YFP 068: Pros/Cons of Dave Ramsey’s Baby Steps


 

Pros/Cons of Dave Ramsey’s Baby Steps

On Episode 068 of the Your Financial Pharmacist Podcast, Tim Ulbrich, Founder of Your Financial Pharmacist, and Tim Baker, YFP Team Member and owner of Script Financial, discuss the pros and cons of Dave Ramsey’s Baby Steps and how they apply to the pharmacy professional.

Summary of Episode

Tim Ulbrich and Tim Baker discuss Dave Ramsey’s baby steps in this week’s episode by sharing their own experiences and answering questions from the YFP community. Dave Ramsey’s 7 steps include:

Step 1 = Save $1,000 for a starter emergency fund

Step 2 = Pay of all debt using the debt snowball

Step 3 = Save up 3-6 months of expenses in savings

Step 4 = Invest 15% of household income into Roth IRAs and pre-tax retirement accounts

Step 5 = Save for kids college

Step 6 = Pay off home early

Step 7 = Build wealth and give

Overall, Tim and Tim feel that Dave Ramsey’s baby steps lay out are a great framework for an individual or family to follow and then iterate to their own needs. However, these steps aren’t a financial plan and shouldn’t be used solely as one. There are so many scenarios and possible financial goals and plans that differ from person to person. For some, it might make more sense to follow the steps in a different order or to adjust the amount of savings or contribution toward retirement. Often times steps 5, 6 and 7 are happening simultaneously instead of consecutively following one another once the previous one is completed. It’s important to weigh the emotional part of your financial journey, your attitudes, and feelings toward debt and your goals, and what time frame you are working with when thinking about paying off your debt. These steps don’t include other important aspects of creating a financial plan, such as obtaining disability insurance, potentially using the avalanche method when paying off debt, or really take into consideration the amount of student loan debt a pharmacist graduates with.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Welcome to Episode 068 of the Your Financial Pharmacist podcast. Tim Baker, excited to be back together on the mic. I think it’s been awhile, right?

Tim Baker: It has been awhile. I feel like we cultivated this baby in the podcast and I’ve, like, been absent for the last few weeks. So I’m excited to be back on.

Tim Ulbrich: Yeah, we had a great month in the month of September doing home buying, all things home buying. Nate Hedrick, the Real Estate RPH joined us. Excited about the partnership with Nate. Excited also to jump into the topic we have today, discussing the 7 baby steps that many are familiar with, recommended by Dave Ramsey. We’re going to talk about the pros and the cons and how we think they do and don’t fit to a pharmacy professional. And we’re going to weave in throughout the show feedback from you, the YFP community, that we’ve gotten via email, the YFP Facebook group and via LinkedIn as well. So Tim, it’s my understanding you’re out at the XYPN meeting right now, correct?

Tim Baker: Yeah, I’m in St. Louis for XYPN Live. I think this is the fourth annual meeting. So XY Planning Network is a group of fee-only CFPs that are trying to bring financial planning to kind of the Gen X, Gen Y generation. So yeah, it’s been good to, you know, rub elbows with some of my colleagues and just get good ideas and bring them back to Script Financial and see how I can better serve clients. So it’s been a good week so far.

Tim Ulbrich: And you’re rocking your YFP T-shirt today? Is that right?

Tim Baker: Yeah, I’m flying the flag, Tim. So you know, we’re going to be talking to a lot of different vendors and things like that. Actually, it’s funny. I was telling you before we started recording that people, you know, my colleagues have kind of noticed what we’ve been doing on the YFP side of things and have taken interest in that. So it’s kind of cool to see that, and yeah, so definitely rocking the YFP T-shirt today.


Tim Ulbrich: Exciting time. So let’s jump into this topic. You know, when I think of the Dave Ramsey 7 Baby Steps — and we’re going to link to them in the show notes, and I’ll talk about them briefly — but for those that are not familiar, we’ll go through them quickly and link to more information. This is such an emotionally charged topic, and so when we posted this week, I said, ‘Hey, YFP Facebook group, YFP community, we’re going to do a podcast recording on the Ramsey 7 Baby Steps. What do you think the good, the bad, how does it work? What are the pros and cons? How does it apply to a pharmacist or not? And for our community personally, those that have walked through this step, what are some success stories or challenges they’ve had?’ So I think based on the response that we got in that post, we’ve got lots to talk about. So you ready to do this?

Tim Baker: Let’s do it.

Tim Ulbrich: Alright, so onto the show. Here’s what we’re going to do. I’m going to walk through briefly the 7 baby steps, so for those that haven’t heard of them before, are not familiar, I’m going to talk about them very quickly. Then, I’m going to get Tim Baker’s thoughts on his opinions at a high level. What does he think about the baby steps? Where do you they work? Where are maybe some areas that need more flexibility? And when it comes to advising his clients, where has he seen these work in both the success route but also in maybe areas that he may disagree with. Now, we’re going to weave in some comments and feedback from the YFP community throughout. So Dave Ramsey’s 7 Baby Steps. If you haven’t heard them before, here they are in order:

Step 1 is save $1,000 for what he calls a starter or a baby emergency fund. Now, we’ll come back and talk about this. We talked in Episode 026 baby stepping into your financial plan, two things to focus on first, which an emergency fund was one of those. We’ll link to that in the show notes. And we also have a blog post on why having an emergency fund matters, so if you want to learn more about this topic, we’ll link to that as well. So Step No. 1, baby emergency fund, $1,000. This is all about getting a quick win and making sure you’re starting to build some protection into your financial plan.
Step No. 2, probably the step, Tim, that causes the most debate — pay off all, all debt using the debt snowball.

Tim Baker: Right.

Tim Ulbrich: So this is referring to credit card debt, student loan debt, car debt. The only exception here to the word all is mortgage, the primary residence, which we’ll talk back and we’ll come back to this in Step No. 6. So Step No. 2 is pay off all debt except for the mortgage using the debt snowball. And we’ll talk about what that means and we’ll dig into that further.

Step No. 3 then is save up 3-6 months of expenses in an emergency fund. So we mentioned Step No.1 is save $1,000 for a starter emergency fund. Step No. 3 is to build up a full emergency fund, which is 3-6 months of expenses. Now, one that he doesn’t publish on his website but he talks often about is Baby Step 3b. And this, I think, Tim, is codeword for “Woops, I didn’t really think about a home. Where should I put it?” So it’s Baby Step 3b, which is save 10-20% down for a home. And I’ve actually heard him reference 10% in some areas, his Financial Peace University class, but also 20% on his podcast. So that’s Step No. 3 and 3b.

Then Step No. 4 as we’re working through these one by one is invest 15% of household into Roth IRAs in pre-tax retirement accounts. So invest 15% of household income into Roth IRAs and pre-tax retirement accounts.

Step No. 5 is save for kids’ college.

Step No. 6 is pay off the home early.

And Step No. 7, probably the most nebulous one, is build wealth and give.

OK, so those are the 7 Baby Steps, and I think it’s worth noting that his recommendation that I’ve heard throughout the podcast and listening to it over the past several years is that steps No. 4, 5, and 6 are actually happening together. So of course you’re not going to invest in 15% possible income into Roth IRAs and pre-tax retirement accounts and be done and check it off. That’s going to be ongoing. Saving for kids’ college is going to happen over a period of time. And paying off the home early will happen over time as well. So steps 4, 5, and 6 are happening over time. So there you have it, the 7 Baby Steps. And I can speak a little bit from personal experience. My wife and I used the 7 Baby Steps in our journey paying off $200,000 of student loan debt. And we worked through them, we made some modifications along the way, which I think is going to lend itself nicely as we get some questions and feedback from the YFP community. So Tim Baker, your thoughts and opinions at a high level on the 7 Baby Steps. Where do they work? And in your experience working with clients, what are some of the successes you’ve seen in clients using these seven baby steps? And where do you think they maybe have a little bit more downside or maybe points of contention?

Tim Baker: Yeah, I think that as a framework, I like it. Now, I think that’s part of the problem with financial planning — because this is essentially like a framework of a financial plan. And I think a lot of people will throw some shade towards Ramsey because, you know, they say, well, it’s not a one-size-fits-all. And I think financial advisors will sometimes give him some backlash because of, you know, he’s too focused on the debt. And if you remember me talking through like, you know, a lot of advisors are paid based on investments. So they’re not incentivized for you to work through your credit card debt or things like that. And then I think there’s just some disagreements about like his particular investment choices. But as a framework, and I think in some of our engagement with the Facebook group and LinkedIn and things like that, there are people that are identifying, saying, ‘Hey, we’re in Step 2. We moved to Step 3, and then we had to move back,’ things like that. So it is more or less a working financial plan that people can identify with and at least benchmark off of. So I’m in favor of that, and I think it’s good to kind of get the blood up a little bit and talk about these things. But I think there are some people that maybe are a little bit more financially savvy that, you know, have their ducks in a row. And they say, ‘Well, this isn’t necessarily how I would do it.’ But for a lot of people that aren’t in that position — and I come across a lot of them, and they eventually become clients, which is a good thing. Where should I put an emergency fund? How much? Why 15%? And what’s a Roth IRA? That type of thing. And I’m not really being facetious, I think some of these things are, they’re true. So for people that go through Dave Ramsey stuff, you know, there’s an assumption, I think, afterwards that they’re going to know more or less which direction they need to go. And from a financial advisor’s standpoint, they don’t necessarily make good clients because they feel like they’re set. But I do think that there are some strengths but also limitations to me overall to the 7 steps. So for example, you know, if I look at the first one, save $1,000 for your emergency fund. You know, I do have clients that are in this position where they have, you know, hundreds of thousands of dollars of student loans, but they have $30,000 or $40,000 worth of credit card debt. So you know, we’re just trying to dig our way out of, you know, paying through the credit card debts but then, you know, having a buffer of like $1,000, that’s a huge step in that direction. So even — you know, some people might look at this like eh, this isn’t for pharmacists. I would say not so fast. There are some situations where that’s going to be true. So like the way I talk about, and I think we talked about this in Episode 026 of the podcast is, you know, let’s baby step our way into that kind of the foundational part of the financial plan, being the emergency fund. So I look at it as kind of look at it in phases. So maybe Phase 1 is $1,000. And as we work our way through some of the — and I think about more the consumer, not predatory debt, but in that where you’re 16-17% — to focus on that first and really not tend too much to the emergency fund. But as you work your way through that, Phase 2 might be to get that to $5,000 because the fact of the matter is, if you’re a single pharmacist and you have a good amount of credit card debt and student loan debt, that alone with your rent could put your emergency in the $20,000-25,000 because you’re multiplying that monthly number by 6, essentially. So for a lot of people to get to that number, they’re going to default on their credit cards before that happens.

Tim Ulbrich: And I think that’s probably the most common thing we hear from pharmacists is they look at this and say, ‘OK, Step 1 is I need a $1,000 baby emergency fund. Step 2, I have to pay off all my debt.’ And so they may be looking at who knows? $200,000 in student loan debt, $20,000 in credit card debt, a $20,000 car note. Then I need to get a full 3-6 months of an emergency fund and then I start thinking about investing. I think that’s the piece where people are like, wait a minute. I’m not going to be investing for 10 or 15 years? And we’re going to come back to that because I think that, you know, the framework, as you mentioned, obviously — and Dave would admit this — is that mathematically, this is not the most advantageous framework to operate from. It’s really a behavioral framework to help people really get the motivation and the mindset and to have some structure around the steps they’re working through. And if we have a thousand people listening to this podcast when we release it, at the end of the day, we have a thousand different financial situations. And I think that speaks to — to your point — that speaks to that this plan by itself probably should not, in my opinion, stand alone but could be paired with the work of a financial planner, could be customized. And I think that if you look at the plan in and of itself, it’s not meant to be a standalone. It doesn’t deal with issues like insurance, end of life planning, investing strategies. You know, we got some feedback from the Facebook group, which I thought was cool. Matt said that he agrees with a lot of the baby steps in terms of them being introductory and getting yourself on track. They’re a good blueprint to getting out of debt. The only problem is what to do after the steps are complete, so they’re not wealth-building steps. And so if you look at Step 7, this idea of building wealth and giving, obviously that’s not necessarily a blueprint for what you should be doing in terms of investing and saving and strategies and end-of-life planning and all those other things that come along with it. However, I will say for those that are listening — and my wife and I just experienced this firsthand — if you feel like you are extremely overwhelmed, don’t know where to start. If you and your spouse maybe where applicable are having difficulty getting on the same page, I think that these steps or it could be another stepwise approach, but having a stepwise approach that you’re working together and achieving and feeling like you’re getting momentum forward, even if that’s not necessarily the most mathematically advantage approach, you can’t speak enough to the value of getting momentum and getting those wheels going forward. Because Tim, how many people do we talk to that say, ‘I’ve been spinning my wheels for seven years, and I feel like I haven’t made much progress,’ right?

Tim Baker: Right. And we’re proponents of — I think there’s some weight to the emotional side of the — we talk about this in the student loan course over and over again. It can’t be just about the numbers. And of course, we’re talking about, you know, for a lot of people, does it make sense to look at PSLF versus not? And in this scenario, in these seven steps, PSLF I don’t think would even be entertained because if you’re trying to pay off in Step 2, the non-mortgage debts as quickly as possible, it’s not even a thing. So if you’re someone that has a lot of student loan debt, and you have the emotion behind it that, hey, you’re anxious or you’re concerned, you can’t sleep at night, these are all things that people have said to me. Then we weight that somewhat heavily because it doesn’t make sense to take a more maybe of a reactive approach, say from a Public Student Loan Forgiveness, and you want to just be more reactive to that. But I think to your point, Tim, that people get riled up about this because potentially in some situations, especially for pharmacists, you might be waiting 10+ years to start putting any money towards retirement and not, you know, capitalize on match and things like that. And I think that’s where I fundamentally disagree with this model.

Tim Ulbrich: So before we go into some of the more detailed questions, let me read off some of those that commented from the Facebook group that talk about the support of this model and I think some of the positive aspects of the success that it can lead to and the behavioral aspects of the model. And then we’ll dive a little bit deeper into maybe where tweaks could be made to this model, depending on individual situations and scenarios.

So Scott says, “The plan is great. It teaches you to focus on just a few things and do them with intensity. You also need to keep in mind that he only teaches very low-risk strategies. If you lost everything like he did, I’m sure you’d have a similar mindset.” So what Scott’s referring to there, if you haven’t heard his story before, Dave essentially — I think it was in his mid-20s — got pretty deep in real estate investing, kind of lost everything. But I do think to his point, as I think through Jess and I going through this approach, intensity is a good word, right?

Tim Baker: Yeah.

Tim Ulbrich: Because when you’re going all in on one step and you’re singularly focused — and yes, to the comments we received, yes that may be at the expense of other things — but that singular focus has to be factored in somewhere into the equation with the mathematical components as well.

Tim Baker: And I think he uses — what does he use, like gazelle-like? You want to be gazelle-like. I think that’s his term. And I see that, you know. I have clients that come in, I want to buy a house, I want to travel the world, I want to start saving for my kids’ education. There’s I want to pay for my wedding, there’s a million different things. And part of my job is to cut through some and say, OK, what’s most important? Because you can do a little of a lot of things, or you can do a lot of one or two things. Typically, the latter is a better prescription for that.

Tim Ulbrich: Dalton says, “You can’t really argue with its effectiveness. The number of people who have gotten out of debt and built wealth through his plan are incredible. He even acknowledges that the plan doesn’t necessarily make mathematical sense all the time because the benefits of compound interest and retirement savings but always follows that up with the fact that being in debt doesn’t make mathematical sense either because if personal finance was all about math, people wouldn’t spend more than they make. I think that it makes sense for pharmacists mostly if they live like a college student still after graduation. You could actually pay off your loans decently fast, as long as lifestyle creep doesn’t happen.” And then he goes on to talk a little bit more about Baby Step No. 2. So let’s jump in there because I think we had a couple questions from the group about Baby Step 2, which makes sense, right? Because pharmacists are facing average debt loads of $160,000. So Dave Ramsey, in speaking to whatever, 5 or 10 million listeners every week, obviously their average debt load is not $160,000. So that is a unique piece to our audience. And Cole asks the question, “I’d love to hear your thoughts about stopping retirement investing and losing the match while in Baby Step 2.” So talk to me about your thoughts as you’re working with clients, typical pharmacist, $160,000 of debt, maybe you’re thinking about this in the frame of these baby steps. We’ve talked before about the match being a no-brainer, let’s take it. But how do you balance this retirement and student loans or at least looking at the match component while in Baby Step 2.

