Investing / Podcast

YFP 204: The Current State of Buying, Selling, and Refinancing a Home

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The Current State of Buying, Selling, and Refinancing a Home

On this episode, sponsored by IBERIABANK/First Horizon, Tony Umholtz, a mortgage manager for IBERIABANK/First Horizon, discusses trends in the housing market coming out of the COVID-19 pandemic and the current landscape for those purchasing, refinancing, or selling 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

On this episode, Tim Ulbrich welcomes Tony Umholtz back to the show to discuss housing conditions in a post-pandemic world. While there may have been significant economic turmoil related to the COVID-19 pandemic, real estate continues to boom. Tony explains some possible motivations for such an active market include work and school being remote in many cases, those in apartments feeling cramped and seeking more space, and others still who have sought to purchase second homes in less populated areas.

Tony addresses some fears about a potential future housing bubble, explains some differences between buyers in the previous housing booms with current buyers, and differentiates the present home buying process, from the practices of the housing boom and conditions that led, in part, to the Great Recession of 2008.

With post-pandemic life offering more flexibility than ever before, Tony explains how that mobility is reflected in the housing market. He makes some predictions about the future of the real estate market and interest rates, shares insight regarding new generations aging up and into the housing market, and provides considerations for those who may be first-time homebuyers, contemplating making a home purchase in the present market.

Lastly, Tony explains the details of the Pharmacist Home Loan offered through IBERIABANK/First Horizon.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tony, welcome back to the show.

Tony Umholtz: Tim, thanks for having me. Good to be back.

Tim Ulbrich: Excited to have you back on the show. You’re a frequent guest I think at this point, and we’re going to link in our show notes to previous episodes in which you’ve been on talking about buying homes, selling homes, what this means from a lending standpoint, options, what’s the professional home loan, and we’ll dig into some of that here today as well. But for those that maybe didn’t catch you on a previous episode, give us some quick background and your current role with IBERIABANK/First Horizon.

Tony Umholtz: Sure, sure. Well, I’ve been in the business a long time now. I hate to say this, but it’s been almost 20 years in the mortgage banking business. And I have been just focused on residential lending has been my focus and have been with IBERIABANK for about 3.5 years. We recently did a merger with First Horizon, so hence the slash. But it will be a full combination by the fall. But it’s been a great company and we’ve been very excited.

Tim Ulbrich: Yeah, and excited for the collaboration here. And we’re going to talk as we get towards the end of the episode about the pharmacist home loan product as I suspect many of our listeners if they’re not already aware, that may be something that’s a good fit for them. But we’re going to spend most of our time today talking about really an interesting topic, and that is housing considerations in a post-pandemic world. I mean, it’s really been a strange year. And although there has been some significant economic turmoil related to the COVID-19 pandemic, certainly what that has meant for jobs that have been lost, the real estate market is continuing to boom. I think we’ve all probably heard stories, maybe some are dealing with it firsthand — I’ve talked with a colleague, a friend, a family member — it’s a wild market out there, Tony. So despite the challenges we’ve had economically related to COVID-19, what’s happening as we’re seeing this, really this significant real estate boom that’s going on across the country?

Tony Umholtz: Well, it’s a very interesting dynamic. And COVID-19 changed everything. But the real estate market has been a big winner. And the interesting part of all this is it’s — there’s been some long-term changes in demographics and even just housing in general, housing construction that just came to a point last year. And one of those things that we’re seeing here, Tim, is we were behind — our decade of new constructed homes, the past decade was the lowest it’s been since the ‘60s. Right? So the inventory created was nowhere near to meet the demand. And that’s one of the reasons we are where we are right now. And of course with COVID last year and so many supply chains being affected, employment being affected, you know, the raw materials, lumber, other materials needed to build homes, there’s less supply. So that’s just caused this challenge here, but it’s a good time — not every housing market is perfect, but the majority of housing markets in our country are thriving right now.

Tim Ulbrich: So Tony, you mentioned one thing in terms of the new home construction, some of the raw materials with lumber contributing to some of the issues we see, really simple supply and demand that I think is leading to a lot of the stories I know I’ve heard of bidding wars and offers that are well above asking and appraisal waivers and other things we’ll get to here in a moment. But what else? You know, I think of — is there some pent-up demand here of we had a housing market that last year if we think about the timing of COVID, you know, March of 2020, that really typically is kind of the beginning of the boom of the home buying season, obviously the pandemic might have tampered with some of that or perhaps people not picking up and moving that might have been going to other jobs or more people working from home and they want more space and so they’re looking to maybe get out of the city or move into the suburbs. What are some of these other factors beyond the construction, beyond the raw materials, that really has got us into this supply-and-demand position that we’re in right now?

Tony Umholtz: Well Tim, you mentioned a few things. And one of those is people moving to the suburbs. We’ve seen a big exodus from some of the big cities. I think one of the housing markets I could say that’s underpriced probably right now is New York City, right? There’s been a lot of — comparatively, there’s been a lot of exodus out of New York City, San Francisco and New York City, some of the bigger cities because people can work from home. A lot of people can. Not everyone can, but a lot of people can, and I think that’s changed a lot of things for a lot of people. The other thing too that I’ve seen is just when I mentioned demographics, the shifts, just the millennials, right? And even Generation Y, they’re starting to get into the housing market more and more, and they’re looking and saying, “Hey, I’m paying $2,000 in rent. I could own a house for this.” I think it’s starting a realization that you can own a home and have your own home. I’ve just seen a huge increase in first-time home buyers as well. I think that’s another big shift with this large group of our population moving up and aging. And then just low interest rates, right? I mean, you have the Fed being very supportive — our Federal Reserve is being very supportive and accommodative to help the economy get through this very, very difficult time. And the housing market’s been a winner. And anytime you have low barring costs, usually it leads to expansion in the real estate market. So that’s the multiple reasons why. And then you put on top of that a limited supply of homes, and that’s why we are where we are in many markets.

Tim Ulbrich: Yeah, and I’d like for a moment — you mentioned one factor, Tony, obviously interest rates, I’ve seen some numbers out there before that on average, you know, if you see a certain drop in basis points or certain percentage reduction in rates, that has obviously an impact on the demand, among other factors, of course. Rates aren’t the only thing. But tell us more about what we’ve been seeing really over the past year. I remember you and I talked about this back in March of 2020, here we are in April of 2021, you know, what have we seen in terms of rates, whether it’s first-time home buyers, those that are refinancing? And then not expecting you to be able to crystal ball this, but where might we see some of the trend of this going forward as I think it might have an impact for folks that are thinking about something like a refinance, you know? Does it make sense now? Or does it make sense that I kind of sit and hold and wait for the future?

Tony Umholtz: That’s a great question, Tim. It’s hard for me to pinpoint exactly. I can tell you trends that I’m seeing right now. You know, clearly we had unprecedented stimulus last year to help rates go to those levels. The Fed is still accommodative. And rates are still very, very good. Purchase money, meaning loans for purchasing a home, are going to be lower than refinancing. There is typically an adjustment — and it’s really a trickle-down effect from Fannie Mae and Freddie Mac on refinances. So there’s a slightly higher rate for refinancing versus a purchase money loan. But it still makes sense. We’re still writing a lot of refinances. And one area that I’m seeing opportunity, even though we’re off the lows — the lows were saw last fall, but we are off them now. But there’s still a lot of people with rates that are over 100 basis points, which is 1%, are over 1% savings level. And then the other thing that I see too is debt consolidation, people that own a home already and they have a lot of equity built up, but they have other loans that they’re paying higher interest rates, we’ve been able to really help some folks get their budget in line, really get themselves on a clean slate and really get a good savings plan. So I think refinancing can make sense no matter what the rates are. Everyone’s situation is different. And the trend for rates, I think what we’re going to see — and this is just, again, a disclaimer that I’m not an economist, but I do — I’m a bit of a nerd, I will admit, and I read a lot of this stuff and I have all kinds of subscriptions that I follow. But the trend is going to be some inflation this year. But the Fed is accommodative. So I think rates will be a little higher as the year goes on, but you have a lot of things that are going to help rates stay at a certain level. But I do think rates will trend a bit higher this year. On the other hand, looking out into the future, large government deficits and debt like we’re posing, I think we’ll hear even more of that here this week coming out, I mean, that’s all deflationary typically. So what that means is it puts pressure on rates to go down, right? So it’s just an interesting time. It’s hard to really be a crystal ball seeing the future, but this year, I think the trend is going to be slightly higher rates.

Tim Ulbrich: Yeah, and as you mentioned, Tony, we saw rates really at a significant low back in the fall, but I do think — and you probably see this more than I do every day — I’ve talked with a handful of individuals in the last several weeks that still may have purchased back in, you know, I remember fall of 2018, rates on a 30-year fixed mortgage were north of 4.25-4.5% for many folks. So I think there still is opportunity out there. And for folks that maybe haven’t gone through that evaluation to see do the numbers make sense? Of course there’s other factors beyond that, not to exclude refinance as an opportunity, even as we may see rates tick up here in a little bit. Tony, one of the things I wanted to get your feel on, you’re in this every day, obviously, in your market down in Florida but also have a good pulse on what’s going on nationally. Here in Columbus, I mean, the folks that I have talked to, it seems like above asking is the norm and in some cases, significantly above asking, bidding wars that are ongoing, sometimes appraisal waivers that are happening, and I think it just raises some attention and warrants some conversation about like, what are the implications of those types of things? You know, I think for folks that are out there shopping now or soon to be out there shopping throughout the spring and the summer, before you find yourself looking and then within 24 hours, you’re in a bidding war, like what are some things, you know — No. 1, are you seeing those and are hearing about that across different markets? And then for the buyer, what are some things that they should just be thinking about of the implications of those types of scenarios?

Tony Umholtz: That’s a great question. And absolutely we’re seeing that in a lot of markets. We lend across the country, so we’re seeing it in multiple, multiple markets. It is — and some are worse than others. But they’re all pretty heated in a lot of ways. One thing I’ll mention just on the waivers of contingencies, I think you’ve got to be very careful with that. I think you need to be very aware of what you’re getting into because when you say I’m just waiving the appraisal contingency, well, if you were to pay $300,000 for a house and it comes in at $280,000, well, the bank is going to use $280,000, the lender is going to use $280,000 as the price point, right? So in that case, you’re coming to the table with $20,000 more in equity. So there is some risk here involved when you waive these contingencies. So I think, you know, I know it’s hard. And I get calls all the time from listing agents on pre-approval letters I’ve sent on behalf of our customers, and they want — they ask me all these questions, and obviously I can’t answer anything personal. But they tell me, “Your input was important because we’ve got 12 offers.” You know? “And I’m taking them all to my seller tonight, and we’re going to meet and go through each one.” Some of the things I’ve learned — one thing I’ve learned from a couple very veteran real estate agents, this might help the audience here, is a lot of my clients will say, “You know, just put the minimum amount of my offer on your pre-approval letter.” So if I’m offering $300,000, just put $300,000 on that letter. So we’ll do that a lot thinking it’s a negotiating tact. But what a lot of these agents have told me, they say, “We actually like the ones that say $500,000 on it.” And the reason why is they know the client’s very qualified.

Tim Ulbrich: They know it, yep.

Tony Umholtz: So they look at it differently than I think a lot of people do because a negotiating is a negotiating. They’re trying to find the strongest candidate that’s going to close. And it’s not just about the price, even. It’s also — price is important, but I think it’s the ease of closing and a lot of times, you’re competing against cash offers too. So you have — and they might be a little lower, so you have to overcome and say, “Hey, mine has financing, but I’ve got to put my best foot forward.” But I’d be very — again, very cautious about waiving these contingencies. I think you have to have some sort of out. If you’re working with a realtor, you have to see if you can negotiate that in. If the appraisal comes in low, it’s going to cause big problems for a lot of people.

Tim Ulbrich: Yeah, and I’m glad you said that, Tony. I think this is a good reminder, you know, something I’ve shared many times on the show before, but especially in the market that we’re in where negotiation is not in your favor as the buyer, right? It’s very much a seller’s market. You’ve got to really take a step back and hopefully objectively evaluate before you’re out there even shopping, what does this mean in the context of the rest of the financial plan, right? And so you know, having a pulse of the market of if you’re looking at homes that are $300,000-400,000, what might that actually end up being in the market? Is it more like $320,000? $330,000? $420,000? $430,000? Depending on offers and so forth. And how does that work out for the rest of your plan? Run out those numbers. Work with your planner, work with your coach to really evaluate that because I think that obviously home buying can be a very exciting, emotional thing. It’s a very important step for many people in their financial plan, but we’ve got to make sure we’re doing it in the right context of everything else that we’re trying to achieve. Tony, the other question I have for you — it made me think about this when you said cash offers, more of them being out there, and I’ve heard the same thing, is how does this then work out for folks that are trying to sell a current home to buy? So I’m thinking of a contingency upon the current sale of a home to buy. You know, is this market even less favorable to them? Or are there strategies that they can employ for those that are in that position where they aren’t able to buy until they also have the sale of their home that they can be competitive against other buyers that are in the market?

Tony Umholtz: We’ve seen a lot of these lately with the contingencies. We’ve had a couple approvals that we’ve done where we’ve had to — the client clearly had to sell their house before they could afford a new one. But once they listed the house, they sold it so quickly that it really was a fast process.

Tim Ulbrich: OK.

Tony Umholtz: So I think the challenge is you don’t want to have that — it’s going to be hard to win over 12 — or say there’s 10 other people bidding on the house at the same time, it’s going to clearly be challenging to win if you have a contingency. But there are some situations where you’ll be surprised that that house sells pretty fast. That’s the other piece is if you want to sell your home, you kind of have to be on your toes and find something pretty quickly.

Tim Ulbrich: Absolutely.

Tony Umholtz: Or negotiate some lease back with the buyer of your home.

Tim Ulbrich: Tony, one of the things I’ve been thinking about lately is considering how hot the market is, considering just the unique factors we have of kind of what’s going on with interest rates and potential inflation and supply and demand and new construction being down, all these variable, like living through 2008, I can’t help but think back to man, are there lessons that we learned there that we should also be thinking about now as we’re really continuing to see this market as hot as it is? You know, essentially is there reason for concern? And I saw a statistic leading up to this episode that says — this was reported from Google — that the search for the phrase “When is the housing market going to crash?” was up 2,450% over the last month, so obviously others are thinking about this. Some research from JP Morgan, quoting that “after robust gains over the past five years, the nationwide nominal house price index is now 40% above its 2012 low point and 4% above the peak that was reached in 2006.” And they go on to say, “If 2006 was a historic bubble, then current price levels should be looked at more closely.” You know, you think about obviously the value of homes going up much faster than we’re seeing in terms of individual’s income, we’re still coming out of some unemployment, you know, related to the pandemic, people getting positions back, so my question here is like, are homes overvalued? You know, what’s the concern of this? And like what is different here from what we experienced in part related to the Great Recession of 2008?

Tony Umholtz: Great questions. I mean, you know, lots of things that you mentioned there. And I’ll give you some feedback from my experience in the business before that time. So I started in the mortgage business almost 20 years ago now. And I lived through that. I was actually — my third year, I think I was in my fourth year in the business was 2005. And I was still pretty young at the time, but I was one of the top loan originators in my company nationally at the time. I wrote 400 loans that year. And I look back at that year, and I was always a very fairly risk-averse person. So you know, I wasn’t one of those lenders doing crazy loans. But back then, Fannie Mae even took loans with no income documentation. I remember running them through Fannie Mae’s system, and they just needed a pay stub and that’s it. So I’ll give you the differences that I’m seeing, and I’ll just equip everyone with the most knowledge they can have here. So back in that timeframe, half of the business I wrote was people who were speculators. They literally were going to buy the homes to either rent them or flip them. That’s what it was. You know, everyone was caught in this train, I’m waiting in line to buy a home to flip it, to rent it. It was that kind of thing. And the other half was owner-occupied clients. So that was the mix of my volume back then. Nowadays, I’d say 95% of the loans that we write are owner-occupied homes. And some of them are like true second homes where people are literally going to be moving to Florida or to another area as soon as they retire. It’s I want to lock in my property now because we’re retiring in a few years. It’s that kind of thing. So the amount of speculation that I’m seeing on an individual buyer basis is much different. Now there’s a lot more institutional landlords out there, hedge fund-types that own rental property, but it’s not to the degree that — I remember back in ‘05, it was just so many people, the greed level, lending standards were much different. We could — like I mentioned, we could do loans with very little documentation. Lots of lenders did — and I’ll share this with the audience if anyone’s ever seen the Big Short movie, I was on the phone, probably 28 years old at the time, with Bear Stearns. I was one of the bigger producers. I remember Bear Stearns mentioning to us that they would buy 100% no documentation loans from us.

Tim Ulbrich: Sheesh.

Tony Umholtz: And I just remember thinking to myself, that’s — and I hadn’t been in the business that long, maybe four years or so — and I remember thinking, that doesn’t seem right. And then of course, couple years later, you know, I had the foresight.

Tim Ulbrich: Come to find out…

Tony Umholtz: But come to find out everything had happened. But the amount of greed that was in the marketplace was a little bit, it was a different environment than it is today. And not to say that things — but the amount of leverage that was in the environment, like anyone could get a loan. It was — people were just buying loans in speculation. Now it seems more fundamental. But you know, the one thing I will add in is interest rates, what does that do? Because if you see interest rates double from here, that’s going to affect affordability. And then from my vantage point, I think with rates being low, prices have risen. But one thing that you should look into is the historical real estate values. And even though we had that peak in ‘06, you’ll notice that we dropped off a lot, and then it typically hovers around that 3-4% long-term appreciation. I think we might be a little over that right now, but I wouldn’t be surprised if we kind of just huddle along that line. Again, never say never, but it’s one of those things where it’s hard to — I don’t see the leverage, the difficulty in getting a mortgage today is much different than it was 14, 15, 16 years ago. It’s not — if anyone’s gone through the process, we really do due diligence, right? We see your income, your assets, we see your credit, we verify everything.

Tim Ulbrich: Yeah, and I was just going to share the same thing, Tony. If anybody has gone through this within the last couple years or even since 2008, you know the difference in terms of paperwork, I saw the difference in terms of transparency of information, easier to understand documentation from a lendee perspective if you’re willing to read through all of that paperwork. So I’m glad you shared that. I think the circumstances are different, and I think it’s important for folks to understand this is not a 2008 type of scenario or 2006 type of scenario in terms of documentation required, in terms of the types of mortgages that are out there, the lending practices, in terms of how conservative I would argue they are today compared to where they were back then. Tony, you said affordability, and that’s something that’s also top of mind for me is you know, I think of pharmacists — obviously, because that’s our community here — where incomes are relatively flat for many pharmacists right now. In some cases, we’re actually seeing incomes go down just because of hours of work that are available and for a variety of industry pressures that we have on those positions — and I’m generalizing here. Of course that’s not true for all positions. But it makes me think, then, about that case where for pharmacists, specifically we may see wages that are flat, obviously housing costs here going up significantly, we’re not even talking about perhaps general inflation in other areas that may be coming into the future. But even beyond pharmacists, like I think this question of affordability is a really interesting one. And you mentioned interest and demand among millennials. I guess the other side of that coin I would ask is like is this market making housing unaffordable for perhaps a generation in some regards? That this is going to impact many people getting into a home and the economic benefits that can come from that.

Tony Umholtz: I think it clearly can influence a lot of people. I mean, you think about in certain markets and just how much prices have gone up, I mean, again, borrowing costs have kept things pretty darn low. That’s helped. But one thing about borrowing costs versus income — and flat income is not, obviously you’re not seeing that gain every year.

Tim Ulbrich: Right.

Tony Umholtz: But normally, the income increases and the increase in prices, it’s not — the increases in prices is outstripped because of that borrowing cost. But you’re clearly right. The one thing that I will throw in, the other thing that’s to me is a little more frightening is rent prices.

Tim Ulbrich: Yeah, that’s right.

Tony Umholtz: They came down right when COVID hit because of the shock to the market, but they’re really surging in most markets. So when I have clients that we do our preapprovals, we see what they’re paying in rent, and it’s eye-opening. So I think that that’s the other side of this is if rents are where they’re at and you look at that affordability, you know, that’s going to be a challenge. And this is one thing we just have to keep an eye on. The markets are — they’ll correct themselves eventually. But the Fed may have to keep rates low longer.

Tim Ulbrich: Yeah. Is that — on the rent side, Tony, I’m sure it’s more complicated than I’m suggesting, but is that a trickle down effect of supply and demand on the buying side? That you know, if there’s not as many homes to go around for people that are interested in buying, you then increase the demand on the rent side, which further drives up rent price?

Tony Umholtz: It’s twofold. So I mean, part of it is supply and demand with rentals too. You know, if you have very little vacancy in your apartment building, you can command higher rents. The other thing you’ve got to watch is as there’s more and more multifamily, which is an apartment complexes or rentals being built, that’ll also put some pressure on rents as well and I think over time will catch up, builders will catch up. It might take a couple of years, but I think there will be an equilibrium, it always does shift. And the other thing I’ll just mention too with COVID is none of us saw COVID coming, right, until it hit. And with the Great Recession of ‘08, we saw some warning signs. You can never predict what it’s going to be. Right? We don’t know this for sure. And you know, we’ve put a lot of safeguards in to prevent some of the things that happened in ‘08. But it could be something different, right? And we don’t know what that will be to impact, but at the end of the day, you need a place to sell. And it was funny, I was on the phone call with a past client this morning. And he had bought his home in 2007, probably the absolute worst time to buy it, and he said, “You know, I just kept it rented.” I think the value got — down here in Florida, there’s parts of this area that got cut in half. I mean, we were hit probably as hard as anywhere in the country. And it came all the way back and is well above what he paid for it now. But that’s one of the things about housing is even investors, if you rent the property, you get a return not just from appreciation. That’s how — this isn’t a talk about investments, but that’s why it’s always important to have that if you own an investment property, that it cash flows, right? So that’s what you’re looking for.

Tim Ulbrich: Tony, one of the other questions that comes to mind here is if I’m someone listening who maybe I’m interested in buying a home, but it’s not a burning need in the moment. I could wait. Is there any merit into hey, let’s let things cool off a little bit, let’s let supply normalize and ride this out for a little bit? Or do you think because of how significant the supply and demand issue is now, that we might be in this type of a market for awhile?

Tony Umholtz: I think it’s going to be awhile before we see things really calm down. I mean, it’s — everyone’s market is different too. I think we have to be clear on that. Most of the country is experiencing a very robust housing market, but every place is different and every pocket of the city can be different. So I think it’s your individual area, but I think overall, in general terms, it’s just going to be up to the person. I don’t think — you know, I’ll just go back and I’ll talk about last year, and I’ll go back to 2017-18. I had conversations with clients of mine, and a lot of these were people that I had done business with for years, so as some of them took a pause, I had a couple of them sold their homes in ‘16 and ‘17 because the market had gone up nicely, said, “I’m going to rent for awhile, then I’m going to buy back in.” Well, that didn’t work so well. So even my own feelings, I remember a couple years ago thinking, things are pretty hot right now, it’s 2019. So it’s hard to predict, and I think you’ve got to look at your family situation. This is a lifestyle decision. It’s not like buying a stock in Apple or Amazon, right? It’s a — you live there. So while it’s an important, big investment, over time, it’s going to be OK. And I think the amount of money you’re going to have to pay in rent will be something you have to keep in mind when you’re paying that rent versus owning a home that you’re building equity in just by making the payments. So if you absolutely don’t have to buy, yeah, you could wait it out, see what happens. But I don’t know how much better it’s going to be. Then the other side of it what are interest rates doing?

Tim Ulbrich: That’s right.

Tony Umholtz: So if we see interest rates moves a half-point higher, then even if prices stay the same and they flatline, you’re going to be paying more per month. So there’s a lot of factors to go into it.

Tim Ulbrich: I’m glad you mentioned the rates again too, Tony, because I think that we often throw around terms like a half-point, quarter-point, that obviously if folks haven’t run numbers before, I’d encourage you to do so. I mean, a half a point, three-quarters of a point, of course as that increases on a $300,000, $400,000, $500,000 loan over 30 years, we’re talking about tens of thousands of dollars of difference, if not more than that. And so this comes back to the conversation about not only where are rates from a time perspective but things like credit and optimizing your credit and understanding your credit score and how to improve your credit, things that we’ve talked about on the show before but obviously why credit such an important part of the financial plan, as we talk here related to home buying and interest rates. Tony, the other trend I want to get your perspective on, you and I have talked about this briefly offline, you know, we’ve mentioned a little bit about the work-from-home movement and perhaps because of this, folks moving more out to the suburbs. I’m also thinking about just beyond their current area, the flexibility that they may now have, not within their area but to move to a warmer climate or to move to a beach town or something that wasn’t on the table before but now because there’s perhaps more flexibility in their work environment that they’re able to do that. So are you seeing those trends, especially knowing where you’re at down in Florida where you’re seeing more folks that are looking for a second home or picking up and moving because they have more flexibility with their work?

Tony Umholtz: The transition has been amazing. I’ve — a couple of stories this week that we have. We have a couple of closings for clients here in Tampa that are from New York City. They can live anywhere. And I’ve been getting a lot of referrals from Miami as well that a lot of folks moving down from New York. And some of them have lived in the city their whole life and just are ready for a change. And they can remotely, and it’s freed them up. I think you’ll see Miami become a major financial district in our country now. I mean, you’re seeing a big exodus of kind of the Wall Street financial firms moving down, relocating their businesses down there. And we’re seeing a lot of it here in Tampa, a lot of second home purchases too for those that can afford them because they can use them and take their kids that might be homeschooled right now or doing online learning. I’ve done a lot of lending on Amory Island, which is down here about an hour and a half south of Tampa. And it’s a really neat spot, but it’s just — the amount of demand because people can do that. They can live there, they can live there part of the time and work there and enjoy the beach. But in other places too, I’ve seen other second home markets around the country where people are taking advantage of this ability to work remotely. And I think the technology has been — this is something that’s always been there. 2020 was a catalyst, right, for all this to happen. And I think you’re just going to continue to see that trend, although there is some of that movement back for some people to get back into the office, especially as the vaccinations have really grown across the country. But I still think you’re going to see this ability to work remotely. Even with me, I’m in the office a couple days a week, and then I work from my home office as well. So we can work effectively both places.

Tim Ulbrich: Yeah, I think every time you and I have connected, Tony, over the last year we’re probably both at home. Sometimes the kids are in the background. It’s just part of the new norm, you know? I think that, to your point, like we saw this coming. I mean, the desire for a more flexible, remote work environment and then obviously the pandemic in 2020 was the catalyst. And it’s going to be interesting to see what goes back, you know, to normal and what stays. You also have the advantage down there of no state income tax in Florida, right? So that’s a bonus for people that are looking there.

Tony Umholtz: We do.

Tim Ulbrich: Let’s transition, Tony. I want to talk a little bit about the pharmacist home loan that you all offer through IBERIABANK and First Horizon. I suspect many of our listeners are already aware of this product from previous podcasts that we’ve had. We’ve got information also on the website, YourFinancialPharmacist.com/home-loan. But I think for many of our listeners, when it comes to home buying, I think of, OK, what are the most common barriers? Well, student loan debt typically rises to the top. And then the other thing I think about is usually the cash available as a new practitioner or a pharmacist who’s getting started to be able to put a down payment on a home. And I think the pharmacist home loan offered through IBERIABANK/First Horizon really allows folks an opportunity that they may have thought otherwise was impossible or weren’t aware of the option that was out there. So tell us a little bit about this mortgage loan option that you all offer. What’s the product about? Minimum down payment, maximum loan amount? And then some of the requirements for one to qualify.

Tony Umholtz: Sure. Well, the product’s been just a great help for so many people. And I think the big advantage of this program is you can do as little as 3-5% down with no PMI. So if you’re a first-time home buyer, you could do 3% down with no mortgage insurance. If you’ve owned before, it’s 5% down, again, no mortgage insurance. And the interest rates are very, very strong. In most cases, they’re better than a client putting 20% down, which is an advantage. And as far as the maximum loan amounts go, we currently are capped at $548,250 as a maximum loan amount for the product. And there’s a minimum credit score of 700. So you have to have at least a 700 credit score to qualify. But other than that, it’s really — that’s the qualifier. So there’s nothing else really you have to be concerned about. There’s not a clear reserve requirement or anything to that degree. And there’s no prepayment penalty on the mortgage either. So you can pay the loan off early if you choose to. Just is a great way to get into the housing market. And PMI is — you look at a $400,000 or $500,000 home, and you’re paying hundreds of dollars a month at that point.

Tim Ulbrich: That’s right. Yeah, great stuff. And we’ll link, again, in the show notes, YourFinancialPharmacist.com/home-loan. We’ve got lots of great information on the site about the product, about home buying considerations, some great educational content there as well. So I hope our listeners will check out that post, “Five Steps to Getting a Home Loan,” again, YourFinancialPharmacist.com/home-loan. Tony, you know, two of the collaborations that we have among others as well that really have been I think a big plus for us at YFP and our community, obviously the work that we’ve been doing with you, tapping into your expertise on the podcast here for pharmacists that are looking for financing options on a home loan purchase. So if you’re in the market for buying a home, I would encourage you to reach out to Tony at IBERIABANK/First Horizon. And for those that are buying and also looking for an agent, a shoutout here to Nate Hedrick, the Real Estate RPh, who is there to help you find an agent in your area that would be a good fit for you. And Nate’s there to walk alongside you in that journey. You can find more information about that at YourFinancialPharmacist.com, click on “Buy or Refi a Home” at the top of the page, and you’ll see more information about the professional home loan with IBERIA/First Horizon as well as an option to find an agent. So Tony, thank you so much for taking the time to join again. What’s the best way that our listeners can reach out to you if they have questions or want to get in touch to learn more about the product?

Tony Umholtz: Definitely by email. My email address: [email protected]. And also our office number, (813) 603-4255. I know it’s all listed on the website, but those are the best ways. We have a great team, and glad to help. Everyone’s situation is different, so we love to help. That’s what we do.

Tim Ulbrich: Tony, great stuff again. Thanks so much for taking time to come on the show.

Tony Umholtz: Thanks, Tim. Good to be here.

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YFP 202: How to Teach Your Kids About Money and Investing

Posted on by yfpadmin

How to Teach Your Kids About Money and Investing

On this episode, sponsored by Insuring Income, Tim Ulbrich welcomes Dylin Redling and Allison Tom, creators of Retireby45.com and authors of two books, Start Your F.I.R.E. (Financial Independence Retire Early): A Modern Guide to Early Retirement and Investing for Kids: How to Save, Invest and Grow Money to the show. Dylin and Allison talk about their FIRE journey and share practical advice and meaningful activities to teach kids about money and investing.

About Today’s Guests

Dylin Redling and Allison Tom are a married couple living in Oakland, California. After working for 17 years in the tech industry in San Francisco, they left the workforce in January 2015 and never went back.

They own and operate the website RetireBy45.com, which provides inspiration, tips, and resources for achieving FIRE (Financial Independence/Retiring Early) and making the most of the FIRE lifestyle. In 2020, they wrote and published two books: “Start Your FIRE: A Modern Guide to Early Retirement” and the best-selling “Investing for Kids.”

They love food, fitness, and travel. Their goal of “60 by 60” is to visit 60 countries by the age of 60. They are halfway to their goal with another 10 years to go!

Summary

Dylin Redling and Allison Tom, creators of Retireby45.com and authors of Start Your F.I.R.E. (Financial Independence Retire Early): A Modern Guide to Early Retirement and Investing for Kids: How to Save, Invest and Grow Money, join Tim Ulbrich on this week’s podcast episode. In this interview, focused on their book, Investing for Kids, Dylin and Allison share their creative process and some of the practical and meaningful activities that can be found in the book.

Allison digs into some of the motivations behind Investing for Kids and talks about why they choose to have superhero protagonists. She explains that she and Dylin not only wanted to make the book educational for kids, walking them through basic concepts of personal finance, but also wanted the activities in the book to be fun and exciting for kids to participate in rather than having those activities feel like more homework.

Dylin and Allison also share their own experiences, growing up with different financial knowledge and money lessons, and how those experiences plus a series of calculated financial decisions brought them to be able to retire in their early 40s. Dylin and Allison remark on their time as retirees and the freedom that they have been afforded because of it. Their goal of “60 by 60” is to visit 60 countries by the age of 60. They are already halfway to their goal!

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Dylin and Allison, welcome to the show.

