YFP 218: How Marina Created a Business in Clinical Herbalism


How Marina Created a Business in Clinical Herbalism

Dr. Marina Buksov discusses her entrepreneurial journey in natural remedies and clinical herbalism.

About Today’s Guest

Dr. Marina Buksov is a registered Doctor of Pharmacy, Health Coach, Clinical Herbalist, and lifelong learner of the Healing Arts. She is the creator of Build Your Holistic Herbal Practice course mentoring other healthcare professionals in clinical herbal as well as business skills. She is also a functional medicine pharmacist as part of PharmToTable telehealth platform.

Marina also offers educational webinars with Radicle Herbs and is a wellness writer for Jejune Magazine. Marina uses her multidisciplinary background to educate patients about the least invasive and most natural methods for healing the spirit-body-mind. Her truly holistic approach helps women embody the best versions of themselves and lovingly celebrate the skin they’re in.

When she is not studying, Marina likes to dance, paint, and tinker with various concoctions (tea blends, meals, DIY projects). She lives with her husband, toddler, and two mischievous kitties in NYC.

Summary

Dr. Marina Buksov, a registered pharmacist, Health Coach, Clinical Herbalist, and lifelong learner of the Healing Arts, joins Tim Ulbrich to discuss her entrepreneurial journey. Marina reveals why she launched her brand and business, some lessons she learned along the way, and how her financial journey has intersected with her business goals.

Upon graduation from pharmacy school, Marina quickly realized that she didn’t feel truly passionate about any one particular area of pharmacy or traditional pharmacy career paths. After connecting with her mentor, she decided to explore alternative medicine. During this time, Marina started working in a Russian-style apothecary that specialized in herbs and supplements. Shortly after, Marina found her way into health coaching, incorporating her alternative medicine training and education from her retail pharmacy experience.

Marina advises other pharmacists who may experience that same sense of not belonging in the profession to explore a variety of areas of pharmacy, connect with mentors, and look for (or create) opportunities to find what and how you resonate with the pharmacy profession even as a practicing pharmacist. Along the way, mentors and coaches have played an integral part in Marina’s business, with financial planning and coaching guiding her ability to take risks with her business while also providing for her future.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Marina, welcome to the show.

Marina Buksov: Hi. Thanks so much, Tim.

Tim Ulbrich: I am really excited to dig into your entrepreneurial journey and start us off by telling us about your journey into becoming a pharmacist.

Marina Buksov: Sure. So my parents are actually both dual majors, you could say, in biology and chemistry. And so they kind of inspired me to go down this road. I always loved chemistry as well. It kind of came naturally to me, I guess because my dad was also a chemistry teacher, even though I was learning chemistry in English and he had learned it in Russian. So we kind of didn’t speak the same language, even though it’s a science. I never really needed the help, but I guess the interest was there, much like it was for him. And so when I was choosing colleges, they kind of just brought up pharmacy and they said, “Hey, this seems like a really lucrative field of study right now that you can look into since you like chemistry and math.” So I kind of decided to try it out with the thinking that if I don’t like it, I could always get out of it. But if I don’t get in now, then I won’t have a Master’s degree in six years and the opportunity was really good. So I ended up applying to a couple of schools, and there weren’t that many pharmacy schools in my area. There were only two, so that narrowed down my choices. And I actually loved it in school. I loved learning about the body, and I learned about the biochemistry and about all the medications but also about the non-pharmacological areas, which is what I specialize in now. So I loved the whole process. So being in pharmacy school but again, when it came time to graduate, I found myself at a loss for where in pharmacy exactly I see myself fitting in. My focus was, again, kind of widespread and I liked a lot of different areas, but I couldn’t see myself doing any one thing. And I chose a variety of diverse rotation settings just to put myself in different experiences, but I still couldn’t see myself doing a fellowship or any other kind of advanced training program or in retail or in hospital. So I was kind of like thinking, what am I going to do after I graduate?

Tim Ulbrich: So you had a lot of interests heading into pharmacy, ultimately went that pathway for the reasons that you mentioned. And I’m not surprised you graduate, I can tell that you’re inherently a learner, you’re interested in lots of different things. You go through your rotations, you’ve got this doctorate degree, but you’re not necessarily feeling like you fit into any “traditional” mold, right, that we often think of of pharmacy graduates, which as I think we’re doing a better job of now in 2021, you know, realizing that there certainly are lots of opportunities. The PharmD is a pathway, in my opinion, to many different opportunities. And we’re going to get to yours here in a moment. But tell us then about the path after pharmacy school. What did you do? And did you find out and ultimately get into something that you found out you love? Or did it just affirm that, you know what, I’m not sure where I’m going to go with this path?

Marina Buksov: Yes, so I guess it’s just taking things step-by-step and one day at a time and seeing what opportunities arise and present themselves. So I did end up going to Midyear to interview for fellowships, but that’s when I realized that I don’t see myself doing neither a residency or a fellowship, even though it’s such a lucrative and competitive field that I feel like, you know, people go into it for maybe the merit of it or the prestige of it, maybe some people are really into it, but I was only seeing like the prestige side of it and I wasn’t really seeing how it was really something I’m personally passionate about, so I decided that wasn’t a good reason to apply. So I turned down the one offer that I had and I instead took another offer from a local pharmacy that was just a plain independent retail pharmacy that I had been working part-time as I was in pharmacy school and like learning the ropes there. So I accepted their position as a pharmacist. I figured this was like a safe step for me, a stepping stone, and from here, I could also do some learning on the side and figure out what I want to do next. And as it turns out, that pharmacy went out of business. Well, not really. But they were selling the pharmacy, so they said, ‘Oh, you know, there’s probably no point in us hiring you because we’re going to be selling the business so then we don’t know what the new owners are going to do.’ So basically, that offer fell through. And I found myself having no idea what to do. But I ended up just spending the summer after graduation and taking the test seeing on social media what opportunities are out there, and I ended up going to another pharmacy to kind of learn the system there and cover for someone. And it turned out a pharmacy next door was looking for a full-time pharmacist. So I happened to just go in there and drop off my resume, and they called me back and they said, “OK, we have a position for you.” And the interesting thing is it wasn’t a full-time in one position. It was kind of split between two stores. And one of the stores was in an area that I had said to myself that I would like to work in before, which is this area of Brooklyn that’s kind of a Russian population area called Brighton Beach next to the beach. And they do a lot of herbal medicine there because Russian medicine, much like Chinese, is very integrative in their approach. So their pharmacies are trained in both herbal medicine and pharmacological medicine and pharmaceutical medicine. So it kind of embodied both of those worlds, and I started my journey there.

Tim Ulbrich: So you’re working in a pharmacy that has more “traditional,” you know, what we think of of the pharmacy and dispensing medications, and then they have this more nontraditional — at least nontraditional in the sense of how we think of pharmacy practice in the U.S. So tell us more about that experience as you’re getting into more of the herbal experience and, you know, what did you learn through that? And how did this position and experience affect your path forward?

Marina Buksov: So it was pretty amazing to see how we have — we’re considered to be masters in our field, right, doctors, actually doctor of pharmacy in our six years of intense schooling, but we really know next to nothing on other types of medicine, anything “alternative” or holistic or complementary. All of that is kind of like if you’re lucky, you get an elective like I did. But otherwise, we don’t know too much. And even the over-the-counter medicines, we don’t go in depth about — again, unless you’re taking a self-care elective. It’s amazing that yes, we pack so much schooling and we come out with so much knowledge but also there’s so much more out there that we don’t know because we don’t know what we don’t know, right? If you just simply don’t know that it’s out there, you won’t even know that you can look for something else, right? So you’ll just rely on the “traditional” things that are conventional and available. So this was kind of like scratching the surface and exposing me to how other countries actually still utilize plant medicine and herbals and many more diverse over-the-counter products than we do. Basically, they’re very, very creative in how people are taking care of themselves from the home and they can go to a pharmacy and get a lot — a bunch of herbs or a bunch of herbal products or a mix between an herbal and a pharmaceutical that’s available without a prescription. And so there’s just so much more to know. And the pharmacists that are trained by, for example, Russian schools or any other kind of country that has this integrative approach, they know maybe not as in-depth as what we know pharmacologically, but they know a lot more about general self-care things that are, again, available to people without going to the doctor and without going to get a prescription. So that was really impressive, and I realized that I also want to know more.

Tim Ulbrich: So Marina, one of the things that I think of and I’ve seen this and heard it from entrepreneurs that have been on this show is that often, some experience that someone has leads to an interest or sparks an idea and then that ultimately will set them off on the path to start something, could be a business, could be a nonproft, could be a side hustle, whatever you want to call it. And before we get into your business, what you’re doing, what you’re working on, I don’t want to gloss over that there is a big jump from experience to idea to actually starting a business. So talk us through that a little bit more in terms of you’re working in this pharmacy, you’re getting this experience, it’s affirming the interests that you have, you’re a learner and you’re absorbing more information. What is the idea or the opportunity that you see that ultimately leads to you starting your business?

Marina Buksov: I mean, I think there were several big factors that were going on, one of which was my personal health journey that has been going on too during this time. And the interesting thing is that now, I — looking back at it — attribute it to psychosomatic things that were happening in my body and my mind and spirit, perhaps, because as I was graduating pharmacy school, I remember described my confusion and not feeling like I fit in anywhere, not knowing if this is actually the path that I should be on, kind of questioning all of that. And I called this my quarter-life crisis that happened because as I chose, you know, the retail position and the retail, as you know, you’re kind of behind the counter and, you know, the most pleasurable activity there was coming out and counseling the patients. But because of the fast pace, even in independent settings, often unless they had questions, counseling wouldn’t really happen.

Tim Ulbrich: Yep.

Marina Buksov: So that was my biggest joy, but unfortunately, I found myself mostly just filling prescriptions and checking things and billing insurances and calling doctors and calling insurances and being behind the counter and not really having the patient-to-patient interaction, which is what my favorite part was. And I started having different kinds of health issues arise from finishing pharmacy school and all through my first years of practice where I had like a worsening in my digestive tract issues that I had growing up, IBS type of things. I was also diagnosed with H. pylori. I had to take a lot of antibiotics. Then I had this obscure dacryostenosis happen in my eyes, which is when your tear ducts basically become more narrow. And so my eyes starting getting chronically inflamed. And at that point, I didn’t even want to come out and see anyone from behind the counter because I felt that I looked horrible with my inflamed eyes. And to top everything off, I also started having PCOS type of symptoms and was diagnosed with it and had lots of acne, which I never had growing up. So it was adult-onset acne and weight gain. And so all of these issues started cropping up when I, again, now, looking back at it, see it tied more to my life purpose and my mission wasn’t really being carried out. And so my health was suffering because of that.

Tim Ulbrich: OK, so Marina, you identify an opportunity to help train others, make other folks aware of some of these practices that, again, could supplement more what we think of traditional medicine. So what does that lead to in terms of your business, your services, what you’re offering, who that’s intended for, and really, what does that look like to solve the problem of which you just described, which is to really help fill what is potentially a gap out there and unawareness and lack of education?