Tim Baker: Yeah, so just a comment on Dave and like the student loans. Like, I think when I first started hearing some of his stuff about the student loans, like he would almost fall off his chair when like a doctor — I think for awhile, I think a fair criticism of him was that he was a little out of touch. And I’ve seen some things where he’s like almost browbeat people, and that’s not productive. But I think in more recent times, he’s come around and he understands a little bit more about the student loan picture. So that’s the first thing. I think the third thing for me personally is — and I say this when we speak to pharmacy schools and, you know, different organizations is — you know, they say the two certainties in life: death and taxes. And I would add that you should, for the most part, match your 401k or your 403b. I think that is for the majority of people the thing to do because it’s one of those things that the whole thing, it’s free money. Unless you’re in dire, dire straits from a predatory or some type of debt, I wouldn’t do it. If it’s student loan debt, absolutely. You need to be doing the match.

Tim Ulbrich: So death, taxes, and the match are three certain things in life?

Tim Baker: I think so. That’s Tim Baker’s amendment to that. So I think by and large, if you’re not doing that — because most of the time, especially because it comes out tax-free, you’re not missing it. So if you’re an employer — and most employers, it’s 3%, 5%. It’s not like you’re asking to give up 10%. Some are structured like that to get the full match, but to get the full match is typically a small percentage of your income. So that would be my thoughts there. And you know, I kind of with the invest the 15% of household income, I kind of say as a general rule of thumb, which these are, to start getting it in your brainpiece for newly minted pharmacists and new practitioners is a race to 10%. Because what often happens is that you do get the match, you get 5%, and you have the 401k inertia. I talk to you years later, and you haven’t increased it at all. So in their mind, I try to plant the seed. It’s a race to 10%, so if you couple that with the match, you know, you are in that 15% range. And that’s typically, when we do the nest egg calculations, which we did on the APhA webinar here recently, the Investment 101 and 102, the nest egg is going to show that that is, more likely than not, true to be in that range.

Tim Ulbrich: Yeah, and I think this is a great example as you think through Baby Step 2 and this question that Nicole throws out there is that this is not a black and white framework, as we’ve already talked about, especially with everyone’s customized situation. So if you’ve heard Dave talk on the podcast or taken any of his courses like Financial Peace, I think he uses an average time range of debt repayment too of about 18 months or less. So again, a pharmacist with $160,000 as a graduate does not match the national average of somebody coming out from undergrad with $25,000-30,000. Now of course they have a higher income potential, but he’s then under the assumption — when you think about steps 3, 4, 5, 6 and so on — that that debt in Step 2 is going to be gone quickly. Now, if you’re somebody listening that’s got $30,000 or $40,000 of debt, maybe that’s the case. But if you’re somebody that has $200,000 of debt, you know, unless you’re hustling like Adam Patterson-style, Tim Church-style, that’s probably not going to be happening. So now, you have to have this discussion and balance and work with somebody like you as a financial planner to say, OK, what is this timeline of debt repayment? Not that we’re going to carry this on forever, but what is the debt repayment strategy? And then how do we now fit retirement savings into there. Because you and I would both agree that if somebody’s paying off their loans for 10 years, probably not contributing to retirement is not a good idea. Not probably — it’s not a good idea.

Tim Baker: Right.

Tim Ulbrich: But if somebody’s hustling for 2-3 years, that conversation is very different, especially if there’s some behavioral momentum that’s going to be happening. Now, I would agree with you 100% that that match is a given in all of those situations, it doesn’t matter whatever the debt repayment period is in my opinion. I think that that should be there.

Tim Baker: Yeah, and I think the other thing to take note of, call out here that I commend for him is, you know, he’s talking — again, I’ve listened to him talk to doctors that have a truckload of debt. And he’s like, “Oh, you’ve got to hustle.” Even though the make hundreds of thousands of dollars, he’s encouraging them. He’s like, you’ve got to take up, you’ve got to get extra shifts. So he’s not resting on your laurels just because you make a six-figure income. So you know, the people that we’ve highlighted, the Pattersons, the Churches, they’re trying to hustle. They’re thinking of additional ways to increase income, which I think is something that kind of falls by the wayside because we’re always talking about how can we cut our expenses? But it’s a two-sided equation. So I would say that that is something to focus on as well.

Tim Ulbrich: Yeah, and just to wrap up this Baby Step 2 and how do you balance the loans with the investing and what’s your time period, I would say that, you know, for many listening, the answer’s going to be different. We’ve talked a lot on the podcast before and live events that we’ve done about how do you make this decision between investing and paying down loans. I don’t think we need to get in the weeds here, but this really comes down to the factors like interest rates, what is your feelings toward the debt? How is your investing style? All of these things, and for everyone listening, that answer’s going to be a little bit different, which will obviously help determine where you’re going to go with that. Tim, Tyrell asks that he says that he’d like to hear pros and cons of paying off house versus student loans if working toward PSLF or towards PSLF or other forgiveness components. So he’s talking about working for a qualifying company, pursuing Public Student Loan Forgiveness, and obviously then that changes your strategy about paying off your loans, correct?

Tim Baker: Yeah, because, you know, typically, the way to optimize that strategy is to take, you know, Step 4, which is invest 15% of Roth IRA and pre-tax retirement accounts and really cross off the Roth because the Roth is after-tax and put as much money as humanly possible into pre-tax retirement because what that effectively does is lower your adjusted gross income, which affects how much you — which is the number that calculates your payment for student loans. So the lower that your AGI is, the lower that your payment is, and the more that you potentially will be forgiven. So there’s a lot of moving pieces to that. So I would say if you’re weighing paying off a house versus student loans, to me, the picture is are we getting the $18,500 into the 401k or the 403b maybe since it’s a nonprofit. Are we maxing that out? You’re probably not afforded a pre-tax IRA deduction because pharmacists typically make too much. But are you maxing out the $3,450 or the $6,900 if you’re a family in the HSA to get that if you have a high deductible plan. Once those things are checked off, then I would say, OK, you know, what are the goals? And maybe paying off the house is that. But if that house is, you know, if the rate’s 3.25, I don’t know. I don’t know if that’s the best way to go. Some people, again, I know Leah Donnells made a comment on this, and she’s a client of mine, and her mantra is, their mantra is they want to get through the debt as quickly as possible. So they, regardless of what the mortgage or interest rate is, they want that out from underneath them. And I can’t blame them because if you think about, hey, we’re striving for financial independence, what is a greater measurement of that when you don’t have to pay the bank your rent or mortgage anymore? So Tyrell, that’s a good question. But again, there’s a lot of moving pieces and I would say focus on the pre-tax accounts and max those out before, you know, throwing more money towards the house.
Tim Ulbrich: So Tim, you know Dave’s a big advocate in Step 2 about the debt snowball. And Ryan in LinkedIn says, you know, as he’s talking about the pros and cons of this model, he says, “Why should I use the debt snowball method? It works great for those people who really benefit from the psychological impact and reward of paying off small debts. But for those who don’t benefit from it will potentially spend more money in the long run.” So give us the quick overview of the debt snowball, how that contrasts to the avalanche method. And as you’re working with clients, how do you guide or advise them in terms of which of those methods may work best for them?

Tim Baker: So the debt snowball method is basically where you write out all of your or you have all of your debts laid out: what kind of debt it is, what the interest rate, what the minimum monthly payment is, and what the balance is. And the idea is to pick the debt that has the lowest balance and pay the minimums on all the other debts. And then for the one that has the lowest balance, you want to pay as much toward that as humanly possible. So when that one falls off, when that debt is paid and dead and gone, then you roll that payment into the next lowest balance. And then when that one falls off, you roll that payment into the next lowest balance. So this is really trying to clear liabilities from the balance sheet. And the idea is that that gives you, if you focus on the lowest one, it gives you a psychological advantage, it gives you momentum, that type of thing. The avalanche method, in contrast, is where you do the same thing except the priority payment is based on the interest rate, not on the lowest balance. So you want to focus on the highest interest rate — this is typically credit card debt and that type of thing — and you pay the minimums on everything else. And then when the highest interest rate falls off, then you direct your attention to the next highest interest rate. So from a math perspective, this makes the most sense because you want to clear those debts off that you’re paying the most interest on. So that’s really the difference between those two. Now, working with clients, theoretically, I coin flip. It’s one of those things where from a math perspective, yes, it does make sense to do the avalanche. But it’s the same thing with everything else. If you’re doing this on your own, don’t get into the paralysis by analysis. Just pick one method and go. For a client that I have, you know, $30,000 of credit card debt with that’s spread out across 20 different cards, to me, it’s just about clearing the balance sheet so she can, you know, work through those effectively. So now, it’s more of an organizational thing. So in that situation, we’re employing the snowball method because it’s almost unwieldy to handle. So it just really depends on where your mind is, if you’re running the math and you’re maybe less emotional towards it, avalanche. If you’re thinking that, hey, it’d be really nice to log into your credit card account or if I plug my client portal that you can sign up for on my website, Script Financial, you can see all of your, you can link all of your accounts and see a dynamic net worth statement. If you see a list of liabilities there that’s $10,000, $12,000 deep, and you really want to log in in six months and see $6,000, then I would say probably the snowball method would be the better route to go.

Tim Ulbrich: Yeah, and I think the time period is critically important here as well, right? So if you’re talking about a wide array of interest rates over a long period of time, say 10 years, obviously the math on that is going to become more advantageous toward the avalanche method. If you’re talking about I’m going to pay off whatever debt we’re referring to in a short period of time, and the interest rate’s aren’t that different, or some combination of that in a couple years, then obviously the math doesn’t matter as much. Does it still matter? Yes, of course. But you have to, again, make this determination about your own behavioral patterns and choices and how important that momentum is or is not. And as I think back to the journey that Jess and I took, that momentum for us was critical, even at the expense of paying a little bit more interest because as we were going through whatever step, let’s use Step 2 as an example, if we were going through a snowball method, if I knew we needed $2,000 more to pay off this loan to get to the next one, we were that more motivated to stay on budget or to look for additional opportunities to earn income, whatever it be, that I’m not sure for us collectively as a couple, we would have been as motivated if we would have been working that through the avalanche method. So did we spend a little bit more interest? Yes. But did we get it paid off faster? For us, I think we probably did. But again, back to the point of customization for somebody else listening, somebody else commenting, that may be a very different situation if for them, it’s very black-and-white, and they can work the system going through the interest rates. I want to encourage for a minute. Amber posted on the Facebook group that, “My spouse and I follow these baby steps, and they are great for getting out of debt. Our problem keeps showing itself on Step No. 3, which is the full 3-6 months of emergency fund. We complete it and are ready to move on, and we have somewhat. But then, wham, something happens and we are right back on No. 3. We’ve been stuck like that for several years now, but living without debt is really freeing and wonderful.” So I think again, it speaks to the power of getting out of debt. But I think is something Jess and I felt as well is that when you talk about something like paying off debt, it can be very exciting to see that balance come down. When you talk about investing, it can be very exciting. Building an emergency fund is not necessarily super exciting. And so obviously, they’ve had some things come up that have derailed them from doing that. But I think for those that are in the grind of building an emergency fund, to your point earlier about how much that could be, $15,000, $20,000, $25,000, $30,000, $35,000, that’s not super exciting. But it’s certainly a critically important step and a foundational part of a financial plan. Tim, wanted to get your thoughts on this. This I think speaks to I think maybe where you have some customization to this seven-step plan. Katie says, “After graduation, we DR’ed our way to becoming debt free.” I love that he has his own DR.

Tim Baker: Yeah, when do we get YFP’ed?

Tim Ulbrich: Seriously, YFP our financial plan, right?

Tim Baker: Can we hashtag YFP’ed? Get that trending on Twitter maybe?

Tim Ulbrich: I like that. Be a trademark, yeah. “The main tweaks we made in the beginning were splitting steps 2 and 3 equally, so equal amounts going toward the emergency fund and debt reduction until we had enough saved, and then we maxed out our own tax-preferred accounts before kids college. It’s not a perfect system, great for debt elimination, not ideal for investing, but it’s simple and gives a roadmap for those starting out. It worked well for us.” So what do you think about that idea of balancing the savings for emergency fund with paying off student loans or other debt?
Tim Baker: Yeah, I mean I think that’s exactly what the point is is like, this is a template for then people can iterate off of. And this is what I was talking about with like having, you know, Phase 1, Phase 2, Phase 3 in terms of, you know, Phase 1, it might be get the $1,000 or $2,000. Have a emergency fund that probably covers 80% of emergencies in your situation. And then from there in Phase 2, now maybe go through and start paying off debt and apply maybe little. I think this is a perfect example of how, you know, they looked at the situation and said, well, this doesn’t work entirely for us, so we’re just going to iterate. And again, bias, you know, I think they did it well themselves working off the two of them, but this is where I think a financial planner can come in and provide a little bit of guidance and objective opinion and say, this is what I would do and these are the recommendations. So I think that’s the power of this is people look at it as a benchmark and then they can iterate off of it and apply it to their own lives.

Tim Ulbrich: Absolutely. And so just to build on this a little bit more, Mark asked and has a comment in the Facebook group, and I can speak to this one. I dealt with this last year. He says, “I’m on Baby Step 2 and I’m really concerned about this idea of not having a credit score. Has anyone used manual underwriting to buy a house? And probably because I don’t fully understand a credit score, but I’m a little concerned about not getting a job because of it.” So I think what he’s referring to is that Dave’s a big advocate for no credit cards, cut them up, get rid of them, pay off all your debt, etc. And obviously, there’s some concern about having no credit when it comes to purchasing a home. If you currently are paying a mortgage, Mark, what I learned throughout this process is that that mortgage payment will still provide you with a credit score. Now, if you don’t have a mortgage and you have no credit cards, then obviously after a period of time of having no credit cards and not making mortgage payments, your credit score will effectively be reduced to 0, which could present problems when it comes to purchasing a home. You certainly could do manual underwriting. There is lenders that are out there that do that, just give yourself some more lead time. It will probably take more time. And we didn’t experience this or get to this point, but I’ve heard — Tim, I don’t know if you’ve heard — that sometimes in a manual underwriting process, you may end up paying a little bit higher of an interest rate.

Tim Baker: Yep.

Tim Ulbrich: So something to balance and think of throughout that process. Tim, want to get your thoughts on this. Lisa says, “I definitely don’t think Step No. 4 should be No. 4.” So No. 4, again, is 15-20% into retirement savings and tax advantage accounts. She said, “It should be closer to No. 1. I have always been taught that saving for retirement as early as possible is a necessity and you should think of that 10-15% money as unusable for anything else. So whatever your net income is, write 10-15% off, and that is your new net income. It’s very easy to push that kind of saving off.” So here she says, “For me, it was more like year one post-graduation, it was Baby Step 2 was immediate, very high interest debt like credit cards.” Then she went to Step No. 4, setting up 401k. Then went to Step 1 and 3 of saving an emergency fund. And then as she went into year two post-grad, she further went into Step 4, saving enough to put max in a Roth IRA, into retirement. And then year three post-graduate, she went back into Step 2 to pay off student loans. So I think the risk that I would have with this — I certainly fundamentally agree with what you talked about before of getting that race to 10%, right? Getting that behavior set up for retirement. But doing that at the expense of any emergency fund, I think you’re putting yourself in a risky situation. Would you agree?

Tim Baker: Yeah, I would. I mean, I probably would put it as, you know, maybe 1a. So I think — you know, I was talking to a prospective client the other day, and I was asking him, you know, if something were to happen from an emergency standpoint, what would you do? And the answer is kind of like, eh, credit card or bank of mom and dad. And I think those are two habits that we probably need to wean off of and break. So I’m always — you know, it’s not the sexiest thing, although I get jacked up every time, you know, an interest rate happens. We’re both Ally proponents. Whenever you get the interest payment in your emergency fund, I think that’s cool. But I’m a big proponent of having some cash set aside for those emergencies and then get serious about at least getting the match. That’s kind of how I view it.