Allison Tom: Thanks for having us.

Dylin Redling: Thank you very much. Great to be here.

Tim Ulbrich: I’ve very much been looking forward to this interview to talk more about your story achieving financial independence and early retirement and more specifically, the work that the two of you did in writing “Investing for Kids: How to Save, Invest, and Grow Money.” And Dylin, let’s start with you only because we share an Ohio State connection since you’re an alum so go Bucks. Why write a book specifically designed for kids about investing? What was the motivation behind your work?

Dylin Redling: Yeah, well, first of all, go Buckeyes. Yes, a great connection there. It’s interesting because I’ll start off with the interesting fact that Allison and I actually don’t have kids. And so you would think that the impetus would have been we had our own kids and we taught them financial literacy and it inspired us to teach more kids. But in fact, we sort of stumbled into this book. This is our second book. Our first book is called, “Start Your FIRE: A Modern Guide to Early Retirement.” And it’s all about early retirement and financial independence, which that book just poured right out of us because it’s something that we live and we know very well. And what happened was the publisher who we worked with on that book came back to us a couple months after that book was published and said, “Hey, we have an idea for this other book. And it’s investing for kids ages 8-12. And what do you guys think because you know about investing and financial concepts, and we think you guys might be able to pull this off.” And we thought, wow, we don’t have kids, we’re not teachers, we don’t hang out with kids. We have a few friends with kids, but we don’t spend a lot of time with them. And so we thought, man, this sounds really challenging and daunting. But it was during the 2020 year of COVID, so we had a lot of time on our hands. So we thought, let’s just go for it. And we dove into it, and it was very challenging because we wanted it to be interesting for kids and informative and fun but somehow, we put our heads together and we had a really good editing team that helped us with some of the concepts to relate to kids. And that’s — and we just dove into it and we just made it happen.

Tim Ulbrich: And I think you guys did an awesome job. You know, one of the things that stood out to me as my wife and I were looking through this book as parents of four young kids trying to teach this topic of money is that’s it’s very hands-on, it’s relatable, it’s digestible, lots of activities, really cool ideas. You know, I often find myself, especially writing, talking about this topic regularly, presenting on this topic, you take for granted how you learned some of this information along the way. You know, I often think, OK, take a concept like compound interest or, you know, mutual funds or index funds or ultimately trying to determine what your retirement savings goals, any of those concepts, and it’s very easy to get lost in the weeds. And I think it’s often hard to figure out, how am I going to break this down and teach this with my children and really work through this? And so I found myself looking through this, not only learning myself of oh, that’s a really neat way to teach a different concept or a very visual way or a nice activity to apply that information. So I think as I looked through this, whether someone is more advanced in their own knowledge and understanding of personal finance or whether they feel like they could also learn from these concepts, either one I think this book could be a really good guide for them alongside of working with their child. So great work in the work that you put together with the book. And Allison, knowing your background is a technical project manager, I’m curious, I mean, how and why did you catch FIRE — pun intended here — with this topic, not only as an individual pursuit for financial independence but also in wanting to help guide others to the work that you’re doing with RetireBy45.com and with the book “Investing for Kids.” Where does the interest come from?

Allison Tom: Part of it is that my college degree is actually psychology and education. So I had all these grand ideas of becoming a teacher, an elementary school teacher, after I graduated from college. But you know, after a couple of years, it dawned on me that frankly, our teachers are woefully underpaid. And there was pretty much there was no clear financial path for me to continue being a teacher making the salary I was making, so I was living in Boston at the time and I moved back to New York where we eventually met waiting tables, of all things. And we came out to San Francisco on a whim, we were on vacation, we were in our mid-20s, we thought, alright, let’s check out San Francisco. And so I bounced around from career to career and ended up on a consulting company that eventually brought me into the technical world of the Bay Area. But you know, so being a project manager is basically being a glorified teacher. So it’s dropping people, wrangling people to do things that you want them to do but do it in a way that makes them want to be — work as a team and learn from each other. So in a way, it was being a project manager was — it had very similar tendencies as it was being a teacher. And so we had always thought, oh, it would be great to retire early, but we didn’t really know what retiring early meant. We thought, oh, 55, that seems like a really good age to retire. It’s earlier than 65, but it seems so far in the future. And living in the Bay Area, our expenses were so high that we were like, there’s no way, even if we’re making decent salaries between the two of us that we’re ever going to retire. But about 11 years or so ago, Dylin came down with double pneumonia and was in the ICU for about 10 days and in the hospital altogether for almost two weeks. And that for us was a light bulb moment because he was within a 50/50 chance that he would make it. And so you know, after that, we kind of thought, OK, do we really want to keep working for the next 25 years or so? And so we kind of like made it our goal to get out of the rat race as soon as we could. And so we kind of fell into by accident. We can talk about that later, but it just — it kind of was a natural progression from all of the things that we’ve been doing over time.

Tim Ulbrich: Yeah, that makes sense. And I appreciate you sharing some of the background and story. We’ll come back to how you got to that point of early retirement, obviously as I mentioned in the introduction, early 40s to be able to accomplish that goal, and we’ll talk a little bit about how you got to that path, why that was possible as well. And so let’s first dig into some of the book of “Investing for Kids.” Let’s start with the main characters of the book, the Dollar Duo: Mr. Finance and Investing Woman. Allison, tell us more about these two characters, how you came up with the idea, why it was important to the overall text, and how those characters can really help the learner, again, 8- to 12-year-old is the target group here, engage with the material throughout the book.

Allison Tom: Well, first of all, it was kind of funny, today is actually Superheroes Day, so —

Tim Ulbrich: There we go.

Allison Tom: It’s a perfect segue into the topic. We were actually taking a walk one day as we were writing the book, and we were talking about politics, of all things. And we were trying to figure out in the administration, whichever administration, whoever won the presidency, what each president could do to make their administration better. And so we kind of were talking and talking about of all things, the Justice League of America and who we would think would be a good fit for making this country a better country. And so the whole idea of the Justice League, kind of thought, we thought, oh, superheroes. Kids love superheroes. Let’s talk to our publisher about bringing in some superheroes. And we were like, well, I don’t know if they’ll go for that, there’s some extra graphics involved and it could be expensive, but we felt that it would really be a good way for kids to relate to finances. And so we kind of pushed hard for this idea of having superheroes teach kids finance.

Tim Ulbrich: Yeah, and that stood out to me in addition to how visual it is. This does not — especially for a topic like investing, right, can be weighty at times, it can be overwhelming, I often find myself when I’m giving a talk on this topic, starts with excitement often when we think about what the — and then you get into the weeds and you see the eyes gloss over, right, and other things. And this does not read like a textbook in any way, shape, or form. And I’m grateful for that. So thank you for the illustrations, the activities, the superheroes, but I think it very much reads like an interactive, applicable, nuts-and-bolts, important information, but how do I actually apply it and hopefully get excited about this information. Again, we’re thinking about an 8- to 12-year-old of wanting to really hopefully empower them to be excited with this for the rest of their own financial journey. And I very much read this book, as I mentioned, being a father of four boys who also lives and breathes personal finance, I really do often find myself in conversation with my boys about money. And honestly, I struggle at times with making the topic of money tangible and meaningful. And it can feel abstract, especially when I find myself trying to say and teach a principle that I very much understand but it feels more abstract as I talk it out loud and especially when you start to view it through the lens of a child. And so I like how you start the book with Chapter 1 on Money 101. You cover important topics like money doesn’t grow on trees, ways to earn money, a little bit of entrepreneurship in there, which is really cool, the history of money, where to keep money. And so Dylin, here’s the challenge that I’m seeing with my boys. In the age of credit cards, debit cards, direct deposit, online banking, digital currency, electronic payment methods, it can feel difficult to teach a child about money when you don’t see it. Right? There’s very little actual, physical cash and therefore, it can be hard to connect work and I think the opportunities from work with earning money and therefore, the opportunity to then save and see it grow. So what are some tips and strategies as you put this book together as well as the other teaching you’ve done on this topic about how can we teach kids about money in a way that it can be relatable, it can be tangible, and then hopefully it becomes memorable for them.

Dylin Redling: Yeah, you know, that’s a really good point about money being very digital in this day and age. I remember when I was a kid, one of the coolest things was my grandmother would give me and my cousins 50 single dollars for Christmas and for our birthdays. They would come in a little box just big enough to hold those 50 $1 bills.

Tim Ulbrich: I love that.

Dylin Redling: And — yeah, it was really cool. And you know, $50 back then for a kid was a lot of money. And those 50 $1 bills would last a really long time. I would take them into the arcade, into the pizza parlor, whatever. And so maybe one way to do it is to actually bring back physical money. And I don’t think the amount really matters that much. But like you said, I mean, being able to tangibly feel it, see it, and understand it, it helps a lot more if you’re using physical money. And I’ll actually give an example of that we used on our blog and in actually “Start Your FIRE” book. I don’t think we mentioned it in “Investing for Kids,” but it’s a little story I like to tell about a money lesson that I actually learned from Allison when we were waiting tables in New York. So we met in a big restaurant in Times Square, and Allison grew up with a little bit of a better financial education in her household than I did. My single mother was wonderful, but it was all paycheck-to-paycheck, there wasn’t a lot of saving or investing. So I came into our initial relationship not very good at dealing with money. So anyway, we were waiting tables. So all of our money pretty much was in tips. So we would have tons of cash. And I remember just putting the money — I would wad it up into balls, I would stuff it into all four of my pockets because I was busy. And then we would go out afterwards and Allison saw how I was treating my money, and she was like, “What are you doing? How do you even keep track of that? That’s awful.” And so she taught me this little lesson. And she doesn’t even remember this because this was 25 years ago, but it stuck out in my head. And basically, I call it the Wallet Lesson. When you take all of your bills and you put them nicely, neatly in order from small to big or big to small, whatever works, fold it neatly into your wallet. And it’s really simple, but the reason it was impactful for me is because it just got me to think about how to respect and treat money. You know, you work really hard for money —

Tim Ulbrich: That’s right.

Dylin Redling: And if you don’t treat it well, you don’t respect it, you know, that $50 might not seem like a big deal. But when it gets to $100,000 or $500,000 and you don’t have that same respect and feel for what that money represents and how hard it was to earn it, you’re not going to put it and treat it and save it and protect it as well as you could.

Tim Ulbrich: Such a good example of a behavioral move, right? The number of dollars didn’t change, but how you treated them, how you respected them, how you viewed them, and I think many of our listeners, we talk on this show often that I believe personal finance, it’s about the math and it’s about the behavior, and both of those are very important and some of those types of moves or here, teaching kids in that way, I think can be very powerful as well. Allison, Chapter 2, save your money, you have an activity titled “Be an Interest Rate Detective.” I love this. I thought this was a really cool interactive activity where you challenge the reader to work with an adult to research interest rates for a local bank savings account, a CD, so a Certificate of Deposit, and an online savings account. So again, this was just one of many example activities you have throughout the book, but why is an activity like this so important in terms of someone being an interest rate detective to experience and go through as they begin their journey of understanding some of the basics of investing?

Allison Tom: So part of it is we wanted all the activities to be something that kids could do with the adult in their life. And we didn’t assume that every child has a parent because we know in this modern day and age that families are different nowadays, and you might have two moms or two dads or a grandmother or grandfather or a guardian of some sort. So we wanted something that people could do together with — kids could do together with someone else. And we thought, oh, it’s going to be interesting because banks are closed during COVID. When we were writing the book, it was right in the heart of shelter in place. But we thought, well, you know, kids have access to — most kids have access to a computer, they can at least walk around to a local bank and banks always have their advertisements on their windows with their interest rates. But we thought it would be an interesting way for kids to see what is in their environment and practice some good behaviors like oh, what does interest rate mean? What is APR? Those are, they’re jumbled letters and so you actually learn what the acronym stands for. And so we want to make sure that kids could kind of connect their physical world to their these abstract ideas about money. So all these activities are kind of a way to get kids to start thinking about it, and we were like, oh, kids aren’t really going to want to do activities, it’s extra homework. So we tried to make them fun and things that they could actually do and feel like they were learning something.

Tim Ulbrich: And I think this was a good example where the activity really, to me, is a rabbit hole of other learning, right? So if you go to the bank and do this activity, just like you suggested, Allison, it leads to other conversations and questions like, what is the federal reserve? And what is an insured account? What does that mean? You talk about that in the book, you know, how do you explain the federal reserve? What is compound interest? Why is that so important? What is principle? What’s interest? What do terms mean? And I think it, again, leads to further conversations, which obviously hopefully spark some motivation and curiosity to learn more on this topic. Dylin, in Chapter 3, Introduction to Investing, you cover very important topics, you know, why to invest, risk v. reward — and I love the Risk-o-meter throughout the book, that was really neat — liquidity, the importance of conducting research, and connecting back to my previous comment about the difficulties teaching a child about money when it may not be tangible, you can’t see it, can’t feel it type of a mindset, I think this is another area where parents may feel challenged to teach a child the importance of investing when again, it might feel somewhat abstract and here, we’re talking about delayed gratification, right? So not spending money on something today that has an instant reward. I think back to my childhood, it was driving to the corner store, buying baseball cards, buying candy, you earn the money, you spent the money, you saw the reward instantly. So here, the activity on investing, which I thought helped to really drive this concept further, you talk about an activity of picking a stock and really going through that process of understanding what’s involved there. So talk us through that type of an activity, what’s involved in that, and why that’s important to help a child relate to the concepts of investing.

Dylin Redling: Yeah, sure. It’s interesting because I can also relate it to how Allison and I do our own investing. And most of what we do, to be honest, are buying mutual funds and index funds. We don’t do a lot of single stock buying. However, there are some advantages to just helping a child or anybody, really, think about, well, if you were to buy a single stock, what would the thought process be when you do that? We actually just wrote an interesting post on our blog just about a week ago where we had $10,000 that we wanted to experiment with. And what we did is we selected five different stocks to invest that $10,000. So $2,000 per stock. And I went through the process in that blog post of why we would do this. And it wasn’t to get rich quick or to see what would happen in a week or a month. This particular blog post talked about a one-year time frame. And it’s the same with the activity for the child. I think we used a shorter — a relatively short time frame so they could at least measure their success. At the end of the day, investing, as you know, as your listeners know, it’s very much a long-term process where you’re investing over years and decades. But again, to get the child to think about some of the things that you might want to think about with whether you’re investing in stocks or any sort of investment, what are the things that go into that thought process? And so getting back to that blog post I wrote, some of the stocks that I suggested that we test out, one was a blockchain ETF. So now that bitcoin and other coin-based just went public, those are things that we wouldn’t necessarily invest in directly. But a blockchain ETF is an example of a way you could dip your toe into that technology. So that was the thought process there. Another example was a cruise company, NCL, Norwegian Cruise Line. Now that COVID is starting to disappear and everyone’s getting vaccinated, people, there’s this pent-up demand to start traveling again. So we thought, hey, in the next year, NCL may actually start to do really good. And they even have a program where if you have 100 shares, you get extra bonus points. And so the idea is to think about all the different aspects to that investment, like how does it relate to what’s going on in the world right now? And what other pros and cons are there to that investment?

Tim Ulbrich: Yeah, and I think we share your philosophy. What I heard there is our planning team often says a good investing plan should probably be as about boring as watching paint dry.

Dylin Redling: Right.

Tim Ulbrich: At the end of the day, it’s about a long-term play. But I like this activity as a concept. You know, I remember I had a great Econ101 teacher that had us do a similar activity. And it’s very memorable because it also leads to many other conversations like well, what type of influence does my marketing have? Or I thought this was going to go this way, and it didn’t go this way. Maybe I had some overconfidence in my selection of things. So why is diversification important? So I think, again, reading it and doing it, two very, very different things. And I think people experiencing this firsthand, especially you think of an 8- to 12-year-old, a very kinesthetic learner, right, hands-on experience that moment, be able to learn through that experience. Allison, as I went through the book, many times I thought to myself, man, what if I would have had some of this information earlier? What if I would have had this in middle school or high school or perhaps even earlier? And shoutout to my parents, who did an awesome job of the foundations, grew up in a small business, felt like I had a little bit of a head start. But outside of some K-12 programs and in higher education, I would say it’s largely absent, maybe some elective courses or some opportunities. And so I can’t help but think like, why aren’t we doing more of this? Why aren’t we covering more of this in a K-12 education? I mean, this type of book, this type of experience, these types of activities would be a home run in teaching kids about money. Here, we’re taking 8-12 investing, but obviously we all know it’s broader than that as well. So question here, I’m not asking you to solve the personal finance educational system woes, but why do you think this is not more foundational to our educational system in terms of personal finance education?

Allison Tom: Right. So I think part of it is that our generation didn’t really learn this either. And so as the educators come up with their curriculum, I think honestly, a lot of adults are really intimidated by personal finance. And so it’s something that seems easy enough for them to cut out of the education system as an elective because well, if they don’t understand it, then kids aren’t going to understand it. And if they’re intimidated by it, then kids are definitely going to not understand it and be intimidated by it, so let’s not even talk about it, which actually is one of the reasons why we thought it was important to write the book. We didn’t get this education when we were growing up. I know my parents are second-generation immigrants. And so the money lessons that they learned were from their parents, who grew up during the Great Depression. And as immigrants coming over to this country, they just pooled their money and they saved and they saved and they worked 20 hours a day to make money and then they would maybe invest it in the bank, although plenty of my relatives didn’t even bother with that. So my lessons growing up were save and save and save and save. I had a little piggy bank, and I would put all my coins in from the piggy bank, but that was the only thing that I learned. And so it wasn’t until I got to college, and then I had my first credit card that I just — oof. It was bad. I did not understand the concept of paying credit cards and interest rates and late fees and minimum payments. And so, you know, I got in trouble with credit cards after I graduated. And it wasn’t until after that that I thought, oh, I really need to learn more about what’s going on here. And so I started watching some shows on PBS, but by then, you know, I’m in my early 20s at that point. My learning took a lot longer for the habits to become engrained in me. So you know, I really do think that if kids could see this stuff earlier, it would be so much more impactful. You know, I’ve talked to a girlfriend of mine, her daughter is 17 and she read the book and she was like, “Yeah, you know, I’m going to start doing the savings plan when I get a job.” My friend was laughing because she’s like, my daughter doesn’t have a job. But she was just like, she got inspired by it, and I thought, oh, if we could just get kids to learn this stuff sooner —

Tim Ulbrich: Yeah.

Allison Tom: All the great things we could do with them. So hopefully. Hopefully.

Tim Ulbrich: Yeah, and I love that, to that point, Allison. I think it was early in the book, you have the reader go through an activity where they identify problems, things that could be improved upon, right? And one of the things I often say is that any business is a solution to a problem, and that solution is one that people care about and are willing to pay for. And you know, I love that because I think for a child, like if they can think about, what are some things that could be done better? You know, one of them you proposed in the book, which was really cool because we recently just bought this — or actually we got it as a gift for our kids from our family — is you mention like chess. Really hard game for kids to play, kids to learn. Why isn’t there a solution out there that can make chess easier to play? Sure enough, there is. There’s a card game where you draw cards, you learn the basic moves of chess. So things like that, I think you’re inspiring some of the creative thinking, the problem solving, and laying some of the seeds of entrepreneurship or even for those that don’t own their own company, which would be the vast majority of folks, intrepreneurship, how can you be a problem solver within your organization? And how can you create solutions that make you a valuable asset within that organization? I want to shift gears a bit to connect some of the work that you have in “Investing for Kids” with what you cover in your site, Retireby45.com. You mentioned your other FIRE book as well. And I got the impression that you both, you believe that everyone could put together — especially an 8- to 12-year-old reading the “Investing for Kids” book — put together a plan for FIRE, again Financial Independence Retire Early — by the age of 45. So Dylin, our listeners know firsthand that time in the market equals success, and that compound interest, as you mentioned in the book, is the eighth wonder of the world. So we know the math is possible if someone starts at an early age. But why do you think it’s important that someone plans for FIRE by the age of 45?

Dylin Redling: Whether you’re able to retire in your 40s or your 50s or you do a traditional retirement in your 60s or even beyond, Allison’s dad, for example, is 70 now — or slightly older — and has no intentions of stopping working even though Allison suggests that he stop and enjoy life. But he’s got a job that he really loves. And so there’s a lot of people out there that are like that. So we love our FIRE lifestyle and the fact that we left our W2 jobs in our 40s, but we know it’s not for everybody. But what we do also know is that the concepts of Financial Independence are good for anybody, no matter when you might want to retire. And those concepts are really about doing the right thing with your money. So it starts with saving, it starts with being somewhat frugal — and when we say frugal, we don’t mean living a spartan lifestyle. We just mean not going crazy with money with spending on things that you don’t want or that you don’t need or you feel like you have to keep up with the Joneses and get a brand new SUV every two years. So there’s that, and of course investing wisely. And you know, we have another story that we write out on our blog, which kind of I think can be somewhat inspiring to people who are in their 20s and maybe haven’t really done anything with their finances yet. We, as Allison alluded to earlier, kind of our story is we met in New York and then we moved to San Francisco. And we were in our mid-20s at the time. And we still hadn’t invested a dollar yet. And it wasn’t until our late 20s that we got “real jobs” with a 401k plan and that sort of thing. And so it wasn’t until our late 20s that we really started investing. And our entire investment life cycle, if you will, was about 17 years from our late 20s to our early 40s. And in that time, we just were so diligent about dollar cost averaging, we did — we invested into both our 401k, our IRA, and a taxable account once we got some extra income literally on a weekly basis for years and years and years, no matter what the market was doing. Through the 2001 .com crash because we’re both working in that industry and of course through the ‘08-’09 recession. Never stopped. And so those kind of habits, again, are good for anybody no matter what your retirement goals are, just really those financial habits are going to put you in a great position.

Tim Ulbrich: Yeah, and I’m glad you shared that, Dylin. One of the questions I had for you was I read your story of not really late 20s, early 30s getting serious about investing, but retired or achieving FIRE by 43, 44, so short window of time, right? We tend to think of a very long trajectory of savings. You mentioned 17 years. So my question was what was the secret sauce? And if I heard you correctly, it was tax-advantaged accounts, 401k’s, IRAs, some taxable accounts and dollar cost averaging and being consistent. Is that fair?

Dylin Redling: Yeah. You know, a couple other things we did — we did the phrase “side hustle” is really popular now. But when we did it, we just called it a side business. This was in the mid-2000s. I came up with an affiliate marketing business that I ran on the weekends. And it ended up being a third income for us. So there’s things like maximizing your income. And then another concept — I’ll shoot it over to Allison to talk about — is geographic arbitrage. And that helped us kind of move about nine years ahead of schedule. Do you want to talk about how we did that?

Allison Tom: Sure. So geographic arbitrage has a lot of different meanings in the — for people. And the gist of it is that you leverage your current salary and move to a lower cost location. And so most people think that is oh, I’m going to make my United States salary and move to Thailand or Costa Rica, where the cost of living is exceedingly low. We did it by moving from San Francisco to Oakland, California, which geographically is a 10-mile difference but at the time, we were able to save about 50% on our housing costs.

Tim Ulbrich: Wow.

Allison Tom: So yeah, it was pretty insane. For being 10 miles away, two or three train stops away on our BART system, we were able to pay off our condo in Oakland in cash by selling our place in San Francisco, which alleviated all the mortgage payments, the increase in property payments and our insurance went down as well. So that, Dylin calculated later, saved us probably about nine years of working because our mortgage in San Francisco was so astronomical that just cutting 50% off just pushed us into the financial independence sphere that much sooner. So it’s things like that. Obviously not everybody is going to be able to save 50% of their housing by moving 10 miles away, but there are other ways to do it. You can do things like house hacking where if you have space on your property, you could build an extra unit and rent it out or if you have an extra bedroom, you could rent it out and have a roommate or Airbnb it. So there are ways tod do it without going through the extreme example that we had. So there are plenty of ways to cut costs in your life that are relatively painless, that we’ve talked about all the time, so there are just different ways to do it to achieve FIRE. And some people don’t even choose to do the early retiring like my father is the example. So retirement is really more of the optional part. We’re not saying you have to retire, you have to leave your job and just sit around drinking mojitos all day long, although it’s certainly not a bad lifestyle. But you know, the retiring part is up to the individual.

Tim Ulbrich: Yeah, I’m glad you said that, Allison, because I know many of our listeners love what they’re doing as pharmacists and they worked hard, and they got a doctorate degree and they have student loan debt and they invested in that education. And so my read is that many pharmacists are captivated by the idea and the power of financial independence. And you know, I believe that’s a goal we all should strive for for a variety of reasons with RE, Retire Early, being one of those perhaps reasons, but other things as well in terms of why that financial independence may be important. So nine years, nine years was estimated from that one decision, which I’m coming full-circle, Allison, about what you shared at the beginning of Dylin being in the hospital with double pneumonia. And when you start to think about the value of time, I mean, nine years and doing some of those calculations and what does that mean for one’s personal situation, I think that’s a really powerful example of taking something that can be mathematical or objective and looking at it in a different mindset. If we were to make this move or this move, what does that mean for us in terms of timeline to retirement, working part-time, pursuing another opportunity, what does that mean for one’s goals towards financial independence? I’m glad you discussed geographic arbitrage because one of the things we see in our profession in pharmacy is that unfortunately, a pharmacist’s income usually does not translate with cost of living. So here I am in the Midwest and that income for a pharmacist in the Bay Area might be a little bit more for a similar role but nowhere near the cost of living difference between Columbus, Ohio and San Francisco, California. So I think this is a move, especially for many of our listeners that might be saying, you know, ‘I’m making a decent income, but I’ve got a lot of work to do on student loans, I want to invest, I want to buy a home, I want to do this or that. And at the end of the day, there’s only so much income.’ So is a move, whether it’s near, within 10 miles, or something a little bit more significant, is that an option that somebody may be able to pursue? Allison, what have you guys been doing since achieving FIRE? You know, what’s been the goals, what’s been the priority, how have you been spending time? I think that’s one of the other common objections that comes up is like, if I retire at 45, like I don’t even know what I would do with my time. Tell us a little bit about that journey since you guys have achieve FIRE.

Allison Tom: So it’s funny, we — so we FIREd quite by accident. We were both working in tech startups, and Dylin got laid off and then I got laid off about five weeks afterwards. And so we kind of took the time after we were both laid off to travel a little bit. That was one of the things that two people who are working can’t always schedule, coordinate their schedules, to take some time off. And so we thought, alright, this is the perfect time. We went to Europe for two weeks and did a cruise around the Mediterranean and had a blast and then came back and thought, alright, we’ve got to get back to work. So we went about — we went on interviews and we just saw just how miserable people were at their jobs. Just so stressed out, and I interviewed with this one guy who was like, “You need to tell me who said this about us so I can go talk to them.” I’m like, I don’t want to work for you. You’re scary. And so you know, the three months turned into six months and then nine months and then Dylin figured out kind of like back of the envelope math, figured out that we could actually retire without having to go back to work anymore. He stumbled into the 4% Rule, which we still hadn’t at that point heard the term FIRE before. You know, the first few years we did a fair amount of traveling domestically. Like we would go back to visit his mother and my father, who both live on the East Coast, which is one of the things you just don’t get time to do when you’re working is spending time with family. And so you know, if we would go back East, we would maybe spend two days with each parent because they don’t live that close to each other. And now, we can actually go and spend a week with each parental unit. And that makes a big difference because, you know, they’re getting older and living across the country, it’s harder to connect with them. So we do a lot more slow travel where we don’t have to feel rushed between people. And then it’s funny because we — our retirement has changed as time goes by. So for people who are concerned that oh, what am I going to do with my time? Your time is yours. You can now make your own schedule. And that, to me, is the beauty of not just financial independence, it’s financial freedom because you can choose what you want to do. And so you know, the first two years were traveling domestically, the second two years were more about traveling internationally. And we had two cats that passed away at 19. So for us, they were like our kids. And so we did not do a lot of traveling away from them until they passed on. And so once they did, we’re like, alright, we’re going to go crazy and go travel around the globe. And so the last — and then the last two years have been focused on writing books and going to financial conferences and kind of learning from others and then applying that and communicating out to audiences like yours. That’s the beauty of the time being yours is you can make it whatever you want to do. We also do a lot more work with our community that we never had time to do when we were working. So we’re a lot more invested in our neighborhood, and we spend more time working with businesses in our neighborhood to bring in more business. So having that luxury of time means you can go explore whatever interests pop up. So you know, did we ever think that we would be working with small businesses two years ago? Probably not. But now we are, and we’re advocates for small businesses in our neighborhood, and that’s something we would never have thought we would have done when we first retired.

Tim Ulbrich: That’s very cool. And I read as well your goal of 60 by 60. Sixty countries to visit by the age of 60. If I understand it, you’re about halfway through. Looking forward to following your journey. I’m hopeful you’ll be blogging about it along the way as well. Dylin, I’m going to throw the last question I have over for you. And one of the things I think about when it comes to early retirement and achieving financial independence or the FIRE movement is that it really does require delayed gratification and at times, you mentioned the word frugality earlier. And that frugality can be at various levels. As you mentioned, we’re not necessarily talking spartan type of frugality. My question here though is how do we strike the balance? You know, whether it’s for ourselves or teaching our kids about saving and investing to take care of our future selves but also valuing and making sure we understand that it’s important that we enjoy some of the money along the way as well. I find myself often struggling with this individually of, OK, I know I need to take care of my future self and probably sometimes I do that at the expense of the experiences and the enjoyment today. And I think striking this balance is really important. What are your thoughts on that?

Dylin Redling: You know, I’ll actually plug a couple of other books besides ours that I really like. One is “A Simple Path to Wealth” by Janelle Collins, which I highly recommend. And another one is actually one of Allison’s favorites. It has a funny title, it’s “I Will Teach You to Be Rich” by —

Allison Tom: Ramit Sethi.

Dylin Redling: Ramit Sethi. And we saw him speak. He was a keynote speaker at FinCon a couple years ago. And one of the things that he said, which really resonated with me and it goes to your question, is spend liberally on things that you enjoy. But hold back aggressively on things that are not important to you. And it’s a very simple concept. But again, it goes directly to your question, and it’s really — maybe you or your kids or whoever’s thinking about this makes a list. Here are the things I’m passionate about. Here are the things that I really enjoy. I love travel, I like eating out at restaurants, I like entertainment, sports, whatever it is. And I’m going to set my budget to focus on those things. I’m going to be OK — maybe I’ll go to a World Series game because I’m a huge baseball fan. Or I’m going to set a goal to go to every baseball park in America. You know, whatever that goal might be. Conversely, think about the things that aren’t that important to you like maybe a brand new car is not important to you, so you drive your car for 10-20 years and you really just never focus on spending a lot of money on that. And so those are the concepts that I think are something to really think about. And for us, that’s what we’ve always done. When people look at our lifestyle from the outside or even some of our friends, you know, they may think, wow, we’ve always lived in pretty expensive apartments — or condos or houses, so they might think, wow, they spend a lot of money. But if you look a little deeper, like we had a car for almost 20 years. We had a Volkswagen Jetta. We just recently got a new-to-us couple years old Toyota Corolla. So there’s an example where we just — you know, having a brand new car wasn’t that important to us. But again, we have the 60 by 60 goal. So travel is really important to us. And we have no problem spending that extra money to go travel for a few months and really try to see the world because that’s something that we’re passionate about. That being said, when we do travel, we try to — we don’t stay at four-star hotels because part of our kind of nature is to also find some deals here and there and to just spend consciously, to just spend our money kind of wisely.

Allison Tom: We prefer to spend money on the experiences rather than the hotel room that we’re putting our suitcase in.

Tim Ulbrich: Yeah. And I was at that keynote that you were at, and with Ramit, and I’ll never forget it. I mean, the concept that he talks about in “I Will Teach You to Be Rich,” money dials, right, is find the things that are of value to you and dial it up. And find the things that are not and dial them down. And you know, I remember hearing that, and I was like, heck yeah. It just makes so much sense. And you know, to the comment of experiences and even the literature really showing happiness related to money, it’s experience and giving typically are the areas where we see that biggest connection. So Allison and Dylin, I really appreciate you guys taking time to come on the show. Kudos on the work here with “Investing for Kids,” I really enjoyed it, as well as the work that you’re doing at Retireby45.com and your other book, “Start Your FIRE: A Modern Guide to Early Retirement.” As it relates to the book “Investing for Kids,” I hope our audience will pick up a copy of this, available at Amazon, Barnes & Noble, many other online vendors as well. I really did find it engaging, it was rich with relevant information, practical exercises to apply the information, as I mentioned, certainly does not look, feel, or read like a textbook. And so I think many in our community are going to find it helpful. What’s the best place for our audience to go to follow the work that the two of you are doing?

