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YFP 053: One Pharmacist’s Journey from Financial Ignorance to Financial Independence

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On Episode 053 of the Your Financial Pharmacist Podcast, YFP team member Tim Ulbrich interviews Dr. Tony Guerra, an author, podcaster, entrepreneur, real-estate investor, educator and father to triplet girls that has an incredible story to share going from financial ignorance to financial independence. Tony talks about his financial journey, his various business ventures, and how and when his mindset shifted that allowed him to be on the path to financial independence.

About Our Guest

Tony Guerra graduated with a Doctorate of Pharmacy from the University of Maryland in 1997 and has followed a non-traditional career path to best suit his needs and interests. Tony has taken on the roles of pharmacist, homeowner, professor, real estate agent, author, mentor, podcast host, husband, and father of triplet girls while continually striving for financial independence. Through motivation and creative entrepreneurial thinking, Tony has created a lifestyle that allows him to focus on his family and his passions.

You can learn more about Tony and his work at http://MemorizingPharmacology.com

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 053 of the Your Financial Pharmacist podcast. We have an awesome episode in store for you today with a special guest, Dr. Tony Guerra that has taken a nontraditional path with his pharmacy career, which has allowed him to be on the path to financial independence. And I’m excited to have him on the show to share that story and journey today. And ever since I heard about Tony’s work more than a year ago and having the chance to learn about his background, I’ve been excited to get him on this show and to share his story with you, the YFP community. So Tony, thank you so much for taking the time to come on the YFP podcast.
Tony Guerra: Hey Tim, thanks for having me on.

Tim Ulbrich: So to be honest, Tony, there’s lots to talk about today. The more I dug into your background and story, the more I thought, where do we even start with this? We’ve got your fascinating pharmacy career, the real estate that you’ve been involved with, successful business ventures, and so I think maybe the best place to start is let’s go all the way back to when you graduated from the University of Maryland in 1997 with your pharmacy degree. So tell us a little bit about your first job out of school and what was your financial situation right away after you graduated?
Tony Guerra: Well, first, thanks for having me on the show. I actually listen to every single one of your podcast episodes, so I’m honored to be No. 53.

Tim Ulbrich: Thank you.

Tony Guerra: And my journey was a little bit different in that, you know, so many students right now are graduating, want to do residency, do 40-60 hours a week. When I sat down for the interview to work for Walgreen’s when I graduated to go to the Phoenix area, I actually asked to work only 24 hours a week or three days a week. And he talked me into four days a week, or 32 hours a week. So I had no interest in maxing out the number of hours I had, and my situation’s a little bit different because they had doubled our tuition from BS to PharmD, but my tuition was $4,000 a year.

Tim Ulbrich: Wow.

Tony Guerra: So I had $16,000 total in tuition. So my situation there is a little bit different, and before people hang up like, this guy doesn’t have any problems, let me talk about the mistakes that I made. So the issue with Maryland is that New Jersey and Atlantic City is not that far of a drive away. So a lot of times my buddies and I would go up to Atlantic City, and the most important thing that we had to do was because in New Jersey you can’t pump your own gas, we just had to have enough money left over to have a tank of gas or at least half a tank of gas to get us back to Maryland. So when I talk about finances, it was truly monopoly money that I was playing with back then. I had $20,000 in credit card debt, I had the student loans, and then I bought a $20,000 car, brand-new car, just out of college. So I had absolutely no concept of what it meant to owe money at the end. So in terms of graduating, the only budget I did was to make sure that I could work 24 hours or 32 hours, so I worked four days a week. And I didn’t want the pharmacy life to take over my life. So I was going to the Phoenix area. I wanted to go to a destination area. After seven years of college, I didn’t want to work 40 hours a week. I only worked 32. But I’d made some mistakes with finances, and eventually, it did catch up with me.

Tim Ulbrich: Couple things there that really stick out to me is, you know, even the student loan numbers, which obviously are very small relative to our indebtedness we’re dealing with today, right? $160,000, $200,000, depending on public-private, whatnot. But also, you’ve got to remember context of, you know, 20 years ago. But that I think does highlight how much that has increased in that period of time, which is obviously shows you —

Tony Guerra: 1,000%, right?

Tim Ulbrich: Yeah, and I think to your point about Monopoly money, I know we just talked about this on your show as well is that we’ve got to change that conversation that it’s got to hit us, have a little bit more of an emotional reaction to that debt. And when we see a number like $160,000, we should be like, ‘Holy cow! What is that?’ One of the things I wanted to ask you, though, which is intriguing to me is your intentional choice to not work full-time. And the reason I want to ask this question is that as you know, right now, there’s a trend going on nationally where some pharmacists are getting cut back to 32 hours, and they’re not getting full-time work because of various reasons, saturations of markets and whatnot. And here you are, and I think a lot of people out there are obviously unhappy with that. They maybe financially feel pressed that they need their full salary, but here you are intentionally not choosing to go full-time. And I heard in your conversation, I heard a little bit of a strategic decision that you didn’t really want maybe to get burned out, you wanted to give yourself other options. Talk more about why you made that choice to not go full-time right away.

Tony Guerra: Well, I can connect the dots looking backwards. I think Steve Jobs said in that famous graduation speech at Stanford, but I call the other eight hours, the Entrepreneurial Eight. And so what I wanted to leave was that other day just for kind of entrepreneurial ventures, and I was taking classes in journalism and writing. I never had a plan to become a journalist, but I knew I wanted something besides pharmacy. I didn’t like my job after about three months, and I kind of knew that that was coming. I’d been in retail for 3-4 years, so it wasn’t a surprise that I’m like, ‘Gosh, this kind of got repetitive.’ And I did try to make changes. I would change my days, I would go to overnights, I worked as a pharmacy manager in a grocery store, I worked in mail order. But it just — I just wanted to minimize that. What I found was that it was OK — I enjoyed the people I was with, and so I focused a lot more on the people I was with and the people I was serving. But if I had that one day a week that was completely dedicated to creative work and making money a different way — and now we call them side hustles — I just wanted a creative outlet. So I think making room for that intentionally before you graduate was something that I really wanted. The residency burnout is much lower in pharmacy than it is in medicine, but to have to dedicate 50, 60 hours at that salary — and it works out to I think maybe $16 an hour as a resident if you work 60 hours a week, that’s deflating. And I didn’t want that to happen. So if I’m going to go to a destination, I wanted to have time to enjoy it. So I knew early that I wanted to be a writer, but that success didn’t come until much later. But the entrepreneurial space — I always made room for entrepreneurial space.

Tim Ulbrich: Yeah, I remember, Tony, my whopping $31,000 salary during 2009.

Tony Guerra: Ouch.

Tim Ulbrich: And I think it’s an interesting point you bring up there, and I’m so glad — and I hope our listeners can stop and listen and absorb the wisdom that you just shared. The Entrepreneurial Eight, I love that term because I wouldn’t say I have many regrets. But if I look back and now with a family of three young boys, every year that goes on since graduation, my tolerance for risk is looking more — looks different with each passing year, right? Because you have more things that you’re accountable for, you have more things that you’re responsible for, and I think as I envision where the profession of pharmacy is going, and as I think about some of the new grads being frustrated with either the options that are available to them or maybe the work environment that they’re in, I love that concept of why not carve eight hours a week? Why not work part-time? Why not put yourself in a financial position that you can do that? Because I think while it not only positions you for potentially long-term other options, business ventures, things where you can control your own destiny, that one day of creative outlet I’m guessing made some of the other time more palatable, whatever you want to call it, that you knew you had that day of the week that you could ultimately turn to that creative outlet. So I hope the new graduates, some of those in their mid-20s where maybe they don’t have a lot of things that are going to hold them back risk-wise, obviously besides student loan debt — is this the time potentially to think about some of those entrepreneurial risks that somebody could take? So what — as you look back and kind of think about the graduates, I know you take a lot of APPE students on rotations, what advice do you have for them? Maybe mistakes that you’ve made? Things you wish you would have done differently? Obviously, you mentioned credit card debt, new cars, and I’m guessing there’s just a certain set of advice or points that you give to your APPE students to say, hey, if I were in your shoes right now, these are the things I wish I would have done differently. What are those things?

Tony Guerra: I find that money and budgeting is kind of deflating. And so what motivates me is doubling my money. So I find places where I can double it. And I want to be very careful not to say, I can double a pharmacist’s salary. I don’t know how to do that. But I can certainly double $400, $5,000, even $40,000. And maybe I can go through some of those stories where I’ve done it or where I understand where I’ve doubled my money. But I find that what you have to do first is what you’ve taught — I think when you’ve talked about your student loan course — is you have to have everything in place before you start playing with this double-your-money game.

Tim Ulbrich: Yes.

Tony Guerra: To put the money somewhere because you can get it, you can always lifestyle creep up to whatever you spend. But I’m actually taking on debt right now so I have a place to put the money so that’s something you also talked about in a recent episode is that people that are high earners that have no debt really struggle to know where to put their money.

Tim Ulbrich: Yeah.

Tony Guerra: So I’m taking on debt in the form of a third home, I just bought it yesterday. And that’s where it is. But maybe we can talk a little bit about some ways to kind of double your money. And we’re not giving investing advice. And I’m going to take this on instead of you guys taking it on because you guys have a very good, methodical way. But maybe we can just talk about how to double $500 to start with.

Tim Ulbrich: Yeah, let’s do it. And I know you’ve been involved in different things. As I mentioned in the intro, you’re an author, so you’ve written a couple different books, and we’ll link to them in the show notes, so “Memorizing Pharmacology,” “How to Pronounce Drug Names,” what am I missing, Tony? What else have you done on the book front?

Tony Guerra: The new one’s “Memorizing Pharmacology Mnemonics.” It’s meant for APPE students. And it should be free on Audible if they’ve never had an audiobook before, but something they can listen to back and forth on their way. You know, I think that really, as you get into the APPEs and you get into the internal medicine one and then the grueling critical care ones, you’ve got to have the basics down. And by having the basics down, I wrote that book and made it into an audiobook with another pharmacist out in New York, so “Memorizing Pharmacology Mnemonics” is where I would start if I was an APPE student.

Tim Ulbrich: So we’ll link to those in the show notes, and I’m guessing — and we’ll talk real estate here in a little bit — but I’m guessing your authorship, and I know you’ve put these online, so you’ve done audiobooks, which if I’m right, one of these has landed its way onto the Audible.com best seller list. And so you’ve obviously had success here. So talk to us about even just that journey of, wow, I want to write a book and how I did that, what impact that’s had for you financially but also maybe just the scratch that entrepreneurial itch that you’ve had all the way back to graduation.

Tony Guerra: I found that I couldn’t write a book until I got mad. So I had to do something to get mad about the book, and so what I did was I was taking classes up at Iowa State, and I went into a class that I knew I was going to get kicked out of. And so there’s an MFA program, a Master of Fine Arts program there, and there was a class on nonfiction creative writing, and this is a class I wanted to take. And I knew I was going to get kicked out. I knew the teacher, and I knew the people there. I said, ‘Hey, you know, I signed up for your class.’ And she said, ‘No, no. You’re not in the MFA program.’ ‘Yeah, but I’m allowed in. I’m in an English program, and part of the department.’ ‘Yeah, we’re just going to stick with what we have here.’ And I knew that would — I didn’t know for sure she’d kick me out — but she did kick me out, wouldn’t let me in the class, so I was excluded. And the one thing that makes me mad is being excluded, and I knew that would happen. So it made me mad enough to write the book, and now the book actually makes double the salary of the professor herself, so I won’t name the person, but it just makes me mad. So I think 98% of people, they say, want to write a book but only 1% do. So some kind of emotional reaction — and I think in your writing your book, “The Seven Figure Pharmacist” with Tim Church, I think that it was an emotional response to what had happened with your stories as well. So to write a book or to get there, you really have to. And what I think I’ll point to is actually another author, Dr. Richard Waithe, who was the host of Rx Radio podcast, I think he probably put about $500 into his book, and I can’t remember the name, but it’s like “The New Pharmacist” or “First Time Pharmacist,” that’s what it’s called. Yeah, “First Time Pharmacist.” And I just by seeing his numbers and knowing how much he makes from each book, he’ll probably double his money I would say in four or five months. But the way that I would — and I don’t mean to be self-serving to your course — but the easiest way to get make $400 on $400 is to invest in your course because the return could be close to $100,000. And that’s one of those returns that’s so big that you don’t even do the math on it. You’re just like, I put $400 into the course, and I saved $100,000. Or in your case, if you had had — if we could go back in time and you wrote the course for yourself, you would have saved $300,000.

Tim Ulbrich: Oh my gosh. I try not to think about it.

Tony Guerra: And I would have saved tons of money. So that’s an easy way to double $400 or $500 — either write a book that you’re passionate about, put maybe $400 or $500 into it or take the student loan course. That’s where I would start with $500. And then maybe we can talk about $5,000 is the next way. But I would recommend being a little slower with this one. But I can tell you how I doubled $5,000 as well.

Tim Ulbrich: Yeah, so before we go there, just talk me through — obviously, you got mad, which I think obviously there’s an emotion there which inspires action. I’m with you, I need something to fire me up, especially if you’re going to sit down and start writing and typing. I remember lots of early mornings, lots of late nights, and it’s a grind, right? As you’re kind of working through the process. So you’re mad, but you obviously were very strategic about, you know, I’m not going to write this just to write this, I want to write something that’s going to provide value and is needed in the market and is something that I have expertise in. And so I think a lot of listeners might be hearing that, hey, I do this every day, and there seems to be a need for something, whether it’s a book, a course, a Webinar, whatever. Talk to us, though, about how you put those pieces together that it’s not just writing a book to write a book, it’s that you want to put something that had value, that was needed and lined up with your expertise. And does that connect with your day job and what you do as a professor right at Des Moines Area Community College? Were you able to sync those experiences up to maximize your time?