Tim Ulbrich: So as we wrap up this episode, Tim, I think that as we look at this framework, I think you and I would both agree that it’s meant to be exactly that. It’s meant to be a framework, it doesn’t apply to everyone’s personal situation, there’s caveats. And again, I think that speaks to the power of individualized, customized financial planning. And I would highly encourage our listeners, if you’re not a part of the YFP Facebook group, head on over, join the group, there’s great conversation going on on this topic as well as many other topics related to your personal financial plan. And that group is really all about encouraging, motivating and inspiring each other in this community of pharmacists, all committed to being on this path towards achieving financial freedom. So Tim, any last thoughts here on the Ramsey plan as we begin to wrap up the episode here?

refinance student loans

Tim Baker: Yeah, I would just say, we didn’t focus too much on 5, 6 and 7. You know, I would just say that, you know, the whole saving for kids’ college, that’s not a given for a lot of people, even pharmacists that have gone through kind of student loan hell. That doesn’t necessarily mean that they’re in a position or even there’s a want to do that. So that might be something that we can, you know, address a little bit more in the future about different strategies to do that. And I would say paying off the home early, we addressed that a little bit. It also depends, and finally, I think No. 7 is kind of like, you get to the end of this and you’re kind of released out into the wild and to build wealth and everything is good. But you know, for build wealth — for what purpose? You know, I often say that typically the way that I price my services is based on income and net worth, which is great because I’m incentivized to kind of help you grow income and help you grow net worth over time. But if we fast forward 20, 30 years, and you’re sitting on $10 million but you’re miserable because you haven’t done the things that you’ve wanted to do, then that’s not a wealthy life. So I would say build wealth, but to what end. So last year, you know, you did an episode on giving, which is part of kind of 7b in the build wealth and give. But not everyone has that same worldview, so you know, some people are, they want to give 10% right off the bat of their income, you know, even if they have debt. Some people are even if they don’t have debt, they don’t really feel inclined to give. So it’s just different. But I would say that a big one that’s probably missing from here, especially from a pharmacist’s perspective is disability insurance. If you don’t have any coverage at all from an employer, the ability to work and earn really needs to be protected. So that would be one of the things that I would probably edit from a pharmacist’s perspective. But I think it’s a great list, it’s a great template to look at and to build off of and to iterate for your own purposes. So I think this is a great episode because we had a lot of engagement on the Facebook group, and I hope it keeps going because I think people learn when we shine a light on it.

Tim Ulbrich: Yeah, and to your point, I think we’re going to come back and do a lot more on all of these topics, but especially in 5 and 6, you know. We haven’t done a ton on college savings. And that’s an interesting one because I think especially as we think about pharmacists coming out with such high debt loads, I think there’s a tendency, myself included, to maybe put that one at a different priority than it should be because you’re compensating from your own experiences, and you don’t want to put your own children through that. So you know, 529s, ESAs, what’s the strategy? What’s the timing of that? How do you balance that with retirement, your current debt, all those other things? And then as you mentioned, even in Step 6 and the home, how you prioritize that, what’s your interest rates? What’s your other goals related to real estate? What’s your motivation? Do you care about the debt? Do you not? How do the new tax laws impact all of that? We’re going to come and talk more about that into the future. So I think there’s lots of people that are out there listening today, Tim, to this episode, that are thinking of the Ramsey plan, thinking about the framework but are finding themselves spinning their wheels with their own financial plan, lots of competing priorities coming at them, not sure in what order and how this applies to their own personal situation. And as we talked about, this plan is not intended, the Ramsey steps are not intended to be a standalone financial plan. And so I know personally, you have lots of clients who know these steps, maybe some are following them to a T, others are not. But they still value the one-on-one approach in terms of working with you and working with a financial planner. So for those that are listening that want to take that next step, get engaged with you as a financial planner to learn more, what’s the best next step they can do to do that?

Tim Baker: Yeah, Tim, it’s super easy. You can either go to the Your Financial Pharmacist website and click on the “Hire a Planner” tab at the top and then you can schedule a free call on that page. Or just go to ScriptFinancial.com and on the homepage, you’ll see a “Schedule a Free Call” button there. So those are really the two ways to find me and schedule a free call.

Tim Ulbrich: So again, that’s YourFinancialPharmacist.com. You can click on “Hire a Planner,” and then from there, you can schedule a free call with Tim Baker to discuss next steps. So Tim, great to be back on —

Tim Baker: Yes.

Tim Ulbrich: the podcast with you. Have a great time at the XYPN conference. And we’re certainly looking forward to having you back as we continue with some great content coming forward.

Tim Baker: I’m going to be YFPing this conference. Trending on Twitter.

Tim Ulbrich: Awesome. Love it. Love it. So as we wrap up today’s episode of the Your Financial Pharmacist podcast, I want to take a moment to again thank our sponsor, Splash Financial.

Sponsor: If you’re looking to refinance your student loans, head on over to SplashFinancial.com/YourFinancialPharmacist, where in just a few minutes, you can check your rate. Splash’s new rates are as low as 3.25% fixed APR, which can literally save you tens of thousands of dollars over the life of your loans. Plus, YFP readers receive a $500 welcome bonus for refinancing with Splash. Again, that’s SplashFinancial.com/YourFinancialPharmacist.

Tim Ulbrich: Thank you so much for joining Tim Baker and I on this week’s episode of the Your Financial Pharmacist podcast. Next week, Tim Church and I will be tag-teaming some updates related to student loans, including the latest on the Public Service Loan Forgiveness program. Also, for those graduates that are getting ready to come out of the grace period and enter active repayment, we will talk about repayment options and strategies. If you like what you heard on this week’s episode, please make sure to subscribe in iTunes or wherever you listen to your podcasts. Also, make sure to head on over to YourFinancialPharmaicst.com, where you will find a wide array of resources designed specifically for you, the pharmacy professional, to help you on the path towards achieving financial freedom. Again, thank you for joining us, and have a great rest of your week.

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YFP 067: Rapid Fire Home Buying Q&A


 

Rapid Fire Home Buying Q&A

On Episode 067 of the Your Financial Pharmacist Podcast, Tim Ulbrich, Founder of Your Financial Pharmacist, is joined by Nate Hedrick, the Real Estate RPh, to wrap up the month long series on home buying by taking questions from the YFP Community in a rapid fire Q&A format.

Summary of Episode

Nate Hedrick answers questions from the Your Financial Pharmacist community covering various facets of home buying process. Nate shares advice, resources, and parts of his financial, real estate, and home buying journeys to help answer these questions. The first question asks how to save for a down payment. Nate recommends using a savings account if the home will be purchased soon, otherwise he suggests to use a higher interest rate investment. The second question is in regards to comparing rates from different lenders without committing to them. Nate shares that it’s best to be upfront with lenders upon your initial conversation and let them know you are shopping around for a mortgage lender. During this process, you’ll receive a GFE (Good Faith Estimate) which is a document you can use as a comparison tool. Question three asks about tax advantages for home buyers. Nate discusses potential tax advantages for home buyers, such as buying down the rate or mortgage points, as well as property taxes. When asked about the process for building a home, Nate suggests asking pointed questions to the builders and to be wary of perks and additional up-sells they may pitch. Nate then talks about real estate crowdfunding sites which pull money together from different investors to leverage larger investments. Finally, Nate discusses buying a home while in debt with student loans.

About Today’s Guest

Nate Hedrick is a 2013 graduate of Ohio Northern University. By day, he works from home as a hospice clinical pharmacist for ProCare HospiceCare. By night, he works with pharmacist investors in Cleveland, Ohio – buying, flipping, selling, and renting homes as a licensed real estate agent with Berkshire Hathaway. This experience has led to a new real estate blog that covers everything from first-time home buying to real estate investing. Nate’s blog can be found at www.RealEstateRPH.com

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Welcome to the Your Financial Pharmacist podcast. This is Tim Ulbrich, and I’m excited to have again Nate Hedrick, the Real Estate RPH, back on the show to do a rapid-fire Q&A to wrap up this month-long series that we’ve been doing on home buying. So Nate, welcome back to the show.

Nate Hedrick: Hey, thanks for having me again.

Tim Ulbrich: So for our listeners, we’ve been all over this topic of home buying during the month of September. And if we have anybody listening who’s just jumping in at the end of this series, I’m going to quickly recap where we’ve been before we jump into the Q&A because I think that will help set the stage and hopefully give you an opportunity to go back and listen if need be. So here we are in Episode 067, and at the beginning of the month in episodes 064 and 065, Nate and I covered the six steps of the home buying process. And I think for those that are just getting started or want a refresher on home buying, that’s a great primer, and I’d highly encourage you to go back and check out episode 064 and 065. In 064, we cover three steps. In 065, we cover three more in detail. And then in Episode 066, last week, I talked through 10 home buying lessons that I have learned over the past few months, maybe some hard lessons, mistakes, lessons reinforced as my family gets ready to make the move from northeast Ohio to Columbus. And just as a reminder, along with this series, we have developed a YFP first-time home buying quick start guide that you can download for free at YourFinancialPharmacist.com/homeguide. Again, that’s YourFinancialPharmacist.com/homeguide. Nd if you’re looking to buy or sell or home or you want to get started in real estate investing or you just have a question that you want to have answered by a licensed real estate agent that is also a pharmacist, head on over to YourFinancialPharmacist.com/realestaterph, where you can get in touch with Nate, the Real Estate RPH. So Nate, you ready to do this rapid-fire Q&A?

Nate Hedrick: I’m ready. I’ve got my coffee, so I’m good. Let’s do it.

Tim Ublrich: Me too. I’m ready to go. So an early morning, here we go. And here’s the format. We’ve done several of these before. We’ve done one on student loans, insurance, and just like those, we’ve taken questions from the YFP community via email, via our Facebook group, and I’m literally going to throw them off one-by-one to Nate, and we’re going to hammer some of these. And then if we have time, I’ve got a couple at the end that are ones that are of interest to me and I know that have been asked out there before. So first question, Nate, comes from Austin via the YFP Facebook group. He says, “What is the best vehicle for saving towards a home purchase? Putting 20% down means holding onto a significant amount of money until finalizing a home purchase? So do you feel it is best to invest that money or save it in a low-interest savings account?” What do you think, Nate?

Nate Hedrick: Yeah, that’s an awesome question, Austin. So it’s funny, I’ll tell you the safe plan. And I’ll tell you what I did. The best bet is honestly to put that in a high interest savings account or some sort of rotating certificate of deposit, something that’s going to be able to basically meet or get near to inflation so that all those dollars you’re saving are basically protected and that your money is worth as much as it was when you put it in. Because if it takes you two or three or four years potentially to get that full 20% down, hopefully not that long, but depending on how long it takes, you want that money to be still worth as much as it was when you put it in. So the safe plan is a high interest savings account or a rotating certificate of deposit. But what we did when I was saving for our down payment, we didn’t have a high interest savings account. I think my savings account made .065% annually. It was a joke. So you know, I knew I was getting beat up by inflation every year that we basically didn’t pull the trigger. So what my wife and I did at the time was I took half of the money that we saved for a new home and put that in a savings account. And the other half for that down payment went into basically a short-term investment account. And I basically, the goal was to make about 6% on that investment, which isn’t outrageous. And if I could do that, basically and inflation was 3%, then I’m basically beating inflation with all that money. And so that was kind of the idea behind it. And it worked pretty well. It’s a riskier play, obviously, you can easily lose money that you’re investing, even in short-term investments, especially. So it’s a risker play. But again, at the time, I didn’t really have a whole lot of options. I suppose if I were just doing it today, I would look for some aggressive certificate of deposits, some of those online banks like Ally and whatnot are fantastic for that.

Tim Ulbrich: Yeah, and it’s nice that some of those higher yield savings accounts, the interest rate has come up a little bit, you know, so I think the last statement I got from Ally, it’s up towards 1.8% or something like that, which is nice from the .5%, .4%, .6% that we were living in. You know, to me, Nate, when I hear this question — and you alluded to this — I think about what’s the time horizon, what’s the appetite for risk? And then also just thinking about some of the tax implications and things along the way as well because if somebody’s looking at, you know, I really want to buy a home in six or 12 months, does the math on getting 6% in an account versus getting, you know, 1.5-2% in a savings account, you think about the potential risk that you’re taking out in an investment account versus a savings account, is it worth it with that time period when you really need the cash? Probably not. But if we have listeners out there that are thinking, you know, I’m in a position to start saving or maybe I have a gift from a family but I’m thinking about buying in five years or six years or seven years. When you think about that type of time horizon, to Nate’s point about the impact of inflation, I think that’s where you then start to think about, OK, how could I leverage these funds? Where yes, I’m investing them so they’re growing and beating inflation, but ultimately, I don’t necessarily want to be losing these moneys or at least minimize the risk of losing those moneys along the way. So for somebody that is thinking about investing, any other details you can provide? So you alluded to a little bit of a CD. When you talked about putting that money into a fund, were you just investing it in mutual funds out in the open market? Obviously you’re not doing that in a retirement account, I assume, correct?

Nate Hedrick: No, no. This was basically open market. Basically, you sign up with an online brokerage. I was doing individual stocks and bonds, I was doing larger investment vehicles like mutual funds, like you said, high dividend stuff. And obviously, like you said, there are tax implications to doing that. So this isn’t something you do lightly. But it’s something I had experience with and felt comfortable doing. And it was something that was, again, successful for me at that time. But I also had a larger time frame to look at. You know, we kind of started looking at that while I was still finishing up college, so I totally agree with you. If you’ve got a short-term play, you’re looking at a year, just throw it in a savings account, just protect that investment. And know that that money’s going to be worth it here in the next year, and you can use that down payment.

Tim Ulbrich: Yeah, and I think this is another good place too to think about, you know, the peace of mind variable, which often gets lost in the math and the weeds of this, right? So if you and/or a significant other or a spouse or somebody really wants to have the peace of mind that that money’s there and I’m not going to lose it, you’ve got to factor that into the equation.

Nate Hedrick: Definitely.

Tim Ulbrich: So Nate, I’m guessing some people are hearing this and thinking, 20% down? Do I really have to do this? I know we’ve talked about this on previous episodes, and you know, you do the math on this. On a $300,000 house, you’re looking at $60,000 down. On a $400,000 house, you’re looking at $80,000 down and so forth. And so we got a follow-up comment to this in the Facebook group where somebody alludes to, well, maybe you don’t need to put 20% down. So the comment here was, “I would consider weighing the option of not paying 20% down. Local credit union offers a first-time home buyer with 0% down. This avoids the PMI without having to save a boatload of money for down payment. Although credit scores were high, we were still approved, even with a pretty high student loan-to-income ratio. Keep in mind that the fixed rate was around 1% higher than going mortgage rate at the time. But with enough equity put in, we may explore refinancing to a lower percentage down the road if possible.” So we’ve talked before about in episodes 064 and 065, we talked a little bit about, OK, if you don’t have 20% down, you’re going to be paying Private Mortgage Insurance. However, there are some instances, and it looks like this is the case, where somebody’s not putting 20% down, and there’s no PMI, in fact 0% down loans. But the implications here are potentially a higher interest rate and obviously not having equity in the home. So what are your thoughts here and what are some variables for people to think about that may be leaning towards, you know what, I’m not going to put 20% down. What are your thoughts?

Nate Hedrick: Yeah. I think it all comes down to your priorities. You know, if your priority is to get into a home quickly, then yeah, I think it’s a really reasonable thing to not put 20% down. You know, before I started this financial journey, you know, our home, we didn’t put our full 20% down. We just got to the point where we had saved a good, I think we were at like 15%. And I said, look, this is the time, we’ve got to move. Our rental lease is up, and we just need a home for a couple of reasons. And so we just went for it. So it’s not for everybody, you kind of have to take that emotional side sometimes, which is harder to think about with a financial decision, and know that now, as we’re getting much, much further. We’re 10 years out now — well, almost 10 years out from the financial collapse of the housing market in 2008. There are a lot more options available to you now. I’m seeing a lot of 10% down conventional loans that have no PMI and the rates are pretty comparable. So there are products becoming more available. I think that the 20% down is very good in terms of being very financially stable and starting off with a lot of equity, but it’s by no means necessary.

