Category: Financial Planning / Podcast

 

On Episode 061 of the Your Financial Pharmacist Podcast, Tim Ulbrich, Founder of YFP, is joined by YFP team members Tim Church & Tim Baker to field insurance questions posed by the YFP community via the YFP Facebook Group in a rapid fire format. Whether it’s life, disability or liability insurance, having the right amount, not too much and not too little of insurance protection is essential to your financial plan.

Mentioned on the Show

• Policy Genius
• YFP Episode 056: Rapid Fire Student Loan Q&A with Tim, Tim & Tim
• YFP Episode 044: How to Determine Your Life Insurance Needs
• YFP Episode 045: How to Determine Your Disability Insurance Needs
• YFP Facebook Group
• YFP Life Insurance Guide
• Seven Figure Pharmacist by Tim Ulbrich, PharmD and Tim Church, PharmD
• Pharmacists Mutual
• HPSO
• APhA

Episode Transcript

Tim Ulbrich: Tim and Tim, welcome. Here we go, rapid fire insurance questions. You guys ready to do this?

Tim Baker: Let’s go.

Tim Church: Let’s do it.

Tim Ulbrich: Awesome. First things first, and I’m not going to sing “Happy Birthday” on the podcast, that would be embarrassing.

Tim Church: Why not, Tim?

Tim Ulbrich: I have a terrible voice, but if you absolutely demand it, we will do it. But it is Tim Church’s birthday! And he’s here recording a podcast, so happy birthday to Tim Church. Sincerely, we mean that. We appreciate all that he brings to YFP and the community. We appreciate his dedication, and so Tim, happy birthday.

Tim Church: Oh, thank you. Appreciate it.

Tim Ulbrich: I mean, what else would you want to be doing besides answering insurance questions, right?

Tim Church: Well, it’s kind of like deja vu because it’s been like, I remember a year ago, and I think it was on my birthday, you guys conned me into jumping in on the podcast.

Tim Baker: Is this like a birthday tradition? How does Andrea let you get away with that?

Tim Church: I guess because we had to both work in the morning, so you know, I’m off the hook and kind of can make it work.

Tim Ulbrich: That’s probably her quiet time that she appreciates and lets you off to record. So let’s do this. We’re going to do rapid fire Q&A all about insurance — life, disability, professional liability, and if you remember back in Episode 056, we did something similar related to student loans. And I would also reference listeners back to episodes 044 and 045, where we talked about life and disability in much more detail than we’re going to get to tonight even though we’re going to talk about those two topics specifically. So make sure to check out those two episodes. So the format, if you haven’t joined us before in Episode 056, I’m going to do the easy work. I’m going to punt the questions. Tim Baker and Tim Church are going to do the hard work. They’re going to answer the questions. And we’re going to get some feedback from the YFP community. And these questions come directly from the YFP Facebook group. So if you’re not yet a part of the YFP Facebook group, check it out. We’d love to have you a part of that community, and we’d love to have you featured on a future episode of the show. So Tim Baker, Question No. 1 comes from Zach in the YFP Facebook group. He says, “Which life insurance option should I choose? Term life or whole life? I think the right answer is term, but I’m not positive. Also, should I purchase it individually or through work? Through work is a lot cheaper.” So Tim Baker, life in terms of term or whole life and where to get it purchased, what are your thoughts?

Tim Baker: Yeah, so I think we’ve documented pretty thoroughly, I think that we’re big proponents of term versus whole life. You know, when I work with clients, I typically say that I feel — this is my opinion, I think this is the Tim, Tim and Tim opinion is that I think that whole life is generally better for the person that is selling it to you than the person is purchasing it. And we kind of take a mantra that we, you know, you buy term and then invest the difference. So to kind of give you a sense of what the difference is is I was on Policy Genius, which is the partner that we use to help our YFP audience with their solutions, insurance solutions, and this is what I use with clients. And before we started recording, I quoted a $500,000, 30-year term policy for a healthy 30-year-old, and it’s kind of the rule of 30. It’s about $30-35. That same $500,000 policy for whole life insurance is about five times more, it’s north of $160 per month. So I think the problem with whole life is that it can be complicated, it can be confusing, it’s not necessarily transparent, although there is a cash — so the big difference is one is pure insurance, term, it covers you for a term, a length of time. The other is whole life, it covers you for your whole life. And there is both an insurance component and like a savings or an investment component. And I think that whole life is typically, you know, I think it has lots of fees and you know, it’s not as transparent as I think I would want it to be. And I’ll probably get a lot of people that disagree with me and think whole life is a good solution, but I typically that for most of our listeners and for most people out there, term is a much, much better fit. From the perspective of should you buy individually or through work, I think one of the problems that I see often is that there is this insurance inertia, same thing when you have a 401k inertia. And what I mean by that is, you know, if your employer says, “Hey, we’ll match 3%.” Then you put your 3% in to get your match, which is great, but then five years later, you’re still at 3%. The same thing can be said about insurance is that most employers will say, “Hey, we’ll insure you 1x or 3x your salary,” or whatever it is, and you can buy up a little bit. That’s typically not going to be enough, especially for pharmacists in terms of what you actually need. So although a group policy is there and is a nice little benefit, for the most part, by and large, especially when you have kids or you have a house, things like that, you’re going to need a lot more insurance outside of what the employer gives you as a baseline. Now, I am a big proponent of buying individual policies because it’s portable. You can take it with you. And if you lock in a policy at 30 years old versus when you’re 45 and leave your job or 50, the policies are going to be a lot different in terms of the premium that you’re paying. So a lot of factors there. And typically, I know Zach, you said the group is cheaper. That’s typically not been my experience. Typically, if you’re a younger professional, you are typically paying a premium for your premium to kind of account for the older population that is in your group, whereas if you’re a younger professional, you’re going to pay a little bit less of a premium because you’re younger, you’re healthier. So I know that’s kind of a lot of moving pieces to that question, but to kind of sum it up — term, buy an individual policy because it’s portable. And yeah, just go from there. And obviously, be more — you probably need more than what the employer gives you, anyway.

Tim Ulbrich: Yeah, and Tim Baker, I wonder too if the purchase he’s referring to at work being cheaper is probably likely because it’s a much smaller amount of coverage, like you alluded to. So I know here at the university, I think we get one or maybe up to two times annual income but a max of $100,000. So you know, I’m wondering if there’s an apples to oranges comparison there where, as you mentioned, $500,000 policy or in my case, as I have documented in other episodes, $1 million policy, about $38 a month, versus $100,000-200,000 policy, obviously, the price difference per month may look very different. But the amount of coverage could also be very different. So it seems, as we talked about on Episode 044 in terms of how to determine your life insurance need, it seems to me this topic of term versus whole life is probably one of the most contested, emotional debate or whatever you want to call it, second only to the should I be paying down my debt versus investing? So lots of opinions on this topic. And one last thing I would add here is that I think for many listening to this show, we know that many of our listeners are recent graduates, new graduates, within 10 years or so of graduation. Often, we have so many competing priorities that being able to have that coverage that you need but being able to free up as much cash as possible to achieve other goals, we think is critically important, which obviously favors the term life side of the argument. OK. Good stuff. Tim Church, question from Anna in the Facebook group, “How long of a life insurance policy should I get? Is it most beneficial to get a 30-year policy?” And so she referenced that she’s currently in her 30s with young kids. What do you think?

Tim Church: Well, I think it kind of goes back to first off, are you in the term or the whole life camp? So go back to the question that you asked Tim Baker. But if you kind of agree and say, “OK. I’m in for term,” well, with term life insurance, you have to actually choose a term over which you’re covered. So you may have an amount in mind in terms of how much you want to have covered in the event of your death but over what period of time? And it’s really subjective to your specific situation, and I’m sure we’ll probably say that about 18 times on this episode as we kind of do on all insurance-related episodes. But really, the main question is is how long is it going to take you until you’re self-insured? I.e., how long is it going to be until no one is actually relying on your income or that you’ve accumulated so much wealth that no one is dependent on you making an income? And also, it could be how long do you want to work for? And how long do you expect to work for? So if you look at some of those big-cost items, so if you have kids, thinking about kids’ college, dependent on your income about future expenses, any debt that would be inherited by a spouse or family member such as a mortgage, so over what period of time are you going to need that coverage in place? So I think those are some of the questions that are really important to ask when you’re trying to figure out that term. Now, practically speaking, most insurance companies — and if you look on PolicyGenius — really, they’re going to go anywhere from 5-30 years. Thirty years is sort of like the maximum amount of time that they’re going to let you go with any policy. Now, some people get a little bit fancy. So they pick a policy for 20-30 years and then a couple years later, they layer on top of another policy to kind of get them an extra couple years or a little bit later into their retirement age. So there’s a lot of different ways you can go about it, but I think kind of a general rule of thumb is how long is it going to take you to become self-insured. And for a lot of people, that’s going to be into the retirement age.

Tim Ulbrich: Yeah, and I think this question really gets to the fact that you can’t buy life insurance in a vacuum, right? So Anna’s asking the question around length of policy, she mentioned she’s in her 30s, she’s got young kids. You alluded to things about when would you be self-insured, which obviously goes to components like how are your retirement savings going? How is your debt repayment going? What other debt do you have? Do you have a mortgage? Do you not? What are your goals? All types of things, so I think that further highlights the importance of comprehensively looking at your financial plan, not just looking at insurance as one component but as really a broader conversation related to all parts of your financial plan. So Tim Baker, continuing on here, Brian, a very active member of our Facebook community, asks, “How much life insurance is suggested for a stay-at-home spouse? General rule of thumb is 10-12 times annual income, but that doesn’t really apply here.” And then Dalton follows up to say, “It’s a great question. I’ve heard about $250,000-400,000 but curious to see the team’s opinions.” What do you think, Tim Baker?

Tim Baker: Yeah, I know Brian. So shoutout to Brian and Leah in Ohio and their son Nathaniel. So yeah, I think this is a tough one because you know, there are a variety of ways to calculate life insurance. I kind of subscribe to the Keep It Simple, Stupid method, which is, you know, roughly if you go by the old adage of 10-12 times income. I think more or less, you’ll be OK. But I think with some of those kind of if you have, you know, one spouse that doesn’t work or, you know, if there are, you know, kids or you have different goals with respect to college or if there’s a special need or something like that, I think breaking it down a little bit further. So the two main avenues that you can go down are let’s call it the Financial Needs calculation, which this method basically evaluates income replacement, lump sum needs, accounting for inflation and things like that, examines recurring expenses and, you know, some variables to consider would be things like final expenses, what the outstanding debts would be that maybe not be forgiven upon death and disability. If and what you want to provide for income to survivors. So if there’s, like I said, education or special needs that we need to account for with the, like again, with the marital status is and the roles of the spouses, size of the family, that type of thing. So that’s more or less one calculation you can go through. The other one is called a Human Life Value, and this is more or less a time value money calculation that uses income throughout what would have been the remaining work life expectancy. So you essentially take out the person that you’re insuring, you basically project what their income would have been, and you kind of discount what their consumption would have been in the household. And then voila, you have your calculation. So in this case, I probably would go through both and then probably with more of an emphasis on the financial need, the first method that I calculated that said, OK, in this case, in Brian and Leah’s case, if Leah decides to go back to work more full-time than she is now when Nathaniel is grown up, like what does that look like? You know, what are your thoughts on having a part of the life insurance benefit go to completely pay off the home mortgage or go to completely fund Nathaniel’s college? So there’s a little bit of wiggle room and gray area, and ultimately, what we’re trying to kind of come up with is a number that, hey, if someone were to pass on, we can then take that money and invest it and have a level of life that makes sense. Now, just to kind of flip that switch with the stay-at-home spouse, from Brian’s perspective, obviously he’s going to be on the road, traveling, working, and things are going to change. There will be an adjustment period if that were to happen, God forbid. But, you know, as lots of families with young kids know that that both work, daycare and child care services are hugely expensive. So I think that, again, we would look at the cost of daycare from basically the age of the kids to kind of college age and then provide some type of benefit to cover that in the event that the stay-at-home spouse was, you know, to die prematurely. So there’s not — unfortunately, there’s not, you know, just like Tim said, it’s not kind of a one-size-fit-all. I think basically, sitting down and asking tough questions — because again, like a lot of my, if I say, “Hey, what do you want to allocate for final expenses?” people look at me like I have three heads. It’s just not something that we think about. So like I’ll provide some guidelines and some left and right limits in terms of that, and then we kind of just build that into the calculation and then go forth, get a quote and get a plan in place. So stay-at-home spouse is a little bit tricky. Again, not a great rule of thumb out there, but I think ultimately, there’s a — sitting down and kind of backwards planning into a number makes the most sense.

Tim Ulbrich: Yeah, good stuff. And a shoutout as well to Brian and Leah. Leah actually is a graduate of NEOMed. Go Walking Whales. Tim Church, also a graduate of the great university that is NEOMed, so excited to have them a part of the community. And this one hits home for me. I know Jess and I really hadn’t thought about life insurance in terms of her being a stay-at-home mom. And that came up as a topic, and all of a sudden, we were asking ourselves, what expenses would arise in the event that she were to be unexpectedly pass away? So I think this is a good topic for everyone to be thinking about. And we ended up landing on $400,000. But obviously, as you mentioned, there’s certainly not one size that fits all here. I would also reference our listeners, we have two great guides and pages on life insurance and disability insurance. So if you’re ever talking about life insurance, if you go to YourFinancialPharmacist.com/lifeinsurance, a great guide that will help you walk through and answer some of the questions that we are talking about here tonight. Tim Church, this is a loaded one regarding disability insurance, and this gave me actually flashbacks to us writing the book, when we were digging in and trying to decipher the code that is disability insurance. So Dalton asks, “I feel like I know very little about disability insurance, even less about professional liability. So it would be great to know how much is needed and what’s a reasonable amount to pay for it.” So we’re going to talk about professional liability here in a minute, but talk to us a little bit about basics of disability insurance and what our listeners should be thinking about.

Tim Church: Definitely. Well, disability insurance is really income insurance. It’s protection to guarantee yourself an income if you can’t work because of an accident or an illness. And I think a lot of people, they have this feeling, especially people that are young starting out in their careers that they’re just invincible and that nothing bad is going to happen to them. And unfortunately, that kind of thinking can lead to a bad situation, as I’ve known — specifically known cases of people who have had debilitating chronic illnesses that have limited their ability to work full-time or part-time. I’ve known people that have gotten into car accidents, who’ve had head trauma and couldn’t work for an extended period of time. So if you think all about that it takes to become a pharmacist, all the time, all the energy, that this is really probably one of the most important insurances that a pharmacist should have because it’s really a way to guarantee that you’re going to have an income for whatever period of time that you become disabled. And you know, that kind of goes into how long should you have a coverage? Should you have a short-term disability coverage? Should you have long-term? And I think that obviously, again, it’s going to be situation-dependent. But if you expect that you’re going to work until you become 60, 65, then you really should have a policy that’s in force over that time period. And so when it comes to the actual amount, you have to ask the question, well, what could you comfortably live on or what kind of lifestyle do you want? And that’s an interesting way to look at it, but that’s really what it comes down to. So if you’re someone that says, I really want to maintain my same standard of living that I’m doing right now, then you probably need to go up to the max of what insurance companies are going to allow you to have, which is about 60-70% of your gross income. And if you think about that 60-70% of your gross, that’s really pretty close to what you’re getting paid net anyway when you think about taxes and other deductions that come into play. So if you’re trying to replace basically most of the income that you’re going for, then that’s a percentage that you would kind of look at. Now, you may be someone to say that, well, if I couldn’t work, maybe I don’t need to have my same standard of living and I would be OK with a lesser amount. And certainly, that’s an example of one of the routes that you could go. Now, one of the things that you mentioned about the book, Tim Ulbrich, is just thinking about how complex these policies are. I mean, when you think about a term life insurance policy, it’s pretty straightforward. You choose a term, you choose an amount, and there you go, right? But when it comes to disability insurance, you have these basics in place, but then you have all of these other bells and whistles. So in the policies, they call them “riders.” And so it can make it very, very confusing, very complex, and it’s almost like you’re buying a car. Like they have all these upsells and things that they’re trying to get you on. Now, some of them are kind of standard in policies. But when you look at what the cost breaks down and how do they come up with a cost for you, really going to be based on some personal details: your age, your health history, the benefit period, so how long you want that coverage. Like I said, for most people, probably going to be up to retirement age. And then also something called the elimination period. And this is basically the time it takes for when you would make a claim that you are disabled until you would actually start getting payments in the mail, you’d start getting a check and getting payments. So the longer that elimination period, the cheaper your policy’s going to be. So if you say, “I have enough emergency fund or enough savings to wait until six months between making a claim,” well then, you would have an elimination period of that length. And basically, you’d be able to cover yourself until that period. And then some of the other things that kind of break down and go into that are some of those riders that we talked about, so something called own occupation, meaning that if you can’t work as a pharmacist, you’re going to get that income every single month, not if you can do any occupation or any meaningful work. So those are something that I think is really important. And then when you go into looking at the cost, again, because there’s so many variables into play, it’s hard to say, you know, what is a good amount? What’s a reasonable amount? But I will give you an example. If you look at someone who’s 25, so around the average age of someone who’s graduating as a traditional student, and they’ve got coverage until age 65, 60% of their income they’re trying to replace within a 180-day elimination period, that’s going to cost around $120-160 a month. And a lot of people may be looking at the number and say, “Wow, that’s a lot higher than life insurance and possibly even health insurance and other things.” And it is. It’s true. If you want kind of a very comprehensive type of policy, it’s going to be a little bit pricier than other things. But again, at the end of the day, you think about all the time and all the effort that you put into become a pharmacist, what are you going to do if you can’t work for a period of time? If you get in an accident, if you become disabled because of an illness, what are you going to do? So again, I think it’s so important. And one of the ways to kind of look for, shop multiple companies, again, is checking out PolicyGenius, and you can do that on our partner page. And that’s at YourFinancialPharmacist.com/insurance. Wow, that was a mouthful, Tim.

Tim Ulbrich: No, that was the Cliff Note version of disability insurance that I wish I would have heard 10 years ago. That was great. And I think, as you mentioned, very complicated topic. And I’m going to issue a call to action to our listeners because I know there are lots of people out there that need adequate life and disability insurance protection that don’t have it in place. So if you’ve heard this night — and obviously, this is just scratching the surface — head on over to the website, learn more, check out the free guides, evaluate what type of coverage you need, and then, as Tim mentioned, you can check out the PolicyGenius site to get going there and get learning more about this topic as well. So also, I’d reference Chapter 7 of the book, “Seven Figure Pharmacist.” We talk about this in great detail, and you can get that over at TheSevenFigurePharmacist.com. OK, two questions we have about professional liability insurance. So Tim Baker, the first question comes from Tyrell. He says, “Should I carry my own professional liability policy on top of whatever my workplace provides?” What do you think?

Tim Baker: Yes. So a professional liability policy is definitely something that you’re going to want. And I think given the cost of said policy, it’s really a smart move. I think they’re almost negligible in terms of what you pay for the year. Typically, if you’re a pharmacist, you want to protect yourself. Typically, the policies that are issued through employers will mainly protect the employer. So this would be to protect yourself if you’re individually named in a lawsuit or if your employer doesn’t have the proper coverage in place to protect you or if you have a second job, if you’re side hustling, or if you kind of give advice outside of your employer, these would be things that would be covered under your own policy. So they say, some of the studies show that 75% of claims against pharmacists is wrong drug, wrong dose. So some of the things that would be covered would be things like that kind of overarching professional liability, things like license protection, defense attorney, those kind of things that are super important, you know, just like Tim Church was talking about with, you know, the disability policy. This is your really protection against your ability to make a living. Pharmacists spend lots of time and money and blood, sweat and tears to get the PharmD, get on to the world, and these are, you know, these are these protection mechanisms that are in place to make sure that you are defending your income and your overall balance sheet. So you know, I know that Pharmacists Mutual, the clients that I work with will look at that or HPSO, I know has an agreement with our partner, APhA, so these are all places that I would look and make sure that, you know, you have that policy that’s portable to you that you’re paying for and provides you coverage that you need.

Tim Church: And like you said, Tim, the cost is really negligible. We’re talking for most policies, they’re going to be like $150-300 a year. So it’s really, really cheap for the coverage that you get. And it’s pretty easy to get these policies. It’s kind of an all or nothing. A lot of the other insurances we already talked about, you have to pick a lot of different variables and things that you want, but these with liability insurance, it’s pretty much all or nothing. And most coverages give you about $1 million worth of liability per claim, then somewhere around an aggregate of $3 million for as an annual limit. So I think for most part, it’s pretty much a no brainer to have.

Tim Ulbrich: Yeah, one thing I would add too to the discussion is that the role and scope of practice, depending on the state that you live in, is evolving quickly. So I think as the role of the pharmacists continues to expand — you know, here in Ohio, we obviously have an expansion of collaborative practice agreements, which means now essentially, we’re able to prescribe without using the word ‘prescribe’ in our state laws. But obviously, that’s going to add additional opportunities where that liability protection is going to be needed even more. So I think for the cost and what that provides, I think it’s critically important. And I know here in Ohio, I’m sure other states are experiencing, you know, the rules associated with the laws that the board is governing are evolving very rapidly, by the week, sometimes by the day. And so being able to stay up with those and make sure you’re practicing according to the law, I think is becoming more difficult, which validates the need for that insurance even more. Tim Church, Kristin asks — this is a good question — from the VA here, “If you work for the VA, do you need to carry professional liability insurance?” What do you think?

Tim Church: It’s interesting. I asked the same question when I first started, and I think a lot of people have this question. Well, when I looked into this a little bit more, that VA employees are federal employees, they have this extra protection through the Federal Tort Claims Act, and so when you’re functioning within your federal scope of practice, it does provide a level of immunity from personal liability damages, so if you have any malpractice or negligence, if you’re working under your scope or within your scope. So I think that you definitely get an extra layer of protection. I think where it can get fuzzy is if you’re functioning within that scope, and if there’s any way that possibly you could be told or determined that you’re not within that scope. And the other thing I would say too is there’s always going to be opportunities to work somewhere in addition to the VA or if you’re going to give verbal advice like Tim Baker mentioned. So I think that in general, if you want that extra layer of protection, it just kind of makes sense. Is it absolutely necessary? Probably not if you’re solely going to be practicing pharmacy within the VA and that’s it. But again, kind of go looking back to the cost and the benefits that you can get, I think it’s just a great buy in terms of what you get in exchange.

Tim Ulbrich: Yeah, just don’t get Crazy Uncle Joe any drug advice, right? Outside of work. And it’ll all be OK. So I think take-home point here, professional liability, get it done. For what it costs, it’s good protection, good coverage, thinking of that also alongside disability in your life. So Tim Baker, last question we have here from the YFP Facebook group comes from Shaveida — and I apologize in advance if I butchered your name. Let me know, we’ll get it right next time. She asks, “My employer advertises long-term care policies.” And she says she doesn’t know much about it. So talk to us briefly about long-term care. We haven’t talked much, I think if any, about it on the podcast or even on the blog. What is long-term care coverage? And who should be thinking about it?

Tim Baker: Yeah, and I would say full disclaimer, I’m not a long-term care insurance expert. I know, typically this is coverage for individuals, you know, basically as they become seniors where you pay an annual premium in return for financial assistance if you ever need help with kind of those day-to-day activities like bathing and dressing and eating meals, maybe toileting, those types of things. And most of my experience with long-term care insurance is from my last firm where a lot of our clients were more kind of approaching retirement and in retirement. You typically don’t buy these types of policies until you’re in your late 50s, early 60s. And they’ve had kind of a checkered past. So back in the ‘90s, there were probably more than 100 insurers that issued these policies. And I think today, it’s less than 20 that actually do because of a variety of underpricing policies and premium spikes and just insurers going out of business. You know, typically, what I saw in that space in my last firm is a lot of people electing to let the policies lapse because they just became too difficult to manage and really self-insure. Now, there’s a lot of risk there because, you know, I read a stat that someone retiring in 2015 will spend I think $245,000 on medical expenses kind of outside of Medicare. So it’s going to be a large part of, you know, the future of retirement planning. How do you self-insure versus long-term care insurance? So you know, like I said, most of my clients are kind of in the 25-45 range, so it’s not something that necessarily I look at day-in, day-out. I know that overall, it can kind of be expensive and difficult to price and project. But I think, again, as my client base ages, it’s just something that we have to look into and see how to really approach that part of the retirement plan.

