Financial Planning / Podcast

YFP 236: Gen X Pharmacists: Financial Challenges and Money Strategies

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Gen X Pharmacists: Financial Challenges and Money Strategies

On today’s episode, sponsored by Thoughtful Wills, Tim Baker talks through the unique financial needs and considerations of Generation X.

Episode Summary

Often referred to as the sandwich generation, Gen X is a big group of people that’s often set on the sidelines when compared to Gen Y, the millennial generation, and baby boomers. Financial planning can be hard enough by itself, but supporting your young (or not-so-young) children often at the same time as aging parents, all while trying to save for retirement, creates a unique strain on finances that requires some specific financial planning! Today on the YFP Podcast, Tim Ulbrich is here with YFP co-founder, co-owner, and director of financial planning, Tim Baker, to talk through the financial needs and considerations of our Generation X pharmacy colleagues who are well beyond the new practitioner phase, but perhaps not yet at that traditional retirement age. We talk through why this generation has some unique financial challenges and touch on how to tackle the pessimism and inertia that often comes with changing or leaving your financial planning too late. We discuss the challenges this generation face, how their debt position and accrued retirement savings compare to other generations, and some strategies to chart a successful path to independence and stability, despite the tough economic hand dealt in their lifetimes. This episode may focus on a specific age group, but all listeners will hear valuable advice and insights that would benefit anyone!

Key Points From This Episode

An introduction to today’s topic of Gen X; the sandwich generation.
How Gen Xers are often providing for their parents, plus a young child or a child over 18.
How these financial expectations are often overlooked or pushed to the side.
We talk about average incomes, the rising cost of education, and what their debt load is.
The impact of the ups and downs in the last few years on their financial mindsets.
How Gen X wants stability but might not have the financial plan or means to get it.
You can take out education loans for your kids, you can’t get retirement loans.
Hear how Tim Baker follows the one-third plan and a reminder of what that is.
Relying on the act of planning, versus having a plan.
Some important questions Gen Xers can ask themselves to get financially stable.
Making sure you’re not on autopilot, particularly in your peak earning years.
Tackling the fear and inertia of having left it so late in life to start saving and planning.
Having empathy for Gen X needing different priorities from the previous generation.
That Gen X really wasn’t dealt a great hand economically, but the problems are fixable.
Reigniting the vision and finding the motivation to do things differently.
Speaking about the lack of confidence in social security for future retirement.
Tim shares a great exercise you can do to check your retirement age and benefits!
We discuss the shifting dynamics of generations and the transfer of wealth.
Some parting words of encouragement from us here at the YFP team!

Highlights

“[Gen X] is a generation that probably has some of the most important, or probably the most urgent needs in terms of their finances and financial planning.” — Tim Baker, CFP [0:04:34]

“39% feel of Gen Xers feel that they’ll never have as secure a financial life as their parents’ generation. As parents, you always want your kids to have a better upbringing.” — Tim Baker, CFP [0:09:26]

“What can you do for your kids? What do you want to do for your kids in terms of an education plan? At the end of the day, your retirement should take precedence, because you can’t take retirement loans. You can take education loans.” — Tim Baker, CFP [0:15:17]

“If I’m a Gen Xer and I’m 50, and I know that I have a decade left if I want to retire by 60, you can do a lot in 10 years. You can.” — Tim Baker, CFP [0:25:29]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here. Thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week, I had a chance to sit down with YFP co-founder, co-owner and director of financial planning, Tim Baker, to talk through the financial needs and considerations of Generation X; those born between the mid-60s and early 80s, falling between the baby boomers and the millennials. That would be our pharmacy colleagues well beyond the new practitioner phase, but perhaps not yet at that traditional retirement age.

Whether you are a student pharmacist, or a new practitioner anticipating some of the financial opportunities and challenges that may face you in the future, or you’re a Gen X pharmacist listening, my hope is that you’ll have something to take away and apply to your own personal situation.

On the show, Tim Baker and I talked through why this generation has some unique financial challenges, and is often referred to as the sandwich generation. We discuss the challenge this generation faces and the balance taking care of themselves, their children, perhaps, as well as their parents, how their debt position and accrued retirement savings compares to other generations, as well as some strategies for a Gen X pharmacist to chart a successful path boards, despite some of those challenges that they may be facing.

As we wrap up another year of the show and are knee-deep into the planning for 2022, I want to say thank you to the YFP community for entrusting us with your time, by listening to the show. We don’t take for granted your support and encouragement of the work that we’re doing at YFP, to help pharmacists on their path towards achieving financial freedom.

Also, a big shout out to YFP members Caitlin Boyle and Rose Mercado for the engine behind making them YFP podcasts a reality each week. Caitlin and Rose, your contributions to the team and the YFP community are truly appreciated. Okay, let’s hear it from today’s sponsor, and then we’ll jump into my conversation with Tim Baker.

[SPONSOR MESSAGE]

[00:02:00] TU: This week’s episode of Your Financial Pharmacist Podcast is sponsored by Thoughtful Wills. Let’s take a minute to hear from Co-Founder, Nathan.

[00:02:08] NK: My name is Nathan Kavlee, and I’m one of the founders of Thoughtful Wills. Our law firm spends a lot of time thinking about the process of estate planning. There’s no way we can get around the yuck of death. Instead, we focus on being lawyers that you’ll actually enjoy working with. We pride ourselves on being approachable. Then, we take the extra time to draft documents that are actually understandable. Then we pair that with technology to make the process cheaper and more convenient. Please visit our website thoughtfulwills.com/yfp and poke around. Then book a meeting with us, please. We are genuinely excited to chat with you.

[INTERVIEW]

[00:02:46] TU: Tim, excited to have you back in the mic.

[00:02:48] TB: Yeah. Good to be back for a full episode, Tim. How’s it going?

[00:02:52] TU: It is going. We are just a couple days away from the New Year, and hard to believe that we’ve had another year of the podcast, another year of the growth of the YFP community, growth of the team at YFP, and so much to be grateful for as we roll the calendar into 2022, and excited for what lies ahead as well.

[00:03:13] TB: Yeah. It’s been a year of change, I think, with everything that’s going on. I think, all for the good. I’m excited for what 2022 brings in. Hopefully, we can continue to crawl out of this pandemic, and we don’t have too many more of the variants that are shutting things down. I’m excited for what’s ahead, though.

[00:03:33] TU: We’re going to start to dig into this topic, one that we haven’t covered in great detail before. Today, we’re talking about the financial needs and considerations of Gen X pharmacists. I think, it’s worth noting that we’re talking about generations, we’re obviously talking in general generality and general form. Certainly, unique situations are going to apply here. Tell us a little bit more about why we want to delve more into this this topic on the podcast as we look at financial needs and considerations of Gen X?

[00:04:02] TB: Yeah. I think, just like the generation, it’s kind of like the forgotten middle child. When we’re talking about Gen X, we’re talking about a group of about 65 million people that are born between 1965 and 1980. The youngest is in their early 40s, turned 41 this year, and then the oldest being in their mid-50s, turning 56 this year. It’s a big group of people that it’s often set on the sidelines when compared to Gen Y and the millennial generation, or baby boomers.

I think, it’s a generation that probably has some of the most important, or somewhat, probably the most urgent need in terms of their finances and financial planning. This generation, it’s called the latchkey generation. A lot of kids after school would go to this latchkey programs. I’ve also heard him them called, Oregon Trail generation, the Trapper Keeper generation. I have a personal affinity.

[00:04:59] TU: Oregon Trail. It’s good.

[00:05:00] TB: Yeah. I’m technically part of the Gen Y. I’m an I’m an older Gen Y-millennial, born in ’82. Well, my brother was born 80, so he’s a young Gen Xer at the end of ’80. I see both, I feel I fit in between both generations, and I see both sides of it. It’s also often called the sandwich generation, which really entails a Gen Xer taking care of not only themselves, but their kids that are coming of age, but also aging parents. 47% [inaudible 00:05:33], 47% of adults in their 40s and 50s have a parent over age 65, and are either raising a young child, or providing financial support to a young child over 18.

You can imagine, Tim. Before I had kids, I’m like, “Man, I can barely take care of myself. How can I take care of another human being?” That’s what’s going on here as their adult, and as they got to take care of themselves, and then they have to basically take care of parents, and then their kids that are coming of age. It’s a daunting task. Unfortunately, there’s a lot of – I feel like, there’s a lot of negativity and cynicism, not just even around the coverage of Gen X, but even inside of Gen X, as you see some of the things that they experience over time. It’s something that I think needs to be talked about more, because I feel all of the press, all of the language is either for baby boomers, or this Gen Y generation, baby boomers – Gen X are just left on the side.

[00:06:36] TU: It’s really true. It’s something that I’ve observed, since we’re prepping for this episode, is when you hear generational news that’s out there, the millennials get a lot of love. Gen Z gets a lot of attention, baby boomers. This concept of a sandwich generation, a generation that’s often overlooked but has some significant things that they’re facing financially. Hopefully, some things that we can turn into opportunities may get overlooked in terms of the stress and the burden that that group is carrying.

You’ve laid the foundation, Tim, in terms of Gen X. So, people born approximately 1965 to 1980. We’re looking at early 40s to mid-50s, known as the sandwich generation, and between millennials and baby boomers. That concept of being caught between taking care of their children, as well as aging parents.

I just talked with a prospective client earlier this week, young family, two kids under the age of four, going through their own student loan, debt repayment scenario, trying to get investing off the ground, and get some early momentum there. Then also, the prospect of potentially having to take care of their elderly parents in the near future. That’s weighty, right? I think, you and I would both argue from individual experiences, as well as the pharmacists that we talk with all across the country, that financial planning can be hard enough in and of itself, without having to think about an additional burden that might be placed upon something like, having to take care for elderly parents.

[00:07:58] TB: Yeah. I think, this is the start of many sandwich generations, unfortunately. Maybe not unfortunately, but I know, a lot of our Gen Y clients are, they have a bucket of money that’s just like, “Hey, my parents either got me here because they immigrated here.” Or, that’s what our culture says, “My job is to is to make money and take care. I am my parents’ retirement plan.” That’s not just related to Gen X, I think, that’s going to be a common theme in Gen Y and Gen Z.

I think, the difference is that the year – it’s upon us already for Gen X. They’re already doing it. Probably, haven’t really planned for it. The good part about Gen X is that they’re approaching their peak earning years. On average, they make more money. I think, I think the average household income was something like, in the $130,000s or something like that. On average, they make a lot more than baby boomers who are winding down, or they’re already retired. Then Gen Ys are still – and we know in pharmacy, it’s a little bit different.

Average net worth for – if you’re if you’re clocking this average net worth, I think I saw a number out there, it was about a $168,000. That’s not a lot, especially if you’re thinking you only have 10, or 20 years left to work, if you’re going to retire in your 60s, that type of thing. I think, the one thing that came out to me when I was looking at this was, 39% feel of Gen Xers feel that they’ll never have a secure as a financial life as their parents’ generation. Which, and that’s one thing is like, as parents, you always want your kids to have a better upbringing.

I think, the other thing that is interesting about Gen X, as you’re looking at the data, and just some of the editorial comments, they are sandwich in terms of – they have a lot of the consumerism that baby boomers had. It was like, Gen X spends more than any other generation in terms of consumer goods, but they also got hit with the rising cost of education. Now not to the degree where pharmacists are coming out today. We have charts where the income was pretty close to what the debt levels are for a PharmD, and then the PharmD debt just raced by the income.

I think, to a lesser degree that the debt, and obviously, they’ve had years, a decade, or more of paying, 15 years of paying off student loans. I think, the biggest portion of what they’re seeing in terms of debt loads are coming in the form of mortgages, credit cards, auto loans. But also, still having those student loans.

Unfortunately, Tim, we see a lot of pharmacists that are in this generation that haven’t put that big of a dent into their student loans at all, because of I think, the construct of “Hey, you just pay the least amount and you drag it on forever.” Unfortunately, you’re left with a large sum, even 10, 15 years into your career, 20 years of your career, unfortunately.

[00:11:07] TU: Tim, one of the things I was thinking about recently, I graduated in 08, was that – 13 years ago or so, that was shortly after the requirement to the PharmD. This group, most of them, unless they went back and got – PharmD would have been in the BS period, before the PharmD was required. One of the things I’ve been reflecting upon is that I graduated in 08, obviously, the recession of 08 was what it was. I was in residency making $31,000 and didn’t have a whole lot of focus, or attention on savings. I didn’t really feel that very much, even though I observed it and lived in it.

All I know, is what has been a pretty wild market ever since then, that’s only been on the up and up overall, obviously, outside of some dips and so forth in between. I often think like, “Man, what kind of overconfidence has that led?” Potentially, not only my situation, but others that are in that window that have graduated in the last 13 years and have not experienced a significant downturn and has had that real impact, where you’ve accumulated savings, and you’re like, “Oh, my gosh. This is real.” I see the dip.

We look at this generation, they’ve been through the dot-com bubble. They’ve been through the 08 financial crisis, and they’ve been through what has been the wild, last couple years on the market, since the beginning of the pandemic, in terms of the ups and downs, and even within a given week, ups and downs. What impact do you suspect that has had in terms of their approach to savings and investments?

[00:12:35] TB: Yeah. I think, it’s had a great impact. I think, it was often documented that a lot of Gen Xers were very, very much educated, but underemployed, especially dot-com. Talk about swings of wealth in markets in dotcom. Then, the subprime mortgage crisis. I think, it’s led to a lot of asceticism, and a lot of the – some of the rhetoric that you see.

I guess, to bring my point full circle, what I was trying to compare to go back to that real quick. Baby boomers, no student loan issues there, but spent and had mortgages and things, car loans and things like that, credit card debt. I think, notoriously not having been great about saving for retirement, and I think, so security’s going to definitely help them. I think, Gen Y have been more adverse to home buying and taking on a big mortgage, and less consumer debt.

Whereas that, with Gen X, you’re seeing the ugly on both sides. You’re seeing the student loans, but you’re also seeing some of the other – that other debt it’s piled on. I think, with regard to investments, I think, that I saw a stat that Gen Xers, they’re thinking, “Yeah, we probably should be –” I think, the number was like, “We’ve probably should be saving 11%.” It’s probably closer to 20%, where they’re at in their career, if you count all of the things that you should be putting in to retirement. I think on average, they’re saving about 9%.

I think, some of the things that you’re seeing that baby boomers are working more into retirement and they don’t have confidence in their money lasting, I think, you’re going to see that compound with Gen X, unfortunately. I think, one of the things that often will buoy the Gen Xers is, as that wealth generation or wealth transfer happens, so baby boomers dying off, you’re going to start to see windfalls that are going to fix some of the ills, unfortunately, that happen.

It’s having a plan for that, and having a plan for that windfall. Gen X wants stability, but they’re not necessarily doing a lot to help their financial future. I think, what they’re just trying to do is get through the day in terms of like, “Hey, I have to take care of myself, my parents.” Then, I’m also looking at, and the whole – we can have a whole other discussion just about education and sending your kids to college, and not experience – Sometimes that, your own experience can color that for your kid. You have some people that are like, “I never want my kids to have an ounce of student loans.”

Or some people would say like, “Hey, I had to deal with it. They have to, too.” There’s no right or wrong answer, but it’s really cutting through that and understanding, what can you do for your kids? What do you want to do for your kids in terms of education plan? At the end of the day, your retirement should take precedence, because you can’t take retirement loans. You can take education loans, and hopefully, they start to figure out how to make this a little bit better, which again, that doesn’t necessarily help. It might help our kids, Tim, in the future, but it’s not going to help Gen Xers whose kids are in college, or approaching that age right now.

[00:15:43] TU: Yeah. Jess and I were just talking about that the other night, of really fighting against some of that gut and emotional reaction of wanting to over – potentially, over-contribute on the college side at the expense of other things, because of the pain we felt in our own journey, and how front and center that is.

[00:15:58] TB: Well, and I just got an email from Ohio529. They’re like, “Hey, if you put this much in, you can max out your $4,000.” Yeah. I’m like, “All right, well, we have this plan” but I’m torn to say like, “Okay. How can I get that just for the tax benefit?” Again, I think, people sometimes do things for the good of the taxes, or at the detriment of their financial plan. I mean, it’s never a bad thing to, I think, save for the future expense that hopefully will be there in the form of college.

At the same time, I had to take a step back and say, well, this is not really what Shane and I talked about in terms of our – what we want to do. And we follow that that one-third plan, which I think we’ve outlined in previous episodes of, one-third is going to come from our – the 529s that we’re saving. One-third is going to come from hopefully, that’s something I can cashflow, as our kids are in college. That present income in the future, if that makes sense. Then one-third from hopefully, scholarships, grants, and then last but not least, loan.

That’s ours. Again, at the end of the day, we’re making sure that we’re trying to fill that retirement bucket, because we want options. We went options as we approach retirement to say, “Okay, we want to work until this, or not have to work, or whatever.” To me, that’s something that the Gen X generation is also dealing with. I think to, again, it’s more into a heightened degree. One, because I think resources are scarce. You’re just dividing up between many more people, because typically, bigger households, and then we talked about again, taking care of parents and things like that. Yeah, I mean, it goes back to relying on the act of planning, versus having a plan. I think, that’s definitely something that Gen Xers should look to do if they’re grappling with all these different issues.

[00:17:53] TU: Yeah. I think, as we’ve talked about many times on the show, and something I know, we both worked through personally, and I sent it in the individuals that we talked to that are considering coming onboard as clients of YFP Planning. Sometimes there’s just so much emotional stress that we carry around related to financial planning, because of all of these things that are swirling in our mind.

We’ve talked about, many of them here is really, to Gen X in terms of debt that might be hanging around, thinking about the college for kids, or grandkids, caring for elderly parents might behind on retirement. Should I be thinking about diversifying other revenue streams? The list goes on and on. So much value from my perspective of the planning process, and what you’ve done, even with Jess and I is, “Let’s get all of these out of our head, onto paper. Let’s talk through them, let’s prioritize them, let’s beat them up. Think about how they fit in with the bigger vision of the plan and where we’re trying to go, what we’re going to try to do. Even if those numbers don’t change drastically tomorrow, we’ll get there over time.” Having that plan just provides an incredible amount, I think, of confidence, and hopefully, at some level, some peace as well.

[00:18:59] TB: Yeah. The plan touches so many things. We touched briefly on the investment retirement stuff. You could talk about just that whole thing for Gen Xers. It’s like, okay, what does retirement look like? Is it early? Do we have dollars that we can access, if it is early retirement? If it’s not, what’s the plan for that? Is the asset allocation correct? Are you working with an advisor and paying too much in fees? What are they actually doing for you? We’ve got a lot of clients where it’s like, when the comparison of what we do at YFP, which versus what an advisor somewhere else would do. It’s a different offering.

Again, I think, that the nice thing about Gen X is that they’re not shut out of the game of financial services, like Gen Y. Because Gen X, at least has investable assets that can be managed, and that’s typically what advisors look for. If you have negative wealth and no money to invest, most advisors will say, “I can’t help you.” Gen X doesn’t have that, and so you have that problem, because if they’ve changed careers that they’ve accumulated money in their IRAs over time, they do get attention. Is it the right attention, is what I would I would argue?

The other thing that we haven’t talked about, that’s about this is, is the protection stuff or the financial plan. Over time, things change. Are your life and disability safe? What are the deductibles? Do you need umbrella policy? We could probably go back to the episode that we have Cameron Huddleston on, which is, Mom and Dad, We Need to Talk.” Not just having a state document for you and a state plan for you, but your parents.

It was also, it could be where you are to a point, as a Gen Xer, where there is more that you can potentially give and maybe, there’s charitable intentions and could be a lot of – sometimes we see Gen Xers that have worked some of these things, it’s that big-pot-of-money syndrome. It’s like, “I have $80,000. I have money in my investments. I have $80,000 in savings account.” Okay, what’s this money for? What are we earmarking it for?

Then, if we’re expecting inheritance, what’s that going to be used for? Have we reviewed our emergency fund lately? There’s so many things here that, I think, Gen X, especially as they proceed through and they’re approaching their peak years of earnings, just need to make sure that they’re not on – I hear autopilot all the time when it comes to a financial plan. There’s typically, tons of things to look at, and do and plan for, and assess. As you’re taking care of parents and sending kids to college, and the one thing we haven’t talked about is taxes, and what that looks like, there’s just a lot – there’s just a lot on the plate.

To me, it just goes back to the idea of sitting down, and building out a plan, but then engaging in the act of planning. As the years go on, and you’re in this last decade, or two of earning, so you can set yourself up for the best retirement that you can.

[00:22:02] TU: Two resources, Tim, I want to point folks to that build on some of what we’ve been talking about here. You mentioned that interview with Cameron Huddleston, who wrote Mom and Dad, We Need to Talk. Great conversation I had with her about how to effectively talk with your parents about their finances. So many good takeaways that I’ve been able to apply in my situation. That was episode 108. We’ll link to that in the show notes.

Then the second thing, we’ve been talking a little bit about kids’ college education, and that was episode 195, where we talked about how to save for your child’s education. That highlights some of what you were sharing in the “thirds” approach. Tim, one of the things I want to ask you about is, I suspect many in Gen X, you’ve given some data here about folks that may not be on track “statistically” or what they think they should be in terms of retirement savings. There’s probably that lingering feeling of like, I’m behind. I’m also maybe trying to pay off some student loan debt, but I’ve got all these other competing expenses that are taking on some of the priority as well.

The question here relates to how to get past that inertia of feeling behind. The best time to invest would have been 20 years ago. The next best time is right now. How do you begin to coach folks through not having that mindset, or approach of like, “Well, at this point I haven’t done it. Therefore, I’m not going to be able to get to that goal anyways.”

[00:23:20] TB: Yeah. I think, I equate it to for some people, it’s like going to the doctor. You don’t want to go to the doctor and talking about, like if you smoke, or if you’re overweight, or things like that. You have this block that, that you know that the answer is bad. There’s this feeling of being judged. I think, from the professional standpoint, we’ve seen it. We’ve seen a lot of things. Just like, doctors have seen it all. It’s not about that. It’s just about changing course, and saying, “Okay, this is what happened, or this is what’s happening. How can we make this better? How can we proceed?”

The thing that, and I hear this all the time, even from clients that we have that are younger, that are in their 20s. I hear throughout all the generations. Really, it’s like, I’m never going to be able to retire. I’m always going to be working. I think for Gen X in particular, because of some of the downfalls in the market, and the investment in education, being under employed, at least from the beginning, that is that pessimism. There was a study by, I think, it was T. Rowe Price that said, 12% of Gen Xers say that they will retire before age 60. Compared to 26% of millennials.

Millennials are more optimistic about that. I guess, to bring it back in terms of where to start, my belief in financial planning is very – it’s very absolute. Meaning, I think, if you engage with a professional, an objective third-party that has your best interests in mind and is really rooting for you to achieve the goals that you want, I think if you do that for years, we have people that really do well with their financial planning in a span of a year, or two, or even three. If you can imagine stacking a deck – If I’m a Gen Xer and I’m 50, and I know that I have a decade left if I want to retire by 60, you can do a lot in 10 years. You can.

If you’re a younger Gen Xer, if you’re 41, if you’re my brother’s age, 1980, and you have say, 20 years, or even 25 years, there’s just so much that you can do in 20 years. If you’re stacking intentional years of working on your financial plan, and thinking about it and revising your goals, and making adjustments and protecting yourself and having those conversations of like, “Hey, is this what I really want? Am I on track?”

There’s this feeling. I think, sometimes it happens with our clients, even just through the first meeting, where they just look at and they can see their balance sheet and all of their things. Then even more so, the second meeting, we’re actually talking about what are their goals, what is a wealthy life for you? Just to have that exercise, to go through that exercise, I think, is empowering. Then it’s like, “All right, let’s get to work and actually get into the financial plan.”

I look at as a very much a glass half full. Whereas, I think, a lot of people, it’s a glass half empty. We know that inertia is a thing. You’re more likely to do what you’re doing currently, than to take the leap to do something different. I think, to answer your question that you originally answered, I think it’s – You have to get over that, because at the end of the day, you’re going to have to get over it, eventually. Whether it’s in your 40s, or if you’re in your 60s, where you have to actually plan to say, “Okay, can I shut this income stream off, that is my livelihood?”

Because eventually, you can’t do the work as a pharmacist in your – It’s really hard to do. It’s a demanding profession. To me, it has to come sooner, or later. Then as a planner, I would advocate sooner. I would just think of it from a – I’m just thinking of it from a patient’s perspective. I’m sure, lots of pharmacists work with patients, which have those anxieties. If you approach it as well, they’ve probably seen it all, which we have, then just have solace in that that you’re not going to be judged, or it’s more about moving forward from here than anything. That’s the best I can – advice I can give.

I know, I get it. I understand. No one wants to be judged, or a lot – sometimes we double down, because pharmacists are your doctors, you’re educated. That doesn’t necessarily mean that you’re a doctor of money, right? We put that on ourselves, or PharmD’s put that on themselves that they should know better, or things like that. I think, that’s crap, to be honest. I think, Gen X, again, you were dealt a not-great hand, because you’re in that sandwich, where baby boomers, my parents are baby boomers, they’re like, “Buy a house. Don’t have credit card debt.”

I didn’t necessarily want to buy a house right away. That was what you did. You got the best education. You would pay whatever you could to get the best job. You buy a house and you have kids, and that’s it. That wasn’t for me. I feel like, Gen Xers were still put in that. They had that appetite for the non-student loan debt, but then, they also had the student loan debt that baby boomers didn’t experience.

That’s the thing that I have to – I would say, it’s cool. That’s where you’re at in terms of the run of things. I think, millennials learn from baby boomers and Gen X, and more like, “I don’t want to rush into marriage, or a house, or things like that. I want to figure this out first.” You had a little bit more, I think, leeway even than Gen Xers did, because Gen Xers, again, because of all the different recessions and things like that.

I think, that’s where, and even things like forgiveness. Gen Xers are probably looking at forgiveness and they’re seeing all these things come off the board here, all these loans. PSLF and things like that.

[00:29:46] TU: I wish. I wish.

[00:29:49] TB: That would have been nice. Because back in my day, shake their cane. Back in my day, this is how – I had to walk uphill to school and the stone -those are some of the things that you weren’t afforded those, because I think, it was President George W. Bush that put that into effect back in the early 2000s. That’s the thing, Tim, is it’s not a great hand. I think, at the end of the day, it’s what you make of it going forward. Again, the nice thing about Gen X is that a lot of these problems, I think, are fixable, because there’s still time. There’s still time. They’re approaching, peeking earning years, like I said. Again, it’s more of the process of planning and making sure that what they’re doing is what they want to do.

[00:30:32] TU: Yeah, the thought that comes, too, Tim, is it’s a great opportunity to re-ignite the vision. I think that, I’m thinking about all the issues we’re talking about that are getting thrown at Gen X. It’s fair that you might feel beaten down and you feel like, “Man, I’m behind, or I wish I’ve done this, or I wish I’d done that.” To reignite the vision a little bit of, okay, where are we trying to go? What are we trying to achieve? Hopefully, that provides some motivation to get over some of the humps to be able to accelerate the plan into the future.

One other thing I want to ask you about, Tim, we’re going to come back and talk about a lot of these in more detail into the future. This episode is really meant to lay the foundation of some of the financial issues that Gen X is facing. We’re going to come back and talk about social security in great detail in the future, which I think is relevant for folks that are in benefit, for folks that are getting ready for benefit decisions, and for even younger practitioners that are maybe asking some questions around, well, how do I factor this in? What might this mean in terms of my long-term planning savings?

I think, there’s a little bit for everyone to learn as it relates to social security. Tim, from Gen X’s perspective, talk to us about confidence in social security, or lack thereof, and how this may factor into some of what they’re working and facing through?

[00:31:48] TB: Yeah. I think, there’s a T. Rowe Price article that basically, said that there’s very little confidence in social security. I think, it’s something 56% of Gen X expects that social security will be bankrupt by the time they retire. A full 73% agree with the statement that I’m expecting some security benefits when I retire, but nothing as generous as what today’s retirees get. I think, there’s two different things at play. One is, will social security not be there at all when I retire in 10, or 20 years as a Gen Xer? Versus, will it be there, but at a diminished amount?

I’m in the camp that I think, social security will always be there in some form or fashion. I do think that it’ll be either funded with a tax increase, or like a payroll increase, or something like that. Or it will be a diminished benefit, either pushing out for retirement age, or just a lower amount.

I think, an exercise, a good exercise for a Gen Xer, and I just did this recently just to check is to go on this socialsecurity.gov website. You can sign in and actually, see what your full retirement age is, if you retire at this age versus this age, what your benefit would actually be. If you have all the quarters that you need to do to qualify for social security. I think, this warrants probably a full episode, but the confidence is not there.