Tim Ulbrich: Awesome. Next question comes from Mac via email. He says, “They say nowadays, your best off to obtain multiple loan quotes when buying a home. Sometimes it can be hard to compare rates when you are comparing apples to apples and fee structures, rates and commissions. What’s the best way to compare rates without going too far with one lender and then feeling committed to them? Or depending on how far down the road you are buying a home, is it too late to switch lenders and not put your purchase at risk in the market that we are in these days? What do you think?

Nate Hedrick: Yeah. That’s a great question. And there’s a couple aspects to it. So the first thing is I would go in with the expectation when you go to these lenders and tell them up front, I’m shopping around for a mortgage lender. My wife and I or my spouse and I or whatever are going to buying a home. And we wanted to find the appropriate mortgage lender for us. So help us make that to be you. And if you set that stage from the beginning, it’s going to be a little bit of an easier conversation. So they should be able to walk you down the road of OK, what kind of home are you looking for? What’s your budget? So on and so forth, which you have when you go in. And they should be able to give you a good faith estimate. This is a GFE document, it’s a very, very common thing. A good faith estimate shows you all of the numbers that they expect a loan to basically take. So an interest rate, it’s going to be all the fees, it’s going to be all the terms of that loan. So how long the loan is going to last, you know, are there prepayment penalties, are there escrow charges, what are the — all the aspects that go into the loan process. So that good faith estimate is that comparison tool because if you get three of those, one from each of your lender, although the individual loans may be a little bit difficult to compare, you’re going to have all that information in front of you, and you can do the math yourself to figure out how those stack up. So really once you get those good faith estimates, focus on the big numbers, APR or annual percentage rate, not just interest rate is a good way to do that. APR basically takes into account a lot of those fees. So if two loans are 4.5%, but one has $5,000 in fees and the other one has $0, that one with the fees is going to have a larger annual percentage rate, basically the effective interest rate is what they really should call it based on those fees that are built in. So you can use an APR to get a better estimate of what that loan is going to look like. The other big thing is you want to watch for — especially on your GFE — are things like rate locking and the ability to lock your rate at a certain time. That can be really beneficial. What the lender fees actually look like because these are one of the most negotiable aspects of a loan. You can basically take one lender’s fees and throw them at another lender and say, ‘Look, they’re not charging for this. I don’t think you should either.’ So that’s a good option. Watch for prepayment penalties. And then also watch for things like mortgage insurance. We’ve talked a lot about private mortgage insurance, but different loans require different amounts of it. And the GFE will basically show you exactly what those are going to look like.

Tim Ulbrich: I think that’s great advice, and the GFE, the good faith estimate to me was kind of the Aha! moment as Jess and I were going through the process. Once you can see that document, you’re like, OK, I can look at this, I can understand it, I can break down all of these costs and you can really start to get that full picture and not just focus on the interest rate, which I think is the common practice when you just get started and you’re getting quotes that are out there. So I love the recommendation of the practice of getting two or three different GFEs from companies, then you can really compare, as Mac’s question, is kind of apples-to-apples. Couple thing that I’ve learned as we’ve gone through this process here over the last month is that I think it’s very easy to just get locked in with a lender really early. And once you’re far enough down that rabbit hole, it’s hard to come back out of it. So I think really starting up front and being clear that you’re getting quotes, get those multiple quotes because I think what we’ve experienced actually on the side of those that are buying our current home is they actually did switch lenders, as Mac’s question is about, can you switch lenders? And how far down the road are you putting things at risk? And the thing you’ve really got to be careful about is that really restarted the whole process and put our sale about two weeks behind. And so you know, documents had to be transferred and how willing is a mortgage company — I mean, how readily available are they going to be to give documents over on a loan they’re no longer doing? And all of these things, and so it can certainly delay the process, so I think shopping up front is really key. And then you can go forward with one lender before you’re too far down the process. To your point, Nate, about the rate lock, I’m actually paying for this right now, this week. So I don’t know if this is something I could have negotiated up front, I think it was one of those things I looked at and said, ‘No big deal. We’re going to close on time, so why does this matter?’ Well, guess what? Closing got delayed, now the rate lock — I’m actually having to pay a few hundred dollars to get an extension on that rate lock.

Nate Hedrick: Yeah, that’s fairly common.

Tim Ulbrich: And I think that if that was something I would have played out and thought, well, what if closing gets delayed? Then I think we could have hopefully prevented that in advance. So great question, Mac. And actually, Mac had a follow-up question via email, unrelated, but on this topic of home buying. He asked, “What should be considered when buying a home to help maximize your tax advantages?” So the dos and don’ts in terms of home buying and tax advantages. And obviously, this is a big question. What are some of your thoughts, Nate, around home buying and tax advantages?

Nate Hedrick: Yeah, that’s a great question. And I’ll try to just hit on a couple of things here because like you said, it is a fairly big question. The first thing I think is important to talk about is what can you do up front? Like what can you do kind of as you’re buying that home to reap some tax benefits? And there are a number of things from, you know, first home buyer tax credits that are available depending on a number of factors. But one of the easiest things you can do is actually — it’s called buying down the rate. And you’ll hear this referred to as mortgage points or buying points. And this is something where if you have extra capital to put into a home purchase, you can actually percentages of that loan to lower your effective interest rate. So if you are buying a $100,000 home, just for easy math, every point on that loan is 1% or $1,000. And every point that you buy, every $1,000 that you spend, drops your interest rate by a certain amount, you know, whether it’s .25% or whatever. So you can put extra money on a loan to effectively lower your interest rate, which is great for the long term, right? If you had that home for 30 years and your interest rate is now a full 1 percentage point lower, let’s say, that’s going to make a big difference over the life of that loan. But in the very next year, basically as soon as you file those taxes for that year that you bought the home, you can also deduct all of that mortgage interest as a deductible on your taxes. So there’s a really cool kind of tax benefit right up front. So that’s one big thing to look at, at least early on. The other thing that you want to look at is — and this is really kind of a thing that’s changed. If you had asked me this question a year ago, it’d be a little bit of a different story. But with the new tax laws, you want to probably know, are you going to be taking the standard deduction next year? Or are you going to be doing the itemized? And with the standard deduction being raised to what it is, a lot of the individual benefits we used to get from homeownership have kind of fallen away. They’re still there, but they’re just not something that you’re going to get any benefit from. The example I have is that basically now that the aggregate amount of state and local sales and property tax is capped at $10,000 a year, people that are buying in New York and California and Hawaii, all these expensive places, they’re not going to see that benefit. You know, you’re no longer really itemizing that deduction anyway. So that cap at $10,000 is not enough to be worth it. So things like that you want to consider: Where am I buying? How am I going to be filing my taxes next year? You know, an accountant can really help with that because that may change your decision a little bit as well. And then the last piece I guess I’ll talk to is that you want to watch for the individual taxes for that area, so the property taxes. And this isn’t something that you can deduct or something that you have to worry about. It is one way to maximize your advantage, right? If I live in a township that has much higher taxes but much better schools, or do I live in a township that has much lower taxes but less amenities and maybe it’s nearby to the things that I want. You know, so that location aspect can be really important as well when talking about tax advantages.

Tim Ulbrich: So Nate, quick question for you on the buying of points, the first tax advantage that you mentioned. You know, I struggled a little bit when I got that offer on the table during the process we’re going through now. And the way I was trying to think about it — and I didn’t think about the deduction side of it, so I’m learning here right alongside the listeners as well — but what I was thinking about it from what’s the break-even point. So if I — just as an example — if I have to spend $2,000 to get my rate down whatever, .4%, you know, I can do the math on that to see that over how many months of saving that interest paid, why recuperate those dollars, and what if I would have just had that cash up front and done something else? So is that the right approach? Or how do you help your buyers evaluate whether or not that purchasing of points is worth it? Or whether those funds could be used elsewhere for other priorities that they’re working on?

Nate Hedrick: Yeah, and that’s a great point. So think about — there’s a couple aspects, and one is how long are you going to be in that home? That’s kind of the first decision. And how long do you expect to pay off that mortgage? If the answer is I can’t wait to buy this down and pay this off in 10 years or less, then buying points is probably not worth it. I think the break-even point is something around the 15-year mark or something like that.

Tim Ulbrich: Yeah, that’s what it was for us. Yep.

Nate Hedrick: Yep. And it varies based on the individual lender, but that’s usually where it’s at. So if you plan on having a true 30-year mortgage, then points can really be worthwhile. But if you plan on buying down your mortgage quickly or paying it off quickly, it’s usually not as beneficial. The other aspect to consider is that as soon as you pay that off, as soon as you put those monies in, it’s harder to get them back out, right? So that money is immediately tied up. So unless you’ve got a real excess of capital, which is obviously harder to find, it may not be worthwhile to tie up that extra money in the property.

Tim Ulbrich: Yeah, I’m especially thinking maybe for some of our listeners that are buying a home, and maybe they don’t yet have a fully funded emergency fund or they have high interest rate credit card debt or other things. So really, it sounds like buying points is an ideal scenario for somebody who is in a great overall financial position, has extra capital, and plans on being in the home for a long period of time.

Nate Hedrick: Yeah, if you’re spending 5% on your student loans every month or every year, you don’t want to be paying, you know, a couple thousand bucks to get a couple of miniscule percentage points off. It’s not worthwhile.

Tim Ulbrich: OK, good stuff. Mac, thanks for your contribution, great questions. Mindy has a question that actually came in via the Real Estate RPH contact form, which is over at YourFinancialPharmacist.com/realestateRPH. She asked, “I’m building a house, second-time home buyer. Wondering what I need to know about the process, things to watch for, etc.” So thoughts for those listeners that may be thinking about building and whether they do or don’t currently own a home, what does that building process bring in terms of new factors and items that people need to be thinking about?

Nate Hedrick: Yeah, yeah. Besides the regular aspects of buying a home, it does add a couple things to the mix. The nice thing is is that you know you’re getting kind of — you know what you’re buying upfront, right? They’re building the home new. You’re not going to find any lagging issues that the home’s been there for 60 years and now the foundation’s starting to crumble, right? As long as everything is done quality upfront, you’re going to get everything brand new, which is a really big advantage. So I think the first question you want to ask if you’re considering building a home is you know, question around the idea of quality. And I think you don’t want to go to them and say, ‘How nice are your homes? Like what’s your quality?’ Like that doesn’t tell you anything because they’re just going to say, ‘They’re fantastic.’ And then you’ve learned nothing. But you want to ask some pointed questions, you know, things like, ‘Talk to me about some of your building standards. Talk to me about how energy-efficient your homes are.’ Because those are things that are going to show you yes, they follow code, but how close do they get to modern building standards? How close do they get to really high energy efficiency standards because those are much more better indicators of quality than just, oh yeah, we always follow code. Like you wouldn’t be a home builder if you didn’t follow code. So asking the right quality questions is a really good place to start, and that will help you know that what you’re getting when you put all that money in is going to be worthwhile. The second part is really the additions or the amendments or the kind of the perks, right? So you’re going to sit down when you’re building a home, and they’re going to walk you through and they’re going to say, ‘OK, the base model that you’ve selected is $400,000. Now let’s get to some of the upgrades.’ And these upgrades can take you — I’ve seen them honestly double the price of a home from that base value. So be careful when they say, ‘starting in the $300s.’

Tim Ulbrich: Starting at…

Nate Hedrick: Yeah, exactly. Like you’ll see that advertised on the big signs for the new developments. ‘Starting in the $200s,’ and realistically, no one’s walking out of there for under $300,000. So the upgrades, the things I would caution you on or draw your attention to is that take the upgrades that you find beneficial. Don’t let them talk you into things that, oh, this ups the resale value. So if you sell this home in five years, this is what people are going to want. If you’re building a home, in all likelihood, you’re building it for you. And so you should buy the upgrades that you want. One of the things I just had a client walk into it and was working through is that they said, ‘Well, we can do your upgraded kitchen cabinets. And right now, the popular thing is to do dark cabinets on the bottom and light cabinets on the top. And that’s only going to be $10,000 more, and you get this super modern kitchen.’ Well, if they sell that home in 10 years and that’s not popular, they may have to redo that. So if you don’t want that, don’t buy it. And that’s I think a good addage for all the upgrades that go with building a home. If you don’t want it, don’t invest that money because you’re the one that you’re building it for.

Tim Ulbrich: So Nate, one of the things that I’ve always wondered about building a house — we’ve never been through the process — is how does the cash flow needed differ from a buying a existing home? So if I’m in a current home, and I’m looking at building, how does that work in terms of selling and the timing? Am I having to put down money earlier where I necessarily can’t wait until the sale of my home? Or is it very similar to buying an existing home that those things are all ironed out?

Nate Hedrick: Yeah, it’s a little different because a lot of times, you have to buy the lot or you have to put in some sort of down payment to secure the lot. And sometimes, you have to buy the lot like upfront. Like it’s a $28,000 or a $50,000 piece of land that you have to basically buy upfront, and then you move forward. Or sometimes they can say, ‘OK, well it’s a $50,000 plot. We need $5,000 to secure this.’ But generally, it’s a lot more. It’s usually on the higher end of securing that location. So depends on the popularity, it depends on how they want to structure it. But there’s really two sides to it. One is basically securing that land and buying that land, and then the second is getting the mortgage on the home itself. And you can often wrap those things together so that everything’s kind of one piece, but the builder and the developer usually wants a lot more upfront to secure that property to begin with.

Tim Ulbrich: You know, one of the things that I’ve seen in our neighborhood, and we don’t actually have a homeowners association, so this may be different in areas that have a little bit tighter regulations, but we’ve actually seen several houses go up where my guess is maybe they didn’t anticipate all costs involved where six or 12 months later, like the yard is still not in or something’s not fully finished, you know, in terms of a porch or something else. So I think just things to consider, to your point earlier about, you know, what is the starting out price? What’s the actual price? And going back to you really defining your budget before you go into those conversations with the builders or else I think it easily could be a conversation where you start at $250,000 and you end at $400,000, you know, depending on what you’re looking at. So Lauren via the Facebook group asked, “What are your thoughts about real estate crowdfunding sites like FundRise?” So talk to us a little about what are real estate crowdfunding sites and what are your recommendations on these for those that may be interested in doing some real estate investing?

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Nate Hedrick: Yeah, this was an awesome question from Lauren. I actually answered it on the Facebook page because I’m in the middle of writing an article about it right now. My wife Kristin actually found FundRise — I had never heard of it before — and said, ‘What is this? Like what’s going on with this?’ And I said, ‘I’m going to find out.’ So I’m actually in the middle of writing this article right now because it’s super interesting. The basics is this: So it’s a REIT, which is Real Estate Investment Trust, but they’re calling it an e-REIT, or an electronic or online or whatever they want to define it as. But the idea is very simple. The idea is that they’re a group of individuals who buy real estate — and this is many aspects. They’re buying rental properties, they’re buying commercial development, they’re buying land, they’re buying all sorts of stuff. And you yourself wouldn’t be able to buy those pieces, you wouldn’t be able to buy the land, you wouldn’t be able to buy the commercial buildings, but if you could buy a very, very small chunk of that, you could still reap some of the benefits. So if you put in, you know, a couple thousand dollars, and 50 people do that, now all of a sudden, they’ve got the capital they need to go forward and take on these big investment and real estate investment properties and projects. So you’re basically crowdfunding a investor group to do these things. So it’s kind of like a mutual fund where you’re buying small chunks of a larger company, but instead, you’re buying small chunks of a larger real estate investing group. And I’ll say a couple of things about FundRise in particular. And I don’t have any personal experience investing with them, so I’ll say that upfront, but the reading that I’ve done and looking through their fine print, I think there’s a couple of aspects. One is that I think that their model is very good in terms of what they’re investing in, where they’re doing it. I think they’re a little ahead of the game. They’re kind of targeting areas that are still not quite on the rise but will be on the rise soon. So I think they have good investments. People in the industry that are talking about them, they’re investing in the right areas. And their current return on investments in the 10-12% area are indicators that they’re doing the right things. So that’s a good sign, right? That they’re investing in the right areas. The problems I think come in when you look at how that money that you’re giving them is being used and how you get it back. They are not a publicly traded entity. They are a publicly available entity. And those are two very different things. If I go into my brokerage account and buy a REIT, a buy a portion of an investing property, I can sell that at any time. It’s publicly traded, so a broker will take that off my hands as soon as I am ready to sell it. Just like a stock — if I buy Apple stock and then go sell it tomorrow, someone’s going to buy that. That’s publicly traded. But if it’s publicly available, I may not have someone available to buy that investment whenever I need to sell. So I could say, ‘Hey guys, I want to cash out. I’m done with FundRise. I want my money back,’ and they would be like, ‘Well, nobody’s buying right now at the price you’re offering. So I’m sorry, we ahve to hold onto your money.’ And if you read all the fine print, they actually really talk about how illiquid the money really is. They can hold onto your money almost indefinitely if it benefits the group of investors. And really, I want you guys to look at that on your own terms because it’s pretty interesting to see how that breaks down. But the idea is simply that if they find it to be in the best interests of the investor group, they can hold onto that money for a long period of time, so it’s pretty difficult —

Tim Ulbrich: That’s interesting.

