Budgeting / Saving Podcast

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

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The Ins and Outs of the 529 College Savings Plan

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

Summary

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

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

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

Mentioned on the Show

Episode Transcript

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

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

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

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

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

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

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

Tim Baker: Yeah.

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

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

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

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

Tim Ulbrich: $10,000. Yep.

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

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

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

Tim Ulbrich: Yeah, let it ride.

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

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

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

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

Tim Baker: That’s right.

Tim Ulbrich: So same thing here.

Tim Baker: That’s right. Yep.

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

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

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

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

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

Tim Baker: Yeah.

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

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

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

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

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

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YFP 210: Why Net Worth Matters

Posted on by yfpadmin

Why Net Worth Matters

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

Summary

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

Mentioned on the Show

Episode Transcript

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

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

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

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

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

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

Tim Ulbrich: That’s right.

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

Tim Ulbrich: That’s right.

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

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

Tim Baker: Yeah.

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

Tim Baker: Yeah.

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

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

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

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

Tim Ulbrich: Yes.

Tim Baker: That’s our jam.

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

Tim Baker: Yeah.

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

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

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

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

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

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YFP 207: How to Avoid These 6 Common Financial Mistakes

Posted on by yfpadmin

How to Avoid These 6 Common Financial Mistakes

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

Summary

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

Common financial errors discussed in this episode include:

1. Not taking advantage of employer match

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

2. No budget or no financial plan

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

3. No insurance or inadequate insurance

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

4. Failure to monitor your credit reports

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

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

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

6. Not utilizing professional advice

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

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tim, welcome back to the show.

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

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

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

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

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

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

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

Tim Ulbrich: Absolutely.

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

Tim Ulbrich: I was going to say…

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

Tim Ulbrich: Yeah, that’s right.

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

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

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

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

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

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

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

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

Tim Baker: Mhmm.

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

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

Tim Ulbrich: Yeah.

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

Tim Ulbrich: That’s right.

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

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

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

Tim Ulbrich: That’s right. Yep.

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

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

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YFP 201: How and Why Trey Made the Transition from a Six-Figure to Resident Salary

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How and Why Trey Made the Transition from a Six-Figure to Resident Salary

On this episode, Tim Ulbrich talks with Trey Lowery about his experiences taking a non-traditional path towards residency training. They discuss why Trey decided to go back to complete residency training, how he and his wife were able to make the transition from a six-figure to a resident salary, and financial tips for those going back to do residency or making a job transition.

About Today’s Guest

Trey Lowery is a clinical outpatient pharmacist at the Iowa City VA Health Care System. He attended pharmacy school at Mercer University College of Pharmacy in Atlanta, Georgia and moved to Iowa City, Iowa with his wife, who attends graduate school at the University of Iowa. He began his pharmacy career as a staff pharmacist for Hy-Vee Pharmacy following graduation in 2018. He then matched to the Iowa City VA’s PGY1 pharmacy residency program in 2019 and continued there in his current position upon completion. In the few years following pharmacy school graduation, Trey experienced the transition from student to the seemingly never-ending job search, to full-time salaried pharmacist, to resident, and back to pharmacist salary again. He is excited to share his experiences with other pharmacists in hopes it will encourage them to not allow potential decreases in pay to prevent them from pursuing their dream job as a pharmacist.

how to Summary

On this episode, Tim Ulbrich welcomes Trey Lowery to the show to discuss his experiences with his non-traditional plan towards residency and the many adjustments that came along with it. Trey shares some of the challenges he and his wife worked through along his journey to residency and how both compromise and financial savvy helped them through the transition.

Some of the best tips and advice that Trey shares in this episode include making sure that you have a solid budget and financial plan ahead of time. Trey shares his long history with budgeting and how he views it as a tool for success rather than something limiting. Tim and Trey go over Trey’s very practical advice on budgeting during residency, including a formula for building your residency budget even when you are not sure of your salary and specifics.

Additional advice includes building your emergency fund up to be able to fund at least 3-6 months of expenses. The reasoning for this is simple, with a 6-figure salary, unexpected expenses and events are much easier to manage, but with a resident salary, those same unexpected expenses and events can be a bigger problem.

Trey closes with a little motivational push and encourages anyone who is looking to take a non-traditional path to residency to do so.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Trey, welcome to the show.

Trey Lowery: Thanks, Tim. Appreciate you having me.

Tim Ulbrich: Appreciate you taking time to come onto the podcast and really share your story and pearls of wisdom for transitioning from a student pharmacist to a pharmacist with a six-figure income to a resident salary and what that meant for you, for your personal situation, and how you were able to financially plan for that transition. And so let’s start with your pharmacy background and give our listeners a little bit more of a picture of where you went to pharmacy school, when did you graduate, and then the route that you took through residency to your current role.

Trey Lowery: Sure thing. So I grew up in the state of Georgia and then went to pharmacy school at Mercer University College of Pharmacy, which is in Atlanta. I then got married after school and my wife decided she wanted to pursue a PhD program. And she chose to do so at the University of Iowa, so then we made the transition and moved from Georgia halfway across the country to the great state of Iowa. And when I got here, I didn’t really have many connections, I wasn’t licensed yet, so I had to figure out how to transition into passing all the different licensing exams and attempting to find a job without a license and without any knowledge of anyone in the area. So thankfully, I was able to do so after a couple of months. And I ended up working at Hyvee pharmacy. It was about an hour away from where I lived, so the job search was certainly expanded. And then after about 9-10 months of working at Hyvee, I applied to the several different residency programs and ended up matching at the Iowa City VA, where I completed my PGY1 and then after finishing it, I was happy to continue on in my current position as a clinical outpatient pharmacist there at the Iowa City VA as well.

Tim Ulbrich: And I’m excited to share your story with others as I suspect there may be many pharmacists out there listening that for whatever reason, you know, didn’t complete residency training right out of school, which may have been Plan A for them in their mind or perhaps they discovered later on that they wanted to do residency training. And that could either be a financial decision, that could be a family situation, a move that’s going on, it could be a match situation, lots of reasons why folks may not necessarily complete residency right out of school. But there may be an interest to go back and complete a later program at a later time. And I think one of the common barriers is wow, this is a big financial change to be considering, right? Going from student income to finally you’ve got that pharmacist six-figure income and then taking a step back at least financially in terms of that resident income. And so we’re going to dig into that in more detail here in a little bit, but I want to give our listeners more perspective on your Plan A and then obviously your work that you ended up doing at Hyvee. But my understanding is your goal was if possible to do residency right after your P4 year and because of the timing, because of the move, you weren’t able to enter Phase 1 of the match, didn’t yet know where you were going to be because of location with your wife’s PhD programs and the options and then at that point were able to move into Phase 2 — for all that have been through this process know how difficult Phase 2 of the match can be in terms of the number of applicants that are out there relative to the position. So talk to us through about that experience. How challenging was that in terms of that being up in the air, unknown, as well as having to make that decision that this is Plan A but I’m going to put that on the back burner because of this move. And if it works out in Phase 2, great. If not, then you’ll pursue something else.

Trey Lowery: Sure, I think that’s one of the interesting parts of my story is that I went into pharmacy school thinking I didn’t want to do a residency because I had worked originally as an intern and as a technician for a company called Kroger, which is very similar to Hyvee, back in Georgia. And I thought that that was the path I wanted to do. I was thinking retail pharmacy, maybe some type of independent or ownership later on. But it wasn’t really until my fourth year rotations when I actually got experience in the clinical and hospital side of pharmacy that I really decided, you know what? I actually really like the idea of the work that I’m doing here, so much so that it was basically around September when I decided OK, I definitely want to pursue a residency. But then the applications were due in December. So that was also part of the speeding up process that I had at the time. So I did what I could in those couple of months, tried to get some research experience, doing some more experience in the clinical areas and bolster my CV as much as I could. But yeah, the unknown of having to wait for Phase 2 was certainly challenging I suppose would be the word. I mean, we didn’t know where we were going to move, we didn’t know how we were going to financially survive after the move because if I didn’t match, then I wouldn’t have a job already lined up in the area. So it was certainly a challenging time. And it was one of those things to where we basically had to decide which of our careers would help the other one, sort of. So my wife was willing to take a year off if that meant that I could pursue a PGY1 anywhere in the country. But ultimately, we decided to go with — stick with the plan of her going ahead and going into school because it was going to take significantly longer and then my ability as a pharmacist to find a job would likely be a little bit easier than hers just coming out of undergrad.

Tim Ulbrich: Yeah, and I’m glad, Trey, that you guys were able to work through that and come to that decision as a family because obviously now you guys are in a great position at the Iowa City VA, your wife’s continuing on in her PhD degree, so it all worked out, but I’m sure that was incredibly stressful in the moment as you guys were evaluating the options that were in front of you. And so you make this move, you obviously get into Phase 2, limited options, lots of applicants, and ultimately weren’t able to land a position in Phase 2. So now you’re at the point of getting a job, right? So you land a position with Hyvee pharmacy, and my question here is once you were in that role, obviously I’m sure in the back of your mind you’re still thinking about residency as a path that you may be interested in, some of your career goals that you identified here in the fourth year that were of interest to you, but you’re making a good income. And I think this can be a hard thing to really objectively say, “I want to go back and pursue this training pathway,” knowing that it’s going to reduce my income by a half, certainly probably even more than that for some positions. And so talk to us about that decision-making process, you know, how you were able to really objectively evaluate, you know what, this path of residency is best for me, even if it means taking a pay cut to go back and do that.

Trey Lowery: Well, for me, Tim, it really stemmed from thinking about what my long-term career goals were as well as my wife’s — you know, obviously that was certainly a sacrifice for both of us in doing that. So when I got to thinking about what I wanted to do over the course of my career for the next 40+ years, I really just didn’t think that my current position was something that I was comfortable with thinking about in the long term. I really thought that I wanted to get more involved in the actual act of patient care, being able to handle some of the decisions instead of being more reactive by when they just come to the pharmacy and drop off prescriptions, it’s hard to really make a lot of interventions in that setting. And depending on when my wife finishes her PhD, we don’t exactly know what’s going to happen there. So it may involve another move, it probably — it will likely involve another job search. And I figured that if I could do anything to bolster my ability to be more marketable in that area by having residency training, then I’d also improve my chances of finding a job in the future and then hopefully being able to land something that I really enjoy like I have right now.

Tim Ulbrich: Well, and good call on the VA. You know, obviously we have many, many VA pharmacists that listen to this show that we work with as clients. And we know how much they enjoy the VA from a scope of practice, from obviously the quality of employment, the benefits, but also from the ability to transition. You know, one of the benefits of the VAs, if you guys have to pick up and move across the country, if you’re able to locate with another VA, you know, that minimizes a lot of the licensure concerns and other things of transferring your practice. So what a great opportunity that you have there. What about the experiences at Hyvee? You know, one of the things I’ve noticed as a residency program director and previous experiences is I have found that those that have some work experience, so graduate from pharmacy school, go out and work for a year or two years, however long that be, and then come back and do residency, seem to be a little bit better prepared to take on the demands, the challenges, the rigor of residency. Are there specific experiences that you had at Hyvee or skills that you obtained through that year that you felt like really benefited you during the residency year?

Trey Lowery: Yeah, and I think that’s an important point for those seeking to go back to do residency is using that to your advantage rather than saying, you know, I’m actually multiple years out of school, I’m well into one specific area, how can I go into a residency program that’s going to require well-rounded, maybe things that I haven’t done before? But I think like you mentioned that that is actually something to use to your advantage because one thing you’ll have over the other candidates that are applying that are still in school is that you’ve actually made that transition into I am an independent practitioner, I have ownership over my practice, when I scan the barcode to verify my prescription, that’s the last check. It’s completely up to my abilities as to whether or not the patient is getting the right thing, and I’m now the one responsible. So I think between that, you also gain some supervisory experience because you’ll actually have technicians that it will be just you in the pharmacy, you have to do a little bit of kind of management of time and management of people in that area. And then for me, it was just kind of the relationships that I really was able to develop with my patients. You know, actually seeing that your work is having an impact on them really makes you want to take more ownership of that. And so then going back into residency, I’d already seen the effects that I could have as a pharmacist on my patients. And so I think that made me care about it a little bit more knowing the sacrifices that I was making to be there.

Tim Ulbrich: Trey, one of the things I think about besides the financial transition, which we’ll get to in more detail here in a few moments, you know, just having a year I guess off — not necessarily off, you obviously were practicing, using skills, but you know, it’s a different pace from happy clinical rotations where you’re being evaluated and you’re expected to do so many interventions and have a certain autonomy of practice. So being, having that transitionary year and even just schedule differences, you know, I think about the pace typically of a residency probably were in more of a normal, not going to say not stressful, but normal schedule, so you finally graduate from school, you get to somewhat of a normal scheduled routine, and then you say, “You know what, I’m going to raise my hand to make a lot less money, to work a lot more, to be able to develop these skills further.” So money aside, just talk to us about the transition of a year off, not using some of those skills perhaps that you obtained in your final year of school or throughout your PharmD as well as just the schedule differences and how you were able to get back into the flow and the rhythm when you started residency.

Trey Lowery: It was definitely a transition, to say the least. For the first couple of months when you’re getting licensed and studying for your board exams, it still feels a little bit like school because I was taking most days of the week to study for that and for job searching purposes and that kind of thing. So for the first couple of months, I didn’t feel like I could just completely relax and not have to worry about the scheduling part. But you’re right, once I got into the position I was in, it was very much I go to work and then I come home and then I don’t necessarily have a bunch of projects or schoolwork or studying to do. And it is definitely easy to get caught up in that position. So when making the transition back, I’ll be completely honest, it was difficult the first couple months. I really felt like I had to do some extra reviewing so that I knew the topics I really hadn’t used in a year or plus, since my rotations when I’m actually going through my rotations in residency. And the scheduling, it was very much a team aspect in our household. My wife definitely helped so much with figuring out ways that we could be able to make sure that we spent time together, that we were — that I had time to focus on my residency projects and had ample time to be at work when I needed to. And it was certainly not easy. But after the first couple of months of residency, I suppose you kind of get used to it. You know what you have to do at that point, but yeah. Certainly a big difference from how it was before then.

Tim Ulbrich: Yeah. So let’s transition to talk about some of the financial tips that you shared with us prior to the interview that I think would be really helpful for folks that are considering a similar pathway, you know, student, practicing pharmacist going back to residency or folks that may be transitioning jobs or careers. I can think of situations where someone’s salary might be reduced or they’re looking to go part-time or they’re making a transition to another position that doesn’t have the same salary and just general financial principles that I think are helpful for individuals that find themselves in a similar situation. And the first one that you mentioned, Trey, is to make sure you have a solid budget and solid habits around budgeting before you get started. So tell me about budgeting, how you and your wife created good budgeting habits and effectively budgeted prior to making this transition back into the residency position. What did this look like?

Trey Lowery: So I am thankful that both of my parents are very financially savvy and both of my wife’s parents are the same. So I actually started my first budget when I got my first job at age 16 because for me, I looked at budgeting not as something that was limiting what I got to spend and where I got to spend the money that I was earning, but I felt very relieved in that I could actually allocate where certain parts of my income was going and then it was OK for it to go to those areas. So when I — when we got married, that was very important to me. I had listened to plenty of examples from different financial advisors throughout the country and from YFP as well to where I knew that money can certainly become an issue in marriage. And so we really wanted to focus on that at the beginning to make sure we were on the same page and go ahead and knock that out. So I use primarily Mint.com and then a couple of other different spreadsheets to track the budgets that we make. And it certainly took a couple of months for that to really become an effective tool. It took some balancing in certain areas and making sure that we were on the same page of all the different categories and that kind of thing. But the reason I say that that’s such an important aspect is because if you don’t have that going into residency, you’re not going to be able to create it while you’re there. You’re not going to have enough time, probably not enough energy, and then if you do have a family, it’s going to be very difficult to get everyone on the same page in the chaos that is residency. So that’s why I recommend if you can, go ahead and — I mean, useful budgeting, good budgeting habits are beneficial for anyone at any time I believe. But if you can make sure that you have those working effectively beforehand, it will only benefit you once you actually enter the reduced salary stage.

Tim Ulbrich: That’s great advice, Trey. And I think sometimes it’s easy, you know, P4s that are listening that are going to be starting a residency, starting a job, folks that are in a position such as yours that might be making a transition where there’s a salary change, sometimes it’s easy to say, “I’m just going to wait until I see what that actual pay stub and take-home pay is,” but I think you can get close enough, right? You can estimate close enough, work through the budget. It won’t be perfect, but the point is you’re being intentional, you’re being prepared with the transition, and then you can fine tune and refine it once you actually get that first pay stub and begin to move forward there knowing that you’ve been intentional and been prepared. Yeah, we have a budget template for folks that are looking to get started with a budget. If you go to YourFinancialPharmacist.com/budget, we have an Excel template that you can download, work through that. We use a zero-based budgeting method and system, and then you can take that information and plug it into a tool like Mint.com, like YNAB, or any other budgeting tool or software or good ol’ pen and paper or Excel if that works best for you as well. So that’s No. 1 around budgeting. No. 2 here is increase your emergency fund if you don’t already have 3-6 months of expenses saved. So why, Trey, did you decide to focus on building emergency fund prior to residency? How did you guys practically do this? And did you end up having to use that fund at all during residency?

Trey Lowery: So this is something that we did initially upon finishing school. That was kind of our first major goal. And it was fun because it gave us something to work towards together that wasn’t high-risk, high-reward, that kind of thing. It was something that we knew that once we got there that would just be a nice cushion for us to have going forward. So the reason that I would recommend increasing your emergency fund or at least having the usual is kind of 3-6 months’ expenses is the recommended is because obviously if you’re decreasing your salary that much, a $1,000 home repair or a car expense or some kind of unexpected family emergency happens, when you’re on a six-figure salary, that isn’t that big of a deal. You just say, “OK, I’ll just move around this part of the budget, and we’ll cover it.” But when you’re in a residency salary, you know, let’s say you bought a house, you have a family, it’s going to be very difficult to make that unexpected expense be able to be covered. And then that could lead to things like putting it on a credit card and then that will only amplify and amplify as things continue to happen. So when you’re in residency, the last thing you want to be concerned I think is some kind of unexpected financial emergency. You’ve got plenty enough on your mind already. So if you can already have a good-sized emergency fund going into it, I think that will just help everything going forward.

Tim Ulbrich: That’s great stuff. And this third one, you know, really caught me off guard the first time I read it. I had to reread it, and then I got to what you were saying exactly. And it’s really a great, great piece of advice. And that is look for salaries at prospective residency options, pick the lowest salary option — say what? — pick the lowest salary option, create a new budget using that salary. Depending on the results of your new budget, you may need to make adjustments. I think this tip is bold. Trey, tell us about what you mean by this, why you took this approach, and why this can be so valuable.

Trey Lowery: Like you mentioned, you may not exactly know the dollar amount that you’re going to have in your paycheck in order to create a full budget around. So for us, because we knew we were going to be located in the Iowa City area, I knew I was going to be applying for residencies within, you know, a 30-minute, hour range and not too much further. So I went on the forecast website and they have actually all the information regarding the salaries and some of the benefits of each of the programs that you’re applying for. And so when you match, you’re very much committed to that program that you match with. So if you have a bunch of different salary options, if you’re looking all over the U.S., it certainly I’m sure varies. If you can create your budget around the lowest one such that if you happen to match to the lowest salary option, which I actually did, so it ended up working out well. I didn’t have to change any of my budgeting once I actually started residency from that perspective. But if you can pick the lowest one, that will be your most strict option for your budget. And if you end up matching with a program that’s anything above that, then at that point, you’ll have extra to put towards other goals or other discretionary expenses, that kind of thing when you’re going into residency. But for me, it was just a way of not getting caught off guard when you had such a massive decrease in income all at once.

Tim Ulbrich: That’s great advice, especially considering the separation you can see of resident salaries, depending on where they’re located, types of roles and things like that. So that can be a big difference if you’re looking at, I don’t know, $48,000 versus $40,000 for example. That can be a significant impact on that year and during that year as well. No. 4 is have a plan for your student loans during residency. What would it be in terms of a YFP podcast if we didn’t mention or talk about student loans? So let’s go there for a minute. How did you decide to handle your student loans during your first year working and then also in residency? Talk to us about the plan, the approach, the strategy you’ve taken, and how you ultimately have gotten to that decision that that is the best repayment plan and option for you.

Trey Lowery: So when I first figured out that I was going to be using student loans to get through graduate school, I had to figure out basically what was going to be my approach to either whether I’m going to pay them off or attempt to go for forgiveness, that kind of thing. When I first started pharmacy school, I really didn’t know that there was such a thing as forgiveness. And my dad always told me, “You know what, you’ll make enough, you’ll be able to pay it off. It’ll be good in the long run. Just go ahead and take them out. You’re going to need to because we couldn’t afford to send you all the way through graduate school.” So I went through pretty much all the way through school thinking that that was going to be my plan, that I was going to pay them off. And then in my fourth year of school, I actually went to a financial advisory meeting led by one Tim Ulbrich from Your Financial Pharmacist. And that is where I discovered that there actually were forgiveness options available, which I had not realized at the time. I feel like I might have already been somewhat committed because the financial gurus that I followed were like Dave Ramsey and some others, which are very much you took out the debt, you need to attack the debt and tackle it in order to make your own financial goals become a thing. But like I said, I hadn’t considered that there were actually other options. So ultimately after looking at the numbers and weighing how we felt about our debt, I did decide to go for the pay-it-off method, which I’m currently doing now, although granted the 0% interest and no payments are certainly a benefit in that.

Tim Ulbrich: Right.

Trey Lowery: With them being federal. But that was what we ultimately decided, and additionally, because I was at first at Hyvee and I wasn’t at one of the accredited organizations that would qualify for PSLF, I really didn’t know if I was ever even going to be in a position to do that.

Tim Ulbrich: Right.

Trey Lowery: So I did use my first year to do some paying off of the debt then as well.

Tim Ulbrich: Yeah, I think that’s great, Trey. And you know, as I shared with you before we hit record, as I’ve said many times on this podcast before, this really is an individual situation. And you know, I think at the end of the day, it’s about having a plan, that you understand the options that are out there, and you feel confident in evaluating those options and knowing that when you apply those options on top of your personal situation that you’ve gotten down the path of the best repayment option or strategy for you personally as an individual. And I think for folks that are listening, you know, this can be a topic that obviously can be overwhelming, there’s lots of options, there’s forgiveness, there’s nonforgiveness, there’s federal, there’s private, the list goes on and on, and it can feel overwhelming. It can become paralyzing. And I think really digging in to understand the options is important and a great piece of advice here for those that are — really for anyone with student loans, but especially for those that are going back into a residency position or going through residency training to make sure that you’re using this time to evaluate those options. So I would recommend to our listeners, Tim Church wrote an awesome book on student loans for us, “The Pharmacist’s Guide to Conquering Student Loans,” really an A-Z guide of all things student loans, customized to the pharmacy professional, really meant to go through all of those options and help you apply that to your personal situation. You can learn more about that at PharmDLoans.com. Trey, this has been outstanding. I think for those that are currently in training, going to pursue training, whether it’s right from pharmacy school, going back, I think they’re going to find a lot of value in your advice and there’s a lot of wisdom here. Any other advice that you have, financial tips, wisdom to share with those that are listening that are going back into a residency position or going right into a residency position, making this transition? Any tips or advice that you would have for them as they go through that transition?