I hear it. Baby boomers, they feel pretty good about it, because a lot of them are approaching – already drawing on it. Gen Xers, very cynical about it. I think, Gen Y is like, “Yeah, I’m not counting on it.” At the end of the day, and we plan as if it’s not going to be there. At the same time, I think, it will be and I think it’ll be a much lower percentage of your retirement paycheck than the average American. It’s going to be there nonetheless. It’s just a matter of what would that be? At the end of the day, I think, it’s always smart to plan for retirement as if it’s going to be you all the way.

I don’t see it going bankrupt. I think, there’s a lot of people that I respect and following the industry that says, “It’ll be there. It might be a diminished benefit.” At the end of the day, it will be a part of your retirement paycheck, Gen X and even Gen Y as we proceed here.

[00:34:09] TU: Tim, this reminds me a little bit of some of the discussion around loan forgiveness. Not to say there won’t be changes or challenges to social security. I think, this has been well-documented, but some of the fear and angst around public service loan forgiveness. We have to think about, to, what would be the fallout if the plug got pulled, right?

I mean, there’s a lot of people, especially with social security, more so than loan forgiveness that, I mean, that would – especially if you’re 10 years away or less to retirement. That’s a big deal. Might there be transitionary phase, or smaller changes made along the way, same thing with loan forgiveness. We talked about making sure objectively evaluating some of those risks, considering them, but also, looking at some of the upside of the plan.

I like your suggestion and solution of, “Hey, let’s plan as if it may not be there and perhaps, even running some best case, worst case, middle of the road type of scenarios, and seeing how that fits out in terms of other savings that we have, and how social security would be complemented by that.”

[00:35:04] TB: Yeah, funding aside, it makes sense. I wouldn’t be surprised, because we live longer. I think, we’re just living longer. It makes sense for us to work longer than previous generations, because people just live in longer. I think, the fallout of – what we said about the loan forgiveness is that people are on track to count on this program. For the government to say, “Hey, psych, just kidding.” At a minimum, I think it would be grandfathered in. I think, if social security would ever go away, which I don’t think you would ever would, but I think it would at least be grandfathered in, in terms of a new account on this. Anybody born after year 2100 or something like that, then maybe that’s not.

I think, a lot of people, because we are really poor at saving for our future, it’s a necessity that I think, needs to happen. It’s a forced way for us to save for retirement. We pay for it out of our paycheck, so we have to save for retirement. One of the things that was a big headline, as baby boomers were going to retire, is they were going to bankrupt the system, right? I read, I think, somewhere that Gen Xers will outnumber baby boomers, by I think, year 2028. That’s not too far away.

I think, the dynamics in the numbers are changing. There’s going to be, again, a big transfer of wealth from generation to generation, which again, could buoy some of these years. I’m not necessarily doing a great job of saving for the future. Again, that would be where I would have a plan for that. I remember, my parents received a small inheritance, and I think, they redid their kitchen. If that’s a goal, then that’s great. I would also want to make sure that everything is on the up and up in terms of retirement. That’s going to be more so the case for Gen X pharmacists, where they have to go further to save for their own retirement, because the social security benefit, it’ll be there, but a much smaller percentage of that paycheck that you’re going to build in retirement. I think, you’re going to want to have the 401k and the IRAs, and some of these other accounts there to build that out.

Yeah. I think, Tim, it’s probably one of the things that we should probably dedicate a few episodes on is, just that whole picture of what that looks like in terms of security and some of those other things that are going on as you’re approaching retirement age.

[00:37:26] TU: Great stuff. Tim, again, intention here was to do somewhat of a high-level overview of some of the financial issues and challenges facing Gen X pharmacists that are in the YFP community. We’re going to dig into some more of these topics in the future. For those that are listening to this episode, and you find yourself thinking about many of these different priorities financially, whether you’re currently working with a planner, looking for a second opinion, not working with a planner, we’d love to have the opportunity to talk with you to see if the services at YFP Planning are a good fit for you. You can schedule a free discovery call at yfpplanning.com.

Again, as we get ready to turn the calendar into 2022, just another thank you to those that take time out of their schedule each week to listen to the podcast. We don’t take that for granted. We appreciate the feedback, and the encouragement that we get. If you have ideas for future episodes, we’d love to hear from you. Wishing everyone a happy and healthy New Year and looking forward to seeing everyone in 2022.

[SPONSOR MESSAGE]

[00:38:23] TU: Today’s episode of Your Financial Pharmacist Podcast was sponsored by our friends at Thoughtful Wills. If you haven’t created your estate plan yet, we urge you to reach out to Notesong and Nathan. They draft custom estate planning documents, like wills, trusts, healthcare directives and durable powers of attorney that fit your situation and reflect your wishes. This is key. These are custom legal documents created and reviewed by actual attorneys.

Thoughtful Wills created to cut to the chase packages, designed for pharmacists who are ready to get their estate planning in order. You’ll really appreciate their dedication to approachable lawyering, and they charge about half of what most law firms charge for the same documents.

These documents are such a gift to your loved ones. If you haven’t created them yet, please just get it done. Reach out to Notesong and Nathan by going to thoughtfulwills.com/yfp. Go ahead and book a meeting with them. They’ll take such good care of you.

[END OF EPISODE]

[00:39:20] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment, or any other advice. Information to the podcast and corresponding material should not be construed as a solicitation, or offer to buy or sell any investment, or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archive, newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacists, unless otherwise noted, and constitute judgments as of the date published. Such information may contain forward-looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements.

For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 234: Your Student Loan Refinancing Questions Answered

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Your Student Loan Refinancing Questions Answered

YFP Planning Lead Planner, Kelly Reddy-Heffner, discusses commonly asked questions regarding refinancing student loans.

Episode Summary

We last had our guest on the show almost two years ago to dig into the most recent administrative forbearance extension for those with student loans, where we helped you calculate your next moves before the end of that extension in January 2022. With that date right around the corner, it’s time to remove the snooze button and get prepared for those student loan repayments to start up again! Refinancing is one of many options available, and with that in mind, we sit down with our very own Kelly Reddy-Heffner, to cover commonly asked questions about refinancing student loans. Hear how the end of the administrative forbearance period impacts one’s decision to refinance, what to look for when considering various refinancing options, and some hugely important points on consolidation. We also dive into what you may be giving up and gaining when moving your loans from the federal to the private systems through a refinance and who should and should not consider refinancing their loans. Kelly also shares some valuable insight on rates in the current climate, partial refi’s, income-based repayment options, and some crucial questions to ask your servicer. This episode has all the answers you need; tune in now to get empowered on your refinancing journey!

Key Points From This Episode

An introduction to Kelly Reddy-Heffner, and recapping her previous YFP episode.
How it’s a complicated decision to choose the right repayment plan for you.
The two distinct categories of who refinancing is not a good fit for.
A reminder that refinancing is a one-way street from federal to private.
Do checking rates impact my credit score? Be aware of the language used!
Unpacking the option of refinancing more than once.
Reading the fine print on what happens to the loan in the event of death or disability.
Picking a time horizon and monthly payment amount that’s doable.
Fixed-rate or variable? Kelly recommends what to do in the current climate.
We break down the difference between consolidation and refinancing.
Pursuing income-based repayment options, and some challenges with private loans.
Hear about a partial refi of a federal loan.
We reflect on some of the past rates etched in Tim’s mind from his repayment journey.
Thoughts on the upcoming end of administrative forbearance and unlikely extensions.
Kelly shares some parting advice for December that we all need to hear!

Highlights

“It is time to really be prepared and to expect those loan payments to start up again.” — Kelly Reddy-Heffner [0:03:14]

“That interest rate that you’re offered is based on your creditworthiness. Unlike in the federal system where it’s a set rate for the year and it’s predetermined in the private market, it is based on your overall capacity to take on that debt and to pay it off successfully.” — Kelly Reddy-Heffner [0:08:19]

“We recommend picking a time horizon and a monthly payment amount that is doable. We love to see people push a little bit to be able to accelerate that repayment and get it done as quickly as possible, but it doesn’t make a ton of sense to walk into a loan that just isn’t doable.” — Kelly Reddy-Heffner [0:11:35]

“Be knowledgeable. It is time to look at everything with a clear open mind and use the information that we have available at present to make a good decision about if this is a good move for you and the student loans.” — Kelly Reddy-Heffner [0:24:09]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00.4] TU: Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast, where each week, we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, we got a chance to sit down with YFP Planning lead planner, Kelly Reddy-Heffner to talk about commonly asked questions with refinancing student loans. During the show, Kelly and I talked about how the end of administrative forbearance period impacts one’s decision to refinance, what to look for when considering various refinancing options, what you may be giving up and gaining when moving your loans from the federal to the private systems through a refinance, and who should and should not consider refinancing their loans.

Those that are itching to learn more about refinancing student loans, you can head on over to yourfinancialpharmacist.com/refinance, where you can look at current offers, calculate projected savings and download a copy of our free refinancing worksheet to compare multiple offers.

As we wrap up another year of this show and are knee deep into the planning for 2022, I want to say thank you to the YFP community for entrusting us with your time by listening to this podcast. We don’t take for granted your support and encouragement of the work that we are doing at YFP to help pharmacist on their path towards achieving financial freedom.

Also, a big shout out to the YFP team members, Katelyn Boyle and Rose Mercado who are the engine behind making the YFP Podcast a reality each week. Katelyn and Rose, your contributions to the team and the YFP community are truly appreciated.

[INTERVIEW]

[0:01:35.1] TU: Kelly, welcome back to the show.

[0:01:36.5] KRH: Thank you for having me Tim.

[0:01:38.3] TU: Before I put you on the hot seat and rapid fire some common refinance questions for you to answer, give us a brief introduction of yourself and your role at YFP Planning, for those that may not have heard you on a previous episode of the podcast.

[0:01:51.3] KRH: I am one of the lead planners here at YFP and have the privilege of working with clients to do comprehensive financial planning. I’ve been with the firm over a year now, I just celebrated my one-year anniversary, which was great. And I certainly am very passionate about these student loan topics today, talking about refinancing as a potential option fits right in with that conversation.

[0:02:19.9] TU: I suspect we have some team Kelly clients that might be listening saying, “Hey, that’s my planner” so shout out to team Kelly that’s listening. We’re certainly super grateful to have you as a part of the team. So we had you last on the show on episode 220 when we talked about the most recent administrative forbearance extension. And on that show, we talk through how those with student loans should be calculating their next moves prior to the end of that extension, which we now know is at the end of January 2022.

Here we are, about a month away and we’ve had the snooze button on student loan payments for almost two years. Kelly, is this really happening, are we going to be back in action here?

[0:03:01.7] KRH: I sadly think it is and isn’t it funny? I was thinking, when did we first start talking about this but right, it seemed like it was so far in the distance. But I do believe we are here. It is time to really be prepared and to expect those loan payments to start up again.

[0:03:22.4] TU: We have discussed many times, emphasis on many, student loan repayments on the show and we’ve talked about how it really is a complicated decision. There’s lots of options, right? We’ve got all the options in the federal system including the standard tenure repayment, extended fixed graduate host to the income driven repayment plans.

Furthermore, we have forgiveness options, both public service, non-public service loan forgiveness and as we’ll discuss today, the various options you have outside in the private sector through a refinance. All that to say, the decision can be complicated in terms of student loan repayment plan that’s best for your personal situation. I really do believe it’s worth the time and the effort to make sure that you’re evaluating all of your options.

With that in mind, remembering that refinancing is just one of the options, let’s dig into some common refinance questions. Kelly, are you ready?

[0:04:12.6] KRH: I am ready.

[0:04:13.1] TU: All right, here we go, number one, who should not refinance their student loans or who should consider at least that this may not be the best move for them?

[0:04:21.5] KRH: I would say, there are two distinct categories of who this is not a good fit for at present. Of course, if you’re working for a nonprofit or a qualifying employer to receive public student loan forgiveness, then this is not a good option. That usually is a competitive strategy when we match that up against all other options, so that at least needs to be strongly looked at as an option if you work for a qualifying employer. As a subset of that, I think if you run the numbers and non-PSLF forgiveness is compelling, then I think that that would be a reason not to refinance as well.

I will say, the other area which is kind of a little bit of an interesting nuance in our current workplace environment is, if you are thinking about leaving your job or changing your job to the point where you might have lower income or are unsure about the consistency of your income. Then I would not rush into a refinance either, and we’re seeing a little bit of transition happening right now I think.

[0:05:34.4] TU: Good points and I think all of that is a good reminder that refinancing is a one-way street from federal to private, right? We ain’t coming around the corner, back into the federal option ones, we go down that pathway, we’re there. Some of the doors that you were kind of alluding to that we might want to keep open for certain folks, we need to be evaluating that before we pull the trigger on refinancing.

Kelly, number two is, will checking rates impact my credit score? I get this question a lot because one exit we recommend for folks that have determined this is a potential path forward is to do the work to go out, shop around, compare rates. And I think that naturally raises the question as, what impact is that going to have on my credit score?

[0:06:11.5] KRH: Yeah, again, we want to make sure people’s credit scores are healthy because it impacts other things. Getting a requote in general should be a soft inquiry, so those soft inquiries aren’t specifically related to an application for credit, so those are recorded differently on your credit score. They’re noted but they should not have an impact on the overall number.

Now, actually, applying, getting approved – and sometimes the language is a little bit interesting. I looked up one of the loan servicers recently and it does give a disclaimer that by checking this box, you’re kind of giving the green light to have some type of credit checked.

I think when we see that type of language, you should assume that there could be a little bit of an impact, it should be minor, that hard inquiry for a period of time. But that’s why we say the kind of group, the shopping together too is supposed to work where if you do a number of inquiries and close proximity to each other that is going to count as one. Similar to shopping for a mortgage rate as well.

[0:07:21.3] TU: If folks go to our refinance page, yourfinancialpharmacist.com/refinance, we have a spreadsheet that you can download that will help you as you’re shopping and comparing some of those rates especially if you decide to bunch those together as Kelly just mentioned.

Kelly, another common question is, can I refinance more than once? What about the opportunity to re-refinance, perhaps because rates have changed or there might be some bonus offers out there or combination of things, what are the opportunities here to look at refinancing more than one time?

[0:07:49.8] KRH: Sure, yeah. It is an option to refinance more than once, like you are not locked into that rate for an indeterminate amount of time. You should be shopping around when you know that rates are lower, the refinance again is based on wanting to get a lower interest rate. If you’re still in the four and 5% range, current rates are lower than that.

Now, I will say, that interest rate that you’re offered is based on your credit worthiness. Unlike in the federal system where it’s a set rate for the year and it’s predetermined in the private market, it is based on your overall capacity to take on that debt and to pay it off successfully.

It is a little less work than a mortgage as well to refinance a mortgage. I do encourage people to look for those lower rates and to make a change. Even a couple of points can make a big difference in overall what you pay over time.

[0:08:56.4] TU: Yeah, we’ve got a calculator as well and this is you know, great place that folks are shopping around to think about too, “What’s the repayment timeline and the impact of the rate?” Shorter timeline to payoff, obviously, the difference of savings versus a longer time to payoff might be greater, depending on the rates. So, considering that as you’re shopping around rates.

Kelly, one of the common concerns I hear is, “Hey, when am I going to be giving up, when am I going to be losing by leaving the federal system, especially if this is a one way street?” And we often talk about that when it comes to the federal loans, if someone were to unexpectedly pass away or become permanently disabled, there’s some protections there, but what about in the private system? Will loans be discharged if one passes away or becomes disabled?

[0:09:39.9] KRH: I’m heading into typical financial planner territory and giving the Tim Baker answer of, it depends. I think this was a mail bag question about maternity benefits and cause payments a little while back. So similar to that answer, in case anyone recalls that, it really does depend on the loan servicer, but we are seeing a lot more private lenders give those provisions a discharge at death or disability.

So that is something that I would say is appropriate to be asking the lender and reading the fine print, and making sure that you do select a loan that not only is a competitive interest rate wise but also has some of those other features that help you feel more comfortable about making the change. And they do exist out there but not with every lender.

[0:10:35.0] TU: Absolutely and you’ll see that, we have some of that listed on the refinance page but to your point, it really does depend on the lender. And for folks that find themselves, maybe they refinanced, historically, they’re listening to this and are coming to realization, “Hey, I didn’t know that I’m currently working with a company where I don’t have those protections.” A great example of where student loans can intersect with other parts of the financial plan. So, thinking about life, disability insurance policies if that’s the case in your situation, “Can I pay extra towards my loan? If I want to be able to pay these off quicker, can I pay off more each month and is there going to be a penalty incurred if I do that?”

[0:11:10.4] KRH: Yeah, it’s very unlikely to see a loan in the current market space where there would be a penalty for prepayment or accelerated repayment. But again, all in the fine print, all in the details, perfect question to ask as you are considering a refinance. But in general, the answer is yes, you can pay extra. We do encourage when we’re talking to clients about refinancing, we recommend picking a time horizon and a monthly payment amount that is doable.

We love to see people push a little bit to be able to accelerate that repayment and get it done as quickly as possible, but it doesn’t make a ton of sense to walk into a loan that just isn’t doable. It’s really important to make sure that you pick a monthly payment, a term that makes sense and then right, if you have some extra that you can put towards that, yes, whether hopefully or a lump sum at the end of the year, anything will help reduce the overall amount of interest that you pay on the life of the loan.

[0:12:20.8] TU: You can always make extra payments, right? You can’t not make the minimum payment. So, good insights there, I think. Fixed or variable? This is an important question because of how these refinance options are presented, where folks might be looking at, “Is it fixed, is it variable, how do I make that decision?” And then even just thinking about the nature of the variable rate and some of the uncertainty that may come from there.

Knowing this is – and it depends, I’m certain, on one’s personal situation. What are some of the things that you’re thinking through, or asking some questions of a client that might be planning, when making this decision around fixed or variable?

[0:12:54.4] KRH: Well, in definitely, the current interest rates are a big component on decisions so we’re at h historically low rates right now. I would lean towards – and again, it does depend on the individual circumstances, but lean towards a fixed rate because the likelihood of a rate being lower in the future is probably not really likely in our current environment.

If you are going to consider a variable rate, again, the attention to detail is extremely important because you need to know the fine print. How frequently will the rate change or could change by how much, and is there a cap on how high the rate can go? So usually, variable rates are when rates are higher and we’re hopeful that they’ll go down in the future. So we kind of lock in something lower and keep looking for a lower rate. But right now, with fixed, they’re pretty low.

Depending on the circumstance, I would lead towards getting that lowest rate locked in for the duration of the loan.

[0:14:04.0] TU: Kelly, refinancing versus consolidation. I often will get questions from folks when we present on student loans and they may be using the terms consolidation but might mean refinancing. Just break this apart for a moment of what the difference is between refinancing and consolidation?

[0:14:20.8] KRH: Sure, so when you have federal loans, often we’re taking loans out, different semesters. When you graduate, you have potentially ten separate loans going on, maybe even more than that. Consolidation is, you’re taking those federal loans and you are consolidating them into one or two loans. Usually, it’s broken down into subsidized, unsubsidized, for convenience. It doesn’t impact the interest rate of anything. It’s kind of the average of the interest rates and it’s rounded up a little bit, so it’s not improving the interest rate on the consolidation side.

A refinance is you’re either taking those federal loans and you are refinancing them into the private market, so you are moving them from federal to private, or you have existing private loans and you’re refinancing them into other private loans.

Again, as you said already Tim, which cannot be emphasized enough, going from federal to private is a one way transaction. There is no turning back and again, consolidation is a little bit of a one way transaction as well. You can’t un-bundle the loans then. Consolidation can be helpful if you’re staying in the federal system to qualify for loan forgiveness programs or certain income driven repayment plans. We often consolidate to open up federal options. We often refinance to get better interest rate.

[0:15:53.8] TU: Just a really good reminder Kelly, I have talked to a few folks in the last few weeks that, where I could tell they were ready to pull the trigger on either a refinance or consolidation but they weren’t yet fully aware of the implications of what that decision was going to mean, and what that ultimately may lead to in terms of other repayment options and pathways not being open to them anymore.

Just a good opportunity to take a step back, make sure we’re looking at all the options around the table and then of course, refinancing and consolidation may or may not be a part of that path forward. Are income-based repayment options available? Obviously, we know that many pharmacists, especially those that are perhaps making that transition from student or resident to a new practitioner, income-based repayment options allowing for that payment as they ease into that bigger income and bigger payments. Are those something that they can pursue also on the private side?

[0:16:46.0] KRH: Unfortunate that is not a feature of private loans and that is why when I said the categories of people that should not jump into refinancing, this is exactly that reference. Just the option to have income-driven repayment gives that flexibility if there is a period of time where you’re not working or income has decreased. You can re-certify your income within those income-driven repayment plans using a statement, and have that payment re-evaluated and probably lowered based on that new income amount.

That’s the challenge with the refinance is, there could be some provisions for unemployment but there is not a system for, “I’m working less” or “I am working different hours.” And we’re seeing a lot of flexibility, we have – many of our pharmacist clients have seen an increase in those per diem hours, different overtime. You know, if that is fluctuating quite a bit and changing, make sure, if you’re going to refinance, you do pick that right term that fits what you know your income is going to be. Because those private plans don’t have that flexibility.

[0:18:04.7] TU: That’s a great point Kelly. I was talking to a pharmacist earlier this week that is working part-time with variable night shifts, day shifts and that’s income is fluctuating, so really important consideration. The other thing I think you might have been eluding to is, we’re seeing a lot of pharmacists that are out there picking up extra shifts with COVID vaccines and other things, so if that were to change and hours were to come back down, that could have some implications as well.

A good reminder of the value of those income-driven options inside of the federal system. What about a partial refi of a federal loan? Maybe not all of them for whatever reason but can I do a partial refinance of my federal loans?

[0:18:41.4] KRH: This probably would not have been a common question prior to the conversation starting about a potential loan forgiveness, like in bulk amount. Once that became a new story, I think there’s been a fair amount of conversation like “I want to leave a little bit on the federal system to just in case, you know, $10,000, $25,000.” We have not heard a lot more conversation about that towards the end of the year.

[0:19:14.6] TU: Yeah, it’s been quiet.

[0:19:15.9] KRH: Yeah, it has been very quiet so I don’t know if that would really happen. And there probably will be some criteria in place, potentially, for who would qualify for that. But, in general, if you’ve already consolidated your loans, then no. You’ve bundled them, you really can’t separate them out. If they are still individual, then you have the potential to explore if you want to maybe refinance the highest rate one, or a combination to see what really would work out the best.

We do see some of those loans, depending on the year they were taken out, on the federal side, could be in the 3%, 4% range. Again, if you’re shopping for a refinance rate and the rate is in the threes, you know then maybe you’re taking a 6.8% federal loan and into the private side, but if you have like a 3% or 3.5% loan on the federal side, then maybe you’re sticking on the federal side for some of those loans.

We don’t like to overcomplicate strategies, try to keep things simple, straightforward, so just keeping that in mind as a component though. You want to make sure everything is easy to make the payment on time, where does the payment need to go. But yes, we do get asked that. I do think it’s a question that has come up because of the current environment, with the possibility of that bulk forgiveness but I cannot say that that is going to happen at this point either.

[0:20:49.5] TU: Yeah, it has been quiet. And, interesting, Kelly when you said 6.8% as an example, it still makes me squirm in my seat. That was many of my federal loans in my debt repayment journey where it’s 6.8% so thank you for bringing up those negative memories. But good example of what that may be.

[0:21:05.5] KRH: Tim, I forgot. I know, well, I think it is – everyone’s like that 6.8%, it’s so high. It competes with a credit card rate. Yes, I apologize though. I don’t want to send you back to a dark space.

[0:21:21.3] TU: No, it’s just interesting, like I can see it on the screen, you know? It’s just amazing how those get etched in your memories. But the story at the end was good, so that’s all positive. The last question I have for you, perhaps the one that many folks are thinking, and knowing it certainly depends on one’s personal situation, but we’re coming up at the end of the administrative forbearance coming around the corner, and so this question of timing.

When should I consider refinancing with the upcoming end? I think there’s been some rumblings all along for good reasons about, will there be an extension coming? And that happened and then it happened again, and it looks like as you mentioned earlier, here we are at the end. So this timing of refinancing is, I suspect, one that we’re going to see a lot of folks asking here in the next month.

[0:22:03.8] KRH: Yeah, how amazing that when we started talking about it again, it seemed like so far in the distance. I don’t see any indications of payments not restarting. In fact, I would recommend that people follow up with their loan servicer and inquire, like we know the forbearance is ending in January. We’ve definitely seen people’s payments starting anywhere from February through July depending on how they had made their last couple of payments or if they made any payments during the COVID forbearance.

Check in with your loan servicer, reconfirm when that payment is going to start. I think it probably is time for the New Year to shop the rates. Right now, I kind of double check to see what they look like for maybe six months ago, and I’d say there’s still competitive and still similar. Those shorter term rates, like five and seven years, look like a little bit lower than even six months ago. But longer term like 10, 20 year looks slightly higher, but again, still well within the two and half to 3.4%.

Again, it does depend on your credit, what rate you get but I think it’s at least time to start asking the question and maybe work through the numbers. Evaluate how likely you are to qualify for a non-PSLF or PSLF forgiveness program. And it is always about that mindset too. I think we’ve spent a lot of – I hope we’ve spent a lot of the last, is it 18 months now? I feel like I’m still saying a year and a half but I think we’re creeping towards two years.

[0:23:48.3] TU: Almost two years, yeah.

[0:23:49.7] KRH: Somewhere in that timeframe, wherever you’re at emotionally with this, you know we’ve been in a little bit of a hiatus. Hopefully, people have been saving, paying down any other debt that they had or making great other choices along the way. Maybe they were able to do a home purchase, do some other things. So now, get the information. Be knowledgeable. It is time to look at everything with a clear open mind and use the information that we have available at present to make a good decision about if this is a good move for you and the student loans.

[0:24:25.9] TU: Great stuff Kelly. I really appreciate your insights here on this episode and previous episodes, and the work that you do with many of our clients at YFP Planning. Not just on student loans, but obviously this being one part of the financial planning, and an important for many folks and how it fits in with other pieces of the puzzle.

If folks are looking to take action on what they have heard today and specifically for those that are looking to make a move on refinancing or inquire more information, you can head on over to yourfinancialpharmacist.com/refinance. There you can look at current offers, start to get some quotes, run some calculations on potential savings, and as I mentioned previously, download the spreadsheet that we have that we can use to compare multiple offers.

For those, secondly, that are looking for more information about which option to pursue, again refinance being just one of the many options to pursue, we have a student loan analysis service that is intended to do exactly that and that more information is at yourfinancialpharmacist.com/sla. And really the purpose of this is that you would work one-on-one with one of our certified financial planners, so that you could look at all of your options and confidently choose a plan that will save you the most money and align with your financial goals.

Again, yourfinancialpharmacist.com/sla. You can learn more information there and if you use the coupon code “yfp” that is good for 10% off. Kelly, thank you so much. I really appreciate you coming on the show.

[0:25:45.1] KRH: Thank you Tim. And I know it is hard in December, but start putting the money aside if you haven’t started doing that. The runway is starting to close in, so go ahead. December is a nice extra little bit of a challenge to top that student loan payment aside into a savings account, but getting back into the habit is important so it’s definitely time to do that.

[0:26:12.2] TU: Absolutely. You say that so gently but it’s so important. Yes, we need to be getting back into the rhythm, the habits and get ready for what we’ve got. A little bit of time to get ready but it’s going to be here before we know it. So, Kelly, thanks again. And to the community, we really appreciate you joining and we hope you have a great rest of your day.

[0:26:25.7] KRH: Thanks Tim.

[END OF INTERVIEW]

[0:26:27.3] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information of the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog post and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analysis expressed herein are solely those of Your Financial Pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.

Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 233: Tax Moves to Consider Before 2022

Posted on by yfpadmin

Tax Moves to Consider Before 2022

On this episode, sponsored by APhA, Paul Eikenberg, YFP CFO and Director of YFP Tax, discusses how pharmacists can optimize their tax strategy.

Episode Summary

As we approach the end of the year and will soon enough find ourselves amid tax filing season, it’s a great time to revisit end-of-year tax strategies and considerations to optimize your tax situation. Today on the Your Financial Pharmacist Podcast, host Tim Ulbrich sits down with IRS enrolled agent and our own Director of YFP Tax, Paul Eikenberg, to discuss how pharmacists can optimize their tax strategy. Paul has supported hundreds of pharmacists in tax filing and tax planning to maximize their deductions and avoid overpaying. Today he kicks us off with the important distinction between tax planning and preparation, as well as why it’s worthwhile to understand key numbers such as marginal tax rates and AGI. You’ll hear him describe common tax blunders he sees pharmacists making and how to avoid them, including realizing an unexpected balance due on April 15. We cover some of the factors that contribute to that making non-qualified IRA or 401(k), 403(b) contributions and missing key deductions in credits, and the listener gets a look into the two exciting tax services we have on offer to help pharmacists looking for a tax preparation and/or tax strategy and planning solution. To top it off, we’ve even got a comprehensive tax checklist for you to get the absolute maximum out of your tax benefits. This is one conversation you don’t want to miss.