Tim Ulbrich: Good stuff, Tim and Tim. This has been fun. We’ve got more of these coming. We’re going to do rapid-fire Q&A’s on investing, home buying, other topics. We’d love to hear from you. So again, if you’re not yet a part of the YFP Facebook group, come on over, join us, ask your questions, and we’d love to feature it on a future episode of the YFP podcast. So on behalf of the team, that’s all for today. And we look forward to joining you again next week. Have a good one.

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On Episode 057 of the Your Financial Pharmacist Podcast, Tim Ulbrich gets practical to talk about why automation matters when it comes to achieving your financial goals and specific ways you can automate your own financial plan. We will hear from the YFP Community about different ways that they automate their financial plan.

Mentioned on the Show

• YFP Facebook Group
• YFP Episode 008: Developing a Millionaire Mindset
• I Will Teach You To Be Rich by Ramit Sethi
• YFP Episode 048: Mo’ Money, Mo’ Problems: Making the Financial Transition to New Practitioner Life
• YFP Blog
• YFP Podcast
• YFP Episode 026: Baby Stepping Your Financial Plan – The 2 Things to Focus On First
• YFP Budget Template
• 5 Steps to Creating Your Best Budget
• Script Financial
• Public Service Loan Forgiveness Program
• Student Loan Refinancing Resources
• Ally Financial Inc.
• YFP Email

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 057 of the Your Financial Pharmacist podcast. Not going to lie, fired up about this episode. When it comes to automating your financial plan, it’s so obvious, so effective, so easy to implement, but yet so many people are not optimizing this to achieve their own financial goals, and that would be myself included. I’ve made some recent changes to my own financial that I’m excited to share with you in this episode when it comes to automation. Whether it’s student loans, retirement, college savings, vacation, maybe it’s saving for a down payment on a home, setting goals and carving out money in the budget and automating those goals is powerful. And I know that I’m not alone that when I say that for some time, I was feeling that when you have multiple financial priorities that are swirling around, that can easily become overwhelming, and automation helps to put these goals into action and takes the stress out of wondering whether or not they’re actually going to become reality.

So let’s jump in as we’re going to talk about different ways of automating your financial plan. And as I was preparing for this episode, I couldn’t help but think back to Episode 008, Developing a Millionaire Mindset by YFP team member Tim Church, because when I think about automation, I think that’s a key piece of developing a millionaire mindset. For those of you that have not read the book, “I Will Teach You To Be Rich” by Ramit Sethi, I’ll link to it in the show notes. It’s just a great, quick, easy read, but one of the things he talks about in that book at great extent is this idea of automation and the power of automation and taking the decision-making out of the hands and taking some of the behavioral components where we tend to make mistakes and putting in processes to help to minimize those mistakes.

So before we dig into the weeds to talk step by step about exactly how to automate your own financial goals, let’s talk about why in the world you’d want to set up an automatic process for your finances in the first place. You know, the first thing that comes to mind — we’ve talked a lot about this on the podcast, throughout various episodes leading up to here now in Episode 057, and we’ve mentioned several times that so much of personal finance is behavioral decision-making. You know, I once heard about four or five years ago, about 80% of this whole topic of personal finance comes down to behavior and about 20% is really digging into the math and the numbers and the strategy. You know, as I’ve made more mistakes, had more successes along the way that on both sides of that, I would argue 80% may not be enough. That might actually be more like 90%.

And for me, when I think about automation, I think about out-of-sight, out-of-mind because I know at the end of the day, if all of that money is just sitting in my checking account and I haven’t automated it towards the goals that I’m trying to achieve, whether that would be getting out of credit card debt, whether that would be paying down student loans fast or retirement, college savings, vacation, home buying, repairs, whatever, I know that human nature and behavior is that I’m going to spend that money — I’m going to hope that something’s left over, but more often than not, nothing’s going to be left over, and I’m going to spend that money. And when I think about automating a financial plan, I think about intentionality. I think about paying yourself first and making sure you’re then really budgeting around the rest of it rather than hoping there’s something left over at the end of the month. So first off for me is that human behavior says that we’re better off taking the decisions out of our hand because we’re prone to making mistakes when it comes to finances. You know, one of the things that gets personal here for me is I think about my own retirement savings, I’m in the state teachers’ retirement system here in Ohio, so many of you know I work as a faculty member of Northeast Ohio Medical University College of Pharmacy, been here for about nine years, and in the state teachers’ retirement system, we essentially are forced to put in a percentage of our paycheck each and every month. And that number is actually I think now approaching 14% that we are forced, no decision in our hands, to put that money into retirement. We then also have an employer match, but as I think about where I am today, nine years later with my retirement assets, I think the only that is possible is because that decision was taken out of my hands. I cannot say that I would have had the discipline, that I would have prioritized putting 15+% of my paycheck each and every month into retirement, so I think that’s a good example as we talk about areas for automation, retirement is certainly one. But again, end of the day, if that money were in my checking account and that decision wasn’t made for me, I probably wouldn’t have achieved the success I have so far as it relates to retirement saving.

And so I think that’s a humbling moment to think that the only reason, the only reason my retirement is on track and ahead of progress is because that decision was put on automatic, because that decision was taken out of my hands. Now, we know that another reason automation is important, besides a behavioral decision processes associated with it, is that for many listening, whether you’re a student, if you’re a resident, maybe you’re somebody who’s transitioned out within the last five or 10 years, regardless of where you are in that spectrum, we know that you’re facing lots of different financial goals that you’re trying to juggle. You know, in Episode 048 we interviewed Dalton Fabian in the episode called Mo’ Money Mo’ Problems: Making the Financial Transition Into New Practitioner Life, and what stuck out to me about that episode with Dalton is he, like many others transitioning from student into new practitioner life, have all of these things that are coming at you at one time, student loans, emergency fund, retirement, down payment for a home, maybe kids’ college savings, lots of different things that are coming. And how do you strategically prioritize those and achieve those? And I think as we’ll talk about here in a minute, I’ll share some examples from those within our Facebook group, having a plan in place with a budget that’s executing those and then automating that plan each and every month is the key to success there.

So let me give you some quotes from those YFP members in our Facebook group, and this is what they had to say about automation in their own financial plan.

So Brianne from the YFP Facebook group said that “I automate as much as I possibly can, including savings, on the first of the month, all fixed bills and student loans as well. To me, that makes it easier to budget because I only ‘feel’ like I have whatever is left over rather than my whole paycheck.” I think there’s such wisdom there from the sense that when you pay yourself first, first of the month, you automate paying yourself towards your goals, all of a sudden, you get used to living on the rest rather than living up to your full income and hoping you can fund your goals after the fact.

YFP team member Tim Church says, “Love automating as much as possible — bills, everything, all bills, student loan payments, HSA contributions and TSP contributions.” That’s his retirement component with the VA. So when it comes to automation for Tim Church, he’s automating as much as possible.

Matt from the Facebook group says that, “I automate most of it but still need help for the leftover. I auto-deposit 529 college savings accounts every 15 days, one for each kid, auto-deduct 401k every check, have a separate target date fund that comes out once a month. I pay my bills as soon as I get them from the mailbox because I like to actually see the balances, which is the only reason they aren’t on autopay.” And I think that’s an interesting point, Matt, that maybe some may say, you know what, I like to not necessarily automate all of my bills — maybe you do, maybe you don’t — but for Matt, he looks at that and says, you know what, if I get my bill, whether it’s water, sewer, cell phone, whatever it be, that he likes to see the balance in the process of it to make sure that everything is accurate.

Brian says that “We automate 401k contributions and savings account for sinking funds.” We’ll talk about sinking funds a little bit upcoming in this episode. “However, we don’t currently automate 529 contributions or IRA contributions. Still not sure which approach is better, but I do find that not automating everything actually requires you to think about it every month as opposed to a set-it-and-forget-it mindset. I think there may be some benefit to that, depending on how you’re wired.” Building off what Matt said, Brian says, you know what, for some things, set-it-and-forget-it is great when you think about 401k contributions, 529, IRA contributions, but for some other things, maybe not so much if you like to have that reminder of exactly what you’re doing.

And Brandon, the last one from our YFP Facebook group, says so when we don’t see it, the importance for him of automation is that “When we don’t see it in the checking, then we don’t spend it.” And Jess and I have noticed the same exact thing. First day of the month comes, auto-withdraw to a separate savings account, different funds, I’ll talk about those here in a minute, boom. Whatever’s left over, that becomes our monthly spending in our budget. But we have already funded our goals because we know the reality that if it sits in our checking account, we’re going to end up spending it. So if it sits in our checking account, we’re going to end up spending it.

So let’s now move into where exactly to get started with this process. We’ve heard from those in the YFP Facebook group. And if you’re not yet a part of that community, you’re missing out — great conversations, come on over to the YFP Facebook group, we’d love to have you a part of that group and a part of the conversation.

So where do you get started? For me, it comes down to two major things: goal-setting and budgeting. Both of which we’ve talked about in the YFP podcast as well on the YFP blog, and if you’ve heard us speak at a live event, you know for us, goal-setting and budgeting are absolutely critical to having a solid financial plan. Now, let’s take a step — and I think goal-setting can be an overwhelming process, but just like you were taught in pharmacy school, when it comes to setting your financial goals, they have to specific. They have to be measurable. They have to be action-oriented. They have to be realistic. They have to be time-oriented. You’ve heard of SMART goals before, right? And they also, in our opinion, they have to have a “why” behind them. What is the motivation for why you’re going to achieve that goal? Now, you all know as you’re working with patients, maybe you’re working with a diabetic patient, trying to get them to make a lifestyle change, achieve an A1C goal, whatever you’re doing, it’s the same thing when we talk about our financial plan. We have to put behavioral pieces, we have to make conscious choices, and we have to have those motivations, specifics, that measurable component, the time-oriented piece, we’re going to have a higher likelihood of achieving that goal. So whether it’s helping a patient with their diabetes or helping yourself with your own financial plan, goal-setting is a critical part. And the other piece of this, which I’ll mention here in a minute, is that when you work on your monthly budget, your monthly budget is simply an execution of your goals.

So for those of you that are listening to this — and I know many of you are sitting here right now, thinking, I feel so overwhelmed with all of these different competing priorities that are out there. I’ve mentioned several of them already. We’ve talked about emergency funds before, we’ve talked about getting credit card paid off before, we’ve talked about making sure you have a solid retirement savings plan in place. What about your student loans and kids college? And the list goes on and on. And you have to first put all of those things on the table and say, OK, I have all of these goals, all of these competing priorities, which of these are the ones that I’m going to go after first? Maybe you’re somebody that says, you know, I’m going to go all in on this one goal, and then I’m going to move to the next one because I know that if I tried to focus on many different things, I tend to get overwhelmed and really just end up spinning my wheels. So some of you may say, you know what, I’ve got credit card debt, and I’m going to go all in on my credit card, knock that out, and then I’m going to move on to something else. Now, others of you listening may say, you know what, I think I can handle more than one goal at the same time, so now I need to look at the top two or three or four goals to make sure that I’m achieving these things in the right order. And I would reference you back to Episode 026, we talked about baby stepping into a financial plan, specifically around emergency funds and credit card debt as the two areas that you want to — more often than not — focus on first. So if you’re hearing this thinking about, I don’t even know where to get started, go back to Episode 026, Baby Stepping into a Financial Plan, I think that will help you get along the path to coming up with how you could prioritize these goals.

So you lay out all of the goals on your paper, and you start to prioritize them. And I literally like to put a number by them. So maybe it’s credit card debt, 1. Emergency fund, 2. Student loans, 3. Whatever the goals that you’re working on. Then you move into the budgeting process. Now, I’m not going to go into detail here on this episode about the budgeting process because we’ve chronicled it before on previous episodes. I’d point you — we have a great budgeting resource at YourFinancialPharmacist.com/budget. Again, that’s YourFinancialPharmacist.com/budget where we have a template, an Excel template, that will walk you through step-by-step how to create a zero-based budget to achieve those goals that we just discussed. I also would reference you to, we have a blog post out there at YourFinancialPharmacist.com, “The Five Steps to Creating Your Best Budget.” So both of those resources we’ll link to those in the show notes, I think will be a great starting point to make sure you can execute your goals through that monthly zero-based budgeting process. Now, if you take the time to sit down and do a zero-based budget and really work through this process, what you will come to at the end of that budgeting process is you’ll determine your total take-home pay, you’ll determine your necessary expenses, you’ll determine your discretionary or nice-to-have expenses, and then you’ll come up with a number that is determined to be your disposable income. Essentially, what amount of money do you have left over each and every month, each and every pay period, that you can allocate towards your financial goal. So if we did the goal-setting process and then we worked through the budgeting process, you may say, OK, at the end of the month, I’ve got $1,000 left over after I pay all my necessary and discretionary expenses. I’ve got $1,000 left over, and here are the three goals that I want to work on. Boom. That’s where the automation begins to happen. So if you were to say, you know what, I’ve got $1,000 left over, and I want to start doing two things. I want to pay off my credit card debt, and I want to build an emergency fund. Maybe you take that $1,000, auto-withdraw the first of the month $500 goes to your credit card bill as one example, $500 goes into a long-term savings account to save for an emergency fund. That decision is now out of your hands, you’ve identified your goals, you’ve set the budget, and now your goals are on automatic. And that provides an incredible amount of peace and confidence when it comes to your financial plan.

Sponsor: So two big pieces to get started here: setting those goals and then getting that budgeting piece in place so you know what that disposable income is, and you know exactly where you’re going to put that money. Now, once we have those two pieces in place, we can then begin to think about the actual processes for automation, and we’ll talk more specifically about where you can put the money in different areas when it comes to automating your financial plan.

I want to take a brief moment before we jump into the second part of the show and to highlight today’s sponsor of the Your Financial Pharmacist podcast, which is Script Financial. Now, you’ve heard us talk about Script Financial before on the show. YFP team member Tim Baker, who’s also a certified fee-only financial planner is owner of Script Financial. Now, Script Financial comes with my highest recommendation. Jess and I use Tim Baker and his services through Script Financial, and I can advocate for the planning services that he provides and the value of fee-only financial planning advice, meaning that when I’m paying Tim for his services, I am paying him directly for his advice and to help Jess and I with our financial plan. I’m not paying him for commissions, I am not paying him for products or services that may ultimately cloud or bias the advice that he’s giving me. So Script Financial specifically works with pharmacy clients. So if you’re somebody who’s overwhelmed with student loans or maybe you’re confused about how to invest and adequately save for retirement, or maybe you’re frustrated with just the overall progress of your financial plan, I would highly recommend Tim Baker and the services that he’s offering over at Script Financial. You can learn more today by going over to ScriptFinancial.com. Again, that’s ScriptFinancial.com.

Tim Ulbrich: OK, welcome back. In the second half of this episode, we’re going to talk about the areas specifically that you can consider for automation, which builds upon the discussion we talked about in the first half of the episode of the goals that you’re setting. And then I will walk you through step-by-step exactly how I think you can set up your automation of your financial plan and more specifically, I’ll show you exactly what Jess and I are doing with our own financial plan when it comes to automation.

So let’s talk about the different areas that you can set up for automation. And lots of these came from personal experience, from Tim and Tim — I know that they do also, YFP team members Tim Baker and Tim Church, as well as what I’ve heard from other pharmacists and those within the YFP Facebook group. Now, one we already mentioned in the beginning comments from the YFP Facebook group, areas of automation of course would be your monthly bills. So this, for me, is more out of convenience than anything else, so I don’t look at automating my monthly bills as being a point of, say, strategy as I do that it’s one less thing that I need to work on in terms of writing a check, making sure that that’s all set and ready to go. And that’s automatically happening each and every month.

Now, to build on what Matt and Brian said in the earlier comments, I, too, am someone that does not automate all of my monthly bills. And the reason is when it comes to those bills that I know fluctuate — water, for example, could be cell phone usage if there’s potentially overage charges — any bill that I know may have variance based on usage, I like to see that and track that and to be able to identify any discrepancies that may occur. Now, if I have bills that I know are the same each and every month and that’s not necessarily going to change, then for me, automation on bills really becomes a point of convenience. So area No.1, of course, would be bills.

Area No. 2 is student loans. And one of the things that Brandon said in our Facebook group is that automation is a must when it comes to student loans if you’re going for the loan forgiveness program. There, he’s referring to the Public Service Loan Forgiveness Program. That way, you are for sure making on-time payments. And Brandon, I think that’s great wisdom there because when it comes to Public Service Loan Forgiveness — and really, in my opinion, any student loan payment — you certainly do not want to have delayed payments for a series of reasons. One, if you’re in Public Service Loan Forgiveness, those then will not be qualifying payments. And then otherwise, you just don’t want delayed payments to be impacting your credit score, your credit rating in any significant way. So I think automation with student loans is great. That’s one where I’m thinking a little bit more about strategy, making sure that I have a plan, I’ve worked through my goals, I’ve worked through the budget, I’ve determined that this much each and every month, I can put toward my student loans. Boom. I’m putting that on automation, and I’m paying my loan servicing company on-time, right out of my paycheck, first thing before I hope that I have that money left over at the end of the month. The other thing I think that’s important to note with student loans and automation is that when it comes to refinancing your student loans, you’ll notice that the various quotes that you’ll get from the refinance lenders, those private companies, is they will typically give you a quote with the assumption that they’re giving you some discount to automate those payments, to set up the autopay on that. So if you do not automate those payments, then you may not get that quote that they’re advertising. So if you need more information on refinancing or have questions about what I just said there, head on over to YourFinancialPharmacist.com/refinance, we have a great page, great resources about where to get started with refinancing, who it’s for, who it’s not for, and if you’re ready to get started, companies that you can pull quotes from that we recommend and that our YFP community gets cash bonuses for.

So area No. 1 was bills, area No. 2 was student loans, area No. 3, for me, is college savings. So here, I’m thinking about 529 plans. And similar to retirement savings, which would be the fourth area, whether that’s 401k’s, 403b’s, Roth IRAs, whatever that would be, now, we’re really talking about automating the savings for the future. So you may look and say, OK, I’ve got three children. I’ve determined that I really want to start saving for kids’ college, and I’m going to start at $50 a month, $100 a month, $150 bucks a month. And you can set up a 529 plan where not only does it auto-withdraw the money each and every month, which then also gives you a deduction on your state income taxes, but it also then will auto-determine where your money’s going in terms of the allocation. So example, for my Ohio 529 plan for my kids, I have I think it’s $100-150 per month that goes toward each kid. And then from there, that $100 or $150 is being distributed in five different investing funds that I have set up automatically. So not only is the money going into the account, but then it’s automatically being invested in those accounts. When it comes to retirement savings, Brandon from the Facebook group says, “I have my retirement set to take out 15% with the employer matching 5%. And what we know from some of the studies that are out there is that the average automatic deferral rate for an employee is only about 6%. And we talked on previous episodes about probably needing closer to 15-20%, depending on your individual situation, needing 15-20% over the course of your career to achieve your long-term savings goals. So 6% is probably not going to cut it. And I think what Brandon’s doing with 15% automatic withdrawal, out-of-sight, out-of-mind, employer matching 5%, obviously then he’s getting closer to that 20% or is getting to that 20% goal. And I think this is an important one because you think about the evolution of retirement savings over time. What used to be more of a traditional pension model is now almost — for most listening — is probably 100% on your back in terms of the responsibility, whether it’s a 401k, a 403b, a Roth IRA, some combination thereof. We have to take the ownership and the work, and I think automation of retirement savings is a great one.

Now, the last one that I want to talk about, which I think is a really tangible for the listeners to get started today is setting up a series of what we call sinking funds. Now, these are established based on the set of goals that you have. So examples of sinking funds that I would throw out there could be an emergency fund, maybe it’s vacation, it could be setting up a sinking fund for purchasing a car or a car repair fund. It could be a gifts fun, so whether that’s birthday gifts throughout the year, Mother’s Day, Father’s Day, Christmas gifts, etc. It could be a sinking fund for a home down payment. Maybe it’s a separate sinking fund for home repairs. Maybe if you’re somebody who has significant medical expenses, you have a separate sinking fund for medical expenses. So what I’m trying to drive home here, the point with sinking funds, is that once you determine the areas and the priorities, instead of having all of this money in one lump sum in a checking or savings account, you start to separate out these funds into separate accounts, and you name them for specifically the goal that you’re trying to achieve: emergency fund, vacation, car, gifts, down payment, home repairs, medical expenses, etc. And what we know when it comes to behavioral finance is that once you name a fund something, you’re more likely to achieve the goal because it’s not in a general pot or pool of money that you lose track of in terms of where it’s going, and then obviously, you’re more likely to spend that money.

So what does this actually look like? And I mentioned before that Tim Baker, owner of Script Financial, helped Jess and I get this set up just a few months. We actually have several of these funds that are set up with an Ally, Ally.com, which is one example that you can use, many others you could do, even with your own banking institution. And so once we set a prioritized list of our goals with the dollar amounts, which, of course, came from the goal setting and the budgeting process, we then — after the budgeting process — we came up with and said, OK, each and every month, we have this total amount of discretionary, disposable income that we can assign to our goals. We then listed our goals out on paper and then based on that total dollar amount, we then said, OK, each and every month, we’re going to put x dollars toward giving, x dollars toward gifts, x dollars toward vacation, x dollars toward home maintenance. And so then what happens is each and every month on the first of the month, those dollar amounts are auto-withdrawn from our paycheck, and the rest of our income becomes what we spend for the rest of the month on groceries and all other expenses for the month out of our day-to-day checking.

So for me, there’s four basic steps here. Is No. 1, Step No. 1 is you have to have a list of prioritized goals with dollar amounts attached to them. No. 2 is you have to be able to know what that disposable income is that you have available each and every month so you can assign those dollar amounts to the goals that you’ve listed out. No. 3 is you then need to create and set up a long-term savings sinking funds account. So for us, what this looked like and it only took about 10-15 minutes for us to set this up is if I log into my Ally.com account, I have an interest checking account, which is basically the base account that we use where we need to spend money out of and then have a debit card if I need to use it. And then I have a series of separate sub-accounts. I have an emergency fund account, I have a giving account, I have a gifts account, a vacation account, and then we have a home maintenance account. And then Step No. 4 is you put those on auto-withdraw. So once you identify the list of goals with the dollar amounts, once you set up the separate sinking funds and you know exactly how much you’re going to put towards those, then you can set up the auto-withdraw so your paycheck into your checking account, once it hits your checking account, it’s an auto-withdrawal into your long-term sinking funds and those sinking accounts.

So that’s the process that we use to put our financial plan on automation, and as I began the episode and talked about why, for us, it’s about the intentionality. It’s about knowing that when it comes — when push comes to shove, if that money’s just sitting in our checking account, more likely than not going to spend it. So it puts our financial goals on automatic, and it allows us to be on the path towards achieving those goals each and every month.

One last point I would make here is that for me, the importance here of automation also comes to an important point of having accountability throughout this process, whether that’s a spouse or significant other, whether that’s a friend, whether that’s a financial planner, somebody that can keep you accountable each and every month, each and every quarter, whatever it be, to check in and say, Hey, we said these were the goals. What’s changed? What’s different? How is the progress going in terms of achieving those goals?

So I hope this episode has been hopefully a moment of inspiration, maybe even empowerment to say, think about your goals, what are those goals, how much do you want to put toward those goals each and every month, what’s the prioritization of those goals? And then setting up the sinking fund accounts to automate those goals each and every month.

So as always, thank you so much for joining us on today’s episode of the Your Financial Pharmacist podcast. We appreciate you listening each and every week, and as always, we would welcome any ideas that you have for future episodes. So you can shoot us an email at [email protected] or jump on over to the YFP Facebook group, and we would love to hear your ideas and input for future episodes of the Your Financial Pharmacist podcast. That’s for today’s episode. Have a great rest of your week.

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On Episode 055 of the Your Financial Pharmacist Podcast, Tim Baker and I talk about the variety of ways in which financial planners get paid and why you should care about how a financial planner charges (Hint: It can impact the quality of the advice that you are getting).