Dylin Redling: Well, our — I’ll plug our website, and I’ll have Allison plug our Instagram account. Retireby45.com is our website, and we blog there on a once or twice a month with a fresh new blog post, and we have a bunch of stuff on there, courses and other things. And then Allison’s been working on really putting together a pretty cool Instagram account.

Allison Tom: So we have Instagram and Twitter both @retire_by_45. Yeah, it’s been an interesting challenge trying to get into the social media, the social media space.

Tim Ulbrich: Very good. We will link to both of those in the show notes as well as the Retireby45.com as well as the books that we’ve mentioned, not only your books but the others that you referenced as well. So the two of you, thank you again very much for your time. I really appreciate it.

Allison Tom: Thanks, Tim. It’s great.

Dylin Redling: Thanks.

Allison Tom: O-H

Dylin Redling: I-O

Tim Ulbrich: I-O!

Dylin Redling: Thanks, Tim. Great talking to you.

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YFP 200: An Interview with Sarah Fallaw of The Next Millionaire Next Door

Posted on by yfpadmin

An Interview with Sarah Fallaw of The Next Millionaire Next Door

On this episode, sponsored by Insuring Income, Dr. Sarah Stanley Fallaw, co-author of The Next Millionaire Next Door and founder of DataPoints LLC, a behavioral assessment advisor fintech company, joins Tim Ulbrich to talk about the surprising secrets of those who achieve millionaire status, how psychology and personal finance intersect, and why it is so important to understand your financial behaviors and tendencies.

About Today’s Guest

Sarah Stanley Fallaw, Ph.D. is the co-author of The Next Millionaire Next Door and the founder of DataPoints LLC, a behavioral assessment advisor fintech company. DataPoints created the industry’s first assessment of wealth potential based on The Millionaire Next Door. Her research on psychometrics and financial psychology has been featured in conferences and publications including Financial Planning Review, Industrial and Organizational Psychology, and the Journal of Financial Services Professionals. Sarah received her Ph.D. in Applied Psychology from the University of Georgia in 2003. Learn more about her work and research at www.datapoints.com.

Summary

On this episode, Tim Ulbrich welcomes Dr. Sarah Stanley Fallaw, co-author of The Next Millionaire Next Door and founder of DataPoints LLC to the show to discuss the secrets and behaviors of millionaires in the United States. Dr. Fallaw shares her experience of co-authoring The Next Millionaire Next Door with her father and outlines some of the behavioral research that went into writing it.

Tim and Sarah mention the money personality assessment tool offered by DataPoints that both pharmacists and those in the field of financial advising can use to better understand personal factors that influence spending, saving, and wealth. Tim mentions how when taking this assessment, he was surprised by some of the questions and ultimately how certain personal characteristics can influence financial decisions.

The key points and concepts from The Next Millionaire Next Door are also discussed and related back to the career and financial situation of today’s pharmacists. Concepts included in the discussion include myths about wealth and income, perceptions about wealth and how wealth is built in America, external influences and factors that can ultimately affect our wealth, the typical lifestyle that most millionaires in our country live, treating personal finance like a business, and the investing patterns of millionaires.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Dr. Fallaw, thank you so much for joining us today.

Sarah Fallaw: Thank you for having me.

Tim Ulbrich: Well, I’ve been looking forward to having you on the show and really excited to have you on as a special guest. This is our 200th podcast, so a big moment for us in the YFP community. And you joined us way back on Episode 035, the Science of Behavioral Finance, that went live back in February 2018. So we’re three years ago where you and Tim Baker, our Director of Financial Planning, talked about how your company DataPoints applies lessons from the book “The Millionaire Next Door,” written by your father, Thomas Stanley. And you two, Tim and you also dug into different factors that measure the propensity to build wealth. So today, we’re going to dig a little bit further into that conversation, talk about behavioral finance, the applications to one’s financial plan. But let’s start if you could share a little bit more about your background, your training, your career, and the work that you’re doing with DataPoints.

Sarah Fallaw: Yeah, absolutely. Thanks for having me on this milestone episode. That’s exciting for you guys. You know, as you mentioned, obviously connected through my father to “The Millionaire Next Door” and research on wealth. But my background is in industrial psychology. So I’m a psychometrician, if you will, by training. And really, the focus that I’ve had throughout my career is trying to understand characteristics and competencies of individuals. And then of course, in the later part of my career, taking that research that went into “The Millionaire Next Door,” and saying, well, how can I help people understand themselves, particularly clients? How can I help the advisor understand how a client might behave or make decisions about finances related to their personality and things like that. And so that’s my background and how I got into this area.

Tim Ulbrich: So how does one — I have to know — how does one get interested in industrial psychology and become a psychometrician? How does that happen?

Sarah Fallaw: Yes, yeah, how does that happen? Well, you start off in clinical psychology, thinking that you want to help everyone. And then you realize or recognize that you might be better suited for the statistical side of psychology, and so that’s how you end up in industrial psychology. No, really, I felt a calling to be in the business side and certainly industrial psychologists are the ones that are applying psychological principles to the workplace, how do you hire people, how do you develop them, how do you have a great organizational culture? All those things. And so that was really what I was attracted to in the field of psychology and then psychometrics kind of came alongside that really using survey research, test development, all those kinds of things to understand individuals. So that’s how you fall into that. You just kind of start on one path, and you end up on another.

Tim Ulbrich: Well, I really appreciate that. You know, we say often on this show and I know from personal experience, so much of personal finance is behavioral. And we’re going to dig into that a little bit further. And I love the mission that you have and the work that you’re doing at DataPoints, helping advisors understand the client money mindset and how that obviously then connects to the financial plan. And you’ve got a really interesting quiz tool that really helps folks understand their money personality. We’ll link to that in the show notes. Folks can find that at DataPoints.com/personality. So tell us a little bit about this personality test, this money personality assessment and really how it can help someone learn about their financial behaviors or perhaps help the advisor who is working with that client to understand how those behaviors connect with the financial plan.

Sarah Fallaw: Yeah, absolutely. So what we know from research, not only obviously that my father conducted but lots of academic research in the fields of financial planning as well as psychology, that certain characteristics about ourselves lead to great money behaviors or maybe not so great choices. So the test that you mentioned is one that measures five factors of personality, which is a really well-researched model, so you know, how are we all different in terms of our attitudes, values, experiences, that kind of thing. And they break down into those five areas that you’ll see things like conscientiousness, so obviously as pharmacists, conscientiousness is of utmost importance. But it’s also an important characteristic when we’re talking about saving and spending and making good financial decisions. So it’s actually predictive of someone’s net worth, it’s predictive of financial success. Some of the other characteristics, things like agreeableness. So how do we get along with other people? Are we there caring for others or are we sort of out for ourselves? What we find, unfortunately, is that those that tend to be a little more agreeable are also those that maybe spend a little bit more than they should. And that makes sense, right? Like we want to pick up the check. We want to take care of this, that kind of thing. So understanding some of those — those are just two of the five — but understanding those characteristics can help you understand what you might do in certain situations and then maybe how to avoid those situations or how to prepare for that situation the next time. So those are some of the things that you can learn about yourself and certainly then, again, if you’re a financial advisor, you can use that information to help your clients as well.

Tim Ulbrich: I really enjoyed this, taking it myself and reading the report and findings. It took me about, I don’t know, 7 or 8 minutes to get through it. And it was different than what I was expecting. You know, I’ve taken lots of money self-assessment tools that are out there, and I think often they’re focused on like your risk tolerance and how conservative or how aggressive. And this really threw me for a loop. I mean, questions like, “I enjoy reflecting on challenges, problems, or large issues,” or “I tend to understand others’ feelings and thoughts. And at first as I was taking it, I was like, how is this going to connect to the financial plan? And then when it got to those five personality buckets that you mentioned, the extraversion, the conscientiousness, the openness, the agreeableness, and the neuroticism, I was like, OK, I’m starting to see the connection and obviously the report and the guide talks about that further. But I can certainly see how one’s awareness of these as well as their coach’s awareness of these could be really helpful as it comes to developing their plan. And I was feeling good, Sarah, about myself when I saw the high conscientiousness, as I suspect many pharmacists would.

Sarah Fallaw: Yes.

Tim Ulbrich: And not so good then when I saw oh man, agreeableness, not so high, and neuroticism, a little bit higher. But you’ve got to dig deeper, right, than just the terms that are there.

Sarah Fallaw: Exactly. Yeah. And there’s always a good — a positive and a negative about any score that you have. So obviously taking that openness to experience one as an example, if you are high on it, it means you’re creative, you like new and different experiences. If you’re low on it, you like things to be the same. And so you know, those can be good or bad depending on the situation that you’re in. Certainly for accumulating wealth, it tends to be better if you’re more of a traditional, I like things the way they are. But again, it can be a good thing for your mental health to be trying new things and experiencing new foods and all kinds of things like that.

Tim Ulbrich: Very good. And let’s shift gears to talk about the work of “The Millionaire Next Door” and the follow-up, “The Next Millionaire Next Door,” which was, as I mentioned to you before we hit record, really both of those books have been transformational for me in my own personal journey. And a lot of what we do and the philosophy of what we do at YFP and how we approach our education and what we believe in I think aligns very well with those two resources and the research that you’ve found and obviously a strong connection there to behavioral finance and the work that you’re doing at DataPoints. So let’s start, I suspect many of our listeners have heard of “The Millionaire Next Door,” arguably one of the best personal finance books and resources of all time, and give us a 10,000-foot overview of that book. What was your father’s aim for the book? And ultimately, high level, what were the findings?

Sarah Fallaw: Yeah, so it was written — I’ll start with that sort of aim question portion of it. You know, he had spent his lifetime studying how individuals build and sustain wealth. So he studied affluent populations in the United States. He was a marketing researcher. And so his goal with “The Millionaire Next Door” was to help individuals understand that there was this kind of component of affluent America, which was made up of people that did this on their own. It wasn’t just the case that they had rich uncles and aunts and that they were born into a certain kind of family. There still to this day was a large component of millionaires who were self-made. And he felt like there were so many unusual aspects of this group that he wanted to share it with individuals. Early in his career, he was teaching, he was consulting, he was working really, really hard and saw several of his peers do that too. He felt like if he could give people this information that maybe that could save them from some of this constant income earning-spending, income earning-spending cycle that they were in. And so that was really the aim. But again, the 10,000-foot view of the book is really that there are certain characteristics that allow individuals to build wealth over time. And again, a lot of times it has to do with the career you choose, with the spouse you choose, with the place you start living when you first buy a home and things like that. And there are, again, these certain characteristics that millionaires exhibit that allow them to build and sustain wealth over time.

Tim Ulbrich: Yeah, and I remember one of the — I can remember one of the tables reading that book, but there’s the big-ticket items like your career, obviously the spouse, the home that you live in, the neighbors and the community that you’re in, all those things that influence your spending patterns and behaviors. And then there’s some other things that may not seem as large on the surface, the jeans you buy, you know, the cars that you drive, things like that that can have a very profound impact and perhaps a window into other spending patterns and behaviors. I personally find, Sarah, that the research that affirms the opportunity for folks to really create their own opportunities and to become self-made, I find that very refreshing and I suspect many of our listeners will who are facing sometimes $150,000-200,000 of student loan debt upon graduation. They’ve got a great income to work with, but they can often feel like they’re starting at point like, oh man, forget about it. Like is there even an opportunity going forward? And I think the compound effect of being intentional with those micro decisions along the way is going to be really important. So why the need for a second edition? Tell us about “The Next Millionaire Next Door” and ultimately how you decided that this resource was necessary as a follow-up.

Sarah Fallaw: You know, that kind of came out of a couple of different things. You know, No. 1, it had been nearly 20 years I think at the time when my father started talking about that, sort of a new book. And it was time to look at some new data, to look at some new aspects of spending, you know, social media was not a thing, right, back in 1996. That was — no one knew that we would have Facebook back then. And so there were a lot of different aspects that he wanted to consider and I was serving in the role of the statistician, I was going to do the survey data collection and the analysis and those kinds of things. And it really wasn’t designed necessarily to be a second edition. You know, he’d had that question asked of him many times by publishers and things like that. But instead, he wanted to really take a fresh look at things. And so yeah, you know, it started off as something that we were collaborating on. And then as you know, he passed away in 2015, was killed by a drunk driver. So I had the privilege of finishing the book without him but certainly the beginning of it and the ideas for it came from him. So yeah, that’s kind of where it came from.

Tim Ulbrich: And there really are so many “Aha!” moments throughout the book. I found myself in both “The Millionaire Next Door” and “The Next Millionaire Next Door,” really shaking my head in agreement with the writing, the research findings, and I think analytical pharmacists and scientists will appreciate the research and the power that’s behind it because often, you know, personal finance education and advice can feel squishy at times. And to really have some research supporting these findings that we can then try to align our behaviors with to give ourself a chance of success I think is very refreshing. So I want to dig into some of the key findings in the book, and I’m going to hit a couple highlights in different chapters of the book hopefully to give our audience really just a sampling of the outstanding content that is throughout and then of course would encourage folks to pick up their own copy of “The Next Millionaire Next Door.” So in Chapter 1, titled “The Millionaire Next Door is Alive and Well,” you share a truth that is so important and I think can often be looked over or easily confused. And that is that wealth is not income. And income is not wealth. So tell us about what this means, what the differences are between income and wealth.

Sarah Fallaw: Yep, absolutely. So I think — and again, you would think after 20 years, 25+ years now, people would see the difference. But it’s hard for even me and certainly my teenagers to even see that. But the truth is how much we make has very little to do with how much we keep. And that’s the idea. You know, we have this confusion in our brain, we see individuals with nice cars or in the best houses or whatever it might be, and we equate spending to having money in the bank. And unfortunately, they’re not. And I think a lot of us, particularly when we come out of grad school, when I came out of grad school, and we have a great big salary and we’re excited about that, you know, again, particularly for pharmacists, it’s just not the same. So we confuse that level of income that we’re receiving with being wealthy, which leads to us spending above our means in terms of our wealth and can lead to a whole host of things. So I think that that’s a mindset that, gosh, if we could teach our kids that, if we could learn that early on in college or grad school, before we have that income that comes in, we would be better off for a whole host of reasons. But yes, that continues to be a struggle. When we work with advisors, that’s one of their struggles, particularly with working with younger clients that are just newly out of school and things like that too.

Tim Ulbrich: Yeah, and if you can crack that nut on teaching your teenagers, let me know so I can teach my boys as well.

Sarah Fallaw: Yeah. Me too.

Tim Ulbrich: Such an important thing of the mindset and a whole separate conversation about what may work, what may not work, and doing that. So you know, I think of pharmacists here, Sarah, and one of the things that pharmacists are blessed with is a great income, often at a very young age, you know, of course I’m overgeneralizing for a moment, but typically pharmacists will come out of school if they go through four years of undergrad, four years of their doctorate training, perhaps some residency after that, you know, still late 20s or maybe early 30s, making a good six-figure income. But one of the challenges is that many pharmacists’ income may remain relatively flat through their career. And so I think this point is all the more important that, you know, I know from personal experience, many of our listeners know that as time goes on, things become more expensive. You know, just generally speaking, right? Our goals, our aspirations, perhaps children, families that are growing, other things that we want to do. And so if our income is not going to see an exponential growth, then we’ve got to really try to be diligent right out of the gates to make sure we establish those behaviors that are going to allow us to create margin. And I know for my wife Jess and I, one of the “Aha!” moments we had early on in our career is OK, good income, but if income comes in and income goes out and it’s not sticking, which I think is really what net worth is a good indicator of what’s sticking, then we’re going to be in trouble ultimately with being able to achieve our long-term financial goals. So net worth, a really good indicator I think of one’s overall financial health. And I think this mindset that you talk about in Chapter 1 is so important. Now, in Chapter 2, “Ignoring the Myths,” you say that in order to build wealth, we have to discontinue or ignore the myths of how wealth is built in America. What do you mean here? And how can we take our financial future into our own hands?

Sarah Fallaw: Yeah, you know, there are a couple of things that go along with this, certainly one of them being that, again, wealth isn’t the same as income and things like that. But you know, there are a lot of kind of, again, mindsets from whether we adopted those as children or adolescents, from the life experiences we’ve had, or that’s what we see in the media, that can keep us from kind of owning the building of wealth, right? So how, for example, if I take myself and say, well, I’m a woman, how can I run a fintech company? Well all of a sudden, I’ve created this sort of artificial, if you will, hurdle for me to get past in order to make the right decisions and to continue on. And it’s the same with building wealth. So if we kind of adopt the mentality that ‘Well, I have all this debt, there’s no way I can get out of it,’ or again, for example, ‘I’m a woman,’ ‘I’m a minority,’ or something like that or ‘I’m in this particular group, I won’t be able to get past that,’ that’s one of the things I think that differentiates those that tend to be financially successful is they see past that no matter what group they belong to or kind of what background they’ve experienced in the past, they’re able to move past that. And so there are a lot of those myths, and they have to do more with like financial attitudes, and that can prevent individuals from actually working to achieve goals because they view wealth as something that can’t achieve.

Tim Ulbrich: And I think what you’re sharing here reminds me of so often we, like many other I’m sure financial planners, get questions like, “Hey, what should I do with my student loans? What should I do about this investment? What should I do about that?” And I think what this is highlighting is often we have to really unwind and understand, you know, what are the money scripts that we’ve been told over time? I’ve heard somebody reference it like, you know, whether it’s family interactions, whether it’s societal types of stories that we’ve been told or believed, we all have some script, we have some baggage with us about how we view and interpret money. And that of course has a fundamental influence on how we spend, on how we save, on how we approach this with a significant other. And we’ve got to be able to understand some of that I think and be able to really set goals and understand some of these behavioral pieces before we start to attack the x’s and o’s of the financial plan. And so I hope folks will hear some of this and take a step back and say OK, what are some of my own behaviors that I need to better understand that if I take the time to do so will have a real big influence on how I approach my financial plan. Chapter 3, you talk about the influences on wealth. And you know, one of the questions I think of here is what outside influences may impact one’s ability to build wealth? So how does our upbringing, how do our friends, how does our spouse really play a role in this? And what does the research say?

Sarah Fallaw: Yeah, so again, one of the key kind of indicators or predictors of financial success is being able to ignore or to not be influenced. But you know, again, there are a lot of different ways that others can make us feel as if we are making certain decisions. So you know, certainly we can talk about upbringing, we see that if your mom or your father but mostly your mother has the most strongest influence, if they tended to be frugal growing up, you will be frugal in later in life, that kind of thing. But we also see, again, social influence. We see that particularly related to social media but also kind of where you plant yourself in terms of your neighborhood, right? So that can have an undue effect on things like car purchases and things like that. And then again, your spouse, we know that millionaires tend to have spouses that are frugal. So even if they’re out maybe running a business or they’re the primary breadwinner, their spouse tends to be frugal. And we know that that can influence financial decisions in the future as well. So certainly influence can be a good thing, but it can also lead to some pretty poor spending decisions as well. And that’s really where we see the influence. We also see it in investing. So if you think about Gamestop and you see like how everyone kind of behaves when things get really exciting, we can be influenced into some of that. And we’ve seen that that can be a good thing, but it certainly can be a negative as well.

Tim Ulbrich: Yeah, we’ve all been told of the circle of influence, right, and those five or six or whatever the number is people that are around us and the impact that they can have. I think it’s no different here when it comes to money. Sarah, I’m curious, I have to know, when you mentioned the research with mom, you know, I’m thinking of my wife Jess really taking a huge role in raising our four boys, like why is that? You know, what is the connection there with the research of the mother and the spending habits that are passed on?

Sarah Fallaw: Yeah, you know, it’s not only the spending habits but career influence as well. But I think it’s primarily because of the time spent. So the research that we’ve done primarily with those that are in like their 30s, 40s, you know, you think about that in terms of well, when were they children or adolescents? Well, it still was the case in most cases their mothers were the ones that were home. So I think that that’s why we see that influence more so than the father. But again, we know that if a mother was frugal, if she was showing good financial behaviors growing up and then I mentioned the career piece as well, it’s also the case that if you had — as a mom or as a parent, if you are helping your child understand their career options and what they might do in the future, that can also be a predictor of income and net worth in the future as well.

Tim Ulbrich: Sarah, one of the personal struggles that I have is around the concept of frugality. And you know, I think that there’s certainly a benefit in frugality of being able to make sure being intentional, we can allocate money towards our goals, we can assure we’re taking care of our future selves, but you know, one of the things I hear our planning team say often, which I really admire, is that it can’t just be about the 1s and 0s in the bank account. So if we do a great job of squirreling away $3 or $4 or $5 million but we’re miserable for 30 or 40 years, like so what? What’s the purpose of that? And so there’s this reconciliation of, you know, we’ve got to be frugal to take care of our future self, but I think we’ve also got to make sure we’re prioritizing and enjoying things along the way that drive us to some of the greatest happiness and value. And so I would just love to hear your personal thoughts as I know a lot of it points to the concept of frugality, like what are your thoughts on that reconciliation between taking care of your future self but also making sure we enjoy it along the way?

Sarah Fallaw: You know, I would say a couple things about that. First and foremost, I think you’re right that many of us aren’t really super excited about being in a spartan lifestyle for their entire life and then having all this money left over when they’re 80. That doesn’t sound great. I think that one of the things I’ve learned personally but then also learned through the research and the work that we do is that there are certain individuals, certain clients, certain people, that love being frugal, that sort of get a thrill out of kind of living that way. And then there are others of us that say, “Well, how long will I have to do this?” or “How can I make this as easy as possible?” So I’ll say a couple of things about that. No. 1, I think that as spouses, you have to make sure you’re on the same page, recognize and respect each other’s viewpoint on those things, make sure that there’s room for if the spouse isn’t really excited about being frugal all the time, make sure that there’s room throughout your relationship and throughout your lifetime to enjoy some of the fruits of your labor but then also have respect for the spouse that really does want to make sure that they have everything ready in the future and is OK camping out outside for their spring break and things like that. So that’s what we’ve sort of learned personally but then also, again, through the experiences of our advisors is to understand that about yourself early on, to communicate that, and then again to make sure that the plan that you put in place acknowledges both members of the household.

Tim Ulbrich: Yeah, and I think this connects so well back to the money mindset concept and the money personality test and really understanding this individually as well as the planner working with the client and the importance of that. In Chapter 4, “Freedom to Consume,” you know, one of the things you talk about there, which I think is a timely topic right now given what the real estate market looks like, which is en fuego —

Sarah Fallaw: Crazy.

Tim Ulbrich: — is home buying. And you know, I think this is a time where I know I’ve talked with many pharmacists over the last six months that are like, ‘I’m looking to buy a home, but I’ve talked with one out in Washington recently, I’m expecting to put $100,000 over asking,’ just kind of is what it is in the market. So this feels like something in the time that might kind of get away from us in terms of where it fits in with the rest of our goals. So talk to us about the research and what you found in terms of the cost of homes that millionaires are living in.

Sarah Fallaw: Typically what we see is that millionaires are — they’re not living in $1 million homes typically. So the majority of them or many of them are living in homes that are less in terms of the value. So we found — I think it was that the current home value for most millionaires — again, this data was taken from 2016 — that it was $850,000, which was significantly higher than in 1996 when I think it was somewhere around $300,000. But you know, inflation, things like that. So I think that that’s one of the important factors. I think also, just from — and again, I’ll use the conscientiousness, you could say frugality, it’s a lot of different things, but I think that millionaires and those that are really savvy about money recognize the costs in moving, the costs in making those large-scale financial decisions. So you know, we have friends and family here in Atlanta, the market is the same as well, you know, where people are — the asking price is just the start. And what we’re seeing is that there’s sort of this excitement about change, excitement about potentially trying to time the market. And I think that millionaires tend to be a little more conservative, maybe like I said, conscientious, they understand the ramifications of making changes like that, and they aren’t necessarily looking for sort of the next big thing. But again, in general, millionaires are not necessarily living in $1 million houses. It’s not always the case.

Tim Ulbrich: Yeah, really interesting research in that chapter, not only on home buying, which I know is a topic of significance to our audience, but also on things like how are millionaires spending money on cars and clothing? And in terms of cars, what types of vehicles are they driving? New v. used? Luxury? Models, makes, and everything in between. So Chapter 5, you talk about strengths for building wealth. And one of the things that really stood out to me here is this concept of running your home like a business. So what do you mean here? And how can someone that’s listening start applying these principles?

Sarah Fallaw: So connecting back to my industrial psychology days here, I really viewed building wealth as a job, looked at sort of what it took, the complexities of it, everything from kind of dealing with the mundane tasks — or again, some folks might think these are fun — but mundane tasks of paying bills and maybe helping to do your income tax, depending on if you do it or if someone else does it, you still have to get everything together for it, those kinds of tasks as well as communicating with your spouse and communicating with the rest fo the family when it comes time to budgeting and spending and things like that. There are a whole host of things that make someone really great at the job, and then there are of course other things that can keep people from doing that job well. So in terms of strengths for building wealth and kind of thinking about personal finance as a job, it makes you kind of think about it differently in terms of OK, you know, this doesn’t seem so complex. I can think about the individual tasks I have to do and consider can I do this task well? Maybe my spouse can do this tax better than I can. We have that often happen with the advisors we work with who are using assessments to say OK, hey, you know what? You might be better at this than I am. And that would make more sense for you to take this part of it. So if you can look at the job of building wealth or of managing your personal finances well and look at it as a job, you can think about what it takes to do that job well. So that’s kind of how we certainly view it at DataPoints, that was sort of, again, in the last several months of my father’s life, kind of how we started talking about how I explained what we were doing at DataPoints, had to kind of walk him through all of that. But that’s certainly the way that we think it’s easiest, especially for those of us that don’t have a financial background to understand what it takes to actually build wealth.

Tim Ulbrich: Yeah, and that really resonates with me because I think that as many of our listeners know from personal experience, this topic can be very emotional at times. And at times, we all can make irrational decisions that often we look back and say, what in the world were we doing with that? And that’s just part of the learning part of the growth? But I think approaching it like a business, you know, helps make this as objective as possible but also helps with thinking about like systems and processes and automation and how do we make sure we can understand where our biases may be, where our shortcomings may be, and how can we build a plan and a system and have a coach and really surround ourselves to give ourself the best opportunity to succeed as possible. In Chapter 7, “Investing Resources,” a whole lot of things we could talk about here that could be a separate podcast in and of itself, but you know, generally speaking, what do you find from the research in terms of what makes someone a successful investor? What are the characteristics and behaviors that somebody will hold in terms of becoming a successful investor?

Sarah Fallaw: Yeah, so that goes back to the personality conversation we were having earlier. There are a couple of different key things that we’ve found, one of them being that emotional side of investing, just like you said, the emotions related to money. What we found is that those that really tend to experience negative emotions more than others, so anxiety or fear, we call that volatility composure. That would be a lower score on that component. Those folks tend to have a harder time, especially when things are chaotic. So — and I’ll put myself in that camp a little bit. So we gravitate towards the news, we want to see what’s happening in the markets, we’re constantly looking at our investments. That kind of personality characteristic can lead us to making maybe not-so-great choices related to our investments, particularly, again, when markets are chaotic. Some of the other components include having a longer term perspective on investing. So for those of us who really view investing as a long-term play, it’s helping us build for the future, those investors tend to have more success than those that look at investing as something that needs to be managed on a daily or a minute-to-minute basis and view it more as maybe fun or entertainment versus something that’s a component of their long-term financial success. So those are a couple of the things. You know, confidence is also something important, particularly in terms of making decisions that align with a long-term strategy. So we don’t want to be overconfident. Those of us that tend to be overconfident are often the ones that are timing the market or trying to, at least, but instead having some level of confidence in our financial choices or investing choices can lead to investing success as well.

Tim Ulbrich: Yeah, and these really resonate to me, Sarah, as a place where a coach can be incredibly helpful in the process because if you can be self-aware of these things and that individual is also aware of these, they can help challenge you appropriately, they can help you stay the course when you have tribulations in the market, which inevitably are going to happen, and I think certainly can be a valuable resource beyond investing but specifically here as we talk about investing. So we have just literally scratched the surface on so much of the rich content that is in “The Next Millionaire Next Door,” so I would highly encourage our listeners to pick up a copy of that book, which you can do pretty much anywhere that you can find a book, whether that’s online, Amazon, Barnes & Noble, so forth. And Sarah, we’re going to link, as I mentioned earlier, in the show notes to the personality assessment available at DataPoints.com/personality. Folks can take that assessment, download that report, work with their planner, provide that information as well. Beyond that, what is the best place that our listeners can go if they want to learn more about your work or if they want to connect with you?

Sarah Fallaw: Yeah, so definitely on LinkedIn, Sarah Fallaw. I’m on Twitter @sarahfallaw, so all one word. They can also go to our website, just DataPoints.com. We have a blog. We write — generally our audience is financial professionals, but we also write at TheMillionaireNextDoor.com as well.

Tim Ulbrich: Awesome. Well, we will link to all of those in the show notes in terms of the social media and the websites as well as the personality data assessment. Sarah, again, thank you so much for your time. This is a special episode for us in Episode 200. And really excited for the opportunity to be able to interview you as a part of the celebration. So thank you very much.

Sarah Fallaw: Thanks for having me.

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YFP 198: What You Need to Know About the Most Recent Stimulus Bill

Posted on by yfpadmin

What You Need to Know About the Most Recent Stimulus Bill

On this episode, sponsored by Insuring Income, Tim Baker and Tim Ulbrich break down the key points of the most recent $1.9 trillion stimulus package also known as the American Rescue Plan Act of 2021. Tim and Tim discuss the items that they think are the most relevant to your financial situation and plan, including the stimulus payments, the expansion of the child tax credit, the unemployment compensation and benefits, and what to make of the student loan forgiveness provisions being tax-free through the end of December of 2025.

Summary

On this episode, Tim Ulbrich and Tim Baker break down the key points of the American Rescue Plan Act of 2021 and the relevance of these key points to you and your financial plan. Tim and Tim review, in detail, the stimulus payments which many people have already received, how the total amount is calculated per tax filer or family, and the nuances and differences between this stimulus package and the two previous stimulus packages.

Tim Baker explains the new phase-out guidelines for stimulus funds in the current package, how the income ‘cliff’ could impact you, and a few ways to implement strategic financial planning to maximize your stimulus. He also breaks down the history of the child tax credit, how this package changes the way that the child tax credit benefit is applied and received, and provides a general guideline for calculating your expected child tax benefit.

Tim and Tim share about the changes and updates to the unemployment compensation and benefits as they relate to the current stimulus package. They also make some general predictions about the future of student loans and student loan forgiveness given the current impact of student loans debt on borrowers and the growing pressure from student loan holders for wide-sweeping change.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tim Baker, glad to have you on the show. How is everything going?

Tim Baker: Busy. Tax season is upon us, so yeah, it’s been really busy. But good. How about you, Tim?

Tim Ulbrich: Good, speaking of taxes, we’re going to come back to that topic today as we dig into the American Rescue Plan Act of 2021, also known as the most recent stimulus bill. And this of course, as our listeners already know, is the follow-up to the CARES Act from March 2020 and then the Consolidated Appropriations Act that was passed in late December of 2020. So the primary focus of these bills of course have been related to COVID-19 relief, but as we will discuss, there certainly are some broader implications here that we need to consider. And while this bill contains lots of things, many of which we’re not going to touch on today, we’re going to hit on those parts that we feel like are most relevant to the financial plan of the YFP community and to those that are listening. So Tim Baker, I’m going to put you on the hot seat here to try to break down hundreds of pages of bills as we talk about what does all of this actually mean? So give us the 10,000-foot view. What is the American Rescue Plan Act? And really, what are some of the key pieces that the bill focuses on?

