my experience in personal finance taught me to avoid credit card debt like the plague (and I do), it’s a lot harder to keep thoughts of buying a nicer car or considering a home upgrade at bay; both of which have a nasty habit of getting you back into debt. Add temptingly low-interest rates into the mix and, well, you get the picture.

5. Force Yourself to Save More

Going hand in hand with keeping yourself out of debt is then using that money to save more. This can be tough because unlike getting out of debt, saving money doesn’t have a well-defined endpoint and the goal you set for yourself can shift over time. In addition, unless you’re in a group that likes to share financial successes, getting external validation (and motivation) about your savings habits is unlikely. After all, people see nice stuff, not nice balance sheets.

Thankfully, there’s a concept I’m going to borrow from the Financial Independence, Retire Early (FIRE) movement that we can use here to make savings a little less boring and give you a better-defined goal to work with. It’s called the “four percent rule.” In a nutshell, the four percent rule sets the amount you need to save to be considered financially independent as 25 times your annual expenses.

How does that make saving less boring? Easy. With a defined goal in mind, you can give your savings journey milestones to get excited about! For example, getting to a point where you have $100,000 in your investment accounts can sound pretty good on its own, but it can be much more meaningful in the context of where you are in your journey to financial independence; arguably the end goal for everyone taking charge of their financial futures.

6. Be Honest With Yourself as an Investor

Finally, I wanted to touch on this one not just because it fits the theme of boring things to do, but because I think as pharmacists (like other highly compensated professionals), we can easily fall into the trap of thinking we’re smarter than we are when it comes to investing. I’ve been guilty of this. But despite what you may hear in the news about small “investors” making scads of money on the latest meme stocks or cryptos, the truth is that day trading the market is a great way to lose money over the long run, or worse. For most investors, following a boring, buy-and-hold style of investing using a diversified mix of quality assets that aligns with your risk tolerance is typically a much better play.

Conclusion

The bottom line is that the path to long-term wealth and financial prosperity isn’t always sexy. Along the way, there are things you’ll need to do that are, frankly, quite boring. But if you can get past that and put in the work to make and keep a financial plan that allows you to build wealth in a secure, consistent way, you’ll be well on your way to reaching financial independence.

Need help figuring out which financial move to make next?

If you’re interested in having support on your financial journey, I encourage you to book a free discovery call with the team at YFP Planning. YFP Planning is a fee-only, comprehensive, high-touch financial planning firm that’s dedicated to serving pharmacy professionals like you.

You can book a free call to see if YFP Planning is the right fit for you.

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7 Things to Consider Before Starting a 529 Plan

Posted on 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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How Much You Need to Hang Up Your Coat: All About the Four Percent Rule

Posted on by yfpadmin

How Much You Need to Hang Up Your Coat: All About the Four Percent Rule

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 book, FIRE Rx: The Pharmacist’s Guide to Financial Independence to learn how to create an actionable plan so you can retire early as a pharmacist.

By now, you’ve probably heard that it’s possible to retire not just early, but incredibly early; like in your 30s or 40s instead of in your 60s or 70s. As evidenced by the financial independence, retire early (FIRE) movement, many people are doing just that. Now while that sounds awesome, the big question (as with most things) is always “how do you do it?”

In an earlier post, “The FIRE Prescription: How to Retire Early as a Pharmacist,” I gave a really broad overview of some of the basic tenets of the FIRE movement: the four percent rule, reducing expenses, investing, and drawdown of those investments. Having a good understanding of those concepts is crucial if you ever want to reach financial independence, but I didn’t go into much detail on any one of them in particular. Time to remedy that. So for this post, I wanted to take a deeper dive into that first concept: the four percent rule.

Why that one? Because it was the first one I listed. Duh.

On a more serious note though, the four percent rule (and by extension the concept of a safe withdrawal rate) should be the first thing to understand when drawing up a game plan for FIRE as a pharmacist. This is because it can help define the ever-elusive concept of “enough.” After all, what kind of journey do you set out on without a destination?

What is the Four Percent Rule?

When people in the FIRE community talk about the “four percent rule” what they’re referring to is a concept known as a safe withdrawal rate for early retirement. A safe withdrawal rate (SWR) can be defined as the annual amount (as a percentage) you can expect to withdraw from an investment portfolio without having to worry about the portfolio running out of money in the future; even as you adjust the initial amount for inflation year over year. Basically, you can look at your portfolio balance and figure out how much yearly income you can draw from it without worrying about the portfolio going to zero by assuming a safe withdrawal rate.

The “four percent” part comes in when we’re making assumptions about what kind of safe withdrawal rate our portfolio might support and it comes from a very important study published by financial planner, William Bengen, back in the early 1990s. In a nutshell, Bengen found that a diversified portfolio of US stocks and bonds could support at least a 4% safe withdrawal rate for retirees looking to tap their investments for retirement income over 30 years (more on that a little later).

Why it Matters

For those looking to join the FIRE movement, the four percent rule is probably the first major concept you get exposed to. Why? Because the whole idea of early retirement and the four percent rule do something incredibly important: it tells you where the endzone is. If you know how much you spend per year, you can use the four percent rule to define how much you need to save so that you can cover those expenses. Once you reach that number, sometimes called your FI number, you can probably declare yourself financially independent and consider early retirement.

So how do you calculate a FI number? Well, to borrow a phrase, it’s shockingly simple. Just take the inverse of 4% which is 25 and multiply your annual expenses by it.

For example, say your annual expenses (taxes included!) are $80,000. What’s your FI number?

$80,000 x 25 = $2,000,000

By using the four percent rule to help determine the amount you need to reach FI, not only do you set yourself apart from most Americans who frankly have no clue how much they need to retire, you give yourself a real number to work toward. With that in hand, you can measure your progress toward what many consider to be the ultimate goal in personal finance.

Given that, it’s no wonder that the four percent rule has become a chief cornerstone of the FIRE movement. What’s more, not only does it give you a concrete goal to work towards, it also puts that goal more firmly under your control.

Think about this for a second.

Many of us have been exposed to the advice that you need to save some multiple of your income by retirement to retire comfortably. But how much control do you really have over your income? As pharmacists, the answer to that question has to be “less than we’d like.” Many of us are all too aware of how much the market forces of supply and demand affect what we can expect in compensation.

That said, the four percent rule does something pretty spectacular. Instead of basing your retirement number on your income, it bases it off your expenses; something much, much more under your control. Cut out $500 a month from your budget? That translates to $150,000 less you’ll need to retire. The math is simple but incredibly powerful. What the four percent rule does, and I really can’t emphasize this enough, is that it gives you the knowledge to take control of your financial destiny!

Where Did it Come From?

Here’s where we’re going to get a little more technical and go over some of the research the four percent rule was born from, so buckle up. The four percent rule, as it’s come to be known, originally came out of the study “Determining Withdrawal Rates Using Historical Data” published in the Journal of Financial Planning by William Bengen in 1994. Bengen’s goal with the study was to shed some light on what kind of income a retiree could safely live on given a standard portfolio of stocks and bonds where the income produced came from the portfolio’s total return. And what did he find? By using historical return data on US stocks and US treasury notes, Bengen was able to conclude that the worst possible scenario for a retiree using a 50/50 stock and bond portfolio was that their money ran out after 33 years following a consistent 4% initial withdrawal strategy, indexing the withdrawal each year to inflation; a level Bengen referred to as SAFEMAX, and the rest of the world came to know as the four percent rule.