Marina Buksov: Yeah, well, it took some time to distill that exact thought in my entrepreneurial journey. And as I like to say, the entrepreneurial journey is kind of like a forever commitment because you’re always growing. And it’s very much tied to professional growth, the business growth, and your personal growth where your business is a reflection of you and what you’re going through internally. And if you can master your own self, you can master having a business. As I was going along and working in mostly the retail setting, I realized this gap existed, right? So the first step was realizing that there is something I don’t know. So the first thing I need to do is educate myself on that. And then I could kind of draw some other conclusions or learn how to run a business with that perhaps or how to incorporate that into my practice that I already have. So first thing I did was I spoke to my complementary and alternative elective professor, and I asked her what she thinks I should do, and I shared with her how I feel like I don’t fit in and I really did have an interest in that elective. So she suggested I reach out to another person who was a graduate right before me. So when I spoke to her, she suggested that I go into health coaching. So my first program out of college was immediately enrolling in a health coaching program. So after that, I underwent a series of other programs where I learned everything from functional nutrition to eventually clinical herbalism. So how to work with plants and phytochemicals in a way to support the human body. Both nutritionally and medicinally, plants have a huge role in this. And they’re really the basis of both traditional pharmacy and naturopathy and even functional medicine or any supplement that you take out there, they have a basis of some kind of plant behind that. So the minerals and vitamins we extract or the active constituents probably have a root in a plant somewhere.

Tim Ulbrich: Yeah, and I think, you know, you’re taking me back, Marina, to sometime in pharmacy school. And you’re right. There’s just a lot of connection back to the herbal aspect. And you’re spot-on that traditional PharmD curricula doesn’t necessarily provide much information — really, if at all sometimes, depending on the curriculum — that would allow folks to think about some of the application of this clinically or how some patients might be interested in approaching this. So again, you’ve identified a need, right? We’ve just talked about that. You mentioned about this very much being a journey, which I would agree with. And you’ve sought out additional training, so you provided some additional education to help increase your skills, which then takes us to the point where OK, you’ve got — you’ve obviously got your PharmD background, you’ve got some additional training, you’ve identified an opportunity to serve a group that perhaps isn’t being served to the full potential. So if I come to you, Marina, and I’m interested in this area of practice, whether I’m a pharmacist or not, like what are you offering? What is the product? What is the service?

Marina Buksov: There were a couple of iterations in my offerings. But it has evolved to me seeing clients in a functional medicine capacity as part of a team on a telehealth platform. So I realized that that would probably be the best use of my time in working with private clients whereas the majority of my business focus is really around educating and that knowledge gap to other providers and healthcare practitioners, especially pharmacists, that are wanting to learn about employing herbal medicine, whether they’re a pharmacy owner that wants to specialize and offer this to their patients or if there’s any other way that they would like to incorporate it as a private consultant like I did for many years or working with supplement companies as a consultant. I mean, there’s a myriad of ways. And that’s actually part of what we do in the program besides the didactic knowledge and homework that I give and accountability that I provide, I also train on the kind of business end side of things and how to actually implement some of these things into your work or business so that you have a successful vocation at the end of it.

Tim Ulbrich: Gotcha. So there’s both the patient side of it; you mentioned seeing clients one-on-one, and then more of the focus of what you’re doing on the business is training and educating others both on their clinical understanding but also some of the business aspects involved with this. So if we continue on the journey, I mentioned before often we have an experience that can spark an idea or lead to an interest that then takes us on our own entrepreneur journey to start something. Once you start something, obviously there’s then the task of OK, do folks know about what I’m doing? And how am I marketing this? And how am I making people aware of this? So tell us about your current strategies. I looked at your website; you’ve got a lot of great educational information, you’ve got a podcast. Like what is your strategy in terms of standing out so that other folks can become aware of who you are, your brand, the services that you offer, and ultimately engage in those and benefit from them.

Marina Buksov: This is definitely something that after I got the clinical knowledge side of things down — and again, I’m a person like many of us, especially pharmacists, we feel like we never know enough, so we always want more and more and more courses and all of this stuff, which I’m definitely guilty of. But eventually, I said, OK, I know enough to start helping people. So now I have to, again, focus on how am I presenting myself? How are people finding me? How can I serve? You know, because I am now capable of serving in the way that I want to serve. But how can I do that without any clients? So I had to also teach myself that and I have to say that it was a very hard and rocky journey to teach myself, so I really recommend investing in a coach that will show you the ropes, which is what I eventually had to do. I actually worked with several business coaches and was part of like Business Masterminds and again, those are great for accountability and support. And I’m trying to really cut that learning curve for people where they can just go to one program that will teach them a really, really good foundation and basis for everything that they would need in terms of botanical medicine, which is again, the backbone of every alternative, holistic practice in some way or form. And so people can get the clinical side of things, get a really good foundation and backbone, and start to dip their feet into the marketing and the business side of things immediately and finding themselves a niche and whatever else will help them on their particular implementation plan because for me, it took me a really long time. You know, I’ve been working slowly, slowly to build my business for about seven years now. And this year was the first year that I really pivoted and decided who am I going to serve and was really clear on that and came out with my program, which I mentioned, that I’m now running. So this all kind of solidified earlier this year.

Tim Ulbrich: And I hope our listeners, especially those that have an idea or maybe they’re at the beginning of their journey or maybe even feeling frustrated with, man, this is just not taking off as quickly as I can, just hearing that timeframe, right? Seven years. You know, I think back to the journey of YFP, coming up on seven years. And there is always something new that is to be learned. And I would encourage folks to check out your website, Marina. We’ll link to that in the show notes, DrMarinaBuksov.com, because I think you’ve done a really nice job of what I think is an important recipe to taking people along the journey from interest to actually being able to engage with those folks and then offer them a product or a service that is of value and hopefully is mutually beneficial between you and that individual. And you know, when you look on your website, you’ve got obviously valuable educational content in terms of interview that you do on the podcast and other resources, but you also have done a nice job with building lead generation techniques and guides and some other things that help you to capture those leads and then you have the ability to follow up with them and convert traffic into conversations that you can have and engage with that community. And so lead with value and then find a way to be able to capture that audience and then you can have that two-way conversation to see whether or not your services may be a good fit. Marina, I want to go back to something you mentioned a little bit earlier. And you mentioned it quickly, but it’s a really important point. And that is that folks that are going on this entrepreneurial journey, no matter where they are in that journey, I do think that certainly includes not only the professional side but a fair amount of personal development. And I believe from my experiences that often, engaging and leaning into the business can really bring out some of the best strengths that someone may have that maybe they weren’t even fully aware of what those strengths were, but it also can expose some weaknesses, opportunities for development, whatever you want to call it, that maybe otherwise weren’t exposed because of all the different hats that you have to wear as you’re trying to get a business off and running. So Marina, for your journey, what are an area or two that you think of by going through this journey and the work that you’ve done in starting this business, it’s really brought out or firmed some of the strengths that you have and then other side of the equation, maybe has exposed some opportunities where you even need to surround yourself with others’ support or even develop yourself a little bit further.

Marina Buksov: That’s a great question. I think really, this journey does expose you with the opportunities for growth, like you said, by exposing you to some of your not-so-favorite qualities or maybe even your worst qualities will come to life when you start to run a business because like I said, often we see the business as a reflection of us because it’s so personal to us. It’s related to our vocation and our personal mission, what we’re trying to be in the world. So sometimes, when we’re faced with not seeing success right away or as soon as we like or the level of success that we like, however you would like to measure that but most people measure it with fame or money or visibility or some kind of feedback, right, from the real world, maybe really good testimonials is another one. So whatever success is for you, it’s important to define it and to also be able to separate you from your business but also learn when it is a mirror and what you can learn from it. So you know, just because your business may not take off as soon as you’d like, like we said, seven years for us, or something is just not going your way or you’re experiencing some sort of setback, just know that it could be a “temporary failure” or think of it only as a lesson because you really can only either win or learn. That’s how I approach things nowadays. And so if something doesn’t take off immediately or doesn’t give you a reward on your investment right away, it doesn’t mean that it wasn’t valuable. It’s a step that was vital for you to not repeat that in the future or to learn a different strategy that will work better or some other important lesson for you to, again, learn from. And especially if you don’t have a business background, you should expect some sort of challenges or setbacks in business your first rodeo because you know, you could be a great pharmacist and know everything there is about pharmacy, but that doesn’t mean that you’ll know immediately how to run a business and how to have that proper mindset to run a business. So for me, it was a lot of coaching that helped me and also seeing that other people on the same journey as entrepreneurs are also experiencing similar challenges and setbacks. So viewing that as a normal part of the growth process instead of seeing it as a failure is my best advice. And ultimately, I realized that even if I do experience setbacks in my business, it’s still worth it for me to eventually have the opportunity to succeed by showing my mission and getting more recognition about my mission. And inspiring others to pursue their missions with my story is worth it to me, despite all of the setbacks that it has potentially.

Tim Ulbrich: Absolutely. And that’s what I encourage folks: Share your story. You don’t know who’s listening, who may be affirmed by that, who might have an idea that it helps stimulate that forward, a student who’s feeling frustrated and unsure of where to go with their career path and just hearing about alternative ideas. I think so much value in that. And Marina, loved what you shared to connect that with the value for you of a coach. And I think that sometimes on this journey, like not only — especially for folks that are working full-time and they’re starting a business or an idea, you know, there’s that excitement, there’s that energy, but it also can be a lonely place and you’re putting in a lot of time. And having a coach, having a community, having a mastermind, having folks around you that you can bounce ideas off of and get support from, is just really important for the accountability but also be able to talk out loud as I think so much of this, we can live in our own thoughts as we’re trying to build the business. And shoutout here as I think about for YFP, my partner at YFP, Tim Baker, you know, I have the opportunity to sit down on a regular basis and we can share wins, we can share frustrations, but just having those conversations I think is so, so valuable. Marina, I’m going to ask you about the connection between the personal financial plan and what you’re doing on the business side and vice versa. And where I’m going with this is that I am a firm believer that a good, healthy business is often built and built confidently when you can build that upon having a strong personal financial foundation because you’re not necessarily worried about, ‘What about this? What about that?’ It doesn’t necessarily mean you have all of your financial goals achieved, but you’ve got a good foundation of which you can work from so you’re not constantly worried about that as you approach the business with confidence. And vice versa, often our business activities are able to help support our personal financial goals, whatever that may be for individuals that are listening. So tell us a little bit about for you, how the business and your personal plan have really worked alongside and have ultimately fed into one another.