Key Points From This Episode

Paul and Tim catch us up with some exciting happenings in the YFP tax team.
Understanding the important difference between tax preparation and tax planning.
Differentiating your marginal tax rate and effective tax rate as a decision-making tool.
Paul explains the implications of AGI and how to arrive at that number.
Touching on the complicated system of student loans and pursuing loan forgiveness.
Some common tax blunders that you should look out for!
Key credits and deductions that you might not be taking advantage of.
What is going to be available moving forward with child-care and dependent care.
Explaining donor-advised funds and a potential strategy around bunching.
Two exciting tax services: reporting only and year-round planning and reporting

Highlights

“Make sure your tax exposure and your tax strategy line up with your financial goals. The biggest thing that tax planning really does is provide some peace of mind that you’re not making mistakes and that you’re making good decisions.” — Paul Eikenberg [0:08:05]

“Our best practices with YFP is to advise people to, instead of putting the money in the [retirement] funds during the course of the year, put it into an investment account.” — Paul Eikenberg [0:23:26]

“The rules on business expenses are, they have to be business-related, ordinary, necessary, and not extravagant. Ordinary is, if someone else is doing the same type of business, they’re going to have the same type of expenses necessary.” — Paul Eikenberg [0:25:09]

“The donor-advised fund makes it easy to [maximize tax benefits]. Then, you can spread that money out and make the donations from the fund you control. It’s like having your own foundation.” — Paul Eikenberg [0:34:36]

Links Mentioned in Today’s Episode

End of Year Tax Checklist

Project your income, taxes, and withholding
Maximize your HSA contribution
Know your FSA carryover limits and spend accordingly
Consider 529 account contributions
Document side business expenses – Mileage Logs**
Have and execute a charitable contribution strategy
Correct any over contributions to 401K/403B/IRAs
Manage your capital gains
Look for IRS Letter 6419 Advanced Child Credit & Notice 1444-C
Have a system for organizing your tax documents
Select & engage your tax preparation method

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week, we strive to inspire and encourage you on your path towards achieving financial freedom.

This week I had the chance to sit down with YFP Director of Tax and CFO, Paul Eikenberg to discuss how pharmacists can optimize their tax strategy. Paul’s an IRS enrolled agent and has supported hundreds of pharmacists in both tax filing and tax planning to maximize their deductions and avoid overpaying. As we approach the end of the year and will soon enough find ourselves in the midst of tax filing season, it’s a great time to revisit end-of-year strategies and considerations to optimize your tax situation.

Some of the highlights from my interview with Paul include him explaining the important distinction between tax planning and preparation, why it’s important to understand key numbers such as marginal tax rates and AGI. Hearing him describe common tax blunders he sees pharmacists making and how to avoid them. Some of these blunders include realizing an unexpected balance due on April 15, and some of the factors that contribute to that making non-qualified IRA or 401(k), 403(b) contributions, and missing key deductions in credits. Finally, hearing Paul’s end of the year to-do list, your notes already prepared and ready to go for you to take action.

Before we hear from today’s sponsor and then jump into the show, at YFP, we know that filing your taxes and figuring out how to optimize your tax strategy can be overwhelming and stressful. That’s why YFP Tax has opened up its tax filing services to 125 additional pharmacist households this year. Unlike other firms, YFP tax isn’t focused on just completing your tax return. Instead, they provide value care and attention to you and your taxes. Because they work specifically with pharmacists, they’re familiar with aspects of your financial plan to have an impact on your taxes like student loans, benefit packages, side hustles and more. You can visit yourfinancialpharmacist.com/tax to learn more and to put your name on the waitlist. Again, that’s yourfinancialpharmacist.com/tax.

Okay. Let’s hear from today’s sponsor and then we’ll jump into my interview with Paul Eikenberg.

Today’s episode of the Your Financial Pharmacist Podcast is brought to you by the American Pharmacists Association. APhA has partnered with Your Financial Pharmacist to deliver personalized financial education benefits for APhA members. Throughout the year, APhA will be hosting a number of exclusive webinars covering topics like student loan debt payoff strategies, home buying, investing, insurance needs and much more. Join APhA now to gain premier access to these educational resources and to receive discounts on YFP products and services. You can join APhA at a 25% discount by visiting pharmacist.com/join and using the coupon code, YFP. Again, that’s pharmacist.com/join using the coupon code, YFP.

[INTERVIEW]

[00:02:54] TU: Paul, glad to have you back on the show.

[00:02:57] PE: Hey, Tim. Good to be here.

[00:02:59] TU: Question, are you ready for another tax season? Feels like we – you, really, and the team just wrapped up things from last year. It’s been a busy year, right?

[00:03:07] PE: That’s how it feels too. We just finished October 15th, the last of our extensions and are trying to build the capacity this year to do all our internal returns and 125 more.

[00:03:22] TU: That’s exciting stuff. In addition to the work that you’re doing as the director of tax and leading that initiative at YFP, the team is also growing. We’ve got some folks that are coming on board. Tell us about those exciting developments.

[00:03:34] PE: Aurielle was coming on board full time this year. She worked with us last year as a contractor and I’ve worked with her in a previous business venture. Really excited to have her come on board, and help smooth out the processes and build capacity to do more returns. Then Ryan Griffin, who’s a pharmacist and loves to do taxes on the side is coming back this year and working with us again. We’ll be adding some – one or two other contractors that we’ve talked to this year are interested in joining our team. It should be a good group to increase the capacity and help us do a better job for more people.

[00:04:23] TU: I know. Tim and I are super grateful for your contributions to what has made the service that it is today for the other folks you mentioned, Arielle and Ryan. We really believe that tax for obvious reasons, we’re going to talk about much that on the show today is such an important thread of the financial plan. That tax planning and preparation is really best if we embed that into the financial plan and can consider that, both looking back in the filing as we’ll talk about, but also in more the planning, and look ahead and the strategy side of it.

That’s the theme for today’s show, how to optimize your tax situation. Great time, as I mentioned in the introduction, end of the calendar year. Some opportunities to wrap some things up, get some momentum in the new year. We’re going to talk through some of the differences of tax planning and prep, key numbers and terms to understand, some commonly made blunders. We’re certainly not going to address all of these. Some strategies and then a checklist of things to do before the end of the year.

Paul, kick us off. I think, really, with this first part which is the theme, as we think of the others, and this really highlights the intentionality of thinking about taxes. Not only looking backwards, and doing the filing, and the preparation, but also more of the proactive planning. Tell us about the difference between tax planning, tax preparation and why that difference is so important.

[00:05:44] PE: Tim, the way I like to look at it, tax preparation is just historically recording what happened last year. We as tax preparers take your information, prepare a return. There’s not much of an opportunity to have an impact on your tax liability. There may be a couple of things we can do when preparing your taxes that you can adjust before April 15th. But it’s really difficult to have much impact on the tax liability during that period of time. You have to understand that when you’re dealing with tax preparation, it’s really deadline driven. When we get into February, March, and April, we’re working every hour trying to complete returns, chase down information, review and file.

There’s not as much time to pay attention to what could have been done, look at future strategies and really think through how to improve the situation. One of the frustrating things on our end is, when you’re preparing a tax return, that’s the time a lot of problems pop up, and are discovered and it’s too late to fix a lot of times there.

You contrast that to thinking about tax planning’s forward focus. For our clients, we do a lot of tax projections in the middle of the year or towards the end of the year. That’s a great time to look for things that can have more impact on tax liability. It’s just like financial planning. If you’re making the right decisions, they compound over the course of years. Tax savings builds, it helps put more money in your investment and savings accounts. It can help you leverage the income you have if you’re making the right tax choices. The best time to do that is not during the tax filing season.

From planning, we help people avoid common mistakes. Make sure your tax exposure and your tax strategy lines up with your financial goals. The biggest thing that tax planning really does is provide some peace of mind that you’re not making mistakes and that you’re making good decisions about how you’re approaching all t he tools you have to mitigate your taxes.

[00:08:27] TU: Yeah. I think our community will appreciate working and living in the healthcare environment, where we see the importance and value of preventative health care versus that that’s more reactive. We think about tax preparation, got to do it, it’s required, right? Or else the IRS is going to come knocking on the door. The tax planning may not have that same priority in terms of that requirement, but so important in terms of that strategy and what that can mean to the rest of the financial plan. As well as Paul mentioned, the peace of mind.

Paul, as we think about key numbers that folks need to know, certainly there’s a lot that we could talk about here. But I think starting off with differentiating marginal tax rate and effective tax rate is really important because these are terms that we throw around. We’ll talk about AGI here in a moment, adjusted gross income. But I think when people are hearing about certain strategies and benefits, or maybe they’ve been told by a preparer before about what their tax rates are, may not have a full understanding of what that term means. And then what the implications are of how to use that or how helpful it is or is not as a decision-making tool. Define for us marginal tax rate versus effective tax rate, and specifically why that marginal rate is an important decision-making tool.

[00:09:40] PE: Well, let’s start with marginal rate. The marginal tax rate, think of it about as the percentage of tax you’re paying on the last dollar you earned and the next dollar you earned. There’s a lot of misconceptions on how the tax brackets work. Most pharmacists are in the 24% or 32% tax bracket. That doesn’t mean you pay 24% on all your income. You’re being taxed at 10% for some, 12% for the next layer, 22% for another layer and then you’re paying 24%. They average out to what’s commonly known as an effective tax rate. Think of effective as the average tax rate.

But the marginal rates, really the number when I talk to people, that’s the number I want them to remember. What is your marginal tax rate? Because that’s your decision-making number. If you want to make a charitable contribution, if you’re in a 24% federal tax bracket, $100, that’s deductible to a charity, you’re going to save $24 in tax. It helps make decisions on traditional versus Roth contributions. You’ll understand what the tax ramifications are.

Today, HSA contributions would save you in taxes. Just having that marginal tax rate, knowing what it is helps make a lot of decisions on earning more money, or how the deduction is going to affect you. When I talk to our clients, that’s one of the most important numbers I want them to remember is where they fall in that marginal tax rate.

[00:11:33] TU: In ballpark numbers, Paul, knowing that, of course, it’s dependent upon one situation, whether or not they live in a state where there is tax or is not. Ballpark numbers, what do you see in terms of many of the clients from a tax perspective of the marginal rate and the effective tax rate?

[00:11:52] PE: When we looked at federal alone, a high percentage of our clients are in the 24% marginal tax rate and see their effective rate in the 17%, 18% area. State taxes, you can live in Florida, Tennessee, Texas and you have zero income tax. California, you see people 9%, 10%. Maryland, when you add in the local tax, you’re up to eight. It’s everywhere between 0% and 10% for the states. You need to calculate that in with the federal for really what your marginal rates are going to be.

[00:12:40] TU: I think the other key number for folks to make sure we’re defining and thinking about the implications would be AGI. When I think of AGI, everyone has likely heard of whether it’s considerations around student loan payments, or phase-outs for certain credits or deductions. Often, those are referenced according to someone’s AGI and the phase-outs based on AGI or adjusted gross income. Paul, tell us what is the AGI. How does that connect to one’s income and what’s subtracted from the income to come up with the AGI and then some of the reasons why that AGI number is so important?

[00:13:18] PE: Let’s talk about what the income is. Gross income, you add all your wages, dividends, interest, if you have capital gains, side business income, any money you’re bringing in, typically gross income. They’re what’s known as above-the-line deductions. The most common things we see are HSA contributions, 401(k), 403(b) contributions. They reduce your AGI. Reduce that gross income, gives you the adjusted gross income. Teachers will see some educator expenses. Residents will see student loan interest that can come off of there. But those are commonly referred to as above-the-line reductions and affect the AGI. You take all that income, reduce them by the above-the-line deductions and you get your AGI.

Now, where we see that really come into effect are student loans, where payments are based on income and will also lower AGI, lowers your payments. Lower payments increase the value of the forgiveness program. They do have a big effect on a lot of pharmacists. It’s a number that we work with people to manage as best they can. Make sure they’re using all their tools to take advantage of those programs.

The other thing you’ll hear a lot are phase-outs. This year, the child credits get reduced when a married filing joint couple’s AGI is above $150,000. You start to phase out there. Child care credits, start phasing out or phasing down. They don’t phase out at $125,000 AGI.

There are a lot of things we see our clients are affected by AGI. There are cases where contributing a little bit more to an HSA or make more into a retirement program can not only affect that marginal rate you’re paying, but can substantially affect some of the credits that would be available to you. The other thing that AGI is a factor in, is your long-term capital gain rates. It’s an important number to manage and work into your tax strategy.

[00:16:03] TU: Yeah. Paul, a couple of things I want to highlight that you said that are really important. Your comment just a moment ago about depending on where you’re at with AGI and some of the phase-outs, it might be helpful to make an HSA contribution, 401(k), 403(b). Obviously, depends on someone’s personal situation. But that highlights what we just talked about a few moments ago of really the differentiation between the preparation and the planning.

If we’re simply going through that preparation and we realize what’s been – and perhaps it’s too late, maybe we make an adjustment for the future. But if we’re planning and proactively looking ahead, we have an opportunity to project where those rates are going to be. And then what are some of those levers that we could pull to really maximize that situation.

The other thing I want to mention to make sure we don’t gloss over, and I think we’ve done so much of this at clients at YFP Planning that perhaps we take it for granted, is that student loans for good reasons, they’re very complicated. Unfortunately, the system is probably more complicated than it needs to be. Tax preparers and accountants may not necessarily be really well versed in student loan repayment strategies, and the intersection of the student loan repayment strategy and tax planning and preparation. We’ve gotten that feedback so many times, of folks that may have talked with someone else and didn’t understand the student loans or got conflicting advice. I think, really making sure for folks specifically that are pursuing loan forgiveness, that you’re really considering how that tax strategy is interfacing with that student loan repayment. Because there are some situations that, filing separately versus filing jointly, that may not be intuitive from a traditional tax planning preparation standpoint, do make sense when it comes to loan forgiveness.

[00:17:41] PE: Yeah. It will almost always cost you more in taxes to file separate. But there are so many cases that we deal with the savings and the benefits on a student loan, just more than make up for it. Substantially more than make up for it in some cases.

[00:18:00] TU: Next thing. Paul. I want to pick your brain on was, some common tax blunders that you’ve seen and things that folks may be on the lookout for. We’re not going to go through an exhaustive list or we’d be here for a long time. But a few things I want to highlight, probably one of the more common things I think we see, and perhaps leads to some headaches for those that are going through the filing phase, is realizing that they were under withholding. Tell us about that, Paul, and why that may be and some of the things that folks can be thinking about to prevent that.

[00:18:33] PE: Yeah. It’s one of the more painful things for both the tax preparer, and the client is when you say, “I know you’ve got a $5,000 refund last year, but this year, you owe $5,000 in taxes.” We see big swings when maybe you got married this year, and your W-2 is now filled out, married, filing joint and it’s not filled out in a way that your employer takes into account your spouse’s income. If you switch jobs in the middle of the year, sometimes the W-4 just don’t match up and you’re under withheld. If you’re working side jobs, if you’re not completing that tax withholding form correctly, you’re employed, both your employers are not taking into account the wages you’re earning at that secondary job.

Multiple jobs, spouse’s earnings not being calculated in are common things. The other items that kind of cause and contribute to that is, maybe you have self-employment earnings and you’re not only got income tax on that, but you’ll have the self-employment tax. If you had capital gains or stock options, sometimes those are going to sneak up and cause a tax liability you weren’t thinking about. This year, you’ve really got to be prepared in thinking about, if you receive the advanced child credits since July, and your AGI is over that phase out, some of that money or all of that money is going to have to be repaid. There’s a chance you weren’t eligible for any of that. You really need to be prepared if you’re getting it and you know your income, your AGI is going to be over $150,000. You should be thinking through whether that might be causing you a problem.

[00:20:36] TU: We’re running out of time, Paul, for folks to opt-out of any of those payments, have they been receiving them.

[00:20:41] PE: December is the only one you can opt-out now, and I believe it’s November 29 that you have to do it by. Just be aware of that one hit. That could cause some unexpected problems.

[00:20:56] TU: Better to find out in November, December than March or April.

[00:20:59] PE: Yeah. That’s what we always say is, if we can identify the issue in October, November, we have six months to be ready for the tax bill. If you find out in March, we’ve got to be ready to pay it right then and there.

[00:21:16] TU: That being a common blunder, unexpected balance due on April 15 as you mentioned, less than ideal for both the preparer and the client. The other bucket here would be non-qualified IRA or 401(k), 403(b) contribution. So tell us more about how this happens and some of the headaches this can create.

[00:21:32] PE: Switching jobs or having multiple jobs is where we’ll see the 401(k), 403(b) contributions go over that 19-5 maximum. A lot of people just put the percentage in. If you work for the same employer all year, they usually stop at the maximum. But if you’ve got multiple employers, they are unaware of what amount the other one has put into it.

Usually, if you discover this before December 31, it’s not that difficult to have the funds given back. But W-2s can be adjusted properly and you avoid some of the more difficult and time-consuming ways to correct it, if you don’t discover it till the end of following season. Knowing that it’s a problem before the end of the year and getting it corrected can save penalties and save you from having to go through the amended returns.

With IRAs, with pharmacists, the phase-outs, it’s more than likely you’re phasing out on your ability to do traditional IRAs. There are limitations on SEP IRAs. There’s a misunderstanding of what the rules are on them. Especially the SEPs, you really don’t know until you do your tax return. How much you can contribute to a SEP is very common. We see people contribute to traditional IRAs. SEPs that are over what they can contribute. Roths as well, and there’s a lot of hoops to jump through to correct it after the fact, where it’s better – our best practices with YFP is to advise people to, instead of putting the money in the funds during the course of the year, put it into an investment account. When we get an exact number, which you qualify for, you’re able to put those in the IRAs up till April 15th and we can deal with actual numbers rather than guessing what you qualify for.

[00:23:53] TU: Then having to correct it later, potentially.

[00:23:55] PE: Yeah. We’ve had people that have had to file two, three years of abundant returns to correct over contributions to IRAs.

[00:24:06] TU: The third bucket of potential blunders would be missing deductions and credits, of course, that may be applicable to folks. There’s lots of deductions and credits to consider, whether that’s childcare credits, adoption credits, tuition deductions, property taxes, charitable contribution. We’re not going to go through all of those. But Paul, are there some of these that jump out of common ones that we see folks overlooking or not taking advantage of?

[00:24:31] PE: Yeah, refis in home purchases. A lot of times when you’re purchasing a home, you’re paying your property taxes in advance and that gets overlooked frequently. Are the property taxes paid at the time of settlement? If you did refi or have a home purchase, you want to have that settlement sheet available to go through and see if it helps with itemized deduction. Side business expenses, if you have a side hustle, document everything you think is a legitimate expense.

The rules on business expenses are, they have to be business-related, ordinary, necessary, and not extravagant. Ordinary is, if someone else is doing the same type of business, they’re going to have the same type of expenses necessary. If you think of it as anything you are spending to get customers or grow how much business they do with you, there’s the argument that that’s a legitimate business expense. Their cell phone, internet cost, some of your continuing education, are all things that can legitimately be switched to a schedule C business. Not all of it, but a percentage of it that you can make a case or business expenses.

Then, one of the things, if you’re not maxing out your HSA, you should be matching out your HSA. People leave dollars on the table with the HSA contributions.

[00:26:15] TU: I think it’s just a good reminder, Paul, as you mentioned, side hustle expenses and the guidelines in the IRS that they have to be business-related, ordinary, necessary, not extravagant. We’re seeing more and more clients at YFP Planning, more folks in the YFP community that are pursuing side hustles or generating additional income from the W-2 income. Certainly, something to be thinking about and planning for, again, hopefully proactively. Which is a good segue into talking about some strategies to optimize one’s tax situation. You’ve already mentioned a couple and we’ve talked about some of these at length on other episodes.

You mentioned HSAs as low-hanging fruit. We’ve talked before about HSAs in the podcast. We’ll link to that in the show notes. You mentioned the side hustle expenses, and we talked briefly about the child tax credit. A couple others that I would like to focus on, Paul, starting with the child care credit, since this was an increase that we saw in 2021 and may be applicable for many that are listening. Tell us about that child care credit and the changes that we’ve seen this year.

[00:27:15] PE: Yeah. This was part of the recovery program. Right now, it’s only been increased for 2021. But you know, we expect that the next legislation that comes through is going – this is going to be a prime factor in it. Child care costs in 2020, you were able to take a credit for up to $3,000 for one child, $6,000 for two or more children. Most pharmacists qualified for 20% credit on those. Two kids, you are qualified to get up to a $1,200 credit. 2021, the amount that the credit is based on it is now $8,000 for one child, or $16,000 for two or more. Maximum credit is $3,200 for most pharmacists this year. For the child care credit, in 2021, you’re going to be looking at probably a 20% credit on $16,000 of expenses, $3,200 hours. Most pharmacists with two children or more. That’s what’s going to be available.

It’s a substantial increase in the amount of credit that’s available and it reflects – it better reflects the actual cost of childcare that we see, then that $3,000 and $6,000 power plant. That’s going to be a good benefit to a lot of the clients we work with. The other thing to look at is the dependent care FSA. That’s a great benefit that we see available to pharmacists that a lot of them are taking advantage of. But you can shift. The limit was $5,000. It was increased to a maximum of $10,500 that can be taken out of your wages and reimburse you for the child care expenses. The advantage of doing it this way, over taking the credit is, if you’re in a higher marginal tax rate, then the 20%. It’s better to have it in the dependent care FSA.

The other big advantage there, two advantages is, it reduces your AGI. The money that is withheld from the W-2 is not subject to the FICA tax. You could save another 7.65% there. It’s a great program if your employer offers it. Not all employers have increased the limit to $10,500. You really need to check what’s available to you through your employer. But if you have it, and you’re paying child care expenses, take advantage of it.

[00:30:09] TU: I’ve heard you say before, Paul, this is one of the more underutilized benefits that we see. Obviously, for those listening that have children, between the childcare credit, the dependent care FSA changes and the child tax credit, lots to consider here. And making sure we’re taking advantage of some of those opportunities.

[00:30:24] PE: Definitely.

[00:30:25] TU: The other thing too, and we won’t go into detail on today’s show, because we’ve talked about it several different times in the podcast related to 529s. But again, on the theme here of children and the context of college savings, that’s another optimization strategy to consider. Obviously, taking advantage of some of the state tax considerations and benefits there. We’ll link to previous content and 529 in the show notes.

Paul, I do want to wrap up this section on benefits talking about a topic that we have not talked about in detail on this show. Tim Baker and I did a question on ask YFP CFP on donor-advised funds, but we didn’t get into the strategy of bunching and some of the nuances of the donor-advised fund. For those that are looking at charitable giving opportunities, tell us more about what is a donor-advised fund and what is the potential strategy around bunching versus not bunching.

[00:31:19] PE: Donor-advised fund is an account you can set up, [inaudible 0:31:26] have an account. There’s a lot of faith-based organizations that have donor-advised funds available. But basically, you make your charitable contribution to that fund. Then you’re the one that controls how it is distributed from there, and it can be distributed over a period of years. It’s tax-deductible in the year you put money in. But it’s an opportunity, it gives you some tax advantages and gives you an opportunity to be more strategic about how you give.

One of the things that it does is, it makes donating appreciated assets easy. I have a fun setup and I can donate stock that I’ve had a significant gain on. When I do that, I’m not paying capital gains tax on the stock I’m donating. Let’s say I paid $5,000 for a stock that’s now worth $10,000. I get a $10,000 charitable deduction when I switch that over. I don’t pay $5,000 capital gain tax. It is one of the best ways to maximize the power of your donations to do more with less.

Donor-advised funds makes that easy and all that money is deductible when it goes in there. Now, that becomes a big advantage when you start talking about a bunching strategy. A lot of people, when the 2018 tax change came in and the standard deduction was raised, are kind of on the edge of being able to itemize or not itemize. When we talk about a bunching strategy, it’s, let’s say bunching charitable contributions in odd years. Instead of making a $5,000 contribution in 2021 and 2022, I’ll make a $10,000 contribution to the donor-advised fund in 2021. I get all of that $10,000 deductible in that 2021 year. That may put me $5,000 over the itemized deduction limit. The next year I take a standard deduction.

It is possible, without changing the amount of money donated in those two years, that I get an additional $5,000 worth of the standard and itemized deduction added together for the two years. Could be as much as $5,000 more than if I donate the money $5,000 one year and $5,000 the next.

[00:34:28] TU: Just by grouping those together, the dollar amount didn’t change, but putting them together maximizes the tax benefits.

[00:34:35] PE: Yeah. The donor-advised fund makes it easy to do that. Then, you can spread that money out and make the donations from the fund you control. It’s like having your own foundation. There are a lot of different options out there. There’s different investment opportunities with the money in it. There can be minimums, some different costs. But you put money in there, the capital gains on money left in there grow without tax. We see people who have stock options that have gone through the roof, can really do an amount of good, and wind up 50 cents on a $1, sometimes, of being able to increase the value of their contributions by that much.

[00:35:29] TU: My hope, Paul as we’re hitting the surface on several different optimization strategies is that folks aren’t feeling overwhelmed, but hopefully an opportunity to say, “Wow! How can I better strategize my tax situation?” I think this again, comes full circle and highlights the benefit of really more of the strategy side of the tax binding in addition to making sure we get that preparation taken care of.

We’ve got a checklist of things that we think you should be thinking about before the end of the year. We’re going to link to these in the show notes. These include much of what we talked about on the show around HSAs, and thinking about FSA carryover limits, 529 contributions, side business expenses, capital gains, preparing for the tax preparation phase, organizing documents. We’re going to put that list in the show notes, which will hopefully help wrap up the year and head into the new year with some confidence. I think that’s a good segue, Paul into what we are offering at YFP tax as two different options to help pharmacists that are looking for a tax preparation, and/or tax strategy and planning solution.

Paul, tell us more about our two options, the reporting only, and the year-round planning and reporting, and what folks can expect from that service and where one or the other may be a good fit.

[00:36:47] PE: We kind of talked about in the beginning, the tax preparation reporting only is just doing your historical tax return and meeting with you and just talking about is there anything you can do that may change the tax situation for the year. The reporting only is good for, if all your income is coming from W-2, if you don’t have a business or planning on having one soon, don’t have real estate income or any substantial retirement or investment accounts, at this point, all your income comes from inside the country, that may be a good fit for you. You’re really not getting the expert advice, you’re getting preparation and kind of basic information on what happened last year and not so much of the future. That’s a fee. We’ll have a base fee, and if you require additional schedules, there may be additional cost if you move from one state to another, maybe some additional costs. It’s more flat lay transaction, we prepare your taxes.

What we’re introducing this year is a year-round planning, which, if you’re self-employed, if you’re thinking about starting a business, have that side business, if you get K-1s from partnerships or LLC, real estate holdings, if your investments have grown and your retirement accounts are nearing that $100,000 mark, maybe there’s things that you’ll have options that somebody else may not. Multiple streams of income, income from outside the US, these are all things that probably point you in the direction of needing a year-round planner.

The expert advice will have a bigger effect on your situation, and having a long-term partner to help you reach your goals. That’s kind of what we’re positioning to work with you on a continuous basis. When we do this, we’ll meet with you, do the taxes and the tax review. We’ll talk about the upcoming years as well as last year. We’ll meet with you during the course of the year to do a projection of where you are and talk about things that we can do in the third quarter, fourth quarter to prepare and make sure we’re ready for the following year. With that, we’ll have a team available when you have questions during the course of the year to answer those questions. That is where we’re geared to have the most impact for clients and pharmacists that want to work with us. I think that we’re well situated and prepared to be a long-term partner and that’s what we’re looking to do.

[00:39:54] TU: Again, two options we have, as Paul outlined, the reporting only and the year-round planning and reporting. More information about both, you can find at yourfinancilpharmacist.com/tax. We’re excited to be opening up the tax services to 125 pharmacist households. First come first serve. Many may already be aware that we do tax planning preparation for those that are clients of YFP planning. We’re going to be opening up these 125 spots to those that are not currently clients as we’ll be doing that work already for those that are clients. Process works and go to yourfinancialpharmacist.com/tax to learn more information. You can join the waitlist.

Early January, we’ll be sending out an engagement letter. You can then upload your documents, complete a questionnaire. We are a paperless tax processing and system. Then from there, there’ll be a completion of a preliminary return and then an opportunity to review that information, sign it and then e-file it.

More information in yourfinancialpharmacist.com/tax. Paul, grateful for your time, expertise contributions on the show and looking forward to the upcoming tax season.

[00:41:02] PE: Thanks, Tim.