Trey Lowery: Well just like with finances, I think this is really a personal decision, and it depends on what your career goals are. Personally, I feel that if you are someone that is committed to pursuing your residency and you know that that’s the path that you want to take, you’re going to be able to figure out the finance part and make it work if you’re committed enough to following that path. So I think just taking some time to figure out what your career goals are and what steps you’re going to need to take to get there are probably the most important. And when I look back on my time during residency, obviously I’m not 40 years down the road at the moment, but I can say even nine months out that I really, really absolutely feel that it was worth it. And I think that in the long term, having a position that I really enjoy, that I feel like I gain a lot out of and I’m really able to make an impact on my patients’ lives the way that I think I would like to, no matter what, that’s going to be worth the $60,000, $80,000, however much you’re giving up for just one year. And if you were to develop good budgeting habits before that time ever comes, then that actually may end up benefiting you financially even more in the long run than not doing a residency in the first place. So I think there may be multiple benefits to pursuing that. But like I said, for me it’s really just depending on the individual.

Tim Ulbrich: You beat me to it, Trey. One of the things I believe — I have no evidence to support this, you know — but one of the things I believe is that a benefit of that year, if you take full advantage, or two years perhaps, is that it really does force you on some level to build some of the behaviors that can have a very long-term benefit throughout your career. So I think one way of looking it at is ‘Oh man, I’m not going to make much money at all.’ Another way of looking at it is, ‘Hey, maybe there’s an opportunity to learn some things throughout this year, whether it’s goal-setting, budgeting, being intentional in other parts of the financial plan, that can have a benefit well beyond those training years.’ So Trey, again, thank you for your time. And appreciate you and your willingness to come on the show to share your story.

Trey Lowery: Thank you so much, Tim. I’d like to say if anybody is in the YFP community on Facebook, feel free to reach out. I’d be happy to continue to share any other points that I might have. If this is something that you’re pursuing, definitely consider it because you definitely can do it. Thank you, Tim.

Tim Ulbrich: Thank you, Trey.

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YFP 192: Findings from the 2021 Pharmacist Salary Guide

Posted on by yfpadmin

Findings from the 2021 Pharmacist Salary Guide

On this episode, sponsored by Insuring Income, Alex Barker, founder of The Happy PharmD, joins Tim Ulbrich to discuss takeaways from the 2021 Pharmacist Salary Guide, including the current state of the job market, trends in salary and compensation, and contributors to job stress and dissatisfaction.

About Today’s Guest

Alex Barker is a pharmacist, entrepreneur, author, and creator of The Happy PharmD and the Happy PharmD Summit.

Summary

Alex Barker, founder of The Happy PharmD, breaks down the 2021 Pharmacist Salary Guide, a helpful resource for pharmacists to understand trends in salary, the job market, and job satisfaction and stress. Alex and his team gathered data from multiple sources and reports to help share trends about the pharmacy job market. Alex shares that pharmacists are still well paid, earn a salary in the six-figure range, and are seeing a small increase in pay, however there are trends that pharmacists should be aware of when it comes to salary changes.

Alex first digs into the low ceiling pharmacists have on their salary. While pharmacists are very well paid when just getting out of college, especially when compared to other similar professions, after 20 years they may only see an additional $12,000 added on to their salary even if their job performance exceeds expectations. Some salary starting numbers may be even lower and it is difficult to work your way up to a top tier salary. He discusses that pay is based on what type of pharmacist position you hold. The highest paid positions are in management, pharma, and nuclear pharmacy, however a small percentage of pharmacists hold those types of positions.

He explains that the reason for such a small increase in pay is due to a ‘perfect storm’ he’s seeing in the pharmacy job market. Alex describes that due to the supply and demand of pharmacists, this perfect storm has been created: 13,000-14,000 pharmacists graduate each year, ⅓ of current pharmacists (~100,000) are looking for a new job, and a negative job growth is predicted due to the oversupply of pharmacists (321,000 jobs decrease to 311,200). Because of this, it’s important to consider your career trajectory. Alex also talks about satisfaction and job stress and Job Rx, a new job board that pulls open pharmacy positions from employment sites.

Click here to download a free copy of the 2021 Pharmacist Salary Guide.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Alex, welcome to the show.

Alex Barker: Thanks for having me, Tim. I enjoy hanging out with you.

Tim Ulbrich: It’s been awhile, specifically Episode 092 when we talked about creating an indispensable pharmacy career all the way back in March of 2019. But for those in our audience that may not know you, I know many folks do know you and the work that you’re doing with the Happy PharmD. But tell us a little bit about your pharmacy career and the work that you are currently doing with the Happy PharmD.

Alex Barker: Happy to, but first I want to acknowledge — was it Episode 092?

Tim Ulbrich: 092.

Alex Barker: So you had me on 100 episodes later.

Tim Ulbrich: Nailed it.

Alex Barker: Wow, good job.

Tim Ulbrich: That was planned. No, I’m just kidding. It wasn’t.

Alex Barker: Yeah, so I’m Alex Barker. I’m a pharmacist. I graduated in 2012, did a residency, went into clinical practice, did not enjoy myself and struggled to find my way with my career. That led me to business, led me to coaching people, led me to creating a few other media companies and other crazy, random ideas. And then I saw, unfortunately, the need of our profession. A lot of people are burned out, a lot of people are unhappy, unfulfilled in their positions. So I took coaching along with our profession and kind of married it into this Happy PharmD where we help pharmacists and coach them into better careers and jobs, doing that since 2017 now.

Tim Ulbrich: Wow.

Alex Barker: We’ve got — yeah, it’s crazy.

Tim Ulbrich: It is.

Alex Barker: If it was back in 2019 that I was last here, I think we only had maybe four coaches including myself. We now have 11. And we have an awesome team, support team, we’re doing research. Lots of crazy stuff. And a good colleague of yours now is our lead coach, Jackie Boyle.

Tim Ulbrich: Yes.

Alex Barker: Who is at NEOMed in Ohio. So yeah. That’s what we do here at the Happy PharmD. And I know why you brought me on was to go over trends and what’s going on in the job market and specifically in pharmacists’ salaries. So, happy to be here.

Tim Ulbrich: Awesome. And for those that are not familiar, make sure you check it out, TheHappyPharmD.com. We’ll link to it in the show notes. And Alex, as you mentioned, today is a topic that I know is of interest to our community, one that I enjoy talking about on the show as well as our folks are certainly interested. What’s happening in the job market? What’s happening with the current state of jobs? And you have an incredible annual salary guide of which we will link to in the show notes and I mentioned in the introduction that distills data about pharmacist salaries, salary changes, job stress, job satisfaction, and overall the pharmacy job market. And one of the things you talk about in there, which we’ll get to towards the end of the show is the perfect storm and what that means as it relates to where we are as a profession. So you’ve been doing this now for several years, is that right, Alex? The salary guide?

Alex Barker: Since 2015, which meant we were looking at 2014 data. So yes, we’ve been doing this many, many years. We have a lot of data, and it’s — frankly, it’s all over the place. It’s a little frustrating. But we’ve got a good — you’ll be able to see in charts and graphs, you’ll be able to compare yourself to others. I’d recommend you look at yourself where you’re at rather than the trends as a whole, but we can dive into those here. Where would you like to hit first?

Tim Ulbrich: Yeah, so my first question, Alex, is there’s other resources out there, you know, a couple that come to mind, several state associations do this, I know we do here in Ohio, there’s the Pharmacy Workforce Survey, which I believe happens every five years, one published last year. So what’s the need for this? Tell me more about why you felt like there was a gap and an opportunity to fill that gap with this resource.

Alex Barker: So one of the things that I like to do whenever I’m looking at a complex problem is multiple resources. You know what, that’s not really unique. I think every pharmacist does that, especially when we’re researching a disease state or a new drug. We’ve got to have the whole picture, right? And one of the things that frustrated me about the multiple reports were the indiscrepancies and the different numbers. So I didn’t really see anyone else putting all of this information together in one place. So that’s why I started way back in 2015 working on this report. I think I published it originally on Pharmacy Times. And we had since now put it on our website because obviously we weren’t around in 2015. I like looking at seeing multiple sources of data, multiple reports, to see and to look for those trends. Right? Because I think we all have hearsay and, you know, secondhand stories of —

Tim Ulbrich: Absolutely.

Alex Barker — what’s happening in the job market. And there is some truth to that. And then we actually have some solid data for some of those hearsay stories. But overall, we can say that pharmacists are still well paid. We’re still in the six-figure range. We are continuing to see a very small overall increase in our pay, albeit that it is very slow and it is slower in comparison to the majority of other health professions. But we are seeing some trends that we should all be aware of when it comes to salary changes.

Tim Ulbrich: And Alex, one of those that you talk about in the guide that I know is something that is of interest to me and the financial plan because these topics are very connected I think for obvious reasons is that when it comes to pharmacist’s salary, of course we’d expect to see some difference based on experience, depending on areas of practice of which we can dig into further. But one of the things you mentioned is that there’s an extremely low ceiling for pharmacists. And this is one of those things — speaking of hearsay — that I have always thought is of course varies based on positions and we know that some areas, there’s more long-term upside and maybe some longer term growth opportunities, but for many pharmacists, outside of cost of living adjustments, if that sometimes, that there’s a relatively low ceiling of where you start, which is a great blessing, may not be too far off from where you end. And you know, that matters for a whole lot of reasons when we talk about the financial plan. So give me your read on that. You know, tell us more about what you’ve found and why is that so significant?

Alex Barker: We should be well aware as pharmacists, we are very well paid for just getting out of college. If you compare our education, the length of it as well as the job market and compare it to other similar professions, we are more likely to be paid higher. So according to a report by Pay Scale, which was the only one, unfortunately, that looked at years of experience with an annual average wage, you’re looking at about $113,000 is the average starting salary for less than years experience, which is, I mean, insane. If you told that to a high schooler, you’d get their ears to perk up.

Tim Ulbrich: That’s right.

Alex Barker: However, if you add on years of experience, so if you work in the profession 20+ years, according to this report, you’re only adding about $12,000 more per year to your salary, which I never realized that when I went through education. I never had my eyes open to that problem, but like that should be a sinking feeling that it doesn’t really matter how much harder you work, it doesn’t matter how long you work with a company, chances are your salary will not increase. In fact, for an institution I worked for, it was very clear that after a certain amount of time, years of experience, that my salary would increase incrementally up to a point. And then at that point, I was locked at the rate at which, you know, the cost of living increases, which in my area, is very low. So —

Tim Ulbrich: Regardless of performance, regardless of performance, right?

Alex Barker: Right. Right. And I would not say that I was an above-average pharmacist. I would say that I was just kind of in the middle. And it didn’t matter. And what made me the most frustrated was that finding out the amount of money that people got for doing insanely well. We had a few amazing pharmacists on our team. They worked really, really hard. And I found out that their — when they exceeded expectations was the measure that they had to get in their annual review, that when they got that, it equated to about $1,500. $1,500. And if you take that, you divide it by the hours that you work, I mean, it isn’t worth it. It isn’t worth it at all to even try harder. And so what we’ve kind of created, unfortunately, in this perfect storm, one factor of it is we have a profession where we are not rewarded for effort. And that’s disconcerting. It creates complacency, I would say for sure. I mean, it did within me when I was a clinician.

Tim Ulbrich: Yeah, and I think especially at a time where you and I both know, we need some innovation, we need some risk-taking, we need some great ideas coming forward. And you know, compensation of course isn’t the only way that’s going to drive that. But certainly, you know, a low ceiling, as you mentioned in the report, may subtly not encourage high performance. And I think that’s a noteworthy thing. And of course, it goes without saying, we’re generalizing here. As you look at this data across the profession, there are certainly areas of the profession where there’s more upward mobility, I would use management/admin type of positions on the health systems side as one example. But there are certainly others. And of course when it comes to the financial plan, what screams to me here, Alex, is that you have to if this is going to be true for your career and the trajectory, you have to be that much more diligent about the financial plan from Day 1. Right? Because naturally what happens is expenses are going to go up if we let them. And so over time, if expenses go up proportionally but salaries do not, we’ve got a problem in terms of being able to achieve all the financial goals that we do. Another way of looking at this if we want to be a little bit more half-glass full is that you do have a great salary at a very young age coming out of school. And if you’re able to keep those expenses down, you’ve got a long trajectory where that money can be saved, you can have compound growth and other things where other professions, while there might be more upwards trajectory, it might take them longer to get to a point of savings. But of course, we haven’t talked about the $175k of debt that our graduates are taking on. Separate story for another day. So when we look at the pharmacist’s salary based on job sector, we know that there are a lot of avenues pharmacists can take in their pharmacy profession throughout their career. So tell us a little bit more about the variation you see in terms of jobs that have higher salary ranges, jobs that have lower salary ranges.

Alex Barker: I don’t think people will be too surprised, but perhaps maybe by the amount. So based on where people are working and the kind of job that they’re working, which by the way — don’t try to do this yourself, OK? Don’t go to look at all these reports because they call pharmacists by different names. I mean, the Bureau of Labor Statistics, which is a U.S. government organization, defines one of our professions as working at food and beverage stores. Tim, I’ll be honest, I don’t know what a food and beverage store is. It’s not a gas station. And they already have general merchandise stores and pharmacies and drug stores. So maybe I’m missing — I live in Michigan, so I haven’t been all over the world. I don’t know what this is. So where are the great paying jobs? Like you said, it comes down to management jobs, they are clearly paid more. We’re looking at ranges anywhere from $15,000 to even $25,000 more. We know that pharma jobs, particularly higher management jobs, pay extremely well. Nuclear pharmacist is one of the top-paying patient care jobs. JobRx reported that their average was at $157,000, which is very, very high. And again, we’re also seeing similar trends that where there is more responsibility, so more prescribing ability, we see pharmacists being paid higher, so clinical pharmacist roles, whereas where we’ve seen the lowest paid pharmacists, we’re seeing those typically in mail-order and PBMs. We’re seeing it in medical marijuana places, mail pharmacies. And as everyone would expect, we are seeing lower salaries, trending downward, in chains and of course independents, long-term care. Now, to clarify, everyone’s got opinions on these things. ‘Oh, well, I know of this person who got this. And I’m paid this.’ It’s trends. We have to keep all of this with a grain of salt because the reporting from each of these sources varies greatly. So I’m herding cats here, and I’m just telling you about my experience with it, OK? It’s challenging.

Tim Ulbrich: Sure. And it’s a good point, I mean, I hope our listeners will take it with a grain of salt. But it’s a great opportunity to see what’s out there. And what’s of concern to me, Alex, is I’m thinking of the distribution of pharmacists by practice, and that first group that you mentioned, management/admin positions, industry and nuclear pharmacy I think were the three you mentioned, that is a small sliver of the pie. Right? The bigger chunk of the pie is the community positions, is the managed care positions. And so I think it is something that we have to consider and we have to take seriously in terms of the significance. Now, hearsay — speaking of hearsay — one thing I have heard that I think is easy for us to hear and say, “Oh my gosh, the salaries of pharmacists, it’s falling apart,” and that is the instances of somebody starting at $35 an hour, $40 an hour, you know, and is it because of a saturated market? Is it because of this or that? Are they perhaps part-time? You know, 32 is kind of the new normal, what we’ve seen here in Ohio. Tell us more, give us the data. What are you actually seeing when it comes to these numbers of, “Hey, I’m starting at $35 or $40.” Is this isolated? Is it more widespread?

Alex Barker: Hearing you say that makes me feel like maybe I’m the one that needs to collect those reports and that data because no one is. You’re right, it’s all anecdotal. I’ve seen it in your Facebook group, I’ve seen people report some of the offers that they’re getting. It’s abysmal. The worst I have heard is $28 an hour. That’s a floating position. I think it was in Austin, Texas or one of the major cities in Texas. And we know that these typically are retail chain positions that are offering these insanely low salaries. We also do have reports of it happening as well in hospital positions. And we also know that there are a few remote clinical positions that are very low as well. And so we’re talking like MTM jobs where you’ve got a lot of flexibility. You work when you want to. But you’re looking at an annual salary of maybe $70,000-80,000. That’s not true across the board, but that’s what we are receiving reports from from the people that get jobs because occasionally, we do salary negotiations for people as well. But the only evidence we have as far as an actual report that’s been shown that I enjoyed seeing this year was drug topics. So if you look at their 2020 base salary, you see this very concerning skew of data — and I’ll send you a picture of this as well so you can put it in the podcast notes if you can do that, I don’t know — but you’ll see that 13%, which is a huge number of people, at the end of their report were receiving less than $70,000 a year or less. And unfortunately, what they didn’t report in this data is the number of people in that bracket who were full-time or part-time. But we do know that the total amount of people was only 13% as well that worked part-time. So I’d have to venture a guess that that 13% that worked part-time, you know, potentially were majorly in that bracket of 13% reporting that, I don’t know. But unfortunately, what we are seeing is because of the glut, because of how easy it is to hire a pharmacist, particularly in a very generic role, we are seeing a lower salary being offered to those pharmacists. And we — based on what we just talked about, that low ceiling, you should assume that you will not — you’re not going to work your way to the top tier salary, $120,000-140,000 if you’re being started at $70,000 annual.

Tim Ulbrich: And where you start matters for obvious reasons. It matters when you’ve got $175,000 of student loan debt, it matters when hopefully if you have something like an employer retirement match, you know, 4% of $70,000 versus 4% of $120,000, that matters over time and compound interest and growth. So question for you here — and I know this is more complicated than we have time to unravel, but what’s the reason? You know, is it simply that we’ve got supply and demand, we’ve got 13,000+ grads coming out per year, pharmacists aren’t retiring at the rate that we thought they may. Is it more about the evolution of the pharmacist’s role and we’re seeing faulty business models and not only those that are being strained financially from existing models but new, innovative ones not popping up that can just find new positions? Like what do you see as the main culprit here?

Alex Barker: Supply and demand. I am not a labor or economics expert.

Tim Ulbrich: Come on, Alex! No, I’m just kidding.

Alex Barker: I did consider getting a PhD once, but no. Not my thing.

Tim Ulbrich: And then you saw the light.

Alex Barker: I did. But now what we have is this perfect storm, as I alluded to in further of our salary guide. The perfect storm is approximately 13,000-14,000 pharmacy students graduating every year entering into the job market, approximately one-third of the current job market — so about 100,000 pharmacists — is looking for a new job — and that’s based off of the AACP national workforce study — and then we also have the U.S. Bureau of Labor Statistics predicting a negative job growth from 321,000 to I think it’s like 311,000.

Tim Ulbrich: Correct.

Alex Barker: So by the way, if numbers confuse you, if I’m saying a lot of numbers, check out the report. It’s all there. Because if I was listening to this, I’d be like, what did he just say? But you’ve got this gestalt of a problem where each factor is creating a much more complex issue. But ultimately, what we have is the main positions that pharmacists take, i.e. hospitals and community pharmacy, and we’re a dime a dozen. I asked on LinkedIn managers, approximately how many applications do you get per job? And it was anywhere from 60 on the low end to I think the highest was over 210. And so if you are a smart manager, you are going to think what is my biggest cost? Employees. So if I have that many people, am I going to give them a compelling offer when if I don’t get my top pick, I probably will get my second, third, fourth, fifth —

Tim Ulbrich: Who are all pretty darn good.

Alex Barker: Maybe even my 15th pick.

Tim Ulbrich: Yeah.

Alex Barker: Because someone’s going to take this offer. Right? We’re pharmacists, we have a PharmD, we’re doctorates, we’re insanely capable people. So you know, getting your 15th pick isn’t the worst thing in the world for them. For our profession, however, what suffers ultimately is our salary, our buying power. We no longer have that. And back in the 2000s, we had that inflated need, right? We needed pharmacists. You got signing bonuses, you got cars when you got offered a job. I don’t know if students are told that anymore, but that’s the way it was. And now, everything’s flipped on its head. We’re in the exact opposite situation, albeit that there is a huge hiring phase happening right now simply because of the COVID jobs.

Tim Ulbrich: Yep.

Alex Barker: We’re seeing a ton of people readily take those. But these pharmacists are just probably going to be in the same situation once this vaccination rush passes through. It isn’t like we’re going to need all those pharmacists again to vaccinate every single year. They’re going to figure out cheaper ways. And everyone knows you can pay a nurse a lot less to vaccinate people. So this temporary demand is not going to last.

Tim Ulbrich: Now, I am — and I’m be remiss if I didn’t say, Alex, my audience knows this — I am a half-glass full type of person. And I will say the one thing — and it does not mitigate the concerns here — but the one thing that stands out to me here is, as I alluded to early today, I do think we desperately need some innovation, thinking a little bit differently, people taking calculated risk. And when you’ve got $175,000 of student loan debt and you have $120,000 contract that’s there to sign, it’s very hard to make an otherwise decision, right? I mean, it’s classic golden handcuffs situation. And I do think there’s a lot of pharmacists out there that have great ideas. And one of the reasons we’re so passionate about the financial plan side of it is that we know the financial pressures are very much connected to the career opportunities, the willingness to do either, whether it’s starting something or even just enjoying the work that you do and having some choice. So I am hopeful. I am also concerned that lower salary and a debt load that continues to climb is a compound problem. But there is also perhaps an opportunity out there where folks may now say, “OK, I can make $70,000, or I might go do this.” And that, “I might go do this,” might be something that’s of perhaps more interest or even an opportunity to pursue.

Alex Barker: You bring up a really good point that I didn’t consider in writing this guide is particularly for new grads, considering your career trajectory is insanely important for determining your financial plan because if you think right now that now’s a good time to be a clinician, trends are showing that clinicians, people who are able to prescribe or have some sort of agreement with a doctor, those jobs, we’re not seeing a major increase in those salaries. In fact, we’re seeing students — or I should say residents being offered less and less money. So you know, if you think you’re wanting to make a lot of money later in your career and you’re willing to work up to that, there are plenty of opportunities out there. We didn’t even go over the fact that as a pharmacist, you’re more than qualified to be a pharmaceutical sales rep. And that has an amazingly high ceiling. You could be paid insanely well. It is not a pharmacist job. It’s not a typical one. But you are overqualified to do it, and if you have the ability, if you have those natural gifts to sell, the ceiling’s really high. And so I think — you know, this is something I didn’t consider, so I’m glad you brought it up, Tim — that when considering your financial future, there is a space for you to take a job that pays you less if the trajectory, if the potential plan of that path could pay you a whole lot more because the reality is that as a clinician, your salary is not going to dramatically increase. One minor report that I didn’t touch on in my report is that Drug Topics said 41%, but in their report reported additional income in 2020, anywhere from the majority of them making around $1,000-5,000 in extra income. Now, they didn’t say how they made that money, but the case is that people, they want to make more. They’ve got things to do with that money.

Tim Ulbrich: Yeah.

Alex Barker: So consider your career trajectory wisely. If you’re looking at the $175,000 and thinking, I need to pay this all down, you know, don’t make the mistake of rushing into a job that just pays well but is a dead end.

Tim Ulbrich: That’s right. Yep.

Alex Barker: That’s just a risk to take.

Tim Ulbrich: Got to think about the 30- to 40-year timeline. And here, we’re talking salary, which is one component but certainly not the only, right? We could have a pharmacist who’s got multiple job offers, is making great money, but they may not like the work that they’re doing or it may be stressful. So talk to us about satisfaction, job stress. Obviously we know job stress correlates to the rate of dissatisfaction that pharmacists are feeling in their work. What did you find here in the reports as far as the number of pharmacists, percentage of pharmacists generally speaking that are either satisfied/dissatisfied in their work and tell us more about those findings.