Tony Guerra: I actually think you have to sync it. So my recommendation to anyone who’s always wanted to write a book is instead of worrying about writing a book, just write the curriculum for the course that you’re going to teach or that you would want to teach and just put it in book form. And then when it comes to audiobook, it took — when I first talked to my narrator, I never had hired a narrator. He was $400 per finished hours, so that means for a 7-hour book, it’s $2,800, a ton of money on something I had no experience with. And he said, boy — because it was a two-month lag between when I could have him do it — he’s like, ‘Boy, you’re going to really have a heck of a time making this for the ear.’ And what he was saying is is that if you can make nonfiction into something that is listenable, people will buy it. And so that’s really where it came from is the two steps are 1, what course would you teach if you could? And then write the course for something that you actually are maybe doing. It’s a lot easier for professors and things like that that have it. But if you’ve got technicians or you’ve got other people that work for you, what would be the course that you would write for them? Or if you, you know, with you guys and teaching about money, how would you write that course? And the second part is is make it for the ear. So you take that course, and then you just read it. And then you just continue to revise it but make it as if you are talking to someone. So those two components, writing for a need — and the pharmacology books, the need was that many nursing students have to take pharmacology but don’t get chemistry before it. So imagine hearing beta lactam or N-acetyl para enol phenol and all of these things, and you’ve never had chemistry. So that was kind of the need that I filled. But the way to get a book done — align it with what you do anyway, and then No. 2, then read it and re-write it as if you’re reading it to someone rather than ‘Here, I’ve wrote this book.’ And if you read Dr. Richard Waithe’s book, it’s really conversational.
Tim Ulbrich: Yeah, I love that. And I think for those that are listening that maybe are not fully satisfied with your job, and you’re looking for a creative outlet, you’re looking to create something, obviously the money that we’re talking about here and how you can generate revenue to help accelerate your financial plan is an important piece, but you can’t underestimate the positive energy and the feeling and momentum that you get from being in the creative process. And so you know, I would ask, outside of your time, of course, what is there to lose to potentially consider a path like this, thinking of the work that you already do? I want to take a brief moment before we jump into the second part of the show to highlight today’s sponsor of the Your Financial Pharmacist podcast, which is Script Financial.

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

Tim Ulbrich: Alright, so we’re back with today’s show. We’re walking through with Tony Guerra to hear about all of his work. We’re talking about some of the books that he’s written, and he’s shared with us kind of that first step he took to earn income. And now we want to talk, Tony, about the next step that you took. So we talked about getting to that $500 point, and now we’re talking about that next level of $5,000. So talk us through for you kind of that next level of the business venture.

Tony Guerra: So the mantra is invest in yourself. And right now, you guys have an only $400 course, but I expect that if you guys continue on your path, there’s going to be a $5,000 course that you guys are going to have in your future where maybe we go to a destination, we get everything done with the finances and things like that, but then we start talking about investing, then we kind of create our own group. So somebody that has done that in the real estate space is Brian Buffini. He came here from Ireland and was one of the best realtors in the country but then created a coaching company. And the $5,000 I spent — I remember these exact words to my coach, and we’re very similar in that we want return on investment mathematically, where my wife is completely different. She would want certain feelings that come out of it. But when I talked to my coach, I said, she said, ‘What do you want to get out of this?’ I said, ‘$10,000. I want my $5,000 back, and I want $5,000 more.’ And that was it. And I ended up making $22,000 as a real estate agent. But what I invested in was $400 a month to get one-on-one coaching, 30 minutes, every two weeks, and what I was basically doing was following the path of somebody that had done these steps and was able to articulate how to do it. And then years later, I want to say five or six years later, just before the crash, my income — and I didn’t take all of this home, I had a little bit of group of people, of real estate agents, but my income — I had to leave pharmacy because it had just gotten away, and it didn’t make enough money. But I made $253,000 in that coaching program.

Tim Ulbrich: Wow.

Tony Guerra: So that $5,000 at first got me to $22,000 in the first year but then I was making $253,000 that last year. And I would have stayed with real estate even with the crash because that’s when people really needed me, but my wife made it clear that we’re moving to Iowa. And so I moved to Iowa, and I completely gave up the real estate business. But to spend $5,000 and make $5,000, I would invest in yourself in some kind of program. I think Blair Theilemier has something that’s a couple thousand dollars or something like that. But those kinds of things, that’s where I would put up to $5,000 in terms of investing in myself. And where I wouldn’t go is into some kind of postgraduate Master’s degree or something like that because you have to wait until you graduate to maybe get a return on that. I’m talking about things that you can — like a real estate license, it’s like $500 — that you can get returns immediately, that you can start making your money right away. But that’s how I’d put $5,000 in and get $5,000 back.

Tim Ulbrich: Yeah, and we think about — we’re always harping on our students, professional development, professional development, professional development. It’s the same thing when it comes to your finances, real estate, a business coach, whatever, you have to look at those opportunities and say — and I’ve done the same thing with business coaching, I’ve done the same thing with hiring Tim Baker to help me with my finances — and I’ve realized all of those and said, ‘That’s an investment. I’ve got to write a check.’ But I realize the return on it is going to be much greater than what I’m investing. And I think that’s true for so many different areas of your life is you have to look at those things and say, OK. I’m going to try to go at this all myself or what are the opportunities I can really hire somebody who’s taken this path that can really keep me accountable and has the expertise to get me to the goal that I want to achieve. So let’s segway, then, into the real estate investing. So you alluded to the fact of being a real estate agent, you got your license, you’re selling real estate. But you’re also now getting into real estate investing. So as I know, you now have three properties, is that correct?

Tony Guerra: Yeah, we’ll close on the other one the first week of July. But I’ll have three again. And we kind of talked through the very first things that I did and then — so I have a 20-state, 20-year real estate career. And this will be my 10th property that I’ve moved in some way or another.

Tim Ulbrich: OK.

Tony Guerra: But I only own three. I only own three right now.

Tim Ulbrich: So why don’t we — obviously, you have the primary residence, and we’ll come back and talk about that because I think there’s some due diligence that people need to do in buying their primary home. But specifically from the real estate investing side, why did you look at this area and say, ‘As a pharmacist, this is something that I want to get into in the long run?’ You mentioned currently owning three. You’ve been involved in 10 properties. So talk to us a little bit about your mindset around real estate investing as a category or as an area. And maybe for you, where did that fit in while you’re also looking at more traditional streams such as a 401k, 403b, and the timing of those.

Tony Guerra: OK. So let’s kind of go all the way back to graduation and you know, should I rent? Or should I buy a home? And the first thing that I did, and when I did look at my student loans, I heard, I was like, why is this not tax-deductible? And your student loan interest is not tax-deductible, but it is deductible on a home loan. So my parents owned a vacation home, and the first home I bought was for $1. I bought it from them for $1; they were able to transfer it to me.

Tim Ulbrich: Sounds pretty awesome.

Tony Guerra: Yeah. Well, they took back the loan. So then I had to pay them monthly payments, but then I immediately put a mortgage on the property and then paid off the student loans so that now, the interest that I would have had on the student loans was now tax-deductible.

Tim Ulbrich: Got it.

Tony Guerra: So that was kind of the first deal I made. This is a deal that’s very common now with the new graduates in all fields in that they’re deciding to rent where they’re going to live, but they’re getting in the real estate market in a different area. So for example, if somebody wants to move to San Francisco, it’s a lot easier to find a rental with maybe rent control or something that’s a little bit more manageable and then buy something maybe in Nevada that’s maybe a vacation home or something like that. So the first thing I did was recognize that a home is a commitment as much as it is a marriage. And you don’t go into a marriage just saying, ‘Oh, look, I qualify for this marriage. Time to get married.’ You know? And I think a lot of people do that. They’re like, ‘Well, I think I should buy a home because it’s supposed to be tax-deductible interest.’ And that may or may not be true with the new tax code. So the first thing I would say is, find a place you want to live and get to know it. And so I lived there a year before I ever bought a home in Tempe. So I didn’t — my first piece of advice is to not buy a home in an area that you haven’t known for at least a year.

Tim Ulbrich: Amen. Yes. Yeah, that’s a mistake actually my wife and I — we had been in the relative area for a year but didn’t know well enough. And we were kind of itching from a renting standpoint, and as I look back, a little bit more patience would have done us a lot of good in terms of the rest of our financial plan. We’ll link in the show notes, there’s actually a good calculator the New York Times has to do a rent-to-buy comparison because I think a lot of times I hear people say things like, ‘Well, my rent costs $1,000, and the mortgage costs $1,000.’ But as you know, that’s not an apples-to-apples comparison. So really trying to look at your financial situation and look at all the pieces to say, where does this fit in in terms of the buy of knowing the area? But also where does it fit in with rest of a financial plan? So where did you then see real estate investing beyond your primary home come into play? And how did you determine it was a right time to get involved in that? Was there a certain point where you said, I’ve got enough equity in my primary home, I’m on the path with my other retirement savings, so now’s the time? When did you make that jump into investing?

Tony Guerra: Well, I first thought I didn’t agree with you on this, but now I do agree with you on this — when I had 20 percent to put down.

Tim Ulbrich: OK.

Tony Guerra: And because I had bought this vacation home, which was in Ocean City, Maryland, so I actually never lived in it more than the 14 days you’re allowed by the tax code as a rental, that I decided to just buy something in Tempe. And the first thing I would say is don’t ever try to time it. The market is crazy. You know, right now, you would say, ‘OK, well now prices are going up. So now maybe I shouldn’t buy because they’re going up, and I shouldn’t do it.’ But then you’ve got this investing coming from China, and I just saw in the news that a house in San Francisco went $1.6 million over asking.

Tim Ulbrich: Gees.

Tony Guerra: So you know, you might say, ‘Oh, well you know, the student loan bubble’s coming and all these things so prices are going to drop, you know, in a couple years.’ And then you have this weird investing thing coming from another country. Timing it is not the way to go in terms of like trying to time when the best time to buy is. But what I liked was that once I had 20% to put down, I don’t want to say I was a bully, but I was kind of a bully. When you make an offer, and you’re putting 20% down, all of a sudden because of the savings rate in the U.S. and all of these things, you are in the pull position. All of a sudden, that seller is like, ‘Whoa. I don’t want to upset this person. I want to get them.’ So when I offered on my Tempe home, I offered under asking in what is a white hot market. The summer, right by Arizona State, to the east side of Arizona State University, is a white hot market. And I was able to offer a little under asking because I had 20% to put down. So when I talk about timing, don’t time the market. Time yourself. Time your own situation because if you have built up 20%, that 20% is actually — I don’t want to say a symptom — but that 20% represents that you have gotten your financial house in order and that you are ready to buy a home.

Tim Ulbrich: Yes.

Tony Guerra: That you are financially ready, and a lot of the things that you put in your course and things like that. So don’t look at 20% as I have to do this thing first, it’s 20% will come if you do all the steps right. And I did a lot of things right in that year, and I took a little money out of that deal I did with my parents, and I bought a house that was $90,000. So the 20% wasn’t a ton of money.

Tim Ulbrich: The other thing — and I would love your input on this — the other thing to me, and my wife and I are hopefully going to be dabbling in this a little bit more here in the near future, but one of the things that interests me about real estate investing is that it has an opportunity, if done well, it has an opportunity for a cash flow on a monthly basis that is not waiting until a traditional withdrawal age for a retirement account of 59 and a half like a 401k, 403b or a Roth IRA. And so I think as people are out there maybe thinking, Oooo, I like pharmacy, I don’t love pharmacy, maybe I want to do something different — at the right time, and if done well, I think real estate investing or business ventures like we’ve talked about the work you’ve already done are alternative revenue streams that aren’t having to wait to a certain age to be able to draw down money over time. And so when you looked at this most recent one you mentioned is out in Tempe, right?

Tony Guerra: Mmhmm. Yep.

Tim Ulbrich: Was that connection because you know the area from being out there previously? Or how do you, I guess how do you approach real estate investing outside of your backyard and feeling comfortable — I’m assuming are you working with a property manager? What does that look like kind of day-to-day on those rentals?