[OUTRO]

[00:41:03] TU: Before we wrap up today’s episode of Your Financial Pharmacist Podcast, I want to again thank our sponsor, the American Pharmacists Association. APhA is every pharmacist ally advocating on your behalf to address the issues that are affecting you most, such as PBM, and payment reform, value over volume and provider status. Make sure to join a boulder APhA to gain premier access to financial educational resources and to receive discounts on YFP products and services. You can join APhA at a 25% discount by visiting pharmacist.com/join and using the coupon code, YFP. Again, that’s pharmacist.com/join, using the coupon code, YFP.

As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding material should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archive, newsletters, blog post and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist, unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements.

For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist podcast. Have a great rest of your week.

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YFP 227: Why Tim Baker, CFP® Bought a Depreciating Asset

Posted on by yfpadmin

Why Tim Baker, CFP® Bought a Depreciating Asset

On this episode, sponsored by GoodRx, Tim Baker talks about his recent decision to buy a depreciating asset, how his journey becoming a Registered Life Planner® (RLP®) impacted his decision, and how he coaches clients considering big financial purchases.

Summary

Your Financial Pharmacist co-owner & YFP Planning Director of Financial Planning, Tim Baker, talks about his recent decision to buy a depreciating asset. He explains why he would purchase an asset that he knows will go down in value and how it became part of his financial plan.

Tim shares what the depreciating asset purchase is and how he and his wife arrived at their decision. After learning a bit about life planning and its incorporation with the financial plan, Tim realized that one of his goals was to make lifelong memories with his family. Tim and his wife decided that purchasing a motorhome was part of their life plan, allowing them to take adventures across the country, creating those lifelong memories, as Tim did with his own family growing up.

He explains how his journey to becoming a Registered Life Planner® (RLP®) surfaced this experience-based purchase and how the financial plan can and should support the life plan. Tim further details his coaching philosophy when working with clients weighing whether or not to make a large purchase. He considers the entire picture, not just the ones and zeros, creating a plan that benefits the client financially, balancing financial wealth with the client’s idea of a wealthy life. Investing in yourself in ways that align with what a wealthy life means to you ultimately makes for a healthy financial plan by taking care of the whole person.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tim, welcome back to the show.

Tim Baker: Yeah, good to be back, Tim. Thanks for having me on.

Tim Ulbrich: Before we jump into your story of purchasing a depreciating asset, you and I were talking this past week about how grateful we are for the journey that has been this podcast over the past several years. We started Episode 01 back in July 2017, didn’t know exactly where we were going to go, how long we were going to do it, but are grateful to be here today, over 225 episodes in, three different shows on the channel each week, recently surpassing an important milestone: 750,000 downloads of the show, so pretty awesome, right, to reflect on that journey?

Tim Baker: Yeah, it’s incredible, really. You know, we talk with a lot of prospective clients that we work with one-on-one with YFP Planning. You know, when you get those comments of like, ‘I’ve been listening to you for so long,’ and you kind of build a relationship with your listeners and you know, after the red drains from my face experience in that, it’s also very something that I’m proud of and I think we should be. And it’s been a good forum to really showcase, you know, like what we believe and our approach to money, and I think this is — and wealth building — and I think this particular episode is another step in that. And you know, it’s just been a great forum for us I think to take something that maybe is a little bit — can be a little bit dry and boring for people and get them excited about it. And I think the podcast has been one of the most monumental things that we’ve done. And that was really kind of the first big thing that we’ve done together, Tim.

Tim Ulbrich: Yep.

Tim Baker: And I think it’s been just a great launchpad for our partnership.

Tim Ulbrich: Absolutely. And one of the great joys we have is, you know, we get periodic emails from those that are listening to say, “Hey, Tim, I was listening to this podcast and I did this or it inspired me to take some action or to work toward this goal,” and you know, those mean so much to us. I think the goal with this podcast is to hopefully inspire, to motivate, to educate, and we believe this topic is a lifelong journey. It’s something that we’ve practiced in our own lives and I’m hopeful that folks find it as a source of inspiration. So all this to say thank you, thank you to the community for listening, for staying with us, for sharing the good news with others as well, and we appreciate those that have been listening to the podcast and many who have even contributed with being a guest on the show. Alright, Tim, it’s confession time. So I’m putting you on the hot seat in front of the 35,000 or so folks that listen to the show each month to really, you know, ask you why as a financial planner did you decide to make a purchase of a depreciating asset. And so let’s just start with the purchase. What was it? When did you make it? And give us a little bit of the why behind that.

Tim Baker: Yeah, so my wife and I, we purchased a Class C Thor motorhome over the summer. It’s about 30-31 feet. It sleeps 10, so it has a bunkhouse, you know, bunker with a cab, kitchen, bathroom, you know, the whole — dinette — the whole 9. And yeah, we purchased it over the summer from a guy here in Ohio. And it was a long time coming — well, I wouldn’t say a long time coming. It was and it wasn’t. But that was the purchase that we made, and for someone who is very much thinking about finances and things like this and growing wealth, this was not necessarily a move that helps in that department. You know, lots of storage costs and repairs and it’s a 20 — I think it’s a 2014 with about 40,000 miles on it, storage, insurance, the tax that we paid on all that stuff adds up. But probably one of the better decisions I think I’ve made, even in — it’s early, so check in with me later — but I think just great in terms of what I think this can do for our family and the experiences that we can have. And that’s really the crux of why we decided to kind of pull the trigger on this.

Tim Ulbrich: So it’s been over a month, right, now, maybe even two?

Tim Baker: Yeah. I think we bought it in August.

Tim Ulbrich: OK.

Tim Baker: So we’re recording here in October. I think August is when we purchased it. Yeah. So — and back up, like this was something — and I give my parents a lot of credit growing up. When I was preteen, my parents bought — we first had a travel trailer growing up, so like we had one of those old conversion minivans and a travel trailer. And we took a trip when the three of us were I think preteens. I have an older brother and a younger sister. And we did four weeks, and I grew up in south Jersey, kind of outside of Philadelphia. And we did a four-week trip to as far west as the Grand Canyon, Mount Rushmore, the Alamo, Yellowstone. And for me, that was transformational. And I think that’s one of the words that I would use for this episode is really that. And you know, it kind of really changed my perspective, oh wow, when you drive west, there’s just — just the topography and there’s just so much to see and people are just different and they speak different. And it really broadened my — I don’t know if I would say worldview, but at least my domestic view of the United States and really kind of lit a fire for me to want to travel and see other things. You know, we did other trips outside of that and my parents would take it up to West Point for football weekends, and it was always like a great reprieve, like being able to go inside and like kind of hang — like chill and not always be buttoned up in uniform and things like that. So I kind of just equated that to freedom. And for awhile, you know, I was like, man, I would love to do this with — I was first thinking like when I retire, so like when I’m in my 60s, 70s, and you know, get a big old rig and drive around. But I just started thinking more and more, and as I went through my experience with life planning, really kind of changed my perception or at least my timeline, so to speak.

Tim Ulbrich: So Tim, I want to talk for a moment, you know, we talk on this show before we — I know the planning team does as well. Anytime you’re making a significant purchase or any purchase, for that matter, it means you’re not doing something else with that money, right? So the economic term here being opportunity cost. So you know, as you’re looking at making this large purchase, I know I’ve heard you talk about real estate as a goal, obviously something that you and I are both bullish on and see a growing interest in our community and in large part why we’ve got the podcast that David Bright and Nate Hedrick are doing a bang-up job leading each and every Saturday. So whether you look at say, hey, could this money go to real estate? Could this money go into long-term investing or a brokerage account? You know, could this money go into the 529 account? I think this concept of opportunity cost is — we often talk about it in terms of the dollars and making a decision, but I think there’s also an opportunity cost to not making decisions as we make the connections of how our life plan is supported by the financial plan. So just to nerd out here for a moment, if you were to put $40,000 or let’s say $50,000 and save that for 40 years at 8%, you know, that’s $1 million. So there’s the $50,000 purchase, and then there’s that hidden cost of what that could be if that money were to grow over 40 years. So just talk us through that process as you evaluated this purchase. I suspect others might be thinking the same as they’re weighing big purchases. Like, how did you both consider the opportunity cost and then eventually get to the point where you overcame just the mathematical aspects of it to determine that this was the right decision for you, for the family, and the goals that you guys have?

Tim Baker: Yeah, it’s a great question. And you know, I think for all the way up until almost like go time, you know, it was real estate investment. You know, we — my Ally account that this money was being, like where this money was, was called “Real Estate Investment Account.” It might still be called that. I don’t know if I ever changed it to like “Motor Home Account.” I mean, it’s fairly empty now. We paid cash for this, and I didn’t want to put a note on it, so I wanted to kind of keep in the budget that we were — that we had. But you know, I think it comes down to like windows, right? So I’m really bullish on real estate, and we have one property that we completely gutted and redid our home in Baltimore and are renting that out now since we’ve now moved out to Columbus, Ohio. And that’s been great. And I wanted, I definitely want to do more of this. But when I say “windows,” it’s kind of windows of time. And that’s what life planning is really about. And you know, specifically about the length of your life, but in this case, when we sat down and we were looking at our plan, I asked my wife Shea, I was like, “Is this really what you want to do?” And she’s like, “Yeah, of course it is. This has been — this is the plan.” And we kind of had this role reversal because I’m more of the — and I see this a lot in couples. I’m more of the person that is thinking like long-term and making sure that we’re doing what we need to do to have a wealthy life in the future. And my wife is typically like, hey, we’ve got to make sure that we’re doing — we’re living our life today.

Tim Ulbrich: Yep.

Tim Baker: But in this case, it was kind of a little bit of a role reversal. And I asked like, you know, I asked the question, is this really what you want to do? And she’s like, well yeah, that’s the plan. But then once I said kind of a combination of these words, she’s like, you’re right. So I basically — what I said to her was, Olivia, our oldest — we have Olivia who turns 7 this Halloween, so in about a week or so. She’ll tell everyone about it. She turns 7 this year. And we have Liam, who turned 2 this year. What I was examining, like I was kind of thinking about this as like, we only really have with her, I don’t know, six, seven years maybe until, you know, we’re no longer cool, like she doesn’t want to hang out with us. You know, you get to the teen years —

Tim Ulbrich: And we’re running out of time.

Tim Baker: Yeah, we’re running out of time.

Tim Ulbrich: Sure.

Tim Baker: And you know, I thought about that even with like the trip that I took that, you know, my brother two years older than me, he was kind of right on that preteen. And we had a good time, but I don’t know — like a summer or two after that, I don’t know if that trip would have worked. So when I put that in context in that kind of emotional tug that that gives you and specifically my wife, she’s like, where do we buy a motorhome? Like where do we do this? And that was really it. You know, that was really what brought us is that, you know, I view this purchase as an investment. You know, so many people view this as an expense. And if you do that, it doesn’t really work. And believe me, there are lots of expenses that are tied to this. But if you view this as an investment, you know, a memory-maker investment, that’s where it works. And I’ve had conversations, you know, we kind of bought the motorhome with my sister and her family in mind. They have twins that are a little bit older than Olivia and our boys are about 10 days apart, so they’re like best bros. So we kind of bought it with them in mind, hoping to share this with their family as well. But they’ve actually been thinking about buying their own and kind of doing big trips and like taking a year of that and all this kind of stuff. And for them, it’s hard to get — like they’re doing it down to the penny in terms of expenses. I’m just thinking — like it’s just tough, that’s a tough sell. It is a tough sell. And I get it. Like as a financial planner, it’s good to do that. But for me, this was really about letting go a little bit. And again, I know in the back of my mind that we’re going to be OK for the future and we’re doing a lot of things in that regard and we have a fully-funded emergency fund and all of those things. But to me, like the emotion, which is what drives our choices of I want my kids to experience similar things that I was fortunate enough to experience as I was growing up, and I think we only have a window of time — and not to say that when she’s a teen and things like that, but when you’re camping, like to me, it’s close quarters. Like you’ve really got to love your kids and your family and I think it gets harder as you get to be a little bit older. But that was the impetus, really. And a lot of that really is rooted in my own life planning journey of how we got to even make this transaction.

Tim Ulbrich: Such a good, reminder, Tim, about, you know, if we only look at the numbers — and here, you’re talking about one thing. I would argue that applies to other things as well where if you’re looking at this only as an expense, we would never make these life planning decisions.

Tim Baker: Right.

Tim Ulbrich: Or these decisions that spark the life, right? I mean, I get the numbers. If instead of buying a motorhome, whether that’s $40,000, $50,000, $60,000, whatever — let’s call it $50,000, if instead of buying the motorhome, you saved $50,000 and you put it into a long-term savings account and it grows for 40 years and you have $1 million. In one, we’re looking at $50,000 of a purchase that’s going to go down in value and has other expenses. And in the other, we’re looking at an investment that’s appreciating and is going to be worth $1 million or more. Like but what we’re really trying to highlight through this journey and through the discussion around the planning process and the importance of bringing out these goals and visions that you have for your plan and for the family and for you individually is that it can’t just be about the numbers and the expense. And Tim, you’ve mentioned a couple times now life planning. Tell us more about what is life planning and how did your journey in going through not only your own life planning but ultimately being registered as a life planner and being able to use that skill set for clients of YFP Planning and training the rest of the team? Like what is that life planning process? And how did going through that journey ultimately lead you down this decision here?

Tim Baker: Yeah, so I found out about life planning kind of George Kinder, who’s kind of the founding father of life planning, and his three questions. And it’s something that once I went through the three questions myself years ago, I immediately incorporated that into kind of our goal setting. We call it Script Your Plan at YFP Planning. And we’re — that’s what we’re doing is we’re kind of saying, OK, now that we know kind of where we’re at, we’ve gone through a get organized, where is all the — what do the finances look like, let’s talk about where we want to go. So we do the three questions with clients now, but I think for me, what I — it was powerful to go through that myself when I was answering those questions, and I found out that there’s a registered life planning designation, RLP, that I just finished this year. And really, it’s been a couple years in the process that I have been going through that. What life planning is, to back up, they say it’s kind of financial planning done right. It’s really about putting first things first. You know, we often live our lives by like a paradigm that is not ours. It’s been kind of something that’s been dictated to us over the course of our lives, you know, get good grades, get a good job, earn a lot of money, that type of thing. But for a lot of us, we kind of get stuck on that, stuck in that, and we can sometimes fall into this state of not really examining our lives and not really saying like, is this really what I want? Is this what I’m doing right now, is this what a wealthy life is? And again, it’s not just about the 1s and 0s, it’s about what are you passionate about? What enriches your life? So years ago, I went out to Arizona and I did the first step, which was the seven stages of money maturity, which kind of focuses on listening, believe it or not. So as planners, we need to shut up. And so much of us, we see like student loans, OK, this is what you do, dah, dah, dah, dah, dah. And there’s a plan. But it’s really about focusing on your client and being there with them, being present with them, and not trying to overpower or not listen. And it’s about communication, kind of the client-planner attitudes, the biases and behaviors that we grow up with, so understanding that. You know, one being money is the root of all evil. Like where does that come from? Or you know, don’t trust — like some of those things were built into me I think. You know, my mom came from a very — her upbringing was tough. And I think some of those were kind of implanted on me. And you go, I have to understand that. And we see a lot of clients with that type of thing. So that was eye-opening. And really the next stage, which I think was truly transformational, was a five-day in-person training called The Evoke Life Planning Training. And this is where you actually go through the different stages of life planning. So I was life planned myself. And I life planned my partner Dan, so shout out to Dan. And I think this for me was very transformational. I kind of went into that training not knowing what to really expect but came out saying like, I am burnt out. My schedule is not mine. You know, kind of what I’m doing right now is not healthy. And from there, you know, I changed a lot of things. But the big thing that I took away from that was my vision meeting, which is the second — you know, it’s all about uncovering your kind of most exciting, meaningful, and fulfilling aspirations. And when Dan went through that with me and lit my torch, it was about really the motorhome and doing that with my family. And I still remember that meeting like it was yesterday. And you know, you go through that and you know, you create so much energy that that’s all I think about. Like that’s all I thought about for a while. And it took me longer than I thought to get it done, but you know, you could run through walls. And then finally, the life plan that you go through like a mentorship, which is like a six-month thing where you go through case studies and one-on-one guidance and group conferences and things like that. So that finished this year. And to me, the challenge that I have now is how do I best inculcate and integrate, I should say, the life planning methodologies into what we’re doing with clients. Right now, we do portions of it, and I tested out kind of the full Evoke method on clients and trying to figure out how to best balance getting to the core of what a client is passionate about but also making sure that we’re soothing the pain that are student loans, investments, tax questions, insurance, home buying, all that stuff. So that’s my challenge going forward. But I think to me, it’s where you really create and have meaningful relationships, meaningful conversations. And that’s what the RLP is about. And I think without me going through it personally, I don’t think that we would be at this step. And like I said, to go back to the whole if you invest this money, what would it be in 30 years? $1 million. I’m like, that’s great. But I would suspect that if you asked a 30-year-older version of myself, I would trade that $1 million for I think the experiences that we’re going to have with this investment, the RV, and with my family. And that’s I think what this is really about.

Tim Ulbrich: And I think that’s what a good coach does, right, what you just mentioned there is ask that question or ask the right set of questions that get somebody thinking about what might 30-year-into-the-future self think of this looking back? And you know, I think there’s some good accountability in that process. I think as you’ve gone through the RLP and just briefly scratched the surface here, I think that has really enriched the planning process and obviously you seeing the value of that being able to bring that effort to clients of YFP Planning, so I’m grateful for that. Tim, I’m looking at your credentials now on LinkedIn. You’re starting to look like a pharmacist with all these letters after your name.

Tim Baker: Alphabet soup. Yeah, I know. I’m working on a few others.

Tim Ulbrich: I was going to say, you’ve got one coming down the pipe, right, the RICP is coming. So.

Tim Baker: Yeah, if I can study, if I can get studying for it, yeah. I mean — and again, I think, you know, one of the things that one of our core values at YPF is optimize you and you know, I’ve been in organizations where it’s stagnant because hey, we’ve figured everything out and we’ve seen everything. And I think that’s just poison to an organization. So you know, I’m not necessarily one for designations just to get them, but I look at it in terms of what can this provide to our practice? How can this further benefit the clients that we serve? And you know, I think that is important. And you know, having that. And it’s funny. I always kind of go back to this story. When I graduated from West Point, I’m like, ‘Well, that’s it. I’m done with school. I never have to pick up a book or do anything.’ And you know, really that changed more when I became an entrepreneur and now I’m a — I read all the time and listen to podcasts and I’m always trying to figure out ways to do things. And I think, you know, that’s the message really even to our clients is keep evolving and keep sharpening the salt, so to speak. You know, I think that it just, it leads to more of an enriched life but also I think it just can continually improve your skill set. And again, like the RLP, the Registered Life Planning, there are advisors, financial advisors, that have taken this training and have stopped being financial advisors. Like all they do is the front end life planning and then they hand it off to advisors. And I actually thought of like even doing that internally is you know, having just life planners that are doing this front-end work that it’s a form of planning, it’s a form of coaching, and then hand it off to our CFPs to kind of, you know, put a lot of that into practice. So it’s an option that I’ve been playing around with. And I think the cool thing about this is you don’t have to have all of the other financial designations to do this, but to me, it’s how do we further enrich ourselves, enrich the lives of our clients?

Tim Ulbrich: Yeah, and you mentioned Kinder and the three questions. We’re going to link to those in the show notes for those that want to dig a little bit deeper. And for those that are hearing this in real time saying, “Hey, I’m really interested in having a financial plan that also considers some of what we’re talking about here around the life plan,” we would love to have an opportunity to talk with you to see if the services offered at YFP Planning are a good fit for you and the financial goals that you have. We do a free discovery call, you can learn more, schedule that at YFPPlanning.com. Tim, talk me through the process not only that you use but in coaching clients of YFPP that are making a big financial purchase, right? It could be a home, whether that’s a first home, an investment property, a vacation home, could be a car, could be a motorhome. What questions are you prodding to help them reflect upon that purchase that hopefully leads to a situation where there’s a purchase that has confidence behind it and not one that leads to buyer’s remorse?

Tim Baker: I think that you know, this is a process, right? So it’s not — you can’t look at it in a silo. I probably wouldn’t have made this type of purchase without a good, solid foundation. So like you know, cash emergency fund, a good savings plan beyond that, I think doing well in the investments, stable job, all those things. But beyond that, you know, like what we often ask clients is if we get into the Delorean, the imaginary Delorean, and we go ahead five years, like what does success look like? You know? If we look back at those five years. And I like to kind of equate age with that because I’m turning 40 next year, Tim, so like in 30 years, I’ll be 70, which is kind of like where my parents are. My dad’s a little bit older than that. So like trying to put myself in their shoes and like what do I want to accomplish because the further away it gets, the harder it is for us to kind of like feel that time. So I think framing it — and just for a lot of us, it’s actually just sitting down and actually asking some of these questions of ourselves. Like I said, I always tell the story when I was — my first job out of the Army was Sears/Kmart. So I would drive to work in the dark at 5 in the morning, and I would drive home in the dark at probably 6 at night or 7 at night or something like that. And those drives I would never remember. Like I would get in my car, and I was on autopilot. And so many of us, like that’s our life is like we’re not really thinking. It’s kind of an automatic thing, so like even asking ourselves these questions, so I think it’s — that’s part of it. It’s just going through that process and examining is this what we want to do? And if it’s not, what the heck are we doing about it? So like one of the things I say to prospective clients, you know, we might go through the wealth-building stage of the financial plan and we’ll do a nest egg calculation that says, ‘Hey, Tim, you need $5 million to retire.’ And that’s typically where they look at us like we have 5 million heads, right, because it’s a big number that’s in the future that doesn’t really mean anything to me. So you know, we go through the process of kind of discounting that back to a number that says, OK, if you’re putting this into your TSP or this into your IRA or this into your 401k a month, you’re on track or you’re off track, right? So we can kind of break that down into more of a digestible number to see if we’re trending to that goal given, you know, a handful of assumptions. But the point of this story is if we do work together for the next 30 years, and you don’t have $5 million, you have $7 million, $8 million, $10 million, whatever that is, that’s great. Like those numbers are bigger than $5 million. But if you’re miserable because you look back at that list of all the things that you wanted to do over 30 years, 20 years, 10 years, whatever that is, and you haven’t done anything and you’re miserable because of it or you’re disappointed, the question I would ask you is what’s the freaking point?

Tim Ulbrich: That’s right.

Tim Baker: Why get this education, why earn this money, why pay down this debt, why invest, whatever, if we’re not going to intentionally direct it to the things that matter to you most? And I don’t think that I’m going to be on my death bed and I’m going to say, “I wish I would not have bought that RV.” I just don’t think that in my heart of hearts because of just — I just think about the reaction that my daughter and my nieces had, just when we pulled that up. And even the two camping trips that I had, I think I snapped a few pictures and texted them to you, Tim, even in our first camping trips, it’s going to be an adventure. And to extrapolate that out, like that’s our lives. Our lives are adventures. But we have to be willing to take it, you know, and seize it. And I think that’s what life planning really tries to get to the surface is what is that adventure? And taking that road and not necessarily adapt to a paradigm that’s not yours.

Tim Ulbrich: Yeah, and you talked about this, I think there’s some really practical things, right, making sure do I have a good foundation in place? We talked about that on Episode 212, you know, what does it look like to have a good, strong financial foundation in place. You know, looking at the value that this purchase is going to add, what are the alternatives, right? We talked a little bit about opportunity cost. You know, waiting a little bit before making that purchase and feeling that peace and the thought that went behind making the decision. But you know, as you highlighted, I think the example of fast forward looking back and really asking some good questions to reflect on that, so, so important. So and you mentioned that — if I heard you correctly — it’s the Thor, right? Which is great. I just see like Tim Baker behind the wheel of the Thor and think of the Thor films, which is fantastic.

Tim Baker: Yeah.

Tim Ulbrich: Where has it gone so far? Where is the Thor going in the future?

Tim Baker: Yeah, so we’ve just done basically weekend trips in Ohio. We’ve just done camping sites that are within a few hours’ drive. So we went up to Cedar Villa one — that was our most recent one. I think next year it’s really looking at some of the national parks. And it’s a lot — it actually is different than growing up. Like you have to book these pretty well in advance, so if we want to go to Yosemite or things like that. And you know, I kind of look at this as like, you know, some summers of adventure is really to get the kids, especially when Olivia is not in school, and go out and do it, you know? And you know, a lot of it is, you know, just being outside of your comfort zone. I don’t think I’ve ever driven something this big, but it’s fun. And you know, it can be a little stressful, and that can be true for whatever your life plan is is that it can be outside of your comfort zone. But it’s one of those things that, again, I’m tooling down the road and I look back and the two boys are in their car seat just gabbing on and the girls are doing their thing. And it’s brought me a lot of fulfillment already, and I think one of the things Shea and I have a long drive here this afternoon heading back to Maryland for a wedding. That’s one of the things we’re going to talk about too is what is the slate of trips? And start scheduling them. And I’m really excited for that. So it’s a journey. And I’m excited, I’m excited for what’s in front of us and again, to me, I look at this as a window of time with our kids. But just to extrapolate that out further, like we have a window of time, which is our life. And again, to kind of bring it back to life planning, it’s really important that we’re taking full advantage of that and not necessarily leaving anything on the table.

Tim Ulbrich: Yeah, one of the things we’re blessed with here in Ohio, Tim, shout out to the Buckeye State, is just some awesome state parks. So you know, trips locally and I know you’ve got a sabbatical coming up here. So one of the benefits we offer for the team at YFP is when you get to the five-year mark, we’ve got a month off and some funds to take a trip with the idea that we’re supporting the things that are central to the life plan. So pressure’s on, Tim, to be planning that, that sabbatical when it comes to the motorhome. Great stuff, Tim. Appreciate your willingness to share the story. And again, for those that are hearing this and interested in taking that next step with the financial plan, especially considering some of the dreams and goals that you have for you individually or for you and your family, love the opportunity to talk about the services at YFP Planning. You can learn more and schedule a free discovery call at YFPPlanning.com.

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YFP 225: How to Navigate Open Enrollment and Employer Benefits

Posted on by yfpadmin

How to Navigate Open Enrollment and Employer Benefits

On this episode, sponsored by GoodRx, Tim Baker, YFP Co-founder and YFP Planning Director of Financial Planning, joins Tim Ulbrich to talk about open enrollment and evaluating employer benefits. Tim and Tim dig into:

Considerations for choosing a health insurance plan
How to determine whether or not your employer-provided life and disability insurance is sufficient (one of the most common questions we get)
Understanding the differences between an FSA, Dependent Care FSA, and HSA
What to be looking for when putting money into your employer-sponsored retirement plan.

Summary

This week on the Your Financial Pharmacist Podcast, Tim Ulbrich sits down with YFP co-owner and Director of Financial Planning, Tim Baker, to discuss open enrollment and the process of evaluating employer benefits. As you go into making your benefit selections for 2022, Tim and Tim share some considerations for choosing a health insurance plan and how to determine whether or not your employer-provided life and disability insurance are sufficient. Tim and Tim provide a general overview into understanding the differences between an FSA, Dependent Care FSA, and HSA and what to be looking for when putting money into your employer-sponsored retirement plan.

Whether you are reviewing your benefits for the first time or are a seasoned professional with open enrollment, there are many factors to consider. Pharmacists may not think to consult with their financial planners when it comes to open enrollment or the process of evaluating employer benefits, but these decisions affect the financial plan. When choosing a plan for the coming year, pharmacists should consider future life events or changes impacting money spent on medical expenses such as a child being born, marriage or divorce, coverage for a significant other, or a child aging out of medical coverage. The open enrollment period is a time to review history in medical spending, how much is spent out of pocket, and how to optimize benefits and cost savings based on those findings.

Tim Baker touches on life insurance and disability insurance, how to calculate your total need, transferability issues to consider when deciding whether or not to purchase a policy outside of your employer policy, and tax considerations.

Tim Ulbrich closes out by breaking down the differences between an FSA, DCFSA, and HSA. He also touches on retirement savings accounts in conjunction with open enrollment and the opportunity to re-evaluate investing and savings goals and how each fits in with the financial plan.

Mentioned on the Show

Episode Transcript

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

Tim Baker: Yeah, good to be here, Tim. Looking forward to getting into open enrollment discussion. ‘Tis the season. So yeah, I’m ready for it.

Tim Ulbrich: ‘Tis the season indeed. Fall is in the air officially here in Ohio, which does mean it’s almost time for open enrollment and ensuring that we’re taking the time to understand and maximize employer benefits. And I think whether someone is reviewing their benefits for the first time, whether that’s accepting a new position, going through another round of open enrollment, a lot to consider here, including insurance, retirement accounts and HSAs, FSAs, to name a few. So Tim, our team at YFP Planning includes employer benefits as a part of the planning process, perhaps an area that folks don’t necessarily associate working with their financial planner on. So how does this part, employer benefits, factor into the financial plan? And why is it so important that we’re looking at it in the planning process?