Alex Barker: Your term earlier, golden handcuffs, I think captures the feeling that most have. According to Drug Topics, they reported 44% are unhappy with their jobs. But a third of the entire group that they surveyed was looking for another job because of their unhappiness with their current one. I think they asked some wrong questions in their survey, but in my interpretation, we’re looking at 7 out of 10 pharmacists were not satisfied with their jobs. And we all practically I think know the reasons why pharmacists are unhappy across the board. But there are some other reports that show that we actually have a higher satisfaction score than that. Pay Scale said that we’re about 74% satisfied, which was higher than what I thought. AACP said 58%. But the pharmacists that were the most happy were those that were in independent community pharmacies, ambulatory care, or non-patient care, which kind of goes back to our problem — you and I have talked about this numerous times. We as pharmacists, we’ve got an identity crisis. If we’re supposed to be patient care-oriented, then why are people who are not in patient care more happy than those that are in patient care. Another survey question in that AACP report was that only 27% of people said — agreed to the statement, “I feel happy at work.” Grinds my gears. I’m supposed to be the Happy Pharmacist, but I’m not happy about that.

Tim Ulbrich: I mean, it’s heavy. And you know, again, this goes back to your comment — I hope the new practitioners and even the students listening are really thinking about the long horizon and trajectory. And this again goes back to me — for me, obviously, the financial plan and cost of living. If you rise your cost of living and everything that comes with it right out of the gates because you’re now going from -30 and debt every year to make $110,000 or $120,000, it is very hard to walk that back. Very hard to walk that back. And if you can hold the line — and I understand certainly this is easier for me to say in Ohio or you to say up in Michigan that may not be as easy for folks that are in higher cost of living areas. But if you can hold that line, especially as you’re going through this transitionary period where you’ve got multiple competing financial priorities, you’ve got typically big student debt loads, you’re trying to really understand what you do or do not like in the work that you’re doing, give yourself options. You know, we talk about all the time, put yourself in the driver seat rather than that being dictated for you. And I think, of course, this discussion certainly emphasizes that as well. Alex, I want to wrap up, you mentioned earlier in the episode talking about the Job Rx. Tell us more about Job Rx. You talk about that in the guide as well. What is Job Rx? And what can folks expect to get from that resource?

Alex Barker: Yeah, Job Rx is a website from a friend of mine, mutual friend of yours, Kevin Miro (?). And I included in this report simply because of some of this newer data that he’s been finding in his job board. If you look at the powers that be, there is a pharmacy demand report, which stated in the 4th quarter of 2020, only 12,000 new pharmacist jobs were created, which is not great but not awful either, which you know, kind of just makes me think like OK, doing the numbers in my head, it makes sense why we’re getting 100 applications per job. But Job Rx is — essentially, it’s a job board where it pulls in all these jobs from employers’ websites into one place so you can apply and get notified when the newest jobs are created. He reported to me that in December of 2020, they added 12,800 pharmacist jobs in one month versus this other demand report that said that that’s how many jobs were created over the entire quarter. This gave me a lot more hope than I’ve ever had before because I’ve never been able to have access to that kind of information or technology that says OK, what exactly is the job reports and how are you getting that data? He also — and I share this in the report as well — that 16,000 pharmacist jobs were added in January of 2021. So when I hear these numbers, I am a lot more hopeful. I do think that they are slightly probably more than what we would expect simply because of the COVID hire push that is going on. But ultimately, this is potentially an amazing resource for pharmacists to finally find the jobs that are out there. And I’ll make one final note that from what I could tell, the vast majority of these jobs, though, were community and health systems-related, long-term care, hospitals, things like that. So right now, I still know that the majority of the buzz, what everyone is selling as the promised land, is the nontraditional roles, right, the pharma, the work-from-home, the remote. And those are still out there, they are possible. But they are certainly not as available as hospital and community jobs.

Tim Ulbrich: Absolutely. And our community can check that out, JobRx.com. We’ll link to it in the show notes. I think certainly a resource that’s going to afford us an opportunity to have some more real-time data, some more up-to-date information that I know will be helpful to not only pharmacists looking for positions to perhaps — I often found myself in a faculty administrative role trying to advise and help students looking for jobs. I see some value there as well. So JobRx.com, again, we’ll link to in the show notes. Alex, where is the best place that our community can go to connect with you, to follow the work that you’re doing and to stay up-to-date on information that we’re talking about here today?

Alex Barker: I’d love it if you connect with me on LinkedIn, that’s where I hang out, it’s where I spend the most amount of my time. We do have Instagram and Facebook, but after watching The Social Dilemma, I don’t know. I’m just trying to stay on one and not try to give away too much information about my life. But yeah, connect with me on LinkedIn. I’d love to have a conversation with you and I try to have one with every single person that connects with me. So that would be a great place to check it out. Otherwise, you can go to TheHappyPharmD.com where we’ve got a lot of resources, blogs about career paths and of course this salary guide.

Tim Ulbrich: Great stuff, Alex. We’ll link to Alex’s LinkedIn profile in the show notes as well as of course TheHappyPharmD.com and the salary guide. Alex, thank you again for joining us and sharing your insights and expertise on this important topic as we talk about the state of the job market and our profession. Appreciate it.

Alex Barker: Thanks, Tim, for having me.

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YFP 191: 10 Common Mortgage Mistakes to Avoid

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10 Common Mortgage Mistakes to Avoid

On this episode sponsored by LendKey, Tony Umholtz, a Mortgage Manager for IBERIABANK/First Horizon joins Tim Ulbrich to discuss 10 common mortgage mistakes homebuyers make and steps you can take to avoid them.

About Today’s Guest

Tony graduated Cum Laude from the University of South Florida with a B.S. in Finance from the Muma College of Business. He then went on to complete his MBA. While at USF, Tony was part of the inaugural football team in 1997. He earned both Academic and AP All-American Honors during his collegiate career. After college, Tony had the opportunity to sign contracts with several NFL teams including the Tennessee Titans, New York Giants and the New England Patriots. Being active in the community is also important to Tony. He has served or serves as a board member for several charitable and non-profit organizations including board member for the Salvation Army, FCA Tampa Bay and the USF National Alumni Association. Having orchestrated over $1.1 billion in lending volume during his career, Tony has consistently been ranked as one of the top mortgage loan officers in the industry by the Scotsman’s Guide, Mortgage Executive magazine and Mortgage Originator magazine.

Summary

Tony Umholtz, a mortgage manager for IBERIABANK/First Horizon, digs into 10 common mortgage mistakes to avoid what he sees people make in the home buying process. The first is not fully understanding in advance the common loan types and considerations or differences of each. Tony breaks down what conventional, FHA, VA, and other unique products, like the pharmacist home loan, are and what borrowers need to be aware of. The second falls into the category of credit blunders, like overestimating your credit score, relying on third-party services (which often provide inaccurate credit scores), utilizing no interest credit cards which could negatively impact your credit, and waiting too long to resolve issues you have with it. The third common mistake is not shopping around for a mortgage lender. Tony expresses that it’s important to find the right product and that some internet-based companies may be great for a mortgage refinance but are hard to work with for a home purchase. The fourth mistake is searching for a house before you get pre-approved. Tony shares that a pre-approval letter shows sellers that you’re serious and can also make you aware of any red flags you may have on your credit report. The fifth is underestimating how much cash you need to close. Tony explains that not only do you need money for a downpayment, but you always need to have money saved for an insurance premium (as well as possible flood insurance coverage), taxes, and closing costs.

The sixth is delayed communications with the lender, title agency, and real estate agents which can make or break a transaction. The seventh is making a home buying decision before you’re ready. Tim shares that you can’t make a decision about any part of your financial plan in a silo and have to consider how each will affect another. Number eight is not thoroughly evaluating how home buying fits in with other financial goals you may have and number nine is not thinking about the money you’ll need after you close for items such as furniture, lawn equipment, etc. The last common mortgage mistake to avoid is misunderstanding or misevaluating mortgage discount points. Tony explains that you should always ask for a no-point quote initially. He shares that points are essentially prepaid interest and that by purchasing a point you’re buying down the interest rate. However, he says that you really have to evaluate this decision and that it’s not always the best move to make.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tony, welcome back on the show.

Tony Umholtz: Tim, thanks for having me.

Tim Ulbrich: Excited for this discussion here in 2021 as we have you back, talking about 10 common mortgage mistakes homebuyers make and steps that folks can take to avoid these mistakes. And many of these come from either personal experience or ones that we know are often being made, so we’re going to go through these one-by-one and certainly lean into your expertise to hopefully give folks a guide of what are some things that they can be aware of going into the lending process, whether that’s a first-time home buy, second time, third time, or refinance and then hopefully put in some steps to prevent those from happening in the future. So Tony, the first one I have here that I know often comes up is that folks may not fully understand in advance the common loan types and the considerations and differences for each. And so before we talk about the pharmacist home loan through IBERIABANK/First Horizon aka “the doctor loan,” give us an overview at a high level of conventional, FHA and VA loans as I suspect those are the main ones our community will already have some familiarity with and perhaps some experience with. You know, generally speaking, how do these work? What’s the difference between them? And what are some important considerations for lendees when pursuing these types of loans?

Tony Umholtz: Yeah, sure. Great question. And that’s definitely the most common types of loans that are out there and that you’ll hear about. Fannie Mae and Freddie Mac, we call them the GSEs, which is Government-Sponsored Entity, they provide conventional financing. And thank God we have them, right? I mean, they really keep our housing market alive. And then we have of course FHA and VA loans, which are backed by — we call it Ginnie Mae, which is HUD, which is also a government program. And those are the main key loans that are out there. There’s also portfolio products, unique, nichey products such as the pharmacist product that we’ve discussed that banks, individual banks, can hold on their balance sheet as well, which don’t have a traditional investor, government-backed sponsors. But not to get too into the weeds here with that, but high level, I would say is conventional products, the main differentiation on that is they will allow a loan amount up to $548,250 in most markets. There is some markets around the country where that’s a higher number. So it’s just around San Francisco, Los Angeles, there’s going to be higher loan limits in certain counties in higher priced areas. But that’s one of the main pieces with them. And a conventional loan above 80% loan-to-value, PMI is required. And that mortgage insurance is required to deliver the loan to Fannie and Freddie. So that’s why it’s so important that you have this mortgage insurance, lenders require it, and that can be costly, right? That can be very costly. FHA and VA — let’s just kind of pull the two apart here — FHA, the Federal Housing Administration loan, is designed for a little bit more flexible credit. Although conventional loans can get pretty low on credit score too, FHA tends to be better if you have lower credit scores because it will allow lower interest rates, for the most part. FHA loans, though, typically don’t have a loan amount max as high as conventional. So for example, if a market’s $548,250 for conventional, it might only be like $325,000 for FHA. So I usually utilize FHA as a last resort, only when it’s the best loan for the client. And then VA of course is for veterans. And the VA loans are great. They allow 100% financing with no PMI. The only downside with VA is there’s a funding fee that’s rather expensive. So I’ve actually had a few veteran clients that we’ve actually gone conventional because it’s cheaper overall. But I could talk a long time on this subject. But hopefully that clarifies the main points.

Tim Ulbrich: Great overview. And to our listeners that want to learn more on each of those, you can check out Episode 169, Tony and I talked through helpful tips for getting a mortgage, going through different loan products, talked about the pharmacist home loan. And tony, we’re going to segue here and talk about that for a moment as I think your discussion on PMI is a good lead-in. And so as we think about the pharmacist home loan, you know, Tony, common barriers to pharmacists being able to purchase a home that I’ve seen is student loan debt, which of course can impact debt-to-income ratio, as well as their ability to save for a down payment. You know, they’re coming out of school, looking to buy a home, six figures or more of debt, and I think that’s where the pharmacist home loan can have its values. Tell us more about the pharmacist home loan option that IBERIABANK/First Horizon has, including minimum down payment, terms, requirements to qualify, PMI considerations and so on.

Tony Umholtz: Sure. The product we offer to pharmacists, it allows very little down payment and there’s no PMI. So it’s probably the key point to it. If you’re a first-time home buyer, you can actually put 3% down and have no mortgage insurance. And if you’ve owned before, it’s 5% down again, with no mortgage insurance. The minimum credit score is 700. And the one piece to this — and again, I don’t — I always try to avoid interest rates because they’re volatile and the market can move, bond market can move, but I have found over the last 18 months that I can offer better rates on this product than if I had a non-pharmacist customer come and put 20% down. I mean, it’s very strong interest rates. So it’s kind of — that’s been the few lead pieces that I’ve noticed. It’s just very strong 30-year fixed loan rates. And that no PMI is just huge. I mean, in some cases if you’re buying a $500,000 home and you’re putting 3% down, you’re talking about a $400 a month savings just for the PMI. So it’s a pretty substantial number. In regards to student loans, it has a — it doesn’t completely waive them. And I find most of my clients that I work with are under an income-based repayment plan anyway. And that’s what we’ll use in calculating a debt-to-income ratio. But in the case where there isn’t a payment, it uses a factor that’s lower than a traditional conventional loan or an FHA loan. So it enables more buying power.

Tim Ulbrich: Very good. And we covered the pharmacist home loan in a fair amount of detail, Episode 139, Ins and Outs of the Pharmacist Home Loan. Also, if you go to YourFinancialPharmacist.com, click at the top “Buy or Refi a Home,” you’ll see more information there to the IBERIABANK/First Horizon product as well as to the real estate concierge, Nate Hedrick, for those that are looking for an agent as well. And we’re excited about the partnership that we have with IBERIABANK/First Horizon because it’s nationwide. And we’ve got a nationwide community here in the YFP community. I have had the chance to work with Tony now for the better part of a year, love what he’s doing, his passion to educate and help folks on this decision and understand how it fits in with the rest of the financial plan. So that’s No. 1, not fully understanding in advance the common loan types and considerations and differences for each. No. 2 here, Tony, is credit blunders. And I’m thinking of those that perhaps may overestimate their credit score or perhaps not have a good understanding of how credit scores impact rates, maybe waiting too long to resolve credit issues and so on. What are some of the common mistakes and blunders that you see related to credit?

Tony Umholtz: The credit and the overestimate — you mentioned overestimating credit. I see that a lot. And you know, I think a couple things I’ll just touch on here with credit. One of the things as a lender, I try not to run credit unless we absolutely have to, right? There’s a lot of clients that’ll call and just want some high level information, but credit is so important because it’s such a critical part of the product. If you have a minimum credit score of 700 and you’re under that, it’s good to know why. And some lenders can — and we offer this service as well — we can give you ideas on how to improve it. We actually have score models that tell us what your score could go to by doing certain activities. But anyway, one of the big blunders I see is just totally following like a third-party monitoring service. And I don’t want to name too many names because there’s a lot of them out there, but traditionally, these third party services are going to overinflate your credit score more than what we would see. You know, like us as a — so for example, a creditor can see a score that is maybe 30 points on average lower than what you might see on one of these services. And I’m even — I subscribe to a service. I will say I do. But it gives me good trends as to what I’m doing, but it’s not what a creditor would see. So in my lifetime of lending, the highest credit score I’ve ever seen was 820, and it was an 80-year-old gentleman who had perfect credit his whole life. So it’s one of those things where, you know, a customer will say, “Hey, my score is 850!” Well, that’s what the monitoring service says, but it’s really not going to be that way when we see it. So that’s one thing, a blunder that I see. The other is a misconception on an inquiry as well. A lot of inquiries is not good. But a couple inquiries at one time for a loan is not going to have an effect on you. There’s a window of time where you can do this. That’s another piece. And then the other really important one — and I can’t stress this one enough — is the no interest for a year type cards and promotions that are out there. And it’s very tempting to go to Best Buy and they’ll offer a $5,000 credit limit for $5,000 worth of stereo equipment and maybe a CD or whatever it might be. And you don’t have to pay interest for two years, which is great, right? It sounds great. But what they do, they report that to the credit bureaus, to Experian, Equifax, and Transunion, as a 100% maxed out credit card. And I’ll confess as a young man, I was in my early 20s, I bought furniture for one of — my first house with a store called Rooms To Go, and I did this. And that’s how I learned. And of course, I’ve seen many clients do this since that time. But it actually happened to me personally. I said, “Wait a minute, why did my credit score go from 750 to 660?” And that was one of the things that happened. I did this credit, you know, it was a maxed-out credit card. That’s how it’s reported to the bureaus. So that’s another big blunder, Tim, that I’ve seen.

Tim Ulbrich: Yeah, and credit — great summary, Tony, great insights there as well. Credit, credit optimization, credit security, such an important part of the financial plan. Obviously we’re talking about here related to securing a mortgage, but generally just an important piece to consider. Tim Baker and I talked about this on Episode 162, Credit 101, talking about what is a credit score, breaking that down, six factors that can impact scores. So if you want more information and better understanding your credit, we’ll link to that episode in the show notes. So that’s No. 2 here, credit blunders. No. 3 is not shopping around. And I know, Tony, that rates, especially in a market where I feel access to information has become easier to find, if you will, that rates may be not necessarily what I’m referring to as much here, although that of course is a consideration. And I think in some cases, if you’ve got good communication with a lender and rates are changing that they’ll be in communication with you. So I think that relationship certainly is important. But obviously we know not all offerings are created equal. So here, we’re talking about the pharmacist home loan. Folks may or may not be aware of that. And so looking at a few different institutions, understanding the products that are out there, but what else, Tony? What are some things that folks may notice beyond the offering and perhaps beyond the rate that would be different from one bank from another? I’m thinking about things like application fees, document fees, other things like that that folks should be thinking about as they shop around.

Tony Umholtz: I really think the — and it can be very challenging sometimes with the shopping around because there’s different levels of knowledge out there. And some of the companies are just set up as call centers as they funnel internet leads in. You know, so there’s different knowledge bases that you’re going to speak to sometimes. So I find that that sometimes adds some confusion. But I think it is very important to find the right product. I think that is very much a critical element, so finding the lender that has the right product for you is important. And I never want to — I’m very sensitive to relationships. So I have people call me and say, “Hey, I have used this lender for 10 years and they’ve always been good to me,” and we’re a competitive industry but sometimes if I think something’s better, I’m very quick to tell that person, “This other lender has a better product.” So I think — and I actually have a lot of lenders that love to send me clients that they know we’re better fitted for. The fee part is important because there’s only really one set of fees the lender controls, and that is there’s a lender portion of fees. The rest are third party. So they’re going to be through third parties. It’s going to be the same, really no matter who they use. So that’s one thing I find that confuses a lot of people is consumers will lump in the prepaid expenses, taxes, insurance, title insurance as well, and doc stamps for the state we’re in or the county recording fees. But those are going to be the same costs no matter what. There’s really only one line item of lender fees that are going to be different, that could vary. So that’s one way to look at the lender is just lender fees and interest rate. Really, it’s as simple as that. But the big things I find when you’re looking, when you’re out there — and again, I’m not going to name names of companies — but when you’re looking to buy a home and you have a — there’s a lot of companies that have popped up, especially internet-based companies that are really just feeding off the refinance market. It’s hard to be equipped for purchases because when you go under contract for a purchase, you have a commitment letter date, right? There’s a commitment financing contingency, there’s appraisal contingency, there’s all these contingencies in a contract, and you want to make sure the lender is watching this and can meet these milestones. A lot of lenders that are set up for refinances just aren’t set up for purchases. It’s OK to use one of these lenders if you can wait 90 or 120 days to close your loan for a refinance, but on a purchase, you can’t do that. So service is very important when you’re buying a home. It still can be with refinancing, but you can always just wait longer, you know? It’s one of those things. But I would just say, you really have to be careful with the service aspect when you’re buying because it’s a very competitive housing market right now, and a lot of these sellers have backup offers. I get calls a lot too because people are under contract and something went wrong with their lender, and I have to jump in sometimes. So I see it even as a secondary lender when things go wrong with the original lender. So I would just say the big thing is a comfort level with that person and that organization. The best rate and product is important too but also making sure that you’re in the best fit for you because one other thing I will say is, you know, if you can get a better rate putting 30% down than you could putting 5% but that’s going to use up all of your liquidity and maybe impact other financial planning aspects of your life, well, the 5% is much better, even if the rate’s a little higher. So I think it’s very important to plan, look at your overall plan. That’s why the folks at YFP are so great to work with because they can look at everything and say, “Hey, this is better for you in the long run because of this.” So I hope that’s helpful. I mean, there’s a lot of components to it. There is a lot of things to think about, but I think it’s really finding a comfort level with the group that you want to work with and especially if you’re buying a home.

Tim Ulbrich: Absolutely. So point No. 3 there, not shopping around, I can speak from personal experience working with more of a big box company, obviously having the opportunity to work with you guys, open communication lines, feeling comfortable with the process, getting questions answered, all of that really matters. No. 4 here is looking mistakes — again, we’re talking about here looking beyond the simple Zillow or Redfin search before you get preapproved and know what you can borrow, which is not necessarily, of course, the same thing as what you can afford, right? We talked about this with Nate Hedrick on the podcast a lot, the Real Estate RPh, what you can borrow, what you get approved from the bank, is not necessarily what you can afford. And that connects, Tony, to what you just said about connecting this home buying decision with the rest of the financial plan. So talk to us here briefly about the importance of the preapproval process.

Tony Umholtz: The preapproval process is critical just to know what you can afford both ways, right? To see if that Redfin search popped up a house that you can’t buy. I’ve also seen it the other way around where, you know, with the rates being so low, clients have said, “Hey, I’m paying $2,900 a month for rent and I can buy more house than I thought I could.” So it’s really just critical in the education process. You know, knowledge is so important. And just knowing what you can and can’t do is important. And the preapproval process will allow us to see if there’s any red flags as well. We’ve had lots of clients that we’ve been able to help get their credit scores up a little bit higher, we’ve had lots of clients that both ways have said, “Hey, I don’t want to buy a home this large because I didn’t realize that this is the cost and the taxes are this.” On the other side, I’ve seen it the other way too, like I mentioned. It’s very important to get pre-approved before you start walking into houses. And I will say that the realtors are very proactive right now because of the tight inventory. We get a lot of phone calls from the listing agents, even. And of course, we can’t give much information away, but they’re calling us, “Hey, are these clients approved?” I mean, it’s a different market in a lot of parts of the country right now.

Tim Ulbrich: That makes sense given where we’re at and the climate of the market. So No. 5 is underestimating the cash to close. So what I’m referring to here, Tony, speaking from personal experience in our first home purchase a little over a decade ago is I think many folks when they’re looking, you know, look at the sale price of the home, they might say, “OK, I’m going to be able to negotiate this or this,” which might be overconfidence, especially depending on what’s happening in the market. And they’re probably thinking about the down payment, whatever that would be, 5%, 10%, 15%, 20% down. But they might not be thinking about other costs that they’re going to need to consider having cash to come to the close. So tell us about not numbers, per se, but what are some of those other things that folks need to be thinking about when it comes to cash to close beyond just the down payment?

Tony Umholtz: One of the big pieces too outside of the down payment is your insurance premium. And insurance is due upfront, full year premium upfront, even if you paid cash, you have to pay for your insurance premium upfront if you want your home insured. And I find that — and this is flood insurance as well if you’re in a flood zone, that’s due as well — but the insurance component is something you have to take into consideration. The other piece outside the down payment is your tax allocation. So normally, lenders will take anywhere from 3-4 months of your property taxes for the escrow account. And for example, the reason for 3-4 months is there’s always a two-month cushion that’s collected. But there’s also, you know, let’s say we were to close today, right, on a house, Feb. 5, your payment is not going to be due — your first payment’s not due until April 1. So we have to collect February and March to be on pace to pay it for you, so we’re going to collect four months of taxes at closing to kind of cushion things. And then of course you have closing costs as well. So there’s a prepaid element and then we have the closing costs. So in addition to the down payment, you have those elements as well. The other thing to keep in mind too that is some confusion that I see a lot with first-time home buyers especially is when you give a deposit on the home, so let’s say when you give your realtor, your realtor goes to help you with the contract, you have to put $5,000 in escrow or deposit — terminology is about the same but different parts of the country call it something differently. That $5,000 gets credited back to you at closing. OK? So it’s a contribution to the overall transaction. It’s not something that you lose or gets lost in any way. It comes back to you. So if your cash to close let’s just say was $10,000, and you’ve already given $5,000, well, you only are going to bring $5,000 to the closing. So that’s another piece just to — questions that come up.