So how did that withdrawal strategy work? Like this. Say you have a $1,000,000 portfolio at the start of retirement. The first year, you’d draw $40,000 from it (4% of the initial balance). Next year, assuming a 3% rate of inflation, you’d increase the previous amount by 3% ($40,000 x 1.03 = $41,200) and that would be the amount withdrawn. In the years that come, just rinse and repeat. Slightly more complicated math than the FI number math, but still not too bad.

Bengen’s study was a watershed moment in the financial planning world. Before his study on withdrawal rates, retirement income planning either followed something akin to a reverse mortgage on the portfolio, reliance on pension income, or the old-school rentier model of only factoring in the income generated by the portfolio (i.e. not touching the principal). With Bengen, now the concept of a safe withdrawal rate could be incorporated into a retiree’s financial plan. His was just the first of many on the subject though.

Another piece of research that gets a lot of traction in the FIRE movement is one conducted by three finance professors from Trinity University dubbed, creatively, “The Trinity Study.” The Trinity Study more or less supported Bengen’s initial findings in that a 4% withdrawal rate tended to coincide with minimal risk of portfolio failure (i.e. going to zero) over a 30 year withdrawal period. The only real difference with the Trinity Study vs. Bengen’s was that the Trinity researchers presented their findings primarily in terms of probability of failure rather than just focusing on the lower bound results as Bengen did.

This was important to the whole safe withdrawal rate discussion because when making forecasts (as you do in the planning process) viewing things through the lens of probability is essential. In this case, the authors of the Trinity study placed the odds of success with a 4% withdrawal rate after 30 years at 95% using a 50/50 mix of stocks and bonds; a conclusion very much in line with Bengen’s and the notion of a 4% safe withdrawal rate.

So What’s the Catch?

So…despite the presence of studies and journals, finance isn’t what you’d call a hard science. Many would dispute the idea that it’s even a science at all. So here’s the tl;dr on how we should view the four percent rule: like the pirate’s code, it’s more of a guideline, not a rule.

Image Source

Why is that?

First, let’s talk a bit about the works that gave us the four percent rule. Just like any of the drug studies you get to look at in your professional life, there are limitations; the most obvious of which is the sample size. For the vast majority of studies that look at historical withdrawal rates, sample sizes are quite small. Take, for instance, Bengen’s study where he looked at the experience of retirees from 1926-1976. Now that sounds like a big time period, but it’s really not. Each year studied assumed a January 1st retirement, so that gives us only 50 data sets. Try bringing a blood pressure med to market with a 50 subject phase III trial. Not gonna happen. To add insult to injury, many of the data sets he used included extrapolated (i.e. made up) data to get to their 50-year endpoints.

Now while the Trinity Study suffered from the same problem as well, some subsequent research has tried to increase the sample size to what you’d expect from a large-scale drug trial. For instance, in a 2017 paper titled “Safe Withdrawal Rates: A Guide for Early Retirees” published for the Social Science Research Network, Dr. Karsten Jeske (who runs the incredible blog Early Retirement Now) was able to expand the data set to 6.5 million retiree scenarios going back to 1871 and retirement periods of up to 60 years! To date, I’m pretty sure that his study is the most comprehensive and one that specifically targets a safe withdrawal rate for early retirement. Surely with that in hand, we can settle on some withdrawal rate as law right?

Nope!

Even such an incredible sample size is still too small. This is because Karsten’s study, like much of the popular research surrounding the four percent rule, is somewhat myopic in scope regarding asset allocation. Very few studies look at the impact of including international stocks (a very common diversification recommendation) in the portfolio, let alone alternatives such as real estate or precious metals.

Secondly, the studies in question didn’t consider investment fees and expenses (like taxes) whatsoever when drawing their conclusions. Kind of like the scenarios you find on a Physics 101 exam where you get to ignore friction, the scenarios described by the aforementioned studies may lack real-world applicability.

The third problem, and in my opinion the biggest one, is that, unlike a drug where we can reliably predict an average response given enough past data, markets don’t work that way. The only thing predictable about markets is that they’re unpredictable. The next 140 years may look like the last 140 years, or completely different. Who knows? Past data can certainly give you an idea of how they may behave, but they tell you nothing about how they will behave.

Perhaps a better approach here as suggested by Dr. Wade Pfau, a professor at the American College of Financial Services, would be to take the past data and use Monte Carlo simulations (remember those from stats?) to present the idea of an SWR in a more probabilistic fashion. I find this approach to be more useful as it can help you picture the relative odds of success based on how a portfolio tends to behave.

Should We Still Use the Four Percent Rule?

Absolutely, but not in the absolute sense. As I said earlier, it needs to be viewed more as a guideline instead of a rule. What I like about it in this way is that you don’t need to be precise with your math. If you can ballpark your yearly expenses using the four percent rule you can: set a savings goal for yourself, track your progress as you go, and, if you reach it, you can probably declare yourself financially independent.

Once there, should you quit your job, lock yourself into an automated withdrawal scheme, and move to the beach?

I wouldn’t.

Can you take some serious liberties with your career at that point?

Oh yes!

Despite its shortcomings, the four percent rule is all about giving you that goalpost where you can take those liberties. And the best part is that you don’t even need to get to that magical number to enjoy the perks! Just knowing where you are on the path can be incredibly powerful and open the door to new options in life.

For instance, when our son was born and my wife Alex wanted to stay home to raise him, we knew that we could do that from an income standpoint. But what about our goal of FI, how would the decision affect that? Thanks to the four percent rule, we could safely say that it wouldn’t matter that much. We knew where we were relative to our goal and we could go down to one income without really setting us back.

Or you could use it the way Cory and Cassie Jenks from Episode 134 of the YFP podcast are, in the pursuit of Coast FI. The four percent rule tells them how much they eventually need to be financially independent, but they’re not in a hurry to get there. Instead, they can take a look at their current savings and, using an assumed rate of return, determine the point at which they no longer need to contribute to their retirement savings. Once there, the money that would’ve gone to savings can go elsewhere…or not be needed at all! They can scale back work and not worry about sinking their eventual retirement.

But what if early retirement or stepping back from work isn’t your thing? No worries, the four percent rule has something for you too. Knowledge is power, and that power can present itself in many ways. One of which is knowing whether you’re in a position of financial strength or not when considering a job change, entrepreneurship, or some other calculated risk with your career. If you’ve done the math and you’re nowhere near FI, you may want to take a more defensive posture. But if you’re well on your way to FI or close to it, that calculus can change dramatically. It may even give you the license to pursue work that can better advance the profession even if it doesn’t pay much (yet!).

Conclusion

The four percent rule, despite its flaws, is a tremendously important tool in the FI toolbox. It allows you to create a concrete financial goal to strive for and one that you can track your progress towards. Once you have that, you can start down the path to FI.

On the path to FI, the four percent rule is just one of many concepts that you’ll want to learn to be successful. The four percent rule just tells you the destination, not how to actually get there; or perhaps equally important, what to do when you arrive. If you’d like to learn more about those things, I invite you to check out my new book FIRE Rx: The Pharmacist’s Guide to Financial Independence.