Tim Baker: Yeah, when I see the numbers, Tim, I actually think they look like — it reminds me of like professional sports contracts, you know, when you first saw that first like that $100 million contract and now they’re signing ones that are $250 million. That’s kind of what it reminds me of. So the American Rescue Plan Act of 2021 was signed into law on March 11, 2021. It’s a $1.9 trillion — with a t — piece of legislation that, according to the Department of Treasury, will change the course of the pandemic and deliver immediate and direct relief to families and workers impacted by the COVID-19 crisis through no fault of their own. So this has been billed, pun intended, as one of the most progressive pieces of legislation in our history. And I think what Congress and what the president is seeing is that they’ve been — I think the numbers are like 9.5 million workers that have their lost jobs and 4 million have been out longer than a half a year or longer. So what this is really meant to do is kind of stimulate and help those that are in need. So to your point, there’s lots of things that this covers, one being like infrastructure, which we’re not even going to get into, but help with small businesses and vaccinations and testing and things like that. But I think what we try — want to do here is really kind of distill it down to what does this mean for many of the listeners that are tuning into this? And how does this affect me? And I think that’s what we’re excited to kind of dig in and jump in and talk through.

Tim Ulbrich: Yeah, and to that point, we’re going to cover three main areas: Economic Impact Payments, also known as the stimulus payments, the Child Tax Credit, which I think is really substantial in some of the changes that are forthcoming there that I think will have an impact for many pharmacists listening and their families, and then also some that may have been impacted in terms of jobs and unemployment compensation. So those are the three areas that we’re going to focus on. Again, certainly not all-encompassing of what this piece of legislation includes but the three that we feel like are most relevant to you. So Tim, let’s start with the stimulus payments as these have already started going out, probably at the time of publishing for those that are eligible, it likely has already hit their bank account. But how much are people getting? What are the phaseouts here in terms of Adjusted Gross Income? And what’s different about this round of stimulus payments?

Tim Baker: Yeah, so stimulus payments or recovery rebates, whatever you want to call them, you know, this is really, to your point, Tim, round 3. So the first one with the CARES Act was, you know, a lot of people received or the tax filer received $1,200 and $500 for dependents. And dependents was more strictly defined. And then second round, I think it was something around $600 per person or per — is what they were looking at. This is the most generous. It’s the greatest stimulus, it’s $1,400 per person. Think of it as taxpayer or spouse. But then it’s also $1,400 for dependent. So a dependent is not strictly defined — this is not just anyone under 17. This could be a college-aged 21-year-old, somebody that you actually provide for the health and welfare. But it could also be for an elderly parent. So that was one of the big things that prior bills had really kind of left out in the cold that those parents that were caring for elderly parents and now all of that is included. So it is a greater benefit in terms of total dollars. It is a better definition in terms of what it qualifies as a dependent. But the big thing that changes are the phaseouts. So — and I wouldn’t even really call them phaseouts. They’re more like cliffs. So for the phaseouts for this round — and this is going to be based on either your 2019 or 2020 tax return. So for a lot of people — and we’re seeing this on the tax side — it might be beneficial to you to kind of hold filing your taxes or not. And this is one of the areas that’s going to be a big part of this. So for a single income or single tax filer, income below $75,000 in Adjusted Gross Income, you’re going to get that full $1,400 times a spouse and dependents, etc. So if you’re a single parent and you have a dependent, you’re going to get $2,800. Now the phaseout or more likely a cliff is very narrow. So once you get to that $85,000, so $75,000-85,000, then basically that rebate or that stimulus check is gone. For married filing jointly, the number is $150,000. And then it completely phases out at $160,000. So before these phaseouts were greater. Now they’re more like a cliff. So the idea here is — this is where planning can be very important here because when we’re actually seeing this — you know, I mentioned that tax season is upon us where as we’re talking through clients, we’re saying, “Hey, this return is ready to be filed. But we’re just holding onto it until the stimulus gets figured out and then we will go ahead and file the 2020, the tax return.” And it’s just basically a planning decision to get the most benefit for that client as we’re looking at those situations.

Tim Ulbrich: Tim, I suspect we have many, many folks listening that that cliff, as you put it, which is really one of the main things that’s different here in addition to the amount of these payments, are going to be impacted because of that cliff. So if I’m someone who’s listening and 2019 and 2020, let’s say I was just above, married filing jointly let’s say for the sake of example, two dependents, so you know, if I were under that $150,000 would have been $5,600 if I’m doing my math correctly. Let’s say someone is just above that $160,000. Out of luck? It is what it is? Like what’s the strategy, if any, here for folks that are just above that cliff and that threshold of those payments?

Tim Baker: A lot of the — and we weren’t sure about this until recently — but a lot of the, with the extensions of the tax filing date, a lot of the targets or the accounts that you can also put money into like an HSA, like an IRA, have also been extended. So it might be where you shift your strategy or you’re saying, hey, I was really focused on this debt, i.e. student loans, that we know that our $0 payments with the CARES Act going until later this year. Maybe you’re trying to get ahead of that, but maybe you do shift some money into some of these other types of accounts to lower your AGI, specifically the HSA was probably the one because there’s no income limits. So these are things that you could do before you file. It’s a little bit of a circular logic because you have to — sometimes you have to get all those numbers in before you can actually figure it out, which again, it’s helpful when you’re having someone help you file your returns. So there can be some planning that you could do before you actually file. But there’s also a look ahead. So the bill basically affords people that potentially have a lower ‘21 tax year, so this year, that when they go to file in 2022 get a true-up or a credit to their taxes say in the future. So basically, the way that this was explained to me is that if you have your 2019 or 2020 return, and you’re in that phaseout, within that range, you’ll get a payout. And that’s typically direct deposit with whatever bank account that you have on, which make sure you do that. So just a message out there: Make sure your banking information is correct. We’ve had some that was incorrect, and that can take a long time to unwind. But the second checkpoint is if your 2020 AGI is less than 2019 and you filed before — so say you already filed your taxes, there is what’s called the additional payout determination date, APDD, that you could potentially — the IRS could potentially look at it and true you up if 2020 is lower than 2019. And then looking ahead to 2021, if the AGI is less than that upper threshold, the IRS will send an additional balance adjustment. So there are going to be some kind of fallbacks to make sure that the people that are in need of relief that are in and around these AGIs are going to be made whole. But there could potentially be some planning to get that money sooner.

Tim Ulbrich: Great summary. And I think what you just mentioned there highlights to me the importance of the planning, not only in the financial plan side of course, which we have been adamant about promoting the value of it and what our planning team does but also on the tax side. I mean, for that reason right there, if you look at someone who may be in this situation, what’s ahead for 2021, what could be done from a planning tax perspective with these numbers in mind as they look ahead to the year. So for folks that are interested in that service and working with our tax professional, working with our financial planning team, you can head on over to YFPPlanning.com and schedule a discovery call.

Tim Baker: And I would just say as a note to this, like this could be really where you are, if you have any control over things like bonuses or unpaid leave and things like this, you know, the planning I think potentially associated with this if you have a young family and you could potentially take FMLA or things like that, these are real-life things that it might not be worth you making that additional money to actually spend that time at home with your family. And that’s the impact of this is if you do a little bit of planning, you can get a really greater benefit that’s really even outside of the numbers of just the dollars and cents, so being paid to stay home in some way.

Tim Ulbrich: So Tim, you mentioned a good PR campaign for the IRS, make sure you have direct deposit set up. Make sure all that’s good.

Tim Baker: Yeah.

Tim Ulbrich: But if someone’s listening, they think they should have received a payment and they haven’t yet gotten one, what’s the strategy here?

Tim Baker: Yeah, just like anything tax-related, I put the heaviest weight on the IRS.gov. So if you go to www.IRS.gov/coronavirus/get-my-payment — and we can put this in the notes of the, you know, you should be able to see kind of the status and what that looks like. So the IRS — and you could probably just Google “IRS stimulus check,” and you’ll get this link and that basically will direct you in what you need to do.

Tim Ulbrich: Tim, the other thing that comes to mind here is, you know, if I’m listening today, I’ve received perhaps a previous stimulus payment in Round 1 or 2 that maybe I’ve put in a savings account, it’s still sitting around or it might have been added too here in Round 3, I think it’s a good time to think about what are some considerations in the event of an unexpected windfall? So of course, assuming someone doesn’t have a short-term need for these dollars, gap of employment, some type of other need, how do you think through this in terms of OK, there’s dollars here now that perhaps weren’t planning on seeing those dollars, and the options of how somebody can best allocate those dollars to their financial plan?

Tim Baker: Yeah, so I’m a big, big proponent of assigning kind of a purpose for like inflows. So you know, like with our business, Tim, like we get profit distributions from the business, like I have a set purpose for that. And it changes from time to time, but I know before the money comes in like what’s that for. So you know, for a lot of us — and again, if we rewind to 12 months ago when everything started to go down and we were starting to see job loss and things like that, you’re like, whoa, OK, this is why we have that emergency fund. And for a lot of people, that can be tough to swallow, especially because where interest rates are right now, you’re not being rewarded as a saver. You know, you’re more rewarded as a borrower for anything just because rates are so, so low. So you know, to me, it’s really getting comfortable with OK, if there was a catastrophic loss like me or my spouse can’t work and we don’t necessarily have the means to generate income quickly, just making sure that that is on point, the emergency fund is really important. But it can be a little bit of a double-edged sword because sometimes we get people that come and work with us and they have $120,000 in the bank and you’re thinking like, oh, that’s a good problem to have. And it is. But it’s a problem nonetheless. So to me, it’s really about once you feel comfortable with those cash reserves is then getting that money into the market. Now right now, one of the things that was not included in this, there was no RMD component to the bill. So you’re thinking like, OK, what’s an RMD. An RMD is Required Minimum Distribution. So once you get to a certain age — and I think they’ve recently changed this, but it was 70.5 — but once you get to a certain age, the IRS is like, “Hey, Tim Ulbrich, remember all that money you squirreled away in your 401k and you haven’t paid any taxes on it? Well now, we’re demanding, we’re requiring you to distribute some of that to yourself that you pay taxes on.” So they didn’t put anything in the bill with this because to be honest, those types of people are not really in need. It’s like, OK, you have all this money squirreled away and you don’t need it to live? Like there’s no reason for a stimulus or some support there. So to me, it’s really about getting the money into the market in a way — so that can be an HSA, it could be an IRA, that could be a brokerage account. And because of the way that rates are, you know, it’s getting invested, or it could be actually looking at something that is more life planning-related. So I’ve had clients recently that are pulling money from potential retirement accounts to do something for their family, which is like a vacation home, a cabin in the woods, that they’re asking me is this crazy? And I’m like, no, not really, because again, this is a use asset that you’re going to be able to rent out, you’re going to be able to enjoy with your family. You’re kind of trading one asset for another, and we’re doing it in a way that kind of minimizes the penalty and the impact. But things like that is like getting creative. And one of the things that you could do, Tim, is you could just stick this money into a checking account and it really does nothing for you. It doesn’t enhance anything about your life or your future plan. And that could be problematic as well.

Tim Ulbrich: And I think this is a timely topic, Tim. I’m thinking of folks that not only have received a windfall through like a stimulus but also may — I’m assuming many listening are still in this time period where they’re in administrative forbearance on their student loans. So dollars that were otherwise being put towards debt that maybe they’re not making those payments, obviously individual to everyone’s situation. Here, there’s also additional dollars. And I think this really highlights to me the benefit of you have a plan in place, you’ve been intentional, you think about the goals. And when that windfall happens, when something happens like you don’t have to make student loan payments, you’re able to quickly identify and direct where those dollars are going to go because you’ve already established the goals and the plan to support those goals.

Tim Baker: Yeah, and I think it goes back to the planning of — in a lot of ways, planning can start with us putting out fires, so to speak. But then it can really evolve to challenging the client to think outside of what is normal, what is expected. And case in point is like everyone thinks — a lot of people think, oh, I have to work until I’m 60 or 65. I’m like, well, do you? And again, this is potentially something that we want to challenge clients on and say like, “OK, we have resources that are here that we can direct in a way that, again, you feel that you’re living a wealthy life both today but then in the future.” I think going from that scarcity mindset to more of an abundance mindset and challenge the client to push their planning in a new direction I think is important too.

Tim Ulbrich: So let’s shift gears to the child tax credit. I think this one has made a significant splash as a part of this bill. Somewhat I guess difficult just to understand exactly what is changing, what’s going to be different, who qualifies, who doesn’t. But I suspect listening are going to be interested in watching this unfold to understand how this impacts them and their personal situation. So child tax credit, tell us a little bit more, Tim, about what’s included in the American Rescue Plan as it relates to the expansion of the existing child tax credit that we have.

Tim Baker: Yeah, and this actually was a tax credit that was expanded in the Tax Cut and Jobs Act under the Trump administration. So back in the day, it was you had a child and it was $1,000 credit. Now before, we used to get exemptions on the tax return and those have gone away. But one of the things that the Tax Cut and Jobs Act did is that it changed the credit, it doubled it from $1,000 to $2,000. And then it really expanded the phaseouts. So at a baseline today, if you have a child, you get a tax credit of $2,000 and that doesn’t phase out until $200,000 for a single taxpayer and doesn’t phase out until $400,000 for a married couple filing jointly. So it’s already a lot more generous. And then with this extra temporary provision as part of the American Rescue Plan, it actually increases more. So the credit amount has been increased so it goes from $2,000 to $3,600 for children under the age of 6. And that’s by the end of the tax year. So I think Olivia turns — I think — Olivia turns 7 this year, so I’m going to be over that. But then it does go to $3,000 for other children under the age of 18 by the end of the year. The example here would be if you have three kids, 2 years old, 4 years old and 8 years old, previously that would have been a flat $6,000 credit. So $2,000 times each kid, so $2,000, $2,000, $2,000 would be the $6,000 credit. Now the credit would actually be $10,200. So you get the full credit for your 2-year-old, $3,600, a full credit for your 4-year-old, which would be $3,600, and then $3,000 for your 8-year-old because you’re above the 6-year-old threshold. So that would be a total of $10,200. So for those of you that have lots of kids — Tim Ulbrich — this could potentially be a big benefit. So the other big part of this is that the scope has been expanded so children 17 years old and younger as opposed to 16 years old. So it gives you an extra year. Now, the other things it does is it follows the same phaseouts as the recovery rebate, as the stimulus check. So again, from a rebate perspective and from a child tax perspective, for married filing jointly, that $150,000-160,000 is critical. And finally, the one big thing that it does and that I want to go through the advanced payments really quick, but it’s now fully refundable. So non-refundable tax credits, Tim, basically what that would mean is let’s pretend at the end of day, you have a $10,000 tax bill. But then you have $10,000 of fully refundable, so that would basically, it would zero out your tax bill. If you had $12,000 of a refundable tax credit, you would actually get $2,000 back. But if you had $12,000 of a non-refundable tax credit, it would just zero it out. So for the IRS, the tax credits are the most generous in terms of credit versus deduction. But a fully refundable credit is even better because that actually sends money your way versus this is zeroing out your balance. So that’s really important.

Tim Ulbrich: Tim, I want to rewind and make sure I understood correctly — and correct me if I’m wrong. So they are looking at when we talk about the phaseouts, they’re looking at 2020 income in terms of AGI?

Tim Baker: It’s going to be whatever’s on file.

Tim Ulbrich: Whatever’s on file, OK.

Tim Baker: Yeah, so again, this is one of the things where you’re — if your 2020 income was higher than 2019, you know, especially if it’s within that threshold, if you’re filing your taxes and that disqualifies you, you want to make sure that you put a pin in that and not file. And that’s just a little bit of planning. Now, if it has gone down because of the pandemic and say you made $180,000 as a family and this year, you’re going to be making $145,000-150,000, then absolutely get that tax return filed and get the benefit of both the stimulus checks but also the child tax credit.

Tim Ulbrich: Gotcha. And if I understand correctly before we go onto the advanced payments and how these are going to be distributed or at least what we think they will be as of now, the phaseouts — so you mentioned that $200,000/$400,000 on the existing tax credit of $2,000. And then you mentioned the phaseouts of income here that also mirror what we saw in the stimulus payments. That is for the bonus amount, correct? So from what is going $2,000 to $3,000 or $2,000 to $3,6000?

Tim Baker: Yeah, that’s right. So you have the baseline amount that’s the what’s part of the Tax Cut and Jobs Act. And then yeah, this would be the — it’s called the extra temporary benefit.

Tim Ulbrich: OK.

Tim Baker: So yeah, that’s right.

Tim Ulbrich: And so for those that are listening like I was when I read this, like my goodness, just tell me what the number is please. So there’s a good calculator I found on Kiplinger.com we’ll link to in the show notes where you can enter in AGI, kids that are under 6, kids that are above 6, and it will project out what that payment will be. But of course, again, I think working with somebody and thinking about some of the strategy side of this can be really helpful as well. So Tim, how will this be paid out? Talk to us about the advance payments of credit and ultimately at least what the IRS is thinking right now, although to be fair to the IRS, they’re also in the midst of tax season, of course we have an extension to that as well. So I think there’s going to be further guidance coming in this area. But what at this point are we expecting?

Tim Baker: Yes, this is kind of a nuanced with this particular part of the bill is that this is actually going to paid out almost like a stimulus check versus like a credit, which you typically don’t see with this type of legislation. So you’ll likely get half of the credit paid out on monthly checks beginning in July. And I think one of the — I might have said it was based on the ‘19, but it actually might be based on 2020 regardless because the payout is going to start in 2021, in the summer. So this might be where it is tacked on to the 2020 versus ‘19. But another example, your AGI is under the $150,000, you have a child under the age of 6, the credit, the total child tax credit would be $3,600. And you would get basically $300, so $300 per month or $1,800 basically between July and December. So the idea is they want to try to get more money into people’s hands and then the rest of that, the other $1,800 would be when you file your 2021 taxes. So now, if you look at the benefit, when you stack it up, in other years that $2,000 credit, which we would just get basically at tax time, it goes from $2,000 to $3,600 and then they divide up half of it is coming to you in check form between July and December and the other half at tax time. That’s the big thing. And again, this is going to be — to clarify from what I said before — this is going to be for 2020, your 2020 taxes, and then basically pay out the rest of the year and then the credit or the true-up would be in 2021 when you file your 2020 taxes. So clear as mud.

Tim Ulbrich: And as I understand it, there’s going to be a portal where folks can enter in information, update it, so somebody that says, “Hey, Tim and Tim, we’re having a baby in 2021 will we be able to update that information?” or if payments go out without updated information that then essentially there would be a true-up when they go to complete that 2021 return.

Tim Baker: That’s correct. Yeah, the idea is that at the end of it, you know, if you filed in subsequent years and you’re in the following year that what the IRS or what the government is trying to do is make sure that you get those dollars that you wouldn’t have otherwise because of yeah. So from a behavioral perspective, it’s going to be interesting because, again, before this was all just kind of figuring out on the wash at tax time, but now you’re actually going to see people starting to receive checks throughout the course of the year, which is, again, a little bit different than what we’re typically used to outside of these bills that come around the economy starts to tank.

Tim Ulbrich: And I think the other thing, Tim, here that’s interesting and certainly we’ll keep the audience up-to-date for folks that are watching this as well is nothing has been decided yet, but my understanding is there are some policymakers that are considering, you know, is this expanded credit something that should become permanent? And so you know, obviously that has implications beyond what we’re talking about here but could be significant to many folks in terms of what that means for their financial plan. So that’s the child tax credit, as you said, clear as mud. So the last piece we want to briefly touch on is unemployment compensation. So we obviously know some of the challenges you referenced early on, Tim, in terms of some of the job loss. We suspect that some listening in terms of their pharmacy positions may have or are currently facing a situation of unemployment or a spouse or significant other, so I think this is noteworthy. What do we see in the American Rescue Plan Act as it relates to the unemployment compensation?

Tim Baker: Yeah, so the good part about this is that it’s been extended. So one of the big headlines in and around before they signed this bill into law and they were going back and forth between the House and the Senate was that, hey, these unemployment benefits were expiring. So typically that’s the beauty of deadlines, right? So the pandemic unemployment assistance, these benefits were set to expire March 14. They’ve been extended until September 6. So if you fall under that bucket, you’ll have a few more months of relief. And then the other big thing that is important to note that is the federal pandemic emergency unemployment piece, this is the additional check amounts. So you have the state benefits, so the state will pay you, you know, $500 a week for unemployment. But then what the federal government did is they added another $300 per week. So this has also been extended, which is important because there’s some states that the way they calculate their unemployment, it’s tough to live off of or survive. So these are the big things. And then the other thing that happens, happened, is that the first $10,200 of unemployment is tax-free. So what this means is that for per person, so if I’m unemployed, the first $10,200 of unemployment compensation received in 2020 will be tax-free. So the AGI must be under $150,000 AGI. So that’s the number you keep seeing. And this is all filing statuses. So it doesn’t matter if you’re single or married filing jointly. And this is a true cliff. So if you make $150,001 and you had unemployment, that unemployment will be taxed. If it’s just under that, then that will be tax-free. So this is a true cliff, there’s no phaseout whatsoever. So again, if you, you know, did file for unemployment and you received compensation, this will be another thing to take a look at to make sure that you’re under that because that could thousands of dollars in terms of your tax liability.

Tim Ulbrich: Tim, the last piece I wanted to ask you about, it certainly did not make as much of a splash in the news as did the stimulus components, the tax credits, or the unemployment compensation, but there was some news that came out related to a loan forgiveness that I suspect some of our listeners are trying to figure out does this mean, if anything, for my own personal loan situation? So specifically related to what we often talk about, Non-Public Service Loan Forgiveness and the tax-free component, tell us about the change here as it relates to loan forgiveness and what we saw in the American Rescue Plan Act.

Tim Baker: Yeah, you know, the big question that a lot of people were saying is like, what’s the loan forgiveness in the bill? And there really wasn’t much in there. And I think a lot of people think that this could be potentially a precursor to what President Biden wants to do in his tax bill. But the big thing that did come out is that it does include a discharge of student debt as taxable income for both federal and private loans. But this debt discharge has to occur between the years 2021 and 2025. So as most people know with PSLF, you know, if I am in that program and I do my 120 payments over 10 years and I have $60,000 that’s forgiven, because of that program, that $60,000 is not viewed as taxable income. But if I’m in a non-PSLF forgiveness option and I do that for 20 or 25 years, that’s $60,000 is then reported as taxable income in the year of forgiveness. So if I make $100,000 and that year I get $60,000 forgiven, it’s as if I earned $160,000 that year. So this is one of the things that they added. Now, for a lot of the non-PSLF forgiveness strategies, some of these won’t even become due until like later in this decade. So it doesn’t really move the needle much.

Tim Ulbrich: Yep.

Tim Baker: I think what this is really trying to address are you get excited or I’ll get excited sometimes when I see like oh, there was student debt forgiven. But it was a lot of these like for-profit schools that kind of misled borrowers and things — I think it’s really trying to address those people that have been forgiven, which are very, very small percentage of people out there that through legislation that they’ve been forgiven and they’re not going to be taxed as if they received that income. So very, very, very minimal in terms of what came out from the student loan borrower. Now President Biden has indicated a willingness to kind of do something here with student loans. I’ve had people that I’ve talked to, prospective clients who are saying, “Hey, I’m trying to figure out what he’s going to do.” I think what President Biden wants to do is have some type of bipartisan legislation and not use the executive order. I know Democrats are calling anywhere from they want $30,000-50,000 — I mean, you have some that are saying the whole, all of it. But typically more moderate Democrats are saying $30,000-50,000. President Biden I think has expressed a willingness to potentially the executive order to do $10,000 per borrower. But who knows, Tim?

Tim Ulbrich: You don’t have a direct line to Biden? I mean, what’s the problem?

Tim Baker: I don’t. I mean, he is an Eagles fan, as I am being from Delaware originally. So we’ve got that going. But nope, I don’t have the direct line to Biden, unfortunately.

Tim Ulbrich: So am I understanding this correctly, Tim, that this is in part potentially setting up tax-free forgiveness if something were to move in that area? So if this window of time, 2021 up through end of 2025, so let’s fast forward six months, 12 months, 18 months, whatever, whether it’s legislatively or through executive order, there’s some forgiveness that is granted, let’s just say for sake of conversation it’s a $10,000 forgiveness as an executive order. This is in part setting it up that that $10,000 would then be tax-free forgiveness?

Tim Baker: Yeah, I think that’s what they’re doing. Again, a lot of what’s in this bill I think is planting seeds for what could potentially come in the Biden tax bill, which could be very much a needle move or so. I think so. I mean, I think that a lot of people, a lot of borrowers are really — they come to me and they say like, “Tim, I don’t want to look at the forgiveness option because I don’t trust it, blah, blah blah.” And I get that. But again, especially when you look at the PSLF and you look at the math, it’s really hard to look at the numbers and say, “Yeah, let’s not at least consider that.” The reason I’m bringing this up is that I think because of all the rhetoric around student loans and how it can be suffocating to someone — we’ve talked about studies that people get married later, buying houses later, starting their families later, all of those things. I think it could potentially be breadcrumbs potentially to look at a forgiveness that’s similar to PSLF, even for working in the private sector but not necessarily the same timeline but the same tax, where it is tax-free. Or not. It could be — I could be completely off the mark there. I guess what I’m saying is that I think that the student loan, like the borrower, where we’re at today, it’ll be more generous to them in the future, not less. So a lot of people are saying like, “Oh, well PSLF could go away.” And I’m like, “It could, but I don’t think so.” Like if I’m looking at that, I’m thinking as a borrower, it’ll be more generous because I think it’s just something that the screams are going to get louder and louder, you know, in terms of like, hey, this is a — this system is not working where the price of schools are and things like that, it’s not working so we need to have some forgiveness. I mean, you look at $1.9 trillion, you know, that would do a whole lot in the student loan department because I think it’s — what, $1.6-1.7 now.

Tim Ulbrich: Yeah, pretty close. Yeah, great stuff. And I think we have covered a lot, Tim. And I think for our visual learners that are saying, hey, that’s great information but I need to see some of the numbers for myself, read through this, understand it in a little bit more detail, we’re going to link in the show notes to the treasury.gov information. We’ll also link to the Kiplinger calculator that I mentioned earlier when we discussed the child tax credits. And our hope is that you’ll be able to understand and apply that information to your personal situation and of course, we’re here and ready to work with you for those that are looking for a financial planner to be in their corner as well as to have a tax professional working alongside of them. So before we sign off for the day, I want to invite you again to a free webinar that we’re going to be doing on April 14 at 8:30 EST where we’re going to be talking about student loan strategies for 2021. So as we’ve discussed here briefly, we all know that administrative forbearance is set to expire at the end of September 2021, really making now the perfect time to determine the best way to tackle your student loans. So during this webinar, I’m going to share how to decide whether you should be paying on your federal student loans during the administrative forbearance, how to evaluate the loan repayment strategies that are out there, and what steps you need to take to pick the best repayment plan for your personal situation.

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YFP 195: How to Save for Your Child’s Education

Posted on by yfpadmin

How to Save for Your Child’s Education

On this episode sponsored by IBERIABANK/First Horizon, Tim Baker and Tim Ulbrich talk through strategies for saving money for your children’s college education. They discuss phases of planning for educational expenses, how to project how much to save, and various options for saving for kids’ college including 529s, Coverdell Education Savings Accounts, UGMA and UTMA Accounts, and Roth IRAs.

Summary

On this episode, Tim Baker and Tim Ulbrich talk through strategies for saving money for your children’s college education.

They discuss phases of planning for educational expenses including how to project how much to save. The two main phases of planning for educational expenses, the accumulation phase and the decumulation phase, are explained. In the accumulation phase, even before your children are born but before they begin attending college, parents will need to first assess their overall financial picture and situation, select the savings vehicle that fits the needs of the financial plan, actually fund the account, and check in regularly to make sure that the plan is on track to meet the educational financial goals. In the decumulation phase, parents are actively making financial decisions that directly impact the cost of the child’s education. The decumulation phase also includes actually paying for college. In both phases there are numerous ways to plan and save, each of which should take into consideration the retirement of the parent as well as their wishes for funding for the child(ren)’s education.

Tim and Tim also break down various options for saving for kids’ college including 529s, Coverdell Education Savings Accounts, UGMA and UTMA Accounts, and Roth IRAs, how they work, as well as the pros and cons for each when predicting the future expenses for your child’s education.

Mentioned on the Show

Episode Transcript

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

Tim Baker: Good to be back. How’s it going, Tim?

Tim Ulbrich: Good. I’m excited about this episode, one that we I know get lots of questions about from the community, from clients. I think it’s an anticipated episode. As I mentioned, a topic around college savings for kids that I believe is top-of-mind for many folks, of those that either have children or those that are thinking about having children down the road and the question is how do you best save for your child’s education? And as pharmacists, we’re all aware — acutely aware — how expensive school can be. 2020 graduate, $175,000 is the median debt load. We all know what that means in terms of our own education and therefore I think it’s probably front of mind as we think about our children’s education as well. Tim Baker, I suspect this is a topic our planning team gets lots of questions about from our clients. Is that accurate?

Tim Baker: Yeah. And it really comes from a place of like, I don’t really know how to approach this. So it’s more of a — I think more so than other things, it’s more of a blank canvas. Some people we kind of direct them if like, hey, if you don’t have a strategy here, we can talk through it. Some people are like, I don’t want my kid to go through what I experienced. I’m going to do whatever I can. And there’s every shade of gray here. So it is definitely something that we talk through with clients who are kind of in the phase of life where they’re just having kids all the way up into where they’re starting to go to college and trying to crack that nut. So it’s definitely something that is top-of-mind for a lot of the families that we work with.

Tim Ulbrich: Yeah, and I think it’s important before we get into account options and strategies — and we’re going to talk about 529s, probably the most well known option in the group, we’ll talk about coverdell account. We’ll talk about some taxable options, Roth IRAs and so forth. But i think before we get there, it’s important we zoom out for a moment, talk about really two phases of planning for educational expenses, the accumulation and decumulation phase. So Tim, talk us through these two phases, what they are, and thoughts that folks may have as they’re planning for kids’ college in these two phases.

Tim Baker: Yeah, so planning for education is very similar to planning for retirement. You know, we as employees will have a 30-, 40-, 50-year career, whatever that might look like. And typically, the overwhelming majority of that is in the accumulation phase where you are gathering assets and then you go through a decumulation or a withdrawal phase as you go into retirement. The same is true, to a lesser degree in terms of timeline, from an education perspective. So you have an accumulation phase, which is — could be before your kiddo is born all the way up until they’re 18 where they go to college and then you transition to a decumulation phase or a withdrawal phase where you’re actually paying for college. So a lot of families, especially with multiple kids, Tim, you’ll experience this with your boys potentially where you have four different one of these kind of rolling at the same time. So the accumulation phase is when you’re kind of just trying to assess what are your goals with respect to the education planning. So for a lot of people, it’s like, I don’t want my child to experience what I’m experiencing right now. For some people, it’s like, I think they need to have a little bit of it but to a lesser extent. And for some people, it’s like, that’s not part of my AO at all, like I’m not necessarily concerned about that. It’s kind of going through the process of organizing and selecting the appropriate investment vehicles to basically meet the goals that are in front of us, how do we want to fund it, so what is — how are we going to basically put dollars in those appropriate funds? And then just kind of those check in regularly along with the rest of the financial plan to see if we’re on track or off track, just like we would do for retirement and the like. And then really transition to the decumulation phase where it’s more about — and I kind of think about this in terms of the financial plan where you’re not a reactive spectator as I was when I was kind of going through this. I was kind of just I’m going to try to get into the best school that I can and I’ll figure out the price tag and everything later on but more of you’re making empowered, informed decisions about college. I think that’s needed, especially because of where the price of school has gone. So just being more in the driver seat and really work on saving on the cost for college, not just for the cost of college. So one of the big things that we’ll talk a bit about is just college is so ambiguous in terms of what it costs. There’s no price tag for everyone. And potentially help be that objective third party that’s removing the emotion and making an irrational home buying decision and do all this while you are taking care of No. 1, i.e. you and your retirement. It kind of goes back to that idea of put your mask on first before you can put your child’s mask on. The same thing is for education planning. So we don’t want to rob your own financial plan for your child’s college tuition. So those are really kind of the two broad phases that have different nuances as we’re going through them.

Tim Ulbrich: And one of the things you mentioned, Tim, in the accumulation phase is assessing the goal, starting to identify what the need is. And as a parent of a young child myself, multiple children, I struggle with the concept of projecting into the future to estimate educational expenses 5, 10, 15+ years into the future, although I know it’s important to begin to think about that and put some numbers around that as well. So how do you walk through this with clients when it comes to projecting the need?