Tony Guerra: OK, well let me give you the big picture. And again, this is kind of advanced investing. Let me actually talk a little bit about just buying a home, and then I’ll talk about this more advanced investing. So if you are — let me talk first about a single person. If you’re a single person coming out of college, and you’re going to buy a home, buy a home as if it were a — my thought is to buy a home as if it were a rental, and make sure that you have at least two other rooms that you’re renting out to other people or at least one other room. Don’t buy a house with just one toilet. Make sure there are two toilets because if you have one toilet, it’s an emergency if it doesn’t work. And that’s my first thing is get cash flow from the place that you’re living in. If you are married, and you’re like, I am not living with anyone anymore, that time is done, we are grownups now, I’m not doing that — and that was — but my wife and I did have somebody always in the basement while we were in residency here. Then my thought with maybe what you and Jess are thinking about is to start thinking about using a team approach. So my wife is a great lurker. She loves to look at homes, so if I say, ‘Hey, can you look at houses here?’ and so forth, that would be something she would be all over it. And then I would be the one that’s crunching the numbers, like, ‘Oh, that’s not going to cash flow at all.’ ‘But it looks so good!’ ‘No, the cash flow is terrible.’ You know? So when I looked at this Tempe home, I almost pulled the trigger on a house — and this is how hot the market is. They asked me to waive the appraisal. So I would pay in if it didn’t appraise. And I was close to doing it. It was $185,000 for a two-bedroom, and I just couldn’t do it. You know, my sensor was going off, like don’t do it, don’t do it. But you want the house! Don’t do it, don’t do it. And then I talked to my wife, and she’s like, ‘No. That’s dumb. Don’t do that.’ So always bring your wife in. She’s turned down a number of the ones that I was like, ‘Oh, I love this one!’ She’s like, ‘No. Why? I just don’t feel good about it.’ And I’ve learned over my 10 years, now almost 11 years of marriage, ‘I don’t feel good about it’ — you want to listen to that sentence. Always, always. But when I went from the two-bedroom that I didn’t buy, I bought a place that’s now a three-bedroom, two-bath in the same place. It’s a mile from a Starbucks and a Target. That seems to be — follow people that are smarter. If you’re trying to go into an up-and-coming area, if you see a Target moving in and then a Starbucks, those are really smart people. Follow those guys. But if you’re going in, if you and Jess are looking for a place, I would start in terms of looking at one, but the other caveat is that I was looking in four different areas of the country so I could see what’s going on. So at Tempe, 85281, 85284; I was looking in Baltimore, 21230, 21224, where I think Tim Baker is, I was looking in Gainesville, Florida, I don’t remember the zip code, and then I was looking in Ocean City, Maryland. So four places I knew, but I was looking at four different markets. And Tempe, in many ways, I just wanted it. My parents are going to end up moving to Arizona, there are a lot of reasons I picked it, but I was looking at different areas, so I didn’t have this kind of myopic view. And I think, not to keep talking too long, but when you’re looking at pharmacy school admissions — I help a lot of pre-pharmacy people — if you’re trying to get the best deal from one school, you might not get the best deal because you’re not looking at all the schools. Just as you know, you’re looking at one repayment plan. You want to look at all the repayment plans. But that was my kind of thought. And in terms of who I had there, Lisa Schofield (?) is my contact there in Arizona, she’s been a realtor for 17 years, I’ve done other deals with her when I was there. Having somebody that’s knowledgeable with investing. You don’t want just a real estate agent, especially not someone that’s related to you. You want someone that specializes in working with investors.

Tim Ulbrich: Great stuff. And to wrap up this section on real estate, I would reference listeners back to episodes 040 and 041, we had Nate Hedrick, the Real Estate RPH on, we talk about 10 things every pharmacist should know about home buying. And I think, Tony, I really appreciate — we haven’t talked as much on this podcast about real estate investing, but I think right time, right place, for many pharmacists, it’s a great move to think about obviously building your own financial foundation and house in order first, but when the right time is there — and I think for many listeners, that may already be there — to be pursuing real estate investing as an alternative way to diversify their investments at large. So I have a couple kind of next-level questions that are not related to any specific topic here, but as I hear this conversation to you, what sticks out to me is that you’re incredibly motivated. You obviously have a significant drive. You have an entrepreneurial mindset. You’re creative in the way that you think; you see alternative revenue streams. You’re willing to look at things that are in an outside-of-the-box way. Where does that come from? Where do you attribute to having that skill set? Is that something you feel like was taught by your parents? Have there been mentor that influenced you? Where would you say that’s come from?

Tony Guerra: This might be disappointing, but its fear. Absolute terror. And it comes from when I started, and I came back to Maryland after four years of being in Arizona, I had something go on with my leg, and I thought it was some kind of rheumatoid arthritis or something like that. It ended up being that I was standing 12 hours a day, and my IT bands were pulling so hard on my knee that I was in knee pain, but I actually, you know, I had to get it so I had a stool that I could sit on, and then I really thought I was going to lose my career. So I thought I was going to go to — I didn’t know what I was going to go to. And so that fear and then also watching the collapse of the real estate market, I was a little better prepared there, but I went from a $253,000 income to doing residency with my wife. So I went from $253,000 to $40,000. So seeing those two drops, I wish I could say I’m motivated by some great, entrepreneurial spirit, all these things, but it’s just fear of not having money. And I think people that maybe have gone through the Great Depression had this kind of mindset, maybe people that were crushed by the drop in ‘08 had this mindset. But really, it’s just that I was really fearful. But the most important caveat in terms of entrepreneurship is to give, ask and receive. So I continue to give without hope of getting anything back, and things come back to you. But that’s kind of my mindset. I’m a little bit scared about money, and that’s why I have two years’ worth of income in my savings account. That’s pathologic to have that much there. But I’m just scared of going through that again, and I never want to have to take a job or a career that takes me away from my children, makes me into a person that comes home that is just so dissatisfied with my work that I’m taking it out on my family, and I feel like that maybe happens a lot. And I just didn’t want to go back there again, ever again.

Tim Ulbrich: So obviously, there’s the fear of money there, which obviously is real. But as I also look at the work you’re doing on the Pharmacy Leaders podcast, I can tell there’s a very intentional pathway of shaping future leaders of the profession that is beyond just wanting to create revenue streams. So as you think about the work that you’re doing there and even some of your other entrepreneurial work, what are you hoping down the road to look back and say, this is what I was trying to do, this is what I was accomplishing. It’s a thought that’s been hanging with me a lot over the last year of, when I’m 70-75, you’re in retirement, what am I going to look back and say, this is what I was trying to achieve, this was the goal that I was going after. So with your work around the pharmacy leaders podcast, developing future leaders, maybe even modeling kind of entrepreneurship, what is that goal for you? What is that pathway?

Tony Guerra: I see time differently. I can’t see really past dinner. I’m very short-term; my wife is very long-term. And usually, people come together that way. So something will really bother me that might be due three weeks from now but I feel like I have to get it done now. So I guess when I look at what’s going on with pharmacy, I see, I guess I’m really scared for them in many ways as a parent who looks at it, and I know that certain students are going to be absolutely fine. These are the kind of national candidates, I look at their resumes, their CVs, what they’ve done, and what they’ve done differently is they’ve invested in other people. And I guess I just fear for them, and that’s why I keep interviewing them and giving them a space to be interviewed so that they can share what they have with the other people that may be making some mistakes. And you can never change someone’s mind, but what you can do is put out the people that are doing it right and expose them to those people. Casey Rathburn, for example, from the University of Houston, comes up, Dallas Tolburg (?) from University of Maryland, (inaudible name) are names that come to mind. These are the people that have invested so much in their pharmacy education in helping other people while they were in pharmacy school that it all came back to them — in the residencies they wanted, the career and eventually the careers they want, so I’m just seeing that if you just try to get through pharmacy school and you’re not known for anything, as Blair Thielemier says, you’re going to be in trouble. But if you continue to invest in other people as Ahmad Ahmad (?) who just started the Your Power Pursuit of Purpose podcast, those are the kinds of people that are going to have no problem. So that’s what my drive comes from. It’s just like, look, I made a bunch of mistakes when I came out. I think I can help a lot of people if I can expose other people to these leaders that are moving and shaping their own lives and other people’s lives.

Tim Ulbrich: Great wisdom there. And if our listeners have not yet checked out the Pharmacy Leaders podcast, please do. You’ve done an awesome job with that podcast, super inspirational, I think motivational for students and really helping shape the future of these leaders. I think you’re, what? 129, 130 episodes in already? Something like that?

Tony Guerra: Yeah, like I said, that’s kind of pathologic too. I mean, I do 3-4 episodes a week. Casey Rathburn (?) said, ‘Hey, can I do some episodes?’ I was like, OK, and she gave me seven episodes in three days. So you know, I wanted to make a space, but again, it’s so in line with what I do. I’m just a people-y person, so I like to talk to people. So it’s not work. And you know, if you’re doing something that you love, you’ll never work a day in your life.

Tim Ulbrich: So we’ll link to that in the show notes. Again, that’s the Pharmacy Leaders podcast. Now, one final — it’s actually kind of a split question — but I want to end here because I would be remiss if we didn’t talk about family. I know it’s important to you, you’re a father of triplets. You’ve got all of these things going on, your day job and your real estate investing, your book, your podcast. So two questions I have here for you that I know will be inspirational for me and probably even help me as well in my own journey. How do you balance all of this with the kids and obviously a marriage? And then second to that, how has some of these ventures in your financial success allowed you and created the space to enjoy the time with family that I perceive to be so important for you?

Tony Guerra: OK. You know, marry the right person.

Tim Ulbrich: Yes, Amen.

Tony Guerra: I hate to say that, it’s kind of a cliche. But man, marry the right person. But the one thing that we did was we did the Five Love Languages book. And I’m physical, which means that it’s better for her to tap me on the shoulder than to say anything to me when she comes home. And hers is service. And I can’t believe I didn’t know this until about seven or eight years in our marriage, but that means that the things that I do, making sure the house is clean when she comes home, it’s the first thing she sees is clean house, not extra work to do after a long day at the VA. So that’s my first recommendation is figure out which love language you have and which love language your spouse has because then you can know what’s important to them. So that allows the marriage to work well. And you’ve talked about “The Millionaire Next Door,” and most millionaires are married with three kids, and that’s the first thing. That’s the strength. But the other thing was — I guess I took for granted, and I didn’t do the episode, I should have, but the Father’s Day episode — I took for granted that 100,000 pharmacists each Father’s Day are probably working, you know, men and women. And I took for granted that this Sunday, I could be with my kids, coach their soccer team, and I think that was the other part is that I work so much because I’m fighting for that time to not have to ever say, ‘Dad’s got to work.’ And my one daughter just absolutely threw a dagger at us one morning. She’s like, ‘Daddy, you always get to come to the parties on Friday. Why does Mommy never get to come?’ And I was just like, oh my gosh, how do I answer this? And so I made sure to — I was like, ‘Daddy just doesn’t make enough money yet. And when Daddy makes enough money, then there’s going to be no problem with Mom coming to everything.’ She’s like, ‘Well, Daddy, you just need to work another job.’ And so I think too many pharmacists accept that that’s just how it is, I work weekends, every other weekend. And I have to tell you, if you follow the steps that you have in your loan course, I can tell you that once they get out of that debt, they could do a 32-hour week or a 24-hour week, no problem. And then they would have, they could stop having those conversations with their children, and they could have really good conversations like, you know, wasn’t that a great game that we had on Sunday?

Tim Ulbrich: Tony, great stuff. And I know your work has been an inspiration to me. I appreciate you taking time to come on this podcast, I appreciate your support of the YFP podcast. And I’m sure we’ll be finding lots of opportunities to partner in the future. So thank you again for coming on today’s episode, I appreciate it.

Tony Guerra: Yeah, I appreciate it too. Thanks so much, Tim.

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YFP 049: Ask Tim & Tim Theme Hour (Pay Off the Home Early or Invest?)

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On this Ask Tim & Tim episode of the Your Financial Pharmacist Podcast, we take a listener question from Michael in Columbus, OH that has stimulated lots of conversation and debate in the YFP Facebook Group…’should I pay off my house early or would I be better off refinancing, extending the term and investing the difference?’

If you have a question you would like to have featured on the show, shoot us an email at [email protected]

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up everybody? Welcome to Episode 049 of the Your Financial Pharmacist podcast. Excited to be alongside Tim Baker as we tackle a great listener question about paying off a home early versus investing the difference for the future. Now, if you don’t own a home, and you’re thinking, you know what, this question doesn’t apply to me, before you hit stop on the play of this podcast, let me encourage you to stay with us. I think this question is really applicable to anybody that’s debating whether or not they should focus on debt repayment, whether that be student loans or in this case, a mortgage, versus investing in the future. So Tim Baker, hard to believe here we are, Episode 049, and that means we’re turning the corner next week on Episode 050 and somewhat of a spoiler alert — almost hitting 50,000 downloads of the podcast. Hard to believe, right?

Tim Baker: Yeah, we always joke, we’re not really sure if that is a good thing or like how we’re doing in the podcast world. But I think 50,000 downloads is a lot. So yeah, I’m excited. I think the podcast has been a great avenue for us to interact with our audiences, and I think it’s been successful so far.

Tim Ulbrich: Yeah, I would agree. And you know, I’m with you. I don’t know what that number means. I don’t know if 50,000, 100,000, 10,000, whatever. But as long as we hear from the listeners that hey, it’s good content that’s providing value and it’s helping, we’re going to keep doing it.
Tim Baker: Definitely.

Tim Ulbrich: And I think we’re having fun doing it. So how often do you get something like this question about the pros and cons of paying down debt, whether it’s student loans or in this case, a mortgage, versus investing? It seems like it comes up all the time, right?

Tim Baker: Yeah, and I definitely get it more in YFP circles than with Script Financial clients. I think ultimately, with a lot of clients I’m working with, it’s still kind of definitely foundational. But it does come up. It’s the same situation with student loans. Do I pay off the student loans? Or do I invest the difference? Like what do I do there? And it’s a tough — you know, you can do the math, which we’re going to go through the example today, but I would say that for this, there’s really no real right answer. I think for this one, there probably is. But it can be definitely shades of gray in terms of which way you go. And I think you know, for this particular question, you got to make sure you have all the information and the advice, like where’s it coming from, that type of thing. But yeah, I mean, it’s a tough one to kind of navigate.

Tim Ulbrich: Absolutely. So let’s jump in and hear the question from Michael in Columbus, Ohio.

Michael: Hey, Tim and Tim. This is Michael from Columbus, Ohio. I have a question about the benefit of paying off a home mortgage. I met with my adviser last week, and he mentioned it would be more beneficial to refinance to a 30-year loan, although I only have five years left on my current one. His rationale was that the banks are giving you the money for next to nothing. And investing the difference in the mortgage payment over 30 years would far exceed the amount of interest that would be paid on a loan. This is completely opposite from everything I know about eliminating debt. What are your thoughts?