Tim Baker: Yeah, I think this is another area, Tim, where like when we say, “comprehensive,” we mean comprehensive. And it’s just like kind of the same conversation with things like home purchase. Most financial advisors are not going to kind of walk you through kind of the A-Z of buying a home because most of the time, a financial advisor is working with people in their 50s, 60s, 70s, right? And the reason for that is because those are the people that have assets, and that’s how they charge their fee. We have many, many, many clients that are in their 20s and 30s. And things like home purchase is really important and is often a big step in their financial journey and their financial plan. So we kind of take the time to go through that based on, I know you’ve said it, I’ve said it, we’ve messed those transactions up in the past, and we just don’t want to see our clients do the same thing. So open enrollment is kind of the same thing. A lot of financial advisors don’t really talk about this stuff because if you’re working with people in their 50s, 60s, like they’ve done it dozens of times, right? So they’ve gone through this. And a lot of our clients haven’t. You know, it’s not something that is kind of what we understand. And so to define open enrollment, open enrollment is the period of time where you can purchase or apply for health insurance for the upcoming year without a qualifying event. And usually a qualifying event is something like a marriage or a divorce or a birth of a child. So it’s typically very centered on the health insurance plan because that’s the big piece of the benefits. But then what the employer does is kind of have you opt out of other benefits that they might offer, which might be life insurance, disability, I’ve even seen things like pet insurance and things like that. You know, some things that are not insurance-related could be like a legal benefit. So that’s what this is is open enrollment. And it’s important because your employer benefits are a major component of your compensation package. And you know, this is kind of the conversation that goes back to things like salary negotiation is I’ve seen clients, they’ll say, “Hey, I’m making $110,000,” and they get an offer for $120,000 but they take a major step back with regard to their total compensation because of the benefits that are associated with that. I think it’s really important to understand what the employer benefits are and how to assess that. So that’s really what’s at stake here is really understanding that piece. And we know this, Tim, because when we plan to hire someone, we know that it’s not just about the salary pay. We apply a multiple on top of that because we know that the benefits that we’re going to provide for the employee are going to be above and beyond that. So that total cost or what I would say is an investment in that person is really beyond the salary. So this is what is really that bell to that. We’re trying to assess an an employee to say, OK, how can I best optimize this part of my compensation. And I would say that there is a lot, you know, a lot of people that don’t necessarily fully optimize this part of their financial plan or give it the attention that it needs because it sneaks up on us or bad information or what have you. So that’s really kind of the overall picture here of what it is and why it’s important.

Tim Ulbrich: Yeah, and Tim, I think when you say sneaks up on us, bad information, it’s important I think for folks, basic stuff before we jump into individual benefits, you know, know your dates, obviously what’s the time span. You know, a lot of employers, depending on how they organize this, will do informational sessions, open Q&As, one-on-ones, group, and some of that might be automated, depending on the system and the platform they’re using. But making sure, understanding the dates, you know, simple things, how much time do you have if you’re going to be on vacation, things like that, making sure you can coordinate with HR. And then also, you know, just taking a look at your pay stub and your benefits. What do you currently have? And really taking a pulse on — and I think just a chance to go back and what’s gross pay, what’s net pay, what’s coming out in benefits, and taking this time that comes around every year as a chance to revisit some of these things that we want to be looking at often. And then of course, just thinking about upcoming changes, right, that might be happening. You know, I think of things like children that might be beneficiaries on the healthcare side, aging out if you think about 26 or folks that might be expecting or perhaps getting married, things that might have an impact on their benefits, considering those things as you’re in the benefits selection. And then of course just refreshing and updating the evaluation of who are the beneficiaries that are listed on certain policies. Tim, I want to start with health insurance. You know, I think it’s the one that typically carries the biggest price tag as we think about it relative to the other insurance and typically carries more options than things like dental and vision and life and disability, which I think for many employers it’s more of a one-way type of option. So the big question here is how do I determine which one to get? And of course, all plans are created differently but when folks are looking at these and you’re evaluating the deductibles and maximum out-of-pockets and premiums and copays and coinsurance, unfortunately, it’s a system that even though our audience is comfortable with all of those numbers because they live in it in the job that they’ve done or have been trained in it previously, there’s just a lot to consider. And if you look at plans, let’s consider a three-tiered plan where you’ve got like a bronze, silver, gold option, you know, you’re looking at OK, less out of pocket, more out of pocket, better coverage, but perhaps I could have lower out of pocket and I could use that money elsewhere. Like general framework, how do you begin to help clients think through this decision and not just look at it in a silo but also consider it in the context of the rest of the plan?

Tim Baker: Yeah, so I think it’s — you know, everyone can say it with me — it depends, right? So you know, I think a lot of it depends on past history or — you know, you mentioned a few things like what’s kind of on the horizon? Is it getting married or having kids? And some of those will allow you to kind of elect insurance outside of the open enrollment period. But those are typically qualifying events. But you know, an example is when we had Liam, when Shea was pregnant with Liam, we opted out of the bronze package, you know, the HSA plan to more of a gold package because we knew that the doctor bills and the hospital bills were going to be there. Our thought process was, you know, although in most cases we’re not going to the doctor a lot, you know, during a normal year, well, electing to a higher deductible plan, which means less coming out of our paycheck but then when we do go to the doctor, there’s going to be potentially more coming out of our pocket. So we did that to get in front of it a little bit. And you know, that’s really important from a planning perspective and kind of mitigating as much of the costs — and we probably saved ourselves if we did the math $1,000 by doing that. So that’s an important part of the plan. Now, sometimes things are going to come up and you’re just not going to — you know, it’s kind of like that emergency fund. You’re just not going to know for the future. But I would say is it’s a little bit of an exercise in looking at your past history, so looking at how often you’re going to the doctor and how often you’re reaching into your pocket to pay for things like copays and things like that. But then also projecting it forward, so that’s kind of where the conversation starts is that, you know, if you’re a younger, healthy professional and you’re not really going to the doctor, then you probably should really consider kind of a bronze, high-deductible, HDHP plan and couple that with the HSA, which we’ve said is a great forum to stash dollars. If you’re looking at regular doctor visits because of a chronic issue or something like that, that’s not going to be for you, regardless of your age. You just know that you’re going to be in and out of the doctor’s office. So I think it’s really looking at, again, kind of the budget and seeing what money has been spent on healthcare costs in the past and then what you think, project those going forward. And like I said, like this is not — it’s important, but these are taking it like snapshots one year at a time. So you can — like after Liam was born and the medical expenses were gone, then we went back to the high-deductible plan with the HSA. So I think it’s really important to kind of take stock of kind of your history, your medical history, your spending on healthcare, to form the baseline of your decision in that realm. The other comment I would make, Tim, is not all 401k’s are created equal. And as many of us know, not all health plans are created equal. So some are really, really great, and some are really, really terrible. And sometimes, that has to do with the size of the organization, sometimes the economies to scale, the bigger that you are, the less that each participant pays, whether that’s the 401k or the health insurance plan. So you kind of have to work with the sandbox, you know, that you’re playing in, so to speak, and something that can be very much out of your control.

Tim Ulbrich: Yeah, and I think, Tim, your example of Liam is a great reminder of not putting open enrollment on auto pilot.

Tim Baker: Yeah.

Tim Ulbrich: And I think that’s what we’re trying to stress here is like, using this as a chance to re-evaluate each year, you know, what happened last year? What worked last year may or may not be what makes sense for this year for a variety of reasons. And I think this is certainly a place where we want to be evaluating what does the cash position look like? What does the reserves look like? And how do we feel about that? Especially if we’re going to be opting into a high-deductible health plan, you know, thinking worst case scenario — hopefully never happens — looking at those out-of-pocket maxes and really asking yourself, how comfortable are we with that happening? How does that make us feel? And could we weather that storm if it were to come?

Tim Baker: Yeah, and you know, and we’ve had some tough conversations with clients that are deep in credit card debt and they really need as much of their income to kind of like right the ship and get going, so sometimes it means sacrificing or being uncomfortable here. You know, one of the things I look at is like if we look at all the debts that are out there, medical debt is not necessarily a bad debt in terms of like they reformed a lot of things with it hurting your credit because it’s kind of been a nightmare, you’re typically not gouged with higher interest rates and things like that. So typically more forgiven. I would even say push back on a lot of medical debt because it’s wrong. I think Tim, you had a story about that when one of your sons was born. So there’s a little bit more give I would say than some of these other ones that goes like right to collections and you’re in a lot of trouble. So it’s kind of — this is all about like mitigating the risk and trying to understand where can we give a little bit so we’re OK.

Tim Ulbrich: I want to shift gears, Tim, to life and disability. Probably one of the most common questions that we get is, do I need to purchase additional life and disability insurance beyond what my employer covers? And of course the answer is it depends on a large part of the individual’s situation and what they have going on and what they’re trying to do with those policies and so forth. But you know, general thoughts and discussion on how one goes about making this decision in terms of understanding what coverage is there from an employer standpoint, determining what total coverage may be needed, and some of the gap and differences between an employer plan and if they purchased a policy out on the open market.

Tim Baker: I think if we look at most pharmacists out there, you know, professionals that are making a six-figure salary, I think there’s going to come a time when there probably is a need to purchase policies outside of what the employer provides. Now, the problem with the financial services industry is that a lot of “financial advisors” are trying to push those policies on a young professional when they probably don’t need them. That’s when you’re a pharmacist that has maybe six figures of debt that’s going to be forgiven if you die or are disabled with no dependents and really, you know, not much on your balance sheet. So there’s kind of like this gap of do I really need this? Or can I just make do with what my employer provides? I’ll say this about the employer-provided policies: Outside of health insurance, which is a health plan, I would say that things like life and disability insurance are not plans. They’re really perks. So they’re meant to supplement or meant to provide some type of benefit that will help the employee but also it’s a way to kind of retain you and things like that. So I really view these as perks and not necessarily plans. I would say, to your point, Tim, I think it’s really looking at the individual and say OK, does it make sense to buy a policy outside of that? Most employers will provide some type of life insurance benefit, whether it’s something like $50,000 or one or two times income, which you can then elect to either increase your coverage or not. I think the downside of that is, you know, if you’re working for an employer as a 30-year-old and you have all of your eggs in that basket and you’re saying, “Hey, I have $1 million” or a lot of times, they’re capped. Most times, pharmacists need a lot more than what their employer can provide. So that’s one of the drawbacks. But if you’re working with that company for 40 years and then you leave to go to another organization, which maybe that isn’t provided or it’s a lot less of a benefit, you have a gap, then you’re going out in the market 10 years older where you’re paying a lot more for that particular policy. So that’s one of the things that — sometimes they’re portable, meaning that you can take them with you, and sometimes they’re not. So for both the life and disability, you know, it’s really looking at your own situation. Just like open enrollment itself, this is one of the things that often overlooked, just insurance. And I know we’ve probably done a podcast in the past about what’s proper life and disability and things like that.

Tim Ulbrich: Yep.

Tim Baker: For the disability, the coverage is typically going to be a percentage of your income. And again, it could be capped, and some employers will offer both long-term and short-term disability. You know, both are great. But you know, oftentimes, because of one reason or another, there’s going to be a gap in the coverage either because of taxes or just that a pharmacist, what they make and what most professionals will say that you need to kind of cover down and typically, that can be anywhere from 50-80% of what your income is, that there is a need to go out onto the open market and buy individual policies. But from an open enrollment perspective, I think if you don’t have those policies, it’s really important to understand, you know, what is there for you? And what can at least tide you over until you get those policies in place? And again, it’s one of those things where it’s like, it’s not important to you until it’s important to you. And it’s really hard to kind of, to show that to clients unless they’ve experienced that pain themselves or a close family member.

Tim Ulbrich: Yeah.

Tim Baker: But it’s going to be a really important piece of protecting the overall financial plan, which is — this is really what this is all about is, you know, insurance is really protecting the financial plan from a catastrophic event and ensuring that you can continue to build wealth and survive into the future.

Tim Ulbrich: Episode 044, Tim, How to Determine Life Insurance Needs, 045, How to Determine Disability Insurance Needs, two that we’ll link to in the show notes. We’ve got more information on the website as well, YourFinancialPharmacist.com. Tim, I think one of the common mistakes I see made here just relating to that discussion on gap in coverage is not digging into the policies to really understand, you know, life insurance is maybe the most obvious example where if you have a policy — if you have a need for life insurance and you have a term policy that’s offered for $50,000 or $100,000 or one times salary or two times salary, typically, those have a cap on them. For many folks, there’s going to be a gap and a shortage. And I think this is where, you know, sitting down one-on-one with someone to really calculate the total need, think about the transferability issues that you mentioned and what does it mean if you pick up employment, tax considerations, and really getting into the weeds of some of the nuances of the policies and things like own occupation, we’ve talked about that before and its importance. And again, thinking about how this fits in with the rest of the plan. And just a shoutout here to our fee-only financial planning team at YFP Planning, this is really where I think the value of fee-only comes in in that really sitting down with someone to determine what is their true need in their best interests. Not too much coverage that there’s dollars being spent that could be put elsewhere in the financial plan, but making sure we’re also not exposing the plan to unnecessary risk.

Tim Baker: Yeah, I mean, you know, this — what we’re talking about here are products. Like insurance is a product. So any time that you talk about dispensing a device, “Hey, Tim, you need life insurance,” and you say, “OK, great. Like where do I get it?” Like we can sell you this product. There’s going to be a conflict of interest. So having someone that is a fee-only fiduciary that is not further enriched by the advice that they’re giving, you know, strips away a lot of that, well, am I being advised in my best interests or in the advisor’s best interests, the one that’s advising me. So that’s I think the beauty of fee-only.

Tim Ulbrich: One example I just want to give here, I just pulled up, Tim, our long-term disability coverage that we added recently for the YFP team.

Tim Baker: Yeah.

Tim Ulbrich: And you know, if you look at it on kind of the main benefits platform, it says, “60% monthly income up to $6,000.” But this is an example where digging deeper is so valuable. You know, you get into things like what is the definition of earnings? So our policy, it’s base wage. So how you’re compensated could have an impact here.

Tim Baker: Yep.

Tim Ulbrich: What’s the elimination period or the timeframe from when the disability happens to when the benefit starts to pay out? Here, it’s 90 days. But if it’s shorter than that, perhaps longer than that, what’s the game plan to fund. Does it have own occupation coverage? We’ve talked about the importance of that before. What’s the maximum benefit? Our policy goes up to age 65. And then things like coverage restrictions, other incentives. So really, just a reminder of this time period and using this point here to really dig into this information and read the policies.

Tim Baker: Yeah, you know, and again, going back to those episodes you mentioned there, that’s where we kind of talk about the nitty-gritty, but I think the beautiful thing about this is like when we’re reviewing this and we kind of look at the — kind of go through the open enrollment optimization stuff is like as a planner, I’m looking at your balance sheet. So I’m like, alright, does it make sense to bolster — you know, because a lot of these, you can opt in. So like our policy doesn’t do this, but a lot of policies, they’ll say, “The employer pays for a 60% benefit of your earnings.” But then you can opt in to get that up to 80%. So you pay an additional — you pay out of pocket out of your paycheck for that additional 20%. If I’m looking at your balance sheet, Tim, and I’m saying, “Man, you have plenty of cash,” I would say, “Let’s not opt into that.” Or we might say, “Let’s do it,” because we know because the employer is going to pay for it, that that benefit’s going to be taxed.

Tim Ulbrich: Yep.

Tim Baker: If the employer pays for the benefit, it’s going to be taxed. That’s the gap. You know, so the idea is looking at your situation and overlaying what’s out there. I think the open enrollment, what I say is we want to look at the things that you’re paying for and say, does it make sense for you to be paying for it? I see a lot of AD&D insurance, and I kind of look at this as like — and again, this is not advice — but I kind of look at those as like when you buy something at Best Buy and they ask you about the warranty. You know, most of the time, you say no because it’s just not worth the money. Some of these things in open enrollment, it’s the same thing. It’s like AD&D, for those to pay out is very rare. So even if it’s $2 per pay period, I’m like, I just don’t think it’s worth it. So we’re trying to make sure that you’re not paying for things that don’t necessarily provide you much benefit, much utility. But then you are paying for things that do. And you know, kind of finding that Venn diagram of sorts to make sure that, again, we’re fully optimized with regard to this part of your compensation package.

Tim Ulbrich: AD&D, for folks that are wondering, Accidental Death & Dismemberment insurance.

Tim Baker: Oh yeah. Yep.

Tim Ulbrich: Tim Baker dropping some financial lingo here.

Tim Baker: Sorry about that. Yeah.

Tim Ulbrich: Tim, next I want to talk about FSAs, dependent care FSAs, especially since we’ve had some changes that have happened there as well as HSAs. And we’ve talked probably among these to the greatest extent, we’ve talked about HSAs because of the value of what that can provide as well as these other options. And we’ve talked about it on the podcast, we’ve got some blog posts, Episode 165, The Power of a Health Savings Account, also have an article on the blog, which we’ll link to, about really more of the strategic investing side of an HSA if you’re able to do that. So Tim, high level overview, FSA, dependent care FSA, HSA, and some of the differences and considerations for these accounts.

Tim Baker: The very crude way that I remember the difference between FSA and HSA is FSAs are really use-or-lose. So when you fund these with pre-tax dollars, if you don’t use those monies for the purposes of healthcare for an FSA for healthcare or dependent care for a dependent care FSA, you lose it. So it’s F-udge. Like I don’t get — you don’t get to use that money. Whereas the HSA, this is — can potentially be an accrual account, meaning that year over year, you can stack Benjamins and hopefully one day becomes that kind of stealth IRA that we talk about that has that triple tax benefit. So like I said, we’ve talked about the HSA ad nauseum. It has to be paired with a high-deductible health plan. You know, you can put the money in. It has a triple tax benefit, which means it goes in pre-tax, it grows tax-free so you can invest it like an IRA, and then you can distribute it in the near term for approved medical costs or when you reach a certain age, you can use it basically for whatever. So that’s the beauty of the HSA. But you know, again, it only works or you only have access to it when it’s paired with a high-deductible health plan. The FSA for healthcare is similar, but very different. So you’re allowed to use — you’re allowed to fund it with pre-tax dollars, meaning if you make $100,000 and you put $1,000 in there, you’re taxed on as if $99,000. So I think the limits for FSA for 2021, I think it’s like $2,750.

Tim Ulbrich: That’s right. Yep.

Tim Baker: Yeah. So the idea is that what you’re trying to do here — it’s a little bit of a game of chicken. So what you’re trying to do is really, again, see into the future and say, “OK, what do I know is a baseline that I’m going to use on my out-of-pocket healthcare expenses?” And if you know for sure that you’re going to spending $2,000 on that, then you should fund it with $2,000. And typically, there is a little bit of give at the end of the year where you can either carry some over or you have some time into the New Year to use it on.

Tim Ulbrich: Two months or —

Tim Baker: Yeah. And every plan is going to be different in its design. So you might be loading up on kind of some of the over-the-counter stuff. I’ve had a client buy a bunch of stuff for like contacts and things like that. So it’s going to be really important to kind of — again, this goes back to the spending plan, the budget, to understand what have you been spending in the past? Is that going to be indicative of what you will spend in the future? And then fund that with at least that baseline amount so you don’t lose it. The same thing can be said for the dependent care FSA. So this is a pre-tax account that you can fund that is used for care for your child who is age 13, for before- and after-school care, babysitting, nanny expenses, daycare, nursery school, preschool, summer day camp, and then also care for a spouse or a relative who is physically or mentally unable to care for themselves and lives in your home. So this money — this has actually been amended under the American Rescue Plan Act. So I think for single and married filing jointly couples, the pre-tax contribution limit went from where you could $5,000 a year, now it’s I think $10,500.

Tim Ulbrich: Significant jump. Yep.

Tim Baker: Yeah, very significant. So the higher limits apply to the plan year beginning Dec. 31, 2020 and before Jan. 1, 2022. So it is a temporary thing, but it allows you to park some dollars that you would otherwise — so if you’re in a 25% tax bracket, it’s as if you’re saving 25%, kind of thinking about it that way. So that’s what really — and for the FSAs, unlike the HSA, the FSA is — it has to be provided by the employer. I think we had a question on the Ask a YFP CFP about the HSA. And you don’t have to necessarily go through your employer. Sometimes, the employer doesn’t offer it. So you can go out and set up your own HSA. The FSA has to be provided by the employer for you to have access to it. So that’s really important. Again, these are all going to be — when you elect it, it’s going to take money out of your paycheck and basically fund these accounts for the appropriate purpose.

Tim Ulbrich: Yeah, and this to me is where when we’ve talked with Paul Eikenberg, our director of tax, and working with our clients, one of the things he talks about here is these being untapped areas of potential.

Tim Baker: Totally.

Tim Ulbrich: And so I think there’s a lot of low-hanging fruit in the financial plan. And I think really evaluating these and perhaps the dollars of any one don’t jump out as being super significant, but I think as we start to add these up with other strategies, there certainly is value. And Tim, you had mentioned we did tackle a question recently on Ask a YFP CFP 084. The question was about fees on an HSA account, but we did talk about the opportunity to access an HSA account independent of the employer. So we’ve talked about health insurance, we’ve talked about life and disability, we’ve talked about FSAs and HSAs and dependent care FSAs. I want to wrap up our discussion by retirement saving options. And I think, again, this is an opportunity to take a step back, look at the overall progress on the investing part of the plan, overall goals, perhaps gap between the goals and where you’re currently at, and then to evaluate where does investing fit in with the rest of the financial plan. And so when we think about, Tim, employer-sponsored retirement accounts, two main buckets we have, which are those that are Roth contributions and those that are traditional. So define for us the difference between those two for folks that are — maybe have some outstanding questions about those or unsure as well as the limits of what we’re able to do in 2021.

Tim Baker: Yeah, so — and I’ll preface this by saying that most of — you know, open enrollment is a good time to check in on your retirement savings options. You’re not necessarily bound to that because you can go in —

Tim Ulbrich: Correct.

Tim Baker: — really at any time and say, “Hey, I was putting in 5%. I talked to a YFP planner, and they said I should put in 8%. That’ll put me on track to get my $5 million nest egg, so that’s what I want to do.” I can really do that at any time. Or I can say, “I want less Roth and more traditional,” or whatever the case is. So it’s just a good opportunity, it’s a good checkpoint to say, OK, where am I at and should I make any tweaks? So — and one of the things that they often do here is they allow you to put in an escalator. So you know — and you can do this any time too, but it’s a good thing to do in open enrollment so every year, you can increase that by 1% or 2% or whatever that looks like. So to answer your question, Tim, the Roth v. traditional, so most employers will offer a 401k or a 403b or if you work for the government, a TSP. So when you elect your retirement options here, a lot of them will now — you’ll have a traditional — so think of two buckets. You’ll have a traditional 401k and a Roth 401k.

Tim Ulbrich: Yep.

Tim Baker: And they’re all under the same plan, but they segregate the monies because for a traditional, these are pre-tax dollars. So that example I gave you is if you put in $1,000 into your 401k and you make $100,00 — your traditional 401k — and you make $100,000, you’re taxed as if you made $99,000. For a Roth, it’s after-tax. So same example, if you put $1,000 into your Roth 401k and you make $100,000, you are taxed as if you made $100,000 because you’re not getting that pre-tax deduction. So for these dollars, the money is either taxed going in or coming out. So for a traditional, you’re not taxed going in, but then it grows tax-free inside of that account, and then you’re taxed when it is distributed, hopefully in retirement. For the Roth 401k, you’re taxed going in, so you don’t get that deduction, but then it grows tax-free and when it comes out, it’s not taxed because it’s already been taxed going in. So a lot of people will say Roth, Roth, Roth. And again, it’s going to depend on your plan. It’s going to depend on what you’re trying to achieve. And a lot of people get this wrong as well. So this is another good check on it to make sure that you’re putting the dollars in the right spot. Your match that your employer provides, if there is a match, is always going to go into a traditional account.

Tim Ulbrich: Yep.

Tim Baker: So if there is a match, you’re going to have — some people get it twisted like, I’m 100% in my Roth 401k, but I see money in my traditional, like what gives? And I’m like, well, this is the money that your employer is matching. It’s going to go there, you know, regardless. So it’s really important, you know — so to kind of give you some numbers with 2021, to max out a 401k, a 403b, it’s $19,500. So you can put that in regardless of how much money you make. So that’s really going to be the limit for the 401k. IRAs are a completely different animal. They’re $6,000, this completely separate accounting mechanism. And that’s going to be dependent on your income whether you can put it in directly into a Roth or a traditional IRA and if you get the deduction. And I know we’ve had podcasts on that as well. But the point of this, Tim, is that the open enrollment exercise is a great opportunity to kind of just do a once-over for your retirement savings options and just make sure that one, you’re in the proper allocation but then it’s also in the Roth v. traditional, and then just making sure that you don’t get stuck in that hey, my employer matches 3%, so for 10 years, I’ve just been putting in 3%. You don’t want to do that because more often than not, it’s not going to be enough for you to retire comfortably. So this is another way to kind of check those things and push the envelope a little bit.

Tim Ulbrich: Yeah, and I point folks back to Episode 074, when we talked about evaluating your 401k plan, also more recently, Episode 208, when we talked about why minimizing fees on your investments is so important. Certainly relevant here as we talk about employer-sponsored retirement plans where we can see a lot of variabilities in those investment options and in the fees. As we’ve said a couple times now throughout the show, open enrollment is such a great time to take a step back and evaluate the financial plan. And for folks that are going through this process and think, you know, I really see the value in working with someone one-on-one to look at the financial plan holistically, to determine how to prioritize the goals, make some of these decisions around open enrollment, could be debt repayment, investing, tax evaluation, and so forth. We’d love to have a chance to talk with you about the YFP Planning comprehensive financial planning services that we conduct on a one-on-one basis. And you can learn more about those services as well as schedule a free discovery call by going to YFPPlanning.com. As always, thank you so much for listening. We hope you have a great rest of your week and look forward to having you join us again next week.

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YFP 223: How First-Time Home Buyers Navigated the Current Housing Market

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How First-Time Home Buyers Navigated the Current Housing Market

On this episode, sponsored by APhA, Jacob and Michaela Soppe discuss their home buying journey in the current real estate market.

About Today’s Guests

Jacob and Michaela are graduates of Ohio Northern University who moved to eastern Ohio in 2018 so that Jacob could pursue his dream of starting a pharmacy with Southeast Healthcare. Since then, he has successfully grown his pharmacy and offers clinical services including diabetes and hepatitis C clinics. Michaela works at East Ohio Regional Hospital where she collaborates with doctors and patients in the inpatient, outpatient, and long-term care settings. In their spare time, they love to stay active and travel the world. They recently bought their first home and are excited to continue to serve God and their patients in their community.

Summary

In this episode, Tim Ulbrich turns the microphone over to Nate Hedrick, The Real Estate RPh and co-host of the YFP Real Estate Investing Podcast, as he interviews two pharmacists, Michaela and Jacob Soppe, about their home buying journey. Michaela and Jacob share their experience working with YFP’s Real Estate Concierge, their home search, how they determined their home buying budget, and the realities of buying a home in the current real estate market.

Jacob and Michaela weren’t necessarily looking for a home after pharmacy school and focused their energy and funds on paying down student loans and investing. When they were ready to start the home buying process, they didn’t know what to do or how to start, so they contacted Nate Hedrick and started working with the Real Estate Concierge Service. Nate paired the couple with a real estate agent in their area who worked with them diligently until they found a home that met their budget requirements and exceeded their expectations on must-have items like room for a family and plentiful parking.

The couple shares their experience receiving regular emails with listings and changes to the housing market, a day with nine house viewings, their experience with their home inspection, and how their experience at closing differs from what many folks will see in the current market.

Mentioned on the Show

Episode Transcript

Nate Hedrick: Hey, Michaela, Jacob, welcome to the show.

Jacob Soppe: Thanks for having us.

Michaela Soppe: Yeah, thank you for having us.

Nate Hedrick: Absolutely. Excited to chat today. We are talking all things real estate. I’m taking over the Tim and Tim show here on the Your Financial Pharmacist podcast so we can talk a little bit more about real estate today. So again, appreciate you guys joining us.

Michaela Soppe: Absolutely.

Nate Hedrick: So we are here to talk a little bit about navigating the current housing market, right? So you guys are first-time home buyers, just closed about two months ago on your first house, and what we thought we would do is kind of sit down and talk a little bit about that, talk about what it’s like to buy a house in the current market, what it’s like to be a first-time home buyer, how you guys navigated that, and just kind of get that information in front of people. So before we dive too deeply into the real estate side of things, maybe give us a little bit of background on your pharmacy journey so far and kind of what you guys are up to.