Marina Buksov: I have to admit that I was a little bit floundering in this area before with actually tracking things. Like you were saying, it’s really important to bounce ideas and to talk about what’s happening, what are the wins, what are the challenges, and to actually put that into numbers and see in that way how your business is actually doing because numbers don’t lie, as they say. So that part of it, actually tracking and putting things down as data and analyzing it, you know, you can just remove some of the stigma that’s attached to OK, is this number a win or a fail? And actually, just view it as a statistic that is showing you OK, what can you improve on based on these numbers? You know, which area needs improvement? Which area is doing well? So that way, you can focus your resources and your time and energy on improving the things that aren’t doing well and doubling down on the things that are. But unless you track it and use numbers, you really won’t know. And so same thing with my business. You know, for a long time, I was reluctant to even put down numbers that are coming in from clients and balancing the checkbook and all of those kind of business tasks because it’s like a hassle because it’s another thing for you to do, but I realized that it’s very important and it actually gives you the clarity and the confidence with what needs to be done next because another thing that was a challenge for me is to learn how to prioritize. And so when you see the numbers in front of you, you see what needs to be done first. You know, what is an area that really needs your help and attention right now? And what scenario that can wait? And often, you know, I spread myself thin. I’m sure many other people do, trying to do all the things. But really, we need a structured guide so that you mentioned before, not to burn yourself out by all the business activities and to really have this focused plan of intention and a plan of action, which can really be informed by the numbers. So when earlier this year, you know, I was investing in coaching programs all these past years and really wanted to take my business to the next level and wanting to leave my job full-time, that’s when we started to — actually last year at this time, so about a year ago, my husband and I decided to look into a financial planner because we wanted to know, you know, where do we stand financially personally? And where can we be confident in making a certain buffer for ourselves so that we can take certain risks with our business? I think that’s really important to have a plan and to expect some setbacks. Nothing is going to be smooth sailing. You know, the past few years taught me that. But I decided it was really important to look at the numbers and to create a buffer, which we were comfortable for a certain period of time so that we give ourselves that safety zone from which the business could grow. And again, that’s always a risk. Is the business is going to take off exactly per our plan, our projections, or not? So shameless plug to YFP: I was working with YFP, and I found that I really didn’t know much because this is not my area of interest, right? Accounting and counting numbers, I am more into health and wellness and getting results for my clients. I would like to dedicate my time for those kind of things. But living in the real world, you do have to think about personal finances and business finances and retirement and putting away money for more expenses than you even are expecting because —

Tim Ulbrich: Boring, right?

Marina Buksov: Yeah, a lot of us live paycheck-to-paycheck, and we don’t realize, you know, we need to set aside money for this or we need to plan an estate or we need to maybe save for education for our kids or if you are a homeowner, there’s many hidden expenses that pop up that you don’t expect. So we decided it was time for us to kind of get a realistic perspective and reality check so that we can be more confident in the business side of things. And so I highly recommend working with a financial advisor that has your best interests at heart and doesn’t just want to sell you things with commission attached.

Tim Ulbrich: Yeah, and I think for Marina, you mentioned some of the value that can come from the technical side, right, of the financial plan. I know for Jess and I and our journey, which I think is something that others may find value in, is sometimes when you’re in the weeds of your own financial plan, it’s really hard to see outward, right? And having somebody as a third party, you know, thinking of spouses or couples that might be working with a planner specifically, where you can have somebody ask really good questions that get you thinking, that get you talking, that get you really evaluating like, what is the true risk on this scale, right? And I think that while I don’t want to categorize all pharmacists as being risk-averse, I think sometimes we view financial decisions on that end — and I’m certainly not promoting that we go out and make crazy financial decisions, right. We’ve got to take care of our future self. But we’ve also got to live a rich life today. And part of what I’m hearing through this interview, Marina, for you is living a rich life was pursuing this passion that not only was only important to your physical and emotional health but also what you saw as an opportunity to bring this information to other healthcare practitioners and ultimately the patients that they serve to be able to have an impact. And that’s an investment worth making, right, in being able to see that through, whether it’s a coach, whether it’s a financial planner, and certainly all the other investments you’ve made in getting the business up. Marina, I’m thinking back to your journey where you mentioned, ‘Hey, I’m graduating pharmacy school. Yeah, it’s been an interesting ride, but I don’t really feel like I fit, right? I don’t fit in a traditional mode of fellowship or of residencies or, you know, community pharmacy or inpatient practice. And so I suspect we have a lot of other people that might be feeling that, whether it’s students that are maybe questioning was this the right decision or I’m not sure where I’m going to go or practicing pharmacists that might feel the pull to explore another area of pharmacy and how their pharmacy degree could be used but they just don’t know where to go, who to talk to, where to start. What advice would you have for folks that are out there that are listening and feeling like, I’m just not sure I really fit in this whole pharmacy thing. Like where do I go? What do I do?

Marina Buksov: Yeah, so I think the best thing to do is really dip your toes, just like I was talking about how I selected a diverse variety of rotation sites for myself in APs and FPs. As much as possible, I tried to diversify. I worked in insurances, worked in different settings, pharmaceutical industry, basically everything was super different. And that taught me, actually, what I liked and what I didn’t like because just getting a glimpse into a setting and how it would be like to work there and the day-to-day, how to assess what they’re doing on their back end and how you feel about that and then giving you a sense of if you can climb the ladder in that space, if it’s more corporate or not. So you can kind of picture yourself in those spaces and see do you feel good there? And does this agree with your inner wiring or your ethics? Because for me, I found that I really wanted to make an impact. That was important to me to use my skills in a way that was impactful and that I felt I was creating good in the world. And I saw that as targeting the low-hanging fruit, you know, how we can improve on a large scale our public health and self-care by education and by self-care. That’s really my mission, what it really boils down to. And the other settings for me didn’t provide that level of impact. You know, there was some personal gratification or again that prestige aspect in some settings, but I was not on the same mission as those settings and what they were doing. So I didn’t feel like I fit in there. On the other hand of the spectrum, even if you don’t get to go on a variety of rotation sites, you can find your own opportunities. So actually, I had a bunch of students reach out to me. And I might be a preceptor someday soon.

Tim Ulbrich: Oh, fun.

Marina Buksov: And then besides — nowadays, yeah, the opportunities are crazy because we’re in a virtual world. But you can also just reach out locally. So when I was considering going to herb school — actually, before I even knew there was a thing because that’s another missing knowledge gap because I didn’t even know there was such a thing — so before I even knew somebody had recommended that I check out an herb shop as a place where I could practice alternative pharmacy. So I went to a local herb shop and asked the owner to give me an internship, which he did. So there is plenty of ways you can create your own opportunity and learn from the experience and empirically applying yourself there. It’s going to teach you so much more than what you can read in a blog or a book. So that’s really what I recommend. And when I was in the shop, that’s when I decided to go to this school and get a more formal education because I did see myself aligning with that and being interested to learn more. So I think exposing yourself to experiencing is the best teacher. So whatever way you can do that locally or virtually nowadays and get somebody to mentor you or again, if you’re able to invest in a coach if let’s say you’re not a student but you’re a pharmacist, it is worth it to have some level of guidance or mentorship.

Tim Ulbrich: Yeah, great advice and wisdom, Marina. And back to a comment that you made earlier. You either win or you learned along the way, correct? And I think of maybe students who have some of those opportunities to choose rotations and get out there and network. But for pharmacists that are out there, you know, don’t let that be a hindrance. You know, reach out to folks like Marina. Reach out to folks in other nontraditional areas. You know, have several conversations. People are very willing typically to meet. And I think not only will that networking be really valuable, but I think it will also stimulate hopefully some ideas and conversations and lead to other connections that will affirm areas of interest and hopefully generate some ideas as well. Marina, I really appreciate you taking the time to share your story. I’m looking forward to following your journey in the years ahead. And I have a feeling you have inspired folks that are listening and perhaps in their own journey, whether they may be on moving forward with some of the ideas that they have of their own. So Marina, as we wrap up, where can listeners go to learn more about you and the work that you’re doing and to connect with you?

Marina Buksov: Yes, so the website you mentioned, it’s DrMarinaBuksov.com. And it has all the links to my social media. But I am on Facebook and Instagram and even TikTok nowadays. So you could reach me everywhere at @DrMarinaBuksov. And you can also search by my business name, which is Raw Fork.

Tim Ulbrich: Great. We’ll link to those in the show notes. And again, Marina, thank you so much for your time.

Marina Buksov: Thank you so much, Tim.

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YFP 216: Common Credit Blunders to Avoid When Buying a Home


Common Credit Blunders to Avoid When Buying a Home

On this episode, sponsored by IBERIABANK/First Horizon, Tony Umholtz discusses common credit blunders when buying a home.

About Today’s Guest

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

Summary

Tony Umholtz, a mortgage manager for IBERIABANK/First Horizon, discusses the impact of credit on purchasing a home and common credit blunders that he has encountered when working with pharmacists during the lending process for the pharmacists home loan product.

Tony explains how credit and your credit score can impact your home buying process. Your credit score can affect your interest rate for a home loan. He details how credit information is collected and how the three main credit bureaus, Experian, TransUnion, and Equifax, aggregate your FICO score. Tony lays out how the scores are calculated, with payment history making up 35% of the score, credit utilization making up 30%, length of history with 15%, and credit mix with 10%.

Some common blunders that Tony has seen when working with pharmacists include having no credit or limited credit history, maxing out a 0% interest rate credit card, and relying on third-party credit tools for an accurate FICO score. Tony further shares that clients may not be checking credit reports and correcting errors that may appear on those reports. During the home loan process, borrowers have also made the credit blunders of co-signing for a loan without fully knowing how it would impact their credit and applying for credit for large purchases like a car or furniture for the whole before the sale is final. The lender knows and can see those last-minute credit applications and changes, and those changes can impact your loan approval.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tony, welcome back to the show.

Tony Umholtz: Hey, Tim. It’s good to be here.

Tim Ulbrich: Excited to have you back on. And last time we had you on was Episode 204, where we talked about the current state of buying, selling, and refinancing a home. And we’re going to link to that episode in the show notes. But Tony, before we jump into the meat of today’s episode, give us the update from your perspective on what’s happening out there in the home buying market. Anything cooling off?

Tony Umholtz: Well, you know, it depends on what you mean by cooling off. It’s still — we’re still kind of dealing with a lot of the same challenges we’ve had this past year with inventory levels are still very, very low. But there’s still a lot of demand from home buyers. And you know, hopefully we’ll see some of that additional inventory come online soon. But with interest rates continuing to decline throughout the summer, there’s still a lot of demand for both new purchases and refinances.

Tim Ulbrich: I suspected as much as interest rates came back down. I know we saw a little bit of a jump up and have come back down since. So appreciate the perspective that you share on that. And so today’s episode, the idea for this episode came from a conversation Tony and I had back on Episode 191 where we talked about 10 common mortgage mistakes to avoid. And on that episode, one of those mistakes we talked about was credit. But we wanted to dig deeper, knowing that there’s a lot more to discuss and also to hear from Tony as he can share more about some of the experiences and what he sees folks making often in terms of credit mistakes that might have an impact on their lending situation and through the process. And so you know, these mistakes could lead to surprises, which surprises during the home process, home buying process, are certainly not good things. We want to avoid that. And that could be surprises in the form of a higher interest rate or surprise credit score. And again, we want to do everything that we can to avoid that and making sure that we’re ready and prepared going into the home buying and into the lending process. Tony, before we get into the common mistakes that you see folks making around credit when purchasing a home, let’s start with the mechanics. How does credit information get into one’s lending application? When does this happen? And how does a borrower get rated?

Tony Umholtz: Great question. And you know, there’s really three large repositories that aggregate all of our information as consumers. And that’s Equifax, Experian, and Transunion. So those are the three main bureaus that are out there that are gathering all the data on our credit histories. So for example, you know, any credit cards that we may have, even starting as young as 18 years old, you know, installment loans, car loans, anything — mortgage loans, student loans, all these types of creditors are evaluated by the three bureaus. So they aggregate all the data, our payment history, our performance, how long we’ve had credit, so those are essentially the three bureaus that are kind of watching us, so to speak.