Tim Ulbrich: Very good. And I think the point here I want to make, especially for folks that are on the home buying process for the first time is making sure you’re appropriately considering what might be the cash needed, down payment, closing costs, you mentioned the insurance, the taxes, and some other things as well. So making sure to plan for that in advance and of course thinking about how that impacts other parts of the financial plan. So we’re halfway through our list of 10 common mortgage mistakes to avoid. We’re going to rapid fire these last five. No. 6 here is delayed communications with the lender, title company and agents. Lots of folks involved, Tony, in this process, lots of moving pieces and parts, and I suspect this is the time to overcommunicate and set communication expectations with the team in advance. So talk to us about from your perspective, you know, what you’re expecting of your — obviously your team but also in terms of folks that are working with your team when it comes to communication.

Tony Umholtz: I mean, communication is critical. And that’s what makes the transactions — makes or breaks them in a lot of ways, the communication. So we really try to communicate — overcommunicate with the client. The title companies can be tricky because some of them are, you know, larger, big box, and they’ll just send blanket emails out and it’s hard to get in touch with someone individually. But I think it’s — you know, one of the things that I think is critical is that we know who the realtor is, and we know who the title company is. And then we know the individual in contact. And it usually goes very smoothly if that’s the case. So just having everyone on board. Normally the realtors are very important for us to know because we have to coordinate, we have to give the appraiser their information typically, just to show the house. But yeah, the title company portion is very important, especially as we get closer to closing because the bank or lender’s closing department is going to communicate with them and balance the figures for closing.

Tim Ulbrich: Very good. Yeah. I think with lots of parties involved, communication — always two-way, but making sure that you’re being proactive in that and of course if there’s questions that are outstanding, making sure you’re reaching out and vice versa to stay on time and on track with closing. I’m going to take No. 7, 8 and 9 because they hit home for me personally. And then we’re going to bring back Tony here to talk about No. 10 related to mortgage discount points. No. 7 is making a home buying decision before you are ready just because “rates are good” or because I’m renting and “throwing money down the drain.” Now we’ve talked about this extensively on Episode 113, Is Your Home an Asset or a Liability? We’ve talked about not only the pressures to buy a home but also the costs of home ownership and comparing renting versus buying. And so I would encourage folks, as we say on the show over and over and over again, to avoid the trap of making any financial decision in a silo. So here, if you’re talking with somebody and rates are good or you see commercials about rates or that’s the center of the conversation or somebody says, “Hey, why are you renting? You’re just throwing money down the drain,” now, you may conclude that it is the right time to buy. But the point I’m making here is to take a step back, what else do we have going on in the financial plan, working with hopefully a financial planner to help you evaluate that decision, look at all pieces of the puzzle, and then proceed with the home buying decision and the budget to buy a home if it makes sense in the context of your plan.

And that really is No. 8 in terms of these mistakes is not thoroughly evaluating how home buying fits in with other financial goals. And so I think as we talk about extensively, you know, if you’re looking at six figures of student loan debt, you’re looking at investing goals, you’ve obviously got other competing priorities for your finances, home buying just being one of those, how does it fit in? And of course, YFP Planning, our fee-only comprehensive financial planning team can help that. You can schedule a free discovery call, learn more, at YFPPlanning.com.

No. 9 mistake here is not thinking about available cash post-close. So we talked about how much money you’re going to need to be able to come to closing. But what about things like a rainy day fund to make sure that if something goes wrong in the home? What about things like furnishing the home? What about things like yard equipment? And so thinking about not only the cash that you’re going to need to bring to closing but also do you have some reserves? Do you have some cushion? What will that look like month-to-month as well as some funds that you have in reserves to be able to handle some of those expenses that will inevitably come after you move in?

And Tony here, No. 10 in our list of 10 common mortgage mistakes I think is misunderstanding or evaluating mortgage discount points, especially as folks are comparing rates among institutions or even within a lender. So talk to us exactly about what are discount points? And ultimately, how folks and tips for folks as they’re evaluating discount points as an option.

Tony Umholtz: I would recommend that you always ask for a no-point quote initially because, you know, some lenders will put that into their pricing. It’s funny, even the Freddie Mac that are posted in the Wall Street Journal, they typically have .6% points in the quote. So you know, I always say that if I put that in there, the rate would be even lower. But that’s really the important element is discount points — let me explain what those are. They are actually — it’s defined as prepaid interest. So you’re basically buying down the interest rate and for a finance person, it’s like you’re buying down the bond rate over time by paying the points at a premium. It sometimes can be a good investment. But most of the time, I don’t recommend it. And the way that you can tell if it’s a good investment is traditionally, on a 30-year fixed, 1 point will typically buy down a .25% in rate, typically. Sometimes ⅜ of a point. Well, over — let’s say it’s .25%. Over four years, you basically pay off the point you paid and then you’re kind of in the money, so as long as you own the home more than four years, you’re in the money. And then a lot of times, depending on your tax bracket and everything, you can write off that point in the year that you pay it. So if it was 2021 and you paid 1% on a $300,000 home let’s say, that would be $3,000. But you know, the spread in rate is important in determining if paying points makes sense. But I find that it typically is not the best way to go unless there’s a big spread. Like I had a — there was a time earlier in the year, especially on jumbo mortgages, larger loans that are above the conventional limit, where we were getting a half point for 1% fee. Well, that made sense all day because you had a two-year payback period on a 30-year fixed. Then you were in the money for a remaining 28 years if you stayed there. So for long-term people who are going to be in the home or own the home long-term, it can make sense sometimes. But to compare lenders, you really just want to ask, like if one lender offers you 2 — this is just throwing out numbers — 2.75% with 1 point and the other one offers you 3% with no points, you can ask the 3%, “Hey, if I was charged 1 point, what could I get? What could my rate be?” And if they came back and said, “It’s 2.625%,” well the offer from the higher rate person is actually better. So that would be one way to compare. But that’s a quick summary of points.

Tim Ulbrich: Yeah, great discussion there of points. I know that comes up a lot, and I think what we’re trying to get to, Tony, is an apples-to-apples comparison the best that we can to evaluate it. And I think you bring up another good point in that discussion, which is the longevity that you may be in the home. And I know that’s an important consideration, one that folks may not be able to predict in advance but to try to objectively evaluate that the best you can because that’s going to impact when you think about rates of the loan, you think about things like points, when you think about down payments and other issues and having to be able to expense a move in the future and closing costs and selling the home, you know, if that runway’s going to be long versus that’s going to be potentially short, that could have a significant impact on many parts of the home buying process. So there you have it, 10 common mortgage mistakes home buyers make and steps that you can take to avoid these mistakes. And to learn more about considerations when getting a home loan and to get more information about the pharmacist home loan offered by Tony and his team at IBERIABANK/First Horizon make sure to check out the post on the YFP site titled, “Five Steps to Getting a Home Loan.” And you can get there by visiting YourFinancialPharmacist.com/home-loan or if you just go to the main page, YourFinancialPharmacist.com, top you’ll see “Buy or Refi a Home,” and that will get you there as well. So Tony, appreciate your expertise as always and appreciate you taking time to come on the show today to talk about this important topic.

Tony Umholtz: Tim, thanks for having me. Really enjoyed it. I always do, and you know, appreciate being a partner with you.

Tim Ulbrich: Thank you very much. And as always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please do us a favor and leave us a rating and review on Apple Podcasts or wherever you listen to the show each and every week. That will help other pharmacy professionals find this show. Appreciate you taking the time to join us. Have a great rest of your week.

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YFP 190: 7 Ways to Reduce Your Monthly Housing Costs

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7 Ways to Reduce Your Monthly Housing Costs

On this episode, sponsored by Insuring Income, Nate Hedrick, the Real Estate RPh, joins Tim Ulbrich to discuss 7 ways to reduce your monthly housing costs.

About Today’s Guest

Nate Hedrick is a 2013 graduate of Ohio Northern University. By day, he is a clinical pharmacist and program advisor for Medical Mutual. By night and weekend, he works with pharmacists to buy, sell, flip, or rent homes as a licensed real estate agent with Berkshire Hathaway in Cleveland, Ohio. He has helped dozens of pharmacists achieve their goal of owning a house and is the founder of www.RealEstateRPH.com, a real estate blog that covers everything from first-time home buying to real estate investing.

Summary

It’s no secret that housing costs, whether that be your mortgage or rent payment, make up a large chunk of many people’s budgets. For some people, housing can be 30% or more of their income. Nate Hedrick, The Real Estate RPh joins Tim Ulbrich on this episode to share 7 ways to reduce your housing costs. Reducing your housing costs allows you to have more disposable income to fund your other financial goals. It’s a win-win, right?

The first is downsizing your home. Many people think downsizing means moving into a tiny home or to an apartment that’s drastically smaller than where they currently live. If that’s what you want to do, that’s great, however downsizing can simply mean moving into a house that’s a bit smaller to help reduce the costs of taxes, insurance, utilities, and maintenance. The second way to reduce your monthly housing costs is to house hack. While house hacking may not be for everyone, this is a great stepping stone into real estate investing and can allow you to, hopefully, live for free. The third strategy is to get a roommate. Like househacking, this may not be an option for everyone, but having a sibling, friend, or even stranger live with you can allow you to significantly reduce your housing costs.

The fourth is geo-arbitrage, a concept that’s been picking up some steam over the years especially among those in the FIRE community. Essentially, in order to save money on housing costs, healthcare, or the general cost of living (think gas, food, taxes, transportation, etc) and get more for your dollar, you pick up and relocate to a new place. We know that the cost of living can vary greatly between cities but that your income may not increase or decrease accordingly, so this can be a powerful way to save money if it’s an option for you. The fifth strategy is to use Airbnb to increase your income. Although COVID-19 may make it difficult to put this in action at the moment, this is one to definitely consider when state’s start to re-open more in the future. Renting out your home, in-law suite, or room in your home can bring in extra cash and help you pay down your mortgage. The sixth way to reduce housing costs is to re-evaluate your homeowner’s insurance policy. Just like you’d shop around for car or disability insurance, you can do the same with homeowner’s insurance. You can also check in with your current company to see if there are any discounts available for installing certain security measures or for paying yearly vs monthly. The last strategy is to refinance your mortgage. With historically low interest rates, you may be able to significantly reduce your monthly mortgage payment. However, it’s important to keep in mind the total cost of the loan and any additional fees and costs you may incur when refinancing.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Nate, excited to have you back on the mic. How you been?

Nate Hedrick: Good, Tim. Thanks for having me.

Tim Ulbrich: It’s been I think a hot second since you were last on the show, Episode 178, where we talked about 5 lessons learned during your most recent investment property purchase. But I don’t want to assume that everyone listening knows who you are and what the Real Estate RPh is all about. So give us a brief background of you, your role in pharmacy, and how and why you started the Real Estate RPh.

Nate Hedrick: Absolutely. So I am a full-time pharmacist. I work with an insurance company here in Cleveland, Ohio. But I also moonlight or side hustle as a real estate agent. So I have my real estate license, have had that for four years now. And I work with local pharmacists and other health care professionals to help them buy and sell property here in Cleveland. And then that expanded a couple years ago into Real Estate RPh, which is a website that I run to educate pharmacists about the real estate process, help them find agents all over the country through our concierge service that we’ve partnered up with YFP for. So we do a lot of interesting stuff. And that’s really what my focus is on this year is really growing that network and being able to help more pharmacists around the country.

Tim Ulbrich: Yeah, it’s been fun to see that grow and more and more that are reaching out to you that are in that home buying process. So we will link in the show notes, obviously, to your site. We’ll also have some more information about the real estate concierge service for folks that want to learn more. We’ll come back to that throughout the episode. So today we’re talking all about ways — specifically, 7 ways — to reduce monthly housing costs. And I don’t think it’s any secret, I know from personal experience, that housing costs, whether that’s your mortgage or rent payment, make up a large chunk of many people’s budget. Now, check this out. According to the U.S. Bureau of Labor Statistics, people that fall into the top income quintiles, many pharmacists of course would be included in this, spend around 30-32% of their pre-tax income on housing. 30-32%. That’s a big chunk of your earnings that immediately are being spent on housing each and every month. And when you think about other competing financial priorities, the ones we talk about all the time on the show: student loans, child care, food costs and so — it may feel like there isn’t much money left to put towards other goals. So of course, thinking about strategies for reducing monthly costs I suspect is relevant for many. So Nate, when working with clients looking to buy a home, do you ever give them any insight on how much of their income they should aim to allocate toward those housing costs? And how do you determine that?

Nate Hedrick: Yeah, so you have to be a little bit careful as an agent, right? We are not financial advisors. You know, I don’t want to step outside my shoes a bit. But we always — whenever I’m meeting with a new client, I do make sure we talk early on about the importance of budgeting and making sure that they’re the ones setting the budget. I’ve had numerous clients come to me and said, “Hey, Nate, I got pre-approved for $600,000. What do you think about that?” And I said, “That’s great. What is your budget, though?” It’s a totally different question. So I always make sure that I bring that up, make sure that they understand that they need to set their own budget and then it’s my job to help keep them on budget. So if they come to me and say, “My budget is $300,000. I don’t want to spend a penny over that,” it is very easy for them to fall in love with a house that is $350,000. And it’s my job to make sure that they don’t go that direction, right? Especially if they’ve told me upfront, “This is our number. We want to stick to it.” I’ve seen it time and time again where if you start looking outside of your price range, all of a sudden, your price range goes up. So what I take my own role as is, “Look, I’m not going to tell you how to spend your money, but I’m going to help you stay on goal if that’s what you want me to do.”

Tim Ulbrich: Absolutely. And I can’t overemphasize enough, you know, what you’re pre-approved for and what the budget is likely are two different things. And so really taking some time up front, you know, what are you looking for? How does that fit in with the rest of your financial goals? Obviously biased on our end — working with a financial planner to help do that. And then you go through the home buying process and make sure that that home buying purchase fits in with everything else that you want to do. Nate, when you heard that BLS statistic, you know, 30-32%, of course we recognize we’ve got listeners all over the country. Cost of living here in the great state of Ohio is very different than cost of living up in the Northeast or out West. So we recognize that. But generally speaking, is that statistic, 30-32% of pre-tax income on housing, is that pretty common what you see among pharmacist clients?

Nate Hedrick: Yeah, if not a bit higher, right? I think that’s probably about right, but it tends to be that or more, I would say.

Tim Ulbrich: OK, makes sense. And of course, we have friends, family that are spending much more than 30% of their income on housing, maybe even spending 50% or more. And again, sometimes that’s subject to cost of living in certain parts of the country. So Nate, why is spending this much money on housing something that folks should — you know, I don’t know if avoid is necessarily the right word. Obviously for everyone it’s a personal decision. But that they should at least be aware of the impact that this might have on other parts of their financial plan.

Nate Hedrick: Yeah, absolutely. I think sometimes it’s easy to look at it and say, “Well, I can handle that payment today. It won’t be a problem. But what does that look like in five years? In 10 years? You know, are you going to be working as much? Are both of you going to be working if you have a spouse? There are a lot of things that you want to plan for the future, and getting yourself into the highest possible payment right up front kind of cripples some of the opportunities you have later. So you could easily become house poor, you could — honestly, I’ve seen pharmacists, I’ve talked to pharmacists, who feel like they’re living paycheck to paycheck because that housing cost is so darn much that they have to commit such a large portion of their income to basically staying on track. Up front, if you can make that decision to pare that back a bit, it makes your options that much better down the road.

Tim Ulbrich: Yeah, makes sense. And I think we have a bias and a tendency — I know I do — to tend to look at our future state through the lens of today, right? It’s just natural. So of course things could change, you know, incomes could go up, but also incomes could go down. So do you have margin? You know, what about financial emergencies and being ready for those things, things that we may not be able to anticipate happening at this point in time? So it’s obvious that reducing monthly housing costs, if we’re talking about 30% or more of pre-tax income, can have a huge benefit on your financial plan. We know that when it comes to the financial plan, obviously income and disposable income is what we need to be able to allocate towards our goals. So whether that’s short- or long-term goals. So let’s dig into seven ways that people can reduce their housing costs. No. 1, Nate, we’re going to talk about is downsizing. And I think when people hear that word, they immediately think of living in a tiny home, moving to an apartment that’s drastically smaller than where they currently live. And if that’s what people want to do, great. You know, we’ve talked with several pharmacists that have had very creative housing situations. I think of Rena Crawford that we had on this show talking about her housing situation out in San Diego and her creativity with renovating a van while she was completing residency. And certainly those are exceptions probably to the norm. But what do we mean here when we talk about downsizing? And why can this be such an impactful way to reduce housing costs?

Nate Hedrick: Yeah, I mean, anytime you’re talking about a larger home, more expensive home, it’s not just the house itself, right? You’re talking about more utilities. If you have more square footage, you’ve got more to heat, more electricity, all those different things go into it, more maintenance costs. If you’ve got a larger footprint of house, there’s more stuff that can break. So all of those things start to stack up. It’s not just a bigger house is it. So that’s kind of important. And what I find is that it’s not always about necessarily downsizing but making sure that when you start, you’re not upsizing, right? So downsizing can be a good move if you’re already in a house where you’re like man, this is really crippling our budget. We need to make a decision. But what I see most often is that people who take this ahead of time, before they ever buy their first house and think about OK, I don’t want to have to downsize later, what can I start with now and then work my way up down the future?

Tim Ulbrich: Yeah, that makes sense. And I think your point is a good one, being proactive — and not even just focusing on necessarily things like the square foot and the mortgage, of course, and those things but other things. You know, you mentioned taxes, you mentioned maintenance, you mentioned utilities. What about the lawn care? And really considering everything that’s involved — could be association fees and other things. How do clients that you work with — you know, I know one of the things folks may not necessarily be as obvious is OK, what is it going to cost me all-in per month? You know, of course you’ve got the mortgage and insurance and they’re thinking about those things. But they may not necessarily be thinking as much about utilities and other things. Of course, taxes are readily available information. I mean, is this information that’s typically forthcoming from the seller? Do people have to prod to try to get some utility payments and things like that to be able to best estimate what this is going to be for their budget?

Nate Hedrick: Yeah, I usually recommend to my clients to ask. I’ve seen some sellers — and I’ve done this once — where we actually posted, not our bills exactly, but I had the seller pull their previous utility bills and say, “Look, let’s just put this number out there. That way a potential home buyer can feel good about it, that it’s going to be $300 a month for all this,” or what have you. That’s definitely something that we’re seeing people ask for, and it’s a great way to get a true estimate of what that particular property might be costing someone.

Tim Ulbrich: Awesome. And I think it’s worth mentioning here, of course when we talk about real estate transactions, you know, there’s costs that are involved. So making sure you’re factoring that in. If you’re going to pick up and move, how great — this is a conversation my wife and I have all this — you know, what’s the true net difference, right? So you might look at, hey, we’re going to sell for $350,000 and we’re going to buy for $250,000. But when you really consider the transaction costs, obviously the fees involved, the moving expenses, really trying to evaluate this and understand what the net difference is. So that’s No. 1, looking at downsizing. No. 2 is house hacking, I think a topic that you and I love, love talking about, one that we have both said on this show several times, “Man, if I could do it all over again, I would have house hacked.” So something we talked about Episode 130, I had Craig Curelop on from Bigger Pockets, episode talking about house hacking your way to financial freedom. And that episode I thought was a great overview in his book of the house hacking process. And it’s a real estate investing strategy that we love but also can serve your primary home needs. So Nate, break it down for us. For those that aren’t aware or perhaps a refresher, what exactly is house hacking? And how can it be a powerful way to reduce housing costs?

Nate Hedrick: So house hacking at its core is the idea that you are buying a property in some way, shape, or form that you are going to live in part of it and you are going to have a renter live in another part. And so traditionally with a house hack, you’re looking at like a duplex, a triplex, or a quad, which you can buy as a — the bank looks at it like a single family home. But you can live in one unit and then you can rent out the others. And ideally, with a proper house hack, you’re having that renter basically pay for your mortgage or pay for your mortgage and your taxes in an ideal world. But the idea is that if you can live in part of the house, rent out the other part, you’re going to have far less housing expenses because you’ve got someone else paying for it for you.

Tim Ulbrich: Absolutely. And I think it’s certainly can look very different for the reasons you mentioned. And one of the things I like about Craig’s book on house hacking, he gives a lot of different examples from his personal situation, others that did it, that I think will give folks a variety of ideas about what house hacking may look like for them and how it may or may not fit into their home buying goals. So Nate, have you worked with clients that have done a house hack? And if so, what was their motivation?

Nate Hedrick: Yeah, actually, I’ve got one right now that I’m working with locally here in Cleveland that’s looking to house hack, which is fun. We’ve been doing — running numbers on houses recently and looking for opportunities. And right now, this pharmacist is actually living in a house with a couple of roommates, wants to buy his own place but doesn’t want the housing prices or the housing expenses to jump dramatically, right? If you go from living in a $400 a month room or whatever the cost is there to this big housing payment, it might be a shock to your budget. But if he can transition to only a couple hundred dollars because the house hack is paying for some of that cost, you can get your own place, start building equity, all the advantages of owning a home without this huge uptick in expenses. So I’ve been working with him to try to find that opportunity. And then we’ve got a ton of concierge clients throughout the country that have done this. I think we’ve talked with a couple here and mentioned a couple in the past that have primarily been searching for a house hack when they’re looking for their first house.

Tim Ulbrich: Love it. And speaking of roommates, let’s talk about roommates. No. 3 here on our list of seven ways to reduce your housing costs, No. 3 is get a roommate. Nate, I thought this wasn’t college anymore. So similar to house hacking, getting a roommate obviously could be a way to reduce housing costs. Talk to us about the role that this can play.

Nate Hedrick: Yeah, especially again, I think people overlook this because like you said, once you buy a house, like I can’t — I can’t go backward, I can’t have a roommate now. But it’s a great way — if you’re in a personal situation where it makes sense, it’s a great way to reduce your expenses for both people. And you can take this as simply as, you know, I’m going to have my brother move back and he’s going to pay me a little bit of rent, or is as severe as putting an ad on Craigslist and having a stranger come live with you. You know, we’ve actually gotten a chance to talk to a couple of individuals here that are experts in this, I would argue. Ryan Shaw on Episode 173 knows all about how to deal with roommates and keeping them sane. And then Bryce Platt, one of our concierge clients that actually went out and bought — Episode 160 for those that are looking for it. He actually went out and bought a condo basically that had — was set up to have three other roommates with him. And so that’s part of that process. So it’s not uncommon anymore, and it’s a great way to reduce your overall expenses.

Tim Ulbrich: Yeah, and I think it’s worth, you know, the reminder or maybe the obvious statement of your first housing situation will likely not be your forever situation, right? So whether it’s a roommate directly living with you or in a situation like Bryce, that may work for awhile and then you decide you may move on. But now you’ve got an investment property that perhaps you can hold onto as well. So that’s No. 3, get a roommate. No. 4, perhaps the most interesting, my favorite on the list, but also likely very unpopular to some folks that love where they live. This is geoarbitrage. And Scott Rieckens, author of “Playing with FIRE,” mentioned this on the podcast last week, Episode 188. And I think it’s such an interesting way to reduce your housing costs. And I think this actually stems back to some of Tim Ferriss’ work talking about geoarbitrage. So Nate, what is geoarbitrage? And how can it help someone’s budget?