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How To Build a 6 Figure Rental Portfolio in Less Than 3 Hours a Week

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How to Build a 6 Figure Rental Portfolio in Less Than 3 Hours a Week

The following is a guest post from Dr. Ryan Chaw. Ryan is a full-time pharmacist who built a rental portfolio on the side, going from zero to $10,755 per month in just 4 years. He is the founder of Newbie Real Estate Investing where he teaches others his system: how to find a college town to invest near, analyzing a deal, generating tenant leads through strong marketing tactics, and how to self-manage college tenants so everything is hands off and automated.

For most new investors, real estate is like a dragon.

It’s big, scary, and you’re afraid of getting burned.

Even scarier is having a bunch of immature college students renting out your bedrooms. But that’s exactly what I specialize in.

“Aren’t you worried the students will trash your house?”

This is a question I get asked all the time whenever I tell somebody that I invest in the student housing market.

My answer is always the same…

“Absolutely not. No way. Nope.”

In fact, thinking that college students will trash your house is one of the biggest myths of college town real estate investing.

Unfortunately, this myth is what holds most real estate investors back from one of the most lucrative markets in all of real estate investing: renting out by the room to college students.

You’re probably wondering right now, “Huh? I don’t understand. How’s that a myth?”

I’ll cover that later in this article, but let’s first talk about why I chose student housing.

How to Start Investing in Real Estate in a College Town

Most real estate investors leave half of their cash on the table when they rent out their house only as a single unit rather than renting by the bedrooms.

For example, here’s what one of my houses would have made if I rented it out only as one unit:

Source: Rentometer.com

But by renting out each bedroom separately, here’s what it’s actually making:

I doubled my rental income by renting by the bedroom.

Because I own 4 of these houses, I’m now making $10,755 per month in rental income!

It wasn’t always like this though. I started out as a typical pharmacist. I graduated in 2015 with my Doctorate of Pharmacy and worked two jobs as a retail and hospital pharmacist. I quickly realized that I didn’t want to work as a pharmacist until I was 65 after talking to an older pharmacist colleague. He told me, “Honestly, I just come here for a paycheck now. I wish I could have retired a lot sooner.”

I realized that while pharmacists typically make over 6 figures, this alone isn’t enough to achieve financial independence.

My inspiration to get into real estate came from my grandpa who had purchased several rentals in the SF Bay Area back in the 50s before Silicon Valley existed. As we all know, Bay Area prices went up like crazy, so Grandpa Chaw was able to retire early and live mostly off the income from his rentals.

I knew I wanted to get into real estate as soon as possible because it’s truly a time game. You buy as soon as you can, then wait for it to grow over time (as your rent goes up, your property price goes up, and you write off tons of money in taxes). When I got my pharmacist license, I decided to work a lot of overtime to save up for my first downpayment, which I used to buy my first rental in 2016.

Unfortunately, I made a lot of mistakes on my first rental and lost over $30,000!

I got a call from one of my tenants one night who said, “You’ve got to fix this. Sewage is pouring out of the kitchen sink and it’s all over the floor now.” I hired a clean-up crew and a plumber to assess the situation. It turned out that I needed to replace the whole sewage line. This cost me $9,000! I had to pay for the repairs out of pocket since this happened only 2 months after I purchased the property and I didn’t have much rental income.

On top of that, I didn’t realize the house had virtually no AC system. I ended up having to install a mini-split HVAC system which cost me $15,000.

Lastly, I had a vacancy for 8 months because I had no idea how to advertise my bedrooms. This cost me $5,200 ($650 per month x 8 months).

At the end of it all, I was feeling very depressed and discouraged. I was tired of having to take calls during my lunch breaks and late nights on weekends. I thought I had made a huge mistake investing in real estate. But I kept at it because I knew if my grandpa could do it, I could do it too. Over the next 4 years and after much trial and error, I created a system for student housing that I now teach to others. The system allowed me to cut the amount of time spent on my rentals to less than an hour a week. I’ll summarize the steps below.

There are 7 steps to creating your own student housing model that will significantly reduce the amount of time you spend on your rental properties.

Step #1: Do your research ahead of time.

Check your local city laws first to make sure everything you’re thinking of doing is legal. Some cities may require you to get a business license to rent by the bedroom. During this COVID-19 pandemic also check the college website to confirm they are scheduling on-campus learning (most colleges have some on-campus activities, whether it be with labs or experiential programs). Luckily, most graduate school students still need access to on-campus buildings to do their research.

Step #2: Choose a college based on enrollment data, college ranking, and the programs that are offered there.

You need to make sure to choose a college with a good market size to rent your bedrooms out to. Consider targeting more Ivy League type colleges because most students that go to those types of colleges received straight A’s in high school and are therefore more serious about completing their studies. Ivy League type colleges also offer opportunities for higher degrees such as medical school, pharmacy school, and nursing school. These types of students likely don’t want to waste their time partying in college. Finally, because these colleges are so popular, most of the students will be from out of the city, state, or even country, so they are definitely searching for a place to stay close to the college.

Step #3 Make your place attractive to college students.

I try to find properties that are in close proximity to campus so that I can charge premium pricing. I also look for houses with plenty of parking. This allows the college students to bring a car so they can drive to their experiential functions such as health fairs for pharmacy, nursing, and medical students. Check out the neighborhood to make sure it’s a good area so the parents feel safe letting their children stay there.

Step #4: Calculate your rental amount and know how much to charge if you put two people in one bedroom (like a couple).

If you are cheaper than on-campus housing, then you automatically have market demand. Because you provide more room and more privacy than on-campus dormitories and charge cheaper rent, it makes sense for a lot of students to just stay in one of your bedrooms. Keep in mind that putting couples into a single bedroom will allow you to charge more for that bedroom.

Step #5: Know what to look for when deciding if you can add or convert a room to a bedroom.

Whenever you can create an extra bedroom, that’s another $500-$700 in additional rental income per month. This is huge! Even adding one extra bedroom will pay for the majority of repairs and expenses that come up on your house throughout the year. Doing this step also typically allows you to at least double the amount of rental income and cash flow you make on the property.

Step #6: Market your bedrooms well to create urgency and demand.

You need to know how to create demand and urgency by highlighting the benefits of staying in your bedrooms vs on-campus housing. And, you have to advertise in the areas where your target market (i.e. college students) hang out. If you have a lot of students interested in renting out a bedroom at your property, you’ve really got the upper hand. You can choose the best tenant out of a large pool of applications. Consequently, it’s really important to get your marketing right so that you can be picky in choosing a tenant.

Step #7: Create systems and teams to help you self-manage the properties to save yourself a lot of money.

Personally, I spend less than an hour a week managing my rentals because I have systems in place for it. I empower my tenants to take on certain responsibilities. Payments are made through a phone app called Zelle since students are tech savvy. I’m able to manage my rentals while working as a full-time pharmacist job because I have these systems in place. And the best part is that I don’t have to waste 8-12% of my revenue on hiring a property manager.

Now that we covered the 7 steps, let’s go through the most important part of this process: how I completely avoid problem tenants to reduce my work load even more.

Marketing

As mentioned earlier, I do targeted marketing toward the type of students I want to attract. I’m looking specifically for the types of tenants who are more concerned about passing their midterms and finals than throwing wild house parties.

Screening

I screen social media accounts. You don’t want people who smoke, drink a lot of alcohol, do drugs, or party nonstop. Any of these types are hard a “no” for me.