Tim Ulbrich: So thank you to Michael for submitting your question on this Ask Tim & Tim episode, we appreciate it. And just a quick shoutout to Michael, he actually was one of my good friends and classmates at Ohio Northern University Class of 2008 — go Polar Bears — so excited you’re a part of the YFP community, really appreciate you taking the time to submit this question because I think it’s probably something that many others are thinking about, and I know something that Jess and I are talking about regularly in terms of whether or not we should pay off the home earlier or whether we should be focusing on other financial goals. So before we jump in and dissect this question, let me first point you to episodes 040 and 041 where we talked about 10 things every pharmacist should know about home buying because in this episode, we’re not going to focus so much on the logistics of home buying itself but rather how to balance the repayment of a mortgage versus other financial goals such as investing. So if you’re listening, and you have other questions about home buying, make sure to check out episodes 040 and 041 where we talk in detail with the Real Estate RPH Dr. Nate Hedrick about home buying. OK, so a couple things I want to recap about Michael’s question, and actually, I want to add in some additional details that he provided on the Facebook page, on the YFP Facebook page, in the Facebook group that is going to help us and be important as we talk about the context of this question. So obviously we know and we heard from Michael, he’s got five years on his current mortgage, which is awesome to begin with, approximately $90,000 left to pay back. And that interest rate, the current interest on his home mortgage is 3.49%. So the suggestion that he got from a financial advisor was to refinance to a 30-year loan, so instead of paying it off in five years, refinance a 30-year loan, which would bring down the monthly payment from approximately $1,500 per month, what he’s paying now, to $500 per month and then invest the difference, which of course would be $1,000 per month that he could then free up and invest. Now, one last piece of information that’s important. If you look at the current 30-year mortgage interest rates, it’s about 4.75%. So his current mortgage rate, 3.49%. He’s got five years left, $90,000 to pay back versus refinancing to a 30-year loan, which would bring up the rate to 4.75%. OK, so Tim, as we start to look at this, I think what would be helpful is if we could spend just a minute or two and break down the math, and let’s get out of the weeds on math, and let’s actually talk about all the other factors that we need to consider on top of the math. So when I look at this, I really am thinking about two different options here that Michael has or that he’s ultimately considering. Option A is to pay off the mortgage, $90,000, pay it off in five years at the current rate, 3.49%, and invest that current mortgage payment, which would be $1,500 a month. After he’s done paying it off in five years, take that entire amount and invest it, $1,500 per month going forward. Option B would be instead of paying it off in five years, would be to refinance to a 30-year mortgage, which would lower the payment from $1,500 down to $500 and investing the difference right away, $1,000 per month rather than waiting five years to invest the full amount. So talk us through the math on those two options, and then we’ll talk through some of the other variables to consider on top of that.

Tim Baker: Yeah, I actually think this is the best way to do it. Obviously, you’re going to have different things that could go on. I mean, he could move and you know, get another mortgage, and that obviously throws a wrench in it. But I think for the best apples-to-apples comparison, Option A, which would be stay the course, you know, pay it off over five years and then invest the $1,500 versus go with the advisor’s advice is probably the best way to measure it. So if we break down the math, for the stay the course Option A scenario, if he were to pay five years to the completion of his loan, he’s going to pay an additional $8,000 in interest paid. So what he actually saves over the course of that is $1.215 million. And basically, the net of that — so if we take out the interest paid, he’s going to net $1.207 million. If we compare that to the advice of his advisor, if he pushes out the loan from five years left and basically refinances it with a 30-year mortgage at 4.75, the interest that he’s going to pay over those 30 years is actually $79,000. So the savings that he gains on this is $1.219, so that is a net of $1.14. So if you compare those two, the net is $1.207 with Option A, and then $1.14 with Option B, which is the refinance.

Tim Ulbrich: Yeah, and I think that’s important. And for those listening, remember what we’re talking about here, the context of Michael’s situation. So five years left on a payoff. Now, the other assumption we made here was an annual rate of return on the investing side of 7%. So I’m going to ask Tim Baker about that in a minute and why we used that number. But remember here, we’re talking about a five-year repayment period. So if somebody’s listening, and you’ve got 20 or 25 years left on your mortgage, I think one of the lessons here to learn is do the math, run the numbers, and obviously, the greater the difference of these rates between your mortgage rate and what you might accrue investing and/or the time period that you have on the payback, obviously these numbers are going to shift and be different. But here what we actually see if we’re looking at this is what I think is the closest apples-to-apples comparison. Both resulting in him paying $1,500 a month over the next 30 years, whether that be Option A, stay the course, all of that going to the mortgage for five years and then all of that for the remaining 25 going toward investing versus Option B, which is the advisor advice, which would be refinancing on a 30-year and balancing that between mortgage and investing over the total 30 years. So I think for me, that’s the apples-to-apples where you as the individual are putting $1,500 a month. And what we see here is actually Option A, pay off the house, and then invest beyond that for the next 25 years, that math actually comes out in favor of that, although for your situation, those numbers may be off or differ slightly. Now, before we talk about the other variables to consider — because I think there’s lots of variables to consider, even if the math wasn’t favorable in terms of paying off the home, Tim Baker, talk us through the 7% because some people might be wondering, why are you using 7% when it comes to the assumed average rate of return on the investing side?

Tim Baker: Typically, when I do any type of calculations for you know, long-term investments, I typically use 7%. Now, with the market has shown over long periods of time — this is not, you know, buying in and out of different types of stocks, it’s basically buying the market and having it take care of you over long periods of time. It will typically return 10%, you know, as an annual rate of return, on average, and then 7% is basically what that is if you take out inflation. So 7 — I’ve seen some people use 7, 8% — that’s typically the best, kind of the — I wouldn’t say industry standard — but that’s typically what I see a lot of advisors use when they’re saying, OK, let’s do a nest egg calculation, how much do you use? And that’s typically what the market will return over long periods of time.

Tim Ulbrich: Yeah. I think that’s important context because obviously, when we look at a mortgage payment or student loan payment, that’s typically a fixed interest rate. You know exactly what you’re going to get if you pay it off early, which obviously when we look at the investing side, we’re making some assumptions. And here, we’re using that 7% number. So just to recap here on the math, for Michael’s situation if we’re comparing that Option A of pay off in five years and then take the whole mortgage payment and invest it over 25 years beyond that, versus Option B, the advisor advice being refinance to 30 years, invest some of it and then pay off the house over 30 years, here the math actually comes out in favor of paying off the home early. Now…

Tim Baker: Which we were surprised by that.

Tim Ulbrich: We were. And I think that to me, because as I look back at the discussion on the Facebook group, myself included, I jumped to conclusions right away. Now, people who know me, you know I’m going to air on the side of pay it off, but I think the assumption is whether you’re on the side of pay it off or whether you’re on the side of invest it, do the math, right? Do the math, and then after you do the math, start to ask yourself, what are the other variables beyond the math that you need to consider? So Tim Baker, when I think about debt repayment, whether it’s a home or student loans, versus investing, beyond the math, usually the No. 1 variable I’m looking at is what is somebody’s feelings toward the debt? And what peace of mind, if any, might they have about getting that off their shoulders? And so as you look at this situation here, even in the context of you working with clients, how do you typically talk somebody through that? And how does that factor in as a variable?

Tim Baker: Yeah, I mean, I think it comes down to — we talk about this a lot in the student loan course — it kind of comes down to like, well, how does this particular debt make you feel? Some people, they look at mortgage debt and they’re like, well, you know, it’s a use asset, I know it’s going to appreciate over the long term, so it’s OK. I don’t mind having that for 20, 30 years. Now, it might change, you know, if he’s been paying this for 25 years or 15 years or whatever the circumstances for this and then to push it out again, that might be a different factor. But I typically — and this is kind of where I think, you know, having a conversation, me asking questions and getting the heck out the way and saying, and you know, I don’t work with Michael, but you know, some of the questions I would ask him is how does he feel, how does he feel about the debt, the mortgage debt? And I know Tim, you have what he originally wrote on Facebook in terms of his feelings towards that. So can you read that off real quick?

Tim Ulbrich: Yeah, I think it’s a great post. It gives us some insight, I think, into how he’s feeling about it overall. So he says, and this was in response to what you had asked him about fees and whatnot involved, and he said, ‘We haven’t decided what to do yet. The idea of having no mortgage in five years or less sounds amazing. However, I know that the best opportunity to create wealth is now so the money has time to grow and compound.’

Tim Baker: So I guess like I would say that, and be like, yes that is true. And obviously in this situation, we saw that that wasn’t true. Now I guess if you use a little different assumption, maybe 8% or if the interest rates weren’t that different for the house, maybe that were true. But in this case, it’s not necessarily the best play. But you know, if I hear a client, say things like ‘amazing’ or ‘anxious’ on the other end of the spectrum, to me, that carries weight. And the math is one thing, but you know, the idea for Michael not to have a mortgage — and we always preach financial freedom. What is one of the big probably milestones to create financial freedom for yourself? It’s probably paying the mortgage off. Now, having $1.1, $1.2 million in the bank is not too bad either, but I think that has to play a part in this. And you know, I just, I cringe at some of these advisors and the advice because I know that it’s probably not necessarily what’s in the best interest or it’s tone deaf to what the client actually wants. So I think that’s the point of the question and the thread that we went through was OK, what are some of the other competing factors that are going on here?

Tim Ulbrich: Yeah, I think there’s so much blanket advice out there too.

Tim Baker: Yeah.

Tim Ulbrich: I think that’s why it was so enlightening to actually run the numbers. Like, you know, if the interest rate market here were three years ago when you could refinance on a 2.75, this math looks different, right?

Tim Baker: Sure.

Tim Ulbrich: Or if you’re assuming 8 or 9 or 10% on the investments or you’re assuming 20 years on a mortgage, so I think that’s a great take-home point for the listeners is to run the numbers first. Don’t get hung up on only the numbers, but you’ve got to see the math. But then layer on all these other things that we’re talking about because for me personally, even if this situation were to be different and let’s say that the advisor advice would net $1.2, and you know, paying it off in five years and going with Option A would net $1.1, personally, I’m probably still going to pay it off because of all these other benefits. Somebody else might look at that and be like, ‘Tim, you’re crazy. You’re leaving $100,000 on the table.’ And what I would say to that is, you know, for me personally, and as I think about peace of mind and flexibility and options and all these other things, is I look at the difference of $100,000, which is going to be further minimized, that difference, when we think about, oh by the way, investing’s not done in 30 years. That’s going to be taken out another 20 or 30 or 40 more, you know, now we’re talking about the difference of what is the total of maybe $3 million versus $2.9 or $2.8, whatever. I’m going to take that trade all day. But other people might have different beliefs or philosophies, which is OK. I think it’s a matter of doing the math then evaluating what it means for your own personal situation. So I think we would take some flack from people on the Facebook group if we didn’t address the tax advantages of home ownership. And so how, if at all, would you factor that in terms of being a plus for carrying out a mortgage for as long as you can?

Tim Baker: Yeah, I don’t know. I mean, I hear taxes like a big mover of the needle for a lot of things that we do financially, but I really think it should be a secondary thing. Like obviously, you know, the bigger that your estate is or the bigger that your balance sheet is, we’re talking a lot more money, but I think just to have a mortgage to have a mortgage to get a tax break, I don’t know. I mean, I think there are other things that you can do. I think with the new tax code, you know, they’re capping that. So $10,000 basically per household is what you get. So it doesn’t really help you too much in high cost of living areas, which Columbus, Ohio, is not. But I think it definitely plays a part in this, the tax advantage and being able to write off that interest. But I think that is very much a tertiary thing that, you know, should be considered. And obviously, we just went through tax season and somebody had to pay Uncle Sam a lot more out of pocket than they’re used to saying, ‘Tim, you’re crazy,’ but I mean, I think real estate can be great from you know, basically, sheltering assets that are tax advantaged. But I think in this particular scenario, to me, it wouldn’t be a major factor in my decision because again, we were talking about do we pay this thing off in five years and be free of debt? Or do we just have it hang over us for 30 years? And obviously, I’m a little bit biased as well, but I think the tax situation should be considered but not necessarily the main driver.

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

Sponsor: Today’s episode of the Your Financial Pharmacist podcast is sponsored by “Seven Figure Pharmacist,” the No. 1 financial resources for pharmacists and pharmacy students. Written by pharmacists for pharmacists, “Seven Figure Pharmacist” will help you get on the path towards building wealth and achieving financial freedom. Specifically, you will learn about how to manage multiple competing financial priorities, strategies to eliminate your student loans and other debt, how to increase your income, the basics of investing, and what to look for when hiring a financial advisor. Head on over to sevenfigurepharmacist.com and use the coupon code “YFP” for 15% off your order of the book.

Tim Ulbrich: And now back to today’s episode of the Your Financial Pharmacist podcast.

Tim Ulbrich: I’m with you, and I think two thoughts I had there is I remember, Tim, when you and I did a session at APhA back in Nashville, you had the group literally close their eyes and kind of visualize how they felt about a situation where they no longer have their student loans. And I think for me, for those listening — unless you’re driving of course, don’t do that — but I think whether it’s student loans, credit card debt, mortgage debt, whatever, like visualize this scenario to get a pulse of how you would feel, and let that be a factor in decision-making and really embrace the emotional part of that decision. You know, the other part I was just thinking about, Tim, as you were talking, is thinking back to “The Millionaire Next Door” by Tom Stanley. And you know, as I read through that book, I can’t imagine people that achieve net worth of $1 million or $10 million, like, are they thinking about taxes? Of course. They’re trying to maximize ways that they can take advantage in a legal way and minimize their tax burden. Of course. But is that a primary factor of why they became a millionaire? Probably not, right?

Tim Baker: Yeah.

Tim Ulbrich: So is it a consideration? Yes. But should it be driving decisions? And I think, especially with this situation, again, interest rates are coming up a little bit, which is a variable that you have to consider. In five years, who knows? Maybe they’ll be higher, maybe they’ll be lower. But again, I think all the more reason to look at the math.