Nate Hedrick: Yeah, it can be difficult to get that money back out. And I’m sure people are — right now, at least it’s fine. But who knows what it’s going to look like five years down the road? So that’s one of the big concerns that I have. The other one is that even though there have been great returns — and again, 10-12% is fantastic returns for something like this — their fee structure is a little bit high. They talk about only charging about 1% upfront, but if you really break down the fees that are built into the back end, fees can be upwards of 3% a year. So the fees can be quite high, and that’s something that you really want to take into account because that’s taking away from your gains. So all of a sudden your 12% is down to 9%, and if they start dropping and they go to 8-10%, now you’re talking about gains that are less than the S&P. And so is it really worthwhile to have this illiquid money making less than you make in a general just brokerage account. So there’s a couple of pieces to consider there.

Tim Ulbrich: Yeah, those are great points. And I would encourage to our listeners that are thinking about this, don’t forget about your tax advantage retirement savings account. So your 401k’s, 403b’s, Roth IRAs, obviously there’s inherent tax benefits of being involved in those accounts that you may not see with something like a FundRise. So don’t forget to factor that into the equation. And certainly I know in my 401 account, I certainly have the option to invest in REITs, and so is there a way that you can get involved in diversifying your investments into real estate while still taking advantage of those tax advantage retirement accounts if you’re not already doing so. Couple other questions that I want to throw out there briefly because I think they’re ones that I get often. The first one is, Nate, probably the most common question I get. And I was surprised we didn’t get it on the Facebook group is, where does home buying fit in with student loan debt? So is buying a home appropriate when I have $150,000-200,000 of student loan debt? If so, is there an ideal or a right time? And what are some of the principles I should be thinking about? And so I wanted to get your thoughts on this one.

Nate Hedrick: Yeah, it’s a great question. It’s actually a really large question. And I think the simplest answer is it fits in wherever your priorities say it does. And that’s almost too simple of an answer, but it really is the truth. If you need a home right now. If your family or your personal environment says that I need a home right now, then you’re going to make it work with your student loan debt. It’s certainly possible. If you are someone that just hates being in debt and hates the idea of owing somebody more than your salary, you’re probably going to wait. You’re going to pay off those loans first before tackling the home buying process. But it really depends on that priority set. In fact, Tim Church and I — Your Financial Pharmacist Tim Church and I have been working on an article that will be coming out probably around the time this podcast is launched. It talks all about how to buy a home with student loans and what that can look like. So it really comes down to your personal journey and where you’re at and trying to fit that in. I mean, I’ll be honest. I’ll tell you, when my wife and I bought our home, we were well into the negatives in our net worth at the time. But it was something that for us, we wanted a home, we needed a home at the time. So it was worth doing. And it really depends on your own situation.

Tim Ulbrich: Yeah, Jess and I were right there with you. And I think for me, this is such a personal, customized question that the answer to this is different for everyone, right? So you know, I think this is a great example of sitting down and really looking at all of your financial goals in terms of things we’ve talked about before on this podcast: emergency funds and how much debt? And is there credit card debt? And where are you at with retirement savings? And what other financial priorities are on the table? And I think the thing I would encourage the listeners to think about is on a month-to-month basis, depending on your student loan payment, as you look at evaluating the home purchase, you know, you really want to be cautious and not put yourself in a situation where you feel like between your student loan payment and your mortgage payment, you really got no margin to do anything else or a little margin where you’re feeling super stressed each and every month. Now, that can also be tricky because some people may say, ‘Well, I’ll opt into income-driven repayment plan, I’ll minimize my student loan payment, I’ll free up cash, and I’ll then be able to purchase a home.’ But obviously, that has limitations as well, being in student loan debt longer. So I think really taking a step back, working with a financial planner like Tim Baker or really looking at all of your financial goals to say, ‘OK. Where does home buying fit in with all these other priorities?’ And then if it fits in at this point in time, what’s the best next step in terms of how much down, what’s the overall purchase price of the home, location, all of the other factors we’ve been talking about this entire month. Nate, one last question I have here. We’ve gotten a lot of action in the YFP community about real estate investing. And I think there’s a big interest out there, rightfully so, especially while the market’s hot, of course. But we had Carrie Carlton on in Episode 009 that talked about real estate investing, which is one of our most popular episodes. For those that haven’t listened to that, I would check that out. But I think many people are thinking about, OK, where is the job market heading? You know, I want to think about an alternative revenue stream. Real estate investing may be that alternative revenue stream. So for those that are thinking about investing in real estate, whether that be for a side income, a business, diversification of investments, what is the best first step they can take? And I think with other financial priorities also in mind, such as emergency funds, debt, etc., is there a right time to jump into real estate investing? So I know this is a huge question. We could do a separate series in episodes, we probably will in the future. But I know we have listeners that are thinking about real estate investing. I want to give them something to hang onto as the next step. What do you think?

Nate Hedrick: Yeah, no, I think that’s great. And you’re right, it’s a huge question. This is why I have a website, right? This is why I have the Real Estate RPH because this is exactly where I was. I remember reading “Rich Dad, Poor Dad,” learning about passive income and real estate investing and thinking, how do I jump into this? What’s the next step I can take? So if you’re looking for the next step, I think the very first thing you should do no matter what is educate yourself. Listening to podcasts like this, checking out blog posts for our site and for Real Estate RPH, that can be a really great tool. And there are so many other resources out there. There are books, there are blogs, there are podcasts. But educating yourself about the types of investing can be a really great first or next step. And then once you’ve done that, and if you want to take a tangible action, you know, I want to do something and see what this actually looks like, I really encourage people to assess some deals in the area that you’re considering. I work with a lot of pharmacist investors here in Cleveland, and the very first thing if they’re new investors, they say, ‘Well, where do I start? What do I do?’ I say, ‘Well, I need you to assess some deals first. Understand the market in which you’re looking in so that you know what a good deal looks like.’ And there are a number of tools that can help you do this. But really, the best thing is just go pen and paper and a calculator. But seriously looking at what available homes are there on the market right now? What are rents looking like if I’m going to rent that? Or what are flips looking like? Or comps looking like if I were to flip that home, depending on the type of investing you’re going to do? And just figure out if that is a good deal, a bad deal or something in between. And then once you have that pulse on the market and you understand it and you’re doing the education and the background, it becomes that much easier when a good deal comes along, you can actually pull that trigger and look at seriously putting an offer on that home.

Tim Ulbrich: So for me here, I think it’s all about learning. Reading, blog posts, books, listening to podcasts, engaging in communities like this one. And I love your advice of really looking at deals and doing the math on them. And I think when I think about real estate investing, Nate, I think all of us have either a family member or a friend or somebody who’s doing this and who is encouraging us to get involved in real estate investing and talks about all the upside of real estate investing. And of all the things I’ve read, for every good, positive return on investment story when it comes to buying homes, there’s probably five that have gone bad that maybe you’re not going to hear about. So really doing your homework, doing the math, making sure you understand all of the costs, everything involved. But we’ll definitely have more content coming on this topic in the future, so stay tuned in the YFP blog, podcast and Facebook group as well. So Nate, this month has been a ton of fun. We are super excited about the partnership between YFP and Real Estate RPH. So thank you so much for taking the time to come on the podcast, contributing to the blog. And for our listeners, again, we continue to bring you content around real estate investing, buying and selling homes. If you have a question that you’d like to get answered by Nate, head on over to YourFinancialPharmacist.com/realestateRPH, and Nate will get back to you in regards to your question. As we wrap up today’s episode of the Your Financial Pharmacist podcast, I want to take a moment to again thank our sponsor, Splash Financial.

Sponsor: If you’re looking to refinance your student loans, head on over to SplashFinancial.com/YourFinancialPharmacist, where in just a few minutes, you can check your rate. Splash’s new rates are as low as 3.25% fixed APR, which can literally save you tens of thousands of dollars over the life of your loans. Plus, YFP readers receive a $500 welcome bonus for refinancing with Splash. Again, that’s SplashFinancial.com/YourFinancialPharmacist.

Tim Ulbrich: Hey, thank you so much for joining me for this week’s episode of the Your Financial Pharmacist podcast. Next week, Tim Baker and I will be talking about the pros and cons of Dave Ramsey’s seven baby steps and how they do and don’t apply to the pharmacy profession. This is a good one, you’re not going to want to miss this episode. If you’ve liked what you’ve heard on this week’s episode, please make sure to subscribe in iTunes or wherever you listen to your podcasts. Also, make sure to head on over to YourFinancialPharmacist.com, where you’ll find a wide array of resources designed specifically for you, the pharmacy professional, to help you on the path toward achieving financial freedom. Have a great rest of your week.

 

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YFP 066: 10 Home Buying Lessons Learned


 

10 Home Buying Lessons Learned

On Episode 066 of the Your Financial Pharmacist Podcast, Tim Ulbrich, Founder of Your Financial Pharmacist, talks through 10 home buying lessons that he learned over the past few months as his family makes the move from Northeast Ohio to Columbus. He shares the good, the bad, and the ugly and hopes these lessons learned will help you in your home buying journey.

Summary of Episode

Tim Ulbrich shares the top ten home buying lessons he’s learned.

  1. DIY route
  2. Read, re-read and understand the fine print
  3. Set your own budget
  4. Ask lots of questions
  5. Put 20% down
  6. Shop around
  7. Consider the total cost of buying a home by including all of the fees
  8. Long-term hidden costs can make a difference
  9. Value of an emergency fund
  10. Have a great team around you

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Welcome to Episode 066 of the Your Financial Pharmacist podcast. I’m excited to be here, and this week I’m flying solo, following up on the two-part episodes that we did in episodes 064 and 065 with Nate Hedrick, the Real Estate RPH. And he’s going to be coming back on next week in Episode 067. We’re going to be doing a rapid-fire Q&A all about home buying. So if you have questions related to home buying, make sure you get those questions answered and ask them. You can head on over to the Your Financial Pharmacist Facebook group or shoot us an email at info@yourfinancialpharmacist.com, and we’d love to feature your question on the podcast next week in Episode 067.

So this week is all about lessons that my wife, Jess, and I have learned and in some cases, to be frank, mistakes that we’ve made during the home buying process. So we are in the thick of it right now, actually getting ready to move next weekend from northeast Ohio to Columbus, Ohio, so I’m in transition from my job at Northeast Ohio Medical University to Ohio State University. Go Buckeyes! Excited about the opportunities ahead and with this transition, of course, comes selling and buying a home. And so just a few weeks ago, when we were planning this episode, believe it or not, it started as five lessons learned. And it quickly grew to 10. And to be honest, it probably could be many more than that. But that’s just sometimes how it goes. And so this episode is about being transparent, it’s about being honest — I’m not going to hide anything from our listeners — and the reality is, even here, a topic that I feel like I know fairly well, I think this just shows that anything related to personal finance, we’re prone to making mistakes. There’s something to be learned in everything that we do. And obviously, I’m hopeful that these lessons can be passed on to you all in the community and can even help Jess and I as we go through this process again in the future.

So to be honest to the listeners, this process of home buying — and for those of you that have gone through it recently, you know that it can be exciting, it can be emotional, it can be stressful — all of which have a tendency to throw us off of our financial game. And I think when we’re talking about such a large purchase and a home buy, and obviously, the selling aspect of it as well, there’s lots of emotions that can be flying around, lots of excitement, lots of highs, lots of lows. And all of those I think are the more reason that we have to have our financial guard up when it comes to home buying and making sure we’re educated and ready to make the best decisions in this area.

And so a couple reminders that I have before we jump into some background about the move that Jess and I are going through and then I’ll jump into the 10 lessons learned. And if you listened to Episode 064 and 065, we reference that all of the month of September is about home buying. And so along with this month, we’ve developed a YFP first-time home buying quick start guide that you can download for free at YourFinancialPharmacist.com/homeguide. Again, that’s YourFinancialPharmacist.com/homeguide.

OK, so here’s the background. Jess and I have been living in northeast Ohio since 2009, actually neither of us are from this area. I grew up in Buffalo, New York — go Bills — and Jess grew up in the Toledo-Bowling Green area in Perrysburg she spent most of her life, and we’ve been in our current home in Rootstown, Ohio, for eight years. And we actually rented for one year prior to that, so we made the move directly after my year of residency. We came up to northeast Ohio, we’ve been here for nine years. Eight years, we’ve lived in our current home, and we had one year that we rented prior to doing that. Now, when we bought in 2010, we bought with an FHA loan — and you’ve heard us talk about that in episodes 064 and 065. And the main reason we did that is because we didn’t have 20% down for the home. And I’m going to talk about that as we do go through these 10 lessons that are learned. So we only put 3.5% down, which is standard with an FHA loan. At the time, we had lots of student loan debt, as you’ve heard me chronicle my journey before, had no significant emergency fund and had no clue, no idea of the process that’s involved. And ironically, as I look back on that, there was very little stress that was involved with that purchase when in fact, there probably should have been a lot of stress. Very little down, lots of student loan debt, no significant emergency fund, and having really no clue of what was going on and the papers that I was signing. Now, here we are in 2018, we’re moving to Columbus, exciting new job, going to be starting at Ohio State. I have no student loan debt, we’re able to put 20% down, we have a fully funded emergency fund, we’ve got a great retirement account and to start on that retirement. And I think we have a decent, solid understanding of the process. But to be honest, I’m finding it incredibly stressful. And I don’t know if that’s because I’m more aware of what’s going on, I’m more concerned about the places where things can go wrong, maybe I have a little bit of post-traumatic from 2010 and thinking of the things that I could have done better. Whatever the reality is, what I’m fearing right now in the moment as we’re about to close in the next week is I’m feeling a little bit stressed, a little bit anxious and obviously, there’s so many moving parts that go along with this process. And hopefully, we’re going to cover many of these in these lessons learned.

Now, the big difference here in 2018 is that we are both buying and selling. And obviously, all that comes with that and the timing of that can be incredibly stressful. So here’s the deal. At the end of the day, home buying, like any other part of your financial plan, it’s all about being intentional. Being prepared, putting it in the context of the rest of your financial plan, and giving yourself from grace when you make a mistake here or there, and learning from those mistakes and being willing to share those mistakes with others. The only difference here is this is arguably the largest purchase that you’re ever going to make.

And so here we go, 10 lessons that I’ve learned or maybe a better word here would be mistakes or maybe even things that have been reinforced for me as we went through the process back in 2010 and I’m reliving here in 2018.