Nate Hedrick: So it’s a concept that basically you are — and we’re seeing a lot of this grow in the FIRE community, like you mentioned Scott but many others in the FIRE community are embracing this idea that in order to save money on housing costs or the cost of living based on a certain area, you basically you pick up and move to a new place. And we’re seeing this really taking off, especially with the changes in how people are working during the pandemic and hopefully after the pandemic is over. Work from home is just totally different than it’s ever been before. And you can basically do your job from anywhere now. If Option 1 is to live in downtown New York in a tiny apartment for a huge, huge cost, but Option 2 is to do that exact same job in Cleveland, Ohio, here, your costs go down dramatically. And so a lot of people are looking at this like, are there other areas that I can live in that I can either find a better job or keep my same job and work remotely that are going to improve my overall housing costs without dramatically impacting my life?

Tim Ulbrich: Yeah and again, I think this is not a forever situation, right? I know I’ve brought this up to various groups when I’ve been speaking before. You know, often you get that look of like, Tim, are you really suggesting that I pick up and move? You know? And it’s not necessarily for everyone, right? Sometimes there’s family situations, other things, where this is not even a possibility for a variety of reasons. But I think sometimes, this is a way to think a little bit more creatively, especially for those that might be in an area where jobs are also saturated. You know, if you could get to a lower cost of living area and perhaps open up some additional job opportunities, this might be something to consider while also accelerating your financial goals. And I think, again, it really depends on one’s personal situation. But I think what makes this so attractive for pharmacists, Nate, you know this, I know this, our community knows this, we do see incomes change slightly in higher cost of living areas but nowhere near what they should proportionally to the expense of those areas, right?

Nate Hedrick: Right. Absolutely.

Tim Ulbrich: So an ambulatory care pharmacist in Cleveland, Ohio, and an ambulatory care pharmacist in San Diego, that salary difference — while there likely is one from my experience in talking with folks — it does not represent the cost of living differences between those two areas.

Nate Hedrick: Definitely.

Tim Ulbrich: And so you know, I think that because of the nature of how that is treated with pharmacy jobs, this concept might also be attractive. And check this out for a minute, Nate. We pulled some data from RentCafe. The average rent for a 700 square foot –703 square feet, to be exact — in Manhattan is around $3,800. But the average rent for a slightly larger place, 883 square feet, in Little Rock, Arkansas — shoutout to our community in Arkansas — is $830.

Nate Hedrick: There you go.

Tim Ulbrich: Of course, Manhattan and Little Rock are not the same thing. Very different cities, right, in terms of what people are looking for and so on. But it just highlights, you know, what does that mean for monthly cash flow, what are your options. And you know, when I see $3,800 a month for 700 square feet, you and I both know what $3,800 a month can buy in Ohio, right?

Nate Hedrick: Seriously. Yeah, it’s crazy.

Tim Ulbrich: It could go a long way. So again, you know, obviously leaving family, friends, your job can be tough. Certainly not for everyone, but I think it’s one thing to consider and for — you mentioned the reasons of mobility now with some jobs having some more remote capabilities. So that’s No. 4, geoarbitrage. No. 5 is Airbnb. Nate, this is one that I think really pushes people to be creative in how they are cutting expenses or bringing in additional income. And we had Hillary Blackburn on Episode 121, where she talked about creating another stream of income as an Airbnb host and specifically talked about how her and her husband rent out their Nashville home for about $600 a night. So talk to us about how folks can use Airbnb or a similar model, of course, we’re just mentioning Airbnb, and use their home to bring in some additional money.

Nate Hedrick: Yeah, I think it’s gotten a little trickier during COVID having somebody in your house or what have you. But still, the idea there is really solid. If you can use the space that you already have — and maybe this is an extra bedroom or maybe it’s a whole extra in-law suite or a pool house or you name it, right — if you’ve got a way to rent out some of that portion of that property that you already have, and it’s a desirable area especially, you can pull in a lot of extra income to offset some of those housing costs. And again, like you talked about Nashville being $600 a night, if you’re in an area that people want to travel to, especially as things start to open back up, I really think that there’s opportunity there for you to get some serious income for that place.

Tim Ulbrich: Yeah, and again, this is one that may make sense for some, not for others. We’ve got an Airbnb calculator on the site. You can see, you know, roughly what you may be earning as an Airbnb host. That’s YourFinancialPharmacist.com/airbnbcalculator. We’ll link to that in the show notes. So that’s No. 5 on our list of seven ways to reduce housing costs. No. 6, Nate, re-evaluate your homeowners insurance policy. I just did this, so this one is top of mind for me. But I think this is something, you know, we haven’t talked a whole lot about on the show but certainly could be a way that folks may be able to shave off money off of their monthly budget, especially if their policies may have creeped over time. And because of escrow and other factors, they may not be aware or as closely aware as they could be of that. So talk to us about re-evaluating your homeowners insurance policy.

Nate Hedrick: Home insurance policy, if you have a mortgage, right, it’s really one of the only things that you can change. Your taxes are consistent, right? The county’s going to set those. The mortgage and the lender payment is set by the lender. HOA fees, that’s all fixed costs. But the home insurance policy, kind of the other piece that usually gets wrapped into that, is somewhat flexible. And it’s not — it’s not as common to mess with the home insurance policy as someone might shop around for like car insurance or disability insurance or life insurance.

Tim Ulbrich: Right.

Nate Hedrick: But realize that you can actually make quite a bit of difference with your home insurance policy. And it can change dramatically based on a number of factors. So if you change your deductible, for example. If you go from a $500 deductible on a home insurance claim to $1,000, you might save 25% on your home insurance policy in some cases. The other thing I’ll see a lot with home insurance is that if you are what’s called escrowing your home insurance or your housing insurance, a lot of times that bank will say, OK, well, we’re going to pay — and escrowing, just briefly, is that you actually pay the bank, you pay the mortgage lender to handle paying your insurance company for you. So usually you’re giving them money every single month as part of your normal housing payment. They’re taking a portion of that, setting it aside in an untouchable account called an escrow account, and then from that account, they basically pay your insurance company. But what I’ve found is that if you have that money in escrow, you don’t get a lot of flexibility with how that payment works. And if you can pull that out — and some lenders will allow you to do this free, some may charge you a small amount — but if you can pull that out, you can get even more creative with how you pay it. I’ve noticed that if you pay your home insurance premium monthly versus yearly, you can get a huge discount by paying it all up front. And so if you know you’re going to be there and you have the funds to do so, you can actually pay it Day 1 of the year and get a whole year’s worth of that payment taken care of at a much lower rate. So there are more flexibility here than I think people really realize, but a lot of it comes down to what are you allowed to do with your lender? And what are you willing to do in terms of that negotiation process?

Tim Ulbrich: Yeah, and I think too — great stuff there, Nate — I think it’s important to note, as you mentioned, these policies vary, you know, in terms of what they coverage, what the coverage includes, obviously personal belongings, other features of policies, and one thing I notice in this process, which certainly makes sense for those that have gone through this one or more times before, is that it’s easy to get focused on price shopping and not necessarily do an apples-to-apples comparison on coverage. So you know, some of these policies may present themselves as oh, well, you know, we could save you $300 a year or whatever. But when you look at the close details of the policy, you might be changing some of your coverage components. So I found it helpful, if you want to keep coverage the same, essentially as you’re going out and getting quotes, say, “This is my coverage. These are the eight things that are included. Here’s my deductible, here’s what’s covered in the policy. And basically give me a quote for this coverage.” You know? So you can do an apples-to-apples type of comparison.

Nate Hedrick: And watch because some will call things something different, right? They’ll have this special feature with Company A versus Company B and it’s literally just the same thing but with a different name. So watch out for that. The other thing I wanted to mention too is that some of them will offer discounts based on certain parameters of your home. So if you live in a disaster-prone area, ask them about what you can do to your homeowners insurance policy by doing some disaster-proofing. Maybe it’s adding storm shutters or maybe it’s actually a security discount. I’ve seen where if you put in electronic locks or deadbolts, just simple deadbolts versus a regular door lock, they will give you a discount on your overall insurance policy. So there are a number of things you should ask about too, like is there any way for me to get a discount on this? What can I do to improve this?

Tim Ulbrich: Yes. Always ask for a discount, right? Yeah, and as some of you are looking to shop around, you know, certainly many ways that you can go about this. Policy Genius is somebody we’ve talked about before, allowing you to compare life and disability insurance quotes, now also has a platform to compare homeowners insurance quotes. Also, renters insurance as well. If you go to PolicyGenius.com/YourFinancialPharmacist, you can learn more. So that’s No. 6 on our list of seven ways to reduce your monthly housing costs. No. 7 is refinance your mortgage. Again, something that’s near and dear to me. We went through this process last summer. We’ve talked about how low rates have been recently for purchasing a home, for refinancing your mortgage over the last year. Nate, talk to us about what mortgage refinancing is and how this can ultimately lower monthly housing costs.

Nate Hedrick: Yeah, so think about refinancing as basically resetting or getting a new loan. Effectively, what you are doing is you are clearing out your old loan, someone is paying that old loan off, and you’re establishing a brand new loan. So it’s similar to — we’ve talked about student loan refinancing. It’s the same idea, right? We’re paying off what you currently have with Lender A, and we’re moving that to Lender B at a new rate or at a lower monthly payment. And so the goal here would be obviously to lower the interest rate and then hopefully as a result, your overall payments are going to go down. So you’re going to eliminate your — hopefully maybe eliminate PMI if you have that in place today. You can, again, drop your interest rate from maybe a variable to a fixed rate that is much lower. You could lower the term over which you’re paying that loan. So you could go from a 20-year rate to a 15 or a 30-year to a 15. And now your overall expenses for the longevity of that house are going to go down. So there are a number of ways that you can use refinancing to cut your costs. But if you’re looking to lower your monthly housing payment, a lot of times it comes down to finding an interest rate that is lower than what you have today and finding a term that makes sense for your financial plan and is less than what you’re paying already.

Tim Ulbrich: Yeah, and I think it’s, although obvious, worth reiterating one of the traps that I see folks often falling into is yes, you know, you can lower the monthly payment, but if you’re extending out the term, keep in mind the total cost of the loan, right?

Nate Hedrick: Yep.

Tim Ulbrich: So trying to make this as apples-to-apples as you can. If you’re already five years into a 30-year term, and you refinance out to a 30-year, obviously you’re tacking on five more years. So yeah, monthly payment might go down, likely will if interest rates are lower, but what does that mean in terms of the total amount paid over the life of the loan? And keeping that in mind as you’re evaluating various options.

Nate Hedrick: And don’t forget, you’ve got closing costs as well in there, right? So you’ve got to make sure that the actual process of buying that loan, you’re getting a new loan but there’s going to be closing costs associated with that to factor in as well.

Tim Ulbrich: Absolutely. Great stuff, Nate. Seven ways to reduce your housing costs, certainly a topic for the reasons we mentioned at the beginning I think folks are interested in. This won’t be the last time that we hear from you and so if you’re listening and you’re looking to buy your first home or you’re looking to move and you want to work with an agent, you don’t currently have one, as Nate alluded to, we’ve got the concierge service working with Nate. It’s free to our community to work with Nate, who will help get you connected with a realtor in your area. And you can go to YourFinancialPharmacist.com, click on “Buy or Refi a Home” at the top, and once you do that, you’ll see an option to find an agent and that will get you connected up with Nate. Also, if you’re looking for a loan, looking to refi your mortgage, want some additional information, again, YourFinancialPharmacist.com, and then you can click on “Buy or Refi a Home” and get some additional information. So Nate, as always, appreciate your time and expertise and thanks for your contribution on the show.

Nate Hedrick: Thanks for having me.

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YFP 188: Playing with FIRE: An Interview with Scott Rieckens

Posted on by yfpadmin

Playing with FIRE: An Interview with Scott Rieckens

On this episode, sponsored by Insuring Income, Scott Rieckens, author of Playing with FIRE, joins Tim Ulbrich to talk about his journey towards achieving FIRE. Scott digs into the ins and outs of the FIRE movement, why he and his wife decided to leave their friends and family in San Diego, how to calculate your early retirement number, and strategies for implementing your own FIRE plan.

About Today’s Guest

Scott Rieckens is an Emmy-nominated film/video producer, serial entrepreneur, and author. Scott has spent his career as a storyteller connecting people with ideas. Along the way, Scott’s work has generated millions of views through a feature-length documentary, multiple televisions series, short films, and a diverse range of commercial projects for Microsoft, NBC, Facebook, FOX, Taylor Guitars, BMW, WIRED and others.

Now, Scott has created Playing with FIRE, which explores the growing community of frugal-minded folks choosing a path to financial independence and early retirement. He and his family reside in Bend, OR.

Summary

When Scott Rieckens, author of Playing with FIRE and creator of the documentary Playing with FIRE, discovered FIRE (financial independence, retire early) a few years ago, it was life changing for him and his family. Achieving FIRE allows people to potentially retire decades earlier than they normally would, a dream that many think could never become a reality. There are some guidelines that allow people to reach this dream, like the 4% rule and 25x rule, however, Scott mentions that FIRE helps you learn habits that push you to save a lot more than you ever thought possible and gets you to start spending your money on things that align with your values. He says that if you start saving more than your spending, you can invest your money in index funds, max out tax advantaged accounts, and let compound interest take over.

Scott became interested in starting a journey towards FIRE after realizing that he wasn’t in control of his time and was spending more time working than he was with his family. With some calculations, Scott determined that if he saved 16% of his income he would retire in 33.4 years but if he saved 58% of his income he could retire in 11 years. He realized that his family was spending money frivolously and went on a quest to align their spending with their values to help reduce their expenses. To figure out his family’s core values, Scott and his wife, Taylor, independently wrote 10 things that provide happiness to them. They continued this exercise weekly and used it as a tool to reduce spending money on things that weren’t aligned with their values and created a budget around what makes them happy.

Scott also talks through how mental shifts can help you cut expenses, how to push yourself to save more money, how to calculate your early retirement number, and strategies for implementing your own FIRE plan.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Scott, welcome to the show!

Scott Rieckens: Thanks for having me.

Tim Ulbrich: Really excited about this interview. As I mentioned before we hit record, I loved the book “Playing with FIRE,” couldn’t put it down, read it in about 24 hours. Loved the documentary. And I’m excited to get you in front of our community as I know this topic is something that is of interest, and I think your story as well as the broader conversation around FIRE is going to provide a lot of value. So thank you again for taking the time.

Scott Rieckens: Yeah, it’s my absolute pleasure. Thanks for having me on.

Tim Ulbrich: So for those in our community that are hearing about FIRE for maybe the first or even second time, give us a high level overview. What exactly is the FIRE movement all about?

Scott Rieckens: So the FIRE movement, it’s — FIRE is an acronym that stands for Financial Independence, Retire Early. And I think it’s a community of people who are practicing sort of a preconceived set of principles so that they can put themselves in a position of financial independence, potentially retiring decades earlier than they would have expected with sort of the way we saw ourselves growing up. So you know, it’s sort of nebulous because there are certain rules that — well, there’s things like the 4% Rule that’s called a rule, but it’s really more of a guideline. And I kind of see many of the principles of FIRE being more of a guideline than a rule. So there’s no hard and fast rules in the FIRE movement. There’s probably not even a real movement yet. But I do think that we’re starting to see seeds of social change. And once, you know, once this can really hit mainstream to the point where we’re seeing social change predicated off of or because of the FIRE movement, then I think we can call it a movement. But for now, it’s fun to call it the movement because it helps those of us who are trying to make it a movement move along. But ultimately the idea is that you learn habits that help you save a lot more than you thought was possible or just really start spending according to your values and really taking a hard look at what those values are as it relates to your spending. And if you can start saving more than you’re making, well, we have a pretty tried-and-true investment strategy. You know, and again, it varies and they’re more guidelines. But in general, people like to invest the surplus in index funds and max out your tax advantaged accounts as much as possible. And then the beauty of compound interest takes over, and the next thing you know, you’re looking at a growing net worth, a growing portfolio, and before you know it, you might have enough to live off of for the rest of your life. So these were all foreign concepts to me three years ago. And then I heard a podcast with Mr. Money Mustache, who is one of the — maybe one of the modern founders of the FIRE movement — and he was discussing these things, and I had never heard of them. I always looked at investing as sort of this nebulous thing that I wasn’t too aware of and I would need a Master’s degree to even participate in. So I kind of brushed it under the rug. And then I heard about all these things, and it all sounded pretty easy to understand and pretty accessible, and it all made sense. And so that’s kind of how I got on the path to our FIRE journey.

Tim Ulbrich: That’s great. And I love that you mentioned, Scott, guidelines because I think that it can feel perhaps if people are learning for the first time that it’s an exact science or somewhat legalistic in some regards. But as we talk about many parts of the financial plan, it comes down to customizing it to your personal situation, and everyone’s situation is different. So I think the guidelines, the principles, are really important. And one of those being — you mentioned the 4% Rule. Talk to us about what is the 4% Rule, and how does that impact one determines what their “FIRE number” is?

Scott Rieckens: Yeah, so the 4% Rule, like I said, more of a 4% Guideline, is a pretty incredible little assumption. And it’s that if you withdraw 4% off of your portfolio annually that — I think it’s something like you have a 96% chance of not running out of your principal investment portfolio over 30 years. And it’s based off of this thing called the Trinity Study. So another way to look at it is — the way I like to look at it is the 25x Rule. And so basically, you take your annual spending. Let’s say it’s $40,000 a year. And you multiply that by 25. And that is $1 million. And so basically, it gives you a way to figure out how much do I need to retire? So if your annual spending is x, you multiply x by 25, and that’s how much you need to retire because you’ll have a 96% chance of never running out of the principal investment portfolio that you have. So it’s a pretty darn safe assumption and guideline. Now, there are some people in the movement that are maybe talking about 3.75% or 3.5% is even safer, and that’s — you know, that all has to do with so many different parameters: your risk tolerance, if you plan to have sort of a side hustle or any kind of passive income or non-passive income into your “retirement years.” And those things can affect, you know, when you decide or what your percentage or when you decide to pull the trigger on your path to financial independence. But in general, I mean, I was starting from scratch. So I couldn’t have even told you how to understand what I need to retire or what that would even look like. And so to just call it the 4% Rule or the 25x and the way I just described it to you, like that’s pretty simple. It made sense to me. And it’s backed by some pretty credible studies. And like I said, there’s people in the movement who are far superior to me in intelligence who pick this stuff apart annually. And so this isn’t something that’s like oh yeah, a study way back in the day said this thing, so we’re all good. This is something that people are constantly scrutinizing. And it turns out what it’s all predicated on is the stock market over time just continues to grow. And so if you’re putting your investments into the stock market — and one of the safest bets you can make is investing in index funds because especially really solid index funds like let’s say Vanguard’s VTSAX, there are a whole team of people who are ensuring that the index of stocks are the highest performing stocks they can possibly have in that index, and it basically represents the growing stock market. So what’s nice about that is you can take a pretty reasonable growth average, and then you can start building models for what your future might look like. And like we have a retirement calculator on our website that, you know, basically bakes in all these principles into one little calculator, and you just plug in your own personal numbers and you can kind of see, oh, alright, you’re on the path, and this is how long it’s going to take you to reach financial independence. Taylor and I did this early, early on in our journey, and for Taylor, it was a huge eye-opener. It was for me as well, but I had gone through a lot of this stuff because I didn’t bring it all to her right away because it was a lot to bring because we were making a lot of interesting money decisions at that time, and there was a lot to unpack there to keep our relationship together while trying to also convince her to maybe join me on this crazy quest to pursue FIRE. But ultimately, you know, when we did the retirement calculator, at our current spending at that time, we were looking at — I think it was something like 40 years of additional work. And at that point, we were so burnt out by work, 40 years sounded like a life sentence. And it was something like we’d be working into our mid- to late 70s I want to say. And then I did some rearranging and said, OK, well if we cut our rent by this and we get rid of our two leased cars and we buy a used car for $8,000 or whatever it was, and we cut our food spending — we needed to cut that quite a bit, it was more than half, let’s say that — and then all these other extraneous things we’re doing, I mean, entertainment. The amount of money we were spending on entertainment was insane, especially where we lived where there was so much free entertainment all around us. And I started doing those numbers and kind of just built a pretty reasonable budget, and I re-entered that information into the retirement calculator to see that we were I think at that time, it was something like 10 years or something away from financial independence. I mean, to shave three decades off of your working career by just making smart money decisions, to me, that was a no-brainer. And it was a huge eye-opener because it wasn’t as if we were spending because we couldn’t help it. It wasn’t because — we weren’t spending because we have an insatiable consumeristic bent, you know?

Tim Ulbrich: Sure.

Scott Rieckens: We didn’t see ourselves that way at all. We kind of were that way, but we didn’t see ourselves that way. And so to just have that eye-opening realization and to get that in order and to do so with the guidance of a pretty strong community online where I could go for answers at any time and have some pretty compelling arguments on why I would want to do these things, it was a pretty quick and swift decision I think in the Rieckens household. And then we got busy sharing that story with the world because I’m a content creator by trade, and this story just seemed too important not to share.

Tim Ulbrich: And it was a great story to share. And for those that want to check out the retirement calculator as well as the other resources and learn more about the book, the documentary, PlayingwithFIRE.co, again, PlayingwithFIRE.co. And Scott, the math is really incredible. I pulled a note from the book. You had mentioned that when you first crunched the numbers using that retirement calculator, you determined you could retire in 34.3 years with a savings rate of 16%, which is a pretty good savings rate. And that was using $120,000 annual expenses, $22,000 in savings. And then the next calculation showed a drop from 34.3 years to 11 years if you could cut expenses in half and get to a savings rate of 58%. So I think that’s what I love about the way you teach this material, the way others teach this in the community, the 25x Rule or maybe it’s the 27x Rule, whatever that number is is that it helps shine a light on retirement numbers. It’s math, right? It’s a set of assumptions, and then you can look at things and determine, OK, what can I change? What might I not be able to change? What levers can I pull? What will have more impact? And then you’re off and running if that’s a goal that you want to pursue. And so I want to talk more about your story. And I want to read for a moment a segment from the book, Chapter 1 is Work, Eat, Sleep and Repeat. And you say this at the beginning of the chapter. You say, “If you’d driven by me on the freeway in San Diego on this particular Monday morning in Feb. 2017, you probably wouldn’t have looked twice. A guy in his mid-30s, sitting in traffic in a relatively new but unremarkable car, drinking a cold brew from Starbucks, just another American heading to work. In fact, there was nothing particularly special about that Monday morning, and I would have lumped it in with 100 other ordinary Monday mornings that I had spent navigating traffic on my way to work, except that on this particular morning, I heard an idea that would change the course of my entire life, an idea that would cause me to quit my job, leave California and spend a year traveling with my family, to question everything I thought I knew about success, money and freedom, to find the secret to the American Dream, the thing that most people crave but few achieve, the ability to do absolutely anything I wanted.” My question here is what caused this desire and feeling? And when did this begin?