Tim Baker: Well, and I think the other thing to consider with the tax question is that it’s not, it’s not set in stone that you get the interest on your house is written off every year. It’s just like our conversation about, you know, PSLF and the longevity of that program and that it’s not a guarantee and could the law change? Absolutely. And I think the same is true — now, I think it would be tough for people to swallow that, and obviously, from a political standpoint, it would be tough to move on for that because it does encourage home ownership and all that, but that’s not necessarily a guarantee, either. And I think the new tax code moves in that direction in terms of capping some of it. So that’s something to keep in mind as well.

Tim Ulbrich: So what about — you know, one of the other things I was thinking about, Tim, is in terms of timeline towards the potential date for retirement and how that factors in. So obviously, we know Michael graduates 2008, so he’s — doing some quick — about 10 years or so into his career. And how might this equation differ for you when you’re talking with a client in terms of somebody who’s a new grad versus somebody who’s maybe 20 or 30 years out and a little bit closer to retirement?

Tim Baker: Yeah, so obviously where you are on the spectrum of like your financial maturity I think is probably a good conversation or a good thing to look at. You know, someone that is early 30s, late 20s, that mid-30s maybe, you still have, you know, 30+ years until you can retire. So you have a lot of time to basically right any wrongs. That’s one of the reasons that I love working with young professionals because at previous firms, you could walk in 55 years old with $30,000 in credit card debt and maybe $50,000 in an IRA and say, I want to retire in five years, and it’s not going to happen. It’s just not going to happen. So with younger people, I think that the time can be a double-edged sword. You can use it for good but then wake up one day and be 55 and like, what have I done? So you know, in this particular case, you know, refinancing a mortgage at Michael’s age, obviously it puts him kind of back in line with what probably a lot of his peer group is doing in terms of their ability to work through the debt and pay it off close to retirement age, I feel like that’s what a lot of people is do is they’ll buy a house and as they’re approaching or ending the accumulation stage of gathering stuff and they’re kind of into this protection phase, you know, it flips because now you have this large asset that you own wholly. If you’re later stage of life, maybe this makes a little bit more sense because you can essentially direct more dollars towards your retirements investments that you’re not really afforded once you get clear of the debt. So I think that timing question is important to recognize. And we kind of see this in student loans is we’re like, you know, for some people that are all-in on their student loans, you know, they can be hyper-focused for five, 10 years, but then they still basically have a good part of their career in front of them to begin building assets. For some people, that’s not the case. So maybe in this situation, you’re kind of, you’re fenced in essentially. You’re saying, OK, I’m going to split the difference and put that $1,000 towards the investments and allow that to grow knowing that when I get to that — those things kind of merge — when I get to that finish line, the house is paid in 30 years, but then I also have that nest egg of $1.1 million. So I think that is probably where it makes sense to look at that. But even then, I think I would look at that on a case-by-case basis because you can have people that are in that stage of life and just know that I don’t want the debt hanging over me. And you know, I’ll be as aggressive as I can. And then when I get through it, I know I need to shift my focus from debt destruction to wealth creation, when that’s basically putting that $1,000 or $1,500 like clockwork into the investments and get it to work. So I think it’s a conversation to be had, but to your point, Tim, like I just, you know — and I don’t know if it’s blanket, I don’t want to overly bash someone else’s advice, it’s just not something that, to me, makes a whole lot of sense for this particular case.

Tim Ulbrich: Yeah, and I think as we look at other factors we know about Michael’s situation through comments and discussion on the Facebook group, I think it further kind of points us in the direction — validating the math in this case — but even further pointing us in the direction of the payoff of the mortgage is that we know — Michael shared within the community that he works the Kroger company, and so they’ve had some recent cuts in hours and whanot, which obviously has resulted in a reduction of pay and I think has inserted a component of uncertainty. Obviously, he’s employable. He’s been working for 10 years and whatnot, so I think other options could be on the table, but I think one of the things I could tell is on the back of his mind is that, what is the long-term career play here? And how certain do I feel in terms of being able to depend upon this income? Or do I want to depend upon this income versus having some flexibility and options? Now, the counterargument to that would be well, if you refinance your mortgage, you’re actually freeing up cash that you could use for flexibility if needed within the next five years. I guess I would counter-counterargument that, and say, yes, but if you can really see the next five years through, from there on out, you’ve got flexibility at $1,500 a month that here, we’ve assumed you’ve invested. But what if just life happens? You have options. What if he decides that he wants to work part-time and get involved in real estate investing? Or he wants to do something else? Or there’s further job cuts and they can’t move? He has options with that amount being freed up. And I think Sandy inside the Facebook group nailed this component that everyone must consider when it comes to flexibility. And she said, ‘I wouldn’t have a good feeling about that at all. Only five years left, to committing to 30 more years at a higher interest? And I constantly think, what happens if a catastrophic thing happens to someone in my family and I have to stop working to care for them? I want that mortgage gone ASAP because that is one less thing I want on my plate, worrying if I’m going to lose my house on top of everything else. The thought of committing to that 30 years or more makes me nervous for you.’ So one component I think to think about in terms of this idea of flexibility. Now, Tim, I want to wrap up here by really digging into us thinking about two important factors here: fees when it comes to advisors and investing and making sure we’re factoring that in, and then also the potential bias of where the advice is coming from. So talk me through at least first that option of fees associated with the investing, how much of an impact that can have and making sure you’re also accounting for any fees that are associated with the advising side of it.

Tim Baker: Yeah, so I mean, when I first saw this post, I was like, I kind of, like, cringe a little bit because to me, this is a blatant play to you know, to get the client investing. You know, you see an opportunity there to get the client investing, which basically helps the advisor from a compensation standpoint. So you know, most advisors out there are paid based on assets under management. So as an example, the example that I tell clients, you know, when I explain my fee structure, which is based on income and net worth. So I had a pharmacist at Hopkins where at my last firm, I charged based on assets under management for everything. And you know, I was managing about $100,000 of their portfolio, an IRA, they left Hopkins and they rolled over another $100,000, and my fee essentially doubled. So I was being charged 1% on $100,000. And then the next day, I was being charged, I was charged 1% on $200,000. So the conflict there is obviously, what stirs the drink, what wags the dog’s tail in a lot of advisor’s, their recommendation, is skewed by the fact that they want you to get into investing. And that’s not a bad thing, to get into investing as early as possible, but when you’re looking at things like the balance sheet, and you’re trying to figure out, OK, what’s the best path forward to grow and protect income, grow and protect net worth while keeping the client’s goals in mind? Sometimes, the investments are going to be a secondary thing. It’s not going to be the main thing, or at least for the early part of the client’s financial life. So when I saw this, I’m like, uh, this is like an attempt to basically grow the client’s AUM and charge him there. So he did confirm that his advisor charges based on AUM, so basically, what that means is if he’s putting in $1,000 every year, you know, it’s growing by $12,000 plus how the investment is actually performing. And at the end of the scenario, at the end of the situation, we said that the basically what he would have is what? $1.1 million, right, Tim?

Tim Ulbrich: Yeah, right about there. Yep.

Tim Baker: So if you charge — if you basically take $1.1 million, and you charge 1% on that, that’s $11,000 per year that he’s basically taking out of that account as basically his compensation. Now, the thing to make notice of that or to take note of is that studies have shown even a 1% AUM can erode your ability to build wealth over time. So we say that it’s $1.1 million, but I’ve read studies that up to two-thirds of that sum can be eroded if you put in a 1% AUM fee every year, which sounds crazy. It sounds like that would be false, but we probably can link a few articles, and I think I might have shared one with him, is it doesn’t sound like a lot, 1%, but over 30 years, it can really add up. And it’s worth noting — and my thing with him was, you know, what are all the facts? So if you take out 1% — and obviously, the same would be true if he were to pay it off in five years and then for 25 years, put in $1,500. It would still be on the same fee agreement. He’s still going to be charged that 1%, but I think the, all the conflicts of interest need to be on the table. And I think advisors do a good job of not actually disclosing what those are. And that, to me, is unfortunate.

Tim Ulbrich: Yeah, and I think just asking yourself the question, not necessarily that somebody’s necessarily giving you bad advice, but asking yourself the question: Where is the potential bias coming from? And making sure you’re doing your due diligence and homework to vet that and make sure the recommendation is really the best for your personal situation. And we will link to that article in the show notes and also put a link to a simple savings calculator because I think it’s helpful for people to run some own assumptions themselves and say, hey, if I were to save $1,000 per month for the next 30 years, and let’s say in one situation I get 7%, the other situation I get 6% because of an AUM fee, what’s the difference of that? And I think those numbers and seeing those numbers is really puts a point of emphasis to the discussion we just had about the impact that fees can have because it’s not just the 1% that Michael would have on this $1.1 or $1.2 million in 30 years. It’s the 1% that’s happening over the course of the next 30 years, each and every year. And this situation, again, we don’t know enough about the advisor relationship to say it’s a bad one at all. And we’re not suggesting that. I think we’re just trying to look at the question objectively. But if we take a step back, if somebody’s charging on an AUM model, they do not have a financial motive to tell you to pay off your home or pay off your student loans. But they do have a financial motive to help you grow your investment side, which growing your investment, as you said, is not inherently bad. You just need to look at it in the context of other financial goals. I would also point listeners here, Tim, to episodes 015, 016, and 017, which were still three of my favorite episodes where you and I dissected the financial planning industry, what to look for, questions to ask, how they get paid. And so we’ll link to those in the show notes as well. Now, last question I have for you is obviously, we’re looking at this, we’re looking at Michael’s question in the vacuum, and I know a little bit about Michael’s situation, so I know he has built a good foundation. But we wouldn’t want to also overlook, you know — before we’re talking about paying off the house early or investing the difference, we also would want to still be looking at, hey, where are you at with the other foundational items? Is there credit card debt? Where’s the student loan debt at? Emergency funds, correct? Looking at some of those other pieces?

Tim Baker: Yeah, that and you know, insurance. I think, you know, we talk about a lot of this is growing wealth, accumulating wealth, but how are we protecting it? If we’re going to putting $1,000 a month into your investment portfolio, is there proper life insurance in place? Is there proper disability insurance? What does the consumer debt look like? What’s the emergency fund look like? Are we funding some of those other goals that he has, like maybe it’s vacationing, maybe it’s starting a side business. All these things are important, and obviously they fall on a scale of what’s more important than the next, but I think having that in place is — and at least being asked the question — is ultimately important too. So yeah, the protection of the overall financial balance sheet and the emergency funds I think would be the things that I would look at, even before I would look at growing that nest egg because I think those are, again, kind of the foundational things that we need to have in place before we get into the market and start doing damage there. So that would be the place that I would look at as well.

Tim Ulbrich: So there you have it, Michael, our thoughts on your question. We appreciate you taking the time to submit it, being a part of the community. For those of you that are not yet a part of the YFP Facebook group, you’re missing out on some great conversation, discussion, encouraging one another, people posing questions, getting answers, getting input, different perspectives. So highly encourage you to check that out. We’d love to have you as a part of that community. And Tim, as we wrap up here on a topic that relates to home buying, I also want to give a shoutout to the work that Nate Hedrick is doing over at Real Estate RPH. We had a chance to talk with him last week, obviously we had him on in episodes 040 and 041. We also had him on the blog. And his blog over at Real Estate RPH and the community that he’s building really addressing everything from first-time home buying to real estate investing, I think he’s got a lot of great direction, content and work that he’s doing that would resonate with our community and I think — would you agree? — we had a good conversation with him with some great ideas coming.

Tim Baker: Yeah, great guy, easy to work. I mean, he knows his stuff, and I’ve directed a few clients his way who are going through the home buying process. I wish we had a Nate in every city, and maybe that’s something that we’ll work on. But you know, I think if you haven’t read his stuff or if you’re not following him, check him out and listen to the podcast episode to get a feeling for kind of his voice and his brand and definitely an up-front guy and like, hopefully we have some collaboration here in the future, more collaboration, I would say.

Tim Ulbrich: So for those that haven’t hit yet, or haven’t yet hit stop on the podcast, I think we have to give them an update on the puppy news in your household because you’ve talked about Rover and dogsitting and the desire to get a puppy. So give us the update.

Tim Baker: Yeah, so we — and I talked about, I think I talked about Leo more than I’ve talked about my daughter Olivia on the podcast, which I joke about. But we did Rover last year, and we’re still doing it, and we watched a dog, Leo, and just loved this dog and we actually got a puppy from kind of the same breeder. We had to go the hypoallergenic and things in our household, so we got Benji over the weekend. And Benji is a little Golden Doodle that is a ball of energy and part of the Baker family. And Olivia, who’s 3, is super stoked. She’s bragging about it to her friends about that Benji is her best friend, so it’s super cute. So yeah, our family is growing for sure, the YFP family is growing.

Tim Ulbrich: So we need a picture on the Facebook page — you, Shay, Olivia, Benji, so get us something out there.

Tim Baker: Yes.

Tim Ulbrich: And this is actually going to be a test to see if Jess actually listens to the podcast or not. I don’t think she does. So Jess and the boys have been heckling me for months about getting — it’s been a cat, a dog, both, whatever — and I think I’m finally about to cave on a Golden. So if she’s listening, I’m into the commitment, we’re going to do it. It’s a matter of time, so we’ll let the group know when that happens as well.

Tim Baker: So if Jess listens to this, basically does that unlock the dog?

Tim Ulbrich: That’s it.

Tim Baker: OK. Alright.

Tim Ulbrich: And it’s right there, so if she doesn’t, it’s not happening I guess, right?

Tim Baker: Right. And I can’t tamper, right? It has to come naturally if she listens to it.

Tim Ulbrich: It has to come, yeah, because it really is too big assumptions. One, does she listen? And two, does she actually listen all the way through? So we’re going to find out. Well good stuff, really appreciate it, Tim, as always and to the YFP community, constantly we’re appreciative of this group and what we’ve been able to do in providing great content and the feedback that you’ve given us, so thank you all. We look forward to next week’s episode.