Tim Ulbrich: And I want to dig in a little bit further about the impact one’s credit score can have on their application, ultimately the interest rate in terms of they’re able to access. So before we look at the numbers, remind us the components of one’s credit score, Tony. I’m specifically thinking here about the FICO score.

Tony Umholtz: Yes. So you know, typically when we look at the FICO score — and we’re starting to see a re-emergence of other scoring models, but the primary driver of our credit scores is going to be our payment history. So payment history is by far the biggest driver of our credit score. So meaning on time payments, not having a 30-day delinquency. And I want to just touch on this for a minute because it’s something that’s come up a lot over my career, my nearly 20 years in the business is let’s just say — we just had this incident with one of my borrowers this past week where they did not get a credit card statement. They were selling their house prior to buying the new home they were buying. And he missed a credit card statement that came to the home. And if it’s over 30 days late, you’re reported to the bureaus. So if it’s 15 days late, you’re not reported to the bureaus as a delinquency. But if it’s over 30 days, then it becomes late. So it’s — that’s a question that comes up a lot. And unfortunately, it’s something we had to navigate here at the last minute.

Tim Ulbrich: Oh man.

Tony Umholtz: But payment history is the biggest driver. The next would be credit utilization. And that primarily is going to be driven on revolving credit accounts. And what I mean by revolving credit accounts is going to be your credit cards that you might have or lines of credit. And those are essentially going to be evaluated based upon how much you have borrowed on that card. For example, I always advise people to try to stay at 50-70% of their credit limits. And what that means — so let’s say you had a $10,000 credit limit on your credit card and you ran it up to $9,000 balance. Well, that’s going to report adversely to the creditors, credit bureaus. And remember, credit utilization is 30% weighting of your score. It’s a big weighting. But that’s the other really big driver of your credit history. Those two alone are like 65% of the weighting of what determines your credit. And then the next couple I would say, just to add in here, is length of credit history, you know, the longer you’ve had credit, good credit, the better that’s going to weigh on your score. That’s usually about a 15% driver. And then your credit mix is about a 10% driver. So the types of credit you have is very important too. You know, do you have experience with — you know, a lot of times, people will come in before they buy their first home and they have maybe a car loan, student loans, credit cards, but they haven’t had a mortgage yet. And a lot of times the mortgage will add more — a stronger credit mix. It would be viewed stronger because it’s a bigger installment loan. It’s a little tougher to get. And then the last driver of your score is inquiries. A lot of people will call me and say, “Tony, the inquiries really hurt my score, and I don’t want this to damage my score.” But they really have the least amount of impact on your score. If you go and have a tremendous amount of them at one time, that can hit your credit a little bit. But normally, a couple of inquiries isn’t going to have much of an impact.

Tim Ulbrich: Yeah, and it sounds like, Tony, you mentioned several components here, but low hanging fruit, you mentioned payment history, so on-time payments, and then credit utilization, how much of that balance is used each month in terms of the revolving amount. Those two alone making up more than 60%. So you know, I think being in tune of if you’re looking to really optimize credit, I think of some tips here that folks may want to consider, specifically with payment history and on-time payments, something like automatic payments, right? Obviously we want to make sure we’ve got the funds to pay that money, you know, in the account that that’s coming from, but the example you gave of someone not getting a mailed statement, hopefully folks can get electronic statements, you know, as a backup to help prevent that. But something like automatic payments can really help make sure that we don’t have something like that happen, especially if you’re in the midst of purchasing a property where the timing of that is less than ideal. I would also point folks here to an episode, 162. Tim Baker and I talked about Credit 101, and what Tony just mentioned there of the makeup of a FICO score was one part of that discussion. But we also talked about credit security, the importance of understanding your credit, how credit really is a thread across the financial plan, and so credit being a very important topic as it relates to the financial planning process. Tony, I’m someone listening today, and I feel like I’ve got a good idea of my credit score. And the question that comes to mind here is how significant of an impact can this have on securing the best rates and terms? And so you know, what I’m thinking of here is 30-year mortgage, maybe because of a higher or lower credit score, we’re looking at maybe a quarter of a percent. And maybe that doesn’t look as much of a big deal on paper as it actually can be mathematically, so tell me about what the impact of this might be.

Tony Umholtz: Well, the longer term the loan is, the more impactful your credit history — your credit scores are going to be. So it’s a good point, Tim, because you know, for example, if you have a 710 score versus a 740, you’re going to get probably about an eighth to a quarter better rate on a 30-year loan having over a 740. Typically on most of our mortgages, over 740 does not get much more benefit.

Tim Ulbrich: OK.

Tony Umholtz: So a 740 score versus an 800 score isn’t going to see a huge benefit. Some of the jumbo loans that get over $550,000 may see a little bit more of a benefit because they have some pricing matrices — the matrix will go up to 780 or higher. But where you really see the impact is like if you’re under 700, right, and you’re at 660 versus even a 700, talking about a large margin risk profile added to the loan, especially on a 30-year fixed. One thing I do want to mention that I think it’s important is the shorter the term, especially on a 15-year fixed, the more flexibility you have with the credit score. So I’ve even had some customers that have been under 700 and it really impacted their 30-year rate, but the 15-year rate stayed the same because the hits don’t really adjust to that until you get even lower because a lower term, you’re paying back the loan faster.

Tim Ulbrich: Yeah, that makes sense. And I would encourage folks, even though that may not seem significant, eighth of a percent, quarter of a percent, when you’re talking about Tony’s comment, a 30-year mortgage, $400,000 or $500,000 home, you know, that can start to add up in terms of obviously difference in monthly payment because of that interest as well as the difference in what you’re going to pay over the life of the loan. And here, we start to think about opportunity costs, right? Where else might that be used in other parts of the financial plan, whether it be investing, other debt repayment, and so forth. So now that we’ve talked about the makeup of the FICO and really understanding that score components and the impact that that might have, let’s talk about some of the common mistakes that you see, Tony, folks that make when they’re applying for really any loan but here, we’re going to talk about the pharmacist home loan a little bit more specifically. And the first one I have here is no or limited credit history. So we’ve been talking for the last five minutes or so about the importance that, you know, a higher credit score can have in getting more favorable rates and terms. So if someone’s listening and they have limited credit history or no credit history, what are the problems that can present themselves there? And what are some of the solutions that they can pursue?

Tony Umholtz: Well, it’s one of those things where especially if you’re young, it’s hard to come right in with very established credit. But I would suggest, I mean, just a couple points here. You know, one thing that — and I didn’t realize, and I’ll just take my own example. But I remember my first day, first month let’s just say, of my freshman year of college, there was a credit card company on campus where you could get a credit card, right? And being the finance major that I am, I was one of those guys that didn’t charge much but used it here and there. And it helped me with my credit history. And I’ve seen that. If you can get even a small credit card even in college, even if it’s got a couple hundred dollar limit, and you use it as a wise steward, right, you’re not out there running it up, I think that’s a great way to start building your credit. That really helped me because I had a solid credit score coming out of college. And I see that with other people too. Now, student loans being paid on time, that all helps as well because student loans will show up quickly too. I do have a situation now with a client that we’ve had to like rebuild their — they had no credit. They had zero credit history, right? So there’s no score. And that becomes a real challenge, especially — I mean, for example, the pharmacist home loan, we do — you don’t have to have a real in-depth credit history. You really can have a fairly young credit history, but you have to have a score. You know, we have to know what that score is. The only other option we have if you have no credit score that we have available is FHA where we essentially kind of have to build your credit history to some degree. But that’s kind of a rare thing these days. But that’s — every now and then, we run into that. I would just say to start building it early. Having some credit is not a bad thing. Just be responsible with it.

Tim Ulbrich: Tony, I’ve heard you say that before about for those that have no or limited credit history, the FHA is an option and building credit. Tell me more about what you mean by that.

Tony Umholtz: So when we say building credit, we essentially are using other types of forms — like for example, you might have paid auto insurance, right, or utility bills, or rent. We’re able to pull some of these other types of elements of payment history together to show responsibility and the ability to repay. So those are some of the things that we’ll actually use to build the credit history as well as we suggest to get a credit card or something to that effect to — depending on their timing and when they want to buy to start developing that so they can at least get a score. But having a score is pretty critical to get the best loans, you know. Really the only one that we have out there is FHA that will allow us to work without a credit score.

Tim Ulbrich: Got you. Another common mistake I’ve heard you mention is, you know, folks that might have purchased an appliance, piece of furniture, there’s several examples of this, on a 0% interest card and not realized the impact that that might have when they’re going through the lending process and purchasing a home. Tell us more about that.

Tony Umholtz: You know, this is another one, Tim, that I learned firsthand personally when I was young and lots of my — I’ve seen it many times over the years with my clients, but you know, I’ll give the example of buying furniture. Fortunately, I did this after I bought my home. I was 25 I think at the time. It was a long time ago. But essentially, I went into a furniture store, was able to buy all this furniture, and they said, “Hey, by the way, that $4,800 in furniture, we’ll give you a credit card where you don’t have to pay interest for over a year.” I said, “Well, that sounds great. Let’s do it.” And you won’t have to make payments for over a year. Well, unfortunately, how those credit cards work — and they’re in all sorts of retail goods. It’s not just furniture. There’s a lot of different promotions out there. It reports to the bureaus as a maxed-out credit card. So you know, a lot of electronics companies are the same way. They’ll offer this to you. And you’ve just got to beware because it’ll report to the bureaus as a maxed-out credit card. And as we discussed, 30% of our weighting of our credit score is based upon credit utilization. If we show a maxed-out credit card, that’s going to be a big hit to our score. And I see that a lot. It’s unfortunate. But it comes up a lot.

Tim Ulbrich: And you taught me that, Tony. I did not know that that was often viewed as a maxed-out credit card. So obviously what we just learned about FICO and utilization, that makes a whole lot of sense of the impact that that could have. So we talked about no or limited credit history, we talked about buying an appliance or piece of furniture or something like that on a 0% card. The other thing I’ve heard you mention several times — and I think we’re seeing more and more as folks are using more of these tools — would be relying on a third-party credit app or tool, whether it be something like CreditKarma, CreditSesame, when we’re relying on that for credit score information that may not match up necessarily with what you’re seeing on the lending side. Is that correct?

Tony Umholtz: That’s right, Tim. Yeah. That’s right. And I think this is an important topic because there’s a lot of variables out there. And I don’t want to say that these like a CreditKarma and some of the other apps and trackers aren’t legitimate and helpful. They certainly are. And they give you a good idea of the trend of your credit score and how you’re performing. The one thing I would caution everyone on, though, is it’s not typically indicative of what your score is to a creditor. Now, mortgage companies in particular, we run what’s called a tri-merge report, which is all three bureaus. So we’re going to see Equifax, Experian, and Transunion’s, each of them give us a score, provide us a score. And we take the median score. So mortgage lenders take the media score where — and the same thing would apply for like a commercial loan if you’re getting commercial loan for a building or something of substance. An auto company, if you’re buying a car, will often just pull one. So they may just pull Experian, right? Or Equifax. So you know, a lot of times there is a little bit of variability in our scores. And they can be different. Our Equifax score could be potentially be 750, our Experian could be 739, and our Transunion might be 730. Well in that case, you’re at 739, not over 740. And that’s where I see the mistake come up because a lot of these trackers will show you a score that’s a little higher than what we would see. And a lot of my customers send me — my clients will say, “Hey, here’s my report, here’s my credit score.” And it’s oftentimes a lot different than what we pull. But I think there’s a lot coming on scores over the next couple years. I think you’ll see different ways of risk assessment. It hasn’t hit us yet, but I think rental performance will come into play more too. It’s important to always pay our rents on time. You know, traditionally that didn’t always come up on reports. But I think there’s going to be some other elements that are going to potentially help us. And I think you’ll see that the medical collections take less weight on the reports. We’re already seeing that too, which is really a blessing for a lot of people that have had things happen.