Tim Baker: Yeah, it’s similar to like retirement. You know? Like we don’t really know what the cost of A, B, or C will be. We know that there’s going to be a factor that’s going to be inflation. We know that over the course of the last few decades that the cost of college education has increased threefold over a 17-year period meaning when your child is born, if it costs $40,000 to go to college today, by the time they’re ready to go, multiply that by 3 and that’s basically what a four-year education will cost. So you know, again, this goes back to the whole idea of like investing and time in the market versus time in the market and the time value of money. And for a lot of us, it’s just — it doesn’t necessarily need to be a completely balanced equation. It’s more about am I on track? And am I funding the education funds that are kind of in line with what my goal is? So there are some individuals — and I’ve actually had conversations with individuals where they’re like, we would love to have more kids, but we’re going to stick with the two that we have because if we add another one, we’re not going to be able to have that 100% solution for education. And those are conversations that I want to really dive into a bit more and really see if there is a potential way around it. So you know, just like retirement, we’re going to be tracking if we’re on track or off track. We do the same with education. The problem is that the cost, again, is ambiguous. There’s lots of components to the cost. There’s not like an itemized list that parents can go and say, “OK, this is exactly what it’s going to be. I’m going to know what that’s going to be in 17 years.” We’re just basically using all the tools, the data, we are making this almost just like we would in retirement. And we’re building the plan around that.

Tim Ulbrich: And I think that’s an interesting point, Tim, the ambiguous costs that are involved. There’s the sticker price of an institution, which from my alma mater, they’ve evolved that approach from big sticker price, discounting it with lots of scholarships, so the true cost is not anywhere near the sticker price to others where the sticker price, you’re in in-state tuition without scholarships and other things might exactly be that amount. And you’re looking at that times three or four or however long it takes. So talk to us about types of costs, types of expenses. What are things that folks need to be thinking about here in terms of the factors that would inform what that overall need may be? Or at least to project that need.

Tim Baker: Yeah, so you know, I think the way that a lot of the tools are built, the financial planning tools that this is kind of what we walk through clients on, you know, you have these different sectors of school. So you have maybe like a private nonprofit four-year on campus experience, which may be the most expensive. So like today’s dollars, it’s like $49,000 is the grand. And then we break those up into the different components: tuition and fees, room and board, books and supplies, transportation expenses, and other. So we have that but then we have all the way down to the public two-year kind of in-state commuter student that it’s a fraction of that, $17,000 all in. So we have the ability to, using the data that we have with some type of inflation number, to say OK, if you want your student to go to Ohio State and you’re in-state, it’s going to cost this much. And then we can build a plan around that. If you want your child to go to just the average four-year out-of-state or in-state, it’s going to cost this much. So you can be very, very granular on this. But really, the things to look at is tuition. So they say a rule of thumb is out-of-state tuition is roughly two times more expensive than in-state. Sometimes it’s a credit per hour, sometimes it’s a flat rate. Room and board, I’m going to do the don’t cut across my lawn, shake my cane at you — but like I remember looking at schools in the early 2000s when I was graduating high school and it being very much a bunk bed cinder block, not necessarily a great cafeteria expenses. And then listening to some of my younger cousins and saying like, “They do what?” And it’s kind of like an arms race, so to speak. And I think that’s one of the reasons that — you’re competing for students — but that’s one of the reasons why some of these have gone up. So room and board, does the school require on-campus housing for freshmen, even sophomores? That’s becoming more and more of a thing. A lot of schools have talked about freezing tuition, but room charges kind of remain unchecked. And a lot of these amenities kind of inflate the cost. It could be food where there’s meal plans. Typical meal plans could be $1,000-2,000 per semester. It could also be things like different fees that are for courses or parking or student ID and orientation, library, legal services, student government. It goes on and on. And these are things that can kind of just start really increasing — it could be textbooks. I know there’s a lot of things that are trying to disrupt that in terms of rentals and things like that. And then just transportation or personal expenses. I know you’ve seen back in the day like oh, like do you use student loans to go and travel and do that? And a lot of people are like, you know, let me live. A lot of people are like, I don’t want to do that because I don’t want to have that inflated student loan number at the end. So it’s very much a layered process in terms of what you’re paying. I think to be able to have some guidance and some counsel on this — and there are financial planning practices that specialize in this alone, especially for a lot of people that are working with Gen X individuals. So I think to have a person to help coach you and your teenager, which can be a little bit different. I know if I transport myself back to that, I’m like, I’m doing what I want.

Tim Ulbrich: That’s right.

Tim Baker: But I think if we reframe some of the conversations — and we see it when we talk to schools of pharmacy. If we’ll say, “Hey, the average debt load is $175,000,” that’s like funny money, right? But then if you actually equate it to like what does that cost per month in student loans and then you maybe multiply that by 12, which is close to $2,000, a year $24,000 if we go to the standard plan, that’s where you’re like OK, like maybe we need to have a more rational, less emotion, and make sure that, again, if you’re in pharmacy, all of that education equates to a higher income. But that’s not the case for everybody. If you go study something different that you’re not necessarily aligning what you’re paying in tuition with the expected salary.

Tim Ulbrich: Tim, one of the things you said, which is something that I’m struggling to think through — Jess and I — with our boys is I’ve heard you talk about taking current costs and projecting out for some factor of growth that we may expect and certainly we’ve all seen the numbers of tuition and fees, important point you made up — fees that are going up that far surpass inflation and historically have gone up at really incredible rates. But it’s important to note there is somewhat of a national conversation going on about the need for more affordable higher education or even perhaps in some cases free education. So this is something that I feel like I’m struggling reconciling is might I be overprojecting the need? And what’s the opportunity cost of that in terms of where else that money could be used and if it’s tied up in this account or that account? We’ll get into that a little bit with individual accounts, but what are your thoughts on that? Not asking you to crystal ball higher education over the next 20 years, but in projecting the need based on going forward and what we’ve seen historically with growth but also some discussions around perhaps this might be more affordable or in some cases free.

Tim Baker: Yeah, it’s a great question. And you see a lot of the political discourse around this in terms of like a more progressive political movement to forgive student debt and then offer free options. I’m going to talk out of both sides of my mouth in some degree. So like I think from a planning perspective, it’s tough to — you know, I kind of always default to the status quo. So just assume things are not going to change. But then when I talk about the 529, I’m kind of talking out of the other side of my mouth in that I think that over the last couple years and I think projecting the future, the dollars in those accounts are going to be able to be used for more liberal purposes even than what they’re used for today. So the free college discussion, I do think that there is a very real possibility that by the time, Tim, our kids go to school, that’s going to be an option on the table, an option that I think that a lot of people should seriously consider. I’m kind of putting myself back in that, like would I want to do that myself? And the answer is probably no, I wouldn’t have. But it might make more rational sense to do that, especially if you don’t know what you want to do, which again, most 17- or 18-year-olds don’t really know that. I think that’s going to be the real — the first big domino to fall is going to be kind of that free two-year community college. And I don’t know what stipulations are going to be on that, but I typically from a planning perspective, I plan as if it’s the status quo and hope that potentially there is an improved reality. So like one of the things they just announced with the latest bailout package was that they’re changing some of the rules to the income-driven plans that if you get forgiveness for a non-PSLF strategy between now and 2026, that that’s tax-free. Like you don’t have to pay the tax bomb.

Tim Ulbrich: No tax bomb, yeah.

Tim Baker: But the caveat to that — there’s not very many people because those are 20- to 25-year plans. There’s not many people that are in that boat. So it’s nice, but is that something that they’re going to extend permanently?

Tim Ulbrich: Right.

Tim Baker: Maybe, but do you say — you look at that, and you’re like, do you stop saving for the tax bomb? I don’t know if I would feel comfortable telling the client to do that. Now, the nice thing about the tax bomb was typically in a taxable account that you can use that and say OK, no more tax bomb, let me go buy a vacation home. That’s great. If it’s in a 529 account, maybe not so much. So yeah, I think it’s a great question. I think one of the things that a lot of people — and I had these conversations with prospective clients that were like, ‘Yeah, I’m kind of just waiting for this election to see if Biden gets elected what he’s going to do on the student loans to kind of push forward on my strategy.’ And I’m like, in my inside voice I’m thinking like, I wouldn’t hold your breath. And again, like could he forgive student loans? Maybe. But it doesn’t sound like he has an appetite to do it from an executive action. And if it’s — it’s going to be I think for most pharmacists very inconsequential. And again, I don’t know if I would hold up my life, my strategy, to wait for the politicians to come in and save it. So you know, whether that’s $10,000 or $30,000, it’s tough. So I think the big thing to kind of follow, which I think will be — is like that two-year. But then what are the stipulations for that? And then does your student, does your kiddo fit into that? I don’t know if that’s a — if it really, really affects my plan from an education standpoint. So that’s kind of what my take is on that.

Tim Ulbrich: Great discussion. And I think it’s important for folks to consider that on their own as well. And let’s shift now into talking about some of the accounts that are available for kids’ college. We’ll spend a decent amount of time on the 529. We’ll also talk about the Coverdell accounts, the UTMA accounts, taxable accounts, Roth IRAs, so different options here that we might consider. Tim, let’s start with the 529s. Obviously they come up in conversation probably the most often from my experience. What is a 529? What type of contribution limits are out there? How can it be used? And talk to us about these accounts at a high level.

Tim Baker: Yeah, so the way that I think about these are these are essentially like retirement accounts for education. But it’s really going to be dependent in terms of — so why do I say retirement accounts? Because most retirement accounts have tax-preferred status. Like if you put dollars in here, you can save taxes. But every state’s going to be different, right? So one of the big things that makes this attractive for a lot of parents is that the parent essentially owns the account. So a lot of these other ones that you mentioned, it’s like, these are Coverdells, UTMAs, UGMAs, these are custodial accounts that really belong to the student. So these are like retirement accounts, but for education that the parent owns. And one of the big things that I think is exciting that really happened over the Trump administration is that they’ve loosened up what these 529s could be used for. So back in the day, you would use these for a long accumulation period. So you would say, “Hey, little Johnny was born in 2000. He’s going to go to school in 2018.” And for those 18 years, you would basically put money in there and then whatever is left over, that’s what he would use for qualified education expenses. Now with some of the changes to the Tax Cut and Jobs Act under the Trump administration, you can now use it both as an accumulation account, so in future like when Johnny goes off to college, but then also today when Johnny starts kindergarten and he’s going to a private school or all the way up through 12th grade. So under the federal law, savers can now throw up to $10,000 to pay for students K-12 tuition. Now every state is going to be different in terms of what they allow. So that’s important to know what your state does allow. The other big thing that the 529 account — so this was under the SECURE Act, basically that it now allows, which is crazy that this is even a thing, but it now allows qualified student loan repayments up to $10,000 per beneficiary from the 529. So before this, if you had $10,000 in a 529 and you had $10,000 in loans, you couldn’t use that money without a penalty, without a 10% penalty to pay that off, which is crazy talk. Like there shouldn’t even be a $10,000 contingent on that. It should be if you have money in there and you have loans, you should be able to pay it off. And then the last thing that the SECURE Act does is it allows you to use the money for like apprenticeship programs. So like we talk about education — I know Tim and I, we talk about this kind of behind closed doors about like what does higher education look like in the future, what’s this going to look like for us versus our kids, and is there going to be a swing back to more of the apprenticeship type programs and that type of thing. And the 529 is opening up that. And you might be surprised by this, but even — like even when I started learning about the 529s, they didn’t allow you to use it for like a laptop or things like software, so it’s been a gradual thing. So I think that the restrictions are going to continue to kind of be loosened up, just because of the need to kind of solve this problem. So the 529, think of it as a retirement-like account that you can put in money and get a deduction on the state level, depending on the state, and basically grow that money tax-free. So if I put in $10,000 over five years and it grows to $20,000, I don’t pay capital gains tax on that as long as it’s used for qualifying education expenses. And I don’t pay any tax on the back end. I do pay a penalty if I use it to buy a car for my kid or something like that. The other big things in terms of flexibility is that let’s say Johnny doesn’t want to go to college. Let’s say he wants to start his own business, which I might be a big proponent of, maybe buy a franchise and learn that. So he can’t use the 529 for that. But maybe Jane, our second child, can. So you can basically use those — and let’s pretend Jane doesn’t want to go. Then maybe their grandkids do. You use it for that. So the money can sit there and grow. A lot of people think like, oh, I’ll never be able to use it. Like you can just keep changing beneficiaries, essentially, and use it for the children or the grandchildren that do need it. So I am a big proponent of it. I know some people, they kind of feel bound by some of the rules because it’s like, what if you don’t use them for qualified education expenses? But I think it’s a viable way to not only get a state tax deduction based on the state that you live in but also to allow those moneys to grow tax-free without paying capital gains that you would see on like a brokerage account or something like that.

Tim Ulbrich: Yeah, and the way I think about these, Tim, just to draw another example to how you explained the tax considerations, I think about these as like a Roth IRA for educational savings. So money going in has already been taxed dollars, it’s going to grow tax-free, you can pull it out tax-free for qualified expenses, which you outlined. I do want to just mention because I think it’s worth further explanation, you gave the example that these can now be used for not just higher education but let’s say I have a child who’s in a private education K-12. And some folks might be hearing that saying, “Well, what’s the purpose if I don’t have the long-term investment or gains?” If I have a 5-year-old or a 6-year-old, 7-year-old, they’re in private school and I put money in and then I turn around and take that money and spend it for that education, what’s the point without the gains? And really, the value, Tim — correct me if I’m wrong — would be on the state income tax deduction, right? You’re essentially passing it through, taking advantage of that state income tax deduction. And then of course if there is any time period of growth, you’re going to get some of that growth as well. But is that the main benefit of that type of approach?

Tim Baker: So if you live in the state of Ohio and you know that you’re going to have $10,000 in private school costs, you could put that money in, that $10,000 in, and then at least in the state of Ohio, I think it’s — what is it? $4,200 per kid. So you could at least take that off. So if you make $100,000 that Ohio recognizes income and you basically use it as a pass-through, so it goes right into that account and then you take it out and now the state of Ohio sees that you made $97,400 if I did my math right. Yeah. So $95,400. So the idea is that you use that as a gateway to lower your state income tax. So you’re not really getting any growth at all. It’s just a way to basically contribute, get the deduction, and then use those in more of the near term. It’s the same thing like you could argue with an HSA.

Tim Ulbrich: Yep.

Tim Baker: So the beauty of the HSA is that you can put those dollars in there. So if you put $2,000 into an HSA and then you use it right away, you’re not really getting any growth or tax-free growth on the accumulation of the asset, but you are getting the reduction on your federal and state income in that regard, which can be very beneficial. So and that’s the dynamic that has changed recently under the Trump administration where it wasn’t there before. It’s a great benefit, especially for those individuals that are sending their kids to private school K-12.

Tim Ulbrich: I’m still waiting for them to add the homeschool provisions, by the way.

Tim Baker: Yeah, that keeps getting cut out. And typically at the last minute too.

Tim Ulbrich: Yeah, I’ve got to dust off my lobbying skills. So get down at the statehouse. So some of the disadvantages I think about, you mentioned one of these with the 529. If it’s not used for educational expenses, which it has been broadened out as you alluded to, 10% penalty and tax on the earnings portion of that investment. Other things that come to mind here, Tim, would be as you’ve alluded to, not all 529s are created equal. So they’re based in different states. And this is where you hear folks say, x state’s 529 is the best one. So is it fees? Is it investment choices? Is it flexibility? Like what are the differences that we see in terms of state 529 offerings?

Tim Baker: Yeah, so like unlike some of these other accounts like the Coverdell and the UGMA/UTMA, the 529s are typically administered by the state. So the 529 will say, “Hey, Fidelity or Vanguard or American Funds, we’re hiring you to take care of our state’s 529.” So just like different custodians and institutions, they’re going to charge different fees and have different investments, the same kind of flows through to the 529. And it’s the same with the 401k and the 403b. So some companies will hire companies that are really efficient. So they’ll have good investment selection and cheaper fees. And some where that is not the case at all. Now, sometimes it’s inconsequential because even if the 529 is not great, the state tax deduction is such that it does make sense to pay the lesser fees to get the tax break. But that’s not always the case. And then there’s some states like North Carolina, they don’t care. Like they don’t have any benefit at all. What you essentially want to do is go out and find the state with the best 529 plan, which is often like Nevada’s typically at the top of the list of — the Nevada 529 because theirs is run by Vanguard. It’s typically lower fees and things like that. So a lot of it goes to fees, a lot of it goes to kind of investment selection that is really the driver of like, what constitutes a good 529 plan and what constitutes a not-so-good 529?

Tim Ulbrich: So I don’t want to spend as much time here, but just high level overview of the Coverdell education saving account, the UGMA, UTMA accounts, what are the main differences of those accounts from the 529s?
Tim Baker: Yeah, and to be honest, Tim, like I’ve seen this with clients. I can probably count on my hands how many times I’ve seen these accounts. So these are both custodial accounts, basically like self-directed. So where I was describing with the 529s are kind of administered by the states, you would just go to a financial advisor or even yourself, work with a banker or custodian, and you would say, “Hey, I want to open these up for the benefit of my kiddo.” So if we start with the UGMA/UTMA, these are just really trust accounts that you invest — basically you help invest a child’s money until they can take over it. So it’s owned by the child, but they don’t necessarily have control of it until they’ve reached the age of majority, which for every state it’s going to be different. So that can range anywhere from 18 years old to 25, depending on the state. So these accounts, what you contribute as the parent or the grandparent or whatever, it’s an irrevocable gift that basically means you can’t — there’s no takebacksies. So you give it and then you have no more control of that asset. So in a lot of ways, you’re kind of bound by the gift taxing limits. So these, you typically see these with very wealthy people that are trying to like spend down their estate so they’re not hit with a crazy estate tax. There’s not a whole lot of like tax benefit. So like if you put $10,000 and it grows to $20,000 for that child, they’re paying $10,000 in capital gains. And this could negatively affect the financial aid of the child because the asset is owned by the child. So I don’t really see these much because of the advent of like things like the 529. The other big thing is that I don’t think — then you can use it anything. So if Johnny reaches 18 and he’s like, I don’t want to go off to college and that’s what this money’s for, but I think he can spend it on whatever he wants. So he’s not bound by the education. The Coverdell, these used to be called Education IRAs. The name was changed. These contributions are not tax-deductible, but it does grow tax-free. So they’re very much like Roth IRAs in that the gains are tax-free and they’re self-directed versus state-directed. So you know, they’re — and the withdrawals are tax-free if used for those qualified education expenses, which are also K-12. So this was even before the 529, that was a thing, the Coverdell did have that. But the big downsides for these is that you can really only put $2,000 a year per student. So it’s very low contribution limits. And then you typically phase out like once you reach $220,000 as a married filing jointly or $110,000 as a single taxpayer, you can’t contribute to the Coverdell at all. So for many pharmacists, you know, you’re very quickly kind of out of that, especially if you have dual income. So I don’t really see these anywhere. I mean, I think primarily I see people save for their kids’ education either in a 529, a Roth IRA, a brokerage account, or I’ve even seen some people do it with real estate, which is an interesting concept as well.

Tim Ulbrich: What would be the advantage of a brokerage account? I want to get to the Roth here in a moment, but these ones, we’re obviously talking about some tax advantages that can be associated with them. So what would be the thinking of a brokerage account as a primary vehicle?

Tim Baker: I think for a lot of people, it’s just — it’s that perceived flexibility, which is there. But I think from a Roth, like you can take whatever you contribute to a Roth out any time penalty-free. Tax- and penalty-free. So that’s one thing that a lot of people don’t understand is that if you contribute, you can take that basis out of the Roth IRA. It’s when you start getting into the earnings, that’s when you get into the penalties. So I think for a lot of people, it’s kind of that idea of just flexibility. The problem is that once you start adding up — like if you’re saving for Jane and Johnny’s college over the course of 20 years or so, you could see real capital gains tax there.

Tim Ulbrich: Yep.

Tim Baker: Hopefully they’re long term capital gains so they’re taxed at a preferred maybe 15% versus a 22%, 25%, 30%. But that’s still money that you have to account for when you’re going to use that for education. So again, I like the 529. It’s not investment advice. I think for a lot of people it makes sense because of the flexibility that you can — you know, if one kid doesn’t use it, you can give it to the next one. It’s just my kind of go-to.

Tim Ulbrich: Speaking of flexibility, one of the things that I’ve thought of that I want to get your input on — I suspect our listeners may have as well — is the Roth IRA as an option for thinking of saving for educational expenses with the understanding that qualified educational expenses are an exception to the early withdrawal penalty and as you mentioned, the basis or the amount that you put in a Roth can be pulled tax-free without penalty at any point. So talk us through that strategy. I think of something like a Roth versus a 529, perhaps more investment options, perhaps an option to keep fees down depending on what you have in the 529, the idea that if Johnny and Suzy decide not to go to college and I don’t have anyone else to transfer it, I can continue those savings on for retirement. Downsides of course would be of maybe we’re not using that as the primary or one of the primary vehicles for retirement and savings. So where does that fit in in terms of strategy of folks when you’re thinking about where a Roth may or may not fit relative to the 529 specifically?

Tim Baker: Yeah, I mean, I’d probably default more so to the 529 first, at least get the state tax deduction. But there’s some people that are just like, I want to really use — because that is one of the exceptions in the IRAs that you can for higher education expenses and I think it’s cap, I don’t know if it’s the same for first-time home buyers, if it’s $10,000. I’d have to look that up. But I think it is. I don’t know, I think we talk about accounts like the HSA that has this dual purpose. But sometimes when you have a dual purpose, you have no purpose. It’s almost like when you have two quarterbacks, right? So for like the Roth IRA, like I look at that as a retirement account, not an education account. But it could very much be used as such. I think that yeah, to your point, is there more flexibility in an IRA versus like a 529? Absolutely. Is it even cheaper? Yeah, potentially. But I think that where the 529 is going — and I think you can have both, really. Some people will never reach their state’s benefit in terms of what the state tax deduction would be. But yeah, I think this is more of a conversation for clients that don’t have that benefit, like I said, North Carolina where the Roth is — or even the brokerage account, but I would probably say the Roth first would be the first avenue. So you know, I kind of, again, default rightly or wrongly to the 529. But I think the Roth can be a viable way to at least put some dollars aside for that purpose.

Tim Ulbrich: Yeah, and I like the thought on the 529 for the state income tax deduction. Maybe you build it from there, maybe you look at a Roth. The other thing, which I think goes without saying, is that if there is a way to earmark your Roth specifically for long-term retirement savings and still contribute to a 529, we can let that money continue to grow as you say on repeat on this show, it’s time in the market that matters, right? So if we can not have to pull that out for college expenses and let it continue to grow, obviously we’re going to reap the benefits of that compound interest. Last question I have for you, Tim, as we wrap up this discussion on kids’ college and savings: One of the thoughts that I have is coming out, I’ve talked about my story and journey on this show many times before, but I suspect for many other pharmacists that have six figures or more of debt, is there a tendency for folks to overcompensate for kids’ college savings at the expense of other areas of their financial plan, specifically for those that have come out with very high debt loads and because of that experience, might lean in that direction of hey, I don’t want my child to have to go through it, at the expense of their own retirement, at the expense of other financial goals that we might traditionally think come before kids’ college? Is that something you see among clients?

Tim Baker: I think that yes, I do. But I also see like a bit of every kind of approach on the spectrum where it’s like, I don’t ever want my child to ever have to go through this again or go through what I went through. But there’s also like some of it like I went through it, so they have to go through it. And then there’s some reservation of like, just because my loans are so bad, I don’t think I’m going to be in a position to help them.

Tim Ulbrich: Yes.

Tim Baker: Sometimes there is kind of the reaction, you know, equal and opposite reaction type of approach. But it’s all over the place. And I think for the most part, the default has often been I want to help my kids as much as I can, but I also need to make sure that I’m taking care of myself. And I wouldn’t say it’s uncommon, but you know, there have been not as many conversations as you would think where I’m saying like, we have to pull that back. So you know, one of the things that we do as part of the goal setting here is how do we want to go about funding this? And there’s a lot of different approaches where you can plan for 100% or you can plan for something that’s a lot less than that and feel good about that as part of your financial plan. So yeah, it is all over the board. But I think there are sometimes is a push to kind of overcompensate for that or some just like, hey, I had to deal with having to find my way.

Tim Ulbrich: Good luck.

Tim Baker: They do too. Yep. Yep.

Tim Ulbrich: Great stuff, as always, Tim. And to those listening and college savings may be on your mind of one of many financial goals that you’re trying to work through, we’d love to have a conversation with you about the comprehensive planning services that we offer at YFP Planning. Now serving more than 200 households across 40+ states of the country. Our team is well versed in this topic among other parts of the financial plan. And you can go to YFPPlanning.com, book a free discovery call to see if our services are a good fit for you. And as always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please do us a favor and leave us a rating and review on Apple podcasts or wherever you listen to the show, which helps other folks find out about the Your Financial Pharmacist podcast.

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YFP 193: Building vs Buying a Home: What to Consider

Posted on by yfpadmin

Building vs Buying a Home: What to Consider

On this episode, sponsored by Live Oak Bank, Nate Hedrick, the Real Estate RPh, joins Tim Ulbrich to discuss considerations for building vs. buying a home, the pros and cons of building, lending considerations when building a home, and common pitfalls when choosing to build a home.

About Today’s Guest

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

Summary

Nate Hedrick, the Real Estate RPh, digs into some important considerations to keep in mind when planning to build a home versus buying a home, how the process for building a home differs from purchasing a pre-existing home, the main approaches to building, and important questions to ask your builder or developer when building in a development or on raw land.

Nate shares his personal experience with his clients in the real estate market and the various motivations for building a home instead of buying. Those who choose to build a home over buying a pre-existing home may be motivated by both the nature of the current housing market and a desire for a variety of customizations to the home.

Nate outlines the many pros and cons when building a home. Benefits of building a home include the level of customization on design based on the builder, creating the home that you want but can’t find in the market, and that new home feeling. Cons when building include the time it takes to complete the home, usually around 9 months, as well as the financial process differing for building a home from the process for buying a pre-existing home.

The two main approaches to building a home are examined: working with a builder or developer to purchase and build on a lot or buying a plot of raw land. When working with a builder or a developer, clients can expect to have a concierge type experience, whereas buying raw land may require purchasers to perform more tests and do additional research to ensure that the land will be viable for the build. To avoid major issues, buyers should include their real estate agent and builder in the entire process of buying and building on raw land. Similarly, when working with a builder or developer, buyers should include their real estate agent in the process as your agent acts as an advocate throughout the buying and building process.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Nate, great to have you back on the show. How you been doing?

Nate Hedrick: Tim, great. Always good to be here.

Tim Ulbrich: Excited to have you back. We had you on Episode 197, Ways to Reduce Your Monthly Costs, and we have some exciting news coming up. Details will be forthcoming. But we’re going to be launching a YFP real estate podcast. Our goal is weekly content for real estate investors, either current investors, pharmacists that just want to learn more, that have been thinking about it but haven’t pulled the trigger. We have heard loud and clear from the YFP community that they want more information on real estate as an investing path. We’ve brought more content in 2021, at the end of 2020. We’ve got more coming ahead. And more information certainly will come. Nate Hedrick is going to play a big role in that effort. So Nate, exciting times ahead, right?

Nate Hedrick: Yeah. I’m really excited. It’s going to be a pretty cool podcast, and we’re bringing back another YFP past guest. We’ll keep it a surprise for now. So excited about all that.

Tim Ulbrich: I love it. And I think you and I, we’ve talked about this extensively, but we know that many pharmacists have inquired about real estate investing. And we have seen firsthand the value that can come from showing examples, stories, the good, the bad, the ugly. And for pharmacists that are thinking about this or even have begun this journey that can see other examples all across the country and of course connect with those folks. And so we’re excited to bring this community together of pharmacist real estate investors. Stay tuned. We won’t announce the exact date of launch or any of that at this point, but wanted to put that on folks’ radar that we’re going to have some more great content coming for you related to real estate investing. So Nate, we’ve been talking a lot about home buying on this show. But something we have not talked as much about is building a home. And I’m excited to dig into this topic and talk through some important considerations to keep in mind if you’re planning on going that route and how the process may differ from buying a home. And this information that we’re going to draw for this episode of which we will link to in the show notes comes from a post on your blog, The Real Estate RPh blog, and that post is 20 questions to ask if you’re building a home. So we will link to that. And this episode is really meant for folks that have been interested in this topic, are thinking about building a home, on the fence about building versus buying. And so we’re going to dig into topics surrounding that. So from what you have seen, Nate, with your clients and in the real estate market, you know, how prevalent is this? Are folks often thinking about building a home instead of buying a pre-existing home?

Nate Hedrick: Yeah. It really depends on the market, but I’m seeing more people going this direction simply because the inventory has been so low recently. With the way the market’s been — actually, I just heard about a client recently that looked for a house for about 2.5 months and there was just nothing. Anything that was coming along was going $20,000, $30,000, $40,000 over asking. And it just became untenable. So they said, ‘Look, we’re just going to sit back, we’re going to renew our lease for another year, we’re going to go ahead and build.’ So I think sometimes it’s something that’s being forced upon people, but other times, you just have someone that goes in and says, ‘Look, we know what we want in a house. We can’t find that in our market today. We’re going to go out and build it, right? We’re going to find the specific spot that we want it to be, and we’re going to get the exact house that we want. This is how we’re going to do it.’

Tim Ulbrich: Yeah, and I just had a similar conversation a couple weeks ago with a pharmacist down in the Raleigh, North Carolina, area. Same thing, you know, very hot market let alone just what we’re seeing national trends in that area specifically and prices where homes were going relative to asking said, ‘You know what, we’re just going to build the thing,’ which I’m guessing is easier said than done as we’ll talk about but is certainly a consideration. What other motivations might folks have? I mean, is it typically just demand? Is it I can’t find anything, these custom aspects that I want? Like what are you seeing from folks in terms of motivation to build?

Nate Hedrick: Yeah, a lot of times, it just comes down to if you know what you want or if there are specific things that you want in a home and it’s difficult to find in that particular market, then you can go out and build it, right? So if you are — and actually, it’s funny. My wife and I were running into this recently. We’ve been kind of casually looking at other houses, just to see what else it out there, and keep coming back to the fact that like if we were to really move, I don’t know that I’d want to go get this big, gigantic house, right? I’m more interested in the land and putting our kind of style house on it. And there are other people that fall into that same category. So I think there are a lot of different motivations. But if you want that true customizability and that feeling of like the brand new car, right, that’s where that home building usually tends to come in.

Tim Ulbrich: Now Nate, you and I both know — especially you as an agent — that when you say we’re “casually” looking, that’s a done deal, right? I mean —

Nate Hedrick: No, I look at enough real estate to be able to look at it casually I think. Hopefully.

Tim Ulbrich: That’s true. So high level as we start this conversation, and we’ll dig in in more detail about what are some specific considerations when you’re considering building, whether it’s working with an agent or financing, common mistakes that folks make, but high level, pros and cons of building. You know, for folks that are thinking, yeah, maybe it’s us, maybe it’s not us, like what are some things that folks may want to think of when it comes to making this decision.

Nate Hedrick: Yeah, the biggest pro is the full customizability. And this can vary based on the actual builder, right? Some builders are going to give you absolute customization from floor plan to design to fixtures. And even if you don’t get that level, right, there are going to be 10 floor plans to choose from. And within that, you can pick your countertops and your cabinets. Again, it gives you that full range of customizations. If you know exactly what you want or are close, 80% of that you know and you can get the rest of the way, that building allows you to get that full customizability. The real con, though, right — or the couple of cons I guess would be timing. So obviously it takes time to build that house, especially if you’re customizing it from the ground up. You’re looking at the very minimum nine months from that date of contract, usually longer, to really get that home built. So waiting game is there. You’ve also got a different type of lending that goes on. And we can talk about this more. But construction loans are very different than your traditional conventional mortgage. And so there’s other stipulations that go with that, some other fees, and it can make it a little bit more tricky, basically.

Tim Ulbrich: And when you talked about customization, Nate, never have gone through this process. You know, I’m sure some folks look at that and they’re like, that’s incredible. I’ll get to choose every detail. I look at that and say, my gosh, I don’t even know what shirt I’m going to wear on any given day let alone what the knobs are going to look like. So is there a wide range of like if you want to keep it simple, builder may say, ‘Here’s Option A, Option B, Option C.’ And then the details are already contained within that? All the way to every little detail is negotiable along the way.