Be strategic in pairing up housemates

I strategically pair up college students. This creates a balance so that even if there are a couple of immature college students in a property, they’re kept in check by the more mature, professional college students. I then also have at least a few people at every house who take on responsibilities to maintain the house. Sometimes I’ll have a tenant who may be messier, but his/her mess gets cleaned up by their parents or the other tenants.

Set yourself up for success

I minimize common space and turn those spaces into additional bedrooms. Not only does this boost my profit, but there literally will be no space to throw a large party.

That’s how simple this can be!

I believe real estate investing should be fun, simple, and enjoyable rather than this big, intimidating beast you have to slay. It also allows you to give back and provide affordable housing. If you’re interested in learning more about how student rentals can shortcut your way to financial independence, I offer a free PDF guide on how to do this and in my emails I offer you quick practical tips on how to determine the best location to invest in, red flags to watch out for, and how to create automated systems that you can implement in your own real estate portfolio at www.newbierealestateinvesting.com.

Ready to take the next step in your real estate investing journey?

One of the most important aspects of real estate investing is building your team and that all starts with finding the right real estate agent.

But as a busy pharmacist, researching, vetting, and connecting with real estate agents can be tough.

That’s why we partnered with our good friend Nate Hedrick, The Real Estate RPh, to offer a free home buying concierge service. As a pharmacist and real estate agent himself, Nate’s got the insider’s view. He has a unique perspective on the home buying process and has used it to help many pharmacists achieve their real estate dreams.

With this service, Nate helps you craft a plan that works within your budget and financial goals, connects you with a pro that you can trust, and helps you stay the course.

Click here learn more about this free home buying concierge service and to book a free call with Nate.

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These Tax Benefits Get Unlocked When You Have or Adopt a Child

Posted on by yfpadmin

These Tax Benefits Get Unlocked When You Have or Adopt a Child

The post is for educational purposes and does not constitute financial advice.

Everyone talks about how much it costs to have or raise a child, and for good reason! Having or adopting a child is not an inexpensive thing to do. You may be surprised at how much you spend after factoring in the accumulated costs of necessities like healthcare, food, housing, and clothing on top of activities, sports, and the toys that they have to have. According to a 2015 report from the U.S. Department of Agriculture, middle-income married couples could spend $233,610 to raise a child until they are 18. After adding in inflation, the cost rises to $284,570!

That’s obviously no small chunk of change.

The good news, aside from the immense amount of joy they can bring into your life? Having or adopting a child can unlock several key moves you can make that can help to lower your tax bill and allow you save for future tuition expenses.

1. Child Tax Credit

Taxpayers who claim at least one child as a dependent on their tax return may be eligible to receive the Child Tax Credit (CTC). The Child Tax Credit is different from a tax deduction. A tax deduction reduces your taxable income, but a credit actually lowers your tax liability or the amount that you owe the IRS. For example, if you have a $5,000 tax bill and are eligible for the Child Tax Credit, you’d owe $3,000 instead. Another amazing feature of this credit is that you’re eligible to receive a refund for up to $1,400, so if the credit brings your tax liability below zero, you could receive a refund up to that amount. Woohoo!

For 2020, the Child Tax Credit is capped at $2,000 for each qualifying child and begins to phase out for those earning $200,000 filing single and $400,000 married filing jointly. To qualify for this credit, you must have earned at least $2,500 in the tax year.

Check out this IRS tool to see if you have a child that would qualify for you for this credit.

2. Child Care Credit

Paying for childcare is a huge expense that parents and caregivers have to face. According to the Center for American Progress, the average cost of center-based child care for an infant in the United States is $1,230 per month. With a family care center or in-home daycare, average costs are around $800 per month. If you have multiple children, you’re obviously looking at a larger bill.

Fortunately, there is the Child and Dependent Care Expenses Credit to hopefully provide some relief to families that are paying for out-of-pocket child care expenses come tax time. The Child and Dependent Care Expenses Credit is designed as a non-refundable tax credit that can cover 20% to 35% of your expenses. Qualified expenses include babysitters, preschool or nursery school, day camp or summer camp, daycare costs, and before and after school care. There are no income restrictions for claiming this credit, however it is capped at $3,000 for one child and $6,000 for two or more dependents that live with you for more than half of the year.

The caveat is that you can only claim this credit if you are working or are looking for work during the time of care, so babysitter expenses for date nights out (or in, thanks COVID!) don’t count. Additionally, you can’t claim payments to your spouse, the parent of the dependent child, a dependent listed on your tax return or your child who is 18 years or younger whether they are listed as a dependent on your return or not. Additionally, you can’t combine this credit with expenses that were paid with pre-tax money from a dependent care flexible spending account. To use the Child and Dependent Care Expenses Credit, Form 2441 must be filled out when filing your taxes. In order to claim payments made to a care provider, you must provide their name, address and Taxpayer Identification Number or a Tax ID number for a preschool or daycare.

3. Adoption Tax Credit

Adopting a child today can cost up to $50,000. The cost is dependent on the country you are adopting the child from, the type of agency or adoption professional you work with, and medical, travel, or other adoption expenses you may incur.

The Adoption Tax Credit is in place to help relieve some of the expenses you may have during the adoption process. This tax credit is non-refundable meaning that it can help lower your tax liability, however you won’t receive a refund because of it. The credit is also only available for the tax liability for that year, although if you have a remaining balance on the credit you’re able to carry that excess forward for up to five years. For 2020, the maximum credit adoptive parents are able to claim is $14,300 per eligible child (child has to be under the age of 18 or mentally or physically incapable of caring for himself or herself). Additionally, there is an income limit and phase-outs on the credit. If your MAGI is below $214,520 then you’re able to claim the full credit. If your income falls between $214,520 to $254,520 you can receive partial credit. However, if your income is above $254,520 then you’re unable to claim the credit.

According to the IRS, the Adoption Tax Credit can be used for the following adoption-related expenses: necessary adoption fees, court costs and attorney fees, travel expenses including meals and lodging, and other expenses that are directly related to the legal adoption of a child. These expenses can count toward the credit even before a child has been identified for the adoption. You can still use this credit for qualified adoption related expenses even if the adoption falls through and never finalizes.

Additionally, some employers offer employer-provided adoption benefits to pay for qualified adoption expenses. These benefits can be excluded from your taxable income for up to $14,300 in 2020, however, you cannot double-dip by using the same expenses in the exclusion as you’re claiming in the credit.

The timing of using the Adoption Tax Credit can vary depending on when you pay the expenses, if and when the adoption was finalized, and whether it’s a domestic or foreign adoption. It’s best to consult with a tax professional to ensure that you’re claiming the credit correctly.

4. Dependent Care Flexible Spending Account

You may have heard of a Flexible Spending Account that allows you to save pre-tax dollars from your pay into an account that can be used for qualified medical expenses, but did you know that a similar account is available to pay for child care costs?

A Dependent Care Flexible Spending Account (DCFSA) is an account offered through your employer where you can use the funds to pay for qualified child care costs. You authorize your employer to hold a certain amount of money on a pre-tax basis each pay period that is then deposited into this account. Unlike an HSA, you cannot spend the money directly from the account. Instead, you have to pay out-of-pocket for the expense, submit the expense and then receive reimbursement.

Qualified expenses that can be covered with a DCFSA include before and after school care, babysitting or nanny expenses, daycare/nursery/preschool costs or summer day camp. It’s important to note that the child or children receiving care must be under 13 years old. You can also use this account to pay for care for your spouse or another adult that is claimed as a dependent on your taxes, who cannot take care of themself and that lives in your home.