Jacob Soppe: I graduated in 2018, and I immediately got a job on rotations. I met with one of my preceptors and they wanted to open a pharmacy, and they wanted me to open it for them, and that’s something I’m interested in, and so I opened it. That was three years ago. And we’re continuing to grow, and I’m very happy with it. We’re a clinic pharmacy, but we also do long-term care, we also do diabetes clinics, and we’re just starting up Hepatitis C clinics.

Nate Hedrick: That’s great.

Michaela Soppe: So I graduated in 2019. We both graduated from Ohio Northern. And we actually got married while I was on rotations, so he’d basically said, “Hey, how do you feel about moving an hour and a half away from Columbus?” I’m like, “OK, that’s great. But I have rotations in Columbus.” So I started working with Rite Aid after I graduated as a pharmacist and kind of floated all over the place because we didn’t really know where we’d be living for sure. And then worked with them for a couple years and at the end of that, in January, I got a job working at a local hospital. So I do mostly inpatient, but I also have a mix of some outpatient stuff and long-term care in there with that as well. So I’m kind of running all over the place. But I love it.

Nate Hedrick: That’s great.

Michaela Soppe: And we finally made it out closer to where Jacob works. So.

Nate Hedrick: That’s nice, especially when, you know, you’ve already got long days at the hospital or at the pharmacy, you don’t want to add an extra long commute to that. So that’s great.

Michaela Soppe: Exactly.

Nate Hedrick: And when you guys graduated from pharmacy school, I know it was different years, but when you graduated, was buying a house kind of always in that mix? Was it always part of the “next step?” Or was this something that came along later?

Jacob Soppe: We knew we wanted to buy a house eventually, but there was student loans in the way that kept me up at night.

Nate Hedrick: Sure.

Jacob Soppe: And I was like, I can’t buy a house until I pay off these, we pay off these loans. And so after about two years, we paid off the loans and that’s when we started looking for a home.

Michaela Soppe: Yeah, it was definitely student loans first and then, you know, it all worked out around the same time where my job brought us instead of an hour and a half away for Jacob, it’s now five minutes away. And at that point, we were like, OK, like we’re ready to find a house because we’re going to be out here for a while.

Nate Hedrick: Wow, yeah. So I know I’ve talked to others who have that feeling of like, man, I cannot buy until these are gone. And so you guys took that and said, yeah, let’s make sure that’s the case. Let’s go all in on the loans and then once that’s done, then we’ll go ahead and buy a house. Do you feel like that was crippling at all? Was it just like, this is what we have to do to get it done?

Jacob Soppe: It was definitely the second one there. We just felt like we had to do it and felt like it was the right way to go for us.

Nate Hedrick: Yeah.

Michaela Soppe: Yeah, it was kind of like, let’s still act like we’re college kids for a couple years, you know, not buy a bunch of brand new stuff. Like most of our stuff came from our families or stuff I had from college. And so until the loans were gone, we didn’t really spend much money on anything else. Like we’d go traveling, but other than that, it was just loans completely. Like our entire paychecks went to it, basically.

Nate Hedrick: Yeah, avoiding that lifestyle creep can be a really great way to get ahead and make sure that those loans could be knocked out first. So that’s awesome. Were there any other factors that were holding you guys back? I mean, was the market something that scared you? Or talk to me a little about that too. Was it just the student loans and once those were gone, you were ready to move?

Jacob Soppe: The other thing that was holding us back was, like I said earlier, I was driving an hour and a half one way to work each day, so a total of three hours when we started and Michaela was still in school. We wanted to see where she was going to end up working and then when she ended up moving closer to my work, it worked out because it was like just after we paid off our loans. So we didn’t end up looking for a house at our old employer where I was still driving 45 minutes, and I really liked the idea of living like right next to work and the gym and church — and we’ll get into that later.

Michaela Soppe: I guess something I should say is that we moved four times in three years.

Jacob Soppe: Yeah.

Michaela Soppe: And progressively each time, every time my position changed, basically, going from rotation student to floater at Rite Aid to actually having a store at Rite Aid to getting the job at the hospital. Basically every single time, we moved closer and closer to where Jacob was working. And now, it definitely just where are we going to be settled was kind of like a factor that was holding us back slightly too because like my goal was always to get a job closer to where Jacob was working but just we didn’t know when that would happen. And it ended up being at a really convenient time for us.

Nate Hedrick: That’s great. And that actually, that’s a good segue because one of the things I want to talk about today is choosing the location and some of the steps that go into that kind of getting ready phase of buying a home. And that’s actually Step No. 1 of six steps that we’re going to talk about today. So we put together a video series — and actually, there’s a guide out there, we can link to that in the show notes. But if you head on over to YourFinancialPharmacist.com, we have the “Six Steps to Home Buying.” And what I’d like to do is actually walk through each one of those steps and kind of get your take and your experience as first-time home buyers and see what information we can share with our audience. There’s a lot of people that are probably in your shoes or who are about to be in those shoes here pretty soon where they’re graduating, they’ve got a lot of student loan debt, or they’re ready to buy a home, and now it’s time to figure out, OK, what does that actually look like? And more importantly, how do I do that in this kind of market? Because it is quite the seller’s market. It’s very competitive out there. And so trying to get a home today is more difficult than it’s been before. So we’ll start with the first step, which is making sure you’re ready. A lot of this step includes things like choosing a location, determining what is important to you guys, and also setting a budget and not letting the bank set the budget necessarily, not just going out and asking for the biggest loan we can get but setting our own budget. And so when you guys sat down and said, “OK, we need to figure out if we’re ready,” what did that look like? Was it a formal process for you or was this like, I don’t know, I’ve been on Zillow, let’s go take a look. You know, what was that like for you guys?

Michaele Soppe: There was definitely a lot of Zillow involved. So before we made our final move here closer to work, the apartment we were at, we were initially looking for houses there because it seemed like a good, you know, central location at the time when I was with Rite Aid still. So I think Jacob was on Zillow every single day, just you know, browsing houses for probably half a year or so at least and then continuing once we did move a little bit closer into another apartment, like OK, now we’re getting serious. What are we looking at? It wasn’t like a formal, let’s sit down and talk about this. It was just something we talked about almost every day probably for months just casually like, OK, you know, what do we want out of this? And everything kind of grew from there.

Nate Hedrick: And did you sit down and figure out, again, like not a formalized but at least like a budget for what you wanted to spend? And how did you go about doing that?

Jacob Soppe: One thing that we talked about even before we got married, we decided together that we both definitely wanted to live way below our means, less than 50% of our income, just because that’s what made us feel safe. Just in case one of us lost our jobs.

Nate Hedrick: Sure.

Jacob Soppe: It’s getting harder to find a job, especially with the growing concern of the pharmacist job market. Then also we want to have a family. We’re big givers as well. And so it just takes a lot of that stress off having a big cushion to make all those fit potentially with Michaela either decreasing work hours or going to 0 in the pharmacy in the future.

Nate Hedrick: Sure.

Jacob Soppe: But as far as budget goes, we decided that we wanted to really find a house for $200,000 or less. And I know like especially in Columbus, Ohio, where we’re from, that is very difficult to do in a nice place for a nice home.

Nate Hedrick: Sure.

Jacob Soppe: But the nice thing about where we moved is that the rural Ohio is much lower cost of living, and we were able to meet that goal of finding a home in that budget.

Michaela Soppe: Yes.

Jacob Soppe: Actually, way under budget.

Michaela Soppe: When we started looking at homes, there were a lot of homes we found that we liked that were more like $250,000-300,000. So like I’d say our upper limit kind of became $300,000 with the understanding of we’d much rather not spend $300,000 on the house. So we actually did find a couple that we liked, which we didn’t get a chance to put an offer in on. I mean, the market out here isn’t quite as crazy as it is in Columbus, but stuff still sells fairly quickly. So it ended up being a good thing because our realtor could kind of point us towards the house that we’re in now, which was like half of that but way big enough for both of us and even for a growing family. And yeah, so that — like we had that budget in mind the whole time. And it did shift a little bit as we were looking, but then it all ended up going back to what we were originally thinking.

Nate Hedrick: Yeah, I love that. And I think there’s two things that I think are really, really important. One is intentionality, right? You guys stepped back and said like, ‘This is important to us to live slightly below the typical means,’ right? Or ‘We can live at 50% of our income. And here’s why we’re doing that,’ right? The intention behind that is that if we want to cut back on hours, we lose a job, we’re not stressing about this home purchase. And I love that. I think that’s super important. The other thing that you said that I think is interesting because I advise my clients of this all the time is that it’s super easy to fall in love up to whatever amount, right? If I start looking at $500,000 homes, I’m going to love $500,000 homes. The trick is not to exceed that budget if it’s reasonable for your market. And so you guys took a step back and said, “Yeah, you know what? It’s possible to find a nice place under this $200,000 in our market.” And again, I know the West Coasters out there are probably like screaming at their radios right now. But the idea is that, you know, you guys took a look at your market and said, “This is feasible, and so I’m not going to push it beyond my means because I’ve set this budget, and this is realistic for where I’m looking. I think that’s a really great way to set yourselves up for success. So I admire that a lot. The other thing you mentioned is that you leveraged your realtor, and that actually leads us to Step No. 2 or point No. 2 here, which is assembling a team. And this is actually where you and I got connected back in May of this past year. And you know, you guys came to us, the Real Estate Concierge service, which is a service that we offer to pretty much anyone that if you want to get connected with a real estate agent, we will actually help you do that. And so again, if you head on over to YourFinancialPharmacist.com and head over to “Buy a Home,” you can check out the Real Estate Concierge service there, a free way to get connected with an awesome local agent. And again, that’s actually how Jacob and Michaela and I got connected. We got you connected with Sean, and I guess tell us a little bit about that process and what it was like to work with an agent.

Jacob Soppe: Yeah, I want to thank you guys, thank you again for finding Sean, our realtor.

Nate Hedrick: Sure.

Jacob Soppe: We had no clue on like what realtor, who should we go to, and we heard about your service through YFP, and so we reached out to you, you found us a great realtor. Sean has over 10 years of experience as a realtor, he’s also a broker. And he was amazing, mainly because one, he was super responsive, two, he found us homes, including the one we ended up buying, that we would like. And we didn’t think we would like this home, so we didn’t put it on our list of liked homes and must-see homes. But he’s like, “I think you guys will like it anyway. Let’s go.” And we looked at like, I don’t know how many homes.

Michaela Soppe: Well, the one day, I think it was a Saturday, we did nine homes on that Saturday. And he had it all set up like perfectly. And then honestly, the whole process only took a week or two for us. He was just on top of it. And you know, ultimately, we looked at 14 or 15, and this was one of the last ones. And we basically knew going into it like, this is something that we’re definitely open to buying because it was a great price, like great location, can’t really get any better. And I’m just really glad that Sean figured out what we liked so easily and you know, pointed us to this house because it wasn’t really on our radar initially.

Jacob Soppe: And one other thing I want to give him praise for too is every house we went to, he pointed out anything that he thought was a potential problem. And so like he was super honest, he wasn’t in a rush to sell us a home.

Michaela Soppe: Yes.

Jacob Soppe: And so I really trusted him and I think that you’ve really found a great realtor.

Nate Hedrick: Good, I’m so glad. That’s awesome. And that’s exactly what we want to hear, right? I mean, the agents you work with, it has to be somebody you can trust. And it’s so funny, that’s exactly what I try to do for my clients is point out the scary, right? My job is to walk around and look for things that you don’t recognize as bad while you just figure out if you’re going to like the house. That’s awesome that Sean was able to do that for you guys. Were there other members of the team along the way that were important as well? I know obviously the real estate agent is big, but were there other players that jumped in here as well that you found a lot of value in?

Jacob Soppe: Not really.

Michaela Soppe: Honestly, it all happened very fast.

Jacob Soppe: We weren’t even really seriously looking for a home.

Michaela Soppe: Yeah, this was just to get our feet wet.

Jacob Soppe: We were actually in the middle of a lease.

Nate Hedrick: Ok.

Jacob Soppe: We were just like looking at homes, we’re like, ‘Oh, well, it takes about a month or two to start closing on a home, so maybe we should just start looking at homes for a couple months and then –’

Michaela Soppe: See what’s out there.

Jacob Soppe: See what’s out there. And so we started looking at homes and we found one that we really liked, and we’re like, ‘We kind of want to put in an offer. But I still have like six months left on my lease.’ And so I was just like, you know what? Let me call up the landlord tomorrow and see if they’d be OK if we put an offer on a home and moved out early. And we talked to them and we ended up having an agreement, and we were able to leave early. And so we’re like, ‘Oh, great.’ Well, the home that we really liked, apparently some other people really liked it too. So it was already gone by the next day. But that really opened the door for us to seriously look.

Nate Hedrick: That’s great.

Michaela Soppe: Yeah, and I guess that’s something else I’d say is don’t be afraid to break your lease because we lived in three apartments before buying this house, and we broke our lease every time, which obviously —

Jacob Soppe: But it was with the —

Michaela Soppe: With their permission. Like obviously, it’s not ideal. But like, I mean, definitely talk it through with them and see what you can do if you’re ready to buy a house. That shouldn’t be something holding you back because usually, they will work with you and figure out a deal that way.

Nate Hedrick: It’s a great tip, and it’s something that I’ve done with tenants of mine. You know, if I can fill that vacancy quickly, it doesn’t bother me who’s in that house as long as they’re a great tenant. So that makes a lot of sense. That’s a good tip. That also leads me to you talked about putting in an offer and looking for a house, but what about the paying for it, right? So there’s dollars there, so talk to me a little bit about financing and did you guys have an idea of how you wanted to finance the home ahead of time? Or what did that look like?

Jacob Soppe: I mean, I’m really adverse to debt. I really don’t like debt. And Michaela really let me spearhead this. And so we went in — I don’t know, I was like, “You know what, I want to do” — how much down was it? I don’t remember anymore.

Nate Hedrick: 15% down?

Jacob Soppe: Not 15%, 20%.

Michaela Soppe: He would have rather paid cash, but reasonably, he wanted to do 20% down.

Jacob Soppe: Yeah, 20% down at 15-year fixed mortgage. But I kept, you know, I listen to YFP, I listen to a lot of other podcasts as well. And I looked at the offer that IBERIABANK has that you guys work with. And I felt like I really couldn’t pass up taking advantage of the low interest rates going on right now. And I was thinking to myself, ‘Well, if I’m going to pay it off early, I can still do that.’ We didn’t necessarily need to do a lower amount, but we ended up doing 5% down on a 30-year fixed. And we do a lot of investing as well, so we are putting every single dollar that we’re not spending on a mortgage into investments.

Nate Hedrick: I love that.

Michaela Soppe: So like when you have a 3% mortgage with IBERIABANK, we’re like, well, we can make more investing that money, you know, in the meantime than we would if we just kind of threw it at the house.

Nate Hedrick: Yeah.

Michaela Soppe: So that kind of changed his mind over a month or two.

Nate Hedrick: I definitely get that debt aversion, but it also makes a lot of sense if you break down the numbers, does it preserve your capital in a way that allows you to do other things, like you said, travel more, invest better, pay down student debt if you hadn’t already done that? Those are the things that that flexibility can allow. So I love that you guys took a look at that and even though you went in with one notion, you evaluated your options and made kind of the best financial move for you guys. That’s huge. And for those that want to learn more about that, definitely head over to YourFinancialPharmacist.com, and again, head over to the Financing section of the “Buy a Home” section, and you can find out more information about IBERIABANK and some of the pharmacist loan options that are out there. Great way to get a low down payment loan without having to get hit with PMI or things like that. So definitely a good option. So then Step No. 4 would be the search, so actually looking for the property itself. And we’ve alluded to this a little bit, but talk to us about that process. What were things that you guys were looking for? Or what were things that you learned after seeing a couple of houses or on that nine-house day, what were things that you learned along that process?

Michaela Soppe: We learned that house hunting is tiring on that nine-house day.

Nate Hedrick: I imagine.

Michaela Soppe: It was a lot of Zillow, a lot of probably other online websites too for houses. And honestly, Jacob looked at most of that because I got a little overwhelmed with all the options.

Nate Hedrick: Sure.

Michaela Soppe: But something we really wanted, which actually kind of excluded this house initially was we wanted a two-car garage was one of our main things because we’ve kind of done it all. We’ve done garage, no garage, all of that. So this house we ended up buying only has a one-car garage, but it has tons of parking, like a carport. You can have everyone over, and they don’t need to park in the street.

Nate Hedrick: Nice.

Michaela Soppe: So that’s kind of why we initially didn’t look at this house. And Sean was like, ‘Well, let’s go look at it.’ So we started out with Zillow. Once we got hooked up with Sean, he created basically an account for us on — was it MLS? On MLS, and basically every day, he would push emails to us of like, here’s any changes in the housing near you, like new houses, price drops, houses going under contract, coming back on the market, being sold. That was super helpful. You know, he’d send it to us after work each day so that he wasn’t interrupting our day and we could look at it, like them, communicate with him what we wanted to see, what we weren’t interested in, stuff like that. And then from there, he would call Jacob up and be like, “Hey, I have a list of these houses. Let’s go see them tomorrow if you’re free or whatever the next day you were free was.” And I mean, really, he just kind of led the way and was like, here’s houses you liked, here’s houses I think you would like, and kind of all over our price range too. We saw stuff under our budget, over our — not over our budget, but on the higher end of our budget — and kind of just pieced together from there what we really wanted and what was important to us.

Nate Hedrick: Yeah, and sometimes just getting out there and seeing it in person can make all the difference. You know, you might think there’s one thing that’s super important or not realize something that is important to you until you get out and see a house that has that particular feature and recognize that. So that’s great. And I also love the tip about the auto-emails. That’s something I recommend for a lot of my clients is get that auto-email so that you are getting daily alerts. It helps us really learn that market so that you can move quickly. If you’re just looking at everything on Friday afternoon and then scrambling to try to react to the properties that have come up in the week, it’s going to be tricky. But if you can get that daily, just take 20 or 30 minutes out of your day to really learn that market, see what properties are coming available, you’ll have a lot more chance at the good properties, and you’ll know what the right price point is because you’re starting to learn that market and see what’s becoming available. So great tips. And then once you actually found the property, again, I know we’ve talked a little bit about this, but talk to me about that negotiation process because Step No. 5 is all about putting that deal together. And so I know negotiations are hard in the current market, there’s not a lot of wiggle room, but what did that look like? What was the putting together the offer process look like?

Michaela Soppe: So Sean was really great with this too because the house that we really liked, ended up buying that we’re living in now, we actually were able to get for asking price.

Nate Hedrick: Nice.

Michaela Soppe: So out here in Eastern rural Ohio, it’s a little different than Columbus, obviously. We knew when we were here he was in contact with the seller’s realtor, and she told him like, “Hey, there’s another offer on the table today. Do they want it or not?” So basically, we were sitting in his house at 8 p.m. like kind of putting together our offer. We knew that this is a house that we would really like, that it could be the house that we’re buying, you know? And we’re like, ‘Well, let’s offer them asking price.’ They’d already dropped the price $5,000 I think. This particular house was on the market for —

Jacob Soppe: Over 30 days.

Michaela Soppe: It was. Some houses go within a week out here, some of them are on the market for months, depending on the houses. You know, there’s not that many people in rural Ohio. But you know, so completely different from the big cities. So basically, we did asking price but we also really wanted this house, so we added an escalation clause just in case, which went I think like $8,000 over maybe.

Nate Hedrick: And could you enlighten our audience about what an escalation clause actually means?

Michaela Soppe: Yeah, so basically if you have an escalation clause on your offer, it means that you’re willing to go up so much more money if the other person bid higher than your or offered higher than you on the house. So like if you’re offering $200,000, the other person offered $205,000, but if you have an escalation clause going up to $210,000, they could take your $210,000 — or I guess $206,000 at that point. You know, something slightly higher than what the other person offered if your clause goes above that.

Nate Hedrick: Yep, that’s spot on. And it’s a great way to protect you from pitting you against yourself, right? Because then you can put in $200,000 and you pay $200,000 if that’s the final price. But if there are other offers, you can still protect yourself by getting higher than — just slightly higher than those next offers. So thank you.
Michaela Soppe: So hopefully it keeps you out of a bidding war.

Nate Hedrick: Exactly.

Michaela Soppe: So yeah, I mean, putting the offer in, I think the deadline was given to us by the seller’s realtor was like 9 p.m. or something. And he faxed over all the papers by 8:55 p.m. and called like, “They’re on their way,” you know?

Nate Hedrick: Nice.

Michaela Soppe: Basically, we knew an hour after that they were —

Jacob Soppe: They verbally accepted our offer.

Michaela Soppe: Yeah, they verbally accepted an hour after that.

Nate Hedrick: Great. Yeah.

Michaela Soppe: It was a very fast process, I feel like, and probably a little less stressful than it is in the big cities for us. But at least putting the offer down was really simple.

Nate Hedrick: Still, yeah, it sounded like crunch time decisions, though, and faxing it then at 0 hours.

Michaela Soppe: It happened really fast.

Nate Hedrick: That’s great. And did you have inspection contingencies on the home as well? I know some people are out there waiving inspection contingencies. What did that look like?

Michaela Soppe: We did have an inspection. I guess something I should mention is we also offered to cover closing costs. I know that’s a big deal-maker or -breaker anymore. But we did have an inspection, and Jacob can talk more about that process.

Jacob Soppe: OK. So

Michaela Soppe: I set it up.

Jacob Soppe: Yeah, so I scheduled an inspection with one of the six recommended inspectors that our realtor gave us contact info for. And so I did some price shopping with them and got to know the guys who did it. And I picked one,s scheduled a time before our closing date, and they came in and they agreed to meet them at the house while they did the inspection and kind of showed me what they were looking at. And then they gave me a full report, photos, and descriptions of the inspection about two days later. So it’s like 80 pages. And we got to look through them, and they highlighted the things that they thought were a big concern and that what we should look at before closing. So what that led to is that we talked — we showed our realtor that report too, and most of the things we’re like, ‘Ah, don’t worry about it. We’ll just fix those problems.’ And our realtor was like, ‘No, no, no, no. The sellers are going to fix those for you. And so we’re going to use this contingency and try to barter for to see what we can get them to fix before we close.’ And we went back and forth probably like four times with the sellers.

Michaela Soppe: That sounds about right.

Jacob Soppe: And our realtor ended up saving us like $5,000 in repairs.

Michaela Soppe: And just like little — some of the stuff was bigger, but some was just little stuff that we’re literally like, it’s fine, you know. And some of the bigger stuff the sellers were like, ‘Well, we’ll split it 50/50 with you guys,’ and Jacob and I are like, ‘OK, that’s fine.’ Sean was like, ‘No. You’re not paying for it.’

Nate Hedrick: I love it.

Michaela Soppe: He’s like, ‘You guys offered asking price. They’re going to pay for it.’ And we’re like, ‘OK, sure, we’ll see what happens.’ And like Jacob said, I mean, they basically agreed to everything except tightening a railing outside. Like literally $5,000 worth of stuff, they got done for us before we closed. Can’t thank Sean enough for that.

Nate Hedrick: That’s great.

Michaela Soppe: Because we had no idea. We’re like, ‘Oh, this is fine. They’re never going to agree to that.’ But they did.

Nate Hedrick: And that’s exactly why you have a good real estate agent to lean on, right? Because again, without that experience, without that know-how, you would have lost out. So that’s a big, important point. The other thing I think is great there is that you guys went into it with this idea of I’m going to offer full asking, and so because of that, like there’s a renegotiation process that may occur. And so there’s two — I think a lot of people assume as soon as you put that offer in, that’s it, you’re done, that’s what you’re buying the house for. But the reality is you get to go back to them, and there’s renegotiations that can occur if you have the right contingencies in place. And again, lean on your agent for that. But that’s a really important factor to making sure you’re getting a good deal. So that’s awesome. Well, that leads to our last step, which is Step No. 6, all about closing. So you’ve gone through, found a house, put the offer in, renegotiated on the fixes and everything, and now you’re ready to actually sign the paperwork. So talk to us a little bit about the closing process. Anything that surprised you or things that you learned during that?

Michaela Soppe: I’d say it was pretty straightforward for us. I mean, basically with all of the negotiations that happened ahead of time, we knew exactly what we were getting, exactly what to expect. We did come walk through the house before we closed, I think the morning that we closed.

Jacob Soppe: The same morning that we closed.

Michaela Soppe: Yeah, just to make sure everything was done, everything was what they said they would do. From there, everything was good. You know, Sean was there at closing with us for the first part. And then once you actually get into the more financial stuff with the bank, your realtor leaves and says, “See you later.” So I guess that was kind of surprising. I’m like, ‘Oh, OK, so he’s not here.’ But it makes sense too just that he would come for a little bit of it.

Nate Hedrick: I remember my first — when I bought my first house, I thought that like my agent was going to be there waiting with the keys as soon as I signed and he was going to drop them in my hand, but then there’s a whole — like title had to actually transfer, and there was the — like you’re working with the bank first and finishing the deal. Was that your experience as well?

Michaela Soppe: So we got the keys at closing.

Nate Hedrick: Nice. That’s pretty rare these days. That’s awesome.

Michaela Soppe: Yeah, we didn’t have to wait until after for it in our case, at least. So I mean, that was kind of what I expected and I guess what I assumed was the norm. But I also wouldn’t be surprised if it does take awhile.

Nate Hedrick: No, that’s good. And again, that is — it’s more rare these days. And again, some states even require you to have different levels of closing with a lawyer present and things like that. So it’s nice when you can actually do it all in one fell swoop like that. That’s excellent.

Michaela Soppe: And we had kind of asked Sean like, do we need an attorney to be there with us? Are we good? He’s like, ‘Well, unless you have any questions about the stuff that’s already been fixed or gone over,’ like everything he basically had already gone over everything with us and there wasn’t any surprises.

Jacob Soppe: And there’s a lawyer at the title company.

Nate Hedrick: Yeah, and depending on your state, that may vary, right? Some states will actually require that you have a lawyer present or that they’re actually the one doing the closing with you. But again, in Ohio where we are, that’s not the case. So good to lean on your agent there for the local guidelines. Well, great. Well Jacob and Michaela, I really appreciate you guys sharing your story. I think, again, it’s a tricky time to be a first-time home buyer, but you guys are proof that it can be quite easily done. And again, YFP is here to help you guys if there’s something to make the process easier. We’re along for that same ride. Any final thoughts or other tips you can share with our listeners?

Jacob Soppe: Well, I can share one thing that we did not include in our search talk, but we were actually looking at a home that we could potentially rent out in the future.

Michaela Soppe: Oh, yes.

Jacob Soppe: Once we outgrow it. It might be awhile before we outgrow it because there’s plenty of space here, but we were looking for a home that we potentially could rent out or even hack out. And we found this home, and the offer we put in fits the 1% Rule that a lot of landlords like to follow when they’re looking for a good home but also I wanted to make sure we bought a home that we could increase the value on. And there’s a lot of opportunity to do that in this home. But we also found that this was — in the neighborhood of like 20 homes, this was like the second lowest valued home in the neighborhood. So we feel like we can really use that to help increase the value of this home if we end up selling it.

Michaela Soppe: Yeah, and part of the plan with this home too — and we’ll be here for awhile — but eventually, it’s something that we could easily rent out in the future because it’s a great size for a rental home, and it’s actually really close to the highway. Like you can see the highway, you can’t necessarily hear it all the time. But it’s in its own little neighborhood but in a really good location for people just passing through. So that was something that was always in the back of our mind that we knew we kind of wanted, our realtor knew we wanted it, you knew we were looking for it. So that was something that just kind of like fit together well with the home we ended up getting as well.

Nate Hedrick: Yeah, that’s awesome. I think that, you know, your shameless plug for our other show, the YFP Real Estate Investing podcast with David Bright and I as cohosts, if you haven’t checked that out, definitely do so. And maybe we’ll have Jacob and Michaela on that show once they turn this property over and start renting it out. I love it. Well again, guys, really appreciate you guys being with us today and sharing your story. Where can people reach out if they want to get in touch with you?

Jacob Soppe: They can reach me at my email, [email protected]. Soppe is spelled S-o-p-p-e.

Nate Hedrick: Perfect. Well, I’ll make sure to put that in the show notes. And again, thank you guys so much for being here.

Michaela Soppe: Yeah, thank you, Nate.

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YFP 222: Why Estate Planning is Such an Important Part of the Financial Plan

Posted on by yfpadmin

Why Estate Planning is Such an Important Part of the Financial Plan

On this episode, sponsored by Thoughtful Wills, estate planning attorneys, Notesong Thomson and Nathan Kavlie, discuss estate planning and its importance in the financial plan.

About Today’s Guests

Notesong and Nathan, Co-Founders, Approachable Attorneys, Thoughtful Wills

Notesong and Nathan met in junior high in Jamestown, North Dakota – a friendship forged in orchestra concerts and speech meets – much laughter in hallways and early-90s nerdiness.