Nate Hedrick: Yeah, it depends on the builder. A lot of times what I’ll see — for the most part — is they’ll offer 3-5 options for a given set of whatever, right? So they’ll say, ‘Your countertops are coming from this supplier. And you’ve got from marble to granite, and these are the preferred options.’ And you’ve got an allowance for that is how they often do it. So they’ll say, ‘Cabinetry allowance is $14,000, and we’re getting it from x, y, and z cabinet maker.’ So then you can go to that particular site or they’ll a lot of times have handouts that you can look through, and it narrows down your options, right? That’s the most common setup. The other cool thing I’ll see a lot is where high end, especially high-end purchases and high end builders will offer a designer as part of that process where you can sit down with them for x number of hours as part of that fee or the cost of building that house, you get x number of billable hours with that designer to pick and choose all those things. And a lot times, those designers will bring with them ideas and collections where they’ll say, ‘Well, if you’re going to choose these cabinets, these are the drawer pulls I recommend.’ Again, you can totally get into the weeds, but that can make that analysis paralysis much, much easier to manage.

Tim Ulbrich: And it always stays on budget, right? I mean, it’s always on budget.

Nate Hedrick: You know, it’s funny, again, these allowances, they offer those but you can pretty quickly break them if you want to.

Tim Ulbrich: I’m sure. I’m sure. Well, it just reminds me like, no judgment here, it’s just human behavior. If I were looking at a home and there were some options involved, like you kind of make one decision that I would suspect has a domino effect on other things that you want to do. So since you talked about the lending piece being different, let’s start there. You mentioned construction loans, which are of course a different animal than conventional home financing, which even within that we’ve also got multiple options we’ve talked about on the show before. Most recently, we had Tony Umholtz from IberiaBank, Episode 191. We talked about 10 common mortgage mistakes but in there talked about some of the financing options. So Nate, talk to us here about lending considerations. You know, what exactly are we dealing with when it comes to construction loans? What’s different? How does this change or not change things like pre-approval and down payments and timing? Walk us through that.

Nate Hedrick: Yeah, it’s fairly complicated, actually. I’ve been meaning to like put together a post and digest this because there’s not a lot of great resources out there that actually walk through this. But the idea is that you’ve got two phases to think about when you’re thinking about a construction loan. And again, a lender is probably going to beat this up and say, ‘Well that’s not what you call it,’ but this is how I explain it, right? So you’ve got — we should have Tony back with me, right?

Tim Ulbrich: Yeah.

Nate Hedrick: But you’ve got this kind of pre-build phase where you’ve got to pay for either the land and the lot, right, the location, and then you’ve got to start paying that contractor, that builder, for some of the materials. So before there’s ever a house there, there’s still costs being incurred. So there’s this construction phase of that loan. And then after, when it’s done, you actually have a mortgage. You have a house that’s paying a 30-year fixed rate mortgage or whatever. And so there’s a number of ways that lenders will break that down. Sometimes they’ll do separate loans. You apply for one, you get the construction loan, you go through that, then you will create basically a mortgage that will pay off that construction loan and then go from there. Sometimes you can do a combined process where the loan will be all in one. They call it a single close often where you’ll close once on that construction loan and it will convert to a 30-year fixed mortgage at the end. It varies by lender, there’s advantages and disadvantages to both. It’s a whole separate podcast episode just to talk about that. But the idea is that you want to make sure you have a conversation. It’s not like going out and getting pre-approved for a $500,000 house. There are considerations in terms of well, is the lot or the land included? Right? Is that included in the finance or do I have to pay for that lot in cash? Again, a number of considerations that come up as you start down that road.

Tim Ulbrich: And so speaking of finding a lot to buy and where folks look and buying land, you know, that to me seems like something that could be both exciting and overwhelming. And I’m used to my typical searches for a home on Redfin and Zillow and things like that. Is it same type of process, you know, in terms of finding a lot to buy, where folks look, what makes a good lot, a bad lot? What are things that folks need to consider here?

Nate Hedrick: Yeah, so there’s two main approaches to this. So one is that you’re going to — that is kind of the more traditional option, which is that a builder or developer has purchased several acres and they develop that into a neighborhood, right?

Tim Ulbrich: OK.

Nate Hedrick: We see this all the time, right? Coming soon, houses starting in the $300,000s, join Orange Village or whatever it is.

Tim Ulbrich: Yes.

Nate Hedrick: You see these. And a lot of times what happens with that is you’re not going out and finding and hunting down a lot. It’s the full concierge package all put together. You go out to the builder, they say, ‘We have 40 lots that we’re preparing to be built upon. You can pick your spot on the street. Here’s our preferred builder or builders.’ A lot of times they’ll have anywhere from one to three builders that they work with on those development lots. And you basically find your lot that way. The other option is to go out and buy raw land. And you can find these on the MLS, you can find them on Craigslist, you can drive around and see some with a sign in the yard. And you can buy raw land and then go out and find your own builder who will come out and custom build on that particular lot. And so the two approaches are very different. One is a much more kind of put together process, going out and actually going to that developer on that particular build lot whereas the other can be much more flexible and a lot of times, you get your truly customizable builds when you’re talking about going out and buying a plot of land and then bringing in a builder to come do that plot.

Tim Ulbrich: And in the first example, Nate, you’ve given, which I drive by those all the time, right? So you see homes for sale. That seems obviously, you know, concierge is probably a good way to think about things kind of customized and put for you together, it’s packaged together, it’s .25 acres or whatever be the lot size. You know it’s ready for water, sewer, all that stuff taken care of. You have comps of that obviously based on the neighborhood. The other one to me is both intriguing/overwhelming. I was just driving by a property yesterday here in Columbus. It was 131 acres for sale. And I’m like, that’s interesting. I don’t know, it’s by the interstate. I was like, there could be something cool you could do with it. And then I stopped right there, right? Because you start to think about like, what is a comp for 131 acres of land like this? And what about being ready for sewage and water and things like that? So any thoughts for folks that are going more that route of I’m just looking for random land that’s out there and putting a home where it may not be as put together for them, if you will. What are those things? I’ve listed a couple, thinking of comps for land, water, sewer, things like that.

Nate HedricK: Yeah, absolutely. So you have a due diligence period on raw land like that where you can start to assess those things, everything from getting like a geotechnical survey, something as simple as a soils test to determine if the soil is appropriate for bearing the structure that you’re talking about. This is a particular problem in certain areas like I think about my in-laws that live in Pittsburgh. So there’s a lot of hills, there’s a lot of old mine shafts, quite honestly — that sounds ridiculous, but that’s a real problem that you contend with as a developer out in Pittsburgh. And so you have to do these site and soil samples to make sure that you’re going to have supportive structures to be able to handle the house that you want to build there. You mentioned hookups, that’s a huge one, right? So if you are out in the country, you might not have access to city water. You might have to put in a septic system and dig a well and again, that well might need to be 100 feet deep, 200 feet deep. Like who knows? Right? If it’s truly, truly raw land, these are all things that you would need to figure out. And so a lot of times what you’ll do is you’ll find a piece of land that you’re interested in and either the seller of that property has done all that work for you and they can say, ‘Here is the site and soils test. Or here’s the survey that we’ve done. There’s already a well. There’s — whatever, you name it.’ Right? They may have done that up front or you can order that yourself. And there are companies that specialize in this. And a lot of times, your agent will actually help you coordinate with those companies. You can often go to your builder because your builder will have the specs needed to make those decisions. And so I often recommend that if you’re going to be doing this, it’s not a buy land, find a builder later. It’s do it all at once because you want that person involved.

Tim Ulbrich: Yes.

Nate Hedrick: You want the architects involved, you want the surveyors involved, the builders involved, all at the same time to make sure you’re not going to run into a problem.

Tim Ulbrich: Now I suspect the question I’m going to ask here is, ‘it depends,’ but I’m going to ask it anyways. One of the other thoughts I have as I look at raw land periodically just out of interest that folks may be wondering if they’re doing the same build a home is resale value. So especially when you get into perhaps unique pieces of land, unique customized properties, I could see an argument on both sides of that, either hey, it’s a unique piece, it stands out, there’s not a lot of other things like it. Or maybe not as many people are in the market for something like that. So is it a ‘it depends’ situation, just every property, every area where when you get into a customized home, customized piece of land, in terms of resale?

Nate Hedrick: Yeah. I’m stealing from Tim Baker, right? It definitely depends. But there is some speculation to draw in too. There’s actually a number of investors out there that will buy raw land for the sheer purpose of saying, “OK, I know that this market is booming and it’s starting to expand. I think it’s coming this direction in the next 10 years, so I’ll go buy this property that I expect to be worth 10 times this, but I have to wait 8 years to get there.” So it can be very speculative in terms of that value. But the other thing that’s nice is that if you are in like a municipality or a city and there’s land there, you can often compare that land value on a cost per acre to other land in the area. So if you — especially like something where we live in Ohio, everything’s flat and easy to kind of figure out. If you’ve got a 1-acre parcel in x city, it’s potentially pretty similar to another 1-acre parcel in that same city. And here’s why. And so you can compare those somewhat easily in certain areas. But in others, it’s almost impossible.

Tim Ulbrich: That makes sense. And you know, you had talked about some key people of the team. And I think you do a great job when you’re talking about home buying or home building in this case and considerations, how important the team is. So we talked about the lending piece and we’ve mentioned the agent piece and the builder piece. But we haven’t talked about that in detail. So let’s start with the agent piece. How does a real estate agent support someone building a home? And how does this differ from those that might be looking to buy a pre-existing home in terms of who they might be looking for?

Nate Hedrick: This, again, kind of depends on if we’re talking about building in that development or building in the middle of nowhere or on raw land. But in both cases, you absolutely want to have an agent on your team. I think it’s obvious a lot of times if I’m going out and buying raw land and getting a builder that it might be helpful to have an agent in that case. But it doesn’t seem as obvious when you’re talking about, again, that concierge model we talked about where you’re going to a site plan, they’ve got a model home, their office is open, they’ve got all these friendly real estate agents there. It often feels like I shouldn’t even need anybody to help represent me. But the reality is you absolutely should. And it costs you almost nothing to do that. The agent being involved is your representative, right? The person that’s selling that property, they are trying to sell that property for as much as they possibly can. So even if you’re going to a development, 50 homes available, everything’s done for you, you absolutely want to have that agent as the core member of your team to help with things like negotiating the contract. I’ll give you a great example. I have a client that I’m working with right now. And our early conversations with the builder, they cited this great, gorgeous rooftop deck, OK? And they said, the rooftop deck, you can add it on for I think it was — I don’t know — maybe $15,000. Let’s just say it was that. And it was this awesome like you could see downtown and you can see the lake from downtown. This place is gorgeous. And they quoted it at $15,000 early on. Well that property started blowing up in popularity. And it got really hot really fast. And so we were in but kind of negotiating the contract still. And so we get to kind of the closing bit of figuring out this contract, and they said, “Oh yeah, and that rooftop deck. It will be $22,000.” We said, “Hold on.” And you know, at the time, the buyers were like, “Well, that’s just what we have to do.” I said, “No, I’ve got some notes here.” So I went back and we looked at it, and we had clear indications from the buyer — or from the builder that it was a $15,000 add-on.

Tim Ulbrich: Yeah.

Nate Hedrick: And so I was able to help negotiate that back down and save them that $7,000. So having an advocate on your team, somebody that knows this stuff inside and out is absolutely essential.

Tim Ulbrich: Yeah. And not only an advocate, but an advocate that takes good notes and is ready to act on your behalf as well.

Nate Hedrick: Helps to have a detail-oriented pharmacist as your agent I suppose. But really, again, that agent is going to also grow the rest of your team from there, right? So if you need inspectors, if you need a lender, if you need a title company, again, most of the time the seller’s going to have the preferred title company that they’re working with or the preferred lender that they’re working with. But you still want someone on your team that can grow that, the rest of that process if you need it.

Tim Ulbrich: And for those listening to this episode, if you’re looking to buy or build a home in 2021, as you likely have heard us talk about on this show before, we’re excited about our partnership with Nate, The Real Estate RPh, for the Real Estate Concierge service that he can help get you connected with an agent that is local to your area but also be alongside for the process, talk to you at the beginning, walk you through along the way, be a second set of eyes, help you think about the beginning to the end, and work with that agent locally as well. So you can learn more at YourFinancialPharmacist.com. You can click on “Buy or Refi a Home,” and then “Find an Agent,” and that will get you Nate. And you guys can schedule a quick discovery call to see if that’s a good fit for what you are looking for. So we talked about the agent, Nate. The builder is one that comes to mind as well. You know, we’ve all heard horror stories of I was working with this builder, they went bankrupt, something happened. I feel like any neighborhood I’ve been in, there’s always been a story of like, oh this stopped here in the neighborhood because this happened. So talk to us about — of course it depends on some level, but considerations when working with and finding a builder.

Nate Hedrick: Yeah, this is exactly why I put together that blog post that you mentioned about the 20 questions to ask if you’re building a home because there are a number of things that I see my clients not even realize they should be asking up front. It starts very, very simply, right? You want to kind of get an idea of how long they’ve been in business, look at the number of homes they’ve built, look at the number of homes they’ve built in your area as well. So you know, if they’re brand new to Cleveland, Ohio, they’ve never built here before and they’re used to working in a different state, they may not be ready for some of the things that come up with building in this particular location. So getting questions about have you built in this municipality before? Have you dealt with the city, the planning committee, the zoning committee, this architect, you name it? All that stuff, you want to make sure there’s some sort of background going into that. So a lot of the questions that I often mention to my clients revolve around proving that that person is experienced enough to handle what we’re dealing with and then also licensed and insured in all those things as well so that if something does go wrong, you’ve got kind of this backup to make sure that you’re not going to lose your money or anything like that. And from there, it really grows to questions about the specifics in terms of are you looking for more energy saving features? Are you looking for more customization? Right? Because certain builders are going to be more customizable than others. Or perhaps maybe they only do certain types of appliances, and you really want the top-of-the-line. So those are all questions that you want to ask as you get into the weeds. But always start with those broader questions about experience and making sure that they’re appropriate for the job.

Tim Ulbrich: Great stuff, Nate. And again, to the community, the conversation we’re having today comes from an article that Nate wrote on the Real Estate RPh blog, “20 Questions to Ask if You’re Building a Home.” We’ll link to that in the show notes. And again, if you’re in the market for buying or building a home in 2021, make sure to head on over to YourFinancialPharmacist.com, click on “Buy or Refi a Home,” and we’ve got additional resources available to you right on that site in addition to an option to find an agent, which Nate can help you throughout that process. So Nate, as always, appreciate your time and your willingness to share your expertise with the YFP community.

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

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YFP 189: Options for Investing When You’re Maxing Out Your Retirement Accounts

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Options for Investing When You’re Maxing Out Your Retirement Accounts

On this episode sponsored by LendKey, Tim Baker, Co-Founder and Director of Financial Planning at Your Financial Pharmacist, joins Tim Ulbrich to talk about strategies for investing when you have maxed out your traditional retirement accounts.

Summary

Tim Baker and Tim Ulbrich dive into what traditional retirement accounts are, how contributions have or have not changed, the priority of investing, and strategies for investing when you’ve maxed out your traditional retirement accounts.

Tim Baker explains that traditional retirement accounts are generally any employer sponsored accounts, like 401(k), 403(b), 401(a), or TSP accounts. Traditional IRA, Roth IRA, SEP Ira, and Simple IRA accounts are also considered traditional retirement accounts. Many of these accounts have stayed stagnant in regards to contribution limits from 2020 to 2021, like 401(k) and 403(b) accounts which remain at $19,500. However, IRA accounts have increased to $6,000 (aggregate total for traditional and Roth accounts) and HSA contributions have increased to $3,600 (single) and $7,200 (family) with a catch up of $1,000 for those over 55.

Tim suggests a few areas of investing to consider after maxing out traditional retirement accounts. Real estate investing is a viable way to build wealth as it often provides flexibility and cash flow, can generate both short and long term gains, and comes with a lot of tax benefits. Of course there are risks involved with real estate investing and it isn’t as passive as a traditional retirement account, but can be a way to help grow your income and net worth. Starting or investing in a business is another avenue to take after maxing out your retirement accounts. This could be in the form of starting a side hustle or business, inheriting or becoming part of a family business, or investing in a partnership. Lastly, taxable brokerage accounts like Robinhood or Acorns are a good stepping stone to get into a different type of investing, however Tim suggests being intentional with what your setting brokerage accounts up for. He also shares that the more boring you can be with investments, like investing in the S&P 500 or total market index funds, the better it is.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tim Baker, good to have you back on the mic. What’s new?

Tim Baker: Not much. Just settling into our new office, YFP headquarters in downtown Columbus. So that’s coming together slowly with just furniture and everything else. But yeah, just getting comfortable. How about you?

Tim Ulbrich: Yeah, exciting times, I think, for YFP. Excited about having you in Columbus. And we’ve got some exciting things planned for the year, and so here today we’re talking about all options for investing after you’ve maxed out traditional retirement accounts. So first of all, if you are somebody listening that hasn’t maxed out your traditional retirement accounts, kudos to you. That’s not an easy thing to do by any means. And remember, as we say many times on the show, investing is only one part of the financial plan. It can’t be looked at in a silo. And for those that are listening that are at the beginning of the investing journey or looking for a refresher, make sure to check out episodes 072-076, our Investing 101 series, as well as Episode 163, Investing Beyond the 401k, 403b, where we discussed IRAs and HSAs in details. And so we’re going to build upon that information here today. So Tim Baker, let’s back up a bit. What are we talking about when we say traditional retirement accounts?

Tim Baker: I guess the thing that pops into my head first and foremost are going to be what’s provided through the employer. That’s typically things like the 401k, the 403b. A lot of us have supplemental retirement plans, things like the 457, some people have 4018s, which are kind of like 401k’s. And then those that we kind of manage ourselves or through the help of a financial planner, so these are things like traditional IRAs, Roth IRAs. Sometimes we’ll see SEP IRAs for those that are self-employed or work for a small business. And simple IRAs also fall under that. So traditionally, those are the ones that we lean on first when we’re kind of looking at ways to defer income for the purposes of saving for retirement.

Tim Ulbrich: So talking about 2021 numbers here, have contribution limits changed from 2020 as folks are considering, alright, new year, what could I be doing to take advantage of these accounts?

Tim Baker: Some of them have changed, but a lot of them actually stayed stagnant. So the most common, the 401k/403b, is the same. So in 2020, you could put $19,500 per year. And that’s of your own money, so doesn’t matter what the match is that your employer gives you. That’s of your own money. And that’s the same for 2021. So you know, if you take your income, you take $19,500 and divide it by your income, that’s the max percentage that you could put in throughout the course of that year. So what I always say to clients that — particularly those that are starting out and maybe they have a little 401k inertia, which is hey, I put 3% and my employer matched 3%, and then they get stuck there. Years later, they’re 5-10 years into their career and they’re still there, that’s typically not going to be enough. So I kind of like the idea of planting the seed of a race to 10% or a race to double digits. And again, that’s kind of just a rule of thumb. Now, in the IRA world, the contribution limits are also the same. So you can put up to $6,000 per year, if you’re thinking about this monthly, $500 a month, into a traditional and/or Roth IRA. So that’s an aggregate number. So if I put $1,000 into my traditional, I can put $5,000 into my Roth IRA. And then probably the other one that I would call out that actually did creep up a bit is the HSA, the Health Savings Account, which is the one that we always talk about that has the triple tax benefit. So if you’re in a high deductible health plan, you basically qualify for that. If you’re an individual, you can put up to $3,600 per year. If you’re a family, $7,200. And then if you’re over 55, there’s a catchup of $1,000 per year as well. So those would probably be the ones that I would call out. So again, if you are in that population of people — which I wouldn’t say it’s always a lot of the clients that we’re working with — but if you are in that population of people that are maxing out the 401k, the IRA, the HSA, then this episode, you know, might be for you where you’re like, OK, well where do I go next?

Tim Ulbrich: And as a reminder, we have a new quick reference guide too. You can quickly take a look at 2021 key retirement numbers, including 401k, 403b, traditional IRA, Roth contribution limits, HSA, education tax credit incentives, required minimum distribution, tax rates. So for those number nerds out there, this is for you. YourFinancialPharmacist.com/2021, you can download that sheet. So Tim, that was one of my questions. I talked with a prospective client this morning who was really in this camp of, you know what, I need to full throttle my investing plan. So I’m at a point of or near at a point of maxing out my 401k, yes, I see another $6,000 I can put in an IRA, doesn’t necessarily have access to an HSA, so is at this point of alright, I’m ready to go with the next steps. So how often do you see this among pharmacists and clients of ours? How hard is it for pharmacists to max them out? And for those that aren’t maxing them out, what’s typically holding them back?

Tim Baker: It’s hard. I think, again, it depends on where you are in kind of your career and where you’re at. If you are a more of a new practitioner and you’re saddled with six figures of debt, to put money into a 401k can be a little bit of a tough go, especially if you’re looking at a $2,000 monthly loan payment. Sometimes, that is very much baked into the strategy that we are employing that the money that goes into these pre-tax accounts lowers AGI and potentially maximizes a forgiveness play, or if you’re looking at a I’ve refinanced, I’m trying to get through them quickly, I am paying $2,000, $3,000, $4,000, sometimes just not a lot of money left over to go into these retirement accounts. Now, there are 10% of pharmacists out there — those are the numbers — that don’t have loans, that kind of the world is their oyster. But that doesn’t always necessarily mean that their money is going into retirement accounts. A lot of pharmacists after going through years and years of training, it’s kind of like, alright, I need to treat myself a little bit. And then that can sometimes be hard to get out of as well. So I think the flip side of that is if you are further along in your career — so the answer, you know, one of the questions is like, is it a big deal that I’m not maxing these out? And I’m like, it depends. If you’re 35 and you’re trying to retire by 50, maybe it is a big deal. If you’re 45 or 50 and you’re trying to retire by 60, maybe it is a big deal. So I think it’s a little bit of, again, looking at the math and how you feel about what your retirement prospects look like and then marrying those two up. But I think if you are in early in your career and you’re maxing these out, it’s just such an easier lift because in the investments, it’s not about timing the market, it’s about time in the market. And if you can get your money working and have that work for 3-4 decades, that money, you know, is just going to go that much further rather if you wait a decade or two out before retirement. So typically, the earlier that you do it, just the easier that number is that you need to be setting aside per month versus waiting. And that’s really what we’re talking about here.

Tim Ulbrich: And I’m going to give a disclaimer here, Tim, before I ask my next question that none of what we’re talking about here is obviously individual investment advice. And for the reason you just mentioned there, it does very much depend on one’s personal situation. And it’s becoming the running joke of, “it depends,” on this podcast. But it’s so true and speaks to the value of one-on-one, customized planning. So my question is, you know, let’s say someone is investing in their 401k/403b or employer-sponsored plan, should they focus on maxing that out first? And really, what I’m getting here is what’s the order of priority when it comes to investing and how do we think through determining this order?

Tim Baker: Yeah, so if we kind of can figure out like how to navigate the multiple competing priorities — and obviously, we talked about like student debt, you know, we didn’t really focus on consumer debt, which we have a lot of pharmacists that come to us that are — we recently started working with a pharmacist, and their biggest pain point was about $50,000 in consumer and personal debt. So — and rightfully so. That’s the one that’s probably the most debilitating. If we can work through the other competing priorities like other pieces of debt and the life events that are — whether it’s marriage, buying a house, having kids, going on vacation, caring for elder parents, you know, saving for kids’ educations, and all that stuff, then really, the baseline I think priority that we typically look at — and I would probably say for Step 1, everything else aside, unless you have really terrible credit card debt, at a minimum I think everyone that has a match available to them from their employer, they should capitalize on that. So you know, the old adage is like, take advantage of the free money. So one of the things I’ll humble brag is like YFP, we have a Safe Harbor 401k that if our employees put in 5%, we match 4%. And I want to make sure that everyone’s taking advantage of that because it is free money. So to me, for the most part, everyone should do that. From there, you know, if there is an HSA on the table due to a high-deductible plan, I’d probably say that would probably be the second bucket to look at because it has a lot of versatility in terms of what you can use it for. You can use it for today’s health expenses, tomorrow’s health expenses, and then tomorrow’s like retirement. And with the triple tax benefit, if you can shelter $3,600-$7,200 per year for the next x amount of years, that’s a great benefit. And then from there, what we typically say is look outside of the 401k and look at things like IRAs, whether that’s a Roth IRA or a traditional IRA. The reason for that is typically, a lot of 401k’s are strapped with administrative fees and/or there’s not a lot of investment options. But it’s more tied to the fees. So if you can establish an IRA and keep costs low, I think that’s a big win. We believe that the expense related to investments is going to be one of the bigger drivers in making sure that you have an efficient portfolio. So if we can do that in an IRA — and to go back to that, a lot of 401k’s are not created equal. So you have some great 401k’s and 403b’s that are absolutely efficient and fantastic, and then you have those that are not. And it can be a very, very wide range. We’re talking about, you know, very wide differences between great and not-so-great. Typically, though, once you max out the IRA, what you want to do is go back to the 401k and max that out. So that’s that $19,500. So again, you calculate that by $19,500 divided by your — or your income divided by the $19,500 — and that’s the percentage that you use. And then finally — and this can probably work concurrently in some ways — you know, if you do have access to other retirement plans or SEP IRAs if you have a side business or things like that, that might be another good way to go. And then from there, from a traditional sense, you know, a lot of financial planners will just point you to a brokerage account. So those individuals that have like a Robinhood account or an Acorns account, where they typically do that Step 1 or Step 2, you know, in most instances, it’s better to kind of make sure that you’re doing all these other things first. But it could be a brokerage account, it could be where you get into real estate investing. It could be where you are buying into a business or starting a business, things like that. But that’s kind of a general rule of thumb for most investors on how to tackle the priority.

Tim Ulbrich: Great stuff, Tim. And we will link in the show notes, we have an investing priority document. We’ve talked about it previously on the podcast as well. I can’t help but mention, you brought Robinhood’s name up before — what a week for Robinhood with the whole Gamestop thing going on this week.

Tim Baker: Yeah, I know, right?

Tim Ulbrich: Pretty crazy times. But I think brokerage accounts are getting a lot of attention this week. So we’ve established some of these more traditional accounts, 401k’s or 403b’s, or for those that are working in the federal government, of course the TSP, you mentioned the HSA, the IRAs, going back to the 401k or 403b or equivalent, perhaps a SEP IRA. And then we got to this, you know, what’s next, right? And so of course, often the advice is a brokerage account. But you mentioned several other things that might be in the mix, so perhaps real estate investing, of course, the brokerage account, investing in a business — I know I often hear something like insurance type of investments may come up. So let’s break these down a little bit further. First off, real estate investing. This is something we talked about a lot in 2020 and are excited to dig into this topic even more in 2021 as we’ve heard from many of you that are interested in learning more about real estate investing, whether that’s hearing some of this for the first time, whether that’s investing in building the portfolio that you already have, or perhaps for some of you, hearing and saying, you know what, it’s not a good fit for me. And obviously, we try to bring both sides of this, of sharing stories of folks that have been successful but also appropriately bringing in the risks that can come here as well. So Tim Baker, from your perspective, I know you personally have an investment property, I know this is something that has come up with clients, something we’re talking more and more about with clients, tell us at a high level why real estate investing, from your perspective, can be something at least worth evaluating for folks out that are maxing out these accounts?

Tim Baker: Yeah, so I think, you know, if we step back and we kind of think about like traditional financial planners, I think, you know, what I typically hear is from a financial planner, like ah, like do you really want to do that? Because do you want to unclog toilets at 2 in the morning? And the answer is no, nobody wants to do that. But I think the sentiment is really rooted in how the advisor gets paid in a lot of ways. So traditional financial planners are really going to get compensated by you, the client, having as much money in your traditional investments, whether that’s an IRA or a brokerage account or a 401k for you to eventually roll over to them for them to manage. I guess the way that we view this is we view real estate as a viable way to build wealth outside of traditional investments that have both kind of near-term benefits of flexibility and cash flow, you know — for example, when you put your money into a 401k, like wave goodbye to that until you’re at least 59.5, for the most part. So you never really can get access to that where if I buy a property, like I could start cash flowing that and make $100, $200, $300 off of that property the next month. There’s that near term, but then you’re also building, and the asset is appreciating as the note that you’re paying down is depreciated. And then there’s a lot of tax benefits from that in terms of being able to make income but then offset that by the deductions. And there’s a lot of things that’s built into the IRS tax code that reward real estate investors. And I think the other thing that’s flexible is that you could keep that, you know, if you talk about a buy-and-hold strategy, you could keep that for the next 30 years just like you keep a 401k. Or you could say 10 years into it, I want to liquidate this and do something else and basically cash out the equity that you have in the property and go do something completely else, which means you could retire on that. So that is maybe another viable strategy. So because of the flexibility, I think because of the tax benefits that you receive, I think it’s a viable way to build wealth. Now, is it as passive as traditional investment? No. And the more passive it is, the less benefit and flexibility that you’ll get. The more actively managed it is, typically the more flexibility and benefit that you get. But then the tradeoff is that you’re actively managing and it takes time and there’s risk. Well, there’s risk in anything. But I think, Tim, really for those reasons, that’s why we like it. And we think it’s a vi — again, a viable way to build wealth. And at the end of the day, the way that we work with clients is what we’re trying to do is help grow and protect income so you could make an argument that we’re growing income in a real estate portfolio by, you know, we’re cash flowing and we’re protecting it because maybe we’re diversifying that away from a typical pharmacist’s salary. We’re growing and protecting the net worth, which means what we have a collateralized asset with a note that’s appreciating over time, while keeping your goals in mind. So again, if that means early retirement, if that means more of a nontraditional path in terms of the career, I think the real estate aspect creates a lot of opportunity to really fulfill financial independence in the eyes of the pharmacist.

Tim Ulbrich: And I’m so glad, Tim, you mentioned the story and example that’s often used as the objection early on of like, who wants to be a plumber in the middle of the night? And I remember — for those that have read “Rich Dad Poor Dad,” they will be able to resonate with this — but I remember reading that book for the first time, and it was like unlocking like a piece of information that I hadn’t really been exposed to or learned before. And that obviously is a little bit more philosophical in nature, and then you start talking to people who are doing it and learning more about it, and that’s one of the great things about where we are in 2021, I mean, the resources available out there to learn more and to connect with others that are doing it is really, really incredible. But I think being open to learning, you know, perhaps being willing to see what might be the answer to some of those objections is really important. And we’re excited to bring more pharmacist’s stories to this community in 2021 on real estate investing and also connect other pharmacist investors with one another. And I would point folks back to Episode 167, we brought on David Bright to talk about must-know real estate terminology. I think that’s a great place to start. You mentioned, Tim, many of the upsides and benefits, perhaps appreciation, cash flow, tenants paying down a loan, some tax benefits, obviously we’re just scratching the surface here. And obviously, you also presented some of the challenge. You know, it may not necessarily be passive, the quality of tenants may or may not be what you have in mind. I think too there’s a little bit of, you know, I call it HGTV syndrome, Tim, in terms of like, you know, you watch the flipping show and you’re like, yeah, I got it, right? And so I think we’ve all got to take a step back and really make sure we’re not overconfident. But I think for pharmacists, I’m not sure overconfidence is often the risk here. I think it’s probably being too passive and feeling like it’s out-of-reach and not necessarily being willing to take what they may feel is a very significant risk to get started. So we’ve talked about several of these strategies on the episode thus far, you know, obviously there’s the buy-and-hold strategy. In Episode 129, we brought on Aaron Howell, and he discussed how he built a 29-unit portfolio. We brought Ryan Chaw on Episode 140 about how he built his portfolio of college town investing. Episode 173, we brought him back on to talk about his systems, which was a really neat episode to hear how he actually operationalizes this. Obviously that’s one strategy, buy and hold. We’ve talked about flips before, Nate Hedrick, 178, five lessons learned from his flip. And we’re going to continue the conversation. There’s other areas, of course, in wholesaling and forming partnerships, and we’re excited about what’s ahead here. So real estate investing, Tim, is one aspect. Another that pops to mind that is near and dear to our hearts, obviously, with what we’ve been building at YFP is building a business, investing in a business, and this, of course, is a big topic. But at a high level, you know, what types of things do you see from our clients in terms of whether it’s side hustles that they’re starting, businesses that they’re starting or even perhaps looking at investing in other businesses and how they begin to evaluate whether that’s a path forward for them?