Expenses that do not qualify include paying for education or tuition fees, overnight camps, expenses for children over 13, field trips, or transportation to or from the dependent care provider.

You can contribute up to $5,000 per year if you’re married and filing jointly. If filing single, you can contribute $2,500 per year. This can be a powerful way to save money for expenses that you know you’ll need to pay for. Because the money comes out of your paycheck pre-tax, you’re lowering your MAGI and ultimately your tax bill.

However, this money doesn’t rollover. Like the healthcare FSA, you have to use it or lose it, so only contribute an amount that you know you’ll use throughout the year.

5. 529 Plan

Depending on your financial goals and plan, saving for your child’s or children’s education may be a top priority for you. One of the most popular ways to do so is with a 529 plan.

There are two types of 529 plans: 529 college savings plans and 529 prepaid plans. 529 college savings plans are the most widely used. Money is contributed after tax, grows tax-free, and is distributed tax-free as long as it’s used for qualified expenses. 529 plans are generally run by your state, however, you don’t have to use that plan and can choose another plan instead.

529 prepaid plans allow you to prepay for a partial or total amount of tuition, but this type of plan isn’t available in every state. While 529 prepaid plans are also tax-deferred, it often doesn’t cover as many expenses as the 529 college savings plan does. According to Saving for College, if you opt for the prepaid plan you may have to pay a premium for tuition and you may not have enough money saved for future tuition costs.

You’re able to open a 529 plan at any time and there aren’t any income phaseouts or age limits on contributions or when the funds have to be used. In the past, 529 plans were only available for undergraduate, graduate, medical, and law school, but that changed in 2018. Now 529 plans can also be used for tuition costs for K-12 education (up to $10,000 per year per child) in addition to higher education costs. Qualified expenses for 529 college savings plans include tuition and fees, books, supplies, equipment, room, and board (if the student is enrolled at least half time), and computer or software equipment, among a few others. However, 529 prepaid plans often only cover tuition and room and board.

Another feature of the 529 plan is that you can choose from a few dozen investment options and can mix funds depending on your risk tolerance. Many plans also have age-based options where the money is invested more aggressively when the child is younger and moves to more conservative allocations as the child gets closer to college age. Another perk of the 529 plan is that many states also allow you to take a tax deduction or tax credit for your contributions which could in turn lower your modified adjusted gross income (MAGI) and tax liability.

When it comes time to fill out FAFSA (Free Application for Federal Student Aid), as long as the 529 plan is owned by a dependent student or a dependent student’s parents, it’s reported as a parent’s asset and the distributions are ignored. This allows you to receive more favorable federal financial aid than if it were added to the student’s assets.

But what if your child decides not to attend college? You have the option to change the name of the beneficiary on the account to someone else in the family, like a brother, sister, cousin, or parent. Remember, there is no age limit on using money from a 529 plan so you can pass this money through your family for as long as you want. If you don’t want to give the money to another family member or save it for a future grandchild, you can withdraw it but you’ll have to pay taxes on any growth earnings as well as a 10% penalty.

6. Coverdell Education Savings Account (ESA)

If a tax-advantaged 529 plan doesn’t seem like a good fit for you, there is another option to save for your child’s education. Formerly known as the Education IRA, the Coverdell Education Savings Account (ESA) is a tax-deferred trust or custodial account designed to help families pay for education expenses. Money contributed to a Coverdell ESA grows tax-free and is distributed tax-free as long as the money is used for a qualified expense. The ESA can be used to cover the cost of tuition, fees, books, and sometimes room and board for higher education as well as elementary and secondary education (K-12).

Anyone can create a Coverdell ESA account through a brokerage account, bank, credit union or mutual fund company, however the beneficiary must be younger than 18 years old at the time it’s opened. Depending on your income, you can contribute $2,000 total per year to a beneficiary.

Your contribution limit begins to phase out if your modified adjusted gross income (MAGI) is between $95,000 and $110,000 for single filers or $190,000 to $220,000 for joint filers. If your MAGI is more than $110,00 (filing single) or $220,000 (filing jointly) then you can’t make any contributions. You also can’t make any contributions to the account after the beneficiary is 18.

Unlike a 529 plan, the funds must be dispersed by the time the beneficiary is 30 years old (except for a special needs beneficiary). If the distributions are higher than the education expenses of the account holder then a portion of those earnings would be taxed to the beneficiary. If the funds aren’t used in their entirety there are options to either roll them over to a family member’s Coverdell ESA account, transfer them to a 529 plan or withdraw them. If the funds are withdrawn and not used to pay for a qualified expense, the earnings would be counted as taxable income and an additional 10% would be changed as a penalty.

One of the benefits of choosing a Coverdell ESA comes down to investment options. With this account, you can self-direct your investments and choose from a range of individual, international or domestic stocks, bonds, mutual funds, exchange-traded funds (ETFs) and real estate investments. These options vary depending on where the account is opened. You’re able to adjust your investment portfolio as many times as you’d like.

Conclusion

Between dependent care flexible savings accounts, child care or child tax credits, and options to grow your money while you save for your child’s education, there are a lot of powerful tax moves that should be considered once you have or adopt kids. It’s important to take a step back and analyze your tax strategy so that you can decide which options are going to work best for your financial plan.

If you want to check out more money tips to consider when having or adopting a child, check out the comprehensive checklist below.

Need Help Trying to Determine Which Tax Moves to Consider?

Trying to navigate the possible tax moves for your situation can be overwhelming. If you need help analyzing which moves work best for your family, how you can get the most out of saving for your child’s education or with your overall financial plan, you can book a free call with one of our CERTIFIED FINANCIAL PLANNERS^TM.

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10 Financial Benefits for Federal Pharmacists You Wish You Had

Posted on by yfpadmin

10 Financial Benefits for Federal Pharmacists You Wish You Had

The post is for educational purposes and does not constitute financial advice. The post may contain affiliate links through which YFP receives compensation.

The federal government is one of the largest employers of pharmacists and offers many unique practice opportunities beyond traditional roles.

Besides the Veterans Health Administration and the Indian Health Service, federal pharmacists also are employed at the Centers for Disease Control and Prevention, the Federal Drug Administration, the National Institutes of Health, the Department of Defense through one of the military branches, and the Department of Justice in the Federal Prison Bureau.

Pharmacists tend to find their work extremely satisfying with the hours and flexibility in schedule being among the top reasons which are something I can personally attest to after spending nearly a decade in a government position.

But beyond these factors that can positively contribute to one’s quality of life, there are also some huge financial perks of being a federal pharmacist.

While salaries are usually less than those in community pharmacy positions, the gap isn’t that wide. However, it’s really the employee benefits in combination with one’s salary that make the total compensation package so generous.

1. Federal Employment Retirement System (FERS) Annuity

As a federal pharmacist, your retirement plan has three components: a FERS basic benefit plan, Social Security, and the TSP (Thrift Savings Plan) which I’ll discuss later on. Contributing to your basic benefit plan each pay period is mandatory and the amount you contribute depends on when you were hired with those starting in 2013 and 2014 paying a higher percentage than those with an earlier start date.

The FERS basic benefit plan is essentially a pension paid out as a monthly annuity which is pretty amazing in a world where these are basically extinct. Remember, this is in addition to any social security income you are entitled to.