No. 1, the DIY route, the Do It Yourself route, has saved us a lot of money. BUT, capital B-U-T, is that wow, it has been a lot of work and to be frank with you, I’m not sure if I would do it again. Now, what am I talking about, the DIY route? So No. 1 here, the DIY route has saved us a lot of money, but it’s been a lot of work, and I think it’s added a lot of stress along the way. So what I’m referring to is in terms of the DIY of the sale of our home. Now, the only reason we are doing a for-sale-by-owner is because we literally have somebody in our neighborhood that was interested in buying the home. And so long story short, a few months ago when we were just getting ready to think about putting our home up for sale, we have a Facebook community group that has a, somebody sent out a message and said, ‘Hey, we’ve got somebody in the neighborhood that’s been renting. They’re looking at buying. Is anybody looking at selling their home in the next year?’ Saw the message and said, ‘Well, in fact, we are.’ And so I reached out to them and said, ‘Hey, we’re looking at selling. If you’d love to see the home, we’d love to have you come over and check it out.’ They came over two days later, came back and saw the home another week later, and they said, ‘Hey, we want to buy the home.’ And so obviously at that point, I didn’t feel like we needed to have a realtor in the process to be giving up 6-7% of commissions on the home. And so ultimately, by not having a realtor in the process, that saved approximately $12,000-15,000 if we were to assume a 6-7% realtor fee on the sale price of the home, which is pretty standard. Now, that sounds great, $12,000-15,000, but as I’ve alluded to in the intro to this No. 1 DIY route saved us money, but is it’s been a lot of work, a lot of stress and a lot of ups and downs all the way. And so because we had a neighbor that was looking to buy it, it made sense, we didn’t have to go through the process. We have three young children, so going through that process of listing the home, showing the home, we’ve been through that before and we know how much work that could be. However, as I look back and as we work through the process of making sure the language in the purchase agreement or the contract was in line, looking and finding a title company that we felt comfortable with, being in constant communication between the parties, the different lending agencies, the title company, the sellers — or excuse me, the buyers that are looking at the home, you are that central glue to the process. And really, the thing that I think has got me the most is the uncertainty that can come with this process. And things have literally been in flux from the second we started working with these buyers. And nothing that necessarily is on their back, but they ended up switching lenders because they were having difficulties with one lender, which re-started the entire process, which meant that there was paperwork that had to get re-filed, and ultimately, we are now running up against potentially not having our closing dates align — fingers crossed we’ll hopefully figure that out tomorrow if that’s going to happen. And ultimately, we are so far along the process with them and we have been along the way, and it’s a great opportunity to have them involved so early, but where ultimately it’s at some regards at the whim of what’s going on in their situation, and so that can make things quite different. And now I will say if I did not feel comfortable with working a title company that we had a good connection with, being able to reach out to the Real Estate RPH, Nate Hedrick, with a question here or there, working with my financial planner and YFP team member Tim Baker, obviously all those really help support me along the way. But I think that as I look back on this journey, I’m not sure that I would do it again, although ultimately, it did save us money in the process, so what’s the lesson learned to be here? If you are somebody that is selling your home and you’re looking at the DIY route, make sure that you feel comfortable and understand all the pieces and parts of the process and not just look at what am I going to save by not having a realtor fee, but do you feel comfortable with everything that’s behind you and how might that also impact you on the buying side of things? So that’s lesson learned No. 1.

Lesson learned No. 2 is the importance of reading, re-reading and understanding the fine print. Now, this sounds like common sense, and you’re probably thinking, Tim, come on. You do this all the time, how do you not read the fine print? Now, it’s not that I didn’t read the fine print, I’m actually quite obsessive about reading the fine print. But it’s making sure that you don’t assume things along the way in the fine print and you re-read the fine print. And obviously when you’re going through this process, you’re excited about buying a home, you’re excited about selling a home, you want things to naturally work out, so you have an optimistic lens in which you’re reading things. And so I think that tendency there, at least it was for me, is to not really read to the detail and understand to the detail that you’re asking the tough, probing questions and you’re not making assumptions that somebody else is taking care of it. And so there’s lot of fine print to read. You have the purchase agreement documents, you have a loan estimate documents that will show you as you get closer to close what are all the different fees involved and what you need to bring to the table as you are selling your home, and as you’re buying your home, what you need to bring to the table at the point of close and what are all those fees that are involved and do you understand exactly what that 85-page document says. And if not, are you willing to ask the questions along the way? You know, what a couple examples that I’ve run through along the way here is actually in a home that we were looking at purchasing in Columbus, that ended up falling apart is that there was something in the contract, which come to find out is actually pretty standard in Columbus contracts, that essentially gives the sellers a three-day, 72-hour clause, almost like a seller’s remorse clause. So if for whatever reason within 72 hours the seller decides, you know what, I really don’t want to sell my home because of reason A, B or C, they can pursue that if they issue an attorney letter explaining exactly why they do not want to pursue that, and that ultimately gives them a right out of that contract or at least to have to offer a counter to that, but of course, they could offer something that is egregious and ultimately, you’re not going to be interested in anyway.

So I’m going to give you an example of this is that we were looking at a home in Columbus. And I never knew that a washer and dryer were something that would be such a big deal to a seller. So long story short, in Ohio, it’s pretty standard that your appliances are going to stay with the home, the washer, dryer, that was going to stay, that was in the contract. We were on vacation, we get a call from our real estate agent, who says, ‘Hey, you know what, the buyer — excuse me, the seller really didn’t want to give up their washer and dryer, they didn’t mean to do that. Can they pull it out of the contract?’ And without even thinking much about it, not really objectively thinking, you know what, now we’re going to have to spend money to buy a washer and dryer, wasn’t trying to be a jerk but said no problem, they can keep the washer and dryer. Just add $1,000 toward close and we’ll go out and buy a washer and dryer. Well, that apparently sent the seller off the deep end, and I guess if you love your washer and dryer, you love your washer and dryer, that’s how it is. And they decided to pursue that clause, issue an attorney letter, spent $300-something dollars to do that, and came back with a counter offer that was $20,000 above what we had originally agreed on, which obviously, we were not interested in at that point. And so the lesson there was I read the purchase agreement. I read every detail of it more than once. But I never caught that section and the detail that obviously until it plays out, I thought maybe you can’t even necessarily do that. And so making sure you’re asking questions where you’re confused, you have people around you that can help and support you, and I think what I’ve learned is that by reading the fine print and showing a commitment to your real estate agent if you’re working with one, to the title company, to the lender, the more you are reading, you’re learning, you’re asking questions, I think the more informed buyer that you are, and it keeps all parties accountable and they’re ready to answer your questions because they know they’re probably coming. So No. 2 is the importance of reading the fine print.

No. 3 is a key one. And Nate and I talked a little bit about this in episodes 064 and 065, but I want to reemphasize it here is that you as the buyer set your own budget. Do not let the bank or the lender set your own budget. And I can speak here from firsthand, going through this right now, is that it’s easy to look at a certain range and then you start looking and you think, that would really be nice or this area would be really nice, and all of a sudden, you’re creeping up. And if the lender is setting the budget for you, you’re not going to necessarily really evaluate does the purchase of this home fit within the context and the other financial priorities that I have? It’s a great example that’s right now is that when Jess and I started working with our lender, Wyndham Capital, who has been outstanding, they’ve done a great job, is that they essentially — and this is in part because I think the lending is fairly loose right now because of how good the market is versus where it was, say, 10 years ago after the crash — they pretty much said, I hear what you’re saying, I know what you want, but you can have double that. Or are you sure that you need to or want to sell your current home? Because you know what, you don’t necessarily have to from our end. And so remember, and Nate talked about something called the 28-36 rule that will be used by the lender in determining what they will allow you as a maximum, what they will allow you as a maximum, to take out or to loan. And the 28-36 rule basically says that a household should spend a maximum of 28% of its gross monthly income on total housing expenses, total housing expenses, and no more than 36% on total debt, including housing and other debt such as car loans and other debt that you have as well. So the 28-36 rule, which may be used by a bank to determine what they will allow you or what they will give you in a pre-approval, $400,000, $500,000, $300,000, isn’t necessarily what you should be purchasing in the context of your other financial goals. And this is where it’s really critical to take a step back and say, what other financial priority goals am I trying to achieve? Maybe it’s paying back student loans, maybe it’s paying off credit card debt, saving for retirement, kids’ college, whatever the other things that you’re working towards, and how can I purchase a home in a way that allows me to achieve these other goals? And what is the maximum I am willing to do in terms of that purchase, not what the bank is willing to give to me.

So just quickly, a couple rules of thumb that I really like that you may have heard of before. If you’ve listened to or read any of Dave Ramsey’s stuff, he refers to a mortgage payment — and there’s different variations I’ve heard of this — a mortgage payment — it could be the mortgage alone or it could be the mortgage and insurance, it could be the mortgage, insurance, taxes and interest, so you’ll hear different versions of this — that is no more than 25%, no more than 25%, of your take-home pay. So if your monthly take-home pay is $8,000, this rule of thumb would say that your mortgage payment, and if you want to be conservative, with taxes, with insurance, with interest, your total monthly payment would be no more than $2,000 if you had an $8,000 take-home pay. Now, what that’s trying to do is prevent you from becoming or feeling like you’re house-poor. So if you have other goals that you’re trying to work on and achieve, you know then that no more than 25% of your take-home pay is going toward your home. Therefore, you’ll be able to achieve your other goals. Now, that’s a great general rule of thumb, but some of you maybe listening have no student loan debt, others of you may have $200,000 of student loan debt plus credit card debt plus very little progress on retirement, and obviously, those two situations would be very different. And so you need to evaluate this on a case-by-case basis.

Another rule of thumb is from the book, “The Millionaire Next Door,” by Tom Stanley says that no more than 2x your household income on the purchase price of a home. So if you have a household income of say $150,000, no more than $300,000 on the purchase of your home. Again, that’s trying to get to this idea of preventing you from becoming house-poor. And I cannot emphasize right now for those of you that are looking at buying in this moment, the lending right now — and I’ve experienced this firsthand — is pretty loose, meaning that you as a pharmacist with a good income, a good, stable earning potential, I think you’re going to find that the bank is willing to give you much more home than you probably need to have and that you probably want in terms of the other goals that you’re trying to achieve. And so what I really encourage you to do is zoom out of the lens of just the monthly payment and look at the total payout of what this home is going to cost you. So as one example, if you were to have a purchase price of a home around a $350,000 with mortgage, taxes, insurance, assuming a 30-year home with about a 4.5% interest rate, it’d be about a monthly payment of $1,900 a month for 30 years. If you do the math, that $350,000 home over the course of 30 years, you’re going to pay out about $684,000. Now, it doesn’t mean it’s a bad decision. It may be a great decision, depending on the other financial goals and what you’re trying to achieve, but looking beyond just the monthly payment also helps you look at this in a different way and evaluate how does this fit in with the other goals that you’re trying to achieve.

So No. 3 here is set your own budget, it’s a great reminder. Jess and I had this reminder this year, especially as the lending is loose. Don’t let the bank set the budget for you.

No. 4 is ask lots and lots and lots of questions. And I alluded to this a little bit in No. 2, but Jess and I have experienced this firsthand is that you want to be respectfully annoying. Be respectfully annoying because I think asking questions and showing a desire to learn, as I mentioned before, keeps all parties — the title agency, the loan officers, the lenders, everyone that you’re working with — let’s them know that you have a desire to learn, let’s them know that you’re ready, you’re invested, and I think it keeps people more accountable along the way. And I’ve had several individuals in this process, everyone from the loan officer to the title agency say, ‘You know what, I can tell that you’re really interested in this, and I usually don’t get these types of questions.’ And I think ultimately, I want them to know that I’m probably going to be asking questions. I think that helps them give me a more detailed and thorough response, also helps keep them accountable to make sure that they are giving the attention due to the process that is going along the way.

And I think this is really true of anything, whether it’s a home, a car, any major purchase that you’re making, an educated buyer, I truly believe, is going to get the best value along the way. And so just a few examples that we have in the lesson learned of the value of asking lots of questions is by asking lots of questions along the way, this has allowed us to negotiate and reduce title fees that actually identified an error in a property tax calculation that got corrected — and maybe that would have probably been identified anyways, but that question really helped identify that, and obviously that led to a reduction in what will be our future monthly payment. And for us, most importantly, as those two examples I just gave you are short-term savings, is that it helped us ensure we understood the process and we know exactly what we’re paying for. So whether it’s cost at closing or whether it’s when we send in that monthly payment each and every month, I know exactly where that money is going each and every month. And I think obviously that is powerful in and of itself, but I think it’s valuable just to know going into the future when we do this again or as we’re helping guide others in the process as well, knowing where that money is going, I think obviously is going to help motivate us to eventually get this paid off and turn this liability into an asset.

OK, so No. 4 is asking lots of questions.

No. 5, I’ve hit on this many times on the podcast and in blog posts, is the importance of 20% down. Now, no judgment here. I’m speaking from making this mistake back in 2010, I alluded to that at the beginning of the episode. Jess and I put 3.5% down through an FHA loan, and to be frank with you, we were paying for that for many years — really up until probably the last year because the reality is the way the mortgage is constructed with interest, it takes so long to build up equity in a home. And so to me, there’s lots of reasons to have 20% down on a home. Instantly, you have equity in the home. So if something like 2008 were to happen and the housing market would flip, you’re not likely to be underwater on your mortgage. Or what if you go to sell unexpectedly in two years because of a job change? And maybe you thought you’d be there 10, 15 or 20, you could build up equity, but you’re not for whatever reason or something unexpected happens. Now, you may not have enough equity in the home to cover all the costs associated with selling that home. And obviously then, you’re going to need additional funds to bring to the table to cover those costs.

Other advantages of 20% down — obviously, no Private Mortgage Insurance, we’ve talked about that, PMI, which is foreclosure insurance. You don’t have restrictions that are associated with loans like an FHA loan, which is in terms of how that PMI is structured and how you’re going to pay it, more stringent inspections and appraisal processes. And I think obviously, 20% down just keeps it simple. No PMI, no restrictions on how that loan is being structured, a cleaner inspection, appraisal process, you’re not trying to buy points in the process and trying to eventually get your PMI reduced. It makes a conventional loan purchase process incredibly simple, and I think it makes you an attractive customer to the lender. That’s something I heard over and over again from the lender that we’re working with, Wyndham Capital said, ‘You know what, you’re a great buyer. And we’re glad to be working with you,’ and I think it’s because of that 20% down, they obviously feel very comfortable with that conventional loan.

Now, the other thing I think 20% down really does — and again, I’m speaking here out of a personal mistake — is that it forces you down in the expectation of the home that you’re buying. It forces you down in the expectation of the home that you’re buying. Now what do I mean by that? If Jess and I right now were to say, ‘You know, we really want to buy a $500,000 home,’ if we stayed committed to 20% down, that would mean we have to come up with $100,000 in cash to be able to go to closing at that home plus the closing costs on top of that. Now, if we don’t have $100,000 equity in our current home or we’re buying for the first time, that obviously is going to take a lot of time to build up $100,000 of cash to be able to close on that home. So I think what that does if you stay committed to 20% down, you say, you know what, maybe that’s a $250,000 home. Maybe that’s a $300,000 home. Maybe less than that or maybe slightly more than that, depending on the market that you’re living in, will allow you to potentially buy down on the home, whereas if you go into a 0% down loan or a 3.5% down loan where you have to bring very little, if any, cash to the table, obviously I think it’s much easier to buy up on home and find yourself in the situation where you feel house-poor.

refinance student loans

So 20% was the lesson learned No. 5, and I think here, this is an important point where you really have to evaluate, am I rushing to buy a home? Should I stay in a rent situation for longer? Should I buy? We have talked about this at great length, and what I would reference you to and will link to in the show notes is the New York Times has a great rent v. buy calculator that really helps you look at this in an apples-to-apples way in the best that you can to make the comparison. Because I know the trap that I fell into was well, I’m paying $1,100 a month for rent, my mortgage with taxes and with insurance is going be $1,100 a month. Why wouldn’t I buy a home and build up some equity? And the reality I learned, which is an obvious one now looking back is that I was really building very little, if any, equity because of how the loan was structured and because I had almost nothing down and I forgot to include all those other fees on top of that in terms of the maintenance and everything that comes with the home that easily is upwards of 30-50% of the mortgage payment by itself.