Tim Baker: Yeah, so I think what I see most frequently is an interest in a closely-held family business, so like a private company that was inherited from maybe a grandfather or things like that and, you know, the question is like, should I keep this? Like what’s the benefit? And you know, they’re getting K1 every year with maybe a little bit of income that they have to basically declare for the IRS. So it could be like more like that. But then I think that there’s also — I mean, we’ve had clients that have taken their side business, their side hustle, and made it a fully fledged, like a regular business. So it could be just plowing money back into the business itself rather than going into the traditional, but I also have had clients interested in investing in like a partnership, whether it’s like a gym or things like that that, you know, that’s a little bit more of a — there’s a lot of risk there. There’s a lot of, again, what’s your role? What do you bring to the business? Is it money? Is it expertise? Is it planning? Is it clients? And kind of really understanding that. Sometimes, it’s just money. So it’s like, hey, I’m going put money in and let you do your thing, and you’re kind of more of a silent investor. So this can come — just like real estate, this can come in a lot of different flavors. So can investing in a business. Again, one of my favorite shows on TV is “Shark Tank.” So I love watching that and how investors speak with business owners and I’m always interested in business just because I just like to talk small business, in particular, and what makes it work and not work. I think we have a lot of clients that are there. I would say for the most part, the predominant thing that I see is a share of an inherited family business or really, taking this hobby or this side hustle and really forming a fully fledged business and how to really handle that. And a lot of the conversation is, you know, do I take money out of the business? Or do I basically reinvest into the business so I make sure it survives and grows?

Tim Ulbrich: Yeah, and we will continue — one of the areas that I’m very passionate about in the profession of pharmacy is I feel like we are missing some creativity around helping students as well as helping pharmacists just imagine what could be different possibilities or ideas. And I think we do that by sharing stories. Not that they necessarily hear a story of a business or side hustle and say, “I’m going to do exactly that,” but to help them think about another area as an example of something that they’re passionate about in terms of solving a problem, creating a solution to that problem. And so we’ll be bringing more in that area. And you know, I agree. We have to know — you know, everyone knows the stats that most small businesses don’t work. Debbie Downer reality. But I think for those that really do their due diligence, understand what their business is all about, is there a market for it, you know, there certainly is some upsides financially in terms of tax, building equity. One of the things that gets me so excited about business is that there may not be a ceiling. Obviously there can also be a floor.

Tim Baker: Right.

Tim Ulbrich: Or falling through a floor that you have to be aware of and also access to some of the retirement options that we’ve already talked about. So we mentioned, again, in the context of investing beyond maxing out traditional accounts, we’ve talked about real estate, we’ve talked about investing in business. What about probably the most common area here, which is taxable and brokerage accounts? What are some things as you’re working with clients that you’re advising them, getting them to think about, whether it’s choosing where they’re going to be investing that money, how they might keep fees low, how they determine where those investments go? Talk to us about the approach in putting money into a taxable or brokerage account.

Tim Baker: The most common that you see are kind of like the Robinhood, Acorns just because they’re UI and they’re use is so clean and easy. And I think for a lot of people that are curious about investing, it’s a first way — you know, kind of the first way to kind of wade in and see, OK, I want to buy this stock, etc. Typically, we talk about the priority of investing, you know, we just started working with a client that had, again, $20,000 in credit card debt but then they have a $10,000 like Robinhood account. And I’m like, those probably don’t make sense. So I think like with brokerage accounts, what I am a big fan of seeing with savings is like what is this account actually for? So a lot of the uses that we see for brokerage accounts are a tax bomb. So those that are taking non-PSLF forgiveness, you know, they need to cover that tax bill. So they’re putting money into a brokerage account because they’re going to need to access it before 59.5 years old, so they can’t put it into their retirement account, and they need to be able to pay off that tax bill when the loan is forgiven. The other one is, again, when we max everything out, that’s a good use for it. So what I typically urge clients to do, though — and it really directs how we’re going to allocate that particular account — is what is it for? So if you’re trying to retire at 50, all of these traditional accounts that we’ve talked about, for the most part — and there’s some exceptions of what you can do, but you can’t really access them without a penalty until you’re 59.5 years old. So that means you have 10 years, 9.5 years where you have to figure something out. And usually, that figure something out is having a robust brokerage account or maybe liquidating part of a real estate portfolio to be able to cover those first 10 years of retirement. I think the big thing here is if you have an IRA, I probably would just have your brokerage account there. And I’m not down on any of these other apps or things like that, but I think for ease of use — and again, not every custodian is equal; there’s going to be different fees and things like that. So you want to be mindful of that. But I know the sexy and the exciting thing to do is to pick individual stocks, whether it’s Tesla or Gamestop or Ford or whatever it is. But I think, you know — and again, not investment advice — but I think the more boring that you are with your investments, typically the better it is because the sexier and the, you know, the investment strategy is, typically the more speculative and the more expensive it is to the investor. So it could be as easy as putting it into an S&P 500 index or a total market index or things like that and call it a day. So there are some advisors that are colleagues of mine, they hear me talk about real estate investing and all of these other things, and I’ll say like, “Hey, this is the reason I believe that a lot of traditional advisors don’t say it is because it’s a function of income.” And sometimes, it’s — and I get a little pushback on that because I’m kind of criticizing my brethren, but it also could just be it’s a ‘Keep It Simple, Stupid’ approach, which I think for finances, it can go a long way. So you know, there is absolutely nothing wrong — I know we’re talking about small businesses and real estate — there is absolutely nothing wrong with having a 401k, an IRA, and a brokerage account and doing a damn good job of building wealth and living an intentional, wealthy life with those tools.

Tim Ulbrich: Yeah, and I think to that point, Tim, like I would encourage our community, like lean into what you’re comfortable on. You know, I think sometimes there’s some FOMO of like, you know, oh, so-and-so is doing real estate investing or so-and-so owns their own business, and it’s cool and flashy, which you usually don’t see the other side of it all the time. But maybe that is a fit, maybe it’s not. But you know, learn about them, understand them, understand your risk tolerance — and maybe for many folks, it’s really leaning into maxing out traditional accounts, maybe opening some brokerage accounts. But perhaps those other things aren’t a good fit. And I agree with you, I’m seeing more and more pharmacists that seem to be interested in financial independence, early retirement, some combination of those, whether they love their job or maybe not. And I think this is where these tools, the brokerage account specifically, come into play. And last week, we interviewed Scott Rieckens, author of “Playing with FIRE,” Episode 188 for those that are interested in learning more about Financial Independence Retire Early. Tim Baker, great stuff. I think this really highlights for me, again, we’re only talking about here investing, one part of the financial plan. But within the investing bucket, we’ve talked about several different things that of course are traditional accounts and all of the nuances there and then beyond that, lots of decisions to be made, priorities to be balanced, and evaluations to be done. And I think this is a great opportunity to promote and shoutout our financial planning team and our lead planners that work directly with clients one-on-one to have these types of conversations, to look at what are the opportunities, what’s the goal, what’s the purpose, what’s the priority, and then ultimately, how do we put a plan in place to make sure that we achieve it over time? So for those that are interested in learning more about the comprehensive financial planning services we offer at YFP Planning, head on over to YFPPlanning.com. You can schedule a free discovery call, and we’d love to talk with you to see if our services are a good fit for what you’re looking for. And as always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please leave us a rating and review on Apple podcasts or wherever you listen to the show each and every week. That’s going to help others find what we’re doing here over at YFP. Have a great rest of your week.

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YFP 185: 10 Financial Moves to Make in 2021

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10 Financial Moves to Make in 2021

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

Summary

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

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

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

Mentioned on the Show

Episode Transcript

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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YFP 182: How This New Practitioner is Leveraging a Team to Invest in Long-Distance Real Estate

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How This New Practitioner is Leveraging a Team to Invest in Long-Distance Real Estate

Young Park, new practitioner and real estate investor, joins Tim Ulbrich on this week’s podcast episode, sponsored by APhA, to talk about his portfolio, why he likes real estate investing, how he got started, what has worked, what hasn’t worked, and why and how he invests in Kansas City while living in Hawaii.

About Today’s Guest

Young Park currently serves as an Ambulatory Care Clinical Pharmacy Specialist at the VA Pacific Islands Health Care System in Hawaii. He moved to Hawaii for this specific position after completing a PGY1 residency at the VA Sierra Nevada Health Care System in Reno, NV. He completed his undergraduate study at the University of Georgia, then completed the Doctor of Pharmacy program at Philadelphia College of Osteopathic Medicine (PCOM) in Georgia.

Young started learning about financial independence and investing after making the far move to Hawaii. His big “why” is to help provide financially for his parents and to be able to spend more quality time with his family and loved ones. He’s working towards financial independence through investing in out-of-state cash-flowing rental properties using the BRRRR strategy.

When he’s not working, he serves at his church on the Sound Team, enjoys Hawaii’s beautiful beaches, and learns about personal growth and investing.

Summary

Young Park, a 2017 pharmacy school graduate, stumbled upon real estate investing on YouTube and quickly discovered how powerful of an investment vehicle it can be. Young was originally interested in investing with stocks but decided to move forward with real estate investing because he felt it has the best return on investment and because of the long-term benefits like appreciation, tax benefits, and mortgage pay down.

In less than 2 years, Young has acquired 3 rental properties in Kansas City, Missouri while living in Hawaii. He decided to invest in real estate thousands of miles away for a few reasons. To start, the cost of homes in Hawaii is extremely high and it’s difficult to find a good real estate investment deal. Additionally, he connected and began working with a mentor that invests in the Kansas City market and was able to lean on him for advice while also leveraging the team that was already in place until he could build his own.

Young also digs into how he’s using the BRRRR method on his investment properties, how he’s getting the capital to fund them, how he analyzes a potential deal, how he’s formed a team to support him, the challenges he’s faced along the way, and how real estate investing is supporting his financial why.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Young, welcome to the podcast.

Young Park: Hey, Tim, thanks for having me.

Tim Ulbrich: Super excited to have you on. When I learned about your story as a new practitioner, active in real estate investing, getting started, taking that first step, we’re going to talk about your journey, what’s worked, what hasn’t worked, why you’ve been doing what you’re doing, what your plans are going forward, and I think this episode is going to be incredibly valuable to our community that is interested in learning more about real estate investing or perhaps even for those that have started looking to build upon the portfolio and the work that they’ve done so far. So Young, before we jump into your real estate journey, tell us a little bit about your background into pharmacy, how you got into pharmacy, what interested you, where you went to school, and the work that you’ve been doing since graduating in 2017.

Young Park: Alright. Hey, first of all, thank you again for having me here on the show. I am so excited to share my story today. So man, about myself. I don’t know how far I need to go back. But yeah, as a child, I guess in high school, I actually wanted to go into music, like into music engineering and recording and playing in a band and stuff. However, my parents were definitely against it. We’re immigrants, so we moved from South Korea back in ‘98. And you know, my parents moved to the States so that we can have better opportunity for me and my sister and just kind of live that American dream that they were hoping for us. They just heard about pharmacy from their friend, how their sons and daughters went to pharmacy school and they graduated, got a awesome deal with a brand new car and a brand new BMW. So to them, this was the American Dream for us. Eventually, I kind of followed that step. I went to — I finished my undergraduate study at the University of Georgia, and then I went to the Philadelphia College of Osteopathic Medicine in Georgia campus for my pharmacy school. So I think one of my professors, Dr. Brett Rollins, was on the show before.

Tim Ulbrich: Yes, he was.

Young Park: Yeah. So yeah, I went to that school and then after that, I completed my PGY1 at VA Sierra Nevada Healthcare System in Reno, Nevada. And after that, I took this current position that I have with the VA Pacific Island Healthcare System in Hawaii as an ambulatory care pharmacist.

Tim Ulbrich: So Georgia, Nevada, and then Hawaii, right?

Young Park: Traveled quite a bit, yes.

Tim Ulbrich: That’s awesome. Well, cool. And so we’re going to talk in a little bit about how do you effectively invest as a real estate investor in Hawaii and why you’ve chosen to go out of area to do your investing in Kansas City, and we’ll talk about why that’s important as we may have many listeners that say, “Hey, I’d love to get started with real estate investing, but you know what, my market isn’t really conducive to that,” high cost of living area, whatever be the reason. Obviously you ran into that, and we’ll talk about how you selected the market that you did and what has been difficult and what has worked with doing some long distance investing. But before we get there, talk to us about for you, why you like real estate investing as an investing vehicle for you going forward and one that you want to build your plan around. Obviously our listeners know there’s lots of different ways to go about investing, traditional accounts, 401k’s, 403b’s, IRAs, obviously they could invest in brokerage accounts, they could start their own businesses, real estate and within real estate, many different ways that you can do this. Why, for you, is real estate an investment vehicle that peaked your interest?

Young Park: OK, so I started getting interested in investing initially into paper assets such as stock, like most people, because that’s the easy one to get into. And I was learning more about that while I was watching YouTube videos, honestly. And I accidentally stumbled upon YouTube videos on real estate investing like Bigger Pockets and some other YouTubers who invest in real estate. And it really got me interested in real estate investing because to me, that had one of the best return on investments, and it’s a hard asset where you can physically obtain the asset. You know, paper asset is great, but it’s almost like a made-up money in the computer space somewhere that determines like this is worth that much. So yeah, that’s why I really got into real estate investing.

Tim Ulbrich: And how do you as an investor — you know, one of the benefits people always talk about with real estate of course is long-term appreciation, tax advantages, you know, that you may not see in more traditional investing — how do those things factor into you wanting to prioritize real estate investing?

Young Park: Yeah, so to me, if I were to compare real estate investing to stock investing, it’s like getting a really high-yield monthly dividend while the tenants are paying down your mortgage. And like exactly what you said, you know, you’re getting the long-term appreciation of the property, you’re getting tax benefits through the appreciation, you’re getting the mortgage paid down, also you’re getting the cash flow — and your cash flow over the long term is going to increase year by year because your mortgage will stay the same and your rent will increase.

Tim Ulbrich: Yeah, and of course — and we’ll talk about your specific properties and how you crunch the numbers. Obviously, we’re talking here under the assumption of you do this in a way that works and is financially viable and of course being able to analyze properties, determine what is a good deal, what is not, is very important as we look at the benefits of real estate investing. Now, before we get into the x’s and o’s and specifics of the property, I like to ask folks such as yourself, what’s the motivation, what’s the purpose, what’s the why? Because we talk all the time on the show about our mission of wanting to help as many pharmacists as we possibly can achieve financial freedom, but I know that that word, “financial freedom,” can mean something different to everyone that’s listening here to this episode. So for you, Young, as you think of that concept of financial freedom and how real estate investing fits into that goal, tell us about what your purpose is, what your why is, what your vision is, and why real estate is really just a piece of being able to achieve that.

Young Park: Great question. So why is extremely important. For most people, they really break it down. The money is never the goal of achieving whatever you want to achieve. It’s actually the time and what you can do with the time that you’re able to obtain through building wealth. So for me, my biggest why is — I will say two things. First of all, I want to provide for my parents financially and also to achieve financial freedom for myself, the time freedom. So my parents moved our family of four to the States with the hopes and dreams of providing a better life and opportunity for me and my sister. Neither of them went to college, and they still don’t speak much English at all. And they did manual labor well into their 60s to provide for us so that we can complete our education. All they knew was to work really, really hard for paychecks and bring food to the table. And because of this, I’m extremely privileged. So because of what they’ve done for us, my main why on investing is for my parents, so that I can help them to retire and live comfortably. And my other why is to be financially independent for myself and for my soon-to-be wife Jamie and our family that we’re going to have so that we can live on our own terms and have options. You know, God forbid, but if something were to happen to my family, I want to be in a position where I can just drop everything and go and be with my family as long as I need to. And building that financial freedom and wealth allows you to have that option.

Tim Ulbrich: And Young, what I heard there, which I love — and I hope our listeners will take heart — is the conviction in which you share that to me tells you’ve No. 1, put thought behind that but No. 2, really likely then provides clarity when you’re making your financial decisions, you know within what context, what frame you’re making those decisions because you’ve thought about, reflected upon, that why. And what I heard from you there was wanting to be able to provide and care for your parents, wanting to get to a point of financial independence such that if you were to wake up tomorrow and for whatever reason, you weren’t able to earn the income that you currently earn, that you would be able to move on without stress and continuing to move on with the rest of your goals and the things that you like doing. And the third thing that I heard was time. And my follow-up question there — because I hear a lot of entrepreneurs talk about time, I hear a lot of real estate investors talk about time, but I very rarely hear people talk about why is that time important. What do they want to do with that time to have that option, to have that freedom, with their time or to gain back more of that time? So for you and your family, more time means what?

Young Park: So more time means spending time with your family and your loved ones. So you can do whatever you would like with whoever you want, you know, going wherever you want to be and how you want to spend your time. You know, for me, growing up, my parents were both working really hard, so they weren’t around home that much. We were still extremely grateful for them, but I want to be a parent that’s there for my children whenever they — let’s say they have a play or they’re playing sports or we get to just enjoy our weekend time or go on vacation together, and I just want to be able to do all those things. Working W2 jobs, it’s great. You get great benefits, and I love my job. But you know, you’re still restricted to certain schedules. You have to meet certain quota, and you know, your schedule can always change — yours and your wife, right? Your spouse, you have to line up our schedules together and all of that’s considering I think that financial freedom and being able to build more time to spend with the loved ones, that’s all I want.

Tim Ulbrich: That’s great. And here, we’re talking about real estate investing being one vehicle in which you can achieve that goal of financial freedom, which of course means being able to do the things that you just said were most important. And so let’s jump into July 2019, you purchase your first property. So two years out from school, I want our listeners to hear, you know, obviously you’re at a point where making that transition post-residency into your first job and you pick up on real estate investing as an opportunity to pursue. So July 2019, tell us about that first property, where it was, what the property was like, what you purchased for it, what you spent to kind of get it ready for tenants, and then ultimately, what it means for you from a rental income standpoint.

Young Park: Sure. July 2019 was when I purchased my first property in Kansas City, Missouri. So I have a whole story about getting into Kansas City market, right, from Hawaii. But just to talk more about the property itself and the investment itself, it was purchased off-market. I actually got it from a wholesaler on Craigslist, believe it or not. Yeah. I didn’t know that was a thing. I was looking into a bunch of wholesalers group on Facebook, you could find that. I spoke with a bunch of realtors to get on their list, and you know, I was also searching on Craigslist to see if there are other owners that wanted to sell their properties or potentially wholesalers. So I found that property on Craigslist from a wholesaler. He actually posted it for — are we allowed to talk about numbers?

Tim Ulbrich: Yeah, go ahead.

Young Park: OK. So he listed the property at $65,000. And I offered $50,000. Of course, I kind of lowballed him. But he got back to me saying, “Hey, if you have the ability to close within five days, all cash, we can do it at $55,000.” And for a new practitioner coming out of pharmacy school, a year of residency, and you have about a year of actual job under your belt, you don’t have $50,000 in addition to me having a ton of student debt. So getting the cash was a — is a whole other story that I need to talk about. But I was able to pull that off, I had $50 in cash, so I close on the property, and we actually negotiated the route crosses. He actually wanted to close out within five days because he had a family reunion coming up the following week, so he just wanted to be done with it. We actually renegotiated so that we got it for $53,000 instead of $55,000. So I got that property at $53,000. And I actually have my mentor, who that’s how I got into Kansas City market. And I used his contractor, who’s been vetted, and they’ve been working 3, 4, 5 years together. So that contractor knows exactly how to turn a property, how everything should look, and I had my mentor, CJ, to be the project manager so that he’s just kind of managing everything and I’m just giving the rehab costs, I guess, on weekly, biweekly withdrawals so that I’m just continually funding it. And once I get some photos saying oh yeah, these were done, then I send in my next draw.

Tim Ulbrich: OK.

Young Park: So I did all that, and everything ended up — the rehab costed about $42,000, I want to say.

Tim Ulbrich: OK.

Young Park: So I’m all in $95,000. So I got that rented out — that was a whole other story about getting it rented out because it was during the holiday season, right around this time actually, and in the Midwest, I’m sure over there, it’s freezing cold, snowing, and no one wants to move during the holiday season.

Tim Ulbrich: Not a great time to find a tenant.

Young Park: It’s not. It’s really not. But you know, right after the new year, so it took a couple months, stayed vacant for a couple months, but I was able to get it rented out in January for $1,000 plus $25 in pet fee.

Tim Ulbrich: So $1,025. So just to rehash these numbers, you purchased it with some negotiation from a wholesaler, $53,000. $42,000 on the rehab, so you’re all in for $95,000. And you’re renting it for just over $1,000. And I’m guessing mortgage, interest, taxes, insurance, probably little less than $800?

Young Park: Correct, correct. But at that time, I didn’t refi yet.

Tim Ulbrich: Right.

Young Park: So I didn’t have any mortgage payments at that time. So after I was able to rent it out — so the strategy I used is the BRRRR strategy, right? So I bought it, I renovated, I rent it out, so I was able to refinance out and it appraised at $142,000.

Tim Ulbrich: Oh, wow. OK.

Young Park: Yeah. So there was a pretty decent chunk of spread there. So I was actually able to pull all my cash out and then some. So it covered all my purchase, my rehab, and then I think I — after closing costs and everything, I think I pocketed about $5,000.

Tim Ulbrich: $5,000. And for our listeners, we’ve talked about the BRRRR method on the show before, and I’d reference our listeners back to other episodes on real estate investing that we’ve done as well as the Bigger Pockets website, podcast, lots of great resources. They’ve got a book solely on the topic of BRRRR. But you know, the goal here — which Young’s story is a great example of that — is to with the cash investment of the property, be able to pull all of that money out or all that plus some, I guess ideal, or if not all of that, as close as you can, so that you can move on and repeat the process into the future, which you did in a second property, which we’ll talk about here in a moment. But I want to break down this one with a little bit more detail and get into some of the weeds here. When our listeners hear $53,000 purchase, $42,000 in rehab, $95,000 all in, rent a little over $1,000, how did you analyze or evaluate as you were projecting not only purchase price but rehab, potential rent? Talk us through your analysis process and determining what was or was not potentially a good deal.

Young Park: So yes, so you want to start before you purchase it, you want to start with the end in mind. You need to start from the ARV, which means After Repair Value. So you want to know what the property would appraise at at the end of the day. So from that point on, you want to figure out what the rehab costs would be and then that gives you what your purchase price can be. So that would be your offer price. So once I do that, I kind of analyze it. So let’s just say for this property as an example, I actually estimated this property to appraise at about $120,000-130,000. So I actually got really lucky. And $120,000-130,000 is actually — you know, if I really think about it, it’s on the conservative side. I always calculate it in the worst case scenario. And if everything works — if it makes sense for me, even if I were to pay like $10,000, $20,000, $30,000 out of pocket, would I be OK with that? And if I am, then I go with it because that’s the worst case scenario, and you can only get better. Whatever you do better, that’s all extra sauce on it, you know what I mean?

Tim Ulbrich: Absolutely.

Young Park: And so yeah. So I do that. So I analyze the property by finding the ARV. And then I estimated the rehab with me and my mentor because he’s done it for so long that he could kind of look at the pictures and see what the estimate would be. And it actually aligned pretty much what we thought it was going to be. So we got that rehab, and we were OK with the purchase price because I was thinking $53,000 purchase, about $40,000 rehab, and appraise it for $120,000. So that’s roughly about 75% of that $120,000 for me to do a full BRRRR.

Tim Ulbrich: Got it.

Young Park: The rehab was a little bit more, but the ARV was a lot higher than I thought. So I was able to actually do a whole run deal on my first deal.

Tim Ulbrich: And that makes sense, Young, if you had projected your numbers at an ARV that was $120,000-125,000 and it came out at $142,000, it makes sense when our listeners hear that you were able to pull out all your cash plus some because of the higher ARV, what ultimately came in at the appraisal when you went to go do the refinance. The other thing I wanted to touch on here, if I had to pick what I think are probably the two most common objections to getting started with real estate investing, they would be that one, I don’t feel like I have the knowledge or experience and two, I don’t have the cash, right, because of whatever. I’ve got student loan debt, I’ve got all of these other priorities of which we talk about on the show all the time, and I can’t necessarily save up $50,000, $70,000, $100,000 to be able to put down on a property. So talk us through how you addressed those two things. You mentioned student loan debt, so I’m sure our listeners are curious, you know, how did you go down this path while you still had student loan debt and how did you reconcile that? But how did you address this knowledge piece? And you’ve talked a little bit about a mentor. And then how did you address the capital and being able to have enough money to get started with investing?

Young Park: First of all, the knowledge portion. So you can get a lot of education just from — and they’re all available online. You can go on YouTube, you can listen to podcasts like the Bigger Pockets. You can read books. I read at least three books from Bigger Pockets and other investment books. However, these to me are just knowledge. And knowledge is important. And people say knowledge is power, but I really think it’s knowledge is just a potential power. It’s only powerful if you are able to take actions and apply it, right? If you just learn, learn and learn, it’s just information. But that doesn’t really get you anywhere. So you have to be able to take that action. And for me, just taking that mentorship was the action step that I needed. Through that mentorship program with CJ, I learned a lot. I learned every week. It was like a weekly phone call. But the biggest thing is that he guided me so that I can actually take the action that if I didn’t take that mentorship and have all these knowledge, who knows if I’d even have a property under my belt right now? Or maybe I bought a turnkey product. But yeah, to me, just learning, keep learning and just taking that step, leap of faith, to get into that deal, get to that first deal, that’s the biggest hurdle.

Tim Ulbrich: And how did you find, Young, that mentor? Because I think a lot of our listeners would say, “Hey, I’d love to have a Yoda in my life on the real estate side.” What steps did you take to say, to move from ‘I’m interested in real estate investing. I’ve read this book, and I’m ready to act and I need to find some people that can help me.’ Talk us through that process.

Young Park: Yes. So I started attending meetups. So after learning, learning, learning and Bigger Pockets, they always talk about, “Oh, come to our meetups.” People are always hosting in different cities. So I actually went on their website, found a meetup there, so I went to one of those meetups, and I learned a lot. And one of the guys that I met there actually pointed out to CJ and Jasmine, telling me that, “Oh, there’s this couple from Hawaii that invests in Kansas City. You should go check them out.” So I went to their meetup, and CJ was actually giving a presentation on investing out-of-state versus locally in Hawaii and how the numbers make so much more sense going out of state. The housing price here is ridiculous. The median housing price here is about $780,000.

Tim Ulbrich: Sheesh.

Young Park: Yeah, and your rents probably won’t even be .5% Rule, if you were to call that.

Tim Ulbrich: Yeah.

Young Park: So it just made more sense to go out of state. And they were doing exactly what I wanted to do, so I went up to go talk to CJ one-on-one and told him like, “Hey, I’m in this position right now. I really want to invest in real estate out of state as well.”

Tim Ulbrich: OK.

Young Park: And then that kind of led to us working together.

Tim Ulbrich: So that’s the knowledge/mentor piece. And I think the meetups is a great idea. We’ve been featuring more stories on this show with the hopes that we can connect more investors that can serve as a supporting community for one another. So that’s the knowledge piece, which led to a mentor, which led to some execution. What about the capital piece? I think many pharmacists may be in your shoes, three years out, five years out, seven years out, “Hey, Tim, I’ve got a boat load of student loan debt. I’d love to do real estate investing,” or, “I don’t even have student loan debt, but I just can’t imagine being able to save up $50,000-100,000.” Here, if you’re buying a property for $53,000, you’re doing a rehab for $42,000, you’re all in for $95,000. And the BRRRR method means that you’re bringing $95,000 of cash to get that done. Was that your money? Did you partner with other folks? How did you manage that?

Young Park: Yes, so I definitely didn’t have money. I had some money that I was getting from a W2 job, but this was actually one of the challenges or action steps that I needed to take during the mentorship course so that I can raise capital. So I had to go out and ask family and friends. I honestly — I think I raised $90,000 — I used some of my money too — from family and friends. And I got a ton of rejections. I asked over 30 people. And just to kind of explain to them what I’m doing, but you know, to them, of course I got a ton of rejections because I had zero track record.

Tim Ulbrich: Sure.

Young Park: I had no track record. People who invested in me — invested with me, invested in me because of our personal relationship. They just know me personally and they know my character. So I was able to raise that. And I think another thing that — I keep coming back to the mentorship. Because I had that guidance to show them like, “Hey, I’m not just going there blindly. I have the people there. I have someone who’s guiding me through the whole step,” I think that helped as well. So I was able to raise $90,000.

Tim Ulbrich: That’s awesome. Which makes that deal possible.

Young Park: It does. It does.

Tim Ulbrich: So and before we talk about your second property, your most recent property — unless you’ve done more since we touched base last — I’m sure our listeners are as curious as I am when somebody hears, “Hey, Young’s living in Hawaii, he’s investing thousands of miles away in Kansas City,” you know, what challenges — we’ve talked about the opportunity, right, obviously you have a more affordable market, you’ve got a group there that has connections through your mentor, through contractors, so you’ve got some track record and experienced people that know the market. So the opportunities I think are obvious. But the challenges may be not so much, or folks may hear that and think, eh, it’s not for me. You know, I can’t see the property, per se, I don’t know it, I’ve got to trust people, this is my first time. Talk to us about some of those challenges with the out-of-area investing and how you were able to overcome those.

Young Park: Good question. Yeah, of course. I think the biggest challenges that people can’t get out of their head is not being able to see and feel, touch the property. I personally have not been to Kansas City yet. And I did get a third property recently, by the way.

Tim Ulbrich: Oh, cool.

Young Park: Yeah. So just working remotely and you have to be able to — at one point, just go with your gut so you can trust people. And I’m not just doing that blindly. I’m starting out with the people I know. So I start with let’s say a realtor or I start with my mentor CJ, and he’s giving me referrals so I try this other contractor, which I used for my second property and now again for my third property. I’m just slowly building a network, building relationships, building my team. And when you’re able to do that, you’re putting a lot of pressure off of you. Right? You have people that are doing the jobs for you. You know, really, at the end of the day, you really don’t have to see the property. Don’t attach your emotion to the property. It’s the numbers. But of course you still need to figure out how can you trust those people? And you just — at one point just have to trust them, right? They’re not intentionally trying to rip you off. They’re good people trying to make their living as well. And we’re giving them opportunity, they’re sharing their experience by working with us. So I think it’s almost the same. You just don’t see them face-to-face. But working remotely has been a good system for me.

Tim Ulbrich: Yeah, and that’s one thing, Young, that I think about, you know, one of the takeaways. And I’d recommend to our listeners Bigger Pockets, David Green has a book, “Long Distance Real Estate Investing: How to Buy, Rehab, Manage Out-of-State Rental Properties.” That was the takeaway I had from that book was it in part forces you to think about your systems and your processes because there’s certain things you just can’t do, right? You’re not getting on the plane often to go to Kansas City. Not happening.

Young Park: Nope.

Tim Ulbrich: So you’ve got to have a team there that you trust, that you have systems for communication, that you have systems for vetting contractors, for paying those invoices. Then obviously with more experience will come more of a track record, and I think that will become a magnet to other investors and other partners along the way as well. So tell us a little bit about your second property, which I knew of, April 2020. Didn’t know you added the third, so congratulations. Tell us a little bit more about those and the numbers as you’re willing to share.

Young Park: Sure. The second property, as you can imagine, was April 2020. Right in the start of COVID. So that deal was so — I was scared, honestly. I thought about backing out from the deal multiple times. But I’m so glad I went with it. So this property was actually listed on the MLS, Multiple Listings Service. I saw that on Zillow, and I spoke with the realtor who posted it. And it was actually a HUD property, which if I’m trying to define it, I think it’s a property that was purchased with an FHA loan. And the person who purchased it couldn’t make the payments, so it was like a foreclosure. So it was bank-owned property. And that property actually had some plumbing issues, so it wasn’t eligible for a bank- or like Fannie Mae-backed loans.

Tim Ulbrich: OK.

Young Park: So you only — you could only buy it cash. So that was actually an opportunity for investors like us because most people who are paying down payments wouldn’t be able to afford that. Right? So that property was listed at $79,000. And I used a current contractor that I have and I had to trust him. I had not used him before. We had some ups and downs, but at the end of the day, he did me right, and we are working on the third property together.

Tim Ulbrich: Awesome.

Young Park: Those are the things you actually have to work on as an investor or with anyone, in fact. You know, people have different expectations. Right? So you know, his expectation and my expectations were different. But we talked it out like, “Hey, this is kind of like the finished product that I would like.” He’s like, “Alright, let’s do that moving forward.” So anyways, going back to my second property, so it was about a $25,000 rehab. So $79,000, $25,000, what is that? Like $104,000?

Tim Ulbrich: Yep.