 

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YFP 043: Ask Tim & Tim Theme Hour (Investing 101)

Posted on by yfpadmin

 

On this Ask Tim & Tim episode of the Your Financial Pharmacist Podcast, we take three YFP community member questions about investing. We discuss investment terminology, considerations for choosing investments, where non-retirement accounts come into play and the pros/cons of target date funds.

If you have a question you would like to have featured on the show, shoot us an e-mail at [email protected]

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 043 of the Your Financial Pharmacist podcast. We’re excited to be here with you doing another “Ask Tim & Tim” episode this week. So if you missed last week’s episode, make sure to go back and check it out as we feature two listener questions on student loans. As a reminder, if you have a question you’d like to have featured on the show, shoot us an email at [email protected]. Before we jump into today’s listener’s questions, I want to mention that just this past weekend, we announced that we are looking for 50 beta testers to jump into our YFP online student loan course that we’re getting ready to launch here in a couple months. Now, for the first 50 that sign up, we’re going to be offering the course at half price, so it’s going to be $179 instead of $349 when it will be fully launched early this summer. And you can head on over to courses.yourfinancialpharmacist.com, again that’s courses.yourfinancialpharmacist.com. And if you use the coupon code LOANRX, that will get you 50% off for the first 50 that sign up to be a beta tester. So again, make sure you head on over there quick. We’re going to take the first 50 that come, then we’re going to close it. We’re going to get feedback from that group, make final adjustments, and then we’re going to be launching that course later in June. So again, courses.yourfinancialpharmacist.com, coupon code LOANRX. So Tim Baker, investing. I think we maybe is this the first time we’re actually digging in to talk about investing? I know we get a lot of people that say, ‘Hey, you guys need to be talking about investing a little bit more.’

Tim Baker: Yeah, I think so. We’re very heavy on the loan, or the student loan side. And it’s funny, you talk about us launching the course or at least the beta test group, and those spots are going fast so it’s kind of interesting to see that there’s obviously an interest there, but I think equally in the investment side of things, there’s a lot of interest and I think there’s a lot of people that are confused about how to start and where to begin, and that’s encouraging too because I think we’re looking outside of the world of student loans, and I think it’s something that we need to do. And I think we’re going to be more focused on the investment stuff going forward too.

Tim Ulbrich: Yeah, I think we’ve been hesitant on some level, not because of course we know people are interested in it, but I think one of our concerns especially knowing lots of people are with student loans and trying to build a solid foundation is that is there a concern, are people looking at this topic of investing in a silo. And so I think that’s a good preface to just our conversation as we talk about the investing questions that came in to remind our listeners, hey, to take a step back, that investing is one part of the financial plan and to figure out exactly where it fits in for your own plan. Alright, well let’s jump in with our first listener question on investing, which comes from Latonia from sunny Los Angeles.

Latonia: Hi, Tim and Tim. This is Latonia Lou (?) from sunny Los Angeles, California. I have a couple questions for you today. The first being what strategies do you have for investments in stocks, bonds and real estate? And secondly, what do you recommend for choosing different types of investment options? And what funds do you recommend for retirement and the 401k?

Tim Ulbrich: Thank you, Latonia for submitting your question. We really appreciate it. And I love your question because I think while it’s rather broad, I think it gives us a good launching point to just talk broadly about investments almost an Investing 101, talk over some terminology. And I think here what’s interesting is I hear Latonia’s question is to me, there’s almost a question behind the question. So Tim Baker, before we jump into answering her question and talking more specifically about the terminology and 401ks and Roth IRAs and asset allocation and all that stuff, what are some of the other factors that you want somebody to be thinking about when it comes to their financial situation before they talk goals related to investing?

Tim Baker: Yeah, I think to get back to your point, Tim, of looking at investing in a silo, I think ultimately, before you really dip your toe into the investment waters, you’re going to want really to focus on a few things. One is what does your debt situation look like, particularly the consumer debt. And we talk about this in Episode 026 of baby stepping into your financial plan, the two things to focus on first. What does your consumer debt look like? And also, what’s your emergency fund look like? And I think that’s why we’re a little bit hesitant is we don’t want people to wade down to the waters of investing without really having that sound foundation in place. If you start building a house without the foundation, it’s going to crumble. So ultimately, you want a good emergency fund to have funds available if something hits the fan. And then you want to make sure that your debt situation is in check. And I think like we mentioned last time, a lot of people draw the line of when to invest differently. So some people want to get through their student loans as quickly as possible before they really take a serious step toward investing. Other people have a little bit of a different mentality, so I think having an inventory of that, in a sense, is smart too. With that said, you know, there’s a few types of investing that is worth taking note of is, you know, if you have a retirement plan that offers a match, more often than not, you want to take advantage of that because that’s essentially free money or 100% return on your investment. Anything you put in, you’ll get 100% return. So that’s one thing to consider. But I think also just kind of an overarching, you know, question to ask is what is your appetite for risk? And for a lot of people, that’s really difficult to quantify. And for a lot of people, especially young people that have kind of come to the market maybe in a time of, you know, recession or market volatility, that we as kind of a generation are scared to wade into the waters of investment. And that really shouldn’t be that way, so what I see with a lot of clients is a little bit of a hesitancy to take intelligent risk and put your money into the market. So I know that’s kind of a very big picture look at things, but I think those would be some questions to ask yourself and like I said, easier said than done, right?

Tim Ulbrich: Absolutely. And I think before we jump into Latonia’s question specifically about choosing different types of investment options, to me this is a good place to just provide that reminder of we have to ultimately know what goal we’re shooting for and why we’re shooting for that goal. And I think that’s going to become evident as we begin this discussion because as we get into terminology and we talk matches and asset allocation and tax advantage, vehicles, 401ks, 403bs, Roths, etc. is that I think it can easily become somewhat overwhelming, especially when you consider with all the other priorities that somebody’s working on. And you’ve heard us talk before on this podcast about having a why behind what you’re doing, whether that’s saving for the future or whether that’s paying off debt, and I think that’s critical here because ultimately, we have to know why are we even doing this in the first place? Why are we putting away 10, 15, 20% potentially of our income towards retirement? Why are we choosing asset allocation models and trying to figure out how we can best invest for the future and keep fees down? So I think that purpose and vision of what we’re trying to do, and I would also reference listeners back to the very beginning of the podcast, Episodes 002 and 003, “Why Every Pharmacist Should be a Millionaire,” where you interviewed me, Tim, and we kind of walked through the what is a nest egg calculation. How do you get to that number? And ultimately again, before we talk about what you’re doing this month or next month, ultimately trying to figure out exactly what are we trying to achieve in the future?

Tim Baker: Yeah, definitely.

Tim Ulbrich: Alright, so let me ask the somewhat naive and I guess beginner question about why do we even need to invest in the first place? You know, we’re going to talk about risk and fees and potential for losing money and all of these things, why do we even need to go there to begin with?

Tim Baker: Yeah. I think it’s important to understand that you face major roadblocks when you’re trying to accumulate wealth and build that nest egg that you mentioned. And the two big ones are taxes and the inflation. So if you, what I often tell clients, if you take a dollar and put that under your mattress, so kind of like a savings account that doesn’t offer any type of interest rate, if you put that under your mattress with average inflation, if you wait 25 years and take that dollar out from underneath your mattress, it’s going to be worth about $.46. So that inflation essentially chops your purchasing power in half. So what investing does is allows you to really kind of get ahead of that curve and allow things like capital appreciation and dividends and that whole thing that we talk about on the ugly side of debt, the interest on top of interest, we kind of turn the tables, and we allow that to work in our advantage. And that’s basically what investing is. The other thing I mentioned is taxes. Obviously, no such thing as a free lunch, so the government wants their piece of the pie. So really, your investments are in that arena. So we have to do some tax planning to basically be able to grow your net worth in a way that is most efficient and where you’re paying Uncle Sam the least amount of money as possible. So again, investment is a major player in that space. So for people that say, ‘Hey, I’d rather just sit money in a savings account and let it go and not really have to worry about the investment piece’ — and I don’t see that a whole lot, but I do see some very, very conservative approach to investing — you’re really going to damage your ability to build that nest egg of $2.5 or $3 or $4 million or whatever the amount is, which for many pharmacists out there, that’s where they’re going to need to be in terms of their retirement savings. So the investment piece is hypercritical to make sure that you’re taking advantage of the compounding interest, the capital appreciations, the dividends and all that.

Tim Ulbrich: So once we establish that investing is in part essential to us achieving our financial goals, then the question becomes how do we invest? Where do we put that money to start to achieve those returns that ultimately are going to combat against the issues you mentioned around inflation and taxes? So I think that gets to the basics of the different investment vehicles, which obviously, there’s more than these four. But I think the four that are our audience should really be thinking about at this point: cash, cash equivalent, bonds, stocks and real estate, as Latonia mentioned in her question. So cash and cash equivalents, Tim, how would you broadly define — obviously, we all know what cash is, but I think it’s that term “cash equivalents” that often gets people hung up.

Tim Baker: Yeah, that could be things like different, not mutual funds, money market funds, that type of thing. You’ll want something that is highly that you can get to, in some cases it could be things like commercial paper, these are things that aren’t necessarily near and dear to what a typical individual investor would have. But typically when I explain cash and cash equivalents, it’s cash what everybody and then kind of like a money market fund, which is not necessarily cash. It’s a little bit less liquid, but that’s kind of what I want clients to understand in that regard.

Tim Ulbrich: Yeah, so I think cash and cash equivalents as low-risk, it’s liquid, it’s accessible, obviously at varying degrees. But also with that low risk, you’re probably not going to see much, if any, upside. And I think all of us are probably feeling that right now in some of our savings account with typical banks, which then takes us up one level, so I think of a bond. So bonds, you know, is I think about a bond, I think about a bond as a debt investment. So I have fond memories actually of my great-great-grandmother buying me EE bonds every Christmas, they’d be hanging on the tree. But it’s a debt investment, so whether it’s the federal government, whether it’s a local government, whether it’s a corporation that ultimately is trying to raise money, it’s a debt investment that you take on. And in return for investing in that, you’re guaranteed a certain interest rate or return on your money. And obviously, there’s different time periods, five, 10, 15, 20, 25 years, and historically, what have you seen, Tim, in terms of rates of return and risk levels when you think of bonds?

Tim Baker: Yeah, I mean, they’re kind of all over the place. So I guess it depends on the type of bonds. Most people when they think of bonds, they think of like government bonds. So on the federal side of things, you have things like bills, which are more shorter term, notes, which are T-notes, which are a little bit longer term, and then treasury bonds, which are the longer term bonds. So again, typically with interest rates, interest rates pay a pivotal part. Typically, when interest rates go up, the values of bonds go down and vice versa. So the bonds and the fixed income market, which is another way to say bonds, have struggled of late just because interest rates have been down. But just like stocks, you can have different types of bonds out there. So if YFP was a publicly traded company, and we had stocks, we could also issue a bond offering. So we could say, ‘Hey, listeners, we’re trying to raise money. Here’s a YFP bond, and with a principal of $1,000, but we agree to pay you 4% semi-annually, twice a year on that particular bond.’ So bonds can be very diverse. And you see companies issue bonds, municipalities issue bonds, and everyone has kind of different application that goes along with it. But bonds in a portfolio are typically, they’re cousins to stocks or equities, but they’re typically viewed as a safer approach to investing. So to give you an example, for young people, a typical split in terms of a bond-to-stock ratio might be 80% stocks, 20% bonds. When I’m helping manage my parents’ money, it’s kind of inverted. It’s 20% stocks, 80% bonds, and really the idea behind that is the capital preservation. So bonds are viewed as less risky and less chance for that basically your investment to go to 0. Stocks are more of a wild card where you enjoy more of capital appreciation and dividends, but the dividends aren’t necessarily fixed like an interest payment. So it’s kind of all over the board. I know I’m jumping a little bit into stocks, but I think they’re easier to explain them in tandem. So you know, in the bond market, it kind of depends on terms of return, what you’re looking for, but you’ll get an interest rate that’ll basically provide you income to the portfolio — or when I say income, it’s cash — whereas stocks are more a dividend and capital appreciation play.

Tim Ulbrich: And actually, this is great timing. So last week, you’re sitting down with Jess and I and looking at our overall asset allocation, which is what you were just referring to in terms of distribution between stocks and bonds, and obviously even within those, you get into different funds and so forth. But talk us through, and this in part answers Latonia’s question, talk us through how somebody determines that or in working with a planner determines that. You kind of identify that Jess and I were on full throttle, I think 97% or something equities and really not much at all in the bond market. And we were leaning more towards 90-10ish type of mix. What were some of the factors that were driving you towards that evaluation and getting us to think of different things?

Tim Baker: So typically, what I will do is I will give clients kind of a risk tolerance questionnaire that asks them, I don’t know, eight questions or so. And what that basically does is it spins off this is where your balance should be. So I think for you, Tim, you were 90% in stocks or equities and 10% in bonds or fixed income or cash or cash equivalents. So a 90-10 split. So then my job is to kind of look at it and say, ‘OK, if you were’ — and again, this is talking a very general sense, but if you were a 65-year-old person approaching retirement, and you were a 90-10 split, I would probably would say, that’s a little bit aggressive because what we don’t want to happen is something that happened, what happened in 2008, 2009 where your investments are all tied to the stock market, and then you wake up and you lose 40% of your portfolio. So what I’m basically surveying is your kind of where you’re at in your career, your appetite for risk, and I generally will suggest either staying or sliding a little bit to the left in terms of being more conservative or a little bit to the right in terms of being more aggressive. So there’s a little bit of a science, but a little bit of a kind of an art to it as well. And essentially, what I do is in your guys’ situation, you guys have both your own investments that I’m helping you manage at TD Ameritrade, which is where I custodian, but then you also have, Tim, you have your 401a at the university and a 403b, which have different investments that go into it. So basically, my job is to basically give you a model of that 90-10 split in your Roth IRA that you have at TD Ameritrade and then give you a 90-10 model with the 403b and the 401a. And as you know, when we were kind of going back and forth in the 403b, the little bit of — I don’t want to say sketchy situation — but I kind of went through your prospectuses and things like that, and it was even confusing to me about how the funds are charging and all that kind of stuff, which is a little bit of a different question. But it’s a little bit of art and science together.