So before we jump into points 6-10, I want to take a quick break and just re-emphasize something we talked about in episodes 064 and 065 is that if you are looking to buy or sell a home, get started in real estate investing or have a question that you want to have answered by a licensed real estate agent that is also a pharmacist, make sure to head on over to YourFinancialPharmaicst.com/realestateRPH to get in touch with Nate Hedrick, the Real Estate RPH. Again, that’s YourFinancialPharmaicst.com/realestateRPH. And you can submit your question. We have a few details and information to fill out, and he will respond to you as soon as possible. Again, we’ll have him back on in Episode 067 for the rapid-fire Q&A on home buying.

OK, so points 1-5, we covered lessons learned. No. 6 is shop around. Shop around for title companies that you’re working with if your contract allows that, shop around for the lender that you’re going to work with, but be careful how you do it. So lesson learned No. 6, shop around, but be careful how you do it. Now, why am I saying be careful how you do it? So I made a mistake — and I alluded to this on Episode 065 — I made the mistake of saying, I’d really like to see this tool that’s out there now advertised called Lending Tree becuase if it’s a good tool to compare for lenders, rather than just depending on the local bank or a lender that I’ve worked with previously, I’d love to be able to share that with the YFP community. Now, I’m glad I tested that first because honestly, I would not recommend that you use a tool like Lending Tree because I submitted my information, and literally for about a month-long period of time, I was getting phone calls and voice messages all day long of lenders trying to get ahold of me, even long after I selected a lender. And so I think that the point here is a good one is shopping around and not just depending on one lending quote or one title company, whatever you’re working with, one real estate agent, is really shopping around will allow you to look at multiple options just like you would with any other major purchase. However, do not just focus on the price when it comes to a title company or an insurance quote that you’re getting or a commission that you’re going to pay a real estate agent or a rate that you’re going to pay a lending company on your loan. That certainly is a critically important factor, but you need to make sure you’re looking at the other components like are they easy to work with? Are they communicative? Are they responsive? Do they have a good reputation? Because I can tell you from this process over the last month, all of these individuals I’ve been in touch with, on some weeks on a daily basis. And so working with one lending agency that’s going to give you a 4.55% rate versus another that’s going to give you a 4.6% rate, but one’s not going to respond to you as much or not going to close on time, they’re going to cause you a lot of headaches, you have to really evaluate is it worth it? And obviously, if you can get the best of both worlds, that’s the place to go. And so making sure you’re shopping around for all these different areas, making sure you know what is and is not neogtiable, I think is a great lesson to be learned, certainly one that I’ve learned. But be careful how you do it in terms of getting multiple quotes.

Lesson No. 7 is make sure to consider all of the total costs and fees that are associated with buying a home — and if you’re selling a home, obviously that’s associated with the selling as well. And to be fair and to be honest, don’t be surprised by a few more that come along the way. And there was sometimes I would look at documents, and just this past week, I was looking at our loan estimate closing documents, and all this laundry list of title fees and no explanation of what they are. And they ended up being legitimate fees, but again, back to being an educated buyer, making sure you’re asking questions, making sure you’re trying to compare one of these to another if you’re looking at shopping around with two different companies, but I think what tends to happen when you’re buying a home is you hone in on the sale price of the home alone. So ooh, that home’s at $350,000, it’s within our budget. Great, that is certainly an important factor, but what about all of the other fees that are involved.

Now, if you’re just buying a home, as Nate mentioned on the previous episodes, there’s really no realtor fees that are involved because of how they’re absorbed by the seller, so that’s simplified somewhat. However, when you’re on the selling end, you obviously have the realtor fees, which can be 5-7%, roughly, of the sale of the home. And depending on the purchase agreement, you may be responsible for some of those at the buyer’s expense. And obviously, that can vary from state to state, region to region, purchase ot purchase. You’ve got the down payment on the home, you’ve got the appraisal cost, you’ve got inspection, you’ve got title fees, you’ve got prepaids at close in terms of homeowners insurance and mortgage insurance if you don’t have 20% down, and property taxes and HOA fees. You’ve got moving fees, right? So if you have to pick up and move across the state or across the country, are you going to hire a mover? Are you going to do it yourself? Are you going to have them pack? Are you not going to have them pack? And of course, you have the transitionary fees. So as you’re in the pack-up phase, you’re probably eating out more, you’re taking trips to Lowe’s to fix things on your current home before you sell if that’s the case or when you’re buying a home, when you get there to do some quick home improvements. So really set out and not just look at the purchase price and say, ‘OK, we got to 20% down or whatever our goal is.’ But look at all of the costs that are involved with the purchase along the way.

And prior to this episode, I sent a note out to our Facebook group to say, hey, what are some of the lessons that you’ve learned along the way when it comes to home buying. And I like what Wes said in terms of ‘be wary of what’s called a special assessment fee in a new neighborhood. Typically, it’s a fee being applied to each homeowner for the cost of development of the new neighborhood. Think bonds taken out by the municipality that include interest that then are being applied equally to each new homeowner for a period of time, say it’s 10 years.’ So Wes, thank you for contributing. For those of you that are not yet a part of the YFP Facebook group, we’d love to have you join. And I think that’s just an example of this laundry list of fees and miscellaneous fees and more fees that can come along the way. And I think the lesson that Jess and I learned is we are so focused on the sale price and so focused at getting that 20% down, thankfully, we had some buffer beyond our six-month emergency fund, our 3-6 months emergency fund to cover some of these other costs. But making sure you’re really looking at the entire picture of all fees that are involved. So that’s No. 7 is consider all the costs.

No. 8, the lesson learned here is the long-term “hidden costs” when buying a home that can make a difference. Now, I’m not talking about the transactional cost, I’m talking about the long-term hidden costs beyond what I just covered in lesson No. 7. So here, we’re talking beyond the sale price, beyond the transaction costs. So what I’m referring to here are things like property taxes, homeowner’s insurance, HOA fees, local income tax if that is applicable or not. And so I think here that again, another area you tend to focus, I know we tend to focus, on the sale price of a home. But in reality, from one neighborhood to another in the same city, your property taxes could be different by $2,000-3,000 a year. Well, that has a huge impact on your monthly payment. Or homeowner’s insurance that you’re going to be paying each and every month, each and every year. Or does the development have HOA fees or not? Does the city have a 1-2% local income tax or not that you’re going to be paying each and every year? These are the long-term, what I call hidden costs that — not saying you necessarily wnat to avoid these because there could be great reasons for being in an area that has these: great schools, great community, great neighborhoods, etc. — but making sure you’re aware of these and how they’re going to contribute to your monthly payment and making sure you’ll be able to stay within budget and to achieve your other financial goals.

And Brittany from the Facebook group here says that, ‘Upkeep costs of one home versus another for sure. So we have two acres and a pool. Upkeep is quite pricy.’ And I think that’s great is if you’re looking at two very different styles of home that’s on land, a home that’s not on land, a home that has a pool, a home that does not have a pool, or any other factor like that, what is going to be the upkeep differences and making sure you’re acounting for those and how that may fit into your monthly budget, obviously those factors being beyond your monthly payment.

No. 9, Jess and I have learned this firsthand, we are feeling it right now, is the value of having a solid emergency fund in place when you’re making these big purchases. So we’ve talked many times before on this podcast and the blog, 3-6 months of expenses in a long-term savings account set aside to cover a job loss or some other emergency fund, and I think it goes without saying that here, when you’re making a massive purchase, you’re in a transitionary period of time, a solid emergency fund in place gives you peace of mind that if something goes wrong on either end, if you’re buying or selling, or you have some backup there during a transition, if you have a gap of employment, as I mentioned, something goes wrong, the peace of mind here can not be traded in terms of what a solid emergency fund will bring. And so I’m a big advocate of, again, 20% down, a solid emergecny fund, neither of which Jess and I did on our first purchase, both of which we’re doing now, brings an incredible amount of peace and I think reduces anxiety during that transitionary period.

And finally, lesson learned No. 10 is the importance of having a good team around you. Now, I mentioned at the very beginning, lesson No. 1, that we’ve taken the DIY for-sale-by-owner approach because we had essentially a buyer approach us in our neighborhood. And so we don’t have the real estate agent involved in the process. However, as I alluded to, if I had to do it all over again, even with a known buyer, I would question that decision, although it’s had great value. And so here, a great team around you, I’m referring to a real estate agent that is transparent, that is acting in your best interests, that you know and that you trust; a good financial planner that knows your situation and that can keep you accountable in this process. So for Jess and I, Tim Baker is a phone call away, and I called him just a couple weeks ago because we were having some potential issues and still are potentially with closing dates to say, hey, what are the options? Help talk me through this. What am I not thinking about? What are my blind spots? And I think for such an emotional, big decision, having a financial planner on your team that can say, hey, does this fit in the context of all these other things that we talked about? Or what if we waited three more months? Or maybe it’s the right time, but what about this or that? Somebody to keep you and/or a spouse accountable through this process is incredibly important. Obviously, you have the lender, the title company, this team is one that you’re going to be communicating with regularly. And Nate alluded to this on previous episodes, making sure you have this team ready to go and knows exactly what your priorities are before you get started in the process.

So there you have it, 10 lessons learned that are reinforced or in some cases, mistakes that we’ve made through this process. And we’re not fully through it yet. So we’ve got a couple weeks. Hopefully at the end of this month, we’re going to be moving into the home in Columbus. We’re in the final processes of getting paperwork signed, closing date’s hopefully this Friday, early next week. And so stay tuned; I may have more stories to share — successes, mistakes along the way. Again, that’s what this is all about, hopefully helping you learn through the process as well and I’m hoping through these lessons, you can save yourself some headaches and do this in a better way or potentially even share some of your own stories with others as well.

So as a reminder as we wrap up here, again, along with this month-long series, we have a YFP first-time home buying quick start guide that you can download at YourFinancialPharmacist.com/homeguide. Again, that’s YourFinancialPharmacist.com/homeguide. And as we wrap up this episode of the podcast, I want to take a moment to again thank our sponsor of today’s show, Common Bond.

Sponsor: Common Bond is on a mission to provide a more transparent, simple, and affordable way to manage higher education expenses. Their approach is no big secret. Lower rates, simpler options, and a world-class experience, all built to support you throughout your student loan journey. Since its founding, Common Bond has funded over $2 billion in student loans. This is the only student loan company to offer a true one-for-one social promise. What that means is that for every loan Common Bond funds, they also fund the education of a child in the developing world through its partnership with Pencils of Promise. So right now, as a member of the YFP community, you can get a $500 cash bonus when you refinance through the link YourFinancialPharmacist.com/commonbond. Again, that’s YourFinancialPharmacist.com/commonbond.

Tim Ulbrich: Thank you so much for joining me today. I look forward to next week’s episode where we’ll bring Nate, the Real Estate RPH, back on to do a rapid-fire Q&A on home buying. Have a great rest of your week.

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YFP 065: 6 Steps to Home Buying (Part 2)


 

6 Steps to Home Buying (Part 2)

On Episode 065 of the Your Financial Pharmacist Podcast, Tim Ulbrich is joined by Nate Hedrick, the Real Estate RPh, to continue a two part series covering the 6 steps to home buying every pharmacist should consider during this exciting process.

Summary of Episode

Nate Hedrick, pharmacist and licensed real estate agent, talks with Tim Ulbrich about the benefits of home buying for pharmacists and the last three of six steps to take when you are considering buying a home. As in Episode 064, these steps to home buying are found in the Home Buying Quick Start Guide.

Step four covers choosing a loan and getting pre-approved. Nate discusses the differences between being pre-qualified and pre-approved for a loan and dives into breaking down different types of housing loans available, such as Conventional, FHA, VA, and Doctor Loans. Step five is all about finding your home and negotiating. Depending on what type of housing market the house you are looking to buy is in, you may be able to negotiate closing costs, a home warranty, or inspections. Nate stresses that everything is negotiable, within reason, and to not focus solely on the purchase price. In step six, the final step of the home buying guide, Nate covers how to inspect, insure, and close on your home.

About Today’s Guest

Nate Hedrick is a 2013 graduate of Ohio Northern University. By day, he works from home as a hospice clinical pharmacist for ProCare HospiceCare. By night, he works with pharmacist investors in Cleveland, Ohio – buying, flipping, selling, and renting homes as a licensed real estate agent with Berkshire Hathaway. This experience has led to a new real estate blog that covers everything from first-time home buying to real estate investing. Nate’s blog can be found at www.RealEstateRPH.com

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Nate, welcome back to the show. How are you doing?

Nate Hedrick: Great. Thanks so much for having me again.

Tim Ulbrich: Awesome. Excited to be here in Episode 065 where we’re continuing to talk about the six steps for the home buying process. And we talked about, in Episode 064, we talked about the first three: making sure that you’re ready to buy a home, we talked about determining what’s important and then ultimately, assembling the right team. And as a reminder for our listeners, you can go to YourFinancialPharmacist.com/homeguide to get a copy of this. No need to take notes. We’ve got it all there for you in more detail, even, than what we’re talking about here on the show. So let’s jump right back into step No. 4, and here we’re talking about choosing a loan and getting pre-approved. So before we talk about the different types of loans, talk us through the pre-approval process. What does that mean? And how does that play out as people are looking for a home? And when should that part of the process take place?

Nate Hedrick: Yeah, great question. So there’s two components here. And here, we have two different terms thrown around. One is pre-qualified, and one is pre-approved. I’m here to advocate, basically, for the pre-approval side of things. Basically, both of them are going to be that the lender says, within some capacity, that this is the amount of money that we would be comfortable lending you if we were to offer you a loan in the future. The biggest difference here is that a prequalification is a very simple, they can do it within an hour or two, they just look at your income, and they give you an idea of what you likely would be able to be lended. And honestly, it’s very weak when you’re bringing that to the table as part of an offer. Pre-approval is a little bit different in that it actually looks at your finances and it really goes through your income, your credit, your current debts, just your financial health in general. And it says, without a doubt, this is the limit at which I will happily lend you. And as a seller, you can take this letter and say with confidence that there’s going to be a loan available to this particular buyer if I accept their offer. So it’s a really powerful tool that you can bring to the table when making an offer because, again, it shows the seller that you’re serious, and it shows them that you are capable, that you’re financially capable of handling the offer that you’re saying you are.

Tim Ulbrich: Yeah, and I think my impression in the market the way it is right now, Nate, is that basically to your point, if you want to be competitive, you better have that pre-approval letter ready to go at the point of making an offer.

Nate Hedrick: Oh yeah.

Tim Ulbrich: So I think going all the way back to step No. 1, you know, before you go to the bank and get that pre-approval and are making sure that you have determined what is the appropriate budget for you. Because my experience, not working with you, Nate, but working with other real estate agents, is that often if I have a pre-approval letter for $500,000, even though that may be outside of the range of what we’re looking for, that often may dictate the types of homes that are being shown to you. So being really ready to establish that budget. And let me give a word of advice to listeners, a mistake I just recently made — and actually, I’m glad I made it before we took it out to the YFP community, but I wanted to use a tool like LendingTree that’s out there to see what are the different quotes that you can get to begin this process. And basically, LendingTree is a compilation of a bunch of different lenders, and you can quickly see different lenders that are out there, you can see what the rates that they’re offering, you enter some information, and I thought, oh man, if this works out, this would be a great thing to give to the YFP community as a tool to use rather than just going to one bank, being able to shop the market at large. And Nate, as you might suspect, I put in my information, and still, a month later, my phone is ringing off the hook.

Nate Hedrick: I was going to ask how your phone is doing.

Tim Ulbrich: Oh, man. It’s crazy. I mean, probably the first two days, I was getting 10-12 phone calls a day, voice messages, and I’m still getting them, even a month later. So I think the point of shopping around is a good one. I think the days of just going to one lender and calling it a day are over, but just be careful in terms of the process you’re using to shop around if you don’t want to get bombarded with phone calls.