Scott Rieckens: Man. I haven’t heard that back in awhile. That was fun. I think we all have an inherent desire for a certain sense of freedom and independence. And you know, I think — I can’t speak for everyone, but when I was in school, when I was in high school and then getting into college, I look back with sort of I think I had sort of a relentless optimism that work would be interesting and what I would do would be great and the things that would follow that, family and friends and all the things, you know, that they would carry me along the way. And I think as you start to get in — well, in my case, got into my mid-30s, I’d been working for a decade, some of those things came true. I got to achieve some goals I had set for myself. I had done some things I was proud of, had just started a family, which I was also immensely proud of. And all those things are fantastic, but they weren’t the entire picture of fulfillment for me because what was weighing me down was I wasn’t in control of my time. Next thing you know, I’ve built this family, I’ve got this job, but there’s no balance here. I have to be at my job more that I want to be and see my family less than I want to see them. I think that’s what it really boiled down to was just why don’t I have that control? And when it hit me, what really hit me was it was my own decisions, it was my own choices, our family’s own choices that were hindering us from having that control and having that freedom. And that’s something that had not connected for me. And you know, at the end of the day, for better or for worse, money is how the world operates. You know, this is how our social construct has been constructed. So what it really boils down to is can you earn money? And if so, how are you using it? And I just had not spent the time to consider those things. One of the taglines of this whole project is what if a happier life were a few simple choices away? And I think that’s ultimately — like that encapsulates what I had found, which was that there is a happier life a few simple choices away. That’s incredible. And then the next question that we kind of posed to ourselves was like, how far would you go for financial freedom?

Tim Ulbrich: Yes.

Scott Rieckens: You know? And that’s ultimately up to you. So that’s why I always say like, the FIRE movement is a set of guidelines, not rules. And the FIRE movement may or may not a movement, but there’s certainly a community of people who really appreciate the idea of spending less on extraneous things that don’t really bring you value and really being smart with your choices. And when you have a group of people that see it that way, it makes it a lot easier to do because I also remember having to unpack our life a bit. You know, there were a lot of — whether it was true or not, whether it was sort of a figment of our imagination or a reality, it felt daunting to suddenly take on a new identity, right? Because you have all of your friends and all of your family that see you one way and have gotten accustomed and used to the way you are. And to have to just kind of throw all that out and start fresh can be really daunting. And so it’s really helpful — you know, like never before were we able to just connect with people that see it this way that might have more information than you do and would happily share it for free instantly. That’s never really happened before, and I think that, like many things that the internet’s provided, it’s created a place where like-minded people can come together and learn from each other and grow something really quickly, grow a social movement very quickly. And right now, you know, Phase 1 of the FIRE whatever it is, to me is getting the word out. It’s improving financial literacy and realigning our world’s connection with what’s most important. You know, that’s a big, daunting task. It’s going to take a lot of time. But the best case scenario would be that Phase 2 is liberating a bunch of really smart, ambitious people from jobs that they may be apathetic at best about and liberate them to go pursue their favorite future. And what could that look like? And how could that change the world?

Tim Ulbrich: I love the way you’re thinking about that because I share that with you, Scott. What would that look like for our communities? What would that look like in terms of people maximizing their talent and their passions? And you know, we’re so passionate at YFP about if we can help put together a financial plan that allows people to pursue some of those goals, wow. I mean, game on in terms of what we could see in people getting the most of the talents that they’ve been getting. One of the things in the book that really resonated with me, as well as the documentary, which showcases the process that you and your wife Taylor worked through to get on a shared goal and path to pursue FIRE. And you mention this wasn’t easy. You know, you were obviously on board, ready to go, had been learning a lot of information and trying to get on the same page. But what I loved was in the book, in Chapter 3, you talk about an exercise where you and Taylor independently wrote down 10 things that provided happiness. And then you came together to share those lists. Why did you do that activity? And what did you glean from doing that?

Scott Rieckens: Yeah, I think, you know, looking back, it was a lot smarter decision that I think I knew it was at the time. But ultimately, you know, if we needed to align our values with our spending, it’s like, well, what are our values? And I think an easy way to decide is just think about what makes you happy. And you know, we did a happiness list predicated on a weekly basis. And it felt like the right time frame. Like if you do like on a daily basis, you’re going to get in the minutia of life and you might get too specific about the things that bring you happiness. And if you go too far out, you might get a little grand. It might be international travel or BMWs or whatever Taylor might have put on the list at that time. But a weekly basis, it’s like, what are you up to this week? And it’s like, well, I’ve got work, I’ve got this, I’ve got that. And what am I going to do to kind of inject some happiness along the way? Well, I’m going to go for a walk. I’m going to go for a bike ride. I’m going to maybe make a nice dinner this week or whatever it is. So it becomes that sort of like centered, realistic happiness list. So I really like the weekly timeframe. But yeah, we sat down and did that, and there’s a couple elements to it. One is I can’t decide for Taylor what makes her happy. And at that time, we were living in this beach community and were spending a ton of money to do so. And if the beach was on her list, and the lifestyle that that particular area provided was just swarming her list, then I had my work cut out for me. We would have to figure out a way to make that work because, you know, the idea of pursuing FIRE was not to go create a whole bunch of disruptive, diminished returns. Like I wanted to make sure that this was going to improve our lives. And so I needed to hear that from her. And she needed to consider it too because you can easily be reactionary when you think something’s about to be taken away from you. You can easily be reactionary when you’re being propositioned with something as drastic as maybe FIRE could be, and it was for us, of like having to — not having to, but maybe making the choice to move. That’s a big choice. Leave your friends behind, leave your jobs behind, like whatever you end up doing. And so yeah, I think you need to start with ultimately like, what are your values? And I think that was a way to do it. So that was critical. And it actually helped so tremendously because we didn’t even talk about money first. We talked about happiness. And I can’t recommend that enough. You talk about what matters to you the most. Then go work on a budget. Don’t work on a budget and never talk about happiness.

Tim Ulbrich: Amen.

Scott Rieckens: Or go the other way, you know, talk about your budget and then talk about happiness. Like how are you going to budget for things if you don’t know what you care about? You know, it was such a small but critical piece to our journey. And yeah, I can’t recommend it enough. Whether you decide to pursue FIRE or not, going through your Top 10 list of what makes you happy on a weekly basis quite often, maybe quarterly or biannually, is a damn good idea because it changes too. You know? We’re evolving beings, and we care more about things sometimes and care less about things other times. And those things should be reflected in your spending habits. So yeah, that was critical. And I got lucky in that scenario because she did not talk about her expensive car and she did not talk about the beach. And so that really was an opening to mutually discuss the potential for leaving. And that was ultimately I think what I would credit with why that was so successful.

Tim Ulbrich: And that was the sense I got when I read it, and it’s quoted here, you talk it all out. I hope our listeners take you up on that challenge to do it. I couldn’t agree more. And just as I reread some of these, it puts things into perspective really quick, right? I mean, I see things on here like, “Hearing my baby laugh,” you know, “Spending time having coffee with my husband,” “going for a walk,” “going for a bike ride.” And I think starting with those types of conversations around happiness and then getting into the budget and the plan and how we’re going to get there is so important. We taught this often with the financial plan of think about the goals, script your plan, and then we’ll get into the x’s and o’s because the x’s and o’s should be within the framework of the vision that we have, and that vision should ultimately derive back to how is money a tool related to deriving happiness? And by the way, Taylor nailed this when she had on here, “Wine, chocolate, and coffee.” Three of my favorite things. So she crushed that list.

Scott Rieckens: Yeah. Yeah. And I told her, look, we can buy all the wine, chocolate, and coffee you want if we take these steps on all the rest of it. And it’s worked.

Tim Ulbrich: So you mentioned the BMW, and I know that comes up throughout the book, but in all seriousness, when our listeners hear the timeframe I mentioned earlier, going from a projected retirement in 34 years down to 11 and how do you get there, you cut expenses and you increase savings. And obviously the next question is, well, how do you make dramatic cuts to expenses so you can increase your savings? So you mentioned food being one of them. You’ve alluded to the BMW. Were there other big-ticket items that were instrumental to you guys knocking down a big expense so you could get the momentum you needed?

Scott Rieckens: You know, specifically, housing, cars and food are typically the top three items that cost the most for an average family. So housing, cars and food are the No. 1 three things that I would recommend taking a hard look at, how you can get creative. Outside of those specific things, I think the thing that was the most important was the mentality, the mental shift and being on the same page because — and I can tell you this from three years of experience now. We’re not always rocking the FIRE train. You know, it’s not consistent. Like it can be consistent. We can go months, even years, where we’re on track. And then like COVID hit. And boy, one excuse after another just start popping in. Like oh, hell no. I’m doing this, I’m doing that. I’m buying this, I’m buying that. I don’t care. And I don’t regret it. We looked back at the New Year, during the New Year here, we looked back at 2020 and we said, “You know what? I think it’s better if we just don’t look at it. Let’s forgive ourselves for the decisions we made and let’s look forward because the good news is we already kind of built up the muscle, you know? We already worked out, we already know how to do this. And so let’s just keep — let’s just do it again.” And it’s amazing because it was literally a mental shift. We sat down to kind of plan out our 2021, a little vision board kind of afternoon. And it really came down to like, we wrote down the things that we wanted to shift from 2020 to 2021. And it was like, anytime we make a purchase, we talk to each other about it first, no matter how trivial because that will make us question our own decision on whether or not we need that thing and will be less about what I have to say to her and it’s more about what she has to say to herself. And it kind of prevents this reflexive, oh, it’s on Amazon, let’s grab it real quick, it’ll be here in two days, easy day, done. And that can get out of hand so quick, and so it was — and we’ve done things like that in the past, like put something in the Amazon cart and you have to keep it there for three days. If you come back in three days and you still want it, you can get it. We needed to go a little harder this time into this new year because 2020 was a dumpster fire. But again, it’s just like the best you can do is flex that mentality because we immediately got on the same page. We didn’t have to have the difficult discussion again. And I think we had the financial maturity finally to look at 2020 and say, there was a reason for those decisions. And we don’t need to sit here and relive them, we don’t need to make ourselves feel bad about them. And it did set us back a little bit on our FIRE journey. But we’re in good shape, and thank goodness because with the destruction of this year, I mean, how grateful and lucky are we that we found this when we did?

Tim Ulbrich: Absolutely.

Scott Rieckens: Imagine where we would be if we hadn’t. And imagine all the folks who are suffering through these difficult times, you know? And so we were able to look at that and go, OK, we’re super lucky. Let’s get back on track because it would be a real damn shame not to, considering everything we have, you know? It’s like, we can’t afford not to do the right thing here. So I hope that answers your question. I don’t like getting into the specific, specific things of how to cut budgets because it’s really personal. You know? You may live in a low cost of living area already with a budget that’s kind of maxing out. And you don’t know what to do, and that could be a matter of having to find ways to increase your income, negotiate a bigger salary, move to a better place — or not a better place but a place with better prospects for higher salaries in your job and then being more deliberate about what your costs are in that higher cost of living area so that you can reap the benefits of the higher pay but not have to also succumb to the higher living costs. You know, there are ways to do those things, the geoarbitrage stuff. But to me, that’s all the fun fine dining in the FIRE community. That’s all the stuff you can learn in the blogs and the podcasts and whatnot is all those very specific detailed minutia of how to really formulate your budget if you want to go hard. But to get started, I think the bigger challenge and the bigger quest is for people to align their values with their spending and start pushing themselves, you know? Taylor and I, we did something that I would recommend, actually. It was extreme in some cases, and I use that word kind of flippantly. I don’t know if it’s extreme, per se, but we — I mean, we did a lot of things very quickly. Within months, we literally packed up and moved our stuff to try to find a place that was cheaper to live, leaving behind a job. I quit my job to do this. And we left behind a whole set of friends and a whole culture that we had built for ourselves, you know? And we slashed all of our spending so hard that we ended up at our peak, we were at like a 76% or 78% savings rate, something in that range. It was extreme. We didn’t buy anything unless it was absolutely critical. And we started to get a little miserable, to be honest. Like it wasn’t fun, you know? And part of that was good, though, because we were ripping off the Band-Aid and showing ourselves how much retail therapy we were really doing. And it ended up being — that’s like such an old adage, but it’s like, you know, the best things in life are free and all that stuff. It’s like, yeah, and not only that but we were going to sushi dinners, let’s say, or just nice, fine dining dinners so often that I remember — I remember one time sitting down to a beautiful, amazing sushi dinner. And we were walking home from it, and I think our discussion was something along the lines of like, “Yeah, it was good, but I feel like last week’s was better.” And it was like, that’s horrible. That’s a horrible waste of money because if I’m comparing this amazing, decadent, unbelievable dinner that took — if you think about what it took to get that fish on that plate, it’s incredible.

Tim Ulbrich: Sure.

Scott Rieckens: And I’m sitting here comparing it to last week’s. And it’s like, oh my gosh. And so to go through and really rip that Band-Aid off and go through the sort of “hardships,” you know, and then all of a sudden we haven’t eaten out in two or three months and then you go to a medium fancy restaurant, and it’s like heaven.

Tim Ulbrich: Yeah.

Scott Rieckens: It’s so amazing. And so it’s almost like it’s a weird hack where all of a sudden, you’re like, wait, I like this more now.

Tim Ulbrich: Yes.

Scott Rieckens: Because I’m doing it less. And that’s when you can get into stoicism and all these various philosophies. And I don’t know, it’s just like our life started improving, even when it was more difficult. And that was an interesting paradox that ultimately, to bring this all back, is the reason why I suggest if people are interested in this and you decide to do it, to go hard at first because, you know, push yourself as hard as you can to see what your real — not your breaking point, but like, you know, your proverbial budget breaking point, see what that is and then work backwards from that. Don’t start where you are and incrementally try to improve because I just don’t think that’s going to be as effective, and you probably won’t stick with it, you know? But for us, to like go to 76-78% savings rates and be miserable and start going, OK, what are the things that we should add back in? And that was a deliberate decision. Next thing you know, we’re hitting like a 50% savings rate, which is incredible. And it feels easy. It feels luxurious. And it’s like, oh, this is it. This is awesome. How lucky are we. But we could have been doing the whole time if we had just made better decisions. And so yeah, I hope that helps.

Tim Ulbrich: It does. And the book and the documentary really takes the reader or viewer through your individual stories. And I also like in the book, you bring in other examples as I think that, again, back to the comment about customizing the scene, the different variations, helps give people ideas about how this might apply to their own individual situation. And one of the questions I have for you, Scott, is when I read the book, I really connected with you as a father of four young children. You discuss in the book the birth of your daughter in 2015 and how ultimately, you’d be pursuing this journey together as a young family. And I suspect many of our listeners are wondering, man, is this really possible? Is this lifestyle and this goal realistic with children? You picked up, you moved, you made some drastic cuts along the way. What advice or what thoughts would you give people surrounding pursuing FIRE while they have a young family?

Scott Rieckens: I don’t know that the children thing — the children thing’s tough because they are expensive little buggers, you know? They are. They’re going to “set you back” from your financial independence date.

Tim Ulbrich: Fact.

Scott Rieckens: But that’s ultimately a tradeoff — I’m sure you would agree with me — is well worth it.

Tim Ulbrich: Sure. Yes, absolutely.

Scott Rieckens: Nothing’s more important. I think for me, I look at it a little differently. It’s not, “Hey, guys, you’ve got some kids? Here’s a couple of trick to make it totally possible to do FIRE.” If you use kids as your excuse not to pursue FIRE, you’re not going to pursue FIRE, but it won’t be because of your kids. It’s because you have decided that that’s what you’ve — that’s what you’ve decided. You know? Don’t use the excuse of your kids. I’m here to tell you, I mean, I only have one, so I don’t have four. But — sorry about that. Gees. Good for you. Wow. Fighting the good fight. But you know, ultimately, we’ve got such a better plan for our financial future and her financial future because we’ve decided to make these choices. And I recognize that not everyone could tomorrow pick up and make the choice. But I assume, you know, your audience is probably in the camp that could make these choices. They just seem daunting. And that’s a great place to be. And so yeah, I wouldn’t use kids as an excuse. There are ways to — obviously there are hacks in everything we do when we spend money. And there are things that you think you need to spend money on that you don’t, you know? You can — just to be clear, I mean, you can buy the brand new Italian-made stroller. Or you can look on Facebook Marketplace or Craigslist and find a used one. It’s all the obvious tips and tricks. But what’s more impactful, in my opinion, is you look at that and you go, yeah, but for my baby, I want the best or for my baby, it needs to be this or that. And those are the types of things where if you’re really aligning your values with your spending, you may look at it a little bit differently after you really do some reading up on the FIRE movement and you understand why you’re spending and the decisions that you’re making. And the next thing you know, you go from only the best for my baby to only the best for my baby and what that entails is not a brand new, Italian-made stroller. It is buying the budget stroller because the amount of money that we can save by doing that will ultimately lead to that child’s college fund or our ability to spend more time with that kid, which will then allow that child to grow better, have a better relationship with their family, with their parents, get more attention and so on and so forth. I mean, these shifts are exponential. The compound interest does not just take over on the money. Yeah, that’s how I would look at it. It’s not a matter of you’ve got kids, here’s five budget tips to help with FIRE when you have kids.

Tim Ulbrich: Sure.

Scott Rieckens: It’s, you have kids? Don’t use them as an excuse to pursue financial independence, which will ultimately benefit everyone in your family.

Tim Ulbrich: And speaking of daunting, many of our listeners, Scott, unfortunately are facing big-time student loan debt. For those that came out of pharmacy school in 2020, about $175,000 is the average, $175,000. So maybe this goes in the excuse bucket, maybe not, but obviously big student loan debt, granted they have a decent income to work with. But what are the thoughts for folks that have big mountains of student loan debt? Obviously that’s a barrier, but is something that others are facing. What have you heard from your experience? And what advice or thoughts do you give folks that are looking at student loan debt but want to pursue a path towards financial independence?

Scott Rieckens: First of all, I have the utmost empathy for people that have that kind of a mountain of debt. And you know, the hope is that that debt was an investment in an education that’s going to give you the ability to pay off that debt and ultimately be even better off for it in the long run. And so with that in mind, nothing changes about my advice or the way I see it because if you have debt, as insurmountable as it may feel, that is ultimately just one barrier in the way of financial independence. And so I guess instead of starting from $0 and then starting to build your net worth, you’re starting from negative and starting to build your net worth. Either way, I would say if you have that amount of debt, you should consider it and treat it as an emergency and a crisis. And people with that situation should absolutely pursue FIRE, at the very least to get themselves out of that debt and starting at $0, you know? And what you do see oftentimes is people that I’ve seen, I’ve seen it, I’ve seen it with my own eyes, I’ve talked to people that did these things and then pulled themselves up by their bootstraps, got the FIRE thing going, and pulled themselves out of this situation. You still have all of these choices. And a lot of times, you’ll see you’ve got this mounting pile of debt, but you have a nice income, and the debt only costs x amount a month, so I’m going to lease this new vehicle, I’m going to get this nice house because I worked so hard to become this profession and now that money’s coming in, so this is what we’re going to do. And all of this boils down to still is choices. It’s those choices. Hey, I’m going to buy a used vehicle with cash that I saved up, and I’m going to eliminate these monthly payments. And those monthly payments are going to go to fund our 401k’s and our Roths. Or if you have a mountain of debt, we are going to pay off that debt as voraciously as we possibly can to get ourselves in a better position, you know? I don’t know, the advice doesn’t change. If anything, it becomes louder if you have a mountain of debt. And that’s a non-empathetic but realistic way to look at it. And another thing I should say is one of the prominent people in the FIRE movement, his name’s Johnathan Mendanza, he’s a cohost of Choose FI, he was a pharmacist.

Tim Ulbrich: Pharmacist.

Scott Rieckens: Yeah.

Tim Ulbrich: Yeah.

Scott Rieckens: And he walked away from a job about a year after finding FIRE because he realigned his spending with his values, he got right, he got on a good track, and then he built what was originally a fun side hustle into something that could sustain him. And he chose a different path than pharmacy. And I’m not suggesting people need to do that. Some people may love their jobs. And by the way, the whole retire early thing? Let’s not get caught up on it. It happens all the time. You may like your job. Great. This is still for you because if you enjoy your job but you have the freedom and flexibility if conditions change, that’s still a win-win. You know?

Tim Ulbrich: Absolutely.

Scott Rieckens: Ultimately, it’s about gaining back your freedom of choice.

Tim Ulbrich: Couldn’t agree more. I think financial independence is a goal we all should strive for. And I think that should resonate with folks, whether they love what they do every day, they don’t, or somewhere in between. And I want to again point our community to both the documentary, “Playing with FIRE,” as well as your book, “Playing with FIRE.” I can’t say enough about both of those, what they’ve meant to me, the impression they’ve left on me and my wife, Jess. “Playing with FIRE,” the documentary will be available on Amazon, iTunes, Google Play, Vimeo or folks can pick up the DVD at PlayingwithFIRE.co. Storytelling is outstanding, it was named a Top 10 Best Finance Movies of the Decade by U.S. News. It includes a cast of personal finance and FIRE all stars, including Mr. Money Mustache, Vicki Robbins, who’s the author of “Your Money, Your Life,” The Minimalists, the Mad Scientist, Jonathan Brad from Choose FI and more. And then the book, you know, we’ve just scratched the surface here and there’s much more to learn in the book, including the seven steps to achieving FIRE, where to learn more about FIRE and the FIRE community, how to crunch your own FIRE numbers, many FIRE stories, and much more. And that is readily available wherever you normally purchase your books. So Scott, thank you so much again for taking time to come on the show. What is the best place for our listeners to go to learn more about you and the work that you’re doing?

Scott Rieckens: Thanks, Tim. Yeah, PlayingwithFIRE.co, it’s got it all. I’m a big fan of Twitter, so we’re on Twitter @playingwithfireco, and we’re on Instagram as well. So yeah, those are the places you can find us. And hope to see you there.

Tim Ulbrich: Great stuff again, Scott. And on behalf of the YFP community and our team, thank you so much for taking the time.

Scott Rieckens: Thanks, Tim.

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YFP 185: 10 Financial Moves to Make in 2021

Posted on by yfpadmin

10 Financial Moves to Make in 2021

Tim Ulbrich talks through 10 financial moves to make in 2021. It’s time to turn the page on 2020 and start 2021 off the right way and that’s with an intentional plan.

Summary

The start of a new year brings an opportunity to reflect, reset, and start fresh. It’s also an incredible time to dig into your finances and become really intentional with your 2021 financial plan. Tim Ulbrich talks through 10 financial moves you should consider in 2021 and how to make them happen.

Here are the 10 financial moves you should consider for 2021:

Simplify and clarify your goals for the year
Revisit the big questions and discussions with your spouse
Take advantage of any low hanging fruit to get a win or two and gain some momentum
Put your goals on automatic…and get out of the way!
Revisit your student loan game plan
Take your tax strategy to the next level
Button up the insurance part of your financial plan
Evaluate where real estate may or may not fit into your financial plan and goals
Update your legacy folder
Set your learning plan
BONUS: Find a community and get a coach for accountability and guidance

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Tim Ulbrich here, and excited to turn the page on the New Year. Here we are, 2021, hard to believe we’re at the start of the new year. And we know that 2020 was a hard year for many, and I’m hopeful that 2021 brings a better year for everyone.

OK, let’s do this. 10 financial moves to consider for 2021. And spoiler alert: I’ve actually got 11, so we’ll have a bonus one at the end. Now, we know every new year, it’s a chance to turn the page, a chance to reset, and yes, it’s just an artificial point in time, a day that is really no different than any other day except obviously for tax reasons and of course, if something is changing at the 1st of the year, whether that be compensation or benefits. But regardless, those aside, it’s an opportunity to turn the page and let’s take advantage of the opportunity to reset. Now, perhaps resetting means that you’re someone who’s on track and it’s just reminding yourself of the plan that you have in place and celebrating the success and the wins that you’ve had thus far and wanting to keep that momentum going forward. Or perhaps the new year means that you feel like you’re not on track. Maybe you’ve got a plan or a plan that you need to dust off, and it’s a chance or an opportunity to reset course and to recorrect for the new year. Or perhaps you don’t have a plan, and it’s time to get one in place and it’s a time to evaluate what are the different parts of the financial plan and considering all of the things that are out there, what are the low-hanging fruit and what are the areas that you can begin to get some momentum on to be able to have longer term success as it relates to your finances?