How much will I get?

Your benefit is calculated using a pretty straightforward formula:

1.1% x High-3 x Years of Service = Basic Annuity Annual Payment

If you retire before age 62 or at age 62 with less than 20 years of service the 1.1% multiple is reduced to 1.0%. Your “High-3” is your highest average salary for three consecutive years which is usually the last three years of your service. This number is based on your average rates of basic pay which does not include bonuses, overtime, allowances, or special pay for recruitment or retention purposes.

Length of service takes into consideration all periods of creditable civilian and military service and only years and months are used in this calculation, so odd days you worked beyond a month are dropped.

Here’s an example of this calculation: Let’s say you are 62 years old, have been a federal employee for 30 years and your “High-3” salary is $150,000. This would result in an annual annuity of $49,500.

If you don’t want to worry about all the rules check out the FERs Retirement calculator below.

FERS Retirement Calculator

When can I retire?

To be eligible to receive the basic retirement annuity you have to meet two conditions. First, there is a minimum number of service years. If you retire at 62, that number is 5, 20 years if you retire at 60, and 30 years if you want to retire at your minimum retirement age (MRA) and that happens to be prior to age 60.

You can also retire at your MRA with 10 years of service, but your benefit is reduced by 5% per year every year you are under 62 unless you have 20 years of service and your benefit starts when you reach age 60 or later.

The second condition to retire is to reach your MRA and this depends on when you were born. If you are a millennial or Gen Z, then your MRA is 57. Sorry FIRE folks!

Check out this table to find out what your FERS minimum retirement age (MRA) is:

2. Access to the Thrift Savings Plan

The Thrift Savings Plan (TSP) is essentially the 401(k) equivalent for federal employees. It’s subject to the same contribution limits as other employer-sponsored plans at $19,500 with the option for $6,500 catch-up contributions if you’re 50 or older for 2020.

However, unlike many 401(k) plans there are some unique features and benefits.

First, regardless of how much you contribute, your employer will contribute an automatic 1% of your basic pay. In addition, your agency will match the first 3% you contribute dollar-for-dollar and 50 cents on the dollar for the next 2%. Essentially, you get a match up to 5%.

This is something to pay close attention to especially if you are a new employee as you are automatically enrolled in contributing 3% of your income. Therefore, unless you adjust this promptly when you start, you could be missing out on the additional matching contributions.

There is a 3 year vesting period but this does not include the 1% automatic contributions.

Similar to other employer-sponsored plans you have the option to make traditional contributions or after-tax contributions via the Roth TSP.

When it comes to fund selection, you have two basic choices: Lifecycle or target-date funds and individual funds. The lifecycle funds (L Funds) are a combination of the individual funds and every three months, the target allocations of all the L Funds except L Income are automatically adjusted, gradually shifting them from higher risk and reward to lower risk and reward as they get closer to their target dates.

There are five individual funds that range from government-backed securities to index funds with the objective to match the performance of the major stock and bond indices such as the S&P 500.

While one of the criticisms of the TSP is the lack of fund options especially for savvy investors, others tout the simplicity in the options and find it less challenging to navigate and make decisions.

But beyond the options that exist, the number one feature that sets the TSP apart from other employer-sponsored plans is fees!

The average plan fees for those with 401(k)s range from 0.37% to 1.42%. Compare that to the expense for the C fund in the TSP at 0.042%!

Here’s why that’s a big deal. If you were to invest $500/month over 40 years into two different funds with a similar performance of 7% rate of return, one with an expense of 1% and one with fees similar to the C fund, that fund with an expense of 1% will cost you about $700,000 over that period, significantly lowering your overall rate of return.

That’s the power of fees.

You can see the current expenses of the individual funds within the TSP. One of the major reasons why the fees are so low is that many employees leave money on the table when they separate from federal service prior to becoming vested and that helps offset the administrative costs.

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3. Life Insurance

Working for the federal government means that you’re eligible for the Federal Employees’ Group Life Insurance (FEGLI) program. FEGLI was started in 1954 and is the largest group life insurance program in the world covering over 4 million federal employees and retirees. This program provides basic term life insurance coverage as well as three additional options that can be added on (Standard, Additional and Family).

To give you an idea of cost, for ~$250,000 policy at age 35 would be around $40/month. You can calculate your potential cost based on coverage here.

One of the huge benefits of this program is that it does not require any medical exam prior to being in force. In fact, you are automatically enrolled when you start.

While getting access to affordable life insurance regardless of pre-existing medical conditions is an amazing benefit, the biggest downside is that it’s not portable. This means that if you are terminated or leave federal service for another position, you no longer have coverage. That’s why it’s important to consider a private term life insurance policy as well.

4. Long-term Disability Retirement Benefits

Beyond the life insurance benefit, you also have some protection in the event you became disabled while in federal service. This is known as disability retirement.

To be eligible, there are several requirements that have to be met including:

Completed 18 months of Federal civilian service which is creditable under the Federal Employees Retirement System (FERS);
The disability is expected to last at least one year;
Your agency must certify that it’s unable to accommodate your disabling medical condition in your present position and has considered you for a vacant position in the same agency at the same pay grade or level;
You, or your guardian, must apply before your separation from service or within one year thereafter;
You must apply for social security benefits. Application for disability retirement under FERS requires an application for social security benefits

The amount you’ll receive varies depending on your age and number of years of service. If you meet the requirements for traditional FERS retirement benefit based on age and years of service, then the calculation of benefits is the same.

However, if you are under 62 and not eligible for immediate retirement, the calculation gets a little more complex. For the first 12 months it is 60% of your high-3 minus 100% of your social security benefits you are entitled to and after that the calculation is based on 40% of your high-3.

Benefits are recalculated after 12 months and again at age 62 if the person is under age 62 at the time of disability retirement.

While this does guarantee at least some income beyond social security once you have at least 18 months of service, it’s not going to be similar to your take-home pay as a pharmacist.

Therefore, you should strongly consider an individual long term disability insurance policy as a supplement in order to move your potential replacement income closer to your current pay.

You will notice that when you are applying for policies, you will be asked if you are a federal employee. That’s because most states will not allow you to replace over 60% of your total income and this will essentially be a supplement.

5. HSA Eligibility

There are a variety of health plans that are offered for federal employees including fee-for-service plans (both PPO and non-PPO), health maintenance organizations (HMO), and high deductible health plans (HDHP) which offers a health reimbursement arrangement (HRA) or health savings account (HSA). This large variety of health plans allows federal employees to choose a plan that makes the most sense for themselves and their families.

I explained in a recent blog post Why I’m Not Using My Health Savings Account to Pay for Medical Expenses that choosing to use a PPO instead of the HDHP that was available to me was one of my biggest financial mistakes. This is because I was making high premium payments each month but wasn’t utilizing the majority of coverage that was available and I was missing out on the triple tax benefits that an HSA account boasts.

As mentioned, an HSA is unlocked through a high deductible health plan (HDHP) and can be used as an account to save for medical expenses. An HSA allows you to contribute money on a pre-tax basis to pay for qualified medical expenses, like costs for deductibles, copayments, coinsurance, and other expenses aside from premiums. If you’re using your HSA to pay for a qualified medical cost, you don’t have to pay any taxes on the money that’s withdrawn from the account.