Young Park: So that was my all-in. And I actually got it rented out, and it was rented out in September, I believe. Or maybe before. Oh, I’m sorry. I think it actually rented out in July. And this one was a lot higher because it was during the summer, so I got a tenant in there for $1,100 plus two pets, so $1,150 per month for the rent. And then I was actually able to refi out of that last month, less than a month ago, and it appraised at $144,000.

Tim Ulbrich: You like that $140,000 range.

Young Park: I didn’t go for that one, but it just ends up being that way. And to me, like when I was doing that conservative analysis, I was expecting it to be somewhere between $120,000-130,000.

Tim Ulbrich: OK.

Young Park: So with this one, I was actually expecting to have some of my money left in the deal, which was totally OK with me. But I ended up doing another home run. Maybe I have a couple thousand dollars in the deal at the end of the day.

Tim Ulbrich: So after the second one, if I’m doing my math right here, you’ve got about $286,000 worth of appraised property, and monthly cash flow in rent of just over $2,100, almost $2,200.

Young Park: Right, the gross rent is that.

Tim Ulbrich: Great. And then break down the third one for us.

Young Park: Third one, so I just got it under contract maybe — ooh, maybe two days after I refi’ed out of the other one or before. Somewhere around the same time. And oh man, this was an interesting one. So it was listed on the MLS since March. And it was initially listed at $115,000.

Tim Ulbrich: OK.

Young Park: And no one — there was like absolutely no interest on that property because it was still available by the time I purchased it. So every month, they’re cutting down by maybe $10,000. And in November — or actually, toward the end of October — they listed it at $85,000.

Tim Ulbrich: Wow. OK.

Young Park: Yeah. And I offered $65,000.

Tim Ulbrich: OK.

Young Park: And they came back to me saying, “Hey, we could do it for about maybe $75,000.” And I said, “There’s no way I could, I’m going to do it.” And this one actually was not an owner that was selling. It’s a huge investment firm that’s just purchasing these properties from auction, and they just keep the ones they like and they sell off the ones they don’t. So this was obviously one of the ones they didn’t like. So they were selling it, and I told them, “Hey, it’s $70,000 or nothing.” And then we agreed into the deal. So we got it under contract at $70,000. And then I sent in my contractor and got the estimated bid for it, and it was a little bit higher than I thought because they had a really good photographer, I guess, taking really nice pictures that looked a lot better than what it actually was.

Tim Ulbrich: OK.

Young Park: So yeah, my bid came back a little higher. So I went back to them and said, “Hey, I want another $10,000 discount or else I can’t do it.” And eventually, after a couple negotiations, they did settle for $60,000.

Tim Ulbrich: Awesome.

Young Park: So I got it from $85,000 down to $60,000. And my estimated rehab is about $40,000 on it.

Tim Ulbrich: And you’re still doing the rehab right now or starting that?

Young Park: Just starting, uh huh. We just — I believe we just finished demo, and they’re buying materials. Yeah.

Tim Ulbrich: OK. And what’s your estimated After Repair Value on that one?

Young Park: Right around the same, $120,000-130,000.

Tim Ulbrich: OK. And we won’t jinx it, but likely it could come in the $140,000s. So.

Young Park: Right, right.

Tim Ulbrich: Well, that’s crazy. So you got it at $60,000 through negotiation after you got the estimated bid higher than you thought. You said that it was originally listed at what? $115,000?

Young Park: Right, back in March.

Tim Ulbrich: Wow.

Young Park: Yeah.

Tim Ulbrich: Crazy. You know, what I love about this too, Young, too, it’s just a methodical, steady approach to getting that first deal done, learning from it, building from it, developing the team, you know, that’s the value of the BRRRR method. You’re getting your cash back out or as much as you can. Obviously through the refinance, going onto the second, going onto the third. And I suggest you’re just getting started. You know, my next question, as I suspect if you and I were to talk in three years, it’s probably not three properties but maybe it’s 10 or 20 properties and you’re probably helping and coaching others along this as well, is I mentioned two objections that I often hear, which were, “Hey, I don’t have the money to get started,” and, “I don’t feel like I have the knowledge or the experience to get started.” The third one I would add to that would be time. So as I hear you kind of going through all this, I think, man, where are you finding time to do all this not only in getting the deals done but then also in managing them? Talk to us about your approach to saving time, especially once you have them rehabs done and then you’re obviously managing these properties longer term. What have you done to minimize your time that’s invested?

Young Park: Good question. So first of all, I live in Hawaii and invest in Kansas City. So we are four or five time zones behind, so I start really early in the day. I usually wake up around 5 a.m. and get started and spend maybe an hour or hour and a half either analyzing or talking to my property manager or realtor or wholesaler or sending out emails and working on that. So I do that. Some days I come home and then if I see some properties that came through the email, I analyze them. And the other portion as far as maximizing my time, I have my property manager, who is managing everything. I would not recommend anyone to get into managing their own properties because your time is important. Yeah, you might be saving 8-10% of the rent, but you know, if you’re analyzing everything correctly and have that number included into your analysis, hey, it all works out. Another thing is I think more recently, I found a realtor that I really like, who is willing to write these low offers because most realtors think it’s a waste of time with the offers that they don’t think it’s going to go through. And you know, most of the time, it doesn’t. They’re correct. But if they find an investor who can actually close on the property, even though they’re on the lower price point, we could do multiple deals with them over the years. So that’s like an incentive for them as well. But kind of going back to that, I have my realtor, I just tell him, “Hey, John, I want to offer $60,000 on this property.” And then he just sends me the documents, and I just sign it online and he forwards it. So that saves a lot of time for me.

Tim Ulbrich: And I’m seeing a theme here of team. You know, you mentioned the mentor, you mentioned the agent that is willing to work with you on that, you mentioned the property management piece, you mentioned the contractors that you’ve gotten comfortable with, so I sense the team here has been incredibly important. And my last question for you is if we were to fast forward five years, what does success look like for you as it relates to your real estate investing?

Young Park: You know, I have to put more thought into that. I definitely — so personally for me, I don’t have x number of properties that I want because you know, number of property doesn’t mean really much. It’s really how much cash flow you’re getting. I would like to have maybe $5,000 worth of cash flow and I would like to go part-time if I can to free up time a little more and spend more time with my family and my loved ones and also be able to help my parents. I think that’s where I would like to be within five years. Sooner the better. We’ll see.

Tim Ulbrich: That’s awesome. And I love how you brought that full circle. I think it’s easy, especially as you’re having some success, you know, you kind of keep going, keep going, but what’s the purpose? Again, back to why you are doing this in the first place. And I sense for you that the time was important, the financial independence was important, the being able to provide for family and making sure that you’re investing in good cash flowing, profitable properties that will allow you to achieve those goals. So Young, thank you so much for taking time to come onto the show to share your story as a new practitioner that’s been active in real estate investing out of the area, what’s worked, and I think your story is going to be an inspiration and perhaps a guide for some that are recent graduates or have been out for awhile and wanting to figure out how they can get started in real estate investing. So again, thank you for coming on the show.

Young Park: Yeah. Thank you so much for having me, Tim.

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YFP 177: New Book: Baker’s Dirty Dozen: Principles for Financial Independence

Posted on by yfpadmin

New Book: Baker’s Dirty Dozen: Principles for Financial Independence

Joe Baker, author of the newly released book Baker’s Dirty Dozen: Principles for Financial Independence, joins Tim Ulbrich on the show. Joe talks about several of the principles outlined in the book, why he wrote the book and what he hopes the reader will glean from applying its principles.

About Today’s Guest

Joe Baker is an Adjunct Assistant Professor at the University of Arkansas for Medical Sciences College of Pharmacy where he has taught personal finance for over twenty years, as well as an adjunct instructor at Harding University College of Pharmacy. He holds a Bachelor of Business Administration from Southern Arkansas University and a Masters of Business Administration from the University of Central Arkansas. Joe retired early in 2019 from Pharmacists Mutual Company where he provided insurance and financial services to Arkansas pharmacists for twenty-eight years. Joe has spoken to both academic and corporate groups across the country promoting financial literacy.

In an effort to give back to his community, he has endowed a scholarship fund for students graduating from his hometown of Emerson, Arkansas.

Joe and his wife, Brenda, live in Little Rock, Arkansas.

Summary

Joe Baker has been teaching personal finance to pharmacists for over 20 years as an Adjunct Assistant Professor at the University of Arkansas for Medical Sciences College of Pharmacy as well as an adjunct instructor at Harding University College of Pharmacy. Tim Ulbrich approached Joe and asked if he’d be interested in writing a book and Joe realized there were a lot of lessons in personal finance he could share. With the help of his daughter Lindsey, Joe wrote over 250 pages of the key principles he teaches and has learned along his journey of personal finances. This book is composed of practical experience and contributions and stories from over 40 people.

In this episode, Joe walks through several of the principles he has written about like finding a path that will fulfill you, getting and staying out of debt, setting up a 401(k) and Roth IRA, finding the right house and picking the right mortgage, protecting your assets and making a difference in your community.

Through November 7th, you can use the coupon code BAKER at www.bakersdirtydozen.com for 15% off your order of the book.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Joe, welcome back to the show.

Joe Baker: Well, thank you, Tim, for the invite.

Tim Ulbrich: Excited to have you. Huge accomplishment as you release your new book, and we’re going to dig in and talk about several aspects of that book, really a comprehensive guide not only for pharmacy professionals but really just a guide overall about how to live a financially well life and how to do it with intention. And we had you on the show back on Episode 082 with Blake Johnson as he shared his debt-free journey. And during that show, Blake articulated how important your guidance was, your mentorship and your role as a teacher in terms of how important that was in the journey for he and his wife to becoming debt-free. And so now we get to talk about how you have compiled all of that wisdom that Blake and other students who have been blessed with your guidance and teachings often speak of as you release your new book, “Baker’s Dirty Dozen: Principles for Financial Independence.” So Joe, first of all, congratulations. I know a lot of sweat, a lot of time went into putting together this book. And here we are, finally getting ready to release it. So congrats.

Joe Baker: Yes, well thank you for talking me into it. I guess I say thank you.

Tim Ulbrich: So I have to ask, now that you’re on the back end of this and we finally get this into the hands of folks and many, many months of writing and editing went into this, and I told you very early on, I said, “Hey, Joe, at some point, this is going to become fun.” And you kept saying, “When is that? When is that?” So as you look now backwards, tell us about the process. What was it like? What type of time was involved? And would you do it again?

Joe Baker: Would I do it again? Yes, I would do it again. But I’d have open eyes this time. I had been thinking about writing a book for years. Former students and current students would say, “Why don’t you put this down on paper and let us have it in a book?” And I didn’t really think much about it until you mentioned — I think it was in May of last year, 2019 — you mentioned and said, “Hey, why don’t you write a book and we will help you promote it?” Then that got the bug started and I started thinking about it and said, you know, I think I can come up with some things. And on August the 15, I started the book. And coincidentally, I started writing the book for something to do in the hospital room. My wife was having some surgeries. And quite frankly, I wrote most of the book in the hospital room. Now, she’s fine today and everything went well. But you know, it was pretty tough having to write a book when someone’s over there moaning in pain. I’d have to call a nurse and say, “Hey, give us some pain pills in here. I’m trying to write my first book.” They weren’t too sympathetic, nor was my wife. But most of it was written, I mean, during the hospital stay. And what’s interesting — I tell people this story — is I thought I was pretty much finished at Christmas. And my daughter, who is just very astute on editing and all that sort of thing, she said, “Well, Dad, why don’t you let me read it and edit it?” I said, “OK. Go ahead.” Well, she started into editing the book, and lo and behold, she would say, “Dad, I don’t understand.” I said, “Lindsey, you’ve got to understand, I wrote this for millennials.” And she said, “Well, I don’t understand it.” So we went almost paragraph by paragraph throughout the book and rewrote it to where she could understand it as a liberal arts major and put in some stories. It was so much involved, involvement for her that I just felt obliged to name her a coauthor because she did, she made it sound so much better. I shouldn’t say this, but one day I was reading through it for the thousandth time, and I said, “You know, I know I’m getting old. But I don’t remember writing this part.” And she said, “Oh yeah, you did not. I put all that in.” I said, “OK.” There is a lot of her in this book, and I’m very proud of what she’s done.

Tim Ulbrich: And shoutout to Lindsey. I appreciated her input along the way. She did a fantastic job. I feel like it’s — as you know, Joe, as I know, especially as you’ve taught on this much longer than I have, it’s very different teaching on this and then putting that into writing in a way that is engaging, that is accessible, that is action-oriented. And I think it takes more effort, but one of the exciting things is this will live on, and it’s going to have an impact on many, many people. And just so folks understand the effort, when you talked about going paragraph by paragraph, we’re talking about paragraph by paragraph of over 250 pages that are in this book. And I think you did an awesome job. One of the first things I said to you after I read it was, “Wow, this is incredibly engaging because of the stories that you’ve included, because of the tone of writing, because of how action-oriented it is.” And you had over 40 people that helped contribute to the book. And I say that as we get ready to jump into talking about some of the key principles because I think this is a topic where multiple perspectives can be helpful to reinforce various points. And I love how you brought in those perspectives and obviously Lindsey put her own stamp on the book as well. So just overall, incredible job. And we’ve got — I think you have photo evidence of some of that hard work writing. I remember you sent me a text at one point with a photo when you were in the hospital writing. And so we’ve got photo evidence of that. So again, congratulations.

Joe Baker: Well thank you. Can I add another story to this? And it kind of goes to one of the reasons I was writing the book is we were playing cards this summer — and by the way, I had my other daughter, Brooke, and her husband, Gabe Crooks, to edit the book. And they did a good job. They weren’t as in depth as Lindsey, but they did do that. We were playing cards, and Gabe and my daughter happened to be there, and we had a big group there playing cards at the table, and one of the card members, one of our friends who is an attorney, says, “Well I couldn’t tell you the difference between an IRA and a Roth IRA.” And all of a sudden, to my right, Gabe, my son-in-law, another liberal arts major, he started explaining the difference, how it’s the taxation, you know, you tax up front and all of that, went into great detail. And I turned to him and I said, “How’d you know that?” He said, “By editing your book.”

Tim Ulbrich: There you go.

Joe Baker: And he’s even starting investing more and more from that. So it seems to have worked.

Tim Ulbrich: That’s great. And I think you know from teaching this for over 20 years as we’ve had several of your former students on this podcast, you know, some people will read this book and go line-by-line and take away multiple things that they’ll apply. Others may take one thing or they’ll jump in and out as their financial life and plan progresses. But I am confident, I know I took many things away, and I’m confident the readers will do the same. Joe, remind our listeners — maybe they didn’t hear you on Episode 082 way back when — a little bit of your career path and then also some of the work that you’ve done over the past 20 years in teaching personal finance. I think it’s a good segway into why you even wrote this book in the first place.

Joe Baker: Well, in my adult life, I’ve worked for 28 years with Pharmacists Mutual companies, so I’m very familiar with pharmacists and pharmacy students. And I spent a lot of time in the college of pharmacy. And in the late ‘90s, I was talking to the assistant dean and the dean about a personal finance course. And one thing led to another, and we started in the fall of ‘99 at the University of Arkansas College of Pharmacy, a two-hour elective for P3s. And I’m going to brag not because of me but because of the content, it is the most popular elective at the university. So it’s been going on for over 21 years. And it’s just — it’s been great. I look forward to it. Pharmacy students are like sponges, they just absorb it all. And we just — we have a good time. We tell a lot of stories. And I learn from them as well. So it’s a two-way street.

Tim Ulbrich: Absolutely. And I have been teaching a personal finance elective for I think 4 or 5 years, not 20+ years. But one of the things I often think of is, I wish I would have had this. And I know I hear that from others as well. So lucky to have the students that have been able to take your course, that they have access to that information. And Joe, I wanted to ask, you know, we throw around the term, “financial independence,” “financial freedom,” all the time. And since it’s in the subtitle of your book, “Principles for financial independence,” I want our listeners to hear from you, what does that term mean to you? And why is that concept of financial independence so important?

Joe Baker: Well financial independence to me means that if I want to pick up roots, move to another place, I can. I’m not obliged to stay at the same job that I’m in. It just frees you up to do so many things. And I know that money can’t buy happiness, but I have been without money, and that has made it very unhappy. It’s nice to know that if the refrigerator breaks down, the wash machine, or if you want to go on a trip, that you don’t really have to think that much about the monetary. I know I always try to get a good deal, but having the financial independence to do those things and to buy things that you need, it really makes a big difference. It takes the stress out of marriage and life.

Tim Ulbrich: One of the things too, Joe, that really resonates with me as I’ve gotten to know you over the past couple years and obviously got to be alongside of you in this journey, I often tell people as I’m describing this book, is it really is just spewing out with wisdom. And I mean that genuinely.

Joe Baker: Thank you.

Tim Ulbrich: Because I feel like your life experience really comes through in addition to what you have found as effective ways to teach these principles such that they’re easy to understand and they’re action-oriented. So you mention in the beginning of the book, you chronicle your timeline, 30 years old, you got married having nothing but some debt. I think that’s a story that I can resonate, our listeners can resonate. And then if we fast forward, 59 years old, your liquid net worth percentile increases from the top 8% to the top 4% in the U.S. And you mention it took 52 years to get to 8%, the top 8%, and only seven more years to get to the top 4%. And one of the things you mention there is that the significance here was the result of having no debt. So what else as you look back on this journey going from really a net worth of $0 or negative to obviously being in such a good financial position and being financially independent in addition to no debt and having that philosophy around debt. What else has been the secrets to your success?

Joe Baker: Well, I’ll go back even further. You know, it’s a really remarkable journey considering I grew up in a small rural area in south Arkansas near the Louisiana state line. We did not have an indoor toilet until I was 9 years old. And I always, when I’m mentoring students, I say, “Listen. If I can achieve what I have coming from not having an indoor toilet, you can achieve as well.” But fast forward to age 30, you’re right. I had debt. I did have a TV and a VCR and a bed without a headboard. So I did have some assets. But the fortunate turn in my life was I married a high school math teacher. And even though I had a business background, she came in and showed me time value of money and all of the other numbers. And I said, “Wow.” So she whipped me up in financial shape, and I knew she was the one when we were having a get-together at her condo. I think this was the second town we were together. And we had some people over, and someone picked up a paper towel roll, used the second to last paper towel and proceeded to throw it away. And from a distance, I saw my wife — or future wife — go over to the trash, pull that cylinder out and pull off that last piece that was glued to it. And I said, “Wow. I’m going to marry her,” because I knew that she was tight with money. And of course, she makes me frugal today — or excuse me, she makes me look like a spendthrift. But anyway, that helped transform me. And we instilled those — a lot of the money principles with our children. Those stories and more are in the book.

Tim Ulbrich: And a shoutout to Brenna Baker for allowing you to write this book but also for giving you the foundation, I feel like, for what allowed you to learn this topic and of course in turn, teach others. And I love that line that you say in the book, “My biggest financial accomplishment came from marrying a high school math teacher.” So one of the lessons, which I couldn’t agree more with, is making sure there’s alignment with your partner, your significant other, your spouse, when you’re talking about personal finance. And the earlier you can get to that alignment, the better. And you do a great job of discussing that in the book and how important it is. Let’s jump into different areas of the book. And we’re just going to scratch the surface on these. But principle No. 1, so Baker’s Dirty Dozen Principle No. 1, is find a path that will fulfill you. And I think many may pick up the book and not expect that it would start here. So tell us about why you started here and why this concept of finding a fulfilling path is so important and relevant to the financial plan.

Joe Baker: Well, the book did not start off this way. The book was evolved that I had in mind was don’t do this, don’t do that. And then we had a epiphany — excuse me, I’m under the weather today, so you’ll have to forgive me a little bit — when you and I went to Washington, D.C., last year, it was September of 2019, last year, and we both attended a conference with a speaker. And he changed my whole focus on the book. You know, by not telling people what they need to buy or whatever, so I said, “Everyone needs to find their own path, financially, career-wise,” but the purpose of my book is to show you the opportunity cost of every economic decision you make and let you make that decision. I can’t pick a path for you. This is the path that you have to come up, and with the help of the book, maybe we’ll find a way to finance that path. And you can tell a little bit about the speaker who that was. We’ll give him credit.

Tim Ulbrich: Yeah, so I remember that. FinCon 2019, we were in D.C. You actually, Joe, if you remember, we had I think lunch or dinner, and you handed me in a manila envelope the first copy of the book. And we could go back and pull that out, and to your point, there was not this part included. We sat through this keynote, which was delivered by Ramit Sethi, which should sound familiar to our listeners, author of “I Will Teach You to be Rich.” Fantastic book. And that keynote, Joe, I remember it was one of those moments for me as well that I talk about often when I am speaking on this topic. He was talking about the concept of money dials and really identifying the things that matter most to you and finding a way to prioritize and fund those in the financial plan. And he had a great example, he called on the audience to do a couple of these, and then finding the areas that don’t mean a whole lot to you and to stop spending money on those things. And he connected that to the concept that we talk a lot about on the show about finding your financial why, having a purpose, having a vision for your financial plan, and by the way, as you mentioned and alluded to in the book, this path can and will look different for probably everyone reading and many of our listeners as well. And so finding that path, articulating that path, defining that path is so important because the financial plan should be a mechanism to help achieve that and make it reality. And for some, that means a very ‘traditional’ path of I’m going to work full-time and I’m going to do that for 30-40 years and I’m going to make a good income. Others may say, you know what? It’s early retirement, it’s staying home with the kids, it’s doing this or that, it’s working part-time, it’s having options, it’s having flexibility. And I think we’re seeing this more than ever of the importance of this. And I know it’s something that I feel personally as well. So I think it’s a great concept and I think it’s a great way to start off the book before you then get into the x’s and o’s of the financial plan. I remember we looked at each other and we’re like, alright, this is something different.

Joe Baker: Yes. I turned to you if you remember, I said, “I’ve just changed the direction of my book.”

Tim Ulbrich: Chapter One, here we go.

Joe Baker: Right.

Tim Ulbrich: I think you do a nice job too in this first principle that I know will resonate with our listeners, many of which in the field of pharmacy while this book goes beyond just one for pharmacists that I know many are struggling with what do I do if I’m in a position where I’m thinking about a career change or I want to do something different or “more meaningful,” how do I consider that? How do I weigh that? And how does that, again, connect back with the financial plan? And you do a nice job of covering that in principle No. 1. Now, you also talk about in the book this concept of avoiding financial minefields. And I think this gets into a little bit of the defensive side of the financial plan. My question here for you is in your experience teaching on this topic and working with many students, what are some of the common financial minefields that you see people stepping into?

Joe Baker: The biggest one right now are weddings. Weddings, I think the national average cost is $33,000, excluding the honeymoon. And that is just a big, big financial minefield. Now, obviously if the person reading the book is not paying for the wedding, that’s a different story. But even for parents paying for the wedding or grandparents or whoever, that should be looked at in the light of opportunity cost. And that’s what I break down in the book, showing if you use less money for a wedding and quite frankly, the stress of a wedding, wow. My daughter, well, Lindsey, she’s one that really wrote a lot about financial minefields of weddings. And she was just in a wedding, and she was — it was very similar to the movie “Bridesmaids” where everything was costing so much, spending so much time. So people have to be aware of that. And that chapter also includes on making the decision on whether you do that or not and plus other decisions, and it’s very similar to another chapter I have, principle No. 4 about understanding the concept of opportunity cost. Every decision we make there’s an opportunity cost whether it’s economic or non-economic. And I try to focus mostly on the economic choices. So weddings, one of the biggest minefields in a list I think a couple more. And I think that’s the same area where I go into budgeting to find out where you’re spending all your money. And you might be surprised at all the smaller minefields.

Tim Ulbrich: Yeah, you do. You do a good job of that, a stepwise approach for budgeting and trying to identify where those minefields may be. And obviously, you build upon that by talking extensively about student loans, a topic that is near and dear to us. And you also do a nice job in another chapter building on this concept of what I view as some of the defensive parts of the financial plan of the importance of protecting your assets. So of course, details about emergency funds, life insurance, disability insurance, liability insurance, insurance insurance. The list goes on and on, right?

Joe Baker: Right.

Tim Ulbrich: We all know how important insurance is. And what you need, what you don’t need. And I think really being able to navigate that, understand it, and as you can tell already listening to this interview, this book covers a wide array of topics. Now, one of the areas you spent the most time in the book on — and I think you did a great job — is on the investing side, the long-term savings and really breaking this down, I would say this is probably the biggest section of the book and I’m guessing the area that you’ve had through experience, identified where there’s the most questions or confusion. And so my question to you as you talk about the principle around investing and establishing an investing plan, you know, we talk about these terms all the time: stocks, bonds, mutual funds, 401k’s, 403b, Roth versions of those, IRAs, traditional and the Roth, HSA, REITs, alternative investments, cryptocurrency — you know, the opportunities and the options go on and on. And I think this can be very, very overwhelming. I know it’s overwhelming from personal experience in talking with many of our listeners. So how do you walk the reader through understanding and applying this information on the very important topic of investing in long-term savings?

Joe Baker: Well, first of all, the way I wrote the book is the way I teach class. I make a promise to the students. At the beginning of each semester, I say, “My goal is for you to never say while you’re sitting in my class, you will never say, ‘When am I ever going to use this?’” To me, that’s very important because you and I, we’ve all been there where we’re sitting and say, ‘When will I ever use that?’ So I keep that in mind, and I try to keep it as simple and really what it boils down to — you know, the three-asset class is cash, bonds and stocks. And if you’re only relegated to participating in an employer-sponsored plan, you’ll have 25-35 funds to choose from. So it’s not like the thousands of decisions you’ll have to make. And I place a couple recommendations. I like stock index funds as well as Warren Buffet, as you know, Berkshire Hathaway, that’s one of his favorites. Target date funds are good too. And I try to make it as simple as possible. And I also include several stories in there from contributors and where they have messed up. And you know, I talk a lot about individual stocks. You know, people at parties, they’ll talk about buying an individual company stock. And it is a good conversational piece, but frankly, might as well just do that for fun because your investments and your retirement should come from your employer-sponsored plan. But I do have a section in the book about picking individual stocks and how to do that. So if you want to do it for fun, that’s fine. But the bottom line is I try to keep it as simple as possible. And I do cover all the areas, and hopefully the reader will have the same experience as the students in my class and say, ‘Oh, yeah, I’ll use this one day.’

Tim Ulbrich: And I think you did a nice job, in my opinion, of keeping it simple, what you need to know, what you don’t need to know. And then through the appendices, also providing additional information for those that want to dig a little bit deeper on some of the topics or where there’s a stepwise approach to things like understanding some of the retirement accounts or opening up an IRA but that there’s a core foundation that you provide. And I think it reads, in my opinion, such that you can go cover-to-cover but then it should stay nearby because you’re going to come back to many of these decisions or need a refresher.

Joe Baker: For example, when you leave an employer, which you will. On average, I forgot the millennials, I think they have 7-9 jobs by the time they’re out. So what do you do with your 401k or 403b? I point that. You have four options. And that is in the book. So there’s some things there that are practical that you can look at and a step-by-step process for that.

Tim Ulbrich: And again, we’re just scratching the surface on topics that are also included that we haven’t discussed yet: how to make sure you and your significant other are on the same page, where to look for things that can appreciate and avoid things that depreciate, how to get out of debt, best practices for home buying, for the financial plan. Now Joe, when we package the book and said, ‘OK, is it the book? Are we going to offer some other resources?’ We ultimately landed on that we thought there would be value in essentially an investing mini-course series, videos, 6-7 videos that would take people more in depth into investing. Tell us about what folks can expect to get out of those investing videos — I know you’ve invested a lot of time and effort into doing those — and why we felt like that was an important supplement to the book.

Joe Baker: Well, a shoutout to P3 pharmacy student Jason Lam, he’s helped me with the audio and video portions. And he has pushed me pretty hard. We have done several videos that we’re — I think we’re pretty proud of. The blooper reel should be very interesting, by the way. But I just filmed it, most of the videos are out back by the pool. I’ve got a big whiteboard. I’m old school, I like to show it on the board. And quite frankly, it’s kind of a mini version of what I taught to the students in class. We’ll see how it turns out. We’ve also filmed a little skit for Halloween day, so hopefully people will check that out.

Tim Ulbrich: I’m looking forward to seeing the bloopers. So yeah, I mean, that investing video series is meant to I think present the information in a different way. Obviously they’ll have the text to read but also more of a stepwise approach. And for those that want to dig deeper on the investing topic, I think you’re going to find that video series to be helpful. And that comes with either the premium or premium pro package of the book, which is again available at BakersDirtyDozen.com. Joe, I want to read a couple of the testimonials. We’ve got a lot of people that had great things to say about this book. You know, one here that I want to read comes from Nicki Hilliard, UAMS College of Pharmacy professor, past president of the American Pharmacists Association. And she says, “Joe Baker is a good-natured, all around nice guy that is passionate about helping others. He has graciously taught personal finance at the College of Pharmacy for many years, and it is always the most requested elective course, not just because of the good information but how these lessons are delivered with great stories and insight into the big picture of what is important in life. He has put to paper his life experiences, stories and wisdom to help others lead a happier, less stressful and more fulfilling life through financial management. I highly suggest you put Joe Baker’s Dirty Dozen lessons to work in your own life.” This is just one, and as I read through others in preparation for this episode, there was a theme that I kept seeing over and over again of the influence that your teachings have had on people and how they have been able to directly apply that information to their personal financial plan. You know, one that stuck out to me, Blair Thielemeier mentioned how important the financial principles that you taught were for her in her journey of being able to start her business and the work that she has done and being able to have her own personal financial plan in order, several students commented specifically on actions they took in terms of budgeting, opening up retirement accounts, other things that they did directly as an account of your teaching. So as you hear that out loud, and I know you’re a humble person by nature, but what does that mean to you in terms of the impact this work has had on people over the past 20 years? And what do you hope is the legacy of this book going forward?

Joe Baker: First of all, Nicki was very generous in her review. And I appreciate that. Well, it just gives validation, you know, when I hear students come back and they’ll repeat a story and say what they’re doing, if they paid off $200-something thousand dollars in student loan debt in four years, which one has, and when they tell me that those stories, that just validates why I did this. Financial illiteracy is — you know, you could be a pharmacist, doctor, lawyer, and still be financially illiterate. Just because you’re smart doesn’t mean — or high IQ — doesn’t mean that you know how to control your finances. So it makes me feel good, it’s the reason I do it. It’s a selfish reason because I know that I’m getting feedback and kind of confirmation of what I’m doing is the right path. So that’s what keeps me going at this. This was all — the first I think it was 10 years that I did this, I didn’t even get any pay, so it was — they came to me, the school came to me and says, ‘Hey, we want you to do this both semesters.’ I said, ‘Well, I was thinking I might not do it at all.’ They said, ‘Well, how about if we paid you?’ which wasn’t much. I said, ‘OK, I’ll do it both semesters.’ So anyway — and the way I look at it is it’s an unlimited attendance in my class. It’s tough, but if I can reach one or two people that would have not been in there if we had had a maximum size, then it’s worth it. So that’s almost like an evangelical feel to it, reaching more and more people.

Tim Ulbrich: Yeah, absolutely. And I know in talking with several of your pupils, you know, and speaking from personal experience, it’s not even just them. Obviously there’s the impact that you will have on them but also the folks that they interact with, that they rub shoulders with, the kids that they’re raising. I mean, this is one of the things we always talk about, hopefully a generational impact you can have in helping people shore up their financial plan to be able to do and achieve the things that they want to do. And ultimately, as you talk about in Baker’s Dirty Dozen Principle No. 13, to be able to have an impact on their communities, on their places of worship, on others, and to be philanthropic as they can do so once they have their own financial house in order. So I know your work has had a great influence on me. I mean that genuinely. I’m confident it’s going to do the same, it has done the same, will continue to do the same, with others. And I’m so glad that you ended up writing this because one of the beauties of a book is that this resource will live on. And it will have an impact, and people will be able to build upon this work, they’ll be able to give feedback on it, and ultimately hopefully be a conversation-starter for many in their own financial plan. So Joe, again, congratulations on the book.

Joe Baker: Thank you.

Tim Ulbrich: Excited to be a small part of this alongside of you in this journey. And again, to our listeners, head on over to BakersDirtyDozen.com. Through November 7, you can use the coupon code BAKER for 15% off. And as always, we appreciate you joining us on this week’s episode of the Your Financial Pharmacist podcast. Have a great rest of your day.

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