Mentioned on the Show

• What to Look For in a Financial Planner and Nuts & Bolts Guide to Hiring a Financial Planner
• Script Financial
• YFP Episode 054: Why Fee-Only Financial Planning Matters
• YFP Episode 049: Ask Tim & Tim: Should I Pay Off My House Early or Invest?
• Unshakeable: Your Financial Freedom Playbook by Tony Robbins
• YFP Blog: Are You Making This $1 Million Dollar Mistake?
• How a 1% Fee Could Cost Millennials $590,000 in Retirement Savings
• Bankrate Simple Savings Calculator
• YFP Episode 032: Find Your Why (Part 1) – 3 Life Planning Questions
• YFP Episode 033: Find Your Why (Part 2) – The Path to Success
• YFP Facebook Group

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 055 of the Your Financial Pharmacist podcast. Excited to be here again with the one and only Tim Baker. Tim, did you see the love Jess was giving you on the Facebook page today? I mean, seriously.

Tim Baker: I know. It’s pretty awesome. Like I said, I finally got to meet Jess for the first time in California when we went out to speak to USC, and it was awesome. And yeah, thanks, Jess, for the shoutout. I know you’re an avid listener of the podcast because I think you guys are en route to puppy-ville, that was the bet. So yeah, it was pretty awesome.

Tim Ulbrich: Yeah, puppy is coming here in a few weeks. So we were just talking last night, actually, about getting excited for puppy to come. And last time I had a real puppy was back growing up, I had a golden retriever. That’s what we’re getting this time, so excited. I think we’re probably underestimating work related to puppy, but so be it, right? You can’t be rational in these situations. Well, what we’re going to do here in Episode 055, we’re going to build off of last week’s episode where you and I talked about your old financial planning firm that you worked for and why you made the jump in 2016 to start Script Financial, obviously a fee-only financial plan for pharmacists. Why fee-only financial planning matters is a lot of what we talked about last time, and so if you haven’t yet done so as a listener, check out Episode 054 because I think that’s a great precursor for what we’re going to talk about today in our conversation here as well. So Tim, why don’t we just bridge that episode and this episode and kick it off with the idea of why somebody should care about how a financial planner charges. And we talked a little bit on the episode last week of, you know, often it can feel like smoke and mirrors, and there’s so many different models that are out there, and we’ll talk through those on this episode as well. But at the end of the day, why should our listeners care about how a financial planner is charging them and how it may impact the advice they’re receiving?

Tim Baker: Yeah, well I think what’s surprising to a lot of people is that majority of advisors out there can put their own interests ahead of their client’s, which — you know, like you said, as someone in healthcare and you’re working with patients, you would think that inherently, that position of trust whether you’re someone in medicine or an attorney or even a financial planner that obviously you’re looking at a very intimate part of someone’s life, that they would be legally bound to act in their client’s best interest. And what a lot of people don’t know is that that’s not true. There was a lot of noise — and it would be noise for financial nerds like me that happened recently with the Department of Labor where they basically wanted to push through this fiduciary role, which basically would force advisors that manage retirement assets — because that’s their jurisdiction is like 401k’s and IRAs — it would force advisors acting in that capacity or advising in that capacity to follow that fiduciary, that best interest standard of care. And a lot of people just don’t know that that’s not — and to be honest, like when I said last episode about not knowing that I wasn’t in the best model, I thought that the suitability standard of care was the best thing. And it’s not. So I think oftentimes, you know, you have to follow the money. And there’s a lot of conflict out there. We referenced that the last time we had done an episode was when we answered Michael’s question — you know, before last episode. His advisor — not that this is right or wrong, but I think there’s a little smoke there — wanted him to basically take the equity in his house, lower his payment and refinance and really invest that. Well, the problem with that is is that because of the way advisors get paid, investments stir the drink in a lot of ways. So you know, most advisors are not going to care about the credit card debt that you have or the fact that you have student debt or that you want to invest in things other than the stock market. They’re really going to care about how can I look at, you know, Tim Ulbrich, the $300,000 or $400,000 that you have in assets and how can I get in, how can I position it so I can benefit — not necessarily benefit — but get them where I can make a profitable business out of working with this particular client. And that, again, that’s not to say that everyone is like that. But I, even myself, you know, when I would look at clients in my own firm, I was like, OK, they have no real assets. They have some cashflow, so maybe I could put them in A Share mutual fund that would pay me 5 — so obviously, like inherently, I want to do what’s in the best interest of my client. But at the same time, I’m like, I also need to earn a living. And for me, it’s like, why even have a system that does that? And I think separating — like going back to that separating the scale of product with the advice that’s given — that has to be the way you go because anything else, human nature’s going to take over. Even if I’m doing well, it’s like, well, we want to add on to our kitchen or whatever. So maybe I sell this annuity to a client that pays me that 8 percent. And I think these are just things that advisors don’t really want to admit. It’s just kind of something that we talk about in closed circles, but it’s human nature, you know? It’s just how it is. And to me, if you can separate the sale of those products with the advice that you give, to me, you’re setting yourself up for success both on the advisor end and the client end, in my opinion.

Tim Ulbrich: Yeah, I agree wholeheartedly. And to me, that’s the whole point of why this fee-only thing matters. I mean, why take on those extra biases if they don’t have to be there?

Tim Baker: Right.

Tim Ulbrich: And you said last time, and you articulated well, there is no such thing as bias-free advice. But why not do everything you can to minimize those biases? If I’m a consumer, I really want somebody helping me to look at my best interests across my entire financial plan — not necessarily pick out one part of it because maybe the pricing model of how they’re getting paid, whether that’s insurance, investments, or whatever, may skew their attention in that direction. And you know what stuck out to me? You read “Unshakeable” by Tony Robbins, right?

Tim Baker: Yes.

Tim Ulbrich: So he talks about it at some point in that book — and we can link to “Unshakeable” by Tony Robbins in the show notes — at some point, he gave a percentage. I’m going to say it was less than like 3 or 4% of all financial planners that are actually acting in a fee-only fiduciary-only type of way. Do you remember what that number was? It was low, right?

Tim Baker: I think he used 3%. I typically will say 5 because I’ve heard different. But yeah, I think it’s like 3-5% is that. 3-5% are legally bound to act in their client’s best interest.

Tim Ulbrich: Which, to be honest, as I said last time on the show, as a pharmacist is just mind-blowing. So the statement I usually lead with is most of you that are listening to this podcast right now or attend a talk that we do, whatever be the case, if you’re working with a financial planner, more likely than not they legally are not obligated to act in your best interest. Now, that doesn’t mean they’re bad people. It doesn’t mean they’re giving terrible advice, it means you need to be really vetting that advisor, in my opinion, in a significant way and really asking yourself and taking a step back, ‘Is this person really giving me the best, holistic, as close as can be non-biased advice that I can get?’ And for those that don’t yet have a planner and will ultimately seek one, making sure you’re asking the right questions, which we have in the guide that I referenced there at the beginning of the show — YourFinancialPharmacist.com/financialplanner — asking those questions to make sure you’re finding out whether or not they have that fiduciary type of responsibility. So we really, I hope, made the case in Episode 054 that fee-only matters. So now, let’s work under the assumption that we’re buying into fee-only. But the reality is there’s a whole other layer then of pricing models within even a category of fee-only advisors. So let’s for a moment assume that, you know, commissions are out the picture, so people if they’re fee-only, they’re not getting payment via insurance products or not getting payment via investments. But still, even in terms of how the client is charged, there’s a variation of models. And we touched on these a little bit last time, but I want to lead into and start with the most common one, Assets Under Management, and then work into what you’re doing in terms of net worth and income. And I first want to lead with — and jump in here, Tim, as well — I first want to lead with I’ve talked with so many pharmacists who think they’re getting financial planning for free. And I’ll hear things like, well, I met with so-and-so from, you know, X Big Box Financial Firm, and they offered a financial plan for free. There is no such thing as a free financial plan, right? The money is coming from somewhere now or later, and so now let’s assume fee-only most common pricing model that’s out there is Assets Under Management, at least that I’m familiar with. So talk us through exactly what Assets Under Management is and how that charge works.

Tim Baker: So typically with Assets Under Management, this is where basically, the client has investable assets, meaning, you know, they can roll it over from a 401k or an IRA that they are currently managing or maybe their present advisor is managing. Or maybe it’s an after-tax investment account. So it’s basically divorced or outside of a typical 401k or a 403b. So those are the investable assets. So what the advisor often does is this where you typically will say, you’ll see advisors say, ‘Hey, I have a minimum of a quarter of a million or a half a million.’ So if you don’t have that amount of investable assets, I can’t help you. And typically, what happens is that, you know, in that model, they’ll say, you’ll get a financial planner or maybe sometimes it’s just investment advice. It just depends on what they actually offer, but they’ll say, ‘Hey, for a set fee, a percentage of what I’m actually managing, you can be my client,’ essentially. And that can range anywhere from, you know, .5% on kind of the low end to 2% and up. You know, as an example, if you have $200,000 and you’re moving it over to your advisor to manage, he might do that for $2,000. Now, sometimes that includes comprehensive financial planning, so you’re looking at things outside of just the investment management like insurance and maybe debt management and estate planning and retirement planning and that type of thing. But sometimes it just includes that. So the problem with that model is that especially for a lot of young professionals, you don’t have $100,000 or $200,000 — now, some people will take you no matter what you have, they’ll have no account minimums, but again, that kind of goes back to you have to follow the money. So if you are working with an advisor that works predominantly with people that have half a million and more, and you have $50,000 with your advisor, you’re probably not going to talk to him or her very often. So again, this is kind of because of the advisor is paid based on the investments, they’re investment-centric. So what the Certified Financial Planning Board says is a financial plan are your fundamentals. So that’s going to be your debt, your cash flow, your emergency fund, insurance, investment, tax, retirement, estate. So if they are paid based on the investment, although it’s a big part of the financial plan, it’s only a piece of the financial plan. And sometimes, that investment can really drive the boat. And especially for younger people where they’re just not, they’re not there, it kind of can degrade other parts of the financial plan that they should be focusing on now to get to the point where they have a larger portfolio. So that’s the problem is that typically, there’s not enough there for a younger client to be profitable for that particular advisor. And then I think that the advice is just skewed a la — I think the question with our Ask Tim & Tim with Michael, I think it’s skewed in a sense because the advisor benefits anytime the client puts more into those investments. So what I say when I talk about it is, you know, in an AUM model, Tim, if we record this podcast and you trip and fall over $100,000 walking to your car to go home, that would be great. And it’s more akin to the wealth transfer that’s going to happen from baby boomers. But if you’re working with a financial advisor that charged you based on AUM, it’s in his or her best interest for you to invest all $100,000 in, you know, a mutual fund that he’s managing or that she’s managing.

Tim Ulbrich: Yeah.

Tim Baker: And that might not be your best interest. Maybe you want to buy that cabin that you and Jess were talking about. Or maybe you guys want to go on that vacation or pay off some debt or pay off the house, you know what I mean?

Tim Ulbrich: Yeah, what if I had loans, right?

Tim Baker: Exactly. If you have loans. Or if you’re one of the pharmacists out there that have — I’m seeing a lot more pharmacists with credit card debt, the advisor is not incentivized for you to pay off the credit card debt. They’re incentivized for you to really get as much in the investment, which is not necessarily a bad thing, but they’re incentivized for you to get into the investment so they can raise kind of their percentage of what they’re managing.

Tim Ulbrich: Yeah, and I think one of the challenges, building on what you said there, one of the challenges I really see, back to your point about the younger clients, as we know, the YFP community, I would say the vast majority of people are within 10 years of graduation, graduating students or making this transition out into this first career phase of the pharmacist life and career. And in my opinion, that’s probably where the most help is needed. You’ve got student loan debt, you’ve got all these transitionary items. I was thinking about all the things you were talking Jess and I through, and we’ve been out 10 years. You know, you’re balancing now that we’re post-student loan debt, we’re balancing investing and life stuff and kids college and savings and all types of things. And if the pricing model is not such that it incentivizes somebody to work with that individual because you may not necessarily have a lot of assets, who is helping that group? And obviously, we believe at YFP very strongly that getting a quick start during that transition period is so successful to being successful long-term with your finances. And so if the industry is built in a traditional AUM model where it’s like, hey, we’ll see you in 20 years, well, what about from now until that point? So and I think your point is so spot-on that if somebody has cash or they’re balancing multiple things, credit card debt, student loan debt, maybe they need a good emergency fund, and AUM model does not incentivize an advisor to build a good emergency fund.

Tim Baker: Right.

Tim Ulbrich: It doesn’t mean they won’t give them that good advice, it’s just again, the model is not built in such a way that it does that. So when I think of AUM, talk us through typically what you’ll see. I mean, is it pretty standard somewhere around 1-1.5% of assets?

Tim Baker: Yeah. You know, it’s funny. I was evaluating a client’s, actually his mom’s portfolio, and her money was a couple hundred thousand dollars was at kind of a broker dealer, independent where I was previously. And the fee that she was charging, she had literally no idea. It was like 1.75.

Tim Ulbrich: Wow.

Tim Baker: On top of the 1+% expense ratio. So the expense ratio, we’ve talked about in the past. It’s basically the funds that she is invested in has a mutual fund manager somewhere on Wall Street that’s managing that fund, takes a percentage out basically to pay himself and to pay the office space on Wall Street and the analyst and all that kind of stuff. So basically, on two counts, she was paying — in my opinion — way more than she needed to. So, you know, I was saying like, in my models, you know, from an expense ratio standpoint, she was paying 1 — I think 1.25. I think you can build a very good portfolio, if not a better portfolio, for less than .1% versus 1.25%. And then she was paying another 1.75 on top of that. So you know, generally I see — and I’ve seen some well-known firms out there charge kind of in that 1-2% area. Typically, in the fee-only world I see more of the kind of 1% is probably pretty prevalent. Now, what a lot of — you know, I mentioned XY Planning Network. What a lot of young planners will do is they’ll charge kind of a flat fee for planning. So they might say, hey, it’s $200, $300, $400 for planning. And then we’ll charge you maybe .5% or even less for AUM investment management. So they kind of delineate their two. And I still think that there is a conflict there, in my opinion, that’s why I don’t do it that way. But then you can kind of go all the way down, you know, the ladder to a service like Betterment, which is the roboadvisor that charges .25% basically, you know, manage it with algorithms and things like that. And by the way, Tim, that is up for Script Financial.

Tim Ulbrich: You’re live!

Tim Baker: Well, I wouldn’t say we’re live. We have the robo that’s set up for us, and I have to figure out — but yeah, it’s pretty close. But for those individuals that — we get a lot of questions about, hey, how do I manage my student loans? And then how do I open up a Roth IRA? We kind of have a solution for that now, that they can do it within 15 minutes and fund it — even less than that. So more to follow on that, but yeah. But you can see anywhere .25% all the way to 2%. But again, it just depends on what you actually get for that because sometimes that 2% includes full financial planning, maybe even tax work, I don’t know, but all the way down to the .25%, which is just kind of the algorithmic, you know, investment model.

Tim Ulbrich: Yeah, and I think to your point too, to the listeners. Don’t forget about it’s not just the fee to the planner here in an AUM model, Assets Under Management. It’s also the fees on the funds. So if you’re not doing due diligence to make sure you’re in well performing, low cost funds, you could be — I’m sure you’ve seen this in clients — upwards of 1.5% to 2% on advisor fee and then you’re maybe getting hosed another percent on top of that or more on a fund fee. And so we’ve written a couple articles, and we’ll dig them up and link to them in the show notes on the impact of fees. And we’ll also link to in the show notes just a simple savings calculator from BankRate. Just run some examples to see and feel the impact of those fees. I mean, if you were to save $100 a month for 30 years and say it’s 7% and another example, you only got 5% because of somebody’s fees and other things, that’s a big, big deal when it’s all said and done. So everything you can to obviously maximize and hold onto those returns, you want to be doing. So let’s transition here then into your planning model because I remember when you and I met, and I really feel like you’re trailblazing looking at pricing in a different way. I think you tend to trailblaze, that’s just how you roll.

Tim Baker: Mic drop.

Tim Ulbrich: That’s how you roll. But I think it’s really pushing the industry to think differently, and as I think about our group and the YFP community, I think it really is obviously allowing for model that’s in their best interest is a fee-only model, but I also think it’s charge and charging in a way that really makes a whole lot of sense. So talk us through this idea of charging based on net worth and income and how you arrived to that point.

Tim Baker: Yeah. So I would say probably outside of the actual like logo and branding of Script Financial the firm, when I had that epiphany to unapologetically go after pharmacists or design a business that is catered to pharmacists, probably after the branding and maybe even moreso, I spent time thinking about how I would charge, what my pricing model would be because I’m very sensitive to conflict of interest and transparency. I think you have to be — because this is the one career that I can think of — and maybe there’s others out there that I’m missing — but it’s the one career where like my compensation kind of directly flies in the face of like the client’s ability to kind of achieve their goals. It’s kind of like — you know, and I think obviously, the value that you get working with a planner, working with Script Financial, I think exceeds the fee. But to me, I’m super sensitive to those types of conversations and that outlook. So you know, again, I think this was on a podcast that I heard one firm doing it in the Midwest that says, hey, the fee is based on income and net worth. And I think once I kind of wrapped my head around it, I really didn’t — again, I was unapologetic about it. I really didn’t look at any different model because to me, it makes the most sense to me because if I am incentivized to help the client grow their income and net worth and protect their income and net worth, to me, that’s an alignment of interests. I think if we’re both in agreement that those are the two things that kind of show progress and overall financial health, then it’s in my best interest for you to do that while kind of keeping your goals in mind. So I think it — for one, I think it reduces the conflict of interest because, again, in that example, if I’m an AUM type advisor, I’m trying to — whether I want to believe it or not, I’m trying to get the client to invest as much as I can because that’s how my compensation is affected. But for me, the net worth — so when we talk about net worth, to kind of back up, the net worth is all of the assets, so the things that you own, subtract all of the liabilities, the things that you owe. So a quick example — if you have $100,000 in a 401k and you have $200,000 in student loan debt, then your net worth is technically — and that’s all of your assets and your liabilities — technically, your -$100,000 in net worth, which is very typical of how my clients or most of my clients are in that negative net worth area. So I am incentivized to help them dig out of that and get to positive because that’s one of the components in which I charge. So to me, it aligns interest. And I think it’s overall best aligned to comprehensive financial planning. So if an AUM model guy, and I say, ‘Hey, Client, I got you 15% return, theoretically a return on your investment year over year,’ that’s great. But I’m not smart because I believe the market has a mind of its own. I think over the long term, the market will take care of you. But I’m not out there beating the S&P 500 or anything like that. I think that’s foolhardy in the grand scheme of things. So I’m not out there saying, hey, I can beat the market or anything like that. I’m saying, hey, I’m going to help increase your assets, lower your liabilities, while keeping your goals in mind. So I think year over year, if you have a -$100,000 net worth, then the next year, I want that to be -$80,000. Then the next year, I want it to be -$40,000 and then we’re in the positives and we’re getting that snowball rolling in the right way. So those are some of the reasons why I think income and net worth are really the big — I think the best way to do it.

Tim Ulbrich: Yeah, I couldn’t agree more. And I think when I heard that from you, it just, it hit me instantly that makes so much sense. And again, as we think about our audience and the holistic planning and assistance that I think they need, just as you gave in that example, it allows you the flexibility to do everything from, hey, we really need to spend time on budgeting, build a foundation, an emergency fund. Or maybe we are ready to jump to that investment stage. But just to give the listeners an example — and Tim, I don’t know, you may not even realize this. So we, Jess and I started working with you I think it was actually November because we just got back from our anniversary out in Napa November 2017. Here we are, almost in July, and we are really now just starting to get in the weeds on the investment side to make sure we’ve got low-fee options, performance is aligned, risk tolerance is right. And to me, that’s so refreshing and speaks to the pricing model because we had all these other things that we wanted to talk about in terms of you getting to know us. We talked about the finding your why episodes and making sure we really understand long-term goals and priorities, and I don’t know if other models are designed in a way that allows that relationship to be built and that trust. And obviously, as you appreciate and I appreciate, if this is going to be a 30-, 40-, 50-year relationship, like that’s well worth that time to invest in it whereas if I may have shown up with, you know, Joe Schmo’s office with a few hundred dollars of assets, I can guarantee that conversation would not have been delayed for so many months until this point.

Tim Baker: Yeah, and obviously you’re in a different stage of life than a lot of the clients that I’m getting straight out of pharmacy school, you know. So, you know, there are assets there that we need to be attentive to. Some clients, we don’t even look at — outside of just making sure that they’re asset allocation is good for their 401k or 403b, we don’t really focus on it too much. And you know, and again, in an AUM office, that might be all they focus on. So it’s like, hey, your retirement looks good. I’ll see you in 10 years when you have something actually for me to manage. And to me, I’m looking at it, OK, how can we adjust behavior? How can we execute the strategy that we’ve picked out for them for student loans? You know, how can we protect, you know, the balance sheet and their income through, you know, insurance policies that are, again, in the best interests of the client? It could be if they have little kids, you know, and a home or something like that, it’s making sure that the estate plan documents are in place. So there’s just so many other things that, you know, to focus on. And again, the investments are just one piece of that. And I think, again, with a lot of advisors out there, they’re so hyper-focused on that because that’s what most people think of when they think of a financial advisor that stirs the drink in terms of compensation and things like that. And that’s, it’s kind of, I guess it’s like the cool kid or the bad boy in the room is the investments because a lot of people just think of, you know, maybe the movies or just it’s confusing to a lot of people. So that’s what they think of first.

Tim Ulbrich: So are there any challenges, downsides that you’ve seen to the model thus far? Or tweaks or things that you’re thinking about?

Tim Baker: Yeah, so the downside — and this is where I kind of have to really work on my communication skills is I think, if I’m perfectly honest, I think that I care more about the pricing model than the client. Typically, the client’s just like, Tim, shut up, just tell me what the fee is, and I’ll pay it. That’s fine. But I’m more like, no, no, no. But seriously, this is like, if we do this, you know, it’s kind of tailored to you, it accounts for complexity because it’s not just your fee is $258 because we did this formula and that’s what it is. And most people are like, just shut up. But for me, it’s telling a story of why I do it. And sometimes, you know, especially from a business perspective, it’s a lot easier just to say, hey, client. Hey, prospective client, it’s this. And the messaging, you know, is super clean and easy. Because I believe so much in this, my conviction has kind of stood in the way of just saying, hey, it’s just going to be whatever, x amount per month and that’s it. Because I believe to my core that this is the right way to do it. But from a messaging standpoint and getting the prospective client to say, OK, I kind of understand what you’re doing, takes some effort on my part to kind of tell that story as I’m explaining what we actually and how we do it. So that’s probably part of it. The other part of it is because it’s based on — and it’s a double-edge — because a lot of my clients pay me through cash flow versus an investment account, in the AUM world, it’s typically just — the fee that you pay is just a line item in your investment. So it’ll just say “Script Financial, -x amount of dollars for this month or quarter” and for a lot of clients, it’s kind of like an out-of-sight, out-of-mind. They don’t look through their statements, they have no — but the way that I do it, I leave, for the most part, I leave the client investments unadulterated. We don’t bill towards the investment accounts if they have them. So it’s all cash flow, so they get an invoice from me that says, hey, thanks for working with Script Financial. And then it’s kind of a regular draw. And you know, you know, the fee is the fee is what I say. But the fee is the fee, meaning it’s not out of sight or out of mind. You’re getting that invoice every month that says, thank you. And for me, I live with — we were talking off-mic beforehand, I live with a healthy level of paranoia because I want to make sure that my clients are receiving the value that I think they should with working in this model. So to me, where in most models it’s kind of out-of-sight, out-of-mind, I don’t really know what I’m paying. It’s full transparency, this is it. And for some people, that can be a little uncomfortable, especially if they’re working with their parents’ firm where they’re paying them who knows what. So I think that’s the big drawback for me is communicating what the value is and also showing them that it will be a cash flow strain on them, but I think that the value they receive outpaces that, especially over the course of 10, 20, 30 years.

Tim Ulbrich: Yeah, and even just like to counter that a little bit. I think one of the downsides of an AUM kind of out-of-sight, out-of-mind model is it waters down the quality of the advice from the planner because I don’t think the client is necessarily has the same expectation. I mean, we know that if I’m writing a check every month or I see it coming out of the account or I get the email reminder from Script, I’m more likely to be an engaged advisee, right? Which ultimately means at the end of the day, if I’m a more engaged advisee and I’m knocking on your door and you’re feeling that accountability like just the cumulative effect of that of 20, 30, 40 years of the quality of the planning advice, I think is worth noting. So as we bring this full circle and connecting this back to Episode 054, one of the things that I mentioned — and Tim, you elaborated on — was the reality that as I was starting YFP and I went out and interviewed a bunch of different financial planners to try to understand the industry, I left many of these meetings really not having a good idea of ultimately how they were going to get paid. And that, obviously, felt frustrating and as I learned more about the fee-only industry, and then I learned more about your pricing model, there is such clarity in when you think of a pricing model of income and net worth, there is no smoke and mirrors about where the cash flow is coming from. There’s lots of transparency in that model, and I think, again, obviously there’s a lot to feel good about that in terms of the fee-only approach and knowing where those dollars come from.