Nate Hedrick: I would really recommend you ask your realtor too. They’re going to have a good inside scoop as to how these loan processors actually work. I can tell you in my own experience as a home buyer what it was like, but it’s really nice to know all of the inner workings of, OK, how responsive is this loan officer? And how responsive is their underwriting team? And that’s something you’re never going to get as a general consumer. So asking your real estate agent, going back to step 3 and making that a part of your team, but asking that agent, OK, which companies do you recommend based on my current status that I should get pre-approved with? And that can be a really powerful tool.

Tim Ulbrich: Yeah, and I think that’s great advice as well that you gave me when you’re also shopping around for homeowners insurance. You know, you certainly can go online and shop around for best rates, best dollar amounts, whatever, but really asking around and making sure you’re going to be able to deal with somebody that 1, is friendly but also 2, is responsive. You might save $50 or $60 a year, but if they’re not going to be very responsive to your needs, is it worth saving $50 or $60 a year, right?

Nate Hedrick: No. It’s invaluable, honestly.

Tim Ulbrich: So in terms of the pre-approval process, I think it’s important to note here as well that there’s going to be some items that you’ll need to provide for this pre-approval process. So you’re going to have to prove income, show your assets, so get ready to send in information related to retirement accounts, logging of any debt and other items, social security, could be rent history, credit reports, etc. And going through this process recently versus 2009 when my wife and I bought our last home, I was really impressed with how automated this has become. So rather than having to download forms and get it to the lender, now they’re using tools where you can enter information, and they’re automatically able to pull that information. So you’re not having to provide those documents every few weeks throughout the process, so obviously will be dependent on who you work with. But I think it’s cetianly become more convenient. So as we continue this step 4 of choosing a loan and getting pre-approved, I think it’s worth talking here about the different types of loans that are out there. And you mentioned one earlier in terms of conventional. So talk us through what exactly is a conventional loan? And then also talk us through some of the other ones, notably would be the FHA, the VA and then the doctor loans that are out there.

Nate Hedrick: Yeah. Great. So there’s a couple different types of loans, and this is by no means an exhaustive list. This is just some of the more common ones. Basically, when you think of a traditional mortgage loan, you’re probably thinking of what’s called a conventional loan. And this is usually with a 20% down payment, and it’s a 30-year fixed rate, and it’s a very kind of standard, general, run of the loan. And the biggest differentiator here is that the conventional loan is not secured or insured by the government. That’s the thing that differentiates it from an FHA or a VA type loan, meaning that the bank, when they take on the risk of you being a lendee, they take on that risk themselves with no insurance that they’ll ever basically be paid back. They’re using the home as collateral, but if you default on payments, that’s all they have. There’s no kind of backup plan. The biggest difference with a government-backed loan is that they do have that sort of backup plan. So because of that, they’re allowed to or they’re able to lend to some people who may not be as qualified, potentially, as someone that might go for a more conventional loan. Now that’s not to say that you or I wouldn’t benefit from the use of a FHA or VA loan, but it does open up the market a little bit better to more individuals. For example, an FHA loan drops the minimum down payment all the way to 3.5%. So if you’re someone that’s having trouble saving up money every single month, and that idea of a $40,000, $50,000, $60,000 down payment is just never going to happen, then this is maybe a potentially attractive option for you. The other thing is that it actually drops the required credit score in some capacity as well because that guarantee is there. So there are some benefits in that. The downside of an FHA loan is, however, some of the additional mortgage insurance premiums that you’ll pay. Because there is that greater risk, they’re going to charge you a little bit more in terms of mortgage insurance premiums. Basically all FHA loans, for example, require an up-front mortgage insurance premium, and it’s usually broken out into the — it’s basically broken down into the individual months, but there is going to be an extra amount that you pay every month for that added risk. So there are advantages and disadvantages to each side. The VA loan is a little bit different. VA loans are really attractive because of their — basically, you can get a 0 down, no money down, basically a loan agreement, but you have to be an active or retired member of the military or at least the spouse of an active or retired member of the military or National Guard. So that’s a really important thing to break out. And it’s not available to everybody, but if it is available to you, it might be a really attractive way to buy a home without as much money required down. So definitely something you need to look into. And then this new type of loan that’s really starting to emerge and we’re seeing it more and more are what we kind of casually refer to as “doctor loans.” And doctor loans or really any sort of specialty loan is what this is classified under are loans that are targeted toward certain types of individuals — in this case, physicians. So if you are a physician, and you’re making x amount of dollars a year, they’re going to look at you as a much more stable lendee than somebody who may not be a physician. And maybe that’s biased, maybe it’s not. But they know, on average, that these physicians are able to hold a higher loan amount or they’re more likely to pay it back or whatever. So they’re offering more attractive loan rates to people like that. So there are loans specifically — there are very few that specifically cater to pharmacists — there are a lot more for physicians available. But I think we’re going to see these specialty loans kind of growing, that you’re going to be targeted based on your occupation, based on your credit history, rather than the other way around.

Tim Ulbrich: Yeah, I think it’s worth mentioning, though, as you mentioned, there’s not a ton of them available out there for pharmacists, although there’s some. I think what I’ve been hearing and seeing is they’re expanding in their reach. And I think at face value, they can appear to be very attractive because of the little to no down payment that’s required, because of not necessarily having the mortgage insurance that’s tied with not having the 20% down in the conventional or the mortgage insurance premiums in an FHA, and because of their exclusion of student loan debt when they’re looking at your debt-to-income ratio, so I think all of those together really makes it a very viable option for somebody that maybe is a new graduate, they have tons of student loan debt, just to get quickly into their home buying process, whether or not they’re ready. And so I don’t think I’m trying to send a message here that these are terrible products, but I think that it just requires a little bit more work on the end of the consumer as those barriers are taken down for you to really do your homework and make sure you’re ready to buy before you jump into one of those loans if they were to be available to you.

Nate Hedrick: And regardless of the loan that you’re going to choose, you’re going to want to make sure you’re doing that homework. In fact, on our website, Real Estate RPH, we’ve got a lot of articles that talk about the different types of loans and really break down the advantages and disadvantages of each. So I encourage you to take a look at that because it’s a good idea to do your homework and understand the different parameters that are involved. It sounds boring, but this is a big part of your life. This could be 30 years of payments that you have to go with, so knowing that before you jump in is really important.
Tim Ulbrich: Yeah, again, in the guide, we have much more detail on each of the information on those four loans. So check that out. And in step No. 5 here, we have finding your home and negotiating. And I think this is a huge one, Nate, because I think often as you’re in the buyer seat, you get excited, again, you’ve got this emotional component, you’re ready to sign the papers, you like the home, you start to envision yourself there. And I think there’s that tendency to not go into that mode of negotiation. So talk us through this step of finding your home and negotiating.

Nate Hedrick: Yeah, so obviously the first step, you know, is going to be that hunt. And the market you’re looking in is really going to differentiate how that search goes. If you’re in a hot sellers market like you were talking about, Tim, that’s kind of what you’ve been dealing with it sounds like, homes are going to be on the market and off the market just that quick. And you’ve got to be able to put in offers quickly and respond to them quickly as well. Here in Cleveland, actually, we’re dealing with kind of a sellers’ market as well. I just sold a home for considerably over our asking price because it was that popular, there was nothing else in the area that was in really nice shape. So people were throwing in offers left and right. So you’ve got to be able to work quickly. That house was off the market within 72 hours of being listed.

Tim Ulbrich: Wow.

Nate Hedrick: Yeah. You’ve got to be able to work quickly if it’s that hot sellers’ market. And that can be really frustrating because you might miss out on something that you were really interested in. Conversely to that, if you’re in a cool buyers’ market, you have a lot of power in your hands. This is really when negotiations are going to be able to come in. You have the time to basically to find that right home, you’ll be able to look at several properties. My wife and I were really lucky when we bought our house a couple of years ago, it was definitely a buyers’ market. We were able to negotiate significantly and really take our time in making offers and thinking about things and working from there. And if you do get to that point where you’re at the negotiation table, realize that everything is negotiable, within reason. But everything is negotiable. I think many people focus on the final sale price as kind of that’s the end-all, be-all negotiation. But there’s a lot of things that can be thrown into there, things like closing costs, which we talked about on last episode. If you need a little help with that extra cash up front, make closing costs a part of your negotiation. Maybe you offer $3,000 more toward the purchase of the home, but you ask for $3,000 back in closing costs. What that allows you to do is basically finance more of the upfront cash requirements right into the loan itself. So you’re going to pay $12 extra a month over the 30 years that you have the loan, but you’re going to have those extra closing costs without having to save up and bring them to the table. So things like that. The other thing that I’ve seen a lot more of is basically non-standard items being entered in the negotiation. I actually just had a property that I sold near me, that I helped someone buy near me, and they had a large piece of farm equipment. Basically, it was a tractor, that the property had used, and the buyer wanted it. He said, ‘How much for the tractor?’ And they actually kind of worked it into the deal. Now, I want you to be careful. All furniture and basically non-secured appliance — and the real estate community refers to that as chattle — that’s anything that’s not a fixture of the home cannot technically be in the purchase of that home. So I can’t say, ‘I’m buying this house and the tractor for $500,000.’ I need to basically have a side agreement with the seller to basically negotiate that. But you can work that into the price in kind of an off-the-record kind of a way, and I’ve seen a lot of people doing that now.

Tim Ulbrich: Yeah, and I think to your point here and just building on what you’re saying and building on the conversation we had before about looking at things like property taxes and homeowners insurance and looking at some of the other components, I think the focus so much is on the typical purchase price, which of course is important and you want to get it at a fair price because obviously that’s going to impact equity when you go to sell it at some point, but there’s all these other things where I think you can really spend time digging into the details and the weeds and make sure that you get yourself a good deal. And you’ve talked about some of these things that you can negotiate. So obviously, there’s some of the things that are within the home, but also you have things like home warranties, you have appliances that may or may not be included. All these other parts of the sale that, again, not just ending at the home price and moving on, but really looking at the entire picture as you’re going throughout this process.

Nate Hedrick: And one important thing to remember is whatever you’re doing in terms of haggling, make sure you’re running everything past your agent. Don’t surprise them with something at the last minute that you said, ‘Oh yeah, we totally handshaked, we did a handshake agreement on that,’ because that’s not going to hold up anywhere. And if it’s going to title and escrow and eventually some sort of lawyer has to get involved, you don’t want to be on a handshake negotiation. So run everything through your agent, make sure it’s all legal and documented. And that way you protect yourself in the long run.

Tim Ulbrich: So Nate, something interesting I’ve seen, and I was always told it was kind of standard that — here in Ohio — things like a washer and dryer, refrigerator, whatever, stay with the home. And for whatever reason, both homes that we’ve been involved with in great detail, both of the owners had some type of fixation with their washer and dryers. It was an odd thing, but isn’t it pretty standard that those major appliances with the home? Or does that vary by region and state as well?

Nate Hedrick: You know, it varies. The best way to determine it is look at the actual listing. So if you are working with an agent and you have access to the MLS, which is the Multiple Listings Service for that region — and they should be able to provide you with this — the listing will define hey, these appliances are all included. And you can generally feel pretty confident going in that if it says washer and dryer, the washer and dryer’s included. And ultimately, if it’s on the purchase agreement and part of that whole contract is the washer and dryer, for example, then that has to be included. And the biggest thing that I’ve seen in terms of ways to kind of thwart this or be a little less than kosher is people will say, ‘Oh yeah, washer and dryer included,’ and then they’ll take the junk washer and dryer from the garage and they’ll hook those up and then take their really nice Samsung brand-new front-loading washers, and they’ll take those with them. So if you’re worried, be very, very specific, you know, x, y, and z washer and dryer have to stay.

Tim Ulbrich: Yeah. I think the other way I’ve seen that, Nate, and maybe this — I didn’t realize it before, maybe why the language existed was appliances, fixtures, whatever, as shown in the listing. And I think that gets to the point that you’re just making there. So OK, step No. 6, our final step here is inspect, insure and close. So here we’re talking about inspection, home warranties, and the closing process. So talk us through these final components here in step No. 6.

Nate Hedrick: Yeah. General home inspection is what you’re really going to be thinking of when you’re thinking about inspecting. And this is absolutely vital to your purchase. We talked a little bit about hot sellers’ markets. I’m seeing areas, not around us, but areas of Ohio, even, where the market is so hot and deals are moving so fast that people are foregoing inspections. And this is a really dangerous practice to get into. The inspection is kind of your final line of having a professional come in and looking at the bones of that house and making sure that it’s going to be safe for you and your family. And so really before you move in, before the deal ultimately goes through, you absolutely want to have that inspection done. And most of the time, the way this is going to work is that you’re going to put in an offer, and it’s going to be contingent on a number of things. And that basically means the deal will not go through unless I sign off on these individual pieces. And one of those contingencies is usually inspection. And again, I always, always advocate that you’re going to have this in place. Inspections usually run anywhere from $200-500, depending on the size of the home and how in-depth it is. And they can take anywhere from one up to — I was on one that was five hours long. But generally, they should be anywhere from 1-3 hours long. And they should really go through with you as the buyer and show you everything in the home. So if they talk about, the boiler is going out soon or the air conditioner needs to be replaced, then they should show you why that is and where that is and what that looks like so that you, once you acquire that home, if you do go through with the transaction, you know all the nuances of that house and how it’s all going to work.

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Tim Ulbrich: Yeah, I think that’s great advice, especially considering the cost of the inspection process. I think it’s a no-brainer, and I’m glad you mentioned that as a somewhat concerning trend that you’re seeing, especially in a sellers’ market. So that covers inspection, so talk us through home warranty. You know, that’s something you often hear about. Is it worth it? Is it not worth it? And then ultimately, the closing process as well.

Nate Hedrick: Yeah. So home warranty, this is a point of contention for a lot of people. It feels like — I’ll back up. A home warranty is basically a one-year insurance policy, for those that aren’t aware. It covers the replacement or repair of any major home appliance, so things like your A/C, your heating, your washer, your dryer. Basically, what it’s guaranteeing is that when you move in, one year from that date, if something breaks, there’s going to be a company available to repair or replace it at no cost to you. And that’s really, that sounds great. You know, it’s really a helpful thing that if you are already stretching your budget or you’re worried about some appliances that might not be working in the long run or over the course of the next year, a home warranty can be a really great way to insure that you don’t have to come up with a really expensive cost down the line. The story I always tell is that when I was buying our home, my wife and I said, ‘Oh, home warranty, that sounds like insurance for suckers. We don’t need that.’ And it was like, I think it was like $500, something like that. It wasn’t even that much. It was cheaper than that. Regardless, we said, ‘We don’t need that.’ And within like three months, our dryer broke, and we had to come up with all the money for the brand-new dryer. And luckily, nothing else broke. But it just, you know, when you want it, you never have it. And it just feels like one of those things that it’s usually not a large cost, if you’re getting it at the time of purchase, you can often get a really good deal on it. Basically, the home warranty companies want you to get it right when you buy the home, and so you can usually get it for only a couple hundred bucks. And then if something does go wrong, it’s going to cover that and take care of it. So it’s something to consider, it’s definitely not for everybody. If you’ve got a brand-new home with brand-new appliances, it’s certainly not necessary. But if it’s an older home, you’re worried about some of the appliances being on their last legs, it’s a really good idea.

Tim Ulbrich: Yeah, and what I saw back in 2009, Nate, in more of a buyers’ market, I would often see these negotiated where the seller would pay for this. And we tried that here in 2018, and the seller’s like, ‘Ah, no. No thanks.’ So I’m guessing that’s just a matter of the nature of the market and where things are at. But I’ve seen these policies as high as $700-800, so to your point, there’s a lot of variety here. Obviously, what does it include? What does it not? And making sure you’re shopping this around. But I think also here, not only for the potential cost it could come to be, but also think about the peace of mind and things you may not even know. And so another thing that I was taught here is making sure that if on inspection, not everything is looked at, hot tub functioning, some random appliance or two or whatever, a home warranty may be a place where you can have those covered in the event that something’s wrong that may not have come up or been reviewed upon inspection.

Nate Hedrick: Yeah, and the other thing I’ll point out that’s really important is ask your real estate agent about which companies they recommend. Again, having that person on your team is really beneficial because I know for a fact there’s a couple of companies that I will not recommend to my clients because I’ve seen in the past clients