Tim Ulbrich: Tony, I can see this playing out. You know, you gave a good example where somebody might be on that line, let’s say a 740, and they think because of what they see on CreditKarma or CreditSesame that they’re going to be above that and then come to find out that they’re not, and that obviously can have a surprise and be an impact on rates. And you know, I’m sure — it reminds me of the patient that might walk through the doors of the pharmacy and be upset with the pharmacist because of what they get through claims adjudication on the insurance side. And the pharmacist is often not deciding that price, but the reality is they’re the person that’s in front of the patient. And I suspect here, that can be much of the same where they may be surprised and take it out on you guys sometimes.

Tony Umholtz: It happens.

Tim Ulbrich: It happens, right?

Tony Umholtz: We’re the messenger.

Tim Ulbrich: Yeah. It’s an emotional process.

Tony Umholtz: It is. One thing that we find that’s been helping too is we have a tool as part of our platform here that can actually tell — we can see what credit — what the scoring potential for a client based upon activities they could do to their report such as paying down debt, consolidating a card or whatever it might be. So it actually — we are able to a lot of times add some value to help people get their scores a little higher. We’ve had a lot of success with that.

Tim Ulbrich: The next one I have here, Tony, is borrowers that may not be checking their credit reports and therefore identifying and correcting any errors that could lead to higher rates. And this one is really something that I find interesting. You know, I do an activity in a personal finance course that I teach where I have folks actually go out, pull their credit reports, analyze them, and then they write a reflection on kind of what they learned. And the trends I have found is that about 50% of the students No. 1, have never checked credit before, have never run a credit report. And then the number of folks that are surprised by what they find on that credit report. So any insights here, even any examples that come to mind of where this can be problematic, especially when you’re in the midst of trying to secure a loan and secure a loan at the best rate?

Tony Umholtz: I think it’s really important for everyone to take advantage of the free credit reports that are out there. You know, the annualcreditreport.com. You’re allowed to have one copy from each bureau per year. And I think that’s something that we all need to do. And the surprises I think are hey, I thought I canceled that credit card years ago, right? And sometimes having open credit — it doesn’t hurt you. But you may not want to have a whole bunch of things out there just from a fraud risk potential. But — and making sure that you’re not attached to things you don’t want to be attached to. You just — in this day and age, you never know, and especially if you get into partnerships and cosigning and things like that, you’ve got to be really careful about what you’re attached to and knowing what entities your credit, you’re attached to. That’s one thing I would just caution because I’ve seen some problems come up with cosigning and people not being aware that they did or applications from everything from student loans to auto loans to business loans. And then just there is a lot of fraud out there, you know? And I think that I’m on LifeLock. I’m not trying to promote anything, I just, I’ve put that on me and my wife’s accounts just so we know what’s going on, right, in case anything ever were to happen we’d be made aware. But certainly would encourage everyone to do that. And you know, I think just knowing what’s out there. I know when I did it one time, I had a credit card that I hadn’t used in like 6-7 years and it was still open, right? If you don’t use it, might want to close it.

Tim Ulbrich: And I’m glad you mentioned the cosigner because I do think that’s something that we hear and see often from the community, whether that’s student loans, whether that’s auto loans, whatever be the situation, obviously there’s a potential risk there of late payments, somebody may or may not be aware of that and the impact that that could have during the credit and obviously impact that could have on your credit and then the surprise that could present during the lending process. Tony, last one I want to talk about here before we wrap up by talking about the pharmacist home loan product is applying for credit before sale is final. And I think many of us who have gone through this process, we’ve gotten the advice of, do as little as you can in terms of new credit or inquiries or anything during this process. But give us some more details, not only why is this important but what is the time period that we should be thinking about this because I sense that there are listeners out there that might be buying a home and also be thinking about refinancing their loans, for example.

Tony Umholtz: Right. And this one is really important, guys, if you’re in process for a home loan because us lenders, we know what you’ve applied for during the process. We’re notified if you secure a new loan. So for example, one that comes up a lot is a new auto loan, a — furniture for the home. I’ve seen that quite a bit. And a lot of our clients are proactive and ask the question first. And we will look and see. If it’s something like hey, my car absolutely won’t work anymore, I need to get a new one, we’ll look and see, will that impact you. We’ll include that new payment into your numbers so it doesn’t affect your home closing. But normally, you want to try to postpone any activity, new credit, when you’re in the mortgage process until after you close just because there’s a lot of risk there, right? It’s a big transaction. You do not want to jeopardize it with new credit because we do know about it. We will know. We are notified if you open anything up. And that’s a really important point if you’re in the process. So I would just caution everyone to be very careful with that. And I will give the classic example. Before they tracked, this is going back probably 2005, I remember I went to this closing for a client of mine, and it was a fairly nice home. And he goes, “Hey, Tony, look at my new car I bought last week!” And the guy had bought a new Porsche, right? This is before we had the trackers. I’m like, don’t tell me this. Oh, don’t tell me that. But anyway, nowadays, we do know what activity has happened. And be very careful. And if you have to do something, just speak to your lender first before you officially apply for any other types of credit during the process.

Tim Ulbrich: Yeah, and that’s where my mind was going, Tony, just knowing the examples that might come here, right? It could be credit, we talked about some of these already, furniture, appliances, student loans, auto loans. Like there’s a lot of things that could come up here, and I think just open communication with the lender if you have questions to make sure that you’re not doing anything that’s going to jeopardize obviously, again, the goal here being that we get the best loan at the best term, you know, and ultimately the best rate so that we can keep the cost of interest low throughout the life of the loan. So Tony, we’ve talked about the makeup of the FICO score, understanding what feeds into that score. We talked about the impact that that could have on someone’s rate and their ability to secure that competitive rate. We talked about some of the common mistakes that you see folks making around credit in the home buying. And I think this is a good connection to the pharmacist home loan product. And I know many of our community members are familiar with this from previous episodes, information we have on the website, but for folks that are hearing this for the first time, give us some more information about the pharmacist home loan, what is it, how it’s different from other options that are out there in terms of down payment, PMI, minimum credit scores, and so forth.

Tony Umholtz: Sure. I mean, again, just a great tool for pharmacists to purchase a home. And the main points of it is you’re able to buy a home — if you’re a first-time home buyer, you could put down as little as 3% and have no PMI. And if you’ve owned a home before, it’s 5% down with no PMI. And that’s significant savings not having the MI but also the interest rates tend to be better than I can offer with a 20% down normal conventional loan for someone else, which is quite a nice opportunity for people. And the minimum credit score is 700. So it doesn’t have like a super high credit threshold. And it’s flexible on reserves and things like that. You know, some programs have very strict reserve requirements, and this one has some flexibility there, has some flexibility on how we value student loans, and you don’t have to be — you know, one of the other things that a lot of doctor loan programs have out there is some of them have restrictions if you’ve been out of residency for 10 years, you can’t use the product. This one does not have those limitations. So it’s — it’s been a great tool for a lot of people. And we’re very pleased that we can offer it.

Tim Ulbrich: And we’ll put Tony’s contact information in the show notes for folks that want to reach out to Tony directly. Also, if you haven’t already done so, make sure to check out — we’ve got a great comprehensive post, very informational, that I think you’ll find helpful, “Five Steps to Getting a Home Loan.” And you can — in that blog post, which we’ll link to in the show notes — learn more about the pharmacist home loan product. We’ve got some calculators there as well. And that’s available at YourFinancialPharmacist.com/home-loan. Again, that’s “Five Steps to Getting a Home Loan” at YourFinancialPharmacist.com/home-loan. Tony, as always, appreciate your insights, your expertise in this area, and thank you for the time coming on the show.

Tony Umholtz: Hey, Tim, thanks for having me. It was great to be here.

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


How Anna Got $127k Forgiven Through PSLF

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

About Today’s Guest

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

Summary

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

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

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

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

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Anna, welcome to the show.

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

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

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

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

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

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

Anna Santoro: Yeah.

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

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

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

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

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

Anna Santoro: Yes.

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

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

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

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

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

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

Tim Ulbrich: Wow.

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

Tim Ulbrich: That’s awesome.

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

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

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

Tim Ulbrich: Yeah.

Anna Santoro: Yeah. It was funny.

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

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

Tim Ulbrich: OK.

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

Tim Ulbrich: OK.

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

Tim Ulbrich: Happy day.

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

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

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

Tim Ulbrich: Yeah.

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

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

Anna Santoro: Plus my Master’s degree.

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

Anna Santoro: Yeah.

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

Anna Santoro: Yeah.

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

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

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

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

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

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

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YFP 212: Checklist for Building a Strong Financial Foundation


Checklist for Building a Strong Financial Foundation

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

Summary

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

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

Mentioned on the Show

Episode Transcript

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


The Ins and Outs of the 529 College Savings Plan

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

Summary

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

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

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

Mentioned on the Show

Episode Transcript

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

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

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

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

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

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

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

Tim Baker: Yeah.

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

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

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

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

Tim Ulbrich: $10,000. Yep.

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

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

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

Tim Ulbrich: Yeah, let it ride.

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

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

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

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

Tim Baker: That’s right.

Tim Ulbrich: So same thing here.

Tim Baker: That’s right. Yep.

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

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

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

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

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

Tim Baker: Yeah.

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

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

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

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

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

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YFP 210: Why Net Worth Matters


Why Net Worth Matters

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

Summary

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

Mentioned on the Show

Episode Transcript

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

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

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

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

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

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

Tim Ulbrich: That’s right.

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

Tim Ulbrich: That’s right.

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

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

Tim Baker: Yeah.

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

Tim Baker: Yeah.

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

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

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

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

Tim Ulbrich: Yes.

Tim Baker: That’s our jam.

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

Tim Baker: Yeah.

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

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

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

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

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

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


Three Real Estate Investing Lessons Learned from Fellow Pharmacists

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

Summary

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

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

Mentioned on the Show

Episode Transcript

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

Nate Hedrick: Thanks. Great to be here.

David Bright: Hey, thanks.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tim Ulbrich: Oh, cool.

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

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

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

Tim Ulbrich: Yeah.

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

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

Nate Hedrick: Thanks, Tim.

David Bright: Thanks so much.

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


Why Minimizing Fees On Your Investments Is So Important

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

Summary

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

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

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

Mentioned on the Show

Episode Transcript

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

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

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

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

Tim Ulbrich: Yeah.

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

Tim Ulbrich: Race to 0 here, right?

Tim Baker: Exactly.

Tim Ulbrich: Yeah.

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

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

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

Tim Ulbrich: That’s wild.

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

Tim Ulbrich: That’s right. Yep.

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

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

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

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

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

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

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

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

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

Tim Ulbrich: Absolutely. Yep.

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

Tim Ulbrich: That’s right.