In my opinion, the most powerful aspect of an HSA is that it can be used as a retirement vehicle, like an IRA. What makes an HSA so appealing are those triple tax benefits I mentioned. Triple tax benefits, you guessed it, all have to do with taxes; your HSA contributions lower your adjusted gross income (AGI), the contributions grow tax-free and the distributions are tax-free. If you’re under 65, the distributions are only tax-free if they are being used to pay for a qualified medical expense. If they aren’t, you’ll have to pay a 20% penalty. After age 65, your distributions don’t have to be for qualified medical expenses, but you will have to pay income taxes if they aren’t.

To learn about how I’m leveraging this benefit and how I’m allowing my money to stay in my HSA as long as possible, check out this post.

6. Paid Parental Leave

Paid parental leave varies so much from one employer to the next. Some companies like Netflix offer up to a year off of paid maternity or paternity leave while employees at other companies are “lucky” to get 4 or 6 weeks off, if any.

Due to recent changes, federal pharmacists will be able to receive up to 12 weeks paid parental leave for the birth, adoption or foster of a new child. This benefit is supposed to go into effect October 1, 2020.

7. Raises for additional credentials and board certifications

Federal employees are paid based on their grade and step and will have a GS or General Schedule status. The grade usually pertains to the position and the step is typically determined by initial qualifications at the time employment starts and also the years of service. Therefore, the most common way to get to the next level is often just to keep your job.

However, some federal employers may actually incentivize you to get these as well either in the form of a one-time bonus or even a permanent raise. In the VA they are referred to as Special Achievement Awards.

8. Opportunity to Pursue PSLF

When I graduated from pharmacy school, I made one of the biggest financial mistakes that ended up costing me hundreds of thousands of dollars! That was not pursuing the Public Service Loan Forgiveness (PSLF) program. As a government pharmacist, I was eligible for PSLF but because I wasn’t aware of all of my options and didn’t have a good handle on the program, I ended up paying way more money than I needed to.

Although PSLF has had a rocky past, it is one of the best payoff strategies available for pharmacists. The math doesn’t lie; PSLF is often the most beneficial to the borrower as far as the monthly payment is concerned (it’s the lowest) and the total amount paid over the course of the program (it’s the lowest).

Of course, determining your student loan payoff strategy takes a lot of thought and discussion. To learn more about all of your options, check out this post.

9. Tuition Reimbursement and Repayment Programs

Did you know that working as a federal pharmacist might qualify you for tuition reimbursement or to enroll in a tuition repayment program? These programs essentially provide “free” money typically from your employer or institution in exchange for working for a certain period of time.

Pretty awesome, right?

The programs that tend to provide the most generous reimbursement or repayment are those offered by the federal government through the military, Veterans Health Administration, and the Department of Health.

If you’re a pharmacist who works for or plans to work for one of these organizations, connect with your human resources department to see if you’re eligible. There is generally a set amount of funding for these programs, so even if you aren’t eligible initially, you may be able to reapply in a subsequent year.

Here’s a rundown of federal tuition reimbursement programs that are currently available:

Veterans Health Administration – Education Debt Reduction Program

Eligibility

Pharmacists at facilities that have available funding and critical staffing needs.

Benefit

Up to $120,000 over a 5 year period

Army Pharmacist Health Professions Loan Repayment Program

Eligibility

Pharmacists who commit to a period of service when funding is available

Benefit

Up to $120,000 ($40,000 per year over 3 years)

Navy Health Professions Loan Repayment Program

Eligibility

Must be qualified for, or hold an appointment as a commissioned officer, in one of the health professions and sign a written agreement to serve on active duty for a prescribed time period

Benefit

Offers have many variables

Indian Health Service Loan Repayment Program

Eligibility

Two-year service commitment to practice in health facilities serving American Indian and Alaska Native communities. Opportunities are based on Indian health program facilities with the greatest staffing needs

Benefit

$40,000 but can extend contract annually until student loans are paid off

National Institute of Health (NIH) Loan Repayment Program

Eligibility

Two year commitment to conduct biomedical or behavioral research funded by a nonprofit or government institution

Benefit

Up to $50,000 per year

NHSC Substance Use Disorder Workforce Loan Repayment Program

Eligibility

Three years commitment to provide substance use disorder treatment services at NHSC-approved sites

Benefit

$37,500 for part-time and $75,000 for full-time

10. Generous Leave Structure

One of the benefits that I have really appreciated while working for the federal government is the amount of paid time off. First, as a federal employee, you get all 10 federally recognized holidays off assuming you have a typical Monday-Friday schedule. But if you do have to work on one of those days, you get paid double time!

In addition to holidays, you start off accruing 4 hours of annual leave or vacation in addition to 4 hours of sick leave every pay period. This equates to a total of 7.2 weeks of leave as a brand new employee.

Once you hit 3 years of service, your annual leave increases to 6 hours and then to 8 hours per pay period once you reach 15 years of service.

When you become eligible for retirement, any accrued annual leave you have remaining is paid out to you in a lump sum whereas any remaining sick leave counts toward extending your time of service which can increase your overall FERS annuity benefit.

Conclusion

Working as a pharmacist in the federal government carries a lot of benefits that go way beyond your salary. Between possible student loan forgiveness with PSLF, access to TSP and HSA accounts, life and disability insurance, and raises for additional credentials and board certifications plus so many more, there are a lot of reasons to consider working for the government. If you’re currently unemployed, are a recent graduate or you’re looking to make a career change, I highly suggest checking out USA JOBs and sign up to get alerts as new positions become available.

Need Help With Your Financial Plan?

Trying to navigate your federal benefits can be overwhelming. If you need help analyzing how these benefits affect your overall plan or are looking to solidify your financial game plan, you can book a free call with one of our CERTIFIED FINANCIAL PLANNERS^TM.

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Why I’m Not Using My Health Savings Account to Pay for Medical Expenses

Posted on by yfpadmin

Why I’m Not Using My Health Savings Account to Pay for Medical Expenses

The post is for educational purposes and does not constitute financial advice

About a decade ago when I started my full-time pharmacist position after residency I made one of my biggest financial mistakes: Not taking advantage of a health savings account (HSA).

At that time, I received the same insurance recommendation from multiple colleagues, “It’s the best” and “It pays for everything.”

While there was no question that this PPO plan had its perks from low co-pays on medical visits and prescriptions to even having dental benefits, I had failed to understand all of my options.

Like many people, I had become victim to decision paralysis given there were 30+ options, and rather than spend hours trying to compare all of the features it was easier just to choose what everyone else had and call it a day.

And that decision cost me big because of the higher premiums I ended up paying for years of good health and the opportunity cost of not contributing to a health savings account.

High Deductible Health Plan

A health savings account is not a health plan per se but rather a benefit that’s unlocked by opting into a specific kind of plan called a high deductible health plan (HDHP).

In 2020 these plans, as defined by the IRS, are those with deductibles of at least $1,400 for an individual and $2,800 for a family. In addition, the max yearly out-of-pocket expenses cannot exceed $6,900 for individuals and $13,800 for in-network services.

Besides having a high deductible and out-of-pocket maximums, one of the distinct features of a high deductible health plan is that the monthly premiums are usually much less than traditional health plans. For example, when I switched from the traditional PPO plan to an HDHP for self plus one, my monthly premium went down by 38%!