Tim Ulbrich: Yeah, and for the listeners to know, he’s being gentle. And it’s humbling for me to admit this, but basically, what we concluded was the 403b that I have is trash. I mean, what did we find on the fee standpoint? That’s insane. Not only was it the number, but then it was even the language within the prospectus. We couldn’t even fully identify where those were coming from and the total amount, right?

Tim Baker: Yeah, it was one of those things where in the disclosures, they say fee about 40 times. And they’re just compounding fees. But the problem is the fees for the funds didn’t match the fees in the prospectus. So, which means basically that there might be other fees that they’re putting into the — yeah, I don’t know. And I think ultimately, we concluded that there’s a number for the 403b that you can call an advisor, so you might call them up and give them the business because — and the problem is like I do this for a living. So if it confuses me, it certainly is going to confuse a pharmacist that basically looks at this maybe an hour a year or two hours a year or once in their life to set it up. So that’s my frustration, that’s kind of like when I approach clients or when I approach any type of like paperwork or agreement, I want brevity and I want basically in plain English because a lot of this stuff is not, and to me, it does nothing but confuses the consumer, and that’s a problem. So getting back to Latonia’s question, ultimately — and I typically will put in cash and cash equivalents and bonds. So like for Tim, if you’re a 90% split, we might have 8% in bonds and 2% in cash, and then 90% in stocks. The real estate item is a different piece. So like I think if you listen to the podcast, we’re all big fans of real estate. You can buy real estate obviously and kind of be your own landlord and do it that way, but you can also buy what’s called a REIT, you can buy a publicly traded REIT, so that’s a Real Estate Investment Trust, which basically pulls together lots of different types of investment property, and then you basically buy shares of that trust. So it’s a way to expose your portfolio to real estate. So typically, my portfolios will have some of that. But again, if you buy an index fund or a S&P 500 index fund, and that’s kind of the next level of investments, a lot of those will have real estate exposure in there. So you know, in terms of the three investment classes, I would say for me, I put bonds and cash equivalents together, and then stocks and those are the two big ones. And then you can slice it as finely as — like I said before we were talking on mic, it could be real estate, it could be merged markets, it could be international. Some people have commodities or a gold allocation. So you can get as complex, but you know, typically you want to keep it simple and go from there.

Tim Ulbrich: Yeah, and they way I look at real estate, and we could talk about this on a lot of other episodes, and I’m not — this is not advice, and I know people will disagree or agree — is that Jess and I are itching to get real estate started, but we’re also looking to other things, saying we need to have these things in place first, and then we’re going to jump into real estate. So I think the timing is key, and for me, obviously we talked about the importance of an employer match and probably getting towards even beyond that and maybe evaluating real estate. So just to go back through those quickly, we talked about cash, cash equivalents, bonds, stocks or what are also known as equities, which essentially is ownership in a company. If you buy stocks in Apple or in Uber or whatever, you actually own a piece of that company. And then you mentioned real estate as well. So we’ve established that investing is important to outpace inflation and to beat taxes. We talked about vehicles by which you can begin to think about how to do that, and we briefly dabbled into asset allocation. Now the question is, where do you begin? Where do you get these things? So obviously you can buy bonds and stocks, etc. in an open market, but most pharmacists are probably going to be thinking, OK, I’m going to start within a 401k or a 403b or Roth IRA or Roth 401k but essentially those being the taxed advantage savings account in which you are then choosing the investments in bonds or stocks or other mutual funds, etc. So Tim Baker, just give us the 30-second kind of high level 401k, 403b, Roth IRA, what they are and how they’re different.

Tim Baker: Right. So I always like to do visuals. And you know this, Tim, because I use like the cat gif every time I explain, you know, investments because basically the inception that goes on here, to kind of reiterate what you’re saying, is you have a vessel, if you will, so that basically is the 401k, the 403b, the Roth or whatever, and inside that cup, we’ll call it a cup, you basically have — and for most people, it’s mutual funds. So it could be a stock mutual fund or a bond mutual fund. And inside of that mutual fund are all the different stocks that you hear about, so Apple and Google and Tesla. And then inside the bond mutual fund, you have all of the bonds like a Detroit bond or a Facebook bond or whatever.

Tim Ulbrich: Hopefully not Facebook.

Tim Baker: Yeah, yeah, exactly. So just think about that in terms of the different layers. So to kind of go all the way back to that original cup that we were talking about, the 401k, 403b, those are generally qualified plans that are provided by your employer. Generally, they’re used to incentivize or attract talent. And the 401k, 403b were originally meant to kind of supplement the pension. So a lot of people are saying, ‘What’s a pension?’ My dad worked for the same company for 40 years. He had basically a pension, and that was the golden handcuffs that basically forced him to stay at his job for that long. And it was basically based on his earnings and the amount of years that he worked on. So when the 401k came around, the company said, ‘Well, let’s ditch the pension and move with that.’ So typically, the 401k company will hire a Fidelity, a Vanguard, a Transmerica or whatever, and they’ll say, ‘Hey, we want you to custody our 401k.’ And then employees basically get individual accounts, so they have their own statements, pick their own investments, generally there’s a match, so the employer will say, ‘Hey, if you put in 5%, we’ll put in 5% matched,’ or whatever the case is. But the offer inside of that 401k or that 403b is typically limited. So you might have 10 or 12 or 15 investments inside of that tax advantage account. So anytime you see Roth in front of any of these types of accounts, an IRA, a 401k, a 403b, anytime you see Roth, you want to think after tax, after-tax money. If it doesn’t have Roth in front of it, it’s typically pre-tax money. So what that means is if you put — typically, now, you can put up to $18,500 of your own dollars into a 401k every year. So say you make $100,000 and say for that year, you put in $10,000. What the government basically taxes you all things else being equal is not $100,000, it’s $90,000. So that money basically flows into your account pre-tax. Now what happens when you distribute that in retirement, when it comes out, it basically is taxed upon distribution. So it either has to be taxed going in or taxed going out. So if you have a Roth 401k, it’s taxed going in, so you make $100,000, you put $10,000 into your Roth 401k, so what the government taxes you on is $100,000 of your income, so you don’t get any type of deduction, but when you go to retire, that Roth 401k, when you distribute that, basically it comes out tax-free. So it’s already been taxed going in, so it doesn’t get taxed going out. And that’s the case with the Roth IRA versus the traditional IRA and all that kind of stuff. So again, sp the big difference is between the 401k and the 403b versus the IRAs, the 401k, 403b are employer-provided or employer-managed. The IRAs, the Individual Retirement Accounts, they’re individually managed by you, and that’s basically the main difference.

Tim Ulbrich: That’s good stuff, and I’m glad we broke that down because a lot of times, I’ll talk with pharmacists, and they’ll say, ‘Hey, I’m putting away whatever, 5% of my income, and my employer’s matching the same into say a 401k or a 403b or a Roth 401k or a Roth 403b.’ But then often that conversation stops there. So I think your point of the vessel, the cup, however you want to look at it, is critical that that’s the vehicle, but then within there, you’re then digging into the asset allocation and actually choosing the investments. And while I think you and I are both certainly in the camp of keeping things simple, there’s some basic things you have to know about strategies of asset allocation and how to keep those fees down, etc. that’s going to have a big impact over 30 or 40 years worth of saving. So Latonia, great question. Thank you for submitting it that we can start this conversation. Obviously, we’re going to have lots more content coming in the future around investing. And I think for me, Tim, this really highlights one of the benefits of a financial planner. And I think back to Episodes 015, 016 and 017 where we broke down exactly what those benefits could be, what you should look for. But investing is only one part of a financial plan, but even within that plan, here we’re talking about looking at how do you minimize your fees and how do you determine the asset allocation models? How do you think about strategy of Roth versus 401k, 403b and the timing of that? And what about the distribution side of things, when you finally get there? And again, investing only one piece of it. But I think a really good financial planner can help you unwind some of that and hopefully take some of the confusion off of your mind there. So let’s take a minute to break to hear from today’s sponsor, and then we’re going to jump in with two more listener questions related to investing.

Sponsor: Hello, Tim Baker here. You know me as team member of Your Financial Pharmacist, co-host of the podcast and one-third of the Tim trifecta. But I am also the founder and owner of Script Financial, a fee-only — that means I’m a fiduciary — financial planning firm dedicated to helping pharmacists achieve financial freedom. We work with pharmacists all over the country every day who look at their financial situation and just don’t know where to start. Why is that? They say, ‘Tim, should I focus on this mountain of student loans? Or should I invest? I think I want to buy a home, but I’m not sure how to prioritize that goal or what that process looks like. I know I need insurance, but I’m confused how much or what kind and paralysis. Blue screen of death.’ There’s a better way. So let’s imagine — actually, first let’s queue the motivational piano music. OK good. Let’s imagine — and you can close your eyes as long as you’re not driving or running on the treadmill, and kudos to those that are doing the ladder — but let’s imagine you have clarity over your goals and how you should prioritize them, you know that this Tim has your back when it comes to your exact student loan strategy or how and where to invest, how much and what kinds of insurance that you need, maybe you’re confused about how much tax to withhold — we file taxes now too — and all the things financial. If you like that script that we’re writing for you — that’s a terrible pun, but let’s go with it — if yes, go to yourfinancialpharmacist.com/scriptfinancial and book a free consult to take that first step towards financial freedom.

Tim Ulbrich: And now back to today’s episode of the Your Financial Pharmacist podcast.

Tim Ulbrich: Alright, let’s jump into our second listener question, which comes from Laura from Pennsylvania.

Laura: Hi, Tim and Tim. It’s Laura from Pennsylvania. Can you talk to us a little bit about non-retirement investments? About six years ago, my husband and I started putting money aside in a Scottrade account. Every few months, we pick and choose a few stocks to buy. But I’m wondering, are there other things we can be doing with this money?

Tim Ulbrich: Thank you, Laura, for taking time to submit your question. We appreciate it. And we’re excited. I think it’s a great follow-up from the one that Latonia submitted where we talked a lot about some of the tax advantage savings accounts, 401k, 403b’s, Roth IRAs, etc. Here, we’re really talking about non-retirement accounts. So you mentioned you and your husband putting money aside in a Scottrade account and trying to then determine where you want to invest that money. So Tim Baker, talk us through — what Laura here is referring to is a non-tax advantage retirement account, so essentially putting money into an account in what I often refer to as the open market. So what are some of the places where somebody might do that? And then even some of the implications tax-wise that people need to be in tune with.

Tim Baker: Yeah, so typically, you know, what we usually call this is an individual, or if it’s with her husband, a joint account. You can also call it a brokerage account. So these are typically names for accounts that are the non-retirement, the IRA type of accounts. So typically, these types of accounts, you really want to drill down to what the why is of this account. So when you set up a brokerage account like this, you know, it’s typically because you’ve either maxed out your $18,500 into your Roth, and you’re maxing out into your 401k, your 403b, or you’re maxing out your IRAs, and basically, this is kind of the spillover into the next investment arena. That’s typically where you see it. Another place that you’ll see individuals do this is when I sit down and go through kind of the find-your-why and essentially, what I’m trying to extract is what are the goals or what are the buckets that we need to basically set up and fill over the next 10, 20 or 30 years? And basically have a plan in place for that. So typically, there’s a lot of short-term goals out there like an emergency fund or I need a sinking fund for travel because I want to go see the orca whales, Tim. Or maybe I need a cat fund or a puppy fund, so you should have a cat fund, Tim. I’m going to have a puppy fund, right?

Tim Ulbrich: Yeah.

Tim Baker: Or a gift fund, we talked about that at the end of last year, where people see spikes in spending, and it’s not necessarily accounted for, so maybe there’s a gift/holiday fund. So typically, I see that, which are kind of more of a near-term, I’m going to spend that within the next 12 months, to the other opposite side of the spectrum, which is retirement. Another place that a brokerage account might fall is, hey, Tim, I know that I want to buy a house in five years, four years, whatever the timeline is. So how do I go about properly saving for that? So typically, what I advise clients is if it gets over a certain amount of time, and we don’t just want to put it in a high-yield savings account, maybe it makes sense to then build out a conservative allocation or a moderate allocation to basically use the market to get a little bit more returns. That’s kind of the in-between, kind of the middle ground of saving for or investing for a goal. There is no tax advantage here at all. So you’re basically funding it with after-tax money, and when it comes out, you basically are taxed on your gain. So there’s long-term capital gains, which are basically any gains that you’ve realized after a year. And those have more preferred tax treatment. And then you have short-term capital gains, and this is basically where you’re buying Facebook one day and then selling it the next day, and it all kind of happens under that year time frame. And typically, those are taxed more aggressively than the long term. What the government wants you to do is basically invest, so invest in a company, invest for the long term, so they penalize people that are kind of moving in and out of investments, by the way, the tax it. So that’s one thing to be considered aware of, and there’s different strategies that you can use in terms of your fixed income or wash sales or tax loss harvesting, which is a little bit kind of probably out of the scope of answering this on the podcast, but those are kind of some of the things to be aware of when you’re investing outside of the retirement-type accounts.

Tim Ulbrich: So Tim, the other thing as I hear Laura’s question just quickly, that as somebody myself who just loves the passive investing approach, and I hear the notion of single stock picking, that makes me a little bit nervous. So just talk for a minute about some of the behavioral biases and some of the things to look out for when people might be getting into the area of single stock picking.