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

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

Tim Baker: Yeah.

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

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

Tim Ulbrich: Sheesh.

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

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

Tim Baker: Yeah, thanks, Tim.

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

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YFP 207: How to Avoid These 6 Common Financial Mistakes


How to Avoid These 6 Common Financial Mistakes

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

Summary

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

Common financial errors discussed in this episode include:

1. Not taking advantage of employer match

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

2. No budget or no financial plan

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

3. No insurance or inadequate insurance

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

4. Failure to monitor your credit reports

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

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

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

6. Not utilizing professional advice

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

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tim, welcome back to the show.

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

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

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

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

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

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

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

Tim Ulbrich: Absolutely.

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

Tim Ulbrich: I was going to say…

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

Tim Ulbrich: Yeah, that’s right.

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

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

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

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

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

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

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

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

Tim Baker: Mhmm.

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

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

Tim Ulbrich: Yeah.

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

Tim Ulbrich: That’s right.

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

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

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

Tim Ulbrich: That’s right. Yep.

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

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

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YFP 203: New Book: FIRE Rx: The Pharmacist’s Guide to Financial Independence


New Book: FIRE Rx: The Pharmacist’s Guide to Financial Independence

Dr. Jeff Keimer, author of the brand new book FIRE Rx: The Pharmacist’s Guide to Financial Independence, joins Tim Ulbrich on this week’s episode. If you’ve heard about the FIRE (Financial Independence, Retire Early) movement before, you know that this is a powerful strategy to build wealth and to put yourself in control of your financial future. Regardless of whether or not you have early retirement goals, achieving financial independence gives you options when it comes to how you spend your time and money. On this episode, Jeff talks about why he wrote FIRE Rx, his FIRE journey, how to calculate how much you need to retire, three reasons pharmacists should consider pursuing FIRE, and how FIRE can change your relationship with money.

About Today’s Guest

Jeff Keimer is a retail pharmacist practicing in Vermont. He began his career in pharmacy while still in high school back in 2005, and he graduated from Albany College of Pharmacy and Health Sciences with his PharmD in 2011. Jeff is a frequent contributor to the Your Financial Pharmacist blog.

After jumping headfirst into the FIRE movement back in 2016, he and his wife were able to conquer their student loans, paying off over $105,000 in nineteen months. Since then, they have been able to set themselves on a course to be financially independent well before most people would even consider it a possibility.

Along the way, Jeff engrossed himself in all things personal finance and found that he has not only a passion for finance, but also of writing; and through that writing, it’s his sincere hope that he can serve his profession by helping enrich the financial lives of its members.

In addition to this book, you can find more of Jeff’s content on the Your Financial Pharmacist blog. You can connect with him on Facebook via the Your Financial Pharmacist Facebook group.

Summary

This week, Tim Ulbrich welcomes Jeff Keimer, PharmD to the show to discuss his new book, FIRE Rx: The Pharmacist’s Guide to Financial Independence. Jeff shares why he wrote the book, his FIRE journey, how to calculate how much you need to retire, three reasons pharmacists should consider pursuing FIRE, and how FIRE can change your relationship with money.

FIRE Rx: The Pharmacist’s Guide to Financial Independence is broken down into three parts: the why of FI and how it applies to pharmacists, how to achieve FIRE, and uncertainties surrounding FIRE. Tim and Jeff walk through each of these areas in their discussion. Jeff shares a number of reasons why pharmacists should consider pursuing FIRE, whether or not they intend to actually retire early, and explains how your relationship with money can be positively affected when seeking FIRE.

Jeff explains a practical method to creating a goal post for retirement, elaborating on the 4% rule and how to calculate how much you need to retire. Jeff and Tim close by tackling some of the greatest concerns when retiring early including health insurance and outliving your nest egg.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Jeff, welcome to the show.

Jeff Keimer: Great to be on. Thanks for having me.

Tim Ulbrich: Hard to believe this is your first time on the podcast. You’ve written a number of great blog posts about FIRE, investing, one about your debt-free journey that we have featured on the YFP website, and we’ll certainly link to that in the show notes. But today, we’re going to be digging into your new book that is available to order called “FIRE Rx: The Pharmacist’s Guide to Financial Independence.” And I’ve been really excited about getting this book out. It’s been a process, it’s been a couple years in the making, and excited to get this into the hands of many pharmacists that I think will find great value from your writing. So before we get into the book, give us a little bit of background on your pharmacy career and what you’ve been doing as a pharmacist.

Jeff Keimer: So I started in pharmacy actually quite awhile ago. I was still in high school back in 2005 when I started working for if you remember Eckerd Drug before they got bought out by Rite Aid. I worked for Rite Aid all throughout college and then took a position with a company called Kinney Drugs up here in Vermont. It’s just a regional drug chain. And yeah, been working as a community pharmacist ever since.

Tim Ulbrich: Small world, Jeff. I interned for Eckerd Drug when I was a pharmacy studen. At the time coming back home in the summers in Buffalo, New York, we had Eckerd Drug and I worked with them before that buyout happened with Rite Aid. So good memory. I think we’re dating ourself a little bit, by the way, when we talk about Eckerd Drug and some students and others are listening like, what are you talking about? You know, for those that are listening and if you’ve been a part of the YFP Facebook group, you likely have seen Jeff’s name pop up who has been really active in that group in commenting, providing some great input and advice. And I think, Jeff, folks may be wondering, especially those that have interacted with you in that group and obviously see that you’re knowledgeable not only on this topic but other areas of personal finance, you know, how did you get interested in personal finance? Was this a topic that always was one that was of interest? Or did something happen out of necessity that brought you into this world and I guess rabbit hole when it comes to personal finance?

Jeff Keimer: So I think I’ve always had kind of an interest in finance in general, maybe not in the application of it if you run my Q&A and how I was in my early years as a pharmacist, I definitely did not act like I was really interested in personal finance or whatnot. But I’ve always taken an interest in finance in general, especially investing. Then once Alex, my wife and I, we started getting down this FIRE rabbit hole, I really got into a lot more, really got to understand a lot more of the concepts. It really played to a wealth of my interests, especially as you get later on down the ways and you’re figuring out different ways to be able to solve your financial issues or invest better, sometimes it can be kind of a game, which really appeals to me.

Tim Ulbrich: So was it you driving this forward? Was it Alex driving this forward? Was it both of you — pun intended — really that caught on fire with the FIRE concept? Tell me more about for the two of you in your personal journey how you guys really made this commitment towards financial independence and why that was a priority for you and your family.

Jeff Keimer: So I think starting off, like I mentioned before, I got out as a new practitioner, really was not good with money, kind of spent every dime in sight just on ridiculous things. I think I spent $5,000 in a year on craft beer or something. But she was really — she gave me the push because she came from a much different mindset than I did when it came to money and particularly saving and really kind of establishing that financial position of strength. You know, as time went on with our relationship, I had a really pretty bad balance sheet. And she did not. I kind of got the hint that I needed to really kind of move myself in that direction, kind of get my house in order and up to her standards first. That’s really where we started. The whole foray into FIRE came later, after we got married. That became kind of a journey I took the lead on, but she was supportive at first and then really kind of came on board and got really excited about it as time went on and we made progress towards it.

Tim Ulbrich: We’ve had a few pharmacists as guests on the podcast like Jason Long on Episode 104, Jared Wonders on Episode 111, who have shared their own FIRE journey. We also had Scott Rickens, author of “Playing with FIRE” on Episode 188. But with that being said, I don’t want to assume that all of our listeners are familiar with FIRE. I shared with you before we hit record, you know, often when I’m speaking with a group of pharmacists and I introduce the concept of FIRE, many folks I find have not necessarily heard of that term before but once I have a chance to explain a little bit more about what is financial independence all about, what is the FIRE movement or community all about, I can see there is certainly an interest that is piqued and folks that are interested in, hey, I want to learn more and see whether or not this is a path for my own personal financial journey. So before we dig more into the weeds on FIRE and the strategies you talk about in the book, give us the high-level definition or overview of what exactly is FIRE.

Jeff Keimer: Basically, FIRE is an acronym. It stands for Financial Independence Retire Early. And I think that the acronym really kind of is in some ways self-explanatory. But what it actually is in practice is that you reach a stage in your personal finance journey where you reach financial independence, meaning the money that’s — your money is basically generating for you, not the money that you’re having to work for. But the money that’s being given to you in the form of dividends, capital gains, things from investments or income from rental properties or a business that you own that you’re no longer having to really work the day-to-day, from basically that is covering all of your living expenses that you have in a year. So you basically, you don’t have to work for money anymore, which then leads people into the retire early concept, in which case they may decide to totally stop working for money. Then that can be far ahead of what people normally consider to be retirement at say 65. You have some people in the space inspires really kind of a large community now that’s really cropped up over the years. You have some of the more famous names in the space. First one I was introduced to was a guy named Pete Adeney, who goes from — he goes by the name Mr. Money Mustache on his blog. And he retired in his 30s. So you know, when most people kind of hear that for the first time — and I know when I heard that for the first time, that’s when I got hooked because I was like, who is this guy? Like how do you do this? This sounds really ridiculous.

Tim Ulbrich: Tell me more.

Jeff Keimer: Tell me more about how you get to a point where you can call it quits in 10 years. But you know, the interesting thing about FIRE is like you can do whatever you want. It’s really retire early is an option. Financial independence is really what I think most of the movement has kind of squared itself around because then you have the option to do the retire early if you want or you can do something else.

Tim Ulbrich: And I think that right there, right, the option to stop trading time for money — and I’m with you, Jeff. As I heard about the movement, learned a little bit more, certainly don’t claim to be an expert myself , and like we’ll talk about here shortly, there’s a variety of options and paths that one can take, certainly not a only-one-route to do FIRE. But FI resonates with me as a goal that all of us should be considering, you know, and what that means for us. It may be something different depending on our personal situation, our income, our expenses, where we live, all of those things. RE maybe, maybe not. You know, I think there’s a lot of things that would go in that direction that would help someone make that decision. But many pharmacists invested a lot of time and money to get their degree, many pharmacists love the work that they’re doing, and so they may not have that goal of RE. Or perhaps it might not be that they have a goal of retiring early but something life throws at them requires them to pivot away from their work income, and they’ve put themselves in a position towards FI to be able to make that adjustment. So we’re going to dig into even more of that, but I want to make sure our listeners, you know, as we have this conversation, don’t necessarily hear us talking about FIRE and are making an automatic assumption that every pharmacist needs to aspire to retire in their early or mid-30s but rather we’ll talk about some of the tenets and principles of FI and of course that RE is something that some may choose and many others perhaps not. So being passionate about FIRE and financial independence for your own personal journey is one thing. Deciding to invest the time to write a book is another thing. And you know and I know that there’s a significant amount of time and effort that can go into this. So why, Jeff, did you feel the need, besides me hounding you a little bit of hey, I think this would be a great topic for pharmacists and would love to see us have more information in this area, why did you feel like it was necessary to invest the time to write a book that would help pharmacists better understand this path towards FIRE?