They both started law school in 2001, bonding over the exciting concepts they were learning, the intense 1L reading requirements, and Legally Blonde (released that summer).

Years later, Nathan asked Notesong to help create a law firm that would emulate the automation of LegalZoom but pair it with actual attorneys to create custom, lawyer-drafted Wills at an affordable price point. Thankfully, Notesong said yes!

This friendship is our firm’s foundation – and with each passing year, both grow stronger.

Notesong Srisopark Thompson, Co-Founder | Attorney, Thoughtful Wills

Caring for so many ill and injured children led Nurse Notesong to law school – she wanted to advocate for children from multiple avenues beyond the hospital bedside. After practicing as a pediatric emergency/trauma nurse for over 18 years, Notesong took a break from paid work to be a full time mom to her three sweet and spunky kids – one of her most challenging and rewarding roles. Along the way, she and her husband caved, and their family also welcomed two fluffy sheepdogs who are constantly at her side as she helps translate estate planning into terms and concepts that are understandable – echoing her signature nursing style when she explained painful procedures (such as IV starts) to her tearful and terrified patients as they clung to their parents.

Having dealt with the yuck of creating her own estate plan, Notesong ensures the Thoughtful Will experience respects and addresses the anxieties of parents and non-parents alike, helping make the process as pleasant as possible. She infuses TLC into every aspect of our brand of approachable lawyering. Attention to detail is crucial in both nursing and law – Notesong doesn’t miss a beat.

Nathan Jay Kavlie, Co-Founder | Attorney, Thoughtful Wills

In high school, Nathan knew his science fair presentation was ready when he could explain the enzyme pathways to his grandmother. That ability to translate concepts was rewarded when he won awards at the international science fair, three years in a row.

Many years later after repeated nagging by his Uncle David, Nathan turned his attention to wills and discovered this whole new area of law that desperately needed translation for normal people. He took a year to learn and study wills & trusts law – rewriting the standard “legalese” will into something elegant and understandable. The Thoughtful Will is one of his proudest accomplishments to date (it’s a three-way tie with his marriage and rehabilitating two rescued terriers).

Summary

This week, Tim Ulbrich taps into a topic not yet explored on the YFP Podcast, estate planning. Estate planning attorneys and co-founders of Thoughtful wills, Nathan Kavlie and Notesong Thompson, discuss what an estate plan is, who needs one, the value of a living trust, and why estate planning is an important part of the financial plan.

Thoughtful Wills solves the issue of unpleasant experiences with attorneys, delaying the start of estate planning. Nathan and Notesong have worked to make death planning and lawyering approachable for everyone.

Nathan explains that estate planning is not just about your estate, but everything you own, even non-physical items, when you die. Estate planning is death planning, using our system of laws to make decisions, spreading goodness even after your death. Anyone who has children, people who have pets, married couples, anyone with some assets, and people who have family members that they care about should consider estate planning as a set of directives in the event of your death. Notesong explains that because circumstances in life change, revisiting the estate plan annually is a good idea.

Nathan and Notesong give a general overview of the estate planning documents, including the will, the revocable living trust, other relevant documents of estate planning, and how they work together to protect your estate after your death. Nathan details what probate is and how it affects a person’s assets when they die without a will, versus with an estate plan. Notesong provides an overview of the healthcare directive and the durable power of attorney, which authorize someone to make decisions on your behalf if you are incapacitated.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Notesong and Nathan, thank you so much for coming on the show.

Notesong Thompson: Thanks for having us, Tim.

Nathan Kavlie: Thank you.

Tim Ulbrich: So before we dive into all things estate planning, a topic that we surprisingly haven’t covered in detail on this show before, I’d love for you both to introduce yourselves and give us an overview of the work that you do with Thoughtful Wills. So Notesong, why don’t you kick us off? And then I’ll have Nathan follow.

Notesong Thompson: Sure. Well, it’s nice to meet everybody on the podcast. I am based in Madison, Wisconsin, and I am mom of three young kids — young, spunky kids. We have two sheepdogs who are very needy and wife of a really busy corporate attorney. But yeah, I’m a lawyer and I previously practiced as an emergency trauma nurse for 20 years, so I bring a lot of different perspectives to estate planning.

Tim Ulbrich: And we’re going to tap into some of your healthcare background a little bit later when we get into some of the healthcare directive pieces of the estate planning process. So very good. Nathan, go for it.

Nathan Kavlie: Yeah, so my name is Nathan Kavlie. I live in Minneapolis. Notesong and I, actually, we met in high school in Jamestown, North Dakota, back in the early ‘90s. But I am a lawyer. I was not a nurse, but I did work in a video store for several years, which, you know, oddly, I think was really I think formative, as much as probably anything else in how I sort of approach the world and my work, which is just sort of — we’re all customer service agents I think in the past. And if you aren’t, thinking that way I think you really are kind of missing the boat because I feel like especially in this new world where with masks and distancing, I think if you’re not spending time thinking about how to be friendly and approachable, you are not being friendly and approachable. I think you’re just missing a chance to sort of make people feel welcome and taken care of. But yeah, I live in Minneapolis with my husband, our two rescue dogs, yeah. Life is good.

Tim Ulbrich: Great comment, Nathan, about the importance of customer service and a priority. I actually — you made me think of the book by the founder of Zappos, “Delivering Happiness,” and great story about just that perspective and how important it is no matter what industry that one is in. So before we get into the weeds of estate planning — we’re going to try to make it as lively and fun to really highlight the importance of estate planning as a part of the broader financial plan — but before we get into that, tell us a little bit more about Thoughtful Wills. What is Thoughtful Wills? What’s the problem that you’re trying to solve? And what is the offering that you have, Nathan?

Nathan Kavlie: Yeah, so I think the problem we’re trying to solve is most lawyers are not very friendly or approachable. They kind of suck to work with. And people know that, right? There’s a reason why people — I’m sure you guys at YFP have heard of how often do you ever get clients that come in and they say, “Well, we’ve got all of our estate planning documents ready.”

Tim Ulbrich: Rarely.

Nathan Kavlie: Rarely, because they know that it’s like, you know, you have to take time off from work and go meet with this lawyer who’s probably going to make you feel like an idiot and charge a lot of money. And that’s the experience that I kept running into over and over again amongst my friends. And so you know, it was sort of an epiphany, like why does it have to be that way? And it doesn’t. We can just work online with people all over the country. We can — instead of sitting down and having this meeting, which is long and frankly then becomes expensive because we’re lawyers, right? We sell our time. We don’t do bookshelves, we don’t sell electric cars. We sell our time. And so you know, we can use technology efficiently to sort of save time, reduce expenses, and hopefully then if we’re being really sort of thoughtful about all of this process, we can sort of create kind of an experience for you that is sort of shockingly friendly and approachable. And that’s really what we’ve sort of done is sort of looked at every piece of our process to sort of ask ourselves, like is this understandable to normal people? Does it feel welcoming? Is somebody going to read this and feel supported? And if it doesn’t, then we work on it and frankly, we keep working on it over and over again just because when are you ever like perfect, right? So we’re sort of on a quest to really make lawyering approachable is I think really the crux of what we do.

Tim Ulbrich: So making lawyering approachable is really a big part of what you guys do. And folks can go to ThoughtfulWills.com/YFP and learn more. And we’ll reference that link again later in the show. I was telling my wife about this interview last night, and the way I was describing it, based on our experiences with a young family, going through the estate planning process, we really delayed ourselves in that process probably longer than we should because No. 1, it wasn’t exciting. It’s pretty boring, right? In my mind, it was going to be somewhat painful. And I felt like the industry wasn’t very transparent. As I look at what you guys have built, you really have addressed all three of those. And excited about what that means for not only pharmacists but also other professionals that want to do this part of the financial plan and do it well. Notesong, tell me about your background as an emergency — if I heard correctly, emergency care nurse. What about that experience led you to want to go back to law school and then specifically do the work that you’re doing now with Thoughtful Wills?

Notesong Thompson: Well, it’s funny you say that because Nathan and I reconnected after several years. And ironically, we were actually in law school at the same time. Started in 2001 and then we graduated in — did we graduate in 2004?

Nathan Kavlie: Uh huh.

Notesong Thompson: And I practiced law for a little bit in the juvenile defense world. I did some public defender work, guardian at litem, and pediatric nursing really drove me to the law because I saw so many things at the bedside that really, really troubled me. It just — it had me just wondering going home at night thinking, why is it like this? Why is this child with this abuser? Why is this informed consent issue an issue at all? So I will admit, nursing is my favorite love. And Nathan had to do a little bit of convincing to get me to practice law again, right, Nathan? And largely it was because of what Nathan talked about before is the traditional legal process is in many ways really miserable. And I practiced at a big law firm, and like I said, I did some more public defender work. But ugh. It was just yucky. And I went through the — I went through the estate planning process at my husband’s fancy law firm, and I just want to be clear that there is a place for attorneys and fancy law firms and for big estate planning too. And I’ve got to tell you, the only thing I remember going through that process myself was how much it was filled with yuck. And it was so anxiety-provoking, emotionally challenging, and we were doing this with a friend who took care of us. But it just was yucky, all of it. And so when Nathan finally convinced me to join in, it was after he heard me on a show called “Moms Every Day,” and he recognized that moms make a lot of decisions and keep the ball rolling forward with things that keep getting back-burnered. And as a mom of three young kids, you know, I — and having worked in healthcare in the nursing, I was faced with life-and-death issues every day. And even with that, at the bedside during a code, working with pharmacists who are handing me syringes of epinephrine and just on the ready — I love pharmacists, by the way. Can I just say? They’re the calm in the storm. And no matter what chaos is going on, the pharmacists were there, they just showed up in their cape and quietly handed us the meds we needed. It was like a miracle. But you know, that’s the thing. It’s the best part that I’ve found about being an estate planning lawyer now with the nursing background is that I still get to give TLC to our clients. And I think they are a little bit shocked when I say, “We’re going to take really good care of you and your family.” So yeah, that’s where I’m tying in nursing into estate planning. And it’s been really wonderful.

Tim Ulbrich: That’s great. And as I mentioned, estate planning isn’t a topic we’ve covered a lot in detail on this show before but certainly an important piece of life and one’s financial plan. And we’re not going to be able to get into all the nooks and crannies and aspects of estate planning, but I do think we’ll be able to lay a good foundation and hopefully get folks somewhat excited about learning more about this topic and some next steps that they can take in their own journey. So Nathan, as I was doing research on Thoughtful Wills and your background, one of your claims to fame that’s listed on the website is having a lifelong obsession with making the complex understandable. And so I want to tap into that a little bit here as we just start the conversation of what exactly is estate plan? What do we mean by an estate plan? Who might need one? Why is it important? And what are some of the various documents at a high level that make up the estate plan?

Nathan Kavlie: Yeah. Let’s emulate — I think let’s start with just the word, right? So we’re talking about estate plan, and estate — so this is the weird part. Estate planning is not just about your estate. Estate really just means like all of your stuff when you die. So when you die, all of your cars, your dirty laundry, your CDs, your art, it’s all — everything you own. And not just physical possessions but if you sort of owned patents or if you wrote some music, all of those pieces of property are your estate. And so we’re planning for that. But the problem is it’s like sanitation engineers, right? You know, like garbage truck people? And it’s like, they’re like, “Now we’re going to be sanitation engineers.” Really, what we do is death planning. But nobody likes to say that. And so they’re like, “Well, let’s call it estate planning.” But the thing is that it’s bigger and more important than just your stuff. Right? Because that’s the thing, it’s like, how many people as they’re lying in the hospital bed dying are thinking about like, ‘Wow, I wonder who’s going to get my couch?’ Right? ‘I wonder who’s going to take care of my silverware collection?’ No one cares about that. You care about your family. And your family is not part of your estate because you don’t own your children, right, as much as people might want to. So we’re planning for death. The problem — and this is why people don’t think about it and I think probably at some level why you haven’t done this as a podcast is because it’s morbid. We’re talking about when you die or we’re talking about when you’re in a coma and can’t communicate. Like these are not fun topics. But they’re important topics because you care about the people in your life. And this is the law’s mechanism for how to do that. Our system of laws, it’s kind of amazing. And I feel like — and that’s the thing I try to sort of impress upon people. It’s like, these documents are frankly like superhero documents because they allow you after you’re dead — I mean, you’re gone. But you are still making effect — you’re having effects in the world. You are actually still spreading goodness and care in the world because of these documents that you’ve created. And that’s kind of amazing I think. And you know, our legal system wouldn’t necessarily have to operate that way. There’s no reason why we would sort of say like, Jim died, and he left this fancy house. And we’re going to let Jim decide who gets the house, right? We could say, “Everybody gets a piece of the house,” right? We’ll sell it and put it into the tax coffers. Or Jim’s oldest son would get it. Right? But no, we give people a lot of control to affect these changes if they choose to. And that’s the thing, that’s what estate planning is. It’s you are making affirmative choices to sort of change the world in the ways that you can by using these documents. So the bad news is we’re talking about death, but the good news is we’re talking about this amazing set of documents that can really change the world for the better for the people that you love and your pets because I don’t have kids so I’m always thinking about my pets. So that’s what we’re talking about. We’re talking about death. And I think just put it out there. You know, we don’t introduce ourselves as death lawyers, but that is what we do. And it’s really important. And that’s the thing, it’s like why should people do this? Well, you know, I guess the thing is like you have people in your life that you love. Do you have young children that you care about? Do you? Right? If you have young children that you care about, probably you care about who would raise them if you and your partner were in an automobile accident or something and you both died unexpectedly, right? And I get why people don’t want to think about it. I mean, I think about one of — my oldest dog is almost 18, and the thought of her passing kind of makes me want to curl up in a ball. So I get why parents, it’s like, it’s a huge hurdle to actually say like, let’s affirmatively think through all of those gory scenarios. But the fact is, it’s like, if you want to really take care of your kids, you have to do this. Right? That’s just point blank. If you care about your kids, you should do this. So who should do this? Who should do an estate plan? People with kids, people with pets they care about, people who care about their family. You know, the thing is is that our system of laws also does have a set of default plans. Every state has a system of default plans. So if you don’t do your will, it’s not like all of your property just goes to the state. There’s sort of a mechanism in place for who should get things. And you know, for a lot of people, that system works great. If you both die in a car crash, it’s not like your children are just wandering the streets, begging for money. There is a system in place to sort of decide who should care for your children, right? So I mean, there are these default plans in place. So just to be clear, the “if you don’t do this,” it’s not catastrophic. But yet if you don’t decide who should take care of your kids, most often all of your relatives fight about it in the courts. You know? I don’t know. But there are default plans. The default plans are not the end of the world, but they are not your choices. And there’s chaos and trouble involved with it because there are lawyers and there are custody hearings and it’s all kinds of yuck. And the way that you opt out of the default plan is by creating these estate planning documents.

Tim Ulbrich: And I appreciate, Nathan, what you said about — and I’ve never heard this perspective before, and I like it a lot, which is that we have a system, which has given folks a lot of opportunity to make decisions that might otherwise be made for them. And so I think if we take that perspective and apply it to the estate plan, it’s not as morbid — still a morbid topic — but you know, now we’re in that conversation of, OK, I’ve got some decisions to make. I’ve got some autonomy. I’ve got some choice. And you know, you’re touching on that concept of probate, essentially that process where if folks don’t make these decisions, yeah, there is a net that’s in place but it might not be the desired state that one has, whether it be related to those that are loved ones and their family or even resources that they have. One follow-up question I have here, Nathan, because I think we probably have many folks listening that maybe this is very obvious that they need these documents or have to update them, maybe there’s young children or just children altogether involved, maybe there’s substantial or growing assets, and I think that tends to be fairly obvious. But often, I’ll get the question from folks that maybe someone who’s more of a recent graduate, perhaps doesn’t have a partner or significant other, there’s no kids involved. So is there a point when it’s a clear like, someone should have an estate plan in process? Or is there a period in time where some folks it might be not now, but we need to look at this in the future?

Nathan Kavlie: Yeah, I mean, if you’re single and don’t have any kids and you get along with your family, you’re probably good to go. I can’t be certain, right? I mean, to be absolutely certain, I’d need to do an analysis of your actual circumstances, but if you’re single and get along with your family, you’re probably fine. If you’re single and you don’t get along with your family, you should definitely create an estate plan. One of my best friends from law school is totally estranged from his mom and his sister, and it’s like, well, you need to do an estate plan then because otherwise they’ll get all of the stuff. And that’s not what he wants to have happen. So when you have children, you know, when you’re pregnant or when you’re thinking about kids — and actually, the thing is when you’re thinking about kids is when you should do this ideally. But anytime in that process is great. We get a lot of clients that sort of say like, our due date is x months away, should we do this now? Or should we wait until the baby is born? And the answer always is, do it now. Because when the baby gets here, you will not have any time. You won’t even have time to sleep. So do it now. Do it when you’re thinking about having kids. We can write the documents to basically sort of already account — a lot of what we do as estate planning is we sort of create documents that anticipate many different futures. Because we don’t know what the future will hold. But we know there are some things that might happen. You might have children. You might not have children. And so we can sort of draft the documents as an either-or situation. So when you’ve got kids, when you get married is a good time as well. Yeah. And if you have some assets, that’s always good. I mean, it’s one of those things, I think people think of it sort of like senior photos, right, where it’s like, it’s going to be expensive and you just do it once. And I think it’s a real disservice. I think it’s driven, of course, by awful lawyers that are really expensive and really unpleasant. But I think it’s sort of weird that we think that like you should only do this once because you will know exactly what your life is going to be like. And circumstances change.

Tim Ulbrich: Yeah, and that’s true, right, with the rest of the financial plan. You know, we always say when you’re looking at investing or retirement or insurance or whatever it may be, it’s an evolution. It’s a journey, right? And that was, Notesong, a question I have for you before we come back and talk with Nathan about the living trust and then some of the other documents. This concept of OK, it’s a lot of work to get it done but is it something I should be looking at annually or every five years or as life events change? And I’m looking at the site where you’ve got a two-step process, which is evaluating the plan and then wanting to avoid probate and you know, a couple different options where one is you’re creating your plan in that Phases 1 and 2 where you’re then updating that or having some ongoing support, so talk to us a little bit more about what you typically do or recommend with folks in terms of OK, yes, we do this upfront work, but then how often we should be evaluating this.

Notesong Thompson: Sure, absolutely. That’s actually a very common question that we get all the time. We’ve reorganized the way to think about this because the whole process is yucky and it’s overwhelming. So Nathan and I really strive to break it down into nuts and bolts. And so on the ThoughtfulWills.com/YFP page, we’ve created two boxes that talk about Phase 1 and Phase 2. Phase 1 is essentially creating your plan. This is where all of the drafting happens and we can customize it as much as our clients want. And then we also ensure that the document is signed correctly and questions can be asked without, you know, worry of the clock ticking because we also want to try to avoid that because that’s always a fear is how much am I going to get charged for this email exchange? Like we try to avoid that. And then Phase 2 is really equally important because if you get a revocable living trust, it’s important that you actually fund that trust. And there are certain mechanisms that have to — that are in place that need to happen in order to put stuff into that trust. And so that is all under the umbrella of Phase 2. And so as far as like reviewing your estate plan, for example, my husband and I drafted our estate plan — gosh, 14 years ago. And we haven’t had a lot of major life changes. A lot of our — we’re still close to the people we’ve named as legal guardians and backups, my sisters and my sister’s mom, and so luckily, if nobody’s developed a gambling habit where we need to change up who’s going to be the trustee or durable power of attorney. That being said, it’s always — we think it’s always a good idea to review your plan every year, just to make sure your wishes are still reflected. And then also, the revocable living trust, it takes a little bit more work, a little bit more follow-up with that every year. But making sure that you fund your trust, make sure that you are updating your non-probate assets too — and I’ll let Nathan go into that later — but you want to make sure that all of your beneficiaries are up-to-date. So it really drives me crazy when all these online will-making services have really now come onto the scene in light of the pandemic, and everybody facing life-and-death issues, they talk about like all these unlimited amendments and things like that. But what they are not talking about is all of the legal requirements that are required in order to make sure that they’re valid, they’re actually valid. So every time you change your plan or you do a formal amendment, if it’s required, you also have to make sure that it’s re-executed, meaning signed and notarized where necessary. And that’s all based on your state. Each state has really super specific nuances and that’s where we rely on our local counsel attorneys in each state to help us ensure that we’re following their state’s laws exactly to a T.

Tim Ulbrich: And Nathan, Notesong mentioned the revocable living trust, the importance that document can play and I heard you guys talk about this on another podcast as really a magical and powerful document that when utilized and funded correctly can sidestep the high cost and hassle of probate and how important that is for professionals, especially professionals who have a higher income potential. So talk to us more about what is the living trust and the importance and the value that that plays.

Nathan Kavlie: Yeah. So I want to sort of back up before I get to that if that’s OK.

Tim Ulbrich: Sure.

Nathan Kavlie: So I think we should first talk about the will, which is really sort of the foundational document to estate planning. I think most people know what a will is. It’s in TV, right? They all gather when somebody dies and reads the will and then people are all pissed off. But the will is the key, right? The will is sort of the foundational document where everybody sort of — where you create essentially your last testimony about what you want to have happen. And so that sort of superhero document that I talk about — I mean, the set of superhero documents. The will is the first one that people do. In like the 1960s, lawyers starting using what are called revocable living trusts. It was sort of a newer concept back then, but now it’s very subtle but it sort of was a little bit kind of cutting-edge back then, but now it is not cutting-edge because, you know, frankly, who wants to have — when you’re talking about your babies and protecting their assets, people don’t want to be experimental in the law. Right? You want settled law.

Tim Ulbrich: Not the place to be cutting-edge.

Nathan Kavlie: Yeah, exactly. So it was cutting-edge in the 1960s. It is not cutting-edge in the 2020s. Basically, so when you create a will or if you don’t have a will, basically, everything goes through probate. And I think it’s first important to say, what is probate? Because I think everybody sort of hears — if you listen to enough or really any sort of financial wellness sort of podcasts, everybody knows that probate is awful, but I don’t know that people necessarily know what probate is. And probate is our legal system’s sort of mechanism to wind up the affairs of people after they die. So it’s important to understand it’s a judicial process. And that’s why it’s expensive and a hassle because you have lawyers involved and you have a judge involved and then they have to send notice to the interested parties and there are hearings and it takes a long time. We probably all know somebody who is like, “Yeah, my grandfather’s estate took 15 years to probate.” That’s what it is. It’s — but it’s an important process because, you know, since we give the dead a lot of control over their assets, we need to make sure that we know what they really wanted. And if they didn’t make a will, then we need to make sure that the process, the sort of default plans, are followed correctly. And so that’s what probate does. So it’s an important thing, but it’s an expensive hassle. And especially — just somebody has to deal with it, right? You don’t just get to turn it over to the lawyers. Like somebody has to manage the process. And so there are ways that you can avoid probate. One of them is called non-probate assets. And I think people are becoming more and more familiar with these. These are things like life insurance and retirement accounts. Life insurance and retirement accounts, when you open them, you choose a beneficiary. So you say, you know, “When I die, this asset will go to my spouse or to my kids,” or something. And because the asset has a built-in beneficiary mechanism, it doesn’t go through the probate process because our system of laws honors life insurance’s own mechanism.

Tim Ulbrich: Makes sense.

Nathan Kavlie: Assets that are inside of a trust are non-probate. It’s like a $10 legal sentence, but it doesn’t really make sense without context. But the idea here is like your goal — because your house is not a non-probate asset. Your house is a probatable asset. So are your cars. Your cars are a probatable asset. So are your rights to music you wrote and your clothes and all of those things — some bank accounts — all of those things go through probate automatically. But if you move them into a trust, they can avoid probate. And so then the grand idea is well, let’s create a trust that will house these assets and then they can skip probate. Caveat: If you live in Connecticut, you don’t get to skip probate entirely. But this still is a very — it minimizes the hassle and the cost. So just a little caveat there. So the goal here, you create your own trust. Trusts are about as old as wills. They sort of hearken back to like the crusades in England. When the lord was taking up the holy cause and going out to the Middle East, you know, what happens to their assets? And so that’s where trusts came about. They were like, well, you can hold my assets, but you hold them for my benefit. You don’t own these lands. You’re just going to hold them for me because I’m going to be gone for like 12 years or something. So trusts — and trusts are used in many different contexts, not just in estate planning because like some charities are structured as trusts. But estate planning uses a lot of trusts. We can set up trusts for your children to protect their inheritance. We also use these living trusts. So it’s lots of different trusts, but this is the revocable living trust that we’re talking about here. And what it ends up doing is it becomes sort of a companion piece to a will so that together your will and your trust take care of all of your stuff together. But the will ends up becoming a much less important piece of this process. The will ends up acting like a backstop so that if you forget to move any of your assets into the trust, the will says, “Throw all these assets into your trust.” So if you forget to — or you know, if you sign all of your documents and you have like a Beetlejuice car accident on your way home and everybody dies, right, it’s like you won’t have had time to move your assets into the trust. So the will acts as a backstop. The will still is important because the will is still going to contain who should take care of your children, who should be the legal guardians, who should be the guardians of your pets. So the will is still an important document, but when we talk about like where your money should go, setting up trusts for your kids, or if you have somebody who has special needs, all of that goes into the revocable living trust. And we’ve described it as sort of a magic law box. Right? It’s like you create this account that you put your assets into, but it really only works if you put your assets in. Otherwise it’s just sort of really expensive paper. And so that’s when we talk about like Phase 1 versus Phase 2, Phase 1 is when we talk through how many kids do you have? Who should take care of your kids? Where should your stuff go? When we’re talking about Phase 1 and creating your plan, I don’t actually care about any of your assets, which is weird because a lot of people come and they’re like, “Well, I want to tell you all about my assets.” And it’s like, I don’t — it’s sort of jarring for them, their, essentially their death lawyer to be like, “We don’t actually care about your assets right now.” Right? And the reason I don’t care about them at this stage is because I don’t know what you’re going to own when you die.

Tim Ulbrich: Yep.

Nathan Kavlie: No one does, right? So right now, we’re creating a plan that really is just sort of broad strokes. And so we talk more in percentages, right? Like half goes to my spouse and half is divided amongst my kids.

Tim Ulbrich: Right.

Nathan Kavlie: And whatever you own, you know, that’s the key because we just don’t know, right? So yeah, during Phase 1, I don’t care about your assets at all. At all. That’s where Phase 2 comes in because once we create your plan and we talk about who should take care of your kids and who should get your stuff, then it’s time to actually talk through your assets. Do you have some retirement accounts? Do you have an LLC? You know, maybe you have an investment property as well as your primary residence. Maybe you have a cabin in a different state. Maybe you have some expensive cars. All of those assets, then we start talking about the actual assets because we need to move them inside of your magic law box.

Tim Ulbrich: I mean this honestly, Nathan, I think that is the best explanation I’ve heard of the will and the revocable living trust in about a five or so minute period. So thank you. You’ve lived up to —

Nathan Kavlie: Well thank you.

Tim Ulbrich: — the obsession of making the complex understandable. It was really, really good, and I hope folks will hit rewind and listen to that as well because I think it can feel overwhelming, and that was very digestible. So thank you for that.

Nathan Kavlie: Thank you. Well, I appreciate it.

Tim Ulbrich: Notesong, pressure’s on now. So we talked about the will and the living trust. But that’s not it. We can’t stop there. There are other estate planning documents that we need to be thinking about. So talk us through some of those other documents and what they mean and why they’re important.

Notesong Thompson: Yes. Well, I mean, it’s the world we’re living in right now. Tim, you and I were talking about this before, but everybody is facing life and death right now with the pandemic in our face and its ever-evolving whatever it is. And so the phrase “accidents and illness happen without warning; there are no guarantees in life,” it just has so much more meaning today. And the healthcare directive and durable power of attorney are equally two magical estate planning documents that operate while you’re still alive. And the magic about them is that they both authorize somebody to act on your behalf if you’re not able to, if you’re incapacitated, if you’re in a coma. And we used to previously refer to these initially as coma documents because we tried to talk to people about them as incapacity documents and nobody got it. And they’d be like, ‘Oh, I’m fine. I’m young. I run every day. I do this. I’m so healthy. I’ll come back to you after when I’m older.’ And you know, we never want to pressure people, but at the same time, in that kind of blunt, very candid way, we just say, “OK. Quick question, do you drive a car?” You know? And it is, these are miserable topics. But we have to also consider that these things happen without warning. So both documents authorize someone to act on your behalf if you’re not able to. They authorize someone to act as a power of attorney. And so with the durable power of attorney document, they act as your durable power of attorney as it relates to finances and property. In your healthcare directive, you’re also a power of attorney, but it’s all related to your healthcare. They can make decisions for you. And the healthcare directive actually has two parts to it. The first part is power of attorney for healthcare. The second part is what a lot of people know as the living will. And that’s where you can get really specific as it relates to whether or not you want a feeding tube or assisted breathing, CPR, if you want altered CPR. I really have taken on the healthcare directive as my baby because I was my dad’s backup backup backup healthcare agent when he took his last breath. And as awful as it was, the saving grace there was that — you know, and he was a physician and he knew the importance of identifying exactly what he didn’t want — as awful as it was to be at the bedside, I was able to also give the poor resident who had to show up at 3:30 in the morning with a crying daughter at the bedside, I was able to tell her, “No compressions, just morphine, oxygen.” You know? And honestly, I think one of the greatest gifts that you can give your loved ones is that healthcare directive because otherwise, as Nathan mentioned before, estate planning is just rife with chaos and emotion. And in that moment, you don’t want somebody fighting over what your loved one wanted at the end of their life. So you can get really, really specific about that and also like organ donation as well. And so I think it’s a really powerful document that way. The durable power of attorney, you know, equally too. It seems like a no-brainer to have this in place, but the thing is you mentioned Zappos and wow, I mean, I know that — is it Tony Hsieh?

Tim Ulbrich: Tony Hsieh, yep.

Notesong Thompson: I’m not sure if I’m pronouncing — Tony Hsieh. I mean, the last I read, sadly, tragically, is that he died without an estate plan and that his dad and brother are in court, fighting to be able to take control of his finances, which are in the billions. And so not only is that a hassle, but they have to go through so many court proceedings, it’s expensive, and they’re trying to grieve the loss of their son and brother. So having this simple durable power of attorney in place lets your person of choosing and their backup, and you’re going to choose to have them as co-agents in case you want to have like a checks and balances. That could be a whole show in and of itself is choosing a durable power of attorney. That is equally important because you want to make sure that you’re choosing somebody who’s going to manage your finances while you’re not able to — or equally like if you’re out of the country and you want to move on a property that’s come available and you’ve been looking at it for 20 years, that person can also step in and act on your behalf in that capacity too. And that’s the durable part of it.

Tim Ulbrich: That’s great. And we’ve scratched the surface on these documents but really important points. We’ve talked about the will, we’ve talked about the revocable living trust briefly, the healthcare directive, durable power of attorney, and as I mentioned at the beginning, the goal is not that folks hear this and say, “OK, I’ve got the textbook on estate planning,” but rather hopefully is stimulating some interest and a conversation among folks about where am I at in this process? What do I need? What do I not have? And what steps do I need to take? And I hope folks will check out ThoughtfulWills.com/YFP, where they can learn more about the work that you guys are doing as well as the services that you offer. I also suspect that we might have some folks listening that are saying, “You know what, I’ve done this or I’m going to do this, but perhaps Mom or Dad or Mom and Dad, it isn’t something they have done. And how do I initiate that conversation?” And it reminds me back to Episode 108 where I talked with Cameron Huddleston about how to effectively talk with Mom and Dad about their finances and this obviously being one of those very important conversations. So Nathan and Notesong, thank you so much for your time, for your expertise, for the collaboration. And looking forward to having you back on in the future so we can dig deeper on this topic.

Nathan Kavlie: Thanks. This was fun.

Notesong Thompson: Thank you, Tim.

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YFP 220: Student Loan Forbearance Extension – Now What?

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Student Loan Forbearance Extension – Now What?

Kelly Reddy-Heffner talks about how those with student loans should be calculating their next moves considering the most recent extension of the administrative forbearance through January 2022.

About Today’s Guest

Kelly Reddy-Heffner is a Lead Planner at YFP Planning. She enjoys time with her husband and two sons, riding her bike, running, keeping after her pup ‘Fred Rogers.’ Kelly loves to cheer on her favorite team, plan travel, and ironically loves great food but does not enjoy cooking at all. She volunteers in her community as part of the Chambersburg Rotary. Kelly believes that there are no quick fixes to financial confidence, no guarantees on investment returns, but there is value in seeking trusted advice to get where you want to go. Kelly’s mission is to help clients go confidently toward their happy place.

Summary

Tim Ulbrich welcomes YFP Planning Lead Planner Kelly Reddy-Heffner back to the show to discuss how those with student loans should be calculating their next moves considering the most recent extension of the administrative forbearance through January 2022. Kelly talks through how to maximize the time left to evaluate your loan repayment options and choose the best next steps for your situation.

Kelly walks through the recent history of administrative forbearance for student loans taking us through to the current and likely final extension set to end at the end of January 2022. During this time of administrative forbearance, recent pharmacy graduates may not have had to make any payments. Others may have allocated the funds elsewhere, new expenses may have arisen, or employment status could have changed. In response, Kelly shares some general advice on making the most of the remaining forbearance period.

The Student Loan Analysis is one way to help pharmacists feel confident with their financial decisions regarding their student loans and to map out realistic goals for repayment regardless of the type of plan. Kelly outlines how the Student Loan Analysis at YFP works, who should consider it, the information to have on hand for your appointment, and where to gather all of your loan details, whether your loans are in the federal or private sector.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Kelly, welcome back to the show.

Kelly Reddy-Heffner: Thank you, Tim. I am happy to be here.

Tim Ulbrich: It’s been awhile. We had you on last Episode 187, where we talked about how to maximize your student loan strategy while federal student loans payments are paused. And that was back in January 2021, and I think at the time we thought, hey, this whole student loan forbearance thing might be coming to an end soon. And here we are again, talking about this topic and what this pending end to the administrative forbearance means. And so Kelly, kick us off by just bringing the audience up to speed on the background of the administrative forbearance on student loans and the extensions that have recently been extended one last time is what we’ve been told.

Kelly Reddy-Heffner: Absolutely. Right. So nothing has changed and yet it feels like everything has changed at the same time. The perfect feeling. Right, we originally had that administrative forbearance at the start of COVID in March of 2020 by the Trump administration. It was extended once during that presidential administration. And then now, we’ve seen with the Biden administration that it was extended two more times. So we had that extension until September, and now we have what I believe is the final time where we have until January 31. So I do think we’re coming to the end of the forbearance extensions, in my opinion. So we’re going to enjoy a few more months of 0% interest, no loan payments due, and of course those loans not having any default issues. So a couple more months, but we’re coming to the end of it.

Tim Ulbrich: Yeah, and Kelly, you and I were talking before we hit record, I think one of the challenges — and certainly there’s been some benefits during this time period. We know firsthand from many in the community that they’ve been able to through this administrative forbearance accelerate the achievement of other financial goals, and that certainly has been a positive but also coming up on the two-year mark, essentially, right? So March 2020, you know, we entered lockdown, the pandemic, we started the forbearance with the CARES Act. So this time period of two years, I think that presents an interesting challenge where perhaps folks have gotten used to having no student loan payment and perhaps other expenses that have come to be. And then I think about the classes of 2020 and 2021 specifically where student loan payments haven’t even been a thing, you know, for them because of their graduation during this time period. So I suspect, Kelly, that a lot of pharmacists, a lot of folks listening out there, perhaps clients that you’ve been working with, have been wondering, should I or should I not make payments on my student loans during the administrative forbearance? And certainly this is not meant to be and it’s not individual advice, but what are your thoughts on this? And how have you helped coach folks through making this decision?

Kelly Reddy-Heffner: Well, I think you’re right that, you know, two years is a lot of time. So we changed our financial goals and priorities changed considerably, our employment may have changed in that timeframe as well. In general, I think I speak for our podcast listeners that they are proactive. They want to be taking action. They’re listening because they want strategies to put into place. So this has been a very interesting time period. We’re feeling like we’re not doing anything with the student loans. But there are a lot of things that we could be doing in the background, which I think can have a very positive impact on net worth and put our listeners in a great position for when repayment starts again that they’ve accomplished a couple other things. So we’ve been recommending if you are, you know, having any other debts, take care of those. Anything accumulating interest should be a top priority while this federal loan is not accumulating any interest. Building up an emergency fund — so again, we may not see net worth increase because the student loan debt is paid off. But we can see positive changes because those emergency funds are improving and giving people more options and more confidence in their finances. If you are in a PSLF program or a non-PSLF forgiveness program, then we’re not making payments at all on the federal side because there’s no benefit to doing that. But if you are only paying the loans, that is your strategy, you’ve either done the math yourself or spoken to a professional and you know that that is your plan, then that really could be on the agenda. Like if it’s comfortable to make those payments on the federal loans, then that could be an activity as well. But we do need to get back into the mindset of the payments are coming back. So we are asking clients and listeners to know at least a rough idea of what the payment amount is and to bring that back into your budget.

Tim Ulbrich: Great point, Kelly, there. I think it’s time to dust off, re-dust off the budget and really look at — run the calculators, use the tools that are available at studentloans.gov, you know, what is that estimated payment going to be as we get into February 2022? And how does that work or what changes need to be made to the budget to make that work, right? And now is the time to get the practice reps so that we’re not caught off guard in the New Year and we can make some adjustments or changes and have some time to warm up to that. And I think that’s a really important point and perhaps one that folks have been thinking about but dragging their feet on for good reason because of all the talk of the extension and I think I believe, you believe, that this is likely the end of that. And so let’s get ready for those payments to begin at the beginning of February 2022.

Kelly Reddy-Heffner: Agree. I mean, there was a statistic out there that 90% of the over 45 million borrowers were not making payments as of March of this past year. So that is the bulk of borrowers not making those payments. So it is time to figure out what that payment might look like. Like you said, recent graduates, 2020/2021, may have had an income tax return with part of a year in residency or the full year in a residency. So that payment amount could be very low. Once they’ve started full-time employment, income has increased, if they’re on an income-driven repayment plan, that’s what drives what that payment amount is, the income. So that will have potentially changed significantly.

Tim Ulbrich: Yeah, one of the things, Kelly, I often share with new graduates or even students that are beginning to think about student loan repayment is because of the complexity of the options that are out there, both federal and private — and we’re going to come back to that here in a little bit — this is not a decision that you want to wander into. Right? We want to be intentional with understanding those options, we want to be intentional with thinking about how this fits in with the rest of the financial plan. And here we are, we’ve got months to do that, right? So let’s take advantage of this time period, the end of 2021, and let’s really get ready so that we can hit that beginning of repayment when the pause ends and we can be confident with making that decision. And as we’ve talked about on the show before, you know, choosing between Option A v. Option B v. Option C, given the amount of student loan debt that many pharmacists have, that can be very significant in terms of the amount that’s going to come out of pocket because of the nuances with the different repayment plans. So intentionality really matters here. And let’s use this time that we’ve got left before this administrative forbearance ends to make sure that we’re ready in making that decision. Kelly, Step No. 1 — so I’m somebody listening and maybe I’m not loving the energy of this episode and the reality that hey, I’ve got to get back in the game. But I’m listening, I’m ready, and whether I’m a 2020/2021 grad or perhaps I was paying prior to the pandemic and it feels like forever ago and I’ve got to get back in the game, what is the first step that listeners can take to get ready for payments to start back up?

Kelly Reddy-Heffner: Absolutely. Well, again, just knowing what we’re dealing with, like what are the loans? Taking that inventory, you know, understanding which ones are federal, which ones are private, they have very different attributes in terms of what types of options are available for repayment. So we want to know what are we working with? What do we have on the table? And again, I think figuring out some of the other lifestyle goals as well, we cannot ever undervalue like how people feel about the loans, what they really want to accomplish with other goals as well. So you can look at studentloans.gov, which will actually redirect to studentaid.gov, to get some calculators, some information. That also is the source of your NSLDS file for taking that inventory and then pulling your credit report, you can get your free annual credit report and seeing like, OK, what’s federal? What’s private? I think knowing how much you can afford is key too. So sometimes that payment amount is what the payment amount is but knowing what your budget is, what you can afford, will help determine like do you need to be in an income-driven repayment and putting a plan in place? Is refinancing a better option because you have resources available? So again, there are resources out there to assist with this. But it’s a lot of data, a lot of information, a lot of subtle nuances. Even we have to be like, hold on. What is the date of the loan? That sometimes will impact what repayment options are available, just literally the date the loan was taken out.

Tim Ulbrich: Absolutely. And so Step No. 1, you know, if you don’t have that up-to-date information is understanding all of the information about your federal and private loans. What’s the balance? You know, who is servicing those loans on the private side? You know, we should be able to quickly get information on the interest rate and the repayment terms on the federal side right now. That probably is showing as a 0% if those are qualifying under the administrative forbearance. But I love — Kelly, I talked with a couple actually just the other night who when I asked them about their student loans, you know, it was very precise. They had all the information. “I’ve got three federal loans, I’ve got one private loan.” And it was to the penny of the outstanding balance, what they had. And I loved the intentionality of hey, I don’t like the number. I don’t like that it’s $194,000. But I understand that in order to put a plan together and to be able to evaluate the options and to be able to know what we can afford inside the budget, I’ve got to understand what we’re working with first and make sure that we have all the details. Step No. 1 is that inventory. And we’re going to link in the show notes to the links that Kelly mentioned on the federal side and the private side. So the federal side, she mentioned studentloans.gov will redirect to studentaid.gov. And then on the private side, running the credit report at annualcreditreport.com. Kelly, after the inventory, you alluded to the second step, which I think is really important is what can the budget afford? And when I teach this topic of student loan repayment, that’s often something I try to walk folks through is, hey, let’s make sure we know what the budget looks like. And as we’ve said many, many times on this show, student loans, as big as they are for many pharmacists, student loans are one piece of the puzzle. So we’ve got to understand what else is going on, what other expenses are out there, what other goals are out there, so that we can determine what that budget can afford. And if we decide to do a more aggressive repayment path, what does that mean for achieving other goals? If we decide to do something like a forgiveness path or more extended path, what does that mean for achieving other goals and really looking across the financial plan? And so we’ve got a budget template for folks that want to get started or update that budget. If you go to YourFinancialPharmacist.com/budget, you can get a copy of that. And so Step. No. 1 is inventory, Step No. 2 is really looking at what the budget can afford, Step No. 3, Kelly, is probably the most confusing, the most difficult, but the most important part, which is understanding the options. And unfortunately, the hand we have been dealt as borrowers of student loans I would argue is more complex than it probably needs to be. Separate topic for a separate day. But talk to us about understanding repayment options, something you work often with our clients about, and just the magnitude of this decision.

Kelly Reddy-Heffner: Well, right. I mean, once you’re on studentaid.gov and you’re plugging in some data, I mean, you’re going to get a lot of information back about these repayment options, especially on the federal side. I mean, and they, again, range significantly. So even that date you took out the loan can have a significant impact on what options are available. So we have income-driven repayment options, which we have two that we usually recommend or work with in PAYE and RePAYE. Of course we have standard repayment as well, which is usually that 10-year term, which is a fixed payment amount, does not vary with income. We don’t lean towards extended or graduate options, just because they really perpetuate the length of time that it takes to repay the loan and often, you know, with pretty high interest paid in the process. So income-driven is usually the area where we’re operating in and also that standard repayment if we’re not refinancing. And again, just understanding like the date you took out the loan, you’re right that 0% is kind of the default on all of the data, which is hard. Like we were taking out loans when we were 18, 20. It’s not usually the ideal time for being detail-oriented about this type of information. So we can take a look at the dates the loans were taken out in the federal system and see what the interest rate was that year. But it’s a lot — it’s a lot of nuance for sure.

Tim Ulbrich: And then we’ve got, you know, on the federal side, you mentioned the variety of options. To make it a little bit more complicated, we’ve then got the private option. And we’re going to come back to talking about some common questions that we get around refinancing. I do — without going too far down the rabbit hole because we have talked about it extensively on the podcast, most recently on Episode 214, I interviewed a pharmacist who had $127,000 that was forgiven through the Public Service Loan Forgiveness. And so we’ve talked in detail about PSLF, non-PSLF, but I think it’s worth talking about again just briefly in the context as we look at the end of this administrative forbearance. So Kelly, quick dive, I don’t want folks to hear this and think, oh, I’ve got it with PSLF and non-PSLF, certainly more complicated than what we’re going to discuss briefly — but quick dive into PSLF, non-PSLF, what they are, and the main differences between the two of them.

Kelly Reddy-Heffner: Absolutely. And I mean, I think there are still questions. Like it has improved our level of information, but the PSLF rules are very specific. You do need to work for the right type of employer in a nonprofit setting, and you can check an EIN number now in some of the PSLF tools on studentloans.gov, which is helpful. You do need to be in the right kind of loan. So we still see that as a little bit of a problem at times. Like it does need to be in a direct type of loan. So if we see FELL loans, we see HPL loans, we see Perkins, those don’t automatically line up to qualify. And that’s where some of the confusion still exists. You do have to be in the right repayment plan. So in income-driven repayment, there are some nuances with standard repayment that require a little bit of conversation if you’re in standard. You have to make the right amount of payments. It’s 120. And you do need the documentation. So as FedLoan servicer changes to a new servicer, this is an area that we are focusing on and just reminding borrowers to make sure that they have their data documented. Go onto FedLoan, take a screengrab of where your cumulative payments are. Of course the best part is it’s a tax-free situation. In contrast, the non-PSLF forgiveness is a longer time period. So instead of being 10 years, it’s 20-25 years. 20 or 25 depends on some nuances with grad loans and the type of repayment plan that you’re in. And again, it doesn’t matter if you work for a nonprofit. You can have any employer to qualify for non-PSLF forgiveness. It really is based more on the amount of loans compared to income for that program. And then there is a tax consequence at the end. I think that tax consequence is one of the things that maybe will continue to be evaluated by the current presidential administration, like are we keeping that? Are we not keeping that? It would have an impact on people in that program. So yeah, there’s some pretty significant differences between those two programs.

Tim Ulbrich: Kelly, when I talk with folks about non-PSLF and the way I describe these is, you know, PSLF I think is a little bit better known by folks just because it’s gotten so much press and attention, although maybe not the best press. But it feels like folks are more aware and educated. I describe non-PSLF as the lesser-known forgiveness option in the federal system. And I think when I see folks’ reaction, there’s kind of this range of emotion from, ‘Oh my gosh, 20-25 years, like I’ve got a tax bill known as the tax bomb at the end of this, like who in the world would do this?’ Right? And then you start to talk a little bit about, OK, well, depending on the debt load, depending on some of the strategies around this, depending on if we think about saving for that tax bomb, maybe it’s not as overwhelming as it can seem. But certainly that’s a long period of time and, right, there’s some complexities here with the tax piece. So in your conversations with clients at YFP Planning, like does this have a role? How often does this come up? And are folks, you know, worried about some of those things that I just raised in terms of that tax piece as well as the timeline?

Kelly Reddy-Heffner: Yes. I mean, that is a long time to be, you know, in a repayment strategy. So right, we do do an analysis to see like what do the numbers look like? Often, these decisions are very emotional. 20-25 years is a long time. So we try to refocus on the factual components like what does the actual repayment look like? Like how does the payment amount per month compare if you refinance or accelerate a repayment? What is the overall forgiven amount? Sometimes, that number is quite compelling. Like if you are seeing, you know, six-figure digits of what’s forgiven, then we really do have to see like is that a viable option, despite the fact that it can be a little overwhelming to think of a 20-year time span. So yeah, we do carefully look at really all that factual data and then try to talk through the emotions behind it and what it means in terms of other things that you might be able to achieve in that timeframe. Sometimes it does make it much easier to buy your first home, to pay off something else, to be able to meet your monthly budget. Sometimes accelerating repayment is not affordable.

Tim Ulbrich: Yeah, absolutely. And I think this is a good reminder of — and many folks that I’ve talked with I can sense that sometimes, the overwhelming feeling, beyond just the number of the amount of debt they have, is that nagging feeling of like, I know there’s so many options out there, and I’m not sure I understand the differences between them and a desire to feel confident in that understanding and then making a decision that you know has evaluated other parts of the financial plan is ultimately best for their individual situation. And I want folks to not underestimate how important that feeling can be, especially with momentum and the rest of the financial plan, to confidently choose the repayment option that you know has been evaluated and is really best for your personal situation and to hopefully feel empowered and educated throughout that process as well. So Kelly, on the private side, refinancing is a topic that we talk about often on this show. It’s one of the most common questions that I get in terms of should I or should I not refinance? What should I look for in a lender? You know, what are some of the considerations in the refinance process? And I want to hit some of that because I think there’s probably many folks that are listening that maybe refinanced before the pandemic and have been excluded from this administrative forbearance or folks that have delayed refinancing and are wondering like, when might I pull that trigger? You know, thinking about what might or might not happen in interest rates. And so I suspect the conversation around refinancing is going to heat up as we saw the activity around refinancing really at historic levels before the pandemic hit back in January and February of 2020. So first of all, Kelly, what is refinancing? Give us the definition.

Kelly Reddy-Heffner: Absolutely. And it is — the two terms consolidation and refinance are very different. They’re used interchangeably, which is not quite right. So you know, as opposed to consolidation, which is taking federal loans for convenience or to be in a position to be in income-driven repayment or to qualify for forgiveness, consolidation is taking like a bunch of federal loans and putting them into like one or two subsidized or unsubsidized. So still federal, interest rate really is not impacted. It definitely doesn’t lower the rate. It may open up other opportunities for different federal programs. Refinance is either taking your federal loans and moving them into the private sector, which is a one-way transaction. Like once you’ve moved into private, that’s it. Or you have existing private loans and you refinance them into other private loans. So very different, very different what is happening there.

Tim Ulbrich: Yeah, and I think folks are likely somewhat in this holding pattern, right? I think in terms of, as I alluded to just a couple minutes ago, like hey, I think refinancing is the play or perhaps they’ve evaluated that, but what do I do? We’ve got several months left of administrative forbearance, rates may or may not go up, there’s offers that are out there that might help minimize some of that concern. But like what might I be giving up as well? And I think that’s one of the other questions and considerations folks need to be thinking about is what is different? So it’s not identical from the federal side to the private side with refinancing. Important note here is that every private lender can be a little bit different. So you know, we’re generalizing as we’ve put them together. But what are some of those main differences or things that folks need to be looking for as they consider what might be different from what they have in the federal system versus what they’re pursuing in the private market?

Kelly Reddy-Heffner: In order to really evaluate a refinance, usually the primary objective to refinance is interest rate. So if you can get a better interest rate, that can be a compelling reason to refinance. But you’re absolutely right that there are tradeoffs to doing that. So you know, high level, I think there is a little of FOMO, like ‘Oh my gosh, interest rates are low. Are they going to go up in the next week?’ And then this becomes not a viable strategy. We have been monitoring interest rates throughout the summer, and they’ve been pretty steady. Like we’ve even seen them go down a little bit and kind of back up a bit, but pretty steady. We have seen some interesting programs or offers from private lenders where they kind of offer this 0% bridge. That was happening for a bit. In general, you know, the couple big things are with the federal loans, we have seen the protections in action. Like we know there is a very tangible like ah, that is what a federal protection means because of the CARES Act. In general, you know, will the loans be discharged? That’s a big question if something happens to someone. In the federal loan program, they are discharged for death and for disability as well. On the private side, it really depends on the lender. So that is something if we’re working with a client who’s considering a refinance, we are looking at the fine print to see what the discharge status would be. In terms of, you know, can I pay extra towards a refinanced loan or even a federal loan, the answer is usually yes in both cases where you can accelerate some repayment if that’s the appropriate strategy to take. But in general, we don’t have income-driven repayment on that refinance side. So if your income goes down, which you know, is something we hope doesn’t happen to our listeners but occasionally it does either by choice or not by choice, you know, is a job opportunity amazing and you’re willing to take a slight pay decrease? In the federal program, you can provide documentation that your income has gone down and have that income-driven repayment re-evaluated and lowered. That’s not a feature of a private loan system. So the payment is what it is.

Tim Ulbrich: And I think you articulated well there why it’s so important that folks are running the numbers, right? You mentioned the primary goal is to effectively lower the interest rate. And for many folks, that savings can be significant. If you’re talking about $150,000-$200,000+ of debt and you’re seeing a spread of 1-3%, whatever it might be, on interest rates depending on their personal situation, like that math adds up. So what I encourage folks is run the math but don’t stop there, right? Be thinking about these other things. You mentioned some tangible examples we have seen are the benefits of the federal program, the CARES Act being one. Just last week or it might have been the week before, the announcement from the Department of Education about over $5 billion being allocated to those that have a total or permanent disability in terms of loan forgiveness. So again, another tangible benefit and them improving the ease of that forgiveness process for those that have a total and permanent disability. So there are differences, and the savings may be there and often that may make sense, but just make sure you’re also considering some of these other factors as well. So we have I think outlined fairly well that navigating student loan repayment certainly on your own given the factors that we’ve discussed can feel overwhelming. I’ve been there, and I think aside from exit counseling that folks get, there really isn’t a whole lot of assistance in figuring out which repayment option is going to be best for your personal situation. And therefore, folks might get defaulted into the standard 10-year repayment plan or wonder, am I in the best repayment plan for my personal situation? And that is why we developed an offer a custom one-on-one student loan analysis. In this service, the goal is that we’re working one-on-one with you to lay out all your options so that you can confidently choose a repayment plan that hopefully will save you the most money and that ultimately aligns with other financial goals. And so in doing this, you’ll work with one of our YFP Planning Certified Financial Planners to inventory your loans, both federal and private, evaluate eligible repayment options, including the ones we’ve discussed here today, student loan forgiveness, income-driven repayment, private refinancing, and then ultimately try to determine what that best repayment strategy is for your situation. So Kelly, you are the lead for us on conducting these one-on-one student loan analyses. I know it’s something you also do frequently with clients of YFP Planning that are participating in our comprehensive planning services. So talk to us a little bit more about this service, the student loan analysis, and what folks can expect.

Kelly Reddy-Heffner: Well, especially now, as there are so many unknowns, we do struggle with like what is the next best step? And I think we do — I hope — help clients get some clarity. Like sometimes there are options and knowns beyond what we think are available. So I’d say one of the biggest objectives of doing the analysis is putting confidence in a next step. So this is the information we have available. So I think it is an ideal option for any borrower who wants to have a strategy in place so that they can make other good decisions about the rest of their financial plan. So it is an ideal opportunity to build some confidence and to say like, ‘OK, here are my various options.’ You know, we look at within the confines of the federal program what the options are in terms of income-driven repayment, which payment plan might be best, do a comparable with refinancing, look at non-PSLF forgiveness, and really put out the facts of these are the options that are available and help talk through what is best for that individual client and that household. It is not ideal for folks who have already refinanced everything into the private sector because already, the options are significantly more limited. You’re in the private sector, you could potentially refinance again for a lower rate — and I think that is a question we get a fair amount, like can I refinance again? It is different from a home mortgage refi. The process is a little bit different. It does have a credit component, though. You know, you are getting a hard credit check if you refinance. So that can have an impact, but you know, there’s not closing costs. It is a little different. So yeah, you know, if you can get a better rate, it’s certainly worth looking into. But for those clients, I feel like we best help people who still have some federal and are deciding like what is that next best step.

Tim Ulbrich: Yeah, I agree, Kelly. I think for — you mentioned, you know, the service is not necessarily for everyone. So folks that have already refinanced and because there is less options at that point — you mentioned it is a one-way street earlier. But for many folks I suspect who are, ‘Hey, I’ve still got federal loans. I’m wondering about forgiveness, PSLF or non-PSLF,’ or those that do think PSLF is the path forward, do I have all my ducks in a row? What might be some of the strategies or things that I’m thinking about for optimizing that strategy? Or if I’m not pursuing Public Service Loan Forgiveness, does non-PSLF forgiveness make sense if I work for a non-qualifying employer? Or might I evaluate that refinancing? And how do I do some of that analysis and consider some of the things one might be giving up by making that move from the federal to the private. And so for folks listening, if you’re ready to get help in mapping out your plan, I think now is a great time as we, again, head into this home stretch on the last several months before that administrative forbearance ends, you can go over to YourFinancialPharmacist.com/SLA, where you can get more information about the service, get a little bit more information about Kelly, what’s included in the service, what the service costs, and then you can book that right there as well and get on Kelly’s calendar. Again, that’s YourFinancialPharmacist.com/SLA. Kelly, really appreciate your time and your expertise and the contribution that you made to the community on the show today.

Kelly Reddy-Heffner: Thank you. I’m excited for listeners to really feel like they can make that forward progress and have some confidence in a decision. So I know sometimes, especially during the last two years, we have that feeling of being in a little bit of a holding pattern. But use the time wisely. Prepared is a strategy. So never underestimate the opportunity of having those ducks in a row.

Tim Ulbrich: Great advice. And certainly last but not least, if you’ve been listening to the show for a while and you like what you’ve heard, please do us a favor. If you could leave a rating and review on Apple Podcasts or wherever you listen to the show, that would help other pharmacy professionals find this show. And if you have a question that you would like us to answer or feature on an upcoming episode, you can reach out to us at [email protected]. Have a great rest of your day.

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YFP 218: How Marina Created a Business in Clinical Herbalism

Posted on by yfpadmin

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

Posted on by yfpadmin

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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