Although the premiums are lower, the annual cost compared to traditional plans will depend on a few things but primarily on how much you use healthcare resources. For example, if you are relatively healthy in a given year, meaning without any accidents, injuries, or acute medical issues, and only go to an annual primary care visit (which is generally covered with an HDHP), then an HDHP will be a bargain compared on a premium to premium basis.

But obviously, you can’t predict the health of you and your family so some years you could end up paying more money out-of-pocket with an HDHP.

My out-of-pocket maximum (for in-network expenses) for my HDHP family plan is $6,850 and this is one of my favorite features. Knowing that 100% of expenses are covered beyond that is actually very comforting in the event that something catastrophic occurred. The old plan that I was on had an out-of-pocket maximum of $11,000.

The other consideration is that many HDHP plans will give you money every year toward your HSA just by being enrolled in the plan. Every year, my plan deposits $1,500 into my HSA for a self + one plan.

While you can incur more out-of-pocket costs with HDHP plans depending on how healthy you are, remember that the premiums are lower and this is the only way to unlock a health savings account.

What is a Health Savings Account?

An HSA allows you to contribute money on a pre-tax basis to pay for qualified medical expenses. These include costs for deductibles, copayments, coinsurance, and other expenses, but generally not premiums.

Unlike a flexible savings account or FSA, any amount you contribute is yours and you are not forced to spend it every year. The funds will be there until you use them (unless you’ve lost funds because of market changes). In addition, an HSA is portable, so anything you’ve contributed will still be yours even if you change employers.

An HSA is technically a tax-exempt trust or custodial account that is set up with a trustee. The trustee is typically a bank but could also be an insurance company or broker that offers investment options.

Although the insurance provider for the HDHP may suggest or even incentivize you to use a specific bank, you have the option to choose.

Health Savings Account Contributions for 2020

For 2020, you can contribute up to $3,550 for self and up to $7,100 for self + one and family. There’s also a catch-up contribution of an additional $1,000 for those 55 and older. These maximums include any contributions made by your health plan. For example, if you are under 55 and your HDHP contributes $1,500/year and you’re on a family plan, you can personally contribute $5,600 to get up to the max of $7,100.

You have until April 15th, 2021 to make your contributions for the 2020 tax year.

Triple Tax Benefits

So beyond being able to pay for qualified medical expenses, what’s with all the hype around HSAs?

It really comes down to one word. Taxes.

Health savings accounts have triple tax benefits.

Contributions Lower Your Adjusted Gross Income

First, any contributions you make lower your adjusted gross income. These are considered above-the-line deductions or adjustments because they reduce taxable income prior to applying the standard or itemized deductions.

Unlike other deductions which have income phaseouts, there are no income caps to get the full health savings account deduction. That’s why this is such an attractive way for pharmacists and other high-income earners to reduce their tax liability.

Plus, if you are pursuing the Public Service Loan Forgiveness program or forgiveness after 20-25 years, this is another way to lower the payments since they are based on your AGI.

This is reported on line 8 of the 1040 form via schedule 1 and form 8889.

Contributions grow tax-free

The name health SAVINGS account is sort of a misnomer because you actually have the opportunity to invest the contributions in a variety of funds. And this is a big deal because any earnings you have on the money within your account grows tax-free.

Whether you invest or simply save the funds in an HSA or not really comes down to how you want it to function.

You could use it as an emergency fund for medical expenses you may incur in a given year or plan to pay for medical expenses on a pre-tax basis throughout the year. In those cases, you want the money to be available, and storing it in a regular savings account or another account that is not subject to substantial market risk would be best.

However, what if you were able to pay for all medical expenses out-of-pocket and avoid taking funds from your HSA for several years?

If that’s you, then you can essentially create another retirement account. Because in this case, an HSA is similar to an IRA and it is often referred to as an IRA in disguise.

By forgoing using the funds in your HSA for several years, you can then incur more risk over time and consider more aggressive investment options beyond a simple savings account.

As an example, take a look at all the funds that are offered through OptumBank, the HSA holder that I am currently using. You can see there are many different equity funds, index funds, in addition to fixed-income or bond funds, and money market.

Distributions are tax-free

The final tax advantage of an HSA is that your distributions are tax-free! However, there are some stipulations.

First, if you are under 65, the distributions you make have to be for qualified medical expenses otherwise you have to pay a 20% penalty and will be taxed according to your marginal rate. After age 65, your distributions don’t have to be for qualified medical expenses, but you will have to pay income taxes if they aren’t.

The key is that you still have to tie distributions to medical expenses you incur but here is the most important point:

You do not have to reimburse yourself through distributions in the same year that you incurred the medical expenses.

Because of this feature, you can max out your contributions for several years, invest aggressively, and then once in retirement or at some later point in time start taking distributions to “reimburse” yourself for medical expenses you’ve incurred throughout the years that you have been contributing.

This is the main reason why I’m not using the funds in my HSA to pay for medical expenses TODAY.

The key is keeping good records of receipts for proof of qualified medical expenses that you paid out-of-pocket in the event that you get audited after you’ve taken distributions. I generally scan in receipts to the cloud on an annual basis to help with recordkeeping.

If you’ve been fortunate to have good health for several years and have accumulated more money in your HSA than what you could reimburse yourself for, then you have a couple of options. You could use it for medical expenses during retirement, take distributions and just pay the taxes, or leave it as an inheritance.

Where does an HSA fit within the priority of investing?

When it comes to saving and investing, you’ve probably been told to take advantage of tax-favored accounts especially if you are looking at a long-term strategy. The two most common ways include a 401(k) or equivalent and an IRA. But where does the HSA fit?

Obviously, if you don’t have access to an HDHP, then it’s a moot point. But if you do, then because of all the tax benefits, it can often make sense to fund right after you’ve obtained an employer match if one is available.

Beyond the tax-favored accounts available to you, it will also depend on how you are prioritizing your other financial goals as well. Check out the chart below for additional guidance on prioritizing your investment accounts.

Conclusion

The health savings account is one of the best ways to pay for medical expenses as it enables you to do so on a pre-tax basis. Contributions you make lower your AGI and there are no income phaseouts. Any earnings grow tax-free and distributions can also be made tax-free for qualified medical expenses. Despite the name, the contributions made can be aggressively invested giving the potential for greater returns over time. Because these distributions can be applied to reimburse for medical expenses from years in the past, an HSA can essentially function like an IRA.

Need Help Starting or Managing Your HSA?

Figuring out where an HSA fits into your plan can be tough if you have student loans and a lot of other competing financial priorities. If you need help funding an HSA or managing the funds within your account, you can book a free call with the YFP team to see if our fee-only financial planning services are the right fit for you and your financial goals.

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2. Savings, Savings, Savings

3. Social Security

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6. Insurance Check-Up

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1. Federal Employment Retirement System (FERS) Annuity

FERS Retirement Calculator

2. Access to the Thrift Savings Plan

3. Life Insurance

4. Long-term Disability Retirement Benefits

5. HSA Eligibility

6. Paid Parental Leave

7. Raises for additional credentials and board certifications

8. Opportunity to Pursue PSLF

9. Tuition Reimbursement and Repayment Programs

10. Generous Leave Structure

Conclusion

Need Help With Your Financial Plan?

Why I’m Not Using My Health Savings Account to Pay for Medical Expenses

High Deductible Health Plan

What is a Health Savings Account?

Health Savings Account Contributions for 2020

Triple Tax Benefits

Where does an HSA fit within the priority of investing?

Conclusion

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Compliance/Legal

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