Tim Baker: Yeah, so you know, in terms of behavioral bias, the big thing is confidence buys. So if you’re one of those people that said, ‘Hey, I invested in GM way back in the day or when Ford hit the bottom,’ and then basically you bought it at $4 or whatever it was, and now it’s trading where it is now, you basically create this false sense that you’re the next Warren Buffett. And you know, people that do this for a living, professional money managers, mutual funds, myself included, can’t pick stocks. You can’t pick stocks on a consistent basis in a way that is where you’re not spending a ton of money on information or trading or whatever. So I think that’s the big thing is confidence buys. But I often say that your portfolio should be mostly, if not 100% of it, low-cost index funds. For some people — and I work with some clients that they have an itch to scratch, so they’re like, what do you think about Tesla? Or what do you think about this company? I’m like, I don’t pick stocks. But I can give you my opinion in terms of where it’s trading and where I think it might go. But to me, that should be limited — if you do it at all, it should be limited to 5%, maybe 10% of your portfolio because it is, you’re basically gambling. Most people, all people, they don’t know if the stock’s going up or down, left or right of any particular stock. And the problem with picking individual stocks is you’re basically putting your eggs all in one basket. If you pick an index fund, so people are like, well, what the heck’s an index fund? If you pick an index fund, you’re basically buying the market. So it’s — and an S&P 500 index fund is basically all of them, you own stock in all of the companies on the S&P 500. You can buy an index fund for, a bond index fund, you can buy an index fund for different sectors or things like that. So I would say, be cautious when you’re doing individual stocks. You can look like a genius, but over the course of investing career, it’s very spotty at best, even for people that do it for a living.

Tim Ulbrich: Yeah, and I think a good point there, looking like a genius, remember is you hear stories from other people, usually you’re hearing the good ones and not necessarily the bad ones, right? So I tell people all the time I bought Ford at less than $2 a share. I don’t tell them about buying Circuit City penny stock, which who would go to a Circuit City anymore? Right? What a joke.

Tim Baker: Right, exactly.

Tim Ulbrich: Alright, let’s jump into our third and final listener question of the episode, which is focused on investing, and that comes from Wes in North Carolina.

Wes: Hey, Tim and Tim. This is Wes Hartman from Durham, North Carolina. I had a question for you guys regarding investing. There seems to be a lot of different options out there to invest in, but is it even worth me trying to beat the target date funds?

Tim Ulbrich: Thank you, Wes, for submitting your question. Great one as we follow up on the first two related to investing. So here, we’re talking target date funds. And essentially, I think the way I interpret Wes’ question is it worth messing with trying to pick all these different asset allocations so much in stocks and bonds, etc., or should I just pick a target date fund? Would it be easier? So Tim Baker, why don’t we first just break down exactly what a target date fund is.

Tim Baker: So typically, a target date fund, and usually if you have auto-enrollment in your 401k or 403b, which I am a proponent of — so basically, what auto-enroll is you start with your employer, and they automatically put you at deferring 3 or 4 or 5% of your income into your 401k without you having to do anything. So typically, in that case, they’ll put you into a target date fund, basically probably would be based on your age. So you might have a target date fund for 2050 or 2055 or 2045, depending on your age. And what the target date fund essentially just takes a mix of other funds and it builds out an allocation for you that says, OK, if we’re going to retire in 2055, it might be a 90-10 split that we talked about with Tim early on. So it might be aggressive allocation that says, retirement’s a far way off, let’s basically build the allocation out in mostly stocks, equities, and a little bit of bonds. And as the portfolio, so as we passed through 2018 and now it’s 2025, maybe it’s 80-20. 2035, maybe it’s 70-30, and so on and so forth. So it becomes over time, more and more conservative. So for the individual investor, man, you’re looking at it like, man that’s great. That’s exactly what I would want — basically, someone else to do all the work for me. There’s some pros and cons to that. Typically, the advantage is if you have no idea what you’re doing, that’s probably the best thing to do is basically, get started, get the money into the retirement account. And if they don’t pick it for you, it’s your choice, just pick the target fund and call it a day. Probably the big disadvantage are of target funds is they typically are more conservative than I guess what I would normally advise. And it’s also hard to really determine if you’re going to retire at the time you said you’re going to retire. So for me, if I were to say I was going to retire in 2050, it might be 2060 or 2065 by the time that actually happens. I’ve said I’m going to live to at least age 100, so in that case, like that decade or whatever, I’ve lost out a lot of my portfolio’s earning potential because I went conservative too fast. The other thing is that in some cases, the target date funds can be more expensive and not perform as well as maybe some of the other funds that are provided for you. So there’s obviously a cost to basically that kind of turnkey strategy that depends on the actual investment plan that you’re in. And not all of these are created equal. I work with some clients that have amazing 401k’s and amazing 403b’s, and then I work with some others that are really bad and really — maybe the follow-up question is, how do you know if it’s good or bad? And typically, the first thing that I look at is expense ratio. So in my opinion, a 401k or a 403b, along with target date funds, which many of them have now, should also offer an index fund and a total market index fund, an S&P 500 index fund, that basically says, hey, I can buy the entire market and basically you buy the entire bond market and then call it a day. So if you compare, if you have one of those 401k’s that has that available to you, typically, that’s a little bit of a cheaper option. And you know, with a little bit of tweaking or a once-a-year checkin, you could probably do as good or better compared to the target date funds. So those are typically, that’s typically my advice on target date — they’re not bad. They’re not bad, but they’re probably — dependent on the plan — there’s probably some meat left on the bone in terms of what you can do with your funds.

Tim Ulbrich: Yeah, and I’m thinking even just Wes, I know you’ve been engaged in the YFP Facebook group and kind of following your questions, I can tell you like to nerd out on this stuff, which is awesome. And so my gut says probably for you, you’re going to probably look at some of those fees and performance and etc. and say, ‘You know what, I think I can do better. I can get the fees lower, I can get the performance better. I don’t mind rebalancing and checking my portfolio, etc.’ But I think to your point, Tim, that for many people, and I’m even thinking of the conversation that was flying around this weekend on the Facebook group, there seem to be a lot of feelings of, I just don’t know where to get started. And I think for many people, this could be a great place to start, especially if you know, you know what, I’m putting money in my 401k, but from there, I’m overwhelmed, and I’m not ready at this point in time to take action. I think it’s a great place potentially for somebody to get going but probably not ideal, in my opinion. I mean, I think for some people, it could be an option that they’re pursuing. I am thinking, though, of a handful of pharmacists I’ve talked to that open up their portfolio and they don’t realize that they’ve had a bunch of their money in their 401k just sitting in cash and cash equivalents because they haven’t allocated money. And obviously, there’s an opportunity cost of doing that. So I think for some, a great place to start, but for others when you consider, you know, is it too conservative? Does it match your goals? Does it match your risk profile? What’s the fees? What’s the performance? It may or may not be the best option to move forward. The other thing I think worth highlighting here, Tim, is that what I understand of target funds, the philosophy behind them is that they’re designed to be selected in a way that they’re potentially the only savings vehicle. It’s determining that different breakdown of stocks and bonds and etc. And so if somebody has other investments, in a Roth, in CDs, in real estate, etc., it may be throwing off, obviously, that intended asset allocation. And I think, again, working with somebody or taking a step back to say, ‘What’s the overall goal? And across all of my investments, where am I at? What am I trying to achieve?’

Tim Baker: Yeah, and it becomes more difficult when you’re trying to manage it at a global level, you know, between your own individual investments and then what’s in your employer investments and then by the way, let’s take into account your spouse’s investments. So it can get a little bit complex. But I think ultimately, the one word that I would describe for investing that kind of plays into all these questions is just simplicity. If you can keep it simple, that’s typically the best route to go. In my industry, typically, the more complex it is, generally the more laden it is with fees and the worth it is to the consumer. So there’s some people that look at index funds that are boring — and investing should be boring. The sexier it is, and the more bells and whistles it is, it’s smart beta and alpha and all this other stuff that we try to dress up investing, typically, the worse off the consumer is. So keep it simple, try to come up with an allocation, and I think one of the questions we had here on the notes that we probably didn’t answer, I think I answered it kind of in passing is you know, what tools do you use to kind of figure out how to do risk profiles. So I basically give a risk questionnaire, but it’s based on Vanguard’s risk questionnaire. So if you Google, and maybe we’ll put a link to it on the website, but if you basically Google Vanguard and risk tolerance or risk questionnaire, it outlines basically what your equity to fixed income number should be. So get that number and look at your 401k and if there is an index fund or a bond fund, basically you could slot it into those two things and call it a day or go the target route. Again, this is not investment advice because obviously I don’t know the individual listeners and all the things that are kind of going into effect with you know, goals and debt and all that kind of stuff, but for simplicity’s sakes, that’s basically how I would approach it.

Tim Ulbrich: Well, good stuff, as always. And I know this was one of our longer episodes, but I think long overdue that we dove into some of this information related to investing. So thank you again to Latonia, to Laura, to Wes, we appreciate you taking the time to submit your question to be featured on this Ask Tim & Tim episode of the podcast. And as a small thank you, we’re going to be sending them a personal favorite, a super comfy YFP T-shirt in the mail this week. And as a reminder, if you have a question that you’d like to have featured on the show, just shoot us an email over at [email protected].

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YFP 021: 6 Reasons Pharmacy Graduates Will Struggle to Build Wealth (And What You Can Do About It) – Part 2

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On Episode 21 of the Your Financial Pharmacist Podcast, we wrap up our two-part series talking about six reasons pharmacy graduates will struggle to build wealth and what they can do to combat these factors working against them.

Episodes 20-21 Special Giveaway

Along with this series, we are providing a YFP step-by-step spending plan (budget) template that will put you on the path to putting purpose to your spending each month. As this series highlights the factors working against us to build wealth, the reality is that we need to be more intentional about our monthly spending in order to achieve our long-term goals.

This YFP spending plan Excel template is ready to go with formulas that will allow you to easily create a zero-based budget.

Get your FREE spending plan template at www.yourfinancialpharmacist.com/budget

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YFP 020: 6 Reasons Pharmacy Graduates Will Struggle to Build Wealth (And What You Can Do About It) – Part 1

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On Episode 20 of the Your Financial Pharmacist Podcast, we kick off a two-part series to talk about six reasons pharmacy graduates will struggle to build wealth and what they can do to combat these factors working against them.

Episode 20 Special Giveaway

Along with this episode, we are providing a YFP step-by-step spending plan (budget) template that will put you on the path to putting purpose to your spending each month. As this series highlights the factors working against us to build wealth, the reality is that we need to be more intentional about our monthly spending in order to achieve our long-term goals.

This YFP spending plan Excel template is ready to go with formulas that will allow you to easily create a zero-based budget.

Get your FREE spending plan template at www.yourfinancialpharmacist.com/budget

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YFP 019: How do Health Savings Accounts (HSA) Fit Into a Financial Plan?

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On Episode 19 of the Your Financial Pharmacist Podcast, we feature a listener question on an Ask Tim & Tim segment of the show. Keith from Ohio asks a question about the utility of a Health Savings Account (HSA) as a long-term investment strategy.

Submit Your Question

Do you have a financial question that we can feature on an upcoming Ask Tim & Tim segment of the show? Head on over to www.yourfinancialpharmacist.com or e-mail us at [email protected] to submit your question today!

 

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YFP 011: Millionaire Theme Hour (Interview with Sam Leveritt, PharmD, BCNP)

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On Episode 011 of the Your Financial Pharmacist Podcast, we interview Sam Leveritt, PharmD, BCNP to discuss his journey going from growing up in poverty, to graduating from pharmacy school with $250,000 in debt, to achieving a net worth today of $1.3 Million.

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Previous Millionaire Theme Hours on the YFP Podcast

Episode 006: Interview with Ken & Trenie – The Healthy Pharmacists) available on iTunes and the YFP web site.

 

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Developing a Millionaire Mindset (Interview with Tim Church, PharmD, BCACP, CDE)

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On Episode 008 of the Your Financial Pharmacist Podcast, we interview Tim Church, PharmD, BCACP, CDE to discuss:

  • the lessons he learned going into over $200,000 of debt;
  • his work behind co-authoring the book Seven Figure Pharmacist, How to Maximize Your Income, Eliminate Debt and Create Wealth;
  • how pharmacists and pharmacy students can build a millionaire mindset.

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About Today’s Guest

Dr. Tim Church is a clinical pharmacy specialist in primary care at hte West Palm Beach VA Medical Center and is the author of When Eating Right Isn’t Enough: The Top 5 Medications to Control Your Type 2 Diabetes.

Tim lives in Delray Beach, Florida, with his wife Andria.

Episode 008 Special Giveaway

Free sample of Seven Figure Pharmacist that includes a special offer coupon code for Your Financial Pharmacist Podcast listeners!

You can access this giveaway at yourfinancialpharmacist.com/008download

 

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Millionaire Pharmacist Theme Hour (Interview with Ken & Trenie – The Healthy Pharmacists)

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On Episode 006 of the Your Financial Pharmacist Podcast, we interview Ken & Trenie Kunke (The Healthy Pharmaicsts) who discuss:

  • all about their journey going from $220,000 in debt to a net worth of $1.4 Million.
  • how their work behind The Healthy Pharmacists helped expedite their progress towards becoming millionaires.

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Episode 006 Special Giveaway

The Healthy Pharmacists Top 10 List to be Financially Fit – available at yourfinancialpharmacist.com/006download

 

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Why Every Pharmacist Should be a Millionaire (Part 2)

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Continuing the conversation from YFP Episode 002 regarding why every pharmacist should be a millionaire, Tim Baker, CFP, interviews Tim Ulbrich, PharmD to help him determine his nest egg and the monthly savings plan needed to achieve that goal.

 

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