Jeff Keimer: Yeah, I never thought about writing the book until you asked me. You said, “Hey, would you like to” — I think we were originally starting and thinking about maybe a short audiobook or something like that. Then it morphed into more of a full form book. And initially, I’ve got to be honest, you know, you said, “Would you like to write a book?” I thought, I think that’s kind of a cool thing to do. I’d like to — maybe that would be a fun little thing to be able to say, “Oh yeah, I wrote a book.” But you know, as time goes on, that can kind of get you in the door doing something, but you have to kind of have a reason for why you actually want to beat something, and especially with writing a book, I mean, that’s the longest thing I’ve ever written. You’ve got to have something in the background. And I was thinking to myself, really I mean, as I was writing the book and kind of thinking about in all the writings that I’d done for the site as well, why I do this. And I think that what it boils down to is different people have different ways that they want to serve their profession in general. And I looked at this as like, people try to play more to their interests in how they want to do that, if they want to do that at all. And to be honest, on the clinical side of things, wasn’t — never really been a huge interest of mine. I really enjoy the role that I play in the profession as community pharmacist, being able to talk with people, help them through their problems and get better outcomes that way. But you know, some of the more clinical-minded or even legislative-minded things that you get into, haven’t really sparked too much of an interest in mine. But finance does. And I think that finance really is a — it represents an interesting problem that needs to be solved for our profession, particularly as I see it kind of going forward because as a profession, I mean, we do need a lot. We need to do a lot, you know, for our profession moving forward to be able to direct it in the ways that I think most pharmacists would like to see it. But financial burdens placed particularly on new graduates who, in my mind, are in a really good spot to be able to try and affect change in our profession, really can be a major hindrance to things actually moving forward. What I see with — through my writing is you know what, if I can help any of these people get to a point where finance is really not such a burden on their shoulders, they might be able to actually get out from the behind the bench and do things that might be more beneficial to our profession on the legislative end, clinical ends, or even on an entrepreneurial end because we really do need — in our profession, we do need to explore different avenues for our services as pharmacists to really evolve our profession as time goes on. And unfortunately, a lot of times when — I’m sure you’re an entrepreneur yourself — the beginning stages of a lot of ventures, you don’t make a lot. It can be very difficult financially. And it’s one thing to kind of come at that sort of a thing coming out of high school or coming out of college with minimal debt, it’s a whole different thing coming out of college —

Tim Ulbrich: That’s right.

Jeff Keimer: And you have $100,000 maybe plus of student loans. And your minimum payment is similar to a mortgage without actually having a house. That, to me, like if you can really kind of help fix that part of the problem, I think that there’s a better chance — not a guarantee, but a better chance that our profession will be able to do the things that it needs to do without as much of the weight of the financial burdens that we have already.

Tim Ulbrich: Yeah, and Jeff, I shared this with you when I read the first draft. What would that have been? Back in probably late fall of 2019. I think you’ve really done an incredible job of taking a topic that can feel overwhelming, especially when you get into some of the weeds on investing options, considerations, you know, and so forth and really did a nice job of breaking that down in a way that was easy to understand, it’s very conversational — for those that like reading blog posts and other things, I think you wrote it an a way that is not intimidating. It’s easy to follow. And it gives people the space to explore this topic and apply it to their own personal situation. And that is something I love because we know that when it comes to putting a financial plan together, whether you’re working with a financial planner or you’re doing it yourself, everyone’s plan is inherently unique to your own personal situation, to your own goals, to your family situation, to where you live, to all of these other factors, whether you have debt and how much, and things you’re trying to aspire to do. And I feel like you really gave the space for folks to be able to make some decisions and really just understand the options, the pathways, spark some interest in what this is all about, and then hopefully, they can take that information and begin to apply it to their personal situation where it makes sense. So as far as I know, this is the first FIRE book specifically as it relates to pharmacy professionals — if someone else wrote one that we don’t know about, they can tell me that I’m wrong on that — and I really believe the book is full of valuable information that lays really a strong foundation for pharmacists that are interested in learning about FIRE and how they can set out on the path to achieve it. In the book, you go into detail about paths to FIRE, withdrawal rates, savings rates, budgeting, debt repayment, investing, portfolio considerations, and the list goes on and we’ll talk about some of those in more detail. And one of the highlights for me is we sent this book out to some pharmacists in the YFP community before it was available to order, and the feedback we received was really amazing. Cory Jenks, who we had on in Episode 196 said, “This book takes the hours and hours of reading and self-education and condenses it to a simple, easy-to-read book that has something for anyone along the journey to FI.” And I would certainly agree with what Cory said there. So let’s dig into the book a little bit further. You wrote the book “FIRE Rx: The Pharmacist’s Guide to Financial Independence,” and you broke it up into three parts: Part 1: The Why of FI and How it Applies to Pharmacists, Part 2: How to Achieve FIRE, and Part 3: Uncertainties Surrounding FIRE. So in Part 1, the Why of FI and How it Applies to Pharmacists, talk us through the three reasons that you think pharmacists should at least consider pursuing financial independence.

Jeff Keimer: The three reasons I really tried to lay out there is first and foremost, it’s defensive. Second, it’s doable. And then third, as I kind of got into on my little soapbox over there, it’s good for the profession I think. So going to that first point, defense, where I don’t think that there’s really a whole lot of pharmacists out there in the profession that look at the state of things right now and think, oh, the gravy train is going to keep going and whatnot. You know, you hear stories every day about — you see a lot of them on the Facebook group too, posting about how tough the job market is, people are going in and getting the offers that they’re finding are really — they’re scary. I mean, they’re like a fraction of what I started at 10 years ago. There’s a lot of pressure in the marketplace right now in terms of pharmacists’ salaries and then also again, on the student debt side, that side keeps going up. Defensively, pursuing financial independence in particular at a really just basic level, I mean, you don’t even need to achieve financial independence to be able to get benefits from the techniques and the things that you do in the pursuit of it anyway.

Tim Ulbrich: That’s right.

Jeff Keimer: Because what it basically boils down to is just — I mean, it’s just good financial hygiene. So you’re getting rid of debt, you’re de-risking your whole financial situation, and really kind of building yourself up into a position of strength where you can really kind of take whatever life throws at you. Now, that could just be what a lot of us — most people kind of experience, you could just have things come up in your personal life, say the kid needs to go into the hospital or you need to go in the hospital, some kind of financial hardship there that you could absorb. Or it could be something more in the lines of the profession. So I remember last year, remember reading one day, one of the major big box stores laid off about 1,000 pharmacists or something like that. That’s a major thing that goes on. And it’s a possibility. And I think for many, many years, our profession really didn’t — we didn’t really have to think about that. I know when I first went into pharmacy school, something like that really was not on the radar or really in anybody’s mind, especially when — we called them fifth years because I went through a six-year program, but you know, the P3 students, second semester, you saw a lot of new cars in the parking lot because people were getting five-figure sign-on bonuses.

Tim Ulbrich: Yep. I remember that.

Jeff Keimer: But I mean, yeah, it basically — it boils down to for defense, it’s a good idea to really even just kind of get into this anyway because as a profession, I think every single pharmacist really needs to be thinking or have in the back of my mind, hey, it might be a possibility that I’m not going to be making more in the future, which is kind of a weird concept if you want to stay in the profession. And I would imagine most pharmacists do want to stay in the profession because we went to school for a reason, and we wanted to be pharmacists for a reason. The second thing after going that doom-and-gloom section, that it’s doable. I think currently, a lot of pharmacists, the doom-and-gloom scenario, while it’s certainly difficult in a lot of markets, that’s not the same — or not saying that every market is this kind of situation where it’s really difficult. So for a lot of pharmacists, particularly ones that are practicing now, and especially if you’re still making that good paycheck, I think financial independence is perfectly doable. You have a strong income to be able to drive it towards financial goals. It does take a lot of discipline, takes some knowledge, but you can do it relatively easily compared to a lot of your peers that might have graduated, people like let’s say you went to high school with. They might have graduated in a different field. So I think that it’s, as a pharmacist, you know, even though we kind of get down on it, most of us still do make very good money compared to what a lot of people, especially straight out of college, would be making. And then the last bit, again, I think it’s good for the profession. You know, if you go down this path and even if you get close to financial independence, you don’t even need to get to full financial independence, but even getting there close, we can remove some of the risk to your career if you need to do something to be that, you really want to get out of a situation that you’re in, maybe you did start working retail after college but you really didn’t want to do that from the beginning, which it’s very much like a thing where if you’re in a position that you don’t necessarily — if you didn’t want to be there in the first place, it could be a bad fit and could be difficult for you for a long term. So if you wanted to contemplate a switch, sometimes having that — being in a position of financial strength can be very beneficial to you and really kind of remove a lot of the risks surrounding moves there. Also, I mean, if you wanted to pursue entrepreneurial work, let’s say start a consulting business or something like that where it’s not clear that you’re going to be making the kind of salary that you were making as a dispensing pharmacist from Day 1, and you probably won’t. But if you’re in a position of financial strength, you can tackle that challenge far easier and far more responsibly I would say than someone who doesn’t have that position of financial strength.

Tim Ulbrich: Yeah, I agree with all of those, Jeff. And the one that resonates with me — and I mentioned this to you as you were writing is that last one. I really — I’m bullish on the opportunities we have. I’m an optimist by nature, but in terms of where we can go as a profession, but I also recognize that $175,000 of debt and dependence on a six-figure income with that type of debt is really golden handcuffs to folks taking risks. And I think that is risk both internally, you know, I think folks, if you’re really saddled with debt or don’t necessarily have a good financial foundation or position, you’re probably not likely within your job to propose new ideas or strategies or take some risks or push back where needed, let alone look for other opportunities that may be out there that are a better fit for you or that also could help us advance as a profession. So I believe firmly a big part of why we do what we do at YFP is if we can help offload some of the financial burden of one’s individual situation, you know, what does that mean for their career as a pharmacist? Or what does that mean for other things that they may want to pursue and may want to do? The other thing, Jeff, I like in Part 1 that you talk about is an FI mindset. And you know, my question here is what part does mindset play in pursuing FIRE? And what are your core ideas on how one can establish an FI mindset or perhaps recalibrate the current mindset that they have if it’s not in line with that?

Jeff Keimer: The concept I like to get through on the FI mindset part is really, when you decide to go for financial independence, you really have to fundamentally change your relationship with money. And what I mean by that is that instead of viewing the money that you bring in simply as the stuff that you’d pay for goods and services with, you really need to think of money in terms of time. There’s a great book, it was written many years ago by a lady, Vicki Robin and her husband, they equated money to a concept they called life energy. And basically, it was when you’re spending money on things, let’s say you’re buying a pair of jeans or you’re buying the latte or whatever, you’re giving money for those things. But in reality, if you’re having to work for that money, what it is is that you’re exchanging the time value of your work, your life energy, for whatever that thing is. Now, most of the time, like the small purchases here and there, that’s really — they can add up, but it can be immaterial in the long run. But for some of the big things like let’s say you want to buy that brand new $50,000 car, you take out a car loan, you do that stuff, what you’re doing is you are committing a lot of your life energy to buying that car. Like it’s not a just oh, I can get this. It’s like no, no, no. You are committing your life to servicing this debt for whatever that you’re spending the money on. Now, the change that gets made is when you have a look at how money, particularly when you start investing it, can beget more money. Then it’s like, alright, so I’m going to have this money and then I can save that money and then it can then buy me time. It can buy my life energy back, which I think is — that’s really the cornerstone of the FI mindset that you need to have is that you’re essentially, instead of expending your life energy, your time, for things and stuff, you’re really just kind of buying back into yourself and making your — getting yourself time back that you wouldn’t otherwise have. Once you really kind of understand that, really kind of engrain that — I mean, I’ll tell you, it is kind of an addictive concept because you end up finding yourself saving money and looking for ways to save money and do things that you ordinarily wouldn’t do because you kind of feel like, I’m doing this, this is, you think of it as miniscule, it’s like, oh, that thing’s going to get me 15 more minutes back of my time or something like that. You know, that’s kind of silly. But it kind of explains the point a little bit.