So No. 1 — as we go to this list towards 10 financial moves to consider for 2021 — No. 1: Simplify and Clarify Your Goals for the New Year. Now, notice I didn’t say set your goals as I suspect that many of you are already doing that. We talk about that on the show all the time, the importance of having an intentional plan heading into the new year or just in general, an intentional plan as it relates to finances to know your compass and know where you are going. So rather, what I’m referring to here is bringing them into focus and getting specific with those goals to make sure that you’re laser-focused on how you’re going to achieve those. So we know, I know, you know, that there are lots of competing financial priorities, regardless of the stage that you are at within your financial plan. So perhaps you’re somebody who’s listening that has been out of school for a decade or more and you’ve worked through maybe the student loan debt that you’ve had, you’ve paid that off and you’re kind of on a next evolution or phase of your financial plan. There’s lots of competing priorities, even after getting rid of those pesky student loans. Or perhaps you’re someone who is a recent graduate or a student that’s listening and you’re trying to figure out, OK, I’ve got this behemoth of my student loans, and how do I begin to think about other things as I also face what is, of course, this big priority that’s right in front of me? Or perhaps you’re someone who’s nearing the retirement age or you’re in the latter part of your career and you’re trying to identify, OK, I’ve done all of this work, I’ve put these things into place and I want to make sure I go into this next phase of my career, next phase of my financial plan, and I do that in a way that is intentional and I do that in a way that is efficient to make sure I achieve the goals that I want to achieve and of course, lots of tax and other considerations that are there as well. So regardless of the stage that you’re in, whether it’s mid-career, end of career, new career, there are lots of competing priorities. And I’m convinced that the priorities, you know, don’t go away. But it’s a matter of how you can identify those and prioritize those to make sure you’re intentional with what you’re trying to achieve in any given period of time. And here, of course, we’re talking about heading into the new year. So if you haven’t already done so, put them down on paper. And my encouragement for you is to leave this to just a few financial goals that you want to make sure that you prioritize and achieve for the year. So I’m going to encourage three goals and that you write them in a way that provides you with the best opportunity to achieve that goal. So making sure you’re specific about the what of the goal, the when you want to achieve that goal by, and the why — what’s the purpose, why does that matter in terms of the rest of your financial plan and why is this specific goal important?

So let me give you an example here. If I were to say, you know, “Beginning Feb. 1, I’m going to allocate an additional $200 per month towards a Roth IRA so that I can grow my long-term savings in a way that aligns with my retirement goals or plan.” So when I get that specific with a what, with a when and a why — so here, we’re talking about what are we doing: an additional $200 per month towards a Roth IRA. When: by Feb. 1. Alright, how does that look in the budget? Now I’ve got an idea of when and how much. Why? So that I can make sure I’m achieving my long-term savings goals. That is a goal that we’re likely or increased likelihood of achieving because we’re getting specific and we can look at the rest of our financial plan to determine whether or not that is feasible and whether or not that is realistic.

Now, before you set your goals, you’ve heard us say this on the show before, you have to be clear on the why, the so what, the purpose. And we’ve talked about why finding your financial why is so important. And you know, really, what we’re trying to answer here is the question of why does this topic of money even matter to you? Or why does this specific goal and achieving this specific goal even matter? Why is this important? Why is this relevant? And that sounds like a relatively simple question, but if you have thought about this in depth before, you know that it is not. This is the “So what?” question. So before you get too deep into the x’s and o’s of any one part of the financial plan, whether that’s debt repayment, whether that’s investing or savings or insurance, whatever that would be, we have to first understand what we’re trying to achieve. And we talk a lot about our vision at YFP of helping pharmacists on their path towards achieving financial freedom. And my challenge to you is what does that concept, what does that term of financial freedom mean for you? There’s no one right answer. And that can certainly — will be certainly different for many folks that are listening to this episode.

So what’s the goal? So a few ideas to get things stirred up, hopefully to get you thinking about this topic a little bit more. I’ve talked with many pharmacists that say, “You know, when I hear financial freedom, I think about flexibility. I think about options of working or perhaps having the choice to work or how much I work or when I work. Even if I really enjoy the work I do.” Or perhaps it’s to be in a position of control with how you’re spending your time or your money. Perhaps it’s to be able to give, to be philanthropic. Perhaps it’s to leave a legacy or to travel without worry or stress or regret. Perhaps it’s to help family members or friends that are in need or be in a position to do that or to start a business or a movement or a foundation or a charity. You get the point. It’s the financial why, it’s the purpose, and that’s really going to help drive the rest of our financial plan. So that’s No. 1, Simplify and Clarify Your Goals. Set three financial goals for the new year. And then the background of those goals should be the purpose, the vision, the why of your financial plan such that if you achieve those goals, you’re one step closer to achieving your financial why.

No. 2, Revisit the Big Questions or Discussions with Your Spouse if this, of course, applicable to you and your personal situation. Could be a significant other as well. Now, I wrote a blog post way back when several years ago titled, “10 Financial Discussions that I Believe Every Couple Should Have.” And we’ll link to that blog post in the show notes. And you know, these are questions such as when you’re balancing financial priorities or making decisions, of all of the financial priorities you have to consider, whether that’s giving, saving for retirement, housing, transportation, paying off debt, and so on, do you and your spouse or significant other agree upon a plan for how you will balance these? How will you prioritize them? How will you fund those goals, in what order and when? Will you be focusing on several at once or just one at a time before moving on to another one? That’s an example of a big question or discussion to have. Another one, for example, might be around giving. How does each individual feel about giving? How much and where? How will this be budgeted for? Another one might be around the level of engagement. Is one individual taking the lead more than the other when it comes to managing the finances? If so, are both individuals aware of the overall financial situation? How do you talk about this topic? How do you communicate this topic? Are there shared accounts, individual accounts? So I’m just scratching the surface here, and I’ll reference you to that post. But my encouragement would be to look at these and maybe several of these you have had, maybe some you need to revisit, some you haven’t had. But the challenge here in No. 2 is to go back and revisit, discuss, rediscuss these questions with your significant other or your spouse with the understanding that the answers to these are of course going to be significant and inform the direction that you take with many parts of the financial plan.

No. 3, Take Advantage of Any Low-Hanging Fruit so that you can get a win or two and get some momentum early on in the year. Now, again, regardless of where you are at in the stage of your career or your financial plan, I think this is a very important concept for us all to consider. Is there any low-hanging fruit that we can get a quick win or two, get some momentum, so that we’re encouraged and motivated and want to be going on with achieving the other perhaps more audacious or bigger goals that we have set out for the year. So things that come to mind here, things that I evaluated myself in 2020, these could be shopping around auto or home insurance or have you looked at this in a while? If not, good chance to understand your coverage, shop these around, see if there’s any you can save without giving up on the quality of those coverages and policies. Perhaps you’re someone who has wanted to get a term life insurance policy in place or that is a need and it fits with your plan but for whatever reason, you haven’t done that. Relatively inexpensive, we’ll talk about insurance here a little bit in a few moments. Maybe it’s refinancing a mortgage. You know, I’m sure you all heard and read about where rates have gone in 2020, certainly probably into 2021, through the pandemic. And perhaps for whatever reason, you haven’t evaluated that. Is that something to consider? Are there any recurring bills that perhaps you’re not aware of or maybe have lost track of or bills that have gone up over time that you might be able to take a fresh look at and negotiate, things like cable and other services. Are you eligible for HSA savings? And we talked about this in episode 165, The Power of a Health Savings Account. But this is an example of a tax-advantaged account where there’s great benefits, the dollars aren’t enormous, but again, perhaps this small victory, this quick win, this low-hanging fruit that can help accelerate the rest of your financial plan. So do any of these resonate? Or are there any others that you would identify of things that you’ve been meaning to do that you know what needs to be done and you want to just take that next step and knock it out and to continue the momentum with other goals in 2021.

No. 4, Put Your Goals on Automatic and Get Yourself Out of the Way. Now, one of my favorite books, I’ve talked about it on the show many times, “I Will Teach You to Be Rich” by Ramit Sethi, he talks about this concept of automation, automation, automation. He goes through great examples of how to do it. We’ve also talked about it on this show, Episode 057, The Power of Automating Your Financial Plan. But the concept is simple: Once you set your financial goals, when your paycheck comes in, you have a system in place so that your goals are being funded right away and that you have a budget behind that to know that you’re not going to be putting yourself in a position where you’re overspending your income each and every month. Now, for those of you that have been doing this for some time, I think this concept of automation is also very important. It’s this concept of prioritizing your goals, paying yourself first rather than hoping you have money left over. And so perhaps it’s revisiting those goals, revisiting the amounts, the timeline, when do you want to achieve those, and building the systems — again, Ramit talks about that in “I Will Teach You to Be Rich,” we talked about it on Episode 057, how to build the systems so that once you get paid, once you have the goals, you’re automatically funding those accounts such that you are essentially assuring — hopefully — that you’re going to achieve those and behaviorally getting yourself out of the way, which often we individually are the biggest barrier to achieving our financial plan. So that’s No. 4, Put Your Goals on Automatic and Get Yourself Out of the Way.

No. 5, Revisit Your Student Loan Game Plan. Now, here we are at the beginning of 2021, ready to turn the page on a new administration in terms of the President and the President’s team, which may or may not bring additional changes around student loans. We don’t know that yet. But what we know of the first of the year, is that we know that the most recent stimulus package that was passed at the end of 2020 did not extend the administrative forbearance on qualifying federal loans that has frozen for the last nine months or so the interest that was due and any payments that were required on those loans. So it’s really been an incredible time period for those that have qualifying federal loans. For good reasons, payments were not due and interest was not accruing on those qualifying federal loans. So what’s going to come next? We don’t know. There’s been lots of hypotheses that have been thrown out there. There’s been several proposals that have been mentioned throughout the presidential debates and leading up to the election. But we don’t know. As of early January 2021, we don’t know what’s going to happen. Now, we do know that if nothing else happens at this point in time, this administrative forbearance is going to expire. But perhaps this could be continued through an executive order, perhaps there’s additional policies and legislation coming into the future. But we don’t know. So my point here is this is the time period, throughout the month of January, to take advantage of this administrative forbearance as long as it lasts — and if it goes on longer, great. If it doesn’t, you’re ready to go. Take advantage of this time period to come up with your student loan repayment plan or to evaluate or re-evaluate your options to make sure that you’ve got the plan in place that’s going to be the best fit for your personal situation. And we talked about this at length on several other episodes, we’ve got lots of resources on the blog, we’ve got, of course, one of our latest books, “The Pharmacist’s Guide to Conquering Student Loans,” which talks about A-Z student loan repayment for pharmacists. And you can get a copy of that book at PharmDloans.com, and if you use the coupon code “YFP,” that will get you 15% off. So this is the time period to take advantage of this administrative forbearance, as long as it lasts, understand and evaluate all your options, and be ready to go such that when this time period is done, you’re ready to hit the ground running with an intentional student loan repayment plan. Now, for those that don’t have student loans or paid them off, happy dance, right? We’re excited that we’re at this point in time, but perhaps this is also an opportunity to pay it forward and help those that are in this situation — it can be very overwhelming — through providing your input, your experience, maybe getting them a copy of a book like the “Pharmacist’s Guide to Conquering Student Loans,” or pointing them in the direction of some resources that could be helpful to them, things that you’ve learned through your journey, mentoring other folks, but an opportunity to pay it forward to those that are dealing with student loans and typically six figures or more of student loans front and center as they’re trying to attack this and come up with a plan in 2021. So that’s No. 5, Revisit Your Student Loan Game Plan.

No. 6 is Take Your Tax Strategy to the Next Level. Now, Episode 184, just last week, we talked about how to optimize your tax strategy. I brought on YFP Director of Tax and our CFO Paul Eikenberg, who’s our tax professional at YFP. And we talked about the difference between tax planning and preparation, a very important difference. We talked about tax planning mistakes that he sees, we talked about strategies that pharmacists should consider employing to optimize their tax situation. We talked about strategies around legal tax avoidance, tax deferment, and then opportunities to take advantage of those accounts and strategies where you can have tax-free gains. And we broke down each one of these strategies and ones to consider, and so go back and listen to Episode 184 if you didn’t catch that over the holidays. And this is the chance — if you have been someone that has perhaps had your tax filing on automatic and haven’t really thought about understanding all of the different options being a little bit more strategic with OK, now that we’ve completed the filing, what should we be thinking about for the next year in terms of more of a strategic tax plan? Perhaps this is the year where you look at bringing somebody into your financial plan that can really help you be more intentional with your tax strategy. So Paul, as I mentioned, leads our tax planning and preparation services for clients of YFP Planning. And this year, we’re excited to make that service available to 50 more households. And so you can learn more about the tax planning and preparation services that we’re offering and secure your spot by visiting YourFinancialPharmacist.com/filemytaxes. Again, don’t wait. We’re capping this opportunity at 50 pharmacist households. So first come, first served. Again, that’s YourFinancialPharmacist.com/filemytaxes.

No. 7, Button Up the Insurance Part of Your Financial Plan. This is the defensive part of the financial plan. Now, there’s lots of insurance to think about, right? Health, auto, home, renters — but here, I’m really specifically talking about life, disability and professional liability. And this is a part of the plan that I think often gets overlooked because it can be overwhelming to understand what one does or does not need. It can be perhaps not necessarily very exciting, right, to spend money on things that may or may not happen when you look at other priorities such as paying off student loans or investing or saving for the future. So my encouragement is learn first, shop second, and buy last. So first, determine what you do need, what you don’t need. So what does your employer offer? What do they not offer? Where are there gaps? What types of coverage do you need based on your personal situation. We talk about this at length on Episode 044. We talked about how to determine life insurance needs, Episode 045. How to determine disability insurance needs in Episode 155, why you need liability insurance and there of course, talking about professional liability. So learn first, spend time, dig in, understand life, disability, professional liability, understand the nuances of those policies. Shop second. Find an independent broker, and we’ve got some resources on the YFP site that can help you shop the market of what you do and do not need after you evaluate what you do or do not have from your employer, what other coverage do you need, what gaps exist? And then finally, buy last once you’re confident in what you need and the options that are out there.

No. 8, Evaluate Where Real Estate May or May Not Fit into Your Financial Plan and fit into your long-term financial goals. Now, I’ve said this before that as we focused on more real estate on this show in 2020, we’ll be doing much of that in 2021 as well, I’m not suggesting that real estate is for everyone. But I do have a sense that for many pharmacists, evaluating real estate investing — and there’s a lot of different ways to get there — is something that folks are interested in, encouraged in for a variety of reasons, and maybe have been on the fence about should I look at doing real estate investing? Is this a part of the financial plan that makes sense based on a lot of different factors? So looking at the risks, the rewards, what’s the goal? What’s the point? Why do I want to invest in real estate? What’s the point of perhaps generating additional cash flow each month? How might you get involved? Or how involved do you want to be or not involved? Do you want this to be more passive? Do you want it to be more active? Do you have opportunities in your area? Would it be outside of your area? Are there mentors or resources in your community that can help you? And so we have — as I mentioned — featured several stories in 2020, a few that come to mind, Episode 173, Ryan Shaw, all these pharmacists, Ryan Shaw talked about the systems that he has in place for the investing that he does. Episode 178, Nate Hedrick, our real estate expert, talked about his experience flipping a home up in Michigan. Episode 182, Young Park talked about his experience with long-distance real estate investing, lives in Hawaii, invests primarily in Kansas City, and how he has developed systems and how he has built the beginnings of his real estate portfolio. So I recommend you check out those episodes and really determining what your plan is in 2021 if you feel like real estate investing is a good fit. What’s the plan for 2021? Is it learning more? Is it making a move on a property? Is it finding a mentor? Is it more than one of those? So make sure to tune in here, more to come in 2021. We’re going to have more episodes, more content focused on real estate investing. We’re going to be launching a real estate regular show, regular podcast on this YFP podcast. We’ll have more information coming about that throughout the month of January and February. And we’re going to continue to build out more resources for those that are looking to learn more as well as engage and connect with other pharmacist real estate investors. Now, of course another great place to learn — as I’m sure many of you have already heard of when it comes to real estate — Bigger Pockets has great content, great resources, they’ve got forums, the podcast, the blog. And one of my favorite books for those looking to get started, “The ABCs of Real Estate Investing” they published as a book. So lots of places to go here. No. 8, Evaluate Where Real Estate May or May Not Fit into Your Financial Plan and Goals and determine where you’re going to take action as it relates to this goal.

No. 9 is Update Your Legacy Folder. Now, we talked about this. It’s been awhile, but way back when, early on in the show, we talked about this concept of a legacy folder. And I think as we turn the page on 2020, heading into 2021, this is a good time to make sure that you’re updating your systems and your files and you’re making sure that what you have in place is most up-to-date and relevant information. So I first heard of the idea of a legacy folder when taking Dave Ramsey’s Financial Peace University through a local church several years ago. And I remember walking away thinking, wow, so obvious yet so important and at the time was something that I hadn’t yet implemented for our own family and our own financial plan. And essentially, the idea of a legacy folder, whether it’s physical, electronic, or both, is a place where you have all of your financial-related documents so in the event of an emergency, others would be able to quickly assess your financial situation and get access to all of the documents and accounts that pertain to your finances. So examples of items here could include things like insurance policies, wills and power of attorney, account information for savings or debt or could be mortgages, could be credit cards, could be student loans, various savings accounts you have, whether that’s brokerage accounts, retirement accounts and so on. Essentially, a one-stop shop for all of your financial documents and making sure those that should have access or could have access or would need to have access know where that information is and how they can get ahold of it in the event of an emergency happening. Of course, you’ve got to think about security and how you secure that information, whether that’s physical, electronic, or both. So that’s No. 9, Updating Your Legacy Folder.

No. 10 is Setting Your Learning Plan when it comes to personal finance for 2021. Now, at YFP, one of our core values for our team is encourage growth and development. And we believe that for ourselves, for our team, and for you, the YFP community, this concept of constantly growing, learning and developing needs to be at the front and center of one’s financial plan, regardless of where you are at on this journey. Right? There’s always something to learn on this topic. So podcasts, lots that are out there, of course, this one. We hope you’ll tune in. I mentioned the Bigger Pockets podcast, there’s other personal finance podcasts and some resources. When it comes to books, of course there’s the classics: “Rich Dad Poor Dad,” “Millionaire Next Door,” other books that come to mind as some of my favorite personal finance books: “The Automatic Millionaire” by David Bach, “Tax-Free Wealth” by Tom Wheelwright, “The Truth About Money” by Ric Edelman, “The Compound Effect” by Darren Hardy, “The Behavioral Investor” by Daniel Crosby, and one that I recently read that’s not as well known, “Happy Money: The science of happier spending,” written by Elizabeth Dunn and Michael Norton is a great resource, not on the x’s and o’s of the financial plan but more on when it comes to how we use our money, what are some of the things where when we think about our why and our purpose and driving value and happiness, how can money be used as a tool? And what does the science really have to say in that area? So set your plan, look at the options. There’s many out there. I’m sure the YFP Facebook group would have other suggestions as well. And set your learning plan for the year and be intentional about making that a priority in 2021.

No. 11, as I mentioned, I had a bonus here. No. 11 is Find a Community and Get a Coach for both accountability and guidance. Now, when it comes to the community aspect, I hope if you’re not already, you’ll be a part of the YFP Facebook group. I think this is a great community that is really encouraging in some regard, mentoring, helping one another on their path towards achieving financial freedom. I think we’re now a community of about 8,000 strong pharmacy professionals all across the country, so hope you’ll join us. And in terms of getting a coach, we really believe one-on-one comprehensive financial planning is what leads to the greatest accountability and the customization of all of these topics that we’re talking about to one’s individual situations. And so I think this derives the greatest results for the obvious reasons of it’s one-on-one, it’s intentional, it’s consistent, it has accountability, it’s specific to your goals and your plan. But we recognize that it may not be for everyone for a variety of reasons. But if you’re not yet already aware or participating in our comprehensive financial planning one-on-one services, you can schedule a discovery call today, no obligations, see if it’s a good fit for you, a good fit for us. And you can do that by going to YFPPlanning.com, click on “Schedule a Discovery Call,” and we’ll get you on the calendar here in the next month. We also talked about in Episode 181, for those of you that are thinking about is a financial planner a good fit, we talked about many of the topics of financial planning of what we do at YFP but also what are important to look at in general? Fee-only, fiduciary, comprehensive, making sure you’re finding the good fit of financial planning services that are specific to your individual needs. And that was Episode 181.

So there you have it, 10 financial moves to make for 2021 or to consider, plus one in terms of the bonus of finding a community and a coach for accountability and guidance. And speaking of that community, as I mentioned in the introduction, we’ve got an awesome giveaway to go along with this episode to kick off the new year. I mentioned how important it was for my own financial plan and journey to find good resources. And we’re excited to be sharing those with the YFP community. And so we’re going to be doing that through a giveaway in this early part of January where we’re giving two winners in the YFP Facebook group a one-year YNAB subscription, a pair of Apple Airpods, and a copy of “Your Best Year Ever” by Michael Hyatt. So two individuals will win each of those three things. And to enter, you have to be a part of the YFP Facebook group and then comment with your 2021 financial goal on the giveaway post at the top of the group.

So let’s have a great 2021. Let’s approach this year with intention, with purpose. I hope you’ll share your goals, your success, your wins, your questions, with the community in the YFP Facebook group. And as always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please do us a favor and leave a rating and review on Apple podcasts or wherever you listen to the show each and every week. Have a great rest of your day, and here’s to an awesome 2021.

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YFP 183: How Amanda and Holden Created Freedom by Paying Off $100k of Debt

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How Amanda and Holden Created Freedom by Paying Off $100k of Debt

Amanda and Holden Graves join Tim Ulbrich to talk about their journey paying off $100,000 of student loans and other debt in just a few years. They share their strategies for aggressively repaying their debt, how they were able to effectively work together as a couple, and what lies ahead for them and their financial plan now that they are officially debt free.

About Today’s Guests

Holden Graves is a pharmacist working for a behavioral health hospital in Texas. He enjoys utilizing data to help problem solve and fix workflow issues. His passion is for disrupting the current healthcare model and focusing on improving patient outcomes.

Amanda Graves is a food scientist who enjoys working in the kitchen. She has a passion for cooking and loves that she can combine science and cooking to create delicious products on an enormous scale.

Amanda and Holden are excited to share their story to help motivate and inspire other professionals on their debt payoff journey.

Summary

Holden and Amanda Graves share their story of accumulating, navigating, and ultimately paying off $100,000 of student loans and car debt in a few years. Holden, a pharmacist, and his wife Amanda, a food scientist, were able to get through their undergraduate programs without acquiring any debt by working, scholarships, in-state tuition, and money from his grandfather. They took steps to minimize their debt burden when Holden went to pharmacy school by attending an in-state school and working. Holden was able to graduate with $80,000 in loans and about $20,000 in a car loan.

Holden and Amanda prioritized discussions about money as a couple before they were married and feel that it built a great foundation in their marriage. They learned a lot about each other and discovered that they had slightly different outlooks on their feelings toward their debt. Amanda was more risk averse and wanted to pay off the debt as soon as possible. On the other hand, Holden was comfortable paying it off over 5 or 10 years while focusing on increasing their investing assets. They compromised and decided to still pay off the debt aggressively over a couple of years while also putting money toward an emergency fund, house down payment, and into their retirement accounts.

To pay off the debt, they relied on automating their finances and refinancing their student loans to get a lower rate. Now that they are debt free, they feel that they have freedom and options and are going to continue saving for retirement, funding smaller goals like vacations, and focusing on increasing their invested assets.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Amanda and Holden, welcome to the show.