Tim Baker: Yeah, and I would say, you know, I would say this too is you know, a lot of planners even, you know, fee-only planners, they might say, hey, for this $300 a month in this AUM, you get two or three or four means a year, and that’s what’s included. But for me, like if I’m hiring a professional — and again, I’m looking at this from the client side of it — if I’m hiring a professional, I want access. So if I have a question about money, I want to be able to say, hey, let me get Tim on the horn or in an email or a text or something so I can basically work through this. So I don’t limit the — you know, this is kind of what you get — I don’t limit what the, you know, the interactions with clients because the more about clients and what’s going on with them, the better I can serve them. So you know, again, it’s on me to build a business that makes it, you know, where I can scale that and everything. But you know, I don’t limit that. And when we say the fee is the fee, but the fee is the fee, like the transparency there is that includes everything, includes filing their tax return. The only thing that really — it includes all the meetings, a lot of financial planners, they don’t focus on budget, and I’m a big proponent of that. So like, you know, I tell clients, you know, some clients will say, the fact that we meet every month to go through a 30-minute budget call is worth it itself because I know that you’re there to be my accountability buddy. And a lot of advisors overlook that because again, when you have minimums of $250,000 of $500,000, it’s just like there’s an assumption of wealth there, right? So to me, outside of hiring attorney to work on estate plan documents, which I’m a big believer in, especially if you have little ones, or buying a life insurance policy, a disability policy, the fee is basically inclusive of everything. It’s the investing, it’s the tax return and planning and all that kind of stuff. It’s all the meetings, the budget meetings. And I think that, to me, is kind of a warm blanket for clients because like I said in the previous model, I would say, oh, this year, I’m going to charge ou x% for selling you a mutual fund or you’re going to pay me a commission for an insurance policy or whatever it is. So it’s super confusing. So for here, it’s pretty much black-and-white. It’s based on a formula. And what I do is I reassess it every two years, so the idea is hopefully we grow together and not have these huge spikes like some of the other models do. And you know, we’re in it for the long haul, I guess. So yeah, transparency, I think, for my own perspective, is something that the industry needs to get a lot better at. And I’m trying to in my own corner of the world here to lead that a little bit, and I think in this model, it’s best served.

Tim Ulbrich: So as we wrap up this two-part series on why fee-only matters and how financial planners get charged and why you should care, don’t forget to head on over to YourFinancialPharmacist.com/financial-planner to get information on what to look for in a financial planner, to download our free guide, “The Nuts and Bolts to Hiring a Financial Planner,” and to learn more about the financial planning services that’s offered by YFP team member and fee-only Certified Financial Planner, Tim Baker. So next week on the show, we hope you will join us. We’re going to go rapid-fire Q&A on student loan questions — those that we’ve received via email and those that are inside our YFP Facebook group. So if you’re not yet part of the YFP Facebook group community, head on over there if you have a student loan question, throw it out there, and we’d love to feature several of those on next week’s show. So until then, have a great rest of your week.

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On Episode 054 of the Your Financial Pharmacist Podcast, Tim Ulbrich, PharmD interviews YFP team member, owner of Script Financial and fee-only Certified Financial Planner, Tim Baker about why he left his old financial planning firm in 2016 to start Script Financial. Script Financial is a financial planning firm dedicated to helping pharmacists meet their financial goals. Tim & Tim talk through why fee-only financial planning matters and why a revolution of fee-only planning is happening today. Head on over to https://yourfinancialpharmacist.com/financial-planner to get information on what to look for in a financial planner, to download the free guide ‘Nuts & Bolts to Hiring a Financial Planner’ and to learn more about the financial planning services offered by Script Financial.

Mentioned on the Show

• Script Financial
• YFP Financial Planner
• YFP Episode 049: Ask Tim & Tim: Should I Pay Off My House Early or Invest?
• YFP Episode 015: Financial Planning Series Interview with Tim Baker Part 1
• YFP Episode 016: Financial Planning Series Benefits of a Financial Planner Part 2
• YFP Episode 017: Financial Planning Series Questions to Ask – Hiring a Planner Part 3
• YFP Episode 032: Find Your Why (Part 1) – 3 Life Planning Questions
• YFP Episode 033: Find Your Why (Part 2) – The Path to Success
• XY Planning Network
• XYPN Radio: XY Planning Network Podcast

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 054 of the Your Financial Pharmacist podcast. Excited to have Tim Baker back on the mic to talk this week and next week about financial planning, specifically why fee-only planning matters and why you should care about how a financial planner is making his or her money. So Tim Baker, here we are, Episode 054. And after a few solo episodes by both of us, a couple guest interviews, it was all the way back on Episode 049 when you and I last did a recording together and that was the Ask Tim & Tim episode where we tackled the question from Michael in Columbus about paying off a home early versus investing. So it feels good to be back together on the mic. How have things been in your world?

Tim Baker: Yeah, it’s been great. Actually, the last episode I think was Tony, right? Tony Guerra, that was the first episode that I didn’t hear until it actually went live. So we pass along editing duties to our assistant Kaitlyn, who is doing an awesome job, so it was kind of weird being a full-blown listener last episode. So I’m excited to be back and record this epsiode.

Tim Ulbrich: Yeah, we’re excited. This is such an important topic and one that we get so many questions about. And I should say, we did address financial planning in a mini-series we did, episodes 015, 016 and 017, we chronicled a little bit of your journey from West Point to becoming a CFP, we talked about the benefits of a financial planner, and then we also talked about questions that somebody should ask when hiring a planner. So we’re going to dig a little bit deeper into those topics here in Episode 054, and then next week, we’re going to jump in even further about how financial planners get paid and specifically why you chose the pricing model that you did in Episode 055. So before we dissect why fee-only financial planning matters and hear why you were convicted enough by this fee-only movement to jump ship from your old firm, let’s go all the way back for a minute to your journey into financial planning. And again, I know we talked a little bit about this in Episode 015, but give us your backstory, the Cliff Note version into why you chose financial planning as a career, especially since — as I remember — at the time, you had a very successful six-figure income and career. So why did you make that decision to jump to the financial planning industry?

Tim Baker: I think it’s actually analogous to why a lot of pharmacists get into pharmacy. I was at a point in my career where I was making, I was actually making good money, but I didn’t feel, I didn’t feel like warm and fuzzy after going to the office all day. You know, the best job satisfaction I got was when I was developing my key members. And I got to a point where money’s great, but I wanted to actually sit one-on-one and help people. And you know, when I left that six-figure job, I did some soul-searching, and I think I took about nine months off, you know, thereabouts, and you know, I just did some traveling and I reconnected because at that point in my life, I was so distracted — not distracted, but I was so involved in my career, and I didn’t really leave a whole lot of room for anything else, which was a problem. So I kind of tried to return to basics and reconnect with my roots, and you know, I was looking at different career paths and what I wanted to do. And both of my siblings — I have a sister who is two years younger and a brother who is two years older — and they both kind of in separate conversations said, ‘Hey, this is why I think you would be good in financial planning.’ And for me, it was kind of like an epiphany that I had when I went to West Point that, hey, maybe I think I really could be good at this and would enjoy a career here. And I was looking for something a little bit more entrepreneurial, which financial planning, it typically is. And that was kind of the path that led me back from the West Coast back to the East Coast and landed my first job in a financial planning firm.

Tim Ulbrich: And Tim, I remember actually, I think it was when you and I were still in our probably in our, let’s call it our dating phase period when we were getting to know each other, post-our initial meeting at Bob Evans a couple years ago. I remember, we were down at your sister’s place in Columbus, great area, great community involvement there. And I remember you telling that story about your siblings saying, ‘Hey, I really think you would be good at this industry, financial planning, because you really like to help people.’ And at the moment, I obviously didn’t know you well; I didn’t understand it. Now that Jess and I have had a chance to work with you as our financial planner and obviously as I’ve gotten to know you over the past couple of years in much more detail, I totally get it because I think your obvious strength, in my opinion, is relationship building and really caring and understanding about people and their situations. And we’ll talk more about that when we talk about why fee-only matters, but I think that’s one of the reasons it matters because you really allow the space for you to get to know your clients. We talk so much on the show that so much of financial planning is the factors beyond money, right? And I think you really understanding, for example, Jess and I and what motivates us, where we get stuck, where we’re frustrated, and it’s genuine. And I think that that relationship-building piece is so important when you think about a financial planner who’s not just somebody that’s really tactically looking at spreadsheets and adjusting things and rebalancing portfolios but really trying to understand who you are as a person to guide ultimately, then, your financial plan.

Tim Baker: Yeah, it’s one of those things — and to be honest, I didn’t really quite understand it even when I was getting into it. And probably some pharmacists think the same things, like they don’t really understand the profession until you’re actually, like, in it. Because I get a lot of, I do get a lot of sideways looks when I’m like, ‘Hey, I want to help people. I want to be a financial advisor.’ People are like, what? That doesn’t really sound like a calling. And I think what often happens — this is probably what we’ll get into a little bit it — I think sometimes the industry, with the sale of product and things like that and how compensation flows, sometimes it can muck that up a little bit. And you know, it’s like whose interests are first? And that type of thing. I think ultimately, you know, when I looked at it from a very pure standpoint, meaning — I’ll use pure instead of ignorance — I just, for me, I just thought, OK, I can sit down across the table from somebody and look at their situation and try to provide, you know, a semblance of a plan or a semblance of that I care about where they are and where they want to go. And I think a lot of what happens in the industry is that just because of how it’s structured, some of that can fall by the wayside. And to your point, like I’m a big believer in behavior and the relationship, and you know, really managing kind of like a life plan rather than just a financial plan. The finances are just really a tool. What’s the bigger picture? And you know, I think oftentimes, we as people, we just get so busy and so — and a lot of it’s just asking questions. Like I’ve said this before, I try to ask good questions and get the heck out of the way and just really you know, course correct a little bit and ask those questions and really hopefully it be a period of self-discovery. So it sounds kind of maybe hippie and you know, like, very touchy-feely, and I think you joked about that before. But again, a lot of these things aren’t things that we necessarily slow down to talk about and really self-reflect. And I think that’s where I can step in and hopefully provide a little bit of that, you know, catalyst to do that.

Tim Ulbrich: Yeah, spot on. And I remember even Tim Church and I talked about this when we were writing “The Seven Figure Pharmacist” book, and you know, obviously the title, “Seven Figure Pharmacist” implies a net worth of a million dollars or more, but we all know it’s not about just getting to a net worth of $1 million or more. I think if you crush your student loans, and you do awesome with your investments and home buying and other things you’re doing, ultimately, if there’s not a bigger plan or purpose there, I think people will find themselves disappointed. And I think that’s so much of what, in my opinion, people should be looking for in a financial planner — somebody who’s really going to help them pull out those pieces and parts like you and I talked about with Jess in Episodes 031 and 032 — I hope I have that right, somewhere around there.

Tim Baker: You’re better at that than me.

Tim Ulbrich: About finding our why, and I think that’s such a critical piece. So I have to be honest that as I started to think about this episode, I thought about all the pharmacists I’ve talked to over the last few years that, in my opinion, have appeared to somewhat aimlessly walk into a relationship with a financial planner. So what I mean by this is I hear a lot of pharmacists say and refer to their financial planner as ‘my guy’ or ‘my gal’ or maybe it’s somebody who mom and dad used and so by default, it’s going to be their same person. And of course, trust and relationships and knowing somebody’s important, but I’m fearful that there’s a lot of naive trust in that financial planner without really a full understanding of what value that person may or may not bring and whether or not they are actually obligated to be acting in the best interest — really understanding even how they get paid. I mean, would you say that’s a fair statement in terms of clients that you’ve talked with initially?

Tim Baker: Yeah, I think so. I think there’s a belief that all financial planners are created equal. And I would say this as full disclosure, this is not meant to be like a bask session. A lot of people that work in these capacities that are financial advisors or that work with mom and dad are, I think are pure at heart and want the best for their clients. I just think that there’s a better system to basically clear away some of the conflicts of interest. And for a lot of it — and I put myself in this bucket — you just don’t know any better. You know, I was into the industry, I was in the industry for quite a bit of time before I actually discovered the whole fee-only model and what that meant. But yeah, I would say that’s a true assessment, and what I try to explain is that it’s not apples-to-apples in a lot of ways. I’ll give you an example. You know, when I was at my last firm, what we typically did was cater to the pre-retirees and the retirees. And that’s what probably 90 percent of the financial planning firms out there do because the way that pricing model works is based on assets that you’ve accumulated over the course of your career. And that’s just basically how an advisor gets compensated is based on that number. And things like budgeting and student loans are not even really in the curriculum of the things you’re taught. You know, you’re taught more about stock options and things like that that for most — even most people, that doesn’t really matter. And things that have huge implications, especially towards the younger population — and I just remember kind of, you know, surprisingly asking questions about this and really no one knowing. And I’ve seen that with prospective clients where they’ll say, ‘Hey, I’ve been working with this advisor for a couple years, and I don’t really have a plan for my student loans.’ And some of the mistakes are you’re talking tens of thousands of dollars just because of you know, not having a clear strategy or not knowing what to do. You know, there was a conversation that I had about student loans, and they were like, ‘Oh, they just amortize over time, just like a mortgage would.’ I’m like — and at that point, I knew more than — I knew less than I do now but more than the other guys — and I’m like, no. And at that point, I’m like, I need to become an expert in this and really drill down as to what is going on with this because — and it’s not just pharmacists, it’s a lot of young people, especially with advanced degrees. And the fact that the industry I think in a lot of ways has failed in terms of providing good advice is a huge issue.

Tim Ulbrich: So you take your advice of the siblings, you go the financial planning route, you determine that’s the right career path for you, and you begin that first job. So tell us a little bit about that firm where you worked prior to then jumping to Script Financial in terms of the pricing model — and I know we talked a little bit about that in 015, 016, and 017, but what was that pricing model? And building on what you already said about where the interest may lie in terms of the client versus really the products and services that are being served?

Tim Baker: Yeah, so the first firm, it was an independent financial advisor firm. It was a solo practitioner, and he — I think he was ahead of the curve in a lot of ways. His niche was actually the LGBT community. He basically charged kind of very similar to what a lot of fee-based advisors charge. So a fee-based advisor is really, you can really in your quiver pick any way in which to charge the client for it to be profitable. So obviously, we’re talking about a business here. So the relationship needs to be mutually beneficial. You need to take care of the client, give them the financial products and plan and then obviously be able to run the business. So he typically would have the model of dependent on where the client fell in terms of assets and basically stage of life, that’s how he would basically determine how and when he would charge it. So to kind of give you an example, if you came in as a pharmacist and you had $150,000 in student loans but you have no assets to manage, he might charge you a flat, you know, a flat fee for a financial plan and give you advice that way. And then basically, the idea was when the assets were there, you kind of counted on that as an income stream. So as an example, you know, you get a financial plan, you work for a community pharmacist for five or 10 years, and then at that point, you know, you would count on the fact that if you left that job, you would be able to roll that money over into an IRA for him to manage. And then basically, it would be a percentage of that. Or in the meantime, you would sell that person insurance products or maybe a commissionable mutual fund that would pay the advisor 5% or whatever. And it would just be little dinks and dabs, like a little bit of — but the problem was is that it’s not clear to the consumer. So you’re like, OK, how are you charging me? Like you could charge me — he didn’t really do this — but you could charge me hourly. But it was commission, it was different products, it could be a flat fee for a plan. It was kind of all over the place, but then like once you reach a certain asset level, so if you work for that company for five years and you roll over let’s just say $100,000 just as an example, $50,000, then you would charge a percent based on that. But the problem with that model, Tim, is that typically what happens is that the people that pay the most in fee get the attention. So typically, if you’re working with your parents’ firm, and they’re paying x and you’re paying a quarter of x, you’re not going to get the attention. And that’s what often happens is that you just kind of, hey, i’ll buy you a mutual fund for your IRA every year, and then we might have a conversation. And then that’s it, and unfortunately, what the industry says is that, oh, you’re young, you don’t really have assets, there’s no need for a plan, there’s no need for advice, which is completely false. It’s more of a pricing issue than a planning issue if that makes sense.

Tim Ulbrich: Yeah, I love that, just the comment you made about where the attention goes. Follow the dollars, right? I even think about this as people may be considering a plan that their parents use. Again, it doesn’t necessarily mean someone is inherently not a good planner, but I think about the life stage my parents are in. They’re in a very much a wealth-building stage. And they obviously have a lot more assets to manage than I do, whereas I think about coming out of school, I didn’t know how to do a budget, I was $250,000 in debt, I didn’t have financial goals, like I need a lot of love and attention when I came out of school as do a lot of new practitioners, right? And is the pricing model set up in a way that’s going to allow that? And I think — and I might be getting ahead of myself here in a few minutes — but when you think about a fee-only model, if I’m paying you for your advice and your services, and that’s relatively similar to what somebody at the next stage of life is paying, you know, I have, then, the power, if you will, to say, hey, Tim Baker, I need your attention just as much as my parents do because you’re helping me in whatever stage I’m in, and you may be helping them in whatever stage they’re in. So you articulated well on a fee-based model, and I would agree with you in terms of it’s really hard to understand where the money comes from. And I think as you’re interviewing, as people in the YFP community are interviewing financial planners, if you find yourself confused about where the dollars are coming from, stop and make sure you get those questions answered because that probably means somebody’s not in the fee-only model.

Tim Baker: Yeah, and I remember, Tim, actually I think this was post-our Bob Evans first date, I think I remember you saying to me, ‘I’ve met with how many different advisors just to understand it, and you walk out of there and you have no idea like how it works.’ And I think you paid me a compliment that you did understand how I charge, and I brushed off my shoulder a little bit. I’m like, alright, I’ve got something here, no big deal.

Tim Ulbrich: So if in a fee-based model, it sounds like it could be a combination of commissions, it could be from insurance products, it could be from investments, it could be in assets under management, it could be a flat fee for a plan. What are the inherent problems, then, with a model that’s priced like that in terms of where the client’s best interests really may lie or not?

Tim Baker: Yeah, I know. It’s funny because I joke when I talk to prospective clients about this. And you know, I say, when people at my last firm would say, ‘Hey, Tim, how do you get compensated?’ usually, that’s a cringeworthy question for a lot of advisors because, you know, part of it is because it takes awhile to explain. Another part of it could potentially take awhile to explain, like I said, these are all different ways that a fee-based advisors has in their quiver to be able to charge people. It doesn’t mean that everybody uses them, but for me, a young planner, I’m just trying to figure out a way to be myself and make a business out of what I was doing. I’d basically say, pull up a chair because this is going to take me awhile to explain it. So it could be, like you said, it could be an hourly fee, it could be assets under management, which I explained was 1% or 2% of whatever the assets that you are physically managing. It could be a mutual fund commission where, hey, you know, Tim, it’s a — let me give you $5,500 to invest, and then I’m going to charge you, you know, 5% on that, so it’s a $275 haircut. Or it’s a C-share commission, which is a 1% annual thing, and it’s a little bit more spread out. But those are more expensive over time. It could be an annuity, it could be life insurance. And typically, the life insurance that pays the advisor more is better for the advisor and not necessarily good for the person that’s buying it. So it’s just a hodge-podge of things, I thought at the time it was kind of obvious, but it totally wasn’t in terms of how it actually worked. I’m like, oh, it’s just this and this and then that’s how it works. But then like the next year, it could change to base on their circumstances. So there really wasn’t a clear path forward. And just things like — you know, I remember getting started, I would be doing happy hours and I remember — so these mutual fund wholesalers come into your office and they say, they whip out the glossy and they say, ‘Hey, this is why you should be our funds,’ which might sound maybe some more like drug reps or things like that.

Tim Ulbrich: That’s what I was just thinking, yes.

Tim Baker: And then they say, and then they basically say, ‘Hey, let’s go out to lunch, and I’ll tell you the great things about what we’re doing at ABC Mutual Fund.’ And then it’s kind of like — and then at my point in the career, I was — they’re looking for, ‘Hey, Tim, how can I help you grow your business?’ And I’m like, ‘Well, I’m doing these happy hours, I’m just trying to generate interest, people to see me.’ And I remember this instance where the guy was like, ‘Well, I’ll foot half the bill if I can come and speak.’ And I’m like, ‘Yeah, that sounds great because money’s a premium, marketing’s a premium.’ But then afterwards, I kind of had, you have that slimy feeling like I’m in the pocket of this particular — and I know in a lot of business, we joke about Shay (?) and construction business, it’s kind of like that’s how business works. I don’t want to be beholden to anybody because they paid for a happy hour. So I just, I wanted to be free, just free of the product, free of like what I was choosing as the tools to implement and really keep the advice pure. And it can be difficult to understand because again, I think probably 95% of the industry, there is a conflict between the advice that you give and the product you sell, and it’s just not commonplace for the whole fiduciary, the whole separation of product and advice, it’s not commonplace in the industry.

Tim Ulbrich: And I think that’s why I struggled with it so much, just as a pharmacist and a healthcare provider, I very naively come from the mindset of you act in the best interest of the patient, period.

Tim Baker: Yeah.

Tim Ulbrich: That’s what you do. I mean, that’s what you do, right? And so you know, should have known better, but obviously as you look at the financial planning industry, very different just in terms of the models that are out there, and actually the vast majority of planners not having to legally act in the best interests of the client. But the example you gave of the pharmaceutical industry and pharma is spot on. I can remember during residency and after rotations, we’d have drug reps come into the office, and they’re presenting the research that was, of course, sponsored by the company. You know, they’re presenting on viewpoint, and obviously as the provider, like we’re obligated to step back and say, ‘What’s the whole body of research? What’s the evidence behind this?’ And I think it’s similar here is you have to follow the money trail. Where is the money going? And as we’ll talk about here in the second part of the show, in a fee-only model, the money is going to the planner for their advice, not for a product, not for a commission, not for insurance or investments, it’s going for their advice, everything from budgeting to paying off student loans to end-of-life planning and everything in between to really look at your plan in a comprehensive nature.

Sponsor: I want to take a brief moment before we jump into the second part of the show and to highlight today’s sponsor of the Your Financial Pharmacist, which is Script Financial. Now, you’ve heard us talk about Script Financial before on the show, YFP team member Tim Baker, who’s also a fee-only certified financial planner, is owner of Script Financial. Now, Script Financial comes with my highest recommendation. Jess and I use Tim Baker and his services through Script Financial, and I can advocate for the planning services that he provides and the value of fee-only financial planning advice, meaning that when I’m paying Tim for his services, I’m paying him directly for his advice and to help Jess and I with our financial plan. I am not paying him for commissions, I am not paying him for products or services that may ultimately cloud or bias the advice that he’s giving me. So Script Financial specifically works with pharmacy clients, so if you’re somebody who’s overwhelmed with student loans or maybe you’re confused about how to invest and adequately save for retirement or maybe you’re frustrated with just the overall progress of your financial plan, I would highly recommend Tim Baker and the services that he’s offering over at Script Financial. You can learn more today by going over to ScriptFinancial.com. Again, that’s ScriptFinancial.com.

Tim Ulbrich: OK, so here we are, Tim. You mentioned, you know, holding some of those happy hours, really starting to understand kind of that fee-based model, trying to avoid, you know, some of that slimy feeling and really wanting to be objective in the advice that you’re giving, so tell us a little bit about ultimately, the pivot point of why you made that decision to leave and then give us that introduction into starting Script Financial. And I’ll start there and even jump ahead and say, why pharmacists specifically?

Tim Baker: Yeah. That’s a great question. And I would say, kind of back up a little bit. You know, like where I was in an independent financial planning firm, like I thought we were the bees knees. Like I thought we were it because we weren’t a big wirehouse or some of these bigger banks that you hear, you know, some of the not-so-great behavior. And we’re better as an independent because we can sell non-proprietary products, meaning we can basically sell any products that are out there. So in my mind, I had landed first time in the best model that was out there. And what I — I wouldn’t say quickly — what I very slowly realized was that I wasn’t in the best model and that there was a little bit more work to be done there. So basically, what happened was I was going through, I was kind of growing, I was slowly growing my business, and I just started to naturally gravitate towards younger people. You know, I kind of just remember retirees, pre-retirees coming in, and I just didn’t connect with them at all, like I just didn’t — retirement was so far away, and it just seemed weird that I would be sitting there, you know, talking about Monte Carlo analysis and things like that or long-term care insurance. And I just didn’t get, like I didn’t feel engaged. So i just started to really gravitate towards younger people. And at that time, it was actually my brother — and my brother works in a completely different industry, but he is very entrepreneurial, and he was researching — he’s a developer, so he’s researching the financial advisor industry and trying to figure out if he could build software that basically helped the industry. And he interviewed a guy named Alan Moore, and Alan was, is a young CFP, and he was starting something called XY Planning Network. And what XY Planning Network is is a group of fee-only CFPs that basically cater to Generation X, Generation Y. So he brought them to my attention and said, ‘Hey, are you fee-only? Like how do you charge? How does it work?’ And at the time, you know, he was basically saying like, dude, you’re wrong. The way that you’re doing it right now, it doesn’t work. This is a better model. And you know, what do you do when your older brother basically is trying to like tell you about your business? I’m like, get out of here. Don’t tell me about how to run my business.

Tim Ulbrich: Go do your developing, right? Go do your whatever.

Tim Baker: Exactly. And then I started to like crack open the book of what fee-only was, and I just started to listen to XYPN radio, which is the podcast they have. It just kind of chronicled different firm owners who are young and kind of worked for other firms and maybe there wasn’t a clear path forward or they saw that, you know, fee-only was better. Maybe they came from the broker-dealer, commission, fee-based world that I did. And I just started to just cram these episodes. And you know, at that time, most of my clients were pharmacists — and I’ll tell the backstory in a second, but I just started to like — wheels started to turn for me, and I’m like, you know, if I’m not comfortable as the consumer doing what I’m doing, why would I position myself as this? So I just started kind of planning from there. And you know, I wanted to make sure — you know, typically when you Google ‘questions to ask your financial advisor,’ typically they’re going to say, are you a CFP? Which I was at that point, a Certified Financial Planner. And then, how do you get paid? And typically, the fee-only model is, they’re very vocal in terms of this is the best model because it reduces the conflict of interest. But there’s still some there; there’s no such thing as conflict-free advice, but that was kind of the early makings of Script Financial, at least in terms of planning and all that. So that’s kind of how that started.

Tim Ulbrich: So talk us a little bit more then, you make this jump, you identify fee-only’s where you want to be, and you say, ‘I’m going to really own the pharmacist space.’ Because what we’ve come to realize after you and I met is that nobody was really — I mean, there’s people that dabble in healthcare financial planning at large, couple people that are out there working with independent pharmacies as a group, but nobody that we know of really niched down and said, ‘I exclusively want to work with pharmacists.’ So talk about that.

Tim Baker: Yeah. So part of the — you know, and I give credit to XY Planning Network, one of their big things is it’s all about niche, you know, owning a niche and really being — because I think what often happens is that financial advisors, financial planners say, oh, like you have a pulse, I can work with you. And you become, you become master of none, you know? You’re very general, you’re a generalist. So working with somebody who is a retiree, like you said, your parents versus you, is very different. And so I started to think about that, and I was like, that makes a lot of sense. And by the way, I’m more drawn to younger people, that kind of Gen X, Gen Y, and you know, the millennial generation’s like 80 million, so that’s not really a niche. It is, in a sense, but you can niche down further. So when I started in the business, one of my first clients was a West Point classmate of mine. He got out of the Army, moved to Baltimore, and that’s really one of the reasons why I’m in Baltimore. I came for an Army-Navy game many, many years ago and really like Baltimore. And they became early clients and then his wife was a pharmacist. And I just started to get referrals through them, and I quickly found that my small client base was mainly pharmacists. So I’m hearing this podcast, I’m hearing niche, I’m hearing fee-only, and I think I was on a drive out to Ohio to visit my sister, and it just clicked for me. I’m like, I’m doing it. Like this is what I’m doing.

Tim Ulbrich: Those are great moments, aren’t they?

Tim Baker: Oh, man. And I guess that was an epiphany moment for me too. I typically say I’ve really only had two of those, but that’s probably the third one where I’m like, this is what I’m doing. And almost like unapologetically like focused on that because I would even — because a lot of my friends in Baltimore are pharmacists. We joke that if 10 of us go out, typically, there’s eight pharmacists and two are non-pharmacists. But even some of my pharmacist friends, they looked at me like I was crazy. But I was unapologetic. I’m like, to me, this is what I’m going to do. So I just started this — like I said before, this thousand cups of coffee. So I would just talk to every pharmacist that I could get my hands on and say, ‘Hey, pharmacist. This is my idea.’ Or maybe not say it that bluntly, but what are the things from a financial perspective that are really kind of top of mind? What’s troubling you? And at the time, it wasn’t readily apparent that the big things were, hey, I’m overwhelmed with student debt, like at least for me. Like I wasn’t completely bought into the niche. So what my research showed me was kind of some of those major pain points being, hey, Tim, I’m overwhelmed with my student loans. I’m really unsure about how to properly save or budget or just invest for my future. And then I feel frustrated because I make a good income, but I’m not progressing financially. And I think once I logged into that, that’s what I often say to a lot of prospective clients, and they’re like, ‘Wow, Tim, you just described me. Check all three of those boxes.’ And for me, that’s not something you’re going to get from a typical, run-of-the-mill, like if I was Baker Financial Planning, and I was basically servicing anybody that was alive, I wouldn’t have the attention to be able to say — and it’s funny, I was on a prospective call yesterday who actually heard you on one of your recent webinars. And he was talking to me, and he assumed that I was — he didn’t know which Tim he was talking to. So he assumed that I was a pharmacist, so he like started to talk, and he’s like, ‘Oh, are you a pharmacist? I don’t remember which Tim.’ And I’m like, ‘I’m not a pharmacist, but I’m tracking all that stuff because I talk to so many of you guys that I understand the language and I understand kind of the transition from P4 to PGY1 and then kind of new practitioners and beyond.’ So to me, I think, you know, embracing that niche — and what I saw in the market, to your point, Tim, was you know, a lot of advisors will go after doctors because there’s kind of that inherent, they make big incomes and everyone wants to kind of go after that demographic of people. And you know, pharmacists and dentists were kind of like throw-ins, you know what I mean? So there wasn’t anybody that was saying, hey, you’re a pharmacist? You’re my guy or you’re my gal, let’s figure this out. And to me from a business standpoint, that just made a lot of sense to just try to own that and really, you know, immerse myself as much as I could. So I just talk to a lot of different pharmacists, and one thing I don’t think I’ve ever said speaking before is, you know, one of the things that I need to figure out when I did this career switch, even going from the firm that I was at to basically by myself where I’m basically trying to build a firm from nothing, really, is I need to figure out ways to generate income just in case the runway runs off. So things like uber and things like that, that was on my radar. But I actually — and it’s on my shelf here. I have — it’s the Pharmacy Technician Certification Exam. So I’m like, hey, if I’m going to be…

Tim Ulbrich: I remember that, yeah.

Tim Baker: If I’m going to trumpet “I understand the niche,” I should, you know — so I kind of got through, but then the business kind of started to take off. But that was always in the back of my mind was to kind of work inside of a pharmacy — and maybe I’ll still do it, work inside of a pharmacy and really understand that. So I was, Tim, I was all-in. And I think a lot of people probably still do, they’re like, ‘You do what?’ Because I’ll stand up at networking things, and I’ll say, ‘Fee-only financial planning for kind of the Gen X, Gen Y pharmacists.’ And people are like, huh? Because most people stand up, and they’ll say, ‘Our business does everything for everybody.’ And to me, this is the mark in a lot of ways.

Tim Ulbrich: Yeah. And I can attest to the fact that I think you’re the only financial planner that knows terms like PGY1, collaborative practice agreement, provider status. I mean, I feel like you read up on it, we talk about it, you get the market, you get the space, and it seems small, but it’s so important. And to your point, when you get up and talk with other planners, like, you know, trying to service everyone versus obviously what we’re doing is focusing specifically on pharmacists and building that community around pharmacists, that’s so valuable to really know that space to the depth and the detail that I think that pharmacists deserve and the clients deserve. So what — we’ve dodged around a little bit I think defining directly fee-only. So give me the 30-second pitch in exactly what is a fee-only financial planner? You know, the straight definition of that.

Tim Baker: So fee-only basically means that the firm or the advisor earns their fee — they earn no commission. So they earn their fee directly from the client themselves, so not through a mutual fund company or life insurance company. There’s no commissions on products that are sold, there’s no kickbacks for referrals or anything like that, and a fee-only financial advisor follows the fiduciary standard of care, which is opposed to the suitability standard of care. So the way I describe it, Tim, is — I think I’ve said this before is — if I’m selling you a suit, and I’m following the suitability standard of care, I just have to measure you and make sure that the suit fits. But that suit could be Philadelphia Eagle midnight green with Philadelphia Philly red polka dots. It could be like disgusting looking. If I’m following the fiduciary standard of care, not only does it has to fit, but it has to look damn good on you. It has to be in your best interest. So if you equate that to the industry, I could say, ‘Hey, Mr. Judge, I know we’re standing here in court because my client, Tim Ulbrich, is really upset about the annuity that I sold him that paid me 8%.’ I can make a case that it is suitable given his income and his assets and all that stuff, but I can’t make a case that it’s necessarily in his best interest. So it’s a little bit harder of a standard of care to achieve, so really, again, like when I work with clients, I say, ‘OK. What are the client’s goals? And then how can I help them grow and protect their income and grow and protect their net worth?’ And to me, those are the two lenses that I’m looking at. And that’s basically how I dispense advice, if you will. And to me, I think that’s the best model to do it.

Tim Ulbrich: Yeah, and just to get granular on this, so when Jess and I are working with Tim Baker as he is our planner — you know, I’m paying him on a monthly basis purely for his advice, input, guidance to Jess and I — but he’s not making any money off of insurance products, commissions, investments, etc. So just to give one example where I think this is beneficial. We had a call, I think it was last week or the week before, and we were probably on the phone for an hour and a half, two hours just talking about kind of bigger life career goals and where does the financial piece — we talked, as we documented in episodes 031 and 032 about kind of our overall purpose and goals. And that stuff is so critically important, as I’ve already talked about earlier on the show, and if I may work with a financial planner that’s not fee-only, they may see $300,000 or $400,000 of assets and really want to focus there, where obviously we’ve got so many other things we’re trying to look at and balance. And I think the value of that, we have experienced firsthand. So I believe, obviously, that I think many people could benefit from your services. And one of the things we realized recently, Tim, I think it was in the Facebook group. We had probably one of the biggest YFP fans out there ask the question of, hey, where can I find a good fee-only Certified Financial Planner? And what that told me is we have not done a good job of making it crystal clear that obviously YFP via Tim Baker and Script Financial offers financial planning services. So this is me from the mountaintop, shouting, saying, ‘Yes, we offer these types of services.’ So what is the best next step that people can take if they’re interested in learning more about your services?

Tim Baker: Yeah, so I would say just go to ScriptFinancial.com. You’ll see a nice green button on the homepage that says, “Schedule a Free Call.” And it’s a little bit misleading because typically, I like to do video conferences or in-person meetings. So if you’re in the Baltimore area, obviously, we can meet in-person. But I like some face-to-face via video conference. I think Script Financial services, I think we service clients in like 15 states now. 15 or 16 states. So we’re growing, but a lot of it — even clients that I have in the Baltimore area, they have kids so they don’t want to deal with traffic, they’ll just do the virtual meeting through the video conference, and it works out well. So yeah, ScriptFinancial.com, you’ll see a nice green button that says “Schedule a Free Call,” and yeah. We can just chat and see if we’d be a good fit.

Tim Ulbrich: Awesome. Good stuff, Tim. And on next week’s episode, we’re going to talk a little bit more about the different pricing models that are out there for financial planners, why you should care about how a financial planner gets paid, and ultimately why and how you landed on the pricing model that you have at Script Financial that’s based off of income and net worth. So make sure to join us next week on Episode 055. As a reminder, don’t forget to head on over to YourFinancialPharmacist.com/financial-planner. Again, that’s YourFinancialPharmacist.com/financial-planner to get information on what to look for in a financial planner, to download our free guide, “The Nuts and Bolts of Hiring a Financial Planner,” and to learn more about the financial planning services offered by YFP team member and fee-only Certified Financial Planner Tim Baker. So that’s all for today’s episode, have a great rest of your week.

 

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On Episode 51 of the Your Financial Pharmacist Podcast, YFP Team Member Tim Baker, CFP talks the 8 things to do or avoid to evade financial purgatory after graduating from pharmacy school.

Episode Transcript

Tim Baker: What’s up, everybody? Welcome to Episode 051 of the Your Financial Pharmacist podcast. Tim Baker here, flying solo, I think for the first time. I guess when you hit Episode 050, I guess we’ve made, so we’ve only sent one Tim to the mic. But all kidding aside, I am happy to be here to host today, and I really want to speak to the recent graduates out there because of I think how important this particular time is in life and in your financial life and in general. So it got me thinking, Tim Ulbrich and I were out at the University of Southern California, speaking to the, basically the entire rising P1s and P3s and the recent graduating class who was hard at work studying for their boards and took some time to listen to Tim Ulbrich and I speak about personal finance. And I’ve got to give USC a shoutout, a well deserved shoutout, to Dr. Park, Carolina and Rocio, I think it was, our stay there and our interaction — Tim Ulbrich and I were excited to come speak, and I think we left even more fired up after our engagement with the students. Super impressive group across the board, and it really got me thinking, especially after talking to the recent graduating class about how important this time is for them. And it really sets the pace. And you know, my work with pharmacists across the country, oftentimes I speak with pharmacists who are five, six, seven years out or more, and they feel like they have nothing to show for it. And I mean, think about even Tim Ulbrich and Tim Church, kind of both admit to, you know, what happened to them after graduation. They were basically kind of sputtering a bit and not really sure how to approach the loans and, you know, not much in the way of making a dent in the debt, maybe a little saved. And I think what often happens is that the pharmacy salary or the promise of that six-figure salary lures you into thinking that everything will be OK because really, you know, as a student, you’re not really making anything. And the promise of making $120,000 soon, you know, once you pass your boards that is, it’ll figure itself out. And that tends not to be the case in a lot of ways. So hopefully, you know, if you are a recent grad, if you’re transitioning to a six-figure income or maybe to a residency program, or if you are a new practitioner and you feel like you’ve been sputtering and this really hits a chord that it’ll prompt you to change course and to right the ship in a sense and get your financial plan in order and really get that moving.

So one of the things that, you know, we discuss often is that, you know, pharmacists on average will make $9 million over the course of your career. $6 million will actually flow through your bank account. So think about that. That’s a lot of money, and I often say to pharmacists, ‘So what are we going to do about it?’ You know, and obviously if you’re transitioning to a residency program, and that might be a little bit of a delayed bird, and that’s OK. And you’re not going to have as much flexibility here as maybe a counterpart that is going, that is foregoing the residency. But I think it’s still important to kind of be mindful of the income that’s going to be coming in.

So back in Episode 035, I had Dr. Sarah Fallaw, who owns Data Points. And basically, that’s a tool that I use that manages a client’s behavior. And it’s based on the research that her father did, Dr. Thomas Stanley, who wrote “The Millionaire Next Door,” and essentially what he studied was that there are really six major factors of the millionaire next door is the people that have achieved a net worth of $1 million or more. You know, there are behavioral factors that come into play that really play a part into achieving that type of wealth. In the episode, we talk about those factors — basically, frugality, confidence, responsibility, focus, planning and monitoring and social indifferent. And these are all factors that play a part and that can be measured versus your peer group. A lot of what I do, you know, is not necessarily — or the value that I provide clients is not really in the order of, ‘Hey, Tim, where should I invest this money? What mutual fund or ETF should I pick? Or what insurance policy should I have?’ And those things are important, but they’re very technical. I think the overarching part of this whole financial planning piece is the behavior, is how we behave. So the message to a recent graduate is be on your best behavior. School is out, you are fixing to make a sizeable income, and not to go nuts. And I use nuts facetiously, but you know, the tendency as humans is that if there is an abundant resource, we’ll spend it. And that could be true as that paycheck flows through your account, you feel that, man, I have a lot of money, what can I buy? What can I purchase? And in the age of social media where everyone’s getting a new car and a big house and taking these trips — and those things are important, and those things, some of those things are important. Those things should be baked into your financial plan. You know, the social indifference part of it is that you’re not going to get caught up in the FOMO or the YOLO of things. And to be honest, I would say that you should, you just graduated, you should treat yourself. You should be able to splurge some and celebrate those wins. But do it in a way that is purposeful, that is maybe not long lasting. So don’t go out and buy, you know, a $50,000 car that you might not be able to afford because that one’s tough to get out from under, and now you’re stuck with that car payment. But I think the behavior is such a big part of this.

So aside from being on your best behavior, think about your goals. And it sounds trivial, and it sounds really not that important, but when I interviewed Tim Ulbrich and Jessica Ulbrich back in Episode 032 and 033 where we talked about find your why, these are often questions that we don’t ask ourselves or we don’t talk about with our spouse or our partner. And we should. And sometimes it’s just life gets busy, and we really don’t take the time to say, where am I going? Why did I go to school and get this degree? And why am I taking this job to earn this money? Like what’s the point? And I often say to clients, you know, because the way that I work with clients and the way that I price my services is based on the client’s income and net worth. And you know, because I think that is the best way to measure basically financial health and progress. And I think it has the least amount of conflicts of interest with regard to giving sound advice. But it’s flawed in a sense that if we work together for 30 years, and I help that client their nest egg number of $5 million or $6 million or whatever the heck it is and they can comfortably retire, but they’re miserable because they haven’t done things that they wanted to do throughout life like hike Machu Picchu or do that European trip or maybe have a family or buy this house or whatever it is, what’s the point? You know, what’s the point of that? And I think it’s a constant exercise in taking care of the present self and looking to the horizon and making sure that we’re taking care of the 30-year or 40-year-older self as well. And I often think that like if you don’t feel that push and pull, you’re probably not doing it right. And I think that’s the same with budgeting, the evil b-word. If you’re not feeling kind of the push and pull — and I think if you’re doing effective budgeting, you’re creating a sense of scarcity because you’re doing the things, you know, the proverbial things like paying yourself first, which is easier in theory, harder in practice.

So in terms of your goal, we subscribe to the what, when and why method. So that basically means that we have statements that basically look like this: “I will x by y so that z.” So what, when and why. So an example of that would be “I will save $5,000 by December 31, 2018 so I can protect my financial plan from an emergency.” That’s a pretty good one. And that actually might not be a bad one — obviously, this is not advice — but that might not be a bad one to look at. But I think another part of this — and we talk about this often is like, you know, think about your goals. But how do you feel about them? Like when you think about — obviously, the elephant in the room is student debt. And you might have heard us talk about student debt once or twice on this podcast. How do you feel about the debt? How do you feel about being able to retire at age 50 or 60? Or how do you feel about the prospect of hustling over the next few years to get through the debt? Or the prospect of investing and watching your, basically your nest egg grow? I think often that we try to — and I say we, maybe it’s my profession or whatever — but we try to out-math you and say, well, time value money and blah blah blah. And that stuff is important, but like if I have clients that are like, I can’t sleep or I’m anxious because these student loans are just gnawing at me, well, let’s do something about it. Let’s be proactive. And you know, the math might say one thing. But that doesn’t mean that that has to be our path. So really think about how you feel and you know, challenge yourself. What are 3-5 financial goals you can write down today and realistically achieve in the next five years? And what I often do with clients, and I think we did on the episodes with the Ulbrichs was transport yourself to that time in the future. So if you’re 26, and you’re thinking five years, uh, I don’t know. I don’t know what I would do in five years, think about it as if you’re 31. And then look back as a 31-year-old and think about that half a decade that just went by, and ask yourself, what does success look like? And I think if you can kind of start with the end in mind and look back, it makes it a little easier to do. I think.

So think about your goals. And really, the next step — and man, I’m going to say it. I’m going to beat the horse dead once again. But it’s the budget. It’s all about that budget. And you know, I think for people that have big, hairy, audacious goals or that — and one of them might be to get through the student debt as fast as possible. One might be to basically be in a position where they can retire comfortably early. It really could be anything. But really take the time — and you know, if you are a pharmacist that recently graduated, hopefully — you know, when we were talking to USC, a lot of their students, they were about ready to go to their residency, and obviously they knew what they were going to make or they had jobs from whether it was community pharmacy lined up, and they had offer letters. So you more or less get a sense of what you are potentially taking home every month. So determine that take-home pay. You know, do some calculations of what will come out because of taxes and different, you know, whether it’s health insurance or all that type of stuff. And then really next is determine what your essential expenses are. So in my world, we call these nondiscretionary monthly expenses. So these are things that are going to come out regardless of if you have a job or not. So things like your student debt payment. That could be argued because if you do have financial hardship, a lot of times, both with your federal loans and even if you were to do a private refi, a lot of those situations, you can get some reprieve. But I probably would calculate it as such. The essential expenses are going to be things like your mortgage or your rent, groceries, utilities, cell phone bill. We can’t live without our cell phone, right? So take a tabulation or make a list of all those expenses and add them up. And then really the next thing is to take and determine your discretionary expenses, so that could be entertainment like Netflix, Hulu, going to the movies, things that if it were to hit the fan, you probably could cut. And then from there, you can essentially determine what is left over, which is your disposable income. And by the way, part of what the essential expense probably should be is savings. So savings is actually categorized as an expense because you are foregoing immediate consumption. So what I often do with clients, and I do it with their client portal, we’ll do a retroactive budget. It’s one of the first meetings we go through. If we determine that, hey, we have $10,000 flowing through our account, and we can see it because of all the transactions and then we can see all the stuff that’s basically flowing out of their account, the exercise is basically to show if we have $10,000 flowing into our account, we essentially should have $10,000 flowing out. And that’s what’s called a 0-based budget. So every dollar has a job. And part of that $10,000 flowing out is hopefully savings. So if we determine after we go line-by-line through every part of their budget that, hey, the expenses actually add up to $9,000, then that tells me that we have $1,000 either to maybe put towards their loans, maybe if they have credit card debt, that would probably be the first thing we do. Maybe it’s to plus up their emergency fund or just savings in general. So we talk about sinking funds, and that’s kind of for those non-monthly expenses that pop up like home maintenance or car maintenance or things like that that aren’t necessarily an emergency, but they happen. So that’s essentially what that looks like. And I think, you know, and we talk about this in our student loan course. In module 1, Tim Ulbrich goes through this. I think having that disposable income number, knowing your number is so powerful because it really can dictate, you know, exactly where to go and how to fund your financial plan. I really encourage to do this, and you can use a napkin, you can use Excel, you can use something like Mint or YNAB or envelopes, that’s what Tim Ulbrich used when he paid off his debt. So I think if you have that number, you can very purposely apply what that disposable income is towards your goals.

And secondarily, you know, in talking, you might be a resident out there, and believe me, in the student loan course, we ran what a typical resident makes, and honestly, there’s not much left over. So I think when we looked at that — now, you’ll get a reprieve if you do look at an income-driven plan, obviously. And that’s one of the things to be aware of too. So if you’re a resident, there’s not a whole lot to work with, so I think the name of the game in that is really to kind of hold on and not incur additional credit card debt and really come out when you transition to that six-figure income ready to go. But the next part — and I’ll speak to residents on this part too — is really have a plan for your debt.

So the first one I would definitely look at is the credit card debt. And I’m finding more and more new practitioners, when I speak to them, have said that they’re leaving school or they’re taking on credit card debt during school. And that’s one thing that even before we get serious with the student loans, the credit card debt gots to go. Secondarily, having a plan for your student debt, obviously is super important. Properly inventorying your loans, whether your federal loans or private loans, and then really selecting the appropriate strategy and repayment plan. So the two broad strokes in terms of strategy are the forgiveness option and the non-forgiveness option. And you know, basically the forgiveness option can be broken down by the Public Service Loan Forgiveness program, which obviously can be very controversial. But you can also be forgiven — a lot of people don’t know this — outside of that program. And they’re a little bit different of programs, but if you are a resident and you think that you’re working for the nonprofit or a government entity, starting the clock on that PSLF, that 10-year program, should happen for jump street, should happen immediately. And that’s one of the things that we discuss in the student loan course is how to really optimize that if you are in that situation. We have a lesson just for that. But if you’re in a non-forgiveness strategy, so you look at the forgiveness strategy and you say, thanks government, thanks, but no thanks, I think I’m going to do it on my own. And really this is probably more of a proactive. The problem with the forgiveness programs is they are more of a reactive. You’re kind of hoping and crossing your fingers that the programs will be around. And I think that they will be around in terms of at least being grandfathered in, that’s Tim Baker’s opinion based on some of the things that I’ve seen come out recently. And we probably can do a whole different episode on that. So if you listen to the podcast, and you’re part of our Facebook group, if that’s something that you want us to talk about, the PSLF program, the state of that, I can kind of give some thoughts and we can probably do an episode just around that. But if you’re in a forgiveness strategy, it’s more reactive, and you’re hoping, OK, government. Please follow through on the things that you said that you do. And if you’re in the non-forgiveness strategy, it’s more, OK, taking the bull by the horns, being more proactive and not necessarily be where you’re paying off $8,000-10,000 per month like we’ve seen some of our debt-free pharmacists do, but there’s a spectrum that you can fit in depending on what your disposable income number is and whether that is staying in the standard repayment plan or looking at one of our partners that does the private refinancing. There’s a lot of different ways to kind of, to look at it, and you know, you just want to make sure that you have a purpose. So I often see a lot of pharmacists, they say, ‘You know, when I got through pharmacy school, you know, I knew I couldn’t make the standard repayment plan, so I decided to go into IBR or ICR,’ and that’s one of the income-driven plans that’s out there and maybe not necessarily one of the best ones. But there’s really no intent behind it. And you know, I think oftentimes, what I see is people that are, borrowers that are kind of in between. And I think what we espouse in our course is that you need to really be either pursuing a forgiveness option or pursuing a non-forgiveness option and really fly one of those two flags. If you’re kind of in the middle, you’re in no mans land or no persons land, to be politically correct. So if you are a new graduate, and you’re hearing me talk about loans, and you’re looking for some clarity, like I mentioned, the student loan course for pharmacists is out, and it’s ready for you to sign up, so visit courses.yourfinancialpharmacist.com to enroll. And really, it’s a three-module course, each module taught by a different Tim. So Module 1, we start you off with getting organized, so doing a proper inventory of your loans, walking you through loan basics, the total cost of loans, budgeting. I teach Module 2, which is determine your payoff strategies. I walk you through exactly the two main strategies and where you potentially fit. I throw in some case studies, and also, there’s one lesson that is targeted just for residents. And then finally, Tim Church wraps it up with Module 3, which is optimizing your payoff strategy. So the course is chocked full of goodies and resources and really, when you are done taking the course, you should walk away with clarity and confidence about how to tackle your loans. So again, go to courses.yourfinancialpharmacist.com to enroll.

The next thing to really discuss is having an emergency fund. So the textbooks say — the emergency fund is basically liquid assets, we’re talking cash money, that is set aside for those unexpected, I can’t believe that actually happened and I need to spend money, events. And what the textbook says is that you need to have 3-6 months of those nondiscretionary or essential expenses. So if you’ve done your budget, thank you very much for doing your budget, but you should know that number. So as an example, if your loan payment is $1,500, and your rent is $1,000, and you are single, what that means is that you should have six months, — because if you’re single, you should have six months. If you are a dual income household, you should have three months, and there’s shades of gray in between. But if you were single and your rent and your loan payment combined are $2,500, multiple that by 6. Congrats, you need $15,000 to cover that. And that’s not even — that’s just covering that — that’s not even the groceries, the utilities, all those things. But you can see how much potentially you need for an emergency fund. So I guess what I want to say here and what I often say to clients is this is what the textbook says. But if you are looking at aggressively paying off loans or depending on where you’re at on the spectrum, you don’t have to basically build Rome in a day. Work towards $5,000. $5,000 will probably cover 75% of emergencies out there, maybe. Work towards $10,000. $10,000 will probably cover 90% of emergencies, maybe. So I think — so this is kind of what I have when I build plans out is have conversations, ask good questions of the clients, of my clients. And then basically say, OK, let’s phase this in. So Phase 1, by the time we get to this level of emergency fund, then we’ll work more aggressively toward this other goal and the next level. So don’t get discouraged, but having a properly funded emergency fund is super important to this whole thing, this whole financial picture.

The next thing that I want to mention that is attributed to a lot of the lifestyle creep that I see, not just with young pharmacists but also young professionals in general — so really what I’m talking about here are car purchases and home purchases. Now, Tim Ulbrich did an excellent job going through car buying in Episode 047, so if you haven’t listened to that, take a listen. So I won’t spend too much time on car buying. But you know, I would just say, and what I say often to young professionals and sometimes have to say this to myself is, you know, once you go in high-end Beamer, Lexus, Audi, it’s really hard to go back. So I’m not trying to dampen the spirit here, but you don’t have to have your dream car — and frankly, you don’t have to have your dream home — right off the bat, especially if you’re staring at $160,000, $250,000, whatever that is, that student debt picture. So because — and I know from experience working with some clients, they go out and they make that purchase, and those cars, they just depreciate so fast. So even if they want to get out of it, you know, they’re underwater, and now they’re stuck with an $800 car payment, and that’s no bueno. So really think long and hard before that happens. What “The Millionaire Next Door” says is that most people that achieve that $1 million net worth, they’re thinking that some other sucker, maybe — can we say sucker? — some other sucker is going to buy a car new, take that depreciation, and then the millionaire is going to come in three, four, five years later and buy that car when most of the depreciation has come off. So just a think to kind of marinate on.

You know, the other thing in terms of major purchases is the house purchase, the home purchase. And same thing with the car, you don’t have to buy your dream home right away. If you are faced with a massive amount of student debt, essentially, you’re broke. So to add another $300,000, $400,000, $500,000, that’s a lot of debt. So we’re a big believer in having as much money that you can bring to the table with regard to a home purchase. PMI, Private Mortgage Insurance, it doesn’t put any equity into your house. It just basically evaporates money from your balance sheet. You know, I think obviously, a very small percentage of people can come to the table — I think it’s like 10% come to the table with that 20% down payment. I would listen back to when we had Nate Hedrick on Episode 040 and 041 where we talk about home buying, that it’s important cash is king with this, it’s important to come to the table and really think about that. And I think if you can set the target of 20%, it really will force down your purchase price. So obviously, if you are looking at a $300,000 house — and I know those students out at USC are laughing at me right now — but if you’re looking at a purchase price of $300,00, that essentially means that you need to save $60,000. So maybe that $300,000 purchase becomes a $250,000 purchase. The point is is that what often happens is when you look at the decision to buy a house, I think sometimes we as a de facto because we’re told that the American dream is to purchase a home and build equity, that it’s almost like our birthright. And it really isn’t. It really isn’t. I think it’s something that should be done responsibly. And one of the tools that we talked about in our recent talk is that, you know, a $1,500 rent payment does not equal to a $1,500 mortgage payment because you need to factor in things like taxes and fees and closing costs and all that stuff, the maintenance of the home. And the New York Times has a great calculator that we’ll link in the show notes that basically looks at all those variables and basically tells you, you know, if we look at the purchase price, the interest rate, how long you plan to stay in the house, taxes, all that stuff, that there’s a break-even point that basically, the calculator will show it makes sense to buy or it makes sense to rent. So the word of caution here is not Debby Downer, but it’s just to think of that purchase not necessarily as an investment, because it’s really not. I think a home that you live in shouldn’t really be thought of as an investment. And again, once you sign those papers and you’re on the hook for a $2,000, $2,500, $3,000 mortgage payment, you really limit yourself in terms of flexibility with other parts of your financial plan.

So another thing to keep in mind is investment. So if your employer provides a match, absolutely should be matching that and getting the full match. Oftentimes though, what happens is I see people start a new job, they are delayed because they have to be at a job for a certain amount of time, maybe it’s six or 12 months, and then all of a sudden they’re like, well, I really like this paycheck, maybe I won’t put money into my 401k. And during that time when you’re not eligible for that 401k, you have that lifestyle creep. You buy the house or the car, and it doesn’t make sense for you. You’re basically, you’re capped out, and it’s hard for you to defer money into that 401k. So that’s something to be mindful during that period before you become eligible. And I would say, bank it in a savings account just like you were deferring it into a 401k.

The other thing to be mindful of is really what’s called 401k inertia. So if you’re employer matches 3%, you know, absolutely you should try to match 3% without question. What often happens is that it anchors the person to that 3%, whereas in reality what I tell clients, it’s kind of a race to 10%. You want to be — when we do those nest egg calculations, you need to be deferring some money away, stocking some money away for that 30-year-older self. So don’t get anchored down by that 401k match, whether it’s 3%, 5%, 6%, and just be mindful of that. And a lot of 401k’s now, you can basically build in like a percent increase every year, and I would totally tell you to do that. Just schedule it, 1, 2%, start that as soon as possible.

So the last part I want to mention is insurance. So the message here is beware, but be covered. So the two that I want to really discuss here is life insurance and disability insurance. And we’ve talked about life insurance in Episode 044 and disability insurance in Episode 045, and you know, I think that these are a crucial part of the financial plan. And really, we talk a lot about accumulation and growth of your assets and of your net worth. This is really the protection of that. And I think that is equally important.

So a few points about life insurance. If you are a new graduate, and perhaps you’re single, you don’t have a family, you don’t own a house, you probably don’t need insurance or you probably don’t need that much insurance. Pharmacists are often targeted, particularly with life insurance, because of the incomes that pharmacists make. And on numerous occasions, when I work with pharmacists, sometimes I have to unwind some of the policies that are sold them. And what I mean by that is you know, at YFP, we believe that term — if you do buy insurance, term life insurance is the best way to go. It’s pure insurance, which basically means that there’s no savings or investment component. It covers you for a period of time. So it could be 20, 25 or 30 years. And if you don’t die during that time, which hopefully you don’t, basically at the end of that term, it expires. It’s essentially done its job. Whole life or what’s called permanent insurance or variable life or universal insurance, there’s different types of permanent insurance out there, essentially, it is part insurance and part savings or investment. And typically, these types of insurance policies are five, six, seven times more expensive than a term policy. And I think that they are often, you know, they’re better for the person or the salesperson that is selling it than it is for the person, the pharmacist in this case, that is buying it. Life insurance I think is crucial. And just to kind of give you a sense of what a policy costs, you know, general rule of thumb — and I think we talk about this in Episode 044 — is 10-12 times income is essentially probably what you need. Say you make $100,000, you need basically $1 million to $1.2 million. So a healthy 30-year-old, so just to kind of give you a sense, so think 30/30/30. So a healthy 30-year-old who purchases a term life insurance policy for 30 years, basically will pay between $30-35 for that policy. So you know, double that, between $60-70 will probably cover you. And the sooner that you get it, obviously, so maybe you don’t have kids, but you want coverage. The sooner you get it, every year that goes by, those premiums go up about 8-10%. So you know, obviously, life insurance is crucial.

Disability insurance probably even more so, especially for you new grads out there. As we mentioned, $9 million over the course of your career, that’s what you’re going to make. You spend lots of time, lots of blood, sweat and tears to get your PharmD, to get licensed, to get going. You’re going to want to protect that. Having a policy to cover you — and we talk about this in Episode 045, and I encourage you to listen if you haven’t listened to that — is important. And to kind of give you an idea, if you were to buy a long-term disability policy on your own to cover 60% of your income, which is kind of best practice, you’re going to spend probably about $120-150 per month to get coverage. Now, some of you are going to be covered by your employer. So we often say that you should get a supplemental insurance policy to basically cover the gap because most employers won’t cover a full 60%, so you should get a full policy that covers that gap with the ability, what’s called a rider, to buy up in case you were to go to a job that doesn’t have that full disability policy. And the same thing with life insurance. Some of you are going to have life insurance through your employer, and it might be one or two times income, and you really don’t even have to do anything to opt into that, it’s just automatic. But oftentimes, it’s going to be far below what you actually need to be fully covered. And it’s also good to have a portable life insurance policy that basically doesn’t matter where you’re working to have that coverage.

You know, we covered a lot of ground here. And you know, and again, you know, the timing here is crucial. What you’ll do here in the next one, two, three years will really set the tone for your financial life and the outlook going forward. So you know, be on your best behavior. Think about what your goals are. Have a budget in mind. Make sure you have some type of emergency fund in place. Have a plan for your debt, whether it’s the credit cards or the student loan debt. You know, be mindful of how much you’re spending on those major purchases. Cash is king. Get into the investment game, whether that’s just taking the match on your 401k to start, that’s good. And cover yourself, but beware. So you know, life insurance policies and disability policies are important.

So you know, the Tim Baker challenge, you know, what are you going to do? What is your plan? If you’ve listened to this episode, and you’ve written down 3-5 of your goals that you’re going to achieve in the next five years, tag me on our Facebook group, call me out and say, ‘Hey, Tim. This is the plan.’ And you don’t have to be a new grad or a pharmacist. I encourage you if you haven’t done this yourself, put it out there. I will respond, and we can have a conversation about that. But I’m so happy that you guys joined me this podcast. It was a blast doing it by myself and looking forward to next time.

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On Episode 48 of the Your Financial Pharmacist Podcast we spotlight Dalton Fabian, a soon to be pharmacy graduate from the Drake University College of Pharmacy & Health Sciences. We ask Dalton about his current financial situation and help him think through how he and his wife can prioritize multiple competing financial priorities when making the transition from student to new practitioner.

About Our Guest

Dalton Fabian is a soon to be 2018 graduate of Drake University College of Pharmacy & Health Sciences. In addition to obtaining a PharmD, Dalton has a minor in Data Analytics. His career interests include health data science and using technology to make patient care more efficient and effective. During his time at Drake University, Dalton was heavily involved in various leadership opportunities focused on advocating for the profession, including serving as the Chapter President for APhA-ASP and planning health fairs for the Des Moines Community.

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Join APhA now to gain premier access to YFP facilitated webinars, financial articles, live events, resources, and consultations. Your membership will also allow you to receive exclusive discounts on YFP products and services. You can join APhA at a 20% discount by visiting www.pharmacist.com/join-now and using coupon code ‘AYFP18’. For more information about our financial resources, visit www.pharmacist.com/financial-education.

Mentioned on the Show

1. The Total Money Makeover by Dave Ramsey
2. The Dave Ramsey Show
3. The Pete the Planner Show
4. YFP Episode 026: Baby Stepping Your Financial Plan – The 2 Things to Focus On First
5. YFP Episode 032:Find Your Why with Tim & Jess Ulbrich – Part 1
6. YFP Episode 033: Find Your Why with Tim & Jess Ulbrich – Part 2

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 048 of the Your Financial Pharmacist podcast. Tim Ulbrich here, alongside YFP team member and owner of Script Financial, Tim Baker. We’re really excited to have on today’s show a soon-to-be, literally this week, 2018 graduate of Drake University College of Pharmacy and Health Science, Dalton Fabian. I had the pleasure of meeting Dalton at APhA annual in Nashville in March 2018, and when I heard a little bit about his financial story and his interest in personal finance, my first thought was, we have to have him come on the show because his story is going to resonate with so many new or recent graduates that are making this transition from student to new practitioner. So Tim Baker, excited to have you back on the show, I know you were in the weeds for a couple weeks on wrapping up the student loan course, right?

Tim Baker: Yeah, something like that, Tim. So good to be back and contributing to the podcast again. It’s a labor of love with the student loan course, but the course is out there. Our beta testers are hard at work, hopefully, testing everything out and making sure it does what the course says it’s supposed to do. But yeah, glad to be on the podcast and glad to talk to Dalton today.

Tim Ulbrich: So before we jump into hearing from him, I’m curious from your perspective, from the planning perspective, obviously you work with so many new graduates or recent graduates. What are the challenges that you’re seeing that they’re facing in terms of making this transition from student to new practitioner? Where are they getting stuck? And obviously, why is this transition so important?

Tim Baker: Yeah, I think this time period in the course of the career of a pharmacist new practitioner is so critical because it really sets the stages for their financial life now going forward. And it’s funny because you know, I have a lot of meetings last week and this week with clients or prospective clients similar to Dalton, and I’m hearing words like “terrified,” “unsure,” “uneasy.” And I think a lot of the backdrop is how do I handle this behemoth that is the student loans. And hopefully the course fills in some of the gaps there, but that’s one part of it. And I think that to set sound behaviors and to kind of have a plan going forward is going to be vitally important because if you just leave this thing kind of on autopilot, it can get away from you fairly quickly. And that could be in the form of just your spending going awry or just not being intentional with, you know, your student loans or whatever goals that you might have. And we’ve talked about being intentional in the past, but I think that this part of the pharmacy timeline is crucial, especially depending on what your goals are. So I’m definitely interested to hear more about Dalton and his story, and I think it’s going to resonate with a lot of our listeners out there.

Tim Ulbrich: Yeah, I think overwhelmed is the one word we hear over and over again of you know, I’ve got all these competing priorities. Where do I start? Where do I go? And when I had a chance to talk with Dalton, obviously he’s got a lot of things going on that we’re going to hear about in the show, but I also love his passion for learning about this topic, and I think that’s really going to help him set a sound plan for the future. So here’s how the format of today’s show’s going to work. Tim and I are going to interview Dalton, we’re going to ask him a series of questions that’s going to allow him to share his financial story, and in turn, we’re going to discuss various strategies about how he could think through this transition. Now, important disclaimer here is that obviously, we’re not intending to give Dalton financial advice. So we acknowledge everyone’s situation is unique. We aren’t necessarily going to gather every piece of information about Dalton and his story. So we’re going to help ask some questions, get him thinking about it. But ultimately, we recognize and acknowledge for each person listening to this show, it’s going to an individual, unique decision when it comes to your own financial plans. So without further ado, let’s jump into today’s interview with Dalton Fabian.

Tim Ulbrich: So Dalton, welcome to the Your Financial Pharmacist podcast. We’re excited to have you.

Dalton Fabian: Thanks for having me.

Tim Ulbrich: And by the way, congratulations on completing your final year of pharmacy school. And knowing this is the week leading up to graduation, thank you for taking time to come on the show, I’m sure it must be somewhat a busy week. And didn’t you just finish your rotations last week?

Dalton Fabian: Yep, so we finished them last week, have a week off, and then graduate on Saturday.

Tim Ulbrich: Awesome. So thank you for taking the time to join us in the midst of all that craziness. And as I alluded to the introduction, we’re going to pepper you with some questions to learn more about your financial situation, some of the challenges you’re facing, maybe some of the decisions that you’ve already made during this transition period from new graduate, obviously into new practitioner life. We know that, as I mentioned already, we know many of our listeners are probably in a very similar, if not somewhat the same boat that you are, either making this transition, going to be making this transition or recently making this transition. So why don’t you, to get us started here, why don’t you tell us a little bit about you, where you grew up, why you chose pharmacy as a profession, what some of the career goals and interests are that you have.

Dalton Fabian: Sure. So I’m originally from Waukesha, Wisconsin, which is a suburb of Milwaukee. I’ve been going to Drake — did undergrad and pharmacy school at Drake. Drake has a two plus four program. Immediately when I get on campus, I knew that’s where I wanted to be. The professors were friendly and all of that, so I just knew that that’s where I wanted to do my pharmacy school. I chose pharmacy — kind of first, I was interested in you know, helping people, interested in learning more about medications. But as I got through pharmacy school, I think that kind of transitioned to just seeing how progressive the profession was, and that made me motivated to go through pharmacy school with immunizations and all those different sorts of things. And then while I was in pharmacy school, I got introduced to informatics and programming. I got really interested in that, and that’s where I plan to pursue additional training.

Tim Baker: And that’s news, right? Dalton, you recently got accepted to — what is it, a Master’s program?

Dalton Fabian: Yeah, so I got accepted to a Master’s program, so it’s the Master’s of Science and analytics. Interested in kind of getting into the Health Data Science and Data Science career path. So yeah, just found out a couple weeks ago that I got accepted there at Georgia Tech.

Tim Baker: Oh, very cool. Very cool. Congrats on that. I guess the question for you, Dalton, is, you know, when you were going through pharmacy school and you know, you were looking at the loans that you were accruing, when did you start really thinking about the whole idea of personal finance? Or when did you get interested in learning more about it? Can you walk us through kind of that discovery for you?

Dalton Fabian: Yeah. I really didn’t focus too much on my student loans until I got interested in personal finance. So I’m a big runner, and got in — couple years ago, got into audiobooks and podcasts and came across “The Total Money Makeover” by Dave Ramsey. I had heard of it before, but came across it as an audiobook, listened to it. Dave Ramsey’s the one who narrates it, so it’s kind of cool to have the author and kind of a well known person narrate the book. So that kind of got me excited about just personal finance in general. And then it kind of made me realize that with being a pharmacist, having a high income and high student debt, that I would need that information in the future. So after that, got into some other personal finance podcasts to kind of get different perspectives on personal finance.

Tim Ulbrich: So for our listeners, Dalton, that are personal finance nerds out there, obviously, we hope they’re listening to the YFP podcast, but what are some of the other personal finance podcasts that you like?

Dalton Fabian: In addition to YFP, love the Dave Ramsey show, so it’s on a podcast also. And then probably one of my other favorites is Pete the Planner, really like his podcast.

Tim Ulbrich: Yeah, good stuff. OK. Cool. So Tim Baker, before we start rapid firing Dalton with some questions, where do you typically start from the planning perspective with a client like Dalton? I mean, what are some of the things that you’d want to know? And how would this typically play out, you know, when somebody signs on to work with you in terms of getting some of this information?

Tim Baker: Yeah, I think when I first meet with a prospective client, basically, the things that we’re going to talk about are like, what are the main pain points or what are things that are kind of top of mind for you? And we kind of just go down that process of discovering, say ‘OK, what are the things that are of concern?’ Whether it’s student loans, whether it’s retiring at a decent age, building a real estate empire, could be credit card debt, could be how to cash flow a certain financial goal. So to really kind of uncover those things that are providing some discomfort. And then just to see if we would be a good fit to work with each other. You know, I think that type of relationship, you’ve got to have obviously trust, but the way you communicate and the way that recommendations are shared I think are vitally important. So I think we would kind of come to that type of period where we say, ‘Hey, does it make sense to go forward based on here are the things that you’re looking at?’ And if we kind of get that, yeah, let’s do this, the client would get into that get organized phase, which we talk about in the student loan course. But this would be the get organized phase of everything, so this is where, Dalton, we would look at all the things financial for you, whether it’s you know, your checking, your credit cards, any student loans that you have, car loans, all that stuff we would basically go line-by-line and basically build out that dynamic net worth statement. And I think that, coupled with a look at a retroactive budget, just to see where cash flow is going, those are kind of the basis for the relationship that I build with clients initially.

Tim Ulbrich: So speaking of pain points then, you kind of mentioned that you start with some of the pain points, Dalton, I’m assuming just from our previous conversation, student loans is top of mind or at least close to the top. So talk us through a little bit about your student loan situation. And if I recall, both you and your wife have student loans, correct?

Dalton Fabian: Yeah. So we both do have student loans. My student loans, just alone, are a little bit over the national average for pharmacists. So I’m about at $190,000 in student loans. So that’s definitely a major financial priority.

Tim Ulbrich: What about for your wife?

Dalton Fabian: Hers are about $90,000.

Tim Ulbrich: OK. So I remember, I think when you and I talked, about $280,000 all in is what we were talking about.

Dalton Fabian: Yes.

Tim Ulbrich: Yes, OK. And remind me — I mean, one of the things I think we’re thinking of, especially as we’re in the context of the student loan course and trying to think through strategies of, is it loan forgiveness? Is it refinancing? Is it keeping them there and paying them off? Tell us a little bit about the interest rates of those loans.

Dalton Fabian: Sure. So I went through and kind of created a weighted interest rate, and so for that $190,000, it’s about 5.9% for my interest rate.

Tim Ulbrich: OK. 5.9%, and then for the $90,000, for your wife, do you have the same thing?

Dalton Fabian: Yeah, similar. Yep.

Tim Ulbrich: OK. So Tim Baker, obviously we’ve got one big variable, one big pain point on the table, about $280,000 in student loan debt, which I think as Dalton, as you mentioned, for you, that’s a little bit above the national average, but not too far off, so I’m guessing many people listening are facing a similar situation, especially if they’re in a relationship with somebody else for their shared student loan debt. What else, Tim Baker, what else are you thinking about besides student loans here when you think paint points?

Tim Baker: Well, I guess before we come off of the student loans, I would just ask the question — Dalton, and what’s your wife’s name, Dalton?

Dalton Fabian: Elizabeth.

Tim Baker: Elizabeth. So when you and Elizabeth talk about the student loans and what that looks like for your financial picture, I guess what are kind of the feelings that are centered around student loans? Is it confusion? Is it anxiety? Is there — you know, how do the loans make you feel?

Dalton Fabian: Sure. I mean, there’s a little bit of anxiety just with when you see that number, $280,000. But we both know that we have both have good careers and high income earning potential. So kind of anxious about the amount but know that with dedicated effort, that we can kind of control the student loan debt and pay it off quickly.

Tim Ulbrich: And Dalton, as a follow-up to that, you know, we’ve had people on this show that you know, have kind of gone all in over two or three years and really just minimalist lifestyle, paid off all their loans, and then obviously others — I took a little bit longer — and others say, ‘We’re going to get this done, and we’re going to get it done quickly. But we also potentially want to be balancing some other priorities that we’re thinking about in the future,’ whether that’s family priorities, home buying, etc., travel, vacations. You know, where do you and Elizabeth stand on that spectrum of wanting to get these paid off?

Dalton Fabian: We probably fit somewhere in the middle. So one of the kind of interesting things of being married during your P4 year is that you’re living on that one spouse’s income. And so kind of how we framed that the whole year was kind of let’s learn how to live on this income, and then once I would get a job, all of my income would be going towards student loans or other financial priorities. So that was kind of an interesting dynamic throughout rotations.

Tim Baker: When you talk about the other financial priorities, Dalton, is there other things on your balance sheet, like on the liability side. Do you have credit card debt or car debt or anything? What does that picture look like?

Dalton Fabian: So no credit card debt or car debt. The main other financial priority, which I’m sure we’ll talk about, is buying a home since we rent right now and we’re interested in buying a home at some point in the future.

Tim Baker: OK. So no credit card debt, no car debt. So are both cars paid for, then?

Dalton Fabian: Yes.

Tim Baker: OK. Winning, right? We talked about this on last week’s episode, so that’s great. So no credit card debt, no car debt. We talked about the student loan debt, we talked a little bit about kind of your feelings, philosophy toward paying that off. Other thing I’m typically thinking about, which we talked about before on this show is emergency fund. So you know, we’ve talked before about 3-6 months of expenses, roughly is what we’re shooting for. Where do you and Elizabeth stand in terms of your emergency fund?

Dalton Fabian: So, right now, we’re at about two months. And we definitely want to increase that amount, though, up to the 3-6 months.

Tim Ulbrich: So as we’re starting to formulate a list of goals, Tim Baker, I’m hearing a plan around student loan debt and paying that off. I’m hearing a plan around increasing or building the emergency fund. And then obviously, Dalton had also thrown in there some aspirations around home buying. So what else and other variables or questions are you thinking at this point?

Tim Baker: Well, I think the big one is I think the big elephant in the room is — we alluded to it a little bit — but the, you know, getting the Master’s and how are we going to — is that more student loans? Are we cash flowing that? What does that look like? That would be another big part of this that I would press Dalton on and say, ‘What does that look like for you? And what do you envision?’ So I guess Dalton, what does — in terms of paying for that part of your education, how do you envision that happening?

Dalton Fabian: Sure. So the goal is to pay for that program in cash. So aside from the prestige of Georgia Tech’s like computer science, data science program, that was also one of the considerations was that it’s a very affordable program. So the goal would be to pay for that one in cash.

Tim Ulbrich: That’s awesome. And what is that program roughly going to cost you?

Dalton Fabian: So over the whole program, which I’ll probably complete over two years, it’s $10,000.

Tim Ulbrich: That seems like a good deal.

Dalton Fabian: Much better than pharmacy school tuition.

Tim Ulbrich: Right? I know, I’m thinking of — I don’t know why I was thinking, oh it’s $30,000 or $40,000 to do that Master’s program, so cool. So $10,000, and you kind of also snuck in there the reality that one of the things that you guys have learned obviously while you’re — you got married while you were still in pharmacy school is that you’re living off of your wife’s income, so you kind of put yourself in a position that as you start thinking about achieving these goals, you’re going to try to do them largely on the back of your income, correct?

Dalton Fabian: Exactly.

Tim Ulbrich: OK. And your wife, remind me, is she an accountant? Do I have that right?

Dalton Fabian: Yes. She is.

Tim Ulbrich: Tim, what else? So we have kind of four goals that we’ve set up there — student loans, emergency fund, home buying, cash flowing the education here, the Master’s degree. What else are we trying to get in the pot? Or other questions we have.

Tim Baker: Yeah, I guess the other things would be just, you know, I would probably press about like what are some other things like in the future like major purchases. So it could be a car purchase, maybe having a baby or expanding your family could be some other things that are on the docket. But I mean, typically, typically — and we’re kind of doing this in a very much accelerated mindset, which is great because I think we can kind of compress a lot of the conversations that I have with clients is alright, you know, if we’re a good fit to work together, and we have a nice, clean snapshot of your balance sheet, kind of where your spending is and then we have a nice, clean snapshot of your goals. So obviously, the missing piece here would be to bring Elizabeth in, and similar to what we did in Episode 032 and 033 where it’s kind of find your why that I did with Tim and Jess Ulbrich, we would basically go through and say, what is important to you? What is your why? And then start to build kind of like a success timeline. So you know, over the next two years, if we were to blast forward to May 2020, and we look back over the last two years, what does success look like? Is that, you know, having the emergency fund completely funded? Is it having school paid off completely and not worrying about that? Are we being aggressive towards the loans? So you kind of start to build a picture of success and then begin to work our way through it. So that’s kind of what we do. So obviously, the big missing piece here is having Elizabeth’s voice here and having her be part of this. But ultimately, when we’re building a financial plan, you know, — and this is something that we talked about in Episode 026, which was baby stepping your financial plan, the two things that I look at first is what is the consumer debt look like? And it sounds like for you, Dalton and Elizabeth, that looks good. There’s no consumer debt. We’re not paying high credit card interest fees, we’re not paying that type of thing. And then secondarily, what does the emergency fund look like? And you know, you cited correctly, Dalton, that you know, typically, with a dual-income household, which you soon will be, right?

Dalton Fabian: Yes. Yep. While I’m doing the Master’s program, I’ll be working part-time as a pharmacist.

Tim Baker: OK. So as a dual-income household, you need three months of nondiscretionary monthly expenses, which basically means expenses that go out the door no matter if you work or not, so things like your rent or your mortgage, groceries, utilities, student loan payments, all that stuff needs to be calculated. So if you guys have $5,000 of that that goes out the door no matter what, times that by 3, you need a $15,000 emergency fund. If you’re a single income earner, it’s basically times that $5,000 by 6. You need a $30,000 emergency fund. Now, you can, you know, for me, and it depends on what the strategy that you take, I think there are different areas or shades of gray for that. Typically, you know, we can kind of talk through that in terms of what, you know, you need for your particular situation. The textbook basically says, 3-6 months. So if the credit card and the consumer debt looks good, and the emergency fund is in place, then we can start to look at how can we fund or how can we support the goals that you have of buying a home, paying for Georgia Tech and then have a good strategy in place for the student loans. So everything is kind of built on that foundation of, you know, basically funding your goals moving forward.

Tim Baker: So before we continue, I just want to talk a little bit about our sponsor today, “Seven Figure Pharmacist: How to Maximize Your Income, Eliminate Debt, and Create Wealth,” and it’s actually authored by our very own Tim Ulbrich and Tim Church. And much of what we’re talking about today with Dalton is actually covered in the book. So things like prioritizing your goals, saving for an emergency, elimination of debt, they also talk about things like minimizing taxes and what types of insurance policies that you need. If you’re a pharmacist out there, this book needs to be on your shelf. You have to get it, you have to read it. It’s excellent. So head on over to sevenfigurepharmacist.com. Use the coupon code YFP and get 15% off the book.

Tim Ulbrich: So one thing I wanted to dive into a little bit deeper, Tim, is I mean I’d love to get even more specific about, you know, a potential plan of attack for Dalton on these. So he mentioned he’s got two of those three months, we obviously know the student loan figures. What we haven’t really addressed is, you know, one of the things I like to think about home buying is what would actually be that dollar amount or figure that is needed for down payment. And then how many months do we have until that goal is going to be realized? And then on the education, you mentioned $10,000. Dalton, when would actually those bills come due if the goal is to pay cash for those?
Dalton Fabian: So it would be at the start of the fall semester, spring semester, and then again the next year.

Tim Ulbrich: OK. So roughly $2,500 over each of those four installments?

Dalton Fabian: Right. Exactly.

Tim Ulbrich: OK. OK. So Tim, take us down into the weeds here, then. Like what would you be doing with Dalton or a client in terms of, you know, we’ve got the detail here that he’s going to be working part-time, so we obviously could get to a rough budget of OK, what is that dollar amount? And then how are we going to allocate it? You know, how would you walk through a client of OK, I’ve got these student loans, I’m going in the grace period, do I cue up the emergency fund? You know, do I start a sinking fund for home buying? Do I make sure I have that cash for that tuition bill? I mean, how do you help somebody actually prioritize those, No. 1, and then 2, what I’m thinking about is the processing you really helped Jess and I implement with the sinking funds and actually putting that on automation. Can you talk us through a little bit of that?

Tim Baker: Yeah, so part of it is again, it’s a conversation that we would have in that why meeting. So part of it is, once we kind of get through what are the things that are most important to Dalton and Elizabeth, then — and a lot of the themes are going to be very similar. And that’s one of the things that’s actually cool is that, you know, I think in our world, you know, it seems like everyone, you know, can be — there’s a lot of division there. But I think when we zero in on the things that are important to, you know, a family or an individual, a lot of it is life experience, it’s giving, it’s basically providing for people close to us. And I think once we kind of zero in on those things, then, you know, one of the things that we’ll talk about is kind of what you said, is OK, what are the major purchases that are kind of going to be up on the horizon? And what’s the timeline? So we talked about the $10,000 for the education, the home purchase. So one of the things I would say is, you know, what would you guys expect to pay for a home if you’re staying in Iowa? Are you doing this remotely, Dalton? Or are you actually going to Georgia Tech?

Dalton Fabian: Yeah, so this is an online program. That’s one of the reasons it’s $10,000.

Tim Baker: So we would kind of drill down into like what do you expect to pay for a home? What kind of down payment do you expect to provide? When’s the timeline for that? And basically back into that. And obviously, a big part of this is, you know, Dalton, when you’re working full-time, what do you expect to basically take home from that? And then if that number is, you know, if we say that number is $5,000 — and I’m just making a number up — basically our goal here would be to divide and allocate that $5,000 among the goals. And if you know, that kind of would be what this looks like. So if we look at your particular sets of buckets, you know, obviously I would say, you know, plussing up the emergency fund to three months I think would be the first thing that I would tackle. So get that, put that into high yield savings account, and then call it a day. Obviously, a near term goal would be let’s basically run the $2,500 into a savings account, get that money in place, and then you know, figure out how much we need to save per month to get to the next $2,500 push. So that would be part of this. And then, you know, in terms of — Dalton, what do you guys anticipate in terms of your home buying timeline? Is that something that’s going to happen next year, 2020? What do you guys anticipate for that?

Dalton Fabian: We’re expecting probably in the next five years or so to make that type of purchase, so looking at potentially reapplying for residencies next year, so that would be a couple year process. And that potentially lead us out of Iowa, but then planning on coming back to the Des Moines area. In terms of pricing — so out here in west Des Moines, the real estate is a little bit more expensive than other parts of the metro area, so probably housing would be $300,000-350,000.

Tim Baker: OK. Is the expectation to kind of come to the table with the 20% down, which would be about $70,000 if it’s a home for $350,000? Or what’s your thought there?

Dalton Fabian: Yeah, so our goal is definitely to do the 20% down to kind of avoid the PMI.

Tim Baker: OK. So obviously, so looking at that, one of the things that we would consider is do you look at with a five-year kind of timeline, you know, horizon, do you save that in, you know, a regular high-yield or do you actually go and, you know, open up a brokerage account and invest and you know, take some, you know, risk with the market and see if the market can return something a little bit better than 1.5%? So that’s obviously one of the questions, you know, or things that we would talk through is does it make sense to go that route? Or does it just make sense to, you know, take the 1.5% over the next five years and go with that? So that would be probably one of the things that we would talk about. And then finally — and again, this is going to figure out, we would have to determine where this fall on the timeline is, you know, what is the overall strategy with the student loans? Is it, you know, is it a forgiveness play? What does that look like for PSLF or non-PSLF? Is it an aggressive strategy where we start knocking through some of these goals and then we become more aggressive in the future so kind of a Phase One or a Phase Two plan? So for you guys, you know, when you guys — you said initially that you kind of fall somewhere in the middle. Are your loans currently in repayment now? Or no? Your wife’s.

Dalton Fabian: So my wife’s, yes. Hers have been in repayment since November 2017 because she went back to grad school to get her Master’s.

Tim Baker: OK. And then is she currently in like a standard plan? Or one of the income-driven plans?

Dalton Fabian: She’s in the income-driven plan.

Tim Baker: Do you know which one she’s in?

Dalton Fabian: Pay, I believe.

Tim Baker: So and then typically, those are, you know, pay or revised pay-as-you-earn is going to be typically the two income-driven that we like, just depending on what the strategy is. So we would basically do a, you know, kind of a student loan analysis and figure out, basically match your strategy with the goals that you’re trying to achieve. So that could be anywhere from keeping the loans in the federal system and driving down your adjusted gross income just so you can have, you know, the least amount paid toward the loans. Does she work for like the government or a 501c3 or anything like that?

Dalton Fabian: No, she does not.

Tim Baker: So do you guys anticipate, you know, seeking forgiveness or anything in the future?

Dalton Fabian: No.

Tim Baker: So if that were the case, then I would probably look at probably staying in — and similar with you, Dalton, you know, as you get through your grace period, enrolling in a income-driven plan and probably drive the payment down as much as possible. And for your loans, the income-driven plan, if you’re at, for $190,000, your loans are probably going to have a payment around $900, $900+, so that would probably be part of the equation. And then what we would do is stick with that until some of these other goals are funded and then with the potential to pivot out and be more aggressive, either through a refinance or something like that in the future. So you know, given your situation — and we did a few case studies with this in the student loan course, it would probably be a two- or a three-phase where we would say, OK, between now, you know, year, for Years 1 and 2, as you go through school or if residency is in the future, stay in this particular repayment plan. And then Year 4 or 5, let’s look if it makes sense to refinance and save and maybe be a little bit more aggressive on the loans at that point in time. So that’s essentially where we would look for, you know, funding those particular goals.

Tim Ulbrich: I would agree. And just to build on that, Tim, especially you mentioned the residency piece, and since there’s kind of these variables in play that he may end up going back and doing residency, which may mean, Dalton, a move right? Potentially that has other variables of moving expenses or costs or unknown variables. I think longer term, you know, depending on the situation, a refinance may be the play. But obviously giving yourself that flexibility to see how that shakes out, knowing that you can go into an income-driven plan, pay extra, pay down the loans and then seeing what happens in the next year or so, especially as you navigate some of the grad school options and whatnot. So Tim, it’s kind of taking me back to the, you know, at the end of Module 1 and into Module 2 of the course where we come up with this idea of finding your number. How much can you put towards your loans each and every month? And then you’re really just executing the plan. And as I hear Dalton’s storyline, kind of the way I’m starting to think through this obviously, and we want to get Elizabeth’s input as well, is that they’ve identified his income is kind of going to be the portion for these various goals. So what that dollar amount is, and then you start dividing it up between, OK, we’re going to finish off the emergency fund, we’re going to save for the education, you know, maybe x dollars per month over five years goes toward a down payment, and then we’ve got this chunk of money that’s available and ready to go towards student loans. And then that repayment strategy may pivot as income changes and residency does or does not come into play. So talk through, just briefly, I felt like it was a huge win for Jess and I — we, Dalton is getting into this point 10 years sooner than I did. So Dalton, No. 1, that’s awesome. But you helped Jess and I get to this point, Tim, where we kind of were able to finally articulate what these things were, put a dollar amount to them, and then you really helped us establish this idea of sinking and sort of automating it. Can you talk through that for a minute?

Tim Baker: Yeah, so, I mean — and I think that’s really the missing piece here is not having Elizabeth and her input. I think ultimately, I don’t really do anything special except ask the question. And a lot of us, either we feel uncomfortable, you know, talking to our partner about this or it’s just not a conversation that is naturally brought up. It’s kind of the same thing of like, you know, estate planning or like who’s going to take care of our kids if something were to happen to us? Or how much life insurance? It’s just not something that comes up in the natural course of conversation. So I think for me is to ask good questions and really get out of the way. But, you know, I think once we kind of identify those buckets, I think for a lot of this is to identify or try to put a number to it in terms of what is the most important thing? So if it’s more important to be in a home in five years versus being aggressive on the student loans, then you know, if I’m doing some quick napkin math, if you’re student loan payment for at least Dalton, if I look at yours, it’s say $900, and then we know that it’s going to go out every month, and then if you want to save $70,000, which is 20% of $350,000 in five years, if we don’t account for any type of interest at all, that’s basically $1,167. So if you combine that with your $900 payment, that’s $2,066. So depending on what your pay looks like, that’s where the conversation will begin and end. Now, essentially, I probably would say, start with the emergency fund. Get that plussed up, and then basically turn that off. But when we talk about basically setting up the emergency fund and sinking funds, what I like about having multiple sinking funds is although money — and we talked about this term before — money is fungable, meaning it’s interchangeable. So we look at money differently depending on like the sources. So if I find $20 in my couch, I’m probably more likely to spend that money on something frivolous, you know, and similar to like a bonus that we get versus if that is something that’s just income. So although money is interchangeable, for clients that I see have the best success is be able to say, OK. This is my emergency fund. It’s labeled emergency fund. I have $15,000 or $20,000, whatever it is. If something happens, if it hits the fan, I have that money. But then I think it’s also equally powerful, whether it’s an investment account or it’s a high-yield savings account, a sinking fund, that it says, this is Dalton and Elizabeth’s first home purchase fund. And every month when I log in, I can see, OK, that account is worth $20,000, $25,000, $30,000. It’s the same thing with, you know, your cash, the cash for your home. So we probably would set up an education fund that would probably just be a sinking fund for that that every quarter, we know that we need $2,500. So we’ll basically infuse the cash, pay it out of that fund, and then basically backfill that with the $2,500. And then when that goes away in two years, then we have that money to basically either throw it towards the house or whatever. So I like the idea of basically having an allocation sheet towards these savings to say, OK. What is the target? What’s the target amount that we need? Where — how much is the monthly deferral? So is that $250 a month of the $3,000 worth of income? And basically, work through it very systematically like that because I think if you’re kind of willy-nilly, you don’t have set figures, then the money gets lost. You know, if you say, oh, just throw it into a sinking fund, and that sinking fund is partly for education, partly for an emergency fund, partly for the down payment for a house, then we can’t really see straight lines. So that would probably — we talk about setting up buckets, those would be the buckets that we would set up, and we would basically just try to figure out how much to fill that, you know, every month. And that’s the purpose of the sinking fund.

Tim Ulbrich: Yeah, what I love about that too is just hearing you talk and thinking about the work you’ve done with Jess and I, I mean, part of the plan is prioritizing and articulating goals, but then the whole other part of this I’m thinking about even looking at Dalton’s situation, is helping execute the plan and the accountability of the plan. And I think there’s so much power and value in having somebody help you through that. And Dalton, I just love that you’re thinking about this, that you and your wife are talking about it. I love that you’ve articulated these goals of tuning up the emergency fund, paying cash for school. You know kind of what you’re looking at home buying, you obviously have inventoried your loans, so you know the details. And I think for those that are listening that maybe aren’t at that point, that’s really step No. 1 is kind of knowing what you’ve got. Obviously, debt-wise, knowing your current financial position and then getting organized with what those goals are and then obviously, at that point, you can start to prioritize and put a plan of action around them. So Dalton, really appreciate you coming on the show and appreciate you being willing to share your story. And I think many others listening are going to value from hearing the position you’re in and just hearing the thought process of how we went about this episode and asking the questions that we did. So thank you so much for coming on today’s episode. We appreciate it.

Dalton Fabian: Thank you for having me.

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On Episode 45 of the Your Financial Pharmacist Podcast, YFP team member Tim Church and Certified Financial Planner Tim Baker discuss some of the key features of disability insurance and walk through how to get the right coverage.

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Episode Transcript

Tim Baker: What’s up, everybody? Welcome to Episode 045 of the Your Financial Pharmacist podcast. I am taking the host seat today. And I’m joined by Tim Church, who hasn’t been on for quite a bit. Today, we’re going to be talking all about disability insurance. Last week in Episode 044, Tim Ulbrich walked down the path for him and his family, talking life insurance and term life insurance, more specifically. So this week, to kind of continue on the insurance theme, we’re bringing on Tim Church, and we’re going to talk all about disability insurance, what that picture looks like for him, how to basically price disability insurance and what that looks like, and hopefully you walk away from this episode with a little bit more confidence in the disability insurance arena. So Tim Church, welcome back to the podcast.

Tim Church: Thanks, Tim. Great to be back on as always. I thought you guys did an awesome job last week talking about life insurance. And I think that and disability insurance are probably some of the least sexiest personal finance topics, maybe just a step above taxes, but obviously, I think it’s something that’s important.

Tim Baker: Yeah, it’s funny because like when I meet with clients, you know, one of the things — and we’ve talked about this in terms of how I price working with clients, it’s about income and net worth. So you know, what I tell clients is when I give them recommendations, I’m trying to figure out, OK, what’s the best way to help them grow and protect their income and grow and protect their net worth while keeping their goals in mind. And the life insurance and the disability insurance are all about that. And it’s definitely — I know you guys talk about in the “Seven Figure Pharmacist,” it’s definitely a defensive posture because you’re basically trying to protect what you have. So it is super important, and I think it’s one of the more overlooked things that pharmacists, at least in my experience, will have in place with their financial plan. So we’re going to get into disability insurance and kind of unpack that whole issue. But before we jump into that, why don’t you tell everyone what’s been going on with you and what you’ve been up to since the last podcast?

Tim Church: Well, I’ve just been kind of hanging out here down in Florida, getting some nice weather, starting to warm up. But other than that, I’ve got three words: Student loan course. So basically, I’ve been knee-deep, trying to get everything ready for our beta group that’s going to be starting in a week or two here. And really, it’s just been a labor love and really excited to see it all come together. Looking back when we first started out the outline, I think I underestimated and think all of us did, all the moving pieces that were going to be required to get it up and running and how many Saturday morning marathon sessions that you and I would have. But basically, you know, it’s been fun. And I think it’s interesting how every time you and I talk, we somehow keep adding more and more content. But CEO Tim Ulbrich is basically putting the hammer down and saying, we’ve got to get to the finish line, which I think is a good play.

Tim Baker: Yeah, and when we had our last T3 conference kind of in Baltimore, this was one of the big points that we were working on is working through the course, and it’s always great to have you and Tim in Baltimore and working through this stuff. I think when we did that way back when, I don’t know if it was March or February or when it was, but we thought we were pretty close, and then we looked at it some more, and we’re kind of at the point where we’re shaving the ice away from this perfect statue, this ice statue. So yeah, I think for me, I just need to sit down and get my videos finalized. I feel like they’ve been there waiting to be recorded. So I’m anxious to get that done, and I think that will be done this week. But we still have some spots left for the beta group, so if you still want to get in on that, it’s 50% off, so you can go to courses.yourfinancialpharmacist.com and enter code LOANRX. So go to courses.yourfinancialpharmacist.com and enter code LOANRX, and that’s for 50% off. And what we’re really trying to get at here is is this course delivering everything that we say it will? And basically, what we believe that this course will do is for one of the major pains for pharmacists, 89% of pharmacists that graduate pharmacy school will have loans is really to provide some type of clarity with their loans in terms of inventory, what they actually owe, who they owe, inventory their feelings about the debt, and then come to a strategy that basically fits their situation and what — there’s a lot of information and sometimes misinformation out there in terms of the student loans and the forgiveness programs out there, and then really how to optimize your situation and get everything you can, either out of forgiveness or even a nonforgiveness strategy. So Tim, do you have anything else to add on student loans before we jump into disability?

Tim Church: No, I think you covered it pretty well. I mean, just excited to get it off the ground. I think it’s going to provide a lot of value to people.

Tim Baker: Yeah. So do I. OK, so let’s get into this. So I think one of the things that we probably should talk about first — and I think this is one thing that we often talk about with financial planning in general is why should we have disability insurance? So Tim, for your particular situation, you know, you look at your financial picture. What are the big reasons why you think disability insurance is important?

Tim Church: Well, I think what it comes down to simply is could I survive if I suddenly was unable to work? And whether that’s because I got in an accident or because of an illness. And at currently, basically it’s not going to happen. My wife and I are dependent on me bringing in an income right now. And she works as well, but it would be very tough, especially with still paying off her student loans and just to be able to live the lifestyle that we currently have. So I think that’s really the biggest thing when I think about disability insurance.

Tim Baker: Yeah. And I think for a lot of people, one of the things that we mentioned in the lead-up here was that for a lot of pharmacists and really, young professionals, it’s one of the things that is often overlooked. And I think part of it is is that feeling of invincibility, part of it is it just doesn’t make the cut when we talk about all the things that we have competing for our income. But it is really imperative that pharmacists have it in place. And like we say time and time again, the average pharmacist will make $9 million over the course of their career. $6 million of that will flow through their bank accounts. And you know, our listeners, Tim, you and Andrea, you guys spent a lot of money to get this degree, which affords you the ability to earn more than kind of the average American. So I think it’s best to protect that. And outside of kind of the time factor with a lot of my clients, their second biggest asset is their ability to earn. So I think a proper policy in place, whether it’s between the employer-provided or a supplemental disability policy, which we’ll get into, I think it’s imperative for this part of the equation. And just to give you guys some context, you know, life insurance is typically — I don’t want to say it’s the sexy part of insurance because I don’t know if there is a sexy part of insurance — but life insurance, typically when people think of insurance, I think, you know, and buying policies, they think of that because it’s, oh, I have a $1 million policy or a $500,000 policy. It resonates more with people. But disability, you know, disability insurance I think is as important, if not more, in the sense that you know, according to the Social Security Administration, 25% of today’s 20-year-olds will become disabled. And I think it’s for a period of at least three months before age 65. And we know that a lot of people out there don’t have the prerequisite emergency fund or things that they can do to survive that three months or even beyond. So again, it’s important to have that policy in place.

Tim Church: And I find, Tim, is that a lot of my friends and colleagues, they seem to be very underinsured in this area. And when I say that, I mean they basically either don’t have a policy or something that’s very minimal, and I think it kind of goes back to that feeling that you know, you may be young and healthy or that something really bad would have to happen, but what’s interesting is I actually personally know some pharmacists who became disabled and couldn’t work for over a year. And a couple of those were really freak accidents where they experienced some head trauma and basically, they had cognitive deficits and they weren’t able to work because of it. And I know another pharmacist, she actually had really bad rheumatoid arthritis. And that really put her in and out of work, and sometimes she was only able to work part-time. But these are actually real cases that I know of where I don’t know their situation, but essentially, they would have needed disability insurance unless they had some significant wealth already accumulated.

Tim Baker: Yeah, and it’s crazy — and I shared this story last week about a colleague working with clients that were widowed or widowered — I don’t know if that’s a word — but basically, they had life insurance in place, and thank goodness that they did because they had three young kids. But you know, this usually hits home when you know someone or you have real life experience. And it’s really not a question of if, it’s when for people to come into contact that are going to go through this type of thing. So you always think that it’s going to happen to someone else, and I think there’s a bias out there, and I should know what that bias is, but you always think it’s going to happen to someone else until it happens to you.

Tim Church: Overconfidence.

Tim Baker: Yeah, and maybe it is overconfidence. So I think it’s definitely important to kind of hear that and just take — like again, a lot of our listeners, you guys have worked so hard to get to a point where you can earn that six-figure income. And you want to protect it for the sake of your lifestyle and for your family, you want to make sure that you’re protecting that. And it really doesn’t take much in terms of effort to kind of get the protection that you need. So hopefully, this episode brings a little bit more clarity to that. And I know you guys brought it up in “Seven Figure Pharmacist” quite a bit. I think it’s hopefully something that, you know, maybe after the third or fourth time of us talking about it, it empowers our listeners to get that insurance in place.

Tim Church: Yeah, and I’m always curious as to the reasons why people don’t. And I think we talked about just that feeling of invincibility, especially if you’re young. But I think the cost also sometimes deters people. When you look at life insurance and some of the other insurance coverages, we’ll get into this, but disability insurance is a little bit more expensive than some of those. And so when you look at just the cost itself, you’re looking at that and saying, ‘Wow. Can I really afford that much extra?’ But then you have to look on the flipside is really can you afford not to have it?

Tim Baker: Yeah, and it should just be baked into your monthly budget, in a sense. And one of the things of life is that, you know, back in the day, you know, your employer used to cover it just like they covered a lot of other things, and it’s not necessarily the case anymore. So again, it’s very important to kind of take control of the situation and get the type of policy that is going to work for you. So what do you think, Tim? Do you think we should kind of break down the types of policies?

Tim Church: Yeah, let’s unpack that. I mean, one of the things that I’ve seen just in my own research and things that we got ready for “Seven Figure” is that disability insurance policies can be very complex. There’s a lot of extra features, add-ons, things like that. And I know when I applied for coverage before, it was like buying a car. You have your base model, and then there’s like 20 upgrades, features, things you can add. So Tim, can you kind of break down the two basic types of disability insurance?

Tim Baker: Yes. So the two broad types of disability insurance are going to be what’s called short-term disability and long-term disability. And I would say not to get caught up in the semantics of what short-term and what long-term is. It’s kind of a moving target for every carrier, every company out there. Essentially, what you want is a policy that covers you in the event of your disability. And we’re going to talk through some of the different aspects of that. Typically, you want a longer term disability policy in place that will last a period of years, if not until basically retirement age. But there are other policies out there that are more kind of stop gaps that a short-term policy would fill in for. So those are the two broad ones are short-term disability and long-term disability.

Tim Church: And wouldn’t you say, Tim, that when you’re looking at kind of that benefit period or the time that you would have the disability insurance coverage, it really kind of comes down as how long would you actually need those benefits in terms of you know, could you accumulate enough wealth by the age of 50, 55 and maybe not need it all the way until retirement? So you could break it down, if you wanted to, in terms of where you would expect to be retired or when you would actually need that income support. Is that a good way to look at it?

Tim Baker: Yeah, I mean, I think what I often say is that I would recommend just like we would recommend an emergency fund or life insurance policies or whatever, I’m going to recommend basically what the textbook suggests. So typically, the textbook would say, ‘Get a long-term disability policy that would last until your Medicare age,’ which would be like 65 — I think it’s 65 — until retirement. So typically, that would be where we would start with a client. And then from there, you know, you might look at that policy like, ‘Gees, Tim, that’s like really expensive. I don’t think I’m prepared for that.’ And that’s kind of when we start looking at some of these other variables that we’ll get into or these key features that we’ll get into that we can slide around to see, OK, what is more in line with your budget. But typically, the textbook would say, ‘Have a policy until retirement age.’

Tim Church: Gotcha. And then when we talk about how much coverage you actually need, when you break that down, so how do you usually walk through clients to talk about the actual needs?

Tim Baker: Yeah, so typically, you’re going to want roughly around 60% of your gross income. So that is before taxes are taken out. And typically, it’s quoted or it’s priced based on monthly amount. So if you make $10,000 per month, you’re going to want something that’s going to cover you for around $6,000. And the reason that that is is you know — and it depends on who is actually buying the insurance, whether it’s you or your employer. It depends on if your employer buys it, then the benefit comes to you taxed. If you buy it, so you’re buying a policy with after-tax dollars, the benefit comes to you as tax-free. But 60% is typically the number that you’re going to want to look at. But again, it’s the same thing with the coverage period. You might get to that point and you say, ‘Wow. 60% until I’m retired is going to cost me this much.’ And that may be where you say, ‘Well, I can probably get by with 50% or 40%,’ and it’s basically a conversation that I have with clients. Obviously, I want to push them to protect as much of their income as they can, but at the end of the day, it is a cash flow concern.

Tim Church: Yeah, and it comes down to also too what kind of lifestyle would you want to have if you become disabled? And do you need that amount? And I guess that’s probably where you can talk with your clients about determining maybe some more specific needs, client-to-client and just kind of asking, do you want to maintain your current lifestyle? Would you be OK if it was reduced a little bit?

Tim Baker: Right. Exactly. And then that’s kind of where you know, the more of the human side comes into it is if a disability event were to happen, what do you see yourself doing and that type of thing. And how do you see yourself living.

Tim Church: Yeah. So we talked about coverage amounts. So the percentage of your income that you’re actually getting a policy for, so that’s going to have a big impact on the cost of the policy. And then also how long those benefits that you would actually receive. And then the next thing that comes into play a lot is the elimination period. So basically, what’s the waiting period between the time that you put a claim in for your disability and you actually receiving benefits. And sometimes, I think that’s where it can be interesting to talk about do you need a short-term and a long-term disability policy? Or could you just have the long-term disability policy? And I guess that really comes down to is whatever that elimination period is that you choose, is do you have a good emergency fund to cover you in that gap or that window?

Tim Baker: Right. So the elimination period or the waiting period or you could think of this as like a deductible that you pay in time before your benefit gets to you should match pretty closely to what your emergency fund is. So if your emergency fund reserves is for three months, 90 days, which I think is typically best practice, especially for a dual-income earner, that’s probably where your elimination period can come out. But again, you can toggle this in a way that you can get policies that have elimination periods after 30 days or you can wait a whole year, and that basically makes the period or the premium a lot cheaper if you wait a year. But then you’ve got to ask yourself, if I become disabled, can I wait a whole year to get my benefit? And for a lot of people, it’s no, but it depends, again, on a case-by-case basis. I would say best practice is probably look at 90-day, so a three-month waiting period once you submit your claim and then price the policies from there.

Tim Church: One of the other things that typically comes up on policies for disability insurance is own occupation or gainful occupation. So can you talk a little bit about that, Tim?

Tim Baker: The big definitions — so these are basically definitions of disability. So your policy is going to have a definition. And the big ones out there are own occupation, which is basically the inability to engage in one’s own occupation, so like a pharmacist. And that’s typically the most expensive because it’s basically the most limited in terms of your ability to receive that or the most inclusive for your ability to receive that benefit. And then there’s something that’s called any occupation, typically referring to is basically if your policy is any occupation or any occ, you might hear, or own occ. Any occ is the inability to engage in any occupation. So this is if you’re a pharmacist, Tim, if you have a policy that is any occupation and you become disabled, but you can’t necessarily be a pharmacist. So maybe you have some, like you said, cognitive disability, but you can still be a greeter at WalMart, as an example, then your claim for your disability insurance would be denied because they could say based on the definition of disability, you can still hold gainful employment, but you just can’t do what you’ve been trained to do. So any occupation is one that is more liberal in terms of your durability to say whether you’re disabled or not. And to me, I would say this would be one that’s definitely kind of a nonnegotiable. I would want clients to make sure that you have an own occupation because think of all the things that you could theoretically do for work. And for you to be denied that benefit would be a tragedy, I think.

Tim Church: Yeah, and it kind of goes back to what we talked about. I mean, how many years of school and training do we go through in order to be able to generate that income? And so of course, you’ll want to protect that and that ability to make that salary.

Tim Baker: Yeah, and some of the other definitions out there that you might see would be like modified any occupation, which would basically be inability to engage in any reasonable occupation that one might be suited by education, experience and training. So that’s maybe kind of an in-betweener. And then the other one you would see is social security definition of disability, which is probably the most stringent. And they basically define that as a mental or physical impairment that prevents the worker from engaging in any substantial gainful employment. The social security definition of disability is the most stringent. So if you have a policy that follows that guideline, you’re definitely going to want something outside of that policy to cover yourself.

Tim Church: Before we continue with the rest of today’s episode, here’s a quick message from our sponsor.

Sponsor: As a pharmacist, you’re going to make millions of dollars over your working career, and you’ve worked hard to get where you are. Take a minute to answer this question: Would you be able to support yourself and your family if you were suddenly unable to work because of an accident or illness? Disability insurance provides you with money to cover your bills and expenses if you’re unable to work. Your employer may offer some coverage, but it may not be enough, and it may not follow you if you were to change jobs. That’s why it can be a good idea to have a private, long-term, disability insurance policy. We want to provide the YFP community with an easy, one-stop solution to help you get the coverage that you need. Therefore, we have partnered with PolicyGenius, America’s No. 1 independent, online insurance marketplace, so you can quickly get quotes from reputable companies rather than wasting time having to make phone calls and shop multiple websites online. You can get your estimate today by going to yourfinancialpharmacist.com/insurance. That’s yourfinancialpharmacist.com/insurance.

Tim Baker: Now back to the Your Financial Pharmacist podcast. So Tim Church, I know we’re talking lots about these different features. Why don’t we jump onto PolicyGenius — and actually, listeners, if you go to yourfinancialpharmacist.com/PolicyGenius, you can actually go through the process that I’m going to take Tim Church down. And just to kind of reiterate this, I talked about this with Tim Ulbrich in terms of the life insurance. You know, one of the reasons we like PolicyGenius is because when you get on there, you’re quickly seeing how clean their interface is. So a lot of these insurance companies that I worked with in the past, you know, their websites are difficult to navigate and just not great. And I guess I’m more of an Apple snob, so I like nice, clean interfaces. And they don’t disappoint in this regard. I think more importantly, you know, from being a fee-only guy, not really liking the commissions, their agents that you might interact with do not get paid a commission. They’re basically paid a salary, so not really incentivized you to put you in a policy that is going to be in your best interests and not yours. And then the other thing that I like is they’re more or less a broker. So they can go out to all of the best companies out there and price the insurance carriers and quote the insurance carriers from across, basically across the board. So you know, for these reasons — and I would say too is when I work with them for clients and I’m sure with our listeners, if you have a question — and the education centers there are great — but if you have a question about your policy or about the process, super eager to help and super responsive, even if you have existing policies, they’ll look at that and kind of give you some advice. So I’ve been nothing but impressed with them in terms of being a good partner for Script Financial and I know with Your Financial Pharmacist, I think they’ve taken care of some of our listeners out there, and we appreciate them and their place in the space of insurance. So Tim Church, are you ready to kind of hop on here and do this thing?

Tim Church: Yeah, let’s do this.

Tim Baker: OK. So again, you can go to yourfinancialpharmacist.com/PolicyGenius and basically, follow this. And Tim, the first page is going to basically take us to life insurance or disability insurance. So obviously, we’re going to go through disability insurance on this episode. So you are a male, what is your date of birth?

Tim Church: 08/14/1985

Tim Baker: You reside in the state of Florida.

Tim Church: The Sunshine State.

Tim Baker: Alright, so the next page is going to be talking about your occupation. So what’s your occupation, Tim? I forget.

Tim Church: Professional drug dealer.

Tim Baker: Alright, so pharmacist. You do work at least 30 hours this week in this occupation, which is unfortunate. How many years have you worked in this occupation?

Tim Church: So a little over seven.

Tim Baker: OK. And then highest level of education? So we have basically JD or MD or PhD.

Tim Church: We’ve got to get on them about that, about putting a PharmD selection, right?

Tim Baker: Yeah, I’ll write a strongly worded email. And then your individual income, so don’t income from a spouse or partner. So what’s that?

Tim Church: So base salary is about $125,000.

Tim Baker: OK, $125. And we’re going to assume no existing coverage. So let’s hit next here. OK. So basically, we’re going to be talking about selecting your monthly benefit. So the default here will default to 60%, which is basically the textbook recommendation. So if you pay the premium, which you will in this case, you’re going to get all of the benefits. So in your case, the recommended benefit or 60% is going to be $6,100 per month.

Tim Church: And that sounds pretty close to what actually my net take-home pay is. So that seems pretty reasonable or realistic of what I would need.

Tim Baker: Right. And that’s kind of the idea is to match that. Now, you know, listeners can’t see this, but on the page, basically it says for a 42-year-old male living in Florida, the monthly range, so this is kind of the first place where you’ll see kind of a quote, so that is $111-151. And the plan features, it says existing coverage of $0, benefit amount of $6,100, a waiting period of 90-days and the benefit period up to age 65. And then this is own occupation, residual disability coverage, which we’ll talk about, and then non-cancellable feature, which we’ll talk about. So this is kind of like the first page where you see more or less, it gives you an idea of where we’re going. So it asks the question, do you expect your income to increase significantly over the course of your career?

Tim Church: I hope so.

Tim Baker: So we’ll put yes. And the reason that we do this — and this is a good point maybe to discuss briefly about employer-provided disability insurance and then basically individually owned disability insurance, which is what we’re doing now. So if you were to answer yes to this question, basically they’ll run quotes with a future increase option, which allows you to increase your benefit amount when your income increases, regardless of any changes in your health status. So the example here is if Tim knows that “Seven Figure Pharmacist” is going to continue to sell, and you’re going to sell it to every pharmacy school out there, whatever the case is, and you’re making a lot of money, you want to make sure that your benefit matches kind of the income that you’re pulling in. So that option gives you the ability to buy more. Secondarily, if you have an employer-provided benefit, they’re going to pay you some type of benefit, which is going to be taxed because they pay the benefit of the premiums, but if you were to leave that job, and you go to another pharmacy job that doesn’t provide disability insurance, then the policy that we’re buying now will give you the option to basically buy more or a future increase option to kind of make up the gap. So basically, that supplemental policy that you would buy now becomes your main, your primary policy and will make up the gap in terms of what you need. So hopefully that makes sense to our listeners out there. So now we’re going to talk about the waiting period. So this is basically that time deductible. And this particular tool will default to 90 days. So policies have waiting period of anywhere from 60-365 days. So if it’s a 60-day waiting period, then that’s typically a higher premium because you’re getting your benefit quicker. If it’s 365 days, you’ll get your benefit a year out. And that’s typically makes the policy a lot more affordable. So Tim, what would you like in terms of your waiting period?

Tim Church: Given I have a pretty decent emergency fund, let’s go put that at 180 days.

Tim Baker: OK, so you’re going to move it out a little bit. OK, so then the benefit period, so basically this is how long the policy will pay you if you become disabled. So policies typically have benefit period of two, five, 10 or up to retirement age, which could be 65 or 67 for a lot of our listeners. Obviously, the longer the period, the higher the cost of the benefit. So what would be a good age for you, Tim?

Tim Church: So I think the default of 65, that’s a good place to start.

Tim Baker: OK, I agree. OK. So then this next page is basically wrapping it up. So it does include own occupation, so this is your occupation. It also asks you about a residual disability. So basically, these are riders or clauses in the disability, and what the residual disability asking you is basically saying, do you want to be paid for partial disabilities that could potentially cause loss of income but doesn’t necessarily prevent you from working completely. So typically, the default here is to say yes. And then the final question is do you want it to be non-cancellable, which basically means as long as you pay the premiums, the insurer can’t cancel the policy or change the premiums or change the benefits. So you basically lock into all aspects of your policy. So typically, you want that as a yes as well. So is that good, Tim?

Tim Church: Yeah, that sounds good. And I was wondering, Tim, if this is a good point to talk about that if you have coverage through your employer only, and let’s say you switch jobs and your new employer doesn’t cover that and you have to get your own policy, you’re probably going to also have a health evaluation. And if you’re not as healthy as you were when you had the previous policy, this could really have a huge impact on cost and your ability to even afford a policy like that. And so even like life insurance, this may be a point where it’s good to even have something outside of your employer, just so you can avoid having the reevaluation.

Tim Baker: Yeah, it’s a great point. So that particular rider, I think if you know that potentially could happen to you or you suspect that could happen to you, I think it’s good to have that in there, so that’s another great point. And actually, Tim, the next part of this just basically asks you some basic health details. So unfortunately for these policies, pre-existing conditions are not covered. So if you have something that could potentially disqualify you, you know, as an example, if you have arthritis and then you submit a claim for arthritis, that won’t be paid by the insurer. So that’s something to be aware of. So the next question, Tim, is going to basically ask you about some conditions like asthma and sleep apnea. I know you’re a healthy guy, so instead of kind of listing all these out, we’ll just skip through those. Is that cool?

Tim Church: Sounds good.

Tim Baker: OK. So now we basically get to the end here, and your quote for long-term disability coverage is going to basically be $115 and $155. You’ll receive a benefit of $6,100 a month up to age 65 after a waiting period of 180 days. And then, and this page, you basically can toggle your all those things that I just listed out, so if you say, ‘Hey, I can get by with $5,000,’ or ‘I want my waiting period to be 90 days,’ it’ll adjust that period. But from there, you basically will go out and put in kind of your name and your email and some contact information to go get actual rates from, you know, insurance carriers like MassMutual or Guardian or some of the other ones that are out there. The tool is great in terms of giving you an idea of where you’re at to get rate proposals and actually receive those and then move forward on your policy. So Tim, does that give you a sense of kind of the process forward for disability insurance?

Tim Church: It sure does. And I think one of the things to mention here, Tim, is that if you use PolicyGenius to get life insurance, you can actually get quotes from individual companies. But for disability insurance, it’s a little bit different because you’re going to get a range of what it could cost you. And basically, PolicyGenius looks and they partner with some of these companies, and they’re trying to find you the best deal. And that’s something that one of their agents will actually provide to you.

Tim Baker: Yeah, and basically, they explain that on the website of why is it a range instead of an actual price. And they’re going to look at all the different riders and things like residual disability and own occupation, and the proposals will try to get that back to you in terms of what the policy offers. So it’s a good point. You know, one thing that I do want to circle back on before closing up here for the day — one thing I do want to circle back on is you know, a lot of pharmacists out there do have disability policies, and you know, how does this all play into, you know, buying your own? So I would say in general, you typically, if you do have a long-term and a short-term care disability policy through your employer, I view that as a benefit. OK, so Tim Church, your quote comes out to between $115-155. Is that more or less what you expected when we started going through this process?

Tim Church: Yeah, I mean, that’s essentially pretty close to what I’m actually paying for my policy now. That gets me almost the exact same benefits, up to 60% of my income. So that’s pretty — at first, I will say, after I’ve gone through the process, it’s not very shocking. But initially, it was because it’s significantly more than life insurance that I pay for and some of my other insurances. So it’s definitely a lot more expensive than some of the other things out there.

Tim Baker: So I think another for listeners to be aware of is a lot of your employers will provide disability insurance. And typically, short-term disability insurance is you know, it’s kind of icing on the cake. Typically, we don’t advise clients to go out and buy a short-term disability policy. We’ll basically say, you know, to make sure you have a good emergency fund. From a long-term disability policy, if you do have long-term disability through your employer, know that the benefit is probably not going to be enough to kind of cover your needs. You know, also understand that it probably makes sense to buy a supplemental policy to your employer policy, so a supplemental insurance policy that’ll be maybe a reduced benefit or basically to give you some additional coverage in case you do leave your job or you want to have that future purchase option in there. But again, the reason that you get a supplemental policy is the benefit might be too small, the benefit period may be too short, or it’s not the right definition — so like any occupation versus own occupation, and you want to make sure you have own occupation in place. And again, you could lose your disability insurance if you switch jobs. So if you have the disability insurance in place that has that future options, that supplemental policy that you bought to kind of cover down on some of those shortages would then become your primary insurance policy, disability policy. So it makes sense to have that in place. So Tim Church, I think we explored disability fairly in-depth. I’m glad we were able to go through the PolicyGenius quote process to kind of give an idea of what that looks like for you. So thank for coming on the podcast, and hopefully our listeners get something out of this and at least get the wheels turning in terms of what they need from, you know, their ability to protect their income.

Tim Church: Definitely. Thanks, Tim. I think it’s so important and just, like I said, like we’ve been talking about, that you worked so hard to get to where you are and also you’ve got to think about yourself and your family and who’s dependent on that income just like life insurance. So at the end of the day, it can really make you feel pretty good to have that protection in place.

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