Tim Ulbrich: I think too, Jeff, you know, sometimes when folks hear that, they may think, oh my goodness, like the frugality of that and I’m scraping for pennies, but I think what happens, at least what happens for me when you talk about that concept of the connection between time and money is that you start to change how you value certain things. So again, I’m speaking for myself, but I think this may be true with others as well. If you’re going to make an investment in an experience, you’re going to make an investment in something else versus an investment in something that maybe doesn’t mean as much to you — and Ramit Sethi talks about this idea in the book “I Will Teach You to Be Rich” of like find the things that like have meaning and value to you, and figure out how you’re going to invest and prioritize in those and find the things that you don’t care about and stop spending money on them. And you know, I think that that has been really an important thing when I think about mindset — and here, we’re talking about mindset around FI — is like it really helps begin you to shape and be more I think self-aware of when you’re spending money, you’re not just making that transaction but you’re starting to think a little bit about like what value do I get or do I not get from this transaction? And is it worth it or not based on the time? And sometimes the answer is yes, and sometimes the answer is no. And I think it just helps grow that awareness and it allows us to pause, stop, think about things and really evaluate it in a little bit more detail. Now, Part 2 of the book is really the meat and potatoes. And you did an awesome job in this section, How to Achieve FIRE, and we’re just going to scratch the surface here with a couple things. But one of the things you talk about in Part 2 is you dive into safe withdrawal and the 4% Rule, which you also talked about on the recent blog post on the YFP website titled “How Much You Need to Hang Up Your Coat,” all about the 4% Rule, and we’ll link to that in the show notes. So just give us a high-level overview of what the 4% Rule is and why that is significant as folks may be getting to think about this question of how much I need.

Jeff Keimer: So in a nutshell, the 4% Rule refers to a tool in financial planning to be able to judge when a traditional let’s say traditional portfolio of stocks and bonds can really fund your expenses in perpetuity. So where it comes from, it comes from a study done by the financial planner William Bengen back in the ‘90s. And what he found was that in looking at retirement cohorts from many, many years in the past, he found that the absolute lowest that a retiree could safely withdraw from their portfolio and not run out of money — and his study was over the course of 30-50 years, depending on which study you want to look at. But in a nutshell, basically it’s he said 4% was the lowest, the worst case scenario that if you retired and then you took out 4% of your portfolio Year 1, and then Year 2 added the inflation according to Consumer Price Index to that initial 4%, so on, so on as the years go on, you keep up with inflation, you wouldn’t run out of money. And 4% was that worst-case scenario. Now, it sounds like a little wonky, but what ends up happening is you can take that 4% figure and take the inverse of it, which is 25.

Tim Ulbrich: Right.

Jeff Keimer: And then once your investment portfolio reaches 25 times your annual expenses, you can — in theory, I would say — declare yourself to be financially independent because there’s a strong probability that in the future, you are not going to run out of money should you just decide to draw down on your portfolio like this. The really powerful thing about the 4% Rule and the whole concept of a safe withdrawal rate is not really in the technical details behind it but it’s giving you a goalpost that you can work towards.

Tim Ulbrich: That’s right.

Jeff Keimer: I remember it was kind of a seminal moment like in my FI journey that when I read Mr. Money Mustache’s post, it was like “Shockingly Simple Math to Early Retirement,” something like that. But it laid that out, and I said to myself, oh, OK, so my retirement number, how much I need is not just this totally nebulous concept where somebody’s like, ‘Well you might need like $5-10 million. We don’t really know. You just need a boatload of money.’

Tim Ulbrich: Plus or minus $3 million.

Jeff Keimer: Yeah, just keep saving and once you get to 65, we’ll figure it out from there.

Tim Ulbrich: Yep.

Jeff Keimer: But this actually gave me something more concrete to work with and say, ‘OK, alright, that’s a goal. And I can achieve that.’ But the other interesting thing too compared to a lot of the traditional financial planning advice is that you tend to see in some of the guidelines out there for how much you need to retire, as it’s a multiple of your income, which many people would argue with me about this, but your income is I think less in your control than you really think it is. There are a lot of forces way outside your control that affect this thing, be it market forces, so pharmacists are seeing that firsthand with supply and demand of licensed professionals. But it could just be some exogenous event in the market that, you know what, you lose your job. Sorry. Or you had a good idea, but now there aren’t too many customers for your idea anymore. A lot of things can happen with your income that are outside of your control. However, with the 4% Rule, it frames the question of how much you need to retire and how much you need for financial independence in terms of your expenses. Now, some of these may be a little bit outside your control, but you have way more control, at least in my view, of how much you spend versus how much you bring in. So I think it’s much more powerful — it’s extremely powerful in the regard that it really takes the whole notion of your financial destiny, your financial independence, out of the hands of whatever’s going on externally in the market and putting it much more in your hands, giving you much more influence over that equation.

Tim Ulbrich: That’s great stuff, Jeff. And I like how you described that calculation towards the FI number as a goalpost, right? It’s a starting point and I think so often, we talk about retirement as I hope I can retire. I wish I can retire. Maybe I can retire at this age. And I think really starting to dig into some of the numbers and taking more control and ownership of what that might look like of your financial plan, rather than being reactive. And as I mentioned in Part 2, this is just one of the many concepts you talk about. You also talk about in Chapter 5, your savings rate, in Chapter 6, you go into a FIRE approach to debt, in Chapter 7, you talk in much more detail about FIRE investing, in 8, investing efficiently and then and finally in 9, which is a question folks probably have often is it’s great if I save it and now I need to pull it out, so how do I, as you say in Chapter 9 titled “Jail Break Your Stash,” so what’s the strategy of actually withdrawing those funds when you need it, which I think is a question for many pharmacists if they’re familiar with more traditional tax-advantaged retirement accounts and they think of things like age 59.5 or greater, well what’s the strategy if there’s early retirement? So certainly covered in much more detail in the book. Jeff, I want to wrap up here with a question about what you address in Part 3 of the book, which is some of the uncertainties surrounding FIRE. And I think is one that folks hearing this for the first time might begin to think of all the objections to why early retirement may not be a good idea. And this might be, well what about health insurance? What about other things where I’m dependent upon my income to be able to have some of those types of things? So there are considerations, potential drawbacks. What are some of the big uncertainties that you see related to FIRE that folks should be aware of?

Jeff Keimer: So I think the big one that a lot of people think of right off the bat has to do with health insurance, which to be honest, I don’t think it’s as big of an issue or will be as big of an issue as people think because I mean, health insurance is something that you can — it’s going to cost more in most regards. Now, there are some tricks that you can get around it. You can take a look into other forms of health coverage like Health Ministries or some people decide to work part-time for a company that offers health insurance benefits in retirement. Or they just, they don’t stop working, they just kind of work for the health insurance benefit. But I think, I mean, that boils down to you’re probably going to have to pay for it. That I think is the thing that comes top-of-mind for a lot of people, especially when you say, ‘Hey, you’re going to retire at 40 years old,’ and most people, like a major consideration is like, ‘Well, I’m not retiring until I get Medicare.’ It can be less of a burden than people think, but I mean, it’s still definitely out there. The other thing too that’s kind of an uncertainty is outliving your assets too, which kind of goes back a little bit to that 4% Rule, and that’s why when we were talking earlier about it, you said it’s a goalpost. But it’s also just kind of a guideline. Like it’s also not set in stone that it’s going to happen. I mean, it’s still very much a concern that you are going to outlive your money. And there are certainly things that you could do to address that, which we talk about in the book, not the least of which, I mean, surprise, kind of along the same lines as health insurance, is just save a little bit more and give yourself a buffer. The other thing — and I think that the really, probably one of the most important in terms of uncertainties to FIRE is let’s say you do want to consider retiring early. What do you do from there? That’s the major question that, you know, if you’re going to be looking at this thing, it’s the thing that you should be thinking about throughout the whole journey.

Tim Ulbrich: Absolutely.

Jeff Keimer: And you know what? I mean, the good news is you don’t need to figure it out before you start. And honestly, I think it’s a stupid exercise to even try to do something like that because this is not going to be — pursuing financial independence or the early retirement, it’s not something that you’re going to be able to say, ‘Alright, I’m going to start doing this and then two years from now, we’re going to be there. And my life two years from now is probably going to look very similar to the way it does now.’ I would say when people go after this thing aggressively, 10-15 years might be more realistic for that. When we started ours, that’s kind of the timeframe we were looking at for it. But even at those kind of time frames, I mean, you don’t know what your life is going to look like 10-15 years from now. You really don’t. My son was born six months ago. And being a new parent, I don’t — I didn’t know ahead of time really what that’s going to look like. I had maybe some idea of what that looks like, but I didn’t understand what it was going to look like. So I think that as you’re making these plans for the future, I mean, it’s something to think about. Like what do you want your life to look like after FI? How or is pharmacy going to fit into that life after FI? For some people — you know, I know for Jason Long when you had him on, it really didn’t. But I think for a lot of other people that are in the profession, it will in some shape or fashion, whether that’s even something as simple as you know what, I want to work per diem for the pharmacy or the hospital or something like that. Or it could be you know what, I have reached financial independence and one of my goals for this was to do more outreach work for the profession, and I’m going to do that. These are the things to think about during the journey because, I mean, I definitely think it’s worth it to consider. And that I would say, most of the other problems that people kind of throw around — I like this term, it gets thrown around actually in the cryptocurrency communities a lot, it’s called FUD. It’s an acronym. It stands for Fear, Uncertainty, and Doubt. And a lot of the FUD surrounding FIRE really, I mean, it’s all math. Health insurance, saving for college in the future, even like long-term care, all of these are math problems that you can solve.

Tim Ulbrich: That’s right.

Jeff Keimer: But the big uncertainty, but it’s kind of a good uncertainty is like, well, now that you have all this time, what do you want to do with it? And how do you want to construct your life after this? That’s really the big thing I think a lot of people need to think about too as they’re going on with the journey in terms of any kind of uncertainty surrounding the FIRE movement.

Tim Ulbrich: That’s great stuff, Jeff. And I love how you wrap up the book when you say, “When I think about the whole concept of FIRE, I don’t really see it as a mad race to the end of work to live a life of leisure. I see it as being a tool that can help people live their best lives. Nothing more, nothing less. And what you’ll get out of it is up to you.” So Jeff, great work. We really have just scratched the surface on the book “FIRE Rx: The Pharmacist’s Guide to Financial Independence.” Congratulations on your efforts. I think it’s going to have a significant impact on many pharmacists out there. Appreciate you taking the time and the effort to put the book together and looking forward to getting it into others’ hands. So Jeff, again, thanks for the time coming on today and your efforts in putting together the book.

Jeff Keimer: Thanks for having me on.

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