Holden Graves: Thanks, Tim. Happy to be here.

Amanda Graves: Yeah, thanks for having us.

Tim Ulbrich: I recently ran across a blog post on the scope of practice titled “How One Pharmacist Paid Off $100,000 of Student Loans and Other Debt in Just a Few Years,” and after reading that article, I was inspired by your story and wanted to bring on not only Holden to share about his journey in pharmacy, school, pharmacy practice, debt accrual, which we’ll talk about here in a little bit, but also bring Amanda on the show as we know that this ultimately for the two of them was obviously a joint decision in how they were going to approach this debt and how they were going to approach the rest of the financial plan. So I really appreciate you guys coming on to share this story. Now before we jump into the specifics of your debt-free journey, how you did it, how much you had, what was the secret to success, what does this mean for you guys going forward, I’d like to start by hearing a little bit about your backgrounds and the work that you’re doing today. So Holden, let’s start with you. Tell us a little bit about your pharmacy career background, how you got into a pharmacy career, what was the interest, where you went to school and the work that you’re doing right now.

Holden Graves: Yeah, that sounds perfect. Yeah, so originally I’m from northwest Arkansas, so near where the University of Arkansas is. So what really got me interested is I actually in high school, one of my favorite teachers actually read an article to us about pharmacists and kind of the need for pharmacists as the population continues to age. So that was kind of what sparked the interest in me, and I went and shadowed — my uncle actually owns his own pharmacy, so I went and shadowed with him and just loved the rapport that he had built with his patients. They all came to him and had questions for him and trusted him just as much as their physicians. And so I just loved that rapport that he built. So that’s what got me interested. I went to the University of Arkansas for my undergraduate, where I met my lovely wife. And then went to the University of Arkansas for Medical Sciences for pharmacy school. So I did my four years there and in the middle of pharmacy school, I got married to my wife. So that was just an amazing experience from that point of view. After school, I actually applied for residency, but I didn’t match with anywhere. So that was kind of interesting, kind of left me scrambling. Luckily, I was able to find a job at the Children’s Hospital in Dallas, where I started and worked there for three years and then now currently at a behavioral hospital, still in the Dallas area.

Tim Ulbrich: Very cool. And you know, I hope here, your story there, Holden, for our listeners and if we have students that are listening, especially those that are in their fourth professional year, getting ready, end of 2020, submitting applications, getting ready for residency interviews, thinking about the matches, it’s overwhelming, right? And I think that just hearing your story about yep, the match was not successful maybe by what you had determined success would look like in that time, but I’m guessing through persistence and other opportunities and doors that opened up, you found yourself in the niche working in behavioral health. Real quick on that, like from the experience of not doing residency, how were you able to find yourself in a position like this? And ultimately, what was successful for you to be able to land a position that others may hear and say, ‘That’s a job that typically does require residency.’?

Holden Graves: Yeah, absolutely. I mean, there’s no small amount of luck that happened. I got into the Children’s Hospital. It was kind of an entry-level pharmacist position, so I was mostly in the operations side. So that part, he basically was only looking for new grads, so that worked out that I was able to get in from that avenue. And after that, I just kind of worked my way into the good graces to where I became the pharmacist in charge of one of the smaller pediatric hospitals. And so that kind of positioned me well as just having that experience of going through and dealing with the nursing leadership and the physician leadership that then ultimately allowed me to transition into the behavioral health side as well, where I’m also serving as a pharmacist in charge. So.

Tim Ulbrich: That’s great. Congratulations. I think paving that pathway is something — we need to hear more of those stories because I think we sometimes fall into the trap that if I don’t do A or B or C, it doesn’t mean I’m going to have these other opportunities. And there’s certainly many other stories out there such as yours. So Amanda, tell us a little bit about yourself.

Amanda Graves: Most definitely. So my background is actually in food science, which is awesome. So I went to the University of Arkansas, where I met my husband. And so graduated from there, and I immediately got into the food industry. And so my background’s a little bit diverse between quality assurance but majority of my career has been in research and development. And then I also dabbled in sales in the food industry for awhile, kind of on a technical sales side. But currently, I work in the culinary department for a restaurant company. So I get to manage kind of the food and culinary side from a science perspective, which is really great for me to be able to combine — I love food, and I love to eat, so I get to combine the culinary arts with the food science side and just make things come to life on a mass scale.

Tim Ulbrich: What a unique career path. When I read some of your background of combining science and cooking, I was like, heck yeah! I mean, that’s awesome. I think one of the reasons I enjoy cooking so much is just, you know, that bringing in some of the science and understanding it. It reminds me of some of the pharmacy training. I think there is so much both art and science in cooking. So how did you find yourself in that career path and even having an interest in that area?

Amanda Graves: It really worked out well. So my high school had a culinary arts magnet program.

Tim Ulbrich: Cool.

Amanda Graves: So I did culinary training for the first three years of high school and then senior year, I was an intern in a hotel kitchen, which was an absolutely incredible experience. But with that, I also learned I didn’t want to be a chef. And just through seeing that, I was like, but I still love food and also in my high school, I was in the science magnet program, and I took chemistry for two years because I just love chemistry. And so just kind of thinking about how I can combine my love of science and food, I just kind of stumbled upon food science, and it really just is the perfect combination.

Tim Ulbrich: I love it. And before we go on to talk more about your financial journey and your story, which I’m confident is going to motivate, inspire other pharmacy professionals and others listening on their own journey and their own debt payoff, what they’re working through as well, I have to know. I don’t hear the thick Arkansas accent that I have heard from other guests on the show that have graduated from UAMS or Harding. What’s the deal? Are there like levels of Arkansas accent?

Holden Graves: Yeah, there’s — up in the northwest corner of the state where the University of Arkansas, we kind of more have the less southern and then as you get closer into Little Rock and the southern part of the state, it gets a lot thicker. Amanda’s also actually from Dallas too, so she doesn’t have that from Arkansas.

Tim Ulbrich: OK. That explains it.

Amanda Graves: So I definitely don’t have a southern accent. And on Holden, it only comes out on certain words occasionally but otherwise not too much.

Tim Ulbrich: Yeah, I’m thinking of other guests we’ve had on the show that are doing some awesome things, debt repayment, real estate investing, others in the Arkansas area, and it was definitely a thicker accent.

Holden Graves: Yeah, that’s more the southern part of the state.

Tim Ulbrich: Absolutely. Well, let’s jump in. Paying off $100,000, student loans and other debt in just a few years, and so we’re going to talk about how you did that, how you accrued it, how you paid it off, why you did it, what was the strategy. So Holden, kick us off here. Was this a majority or all of your student loan debt? Tell us about the amount and also the position and how you got into that.

Holden Graves: Yeah, absolutely. So I guess it depends on who you’re talking to on whose debt it is. So according to me, it’s all of my student loan debt. According to my lovely wife, it’s all of our student loan debt. So it was mainly my schooling that accounted for all of that. So as far as the actual student loan debt goes, we were about $80,000 in student loan debt. But in the middle of pharmacy school and then right after pharmacy school, we actually purchase two new cars. And so at the lowest point, we had about $100,000 in total debt.

Tim Ulbrich: OK. So about $80,000 in student loans, about $20,000 in two cars. That brings us together to that $100,000. Now, I’m sure many of our listeners hear $80,000 and say, “I wish I only had $80,000 in student loan debt,” which you know, it’s unfortunate that I even have to say that out loud, but that’s the reality, right? So we have Class of 2020, we now have the median student loan debt that is north of $175,000. I’ve often talked and worked with pharmacists that exceed that or perhaps even couples that have more on top of that, so $80,000 — I don’t want to mitigate what you guys have done. I mean, it’s incredible. But my question there is what was the strategy? How were you able to keep the debt load I guess “low” of $80,000 compared to what we see out there as the normal?

Holden Graves: Yeah, absolutely. Yeah, so we were very intentional — or I was very intentional early on whenever we were accumulating the debt. So luckily, we were both able to graduate undergrad with no debt, so it was just pharmacy school that I needed to finance my way through. But I just still wanted to take out the minimum that I possibly could. So I really only took out enough loans just to cover tuition. I never took out anything extra to cover expenses or rent or anything. I had a little bit saved up because I actually worked in a pharmacy in undergrad and saved up some money there. And then while I was in pharmacy school, I did still work as well. So I still was — that was basically able to cover my rent and food payments were basically coming from what I was able to work. So that’s kind of the way we did that. And then just going to our in-state school, University of Arkansas, is one of the lower cost programs, so just trying to stay as low cost as we possibly could with that was a big key.

Tim Ulbrich: Yeah, multi-prong approach, I think that’s a good strategy. A little bit of strategy in where you go to school, in-state tuition, as well as being able to work and some other things that can help reduce. And as our listeners know very well, whether they are in the debt accrual or debt paydown phase, anything you can do to reduce that indebtedness while you’re in school is going to pay dividends obviously from what you don’t have to pay back into the future. So in the article that you wrote and I referenced earlier in the show, you mention that while you were still in pharmacy school and before you were married, you had discussions about money, which I think and I’ve talked about on the show before is so important for every couple to be doing as early as you can, having some of these big discussions around money, here, we’re obviously talking about debt but of course it’s much bigger than that. So Amanda, tell our listeners about those conversations, you know, how they went, how you felt about the debt even though it wasn’t your own debt but was going to become your collective debt, how those conversations went, and what you ultimately discovered about each other through those conversations.

Amanda Graves: Yeah, most definitely. So we both knew that a great foundation in marriage is communication, and we also knew that financial stress can one of the major stressors in a marital relationship. So we wanted to start those conversations really early on, just to make sure we were on the same page and kind of had a strategy. And then for my personal perspective of coming in, you know, I was all-in, I was very supportive of Holden and going to pharmacy school and that included the student loan debt that came along with it. So I — as Holden mentioned earlier, I very much saw it as our debt, not just his debt. And so together, we needed to kind of make that plan to address it. But like you mentioned, a lot of those early conversations, we got to learn a lot about each other and just how we viewed money and kind of those different backgrounds that we had from a financial perspective and kind of blend those together to make a plan so we had that even before we were married, which helped just to kind of continue to address that as we were kind of going through the process.

Tim Ulbrich: That’s great. I think conversations are important, as awkward as they may be at first or however you break the ice, you know, I think the outcome is incredibly valuable, not only on the debt repayment part, but of course as you guys know, from living this, this is just one part of the financial plan, so having open communication here hopefully will translate to other areas as well. Holden, for our listeners that perhaps find themselves in a situation where they’re carrying a big debt load, maybe a serious relationship, haven’t yet had that conversation, maybe they’re feeling a little bit of guilt about hey, I’m bringing this debt into the relationship, I’m not sure how someone’s going to perceive this, any words of wisdom or advice that you would give them here in how you were able to approach this subject? Or was it just a natural conversation that really came to be between you and Amanda?

Holden Graves: I think the — just the foundation of our relationship and just the trust that we were able to give to each other that she was open to hearing exactly what it was. And the main thing is that I didn’t want this to be like me v. her or anything like that. Like I wanted us to come together to try and tackle the debt together and try and do everything. So I didn’t want to take her feelings out of the situation, and I wanted to take her advice as well because she’s much smarter than I am. So I definitely, I wanted to bring us both on the same page because it’s a lot easier if we’re both know what we’re heading towards as opposed to two people at odds with each other.

Tim Ulbrich: Absolutely. And that is a good segue into one of the questions I like to ask individuals such as for you guys as you’re going through this journey together and have chosen an aggressive debt payoff strategy is what’s the purpose? What’s the reason? What’s the why behind this aggressive debt repayment? And we’ll talk in a moment about exactly how you did it, but I think that question is one that I talk often on the show about it’s so important to answer that. And I don’t necessarily believe there’s one right answer, but we know there’s options, right? So you guys could have taken out this $80,000 in student loan debt, you could have taken out 20+ years or you could have aggressively paid it off like you did, whether that’s in the federal system or with a private lender. So tell our listeners — and Amanda, I want to start with you, and Holden, feel free to add on from there. Tell our listeners about what was the purpose. What was the why behind this aggressive debt repayment strategy?

Amanda Graves: So for me personally, which in my answer might vary a little from Holden’s, but for me, the why was just the stress of just having that debt kind of hanging over us, I am personally very risk-averse. And I just try and avoid anything that would either be risky or cause me more stress. Really, it was just the fear of it just kind of looming over everywhere. And I just wanted it to be gone. I just wanted it to be completely gone as fast as possible. And I was ready to do kind of whatever we needed to do to get there to kind of move on to what life would look like after the debt was paid off and just be able to have not that standing payment of the loan every month but being able to kind of free that up to have a little more flexibility in the future.

Tim Ulbrich: Holden, what about you?

Holden Graves: Yeah, mine was kind of along the same viewpoints of it’s just the stress of it hanging over you. Less so of the stress that it was hanging over me and more so of what it was hanging over Amanda. So I just could see the way that she just kind of just did not like the stress and I just knew that that’s just something we needed to get out of our lives as soon as possible. I was kind of more on the train of, you know, kind of doing the five- or 10-year repayment and just kind of letting it drag out and be invested. So kind of my viewpoint was let’s work on getting our invested assets up as high as we can as early as we can. So that’s kind of where the compromise came in. If it was up to Amanda, we probably would have had it paid off in that first year. So we kind of settled somewhere in between so that way we could make sure that we were maxing out some of our investment accounts, going about it that way as well.

Tim Ulbrich: Yeah, and I think compromise is such an important summary of what you just said. You know, I think some of our listeners may hear $80,000 and their natural tendency may be hey, I’m going to take that out, low interest rate, as much as I can take it out long. Again, there’s not a wrong answer, depending on somebody’s interests and how they feel about the debt. And I always say it’s the numbers plus the emotions. And both of those are really important, right? So I like what you said, Holden, you know, you may have leaned toward one strategy, but when it’s causing stress or anxiety, I think this is an area — and I say this with emergency fund as well — there’s places to defer, and there’s places where you maybe push someone to come more to the middle or maybe an area that they’re not as comfortable with. And I think this is one when you’re talking about the stress and when you’re talking about some of those other emotions that can come with this debt load, probably not the area to be pushing somebody, even if mathematically you could make an argument that hey, if I put more in investing, it may mean more in the end. So kudos to you guys for working through that.

Holden Graves: Yeah, and don’t think I didn’t also try that approach too. But it did not completely get rid of the stress from her point of view.

Tim Ulbrich: I can see the conversation of like, hey, here’s the compound interest calculator, and look at the numbers, and what if we did this? What if we did that?

Holden Graves: That’s exactly what I tried to do.

Amanda Graves: Yes, we did go over that.

Tim Ulbrich: So I want to build on something, Holden, that you said. You know, I heard you say investing was a priority. Many of our listeners are often trying to balance student loans, investing, emergency funds, paying off a car debt such as what you mentioned, saving for a home, starting a young family, making sure they have the right insurance policies in place, the list goes on and on. And I think that can be very overwhelming for folks. And there’s kind of different strategies of sometimes you balance a lot of these, sometimes you focus in on one, depending on the goal, depending on the timeline, again, depending on the math, how somebody feels. So talk us through your strategy in terms of how you approached the debt alongside of investing, alongside of emergency funds, and I know you guys currently have a home, so also being able to save up for the down payment on a home. How did you bring those issues to the table and then determine how you were going to allocate funds into what priority?

Holden Graves: Yeah, so basically we just kind of came and sat down to be able to discuss what our goals are. We actually do a monthly check-in, meeting, just a financial checkup every month so that way we can make sure we can see what we’re — we track all our spending, so we see what we spent on, how much we’ve got left over for the month and if there’s anything we need to adjust for the next month and the next year and then just also be able to talk about our goals and what goals we have. So it was kind of just that approach of just getting to the table and seeing everything. So of course mostly from Amanda’s side, it was we need to pay off the car loan, we need to pay off the student loans, and she was also a little bit like a down payment for a house because we also wanted to get into a house. And then big into the emergency fund as well, so that was kind of the other part. And so then of course I agreed with all of that. Also saving just as much as we could in our retirement accounts, so we started off just a little bit over the match and then just kind of slowly racked up over a year or two to be able to max out our 401k’s.

Tim Ulbrich: And I’m guessing our listeners may be thinking what I’m thinking, which is, you know, you’re making it sound very easy. But even when you look at that number, I mean, $80,000 or $100,000 and some over three years, people will do the math, $100,000, 36 months, those are big monthly payments. And so it wasn’t just the student loan debt or the car debt. It was also the down payment that you were saving for a home, it was also investing for retirement, all of those things need cash, right? And at some point, you’ve got to figure out how we can lives off of less than we make so we can free up cash to be able to achieve those goals. So tell us more, Amanda, like what was the strategy or what was the success, the secret sauce, whatever you want to call it, for you guys in terms of being able to keep expenses down so you could ultimately free up cash and put that cash towards the goals. What were some of the sacrifices or cuts that you guys had to make?

Amanda Graves: One thing I think that we learned — and I think Holden mentioned it earlier — that we got married in the middle of pharmacy school, so for those first two years of marriage, Holden was in school and I was working. So we kind of had figured out how to live off of one salary. And then even though we were super excited, you know, come graduation and Holden getting a job, we really tried to live within the same means that we had been for those previous two years and then just kind of bringing the new paycheck that we were getting to go towards all those different things of meeting our financial goals. So I think that was the big thing was still living off the same budget and then just freeing up the rest to our financial goals.

Tim Ulbrich: And how did automation, Holden, if at all, play a role here? You know, we talk a lot about on the show, once you’ve got a plan, really one of the best things we do is get out of our own way to make sure the plan actually happens. And automation is often the vehicle, the system, that will allow that to happen. Did you implement kind of automatic withdrawals towards these payments? Or how did you make sure your goals were being achieved while you had other competing priorities for your expenses?

Holden Graves: So of course, I went to the University of Arkansas, so Joe Baker is —

Tim Ulbrich: Yes.

Holden Graves: Was there, and he was —

Tim Ulbrich: Shoutout to Joe.

Holden Graves: He was my professor. Yeah. I know, I still need to get his book, so don’t tell him I haven’t gotten it yet. He really kind of set us up, so that was a really good foundation. And then at the time, he was recommending “Automatic Millionaire,” so it was before y’all had come out with your book. And so that was a big one that I just read that and just like loved this of these people that just kind of never really made that much, and they just saved automatically and paid off stuff and all of a sudden, they had three homes and like $1 million in the bank just because they were automating everything and not thinking about it. So that was a big thing for us. So everything we had was automated. We had our 401k’s automated, we had basically everything coming out of my paycheck, so my paycheck would get deposited every other Thursday. And Friday, we had all of the automatic drafts going towards our different savings accounts and also towards our loan accounts as well.

Tim Ulbrich: Awesome. And we’ll link in the show notes “The Automatic Millionaire” by David Bach. We’ve talked about that on the show before. Also to Joe Bake himself, “Baker’s Dirty Dozen: Principles for financial independence,” excited about that new resource coming out. And I also would add, to our listeners that want to learn more about this concept of automation, one of my favorite books — you’ve probably heard me talk about it before — “I Will Teach You to Be Rich” by Ramit Sethi. He does an awesome job of actually getting in the weeds on kind of what could this look like from a system standpoint and how can you implement it? And I think for many people, the idea of it seems more complicated than the actual implementation process. So I’d recommend those resources. Before I ask you guys about hey, what’s ahead now that we’ve got this debt paid off, we’re in the home, I wanted to, Holden, for a moment go back to the student loans. I didn’t ask you what the strategy was there. Was it staying in the federal system, pay them off? Was it refinance the loans? And any advice you would have for our listeners who are trying to make that distinction or that decision.

Holden Graves: Yeah, absolutely. So we went with the route of refinancing. So I never really thought about getting it to filing or attack this separately or going into the weeds on that. I just looked at what our tax return was and tried to plug that into the REPAYE and PAYE options and just realized that we’d actually be paying more towards the debt doing that than just the standard 10-year payments. So that was never really an option was doing that. And then I didn’t really want to be tied down with one particular company or one particular field, so I didn’t want to be in the Public Service field of five years in, I’ve realized, wow, I don’t really like this, I didn’t want to be stuck in that type of situation. So since we were going to be so aggressive with it, we decided to refinance and got a much lower rate on the refinance. So just kind of went at it that way and paid it off just as much as we could, as quickly as we could.

Tim Ulbrich: That makes sense. And so you know, as we now look at the future and what’s ahead, we’ve got an emergency fund in place, we’ve got student loans paid off, check, we’ve got the cars paid off, check. Obviously you’re in the home, so the down payment happened, check. And you were investing for retirement along the way. So I’d like to hear from both of you, both some of the numeric goals of what’s ahead, where do you guys want to focus on in terms of the x’s and o’s in your financial plan and then perhaps some more of the softer sides of the financial plan, you know, what are you hoping this means for your family going forward? So Amanda, you want to kick us off?

Amanda Graves: Yeah. So now that we’re kind of moving forward as we’ve checked all those boxes, I’ll let Holden speak to more of the financial strategy because he’s better with that. But —

Tim Ulbrich: He’s the nerd. He’s the nerd, right? Let’s be honest.

Holden Graves: That’s it.

Amanda Graves: Oh, he totally is. He totally geeks out on finances, which I love. And he does really great at kind of the future planning where I’m more of the close-in, monitoring the monthly budget. So I’m kind of the —

Tim Ulbrich: Sure.

Amanda Graves: The monthly person whereas he kind of does everything else. But it’s just been really great to kind of be a partner and seeing those different strategies kind of come to life. And what that means too is it kind of gives us the freedom to do what we want both now and in the future, you know, with saving for our retirement but also we have smaller goals too. We have automatic savings for vacations. So if we decide we want to take a family vacation, it won’t be a big financial stress because we created that savings just so that way, we can do little trips or activities and different things like that.

Tim Ulbrich: And Holden, give us the, you know, what’s the next 3-5 years look like? What’s success look like for you guys going forward now that you’re past this $100,000 of debt?

Holden Graves: Yeah, absolutely. Yeah, so we’re just kind of focused right now on just kind of accumulating as much as we can. It’s just kind of where like we don’t have specific 3-year to 5-year goals. We usually go one year at a time. But for the most part, it’s just 3-5 years, we’re still going to get 3-5 years of invested assets to be able to cover us for if anything were to happen or if anything — if one of us needed to take a break or walk away from a job that’s stressful. So that’s kind of the biggest things there. One thing Amanda didn’t mention, though, was actually when we paid off our student loans. We actually paid off our student loans in October of 2019. And our son was born at the end of November that year. So about a month difference, so it actually was — it worked out perfectly because it was just amazing because we really didn’t feel any richer after we paid off the loans because immediately Amanda went on maternity leave. But it really gave her the freedom to take the full 12 weeks off and make sure that she could go back.

Tim Ulbrich: Sure.

Holden Graves: Now especially, she could decide later on whether she wants to take a smaller role with what she’s doing or just step away altogether. It just kind of gives us the freedom to have those options. So we’re just trying to build up that so that it takes a little bit of the stress off Amanda too so she’s less worried about if she wants to step away or just slow down a little bit with work.

Tim Ulbrich: Freedom and options. Couldn’t have said it better. I think, you know, for you guys, this certainly is the case. You’re moving into what I would say is the offensive part of the financial plan and really being able to build some of the wealth into the future, obviously achieve other goals that you want to achieve and have the freedom and option if for whatever reason, you didn’t want to work or work part-time or to be able to replace some of what would come from a traditional W2 income. So congratulations on the progress of what you guys have made. I’m excited for what lies ahead for you guys as well. And I really appreciate you taking the time to come on the show to share your journey.

Holden Graves: Yeah, thanks for having us on, Tim. It was a pleasure.

Amanda Graves: Thank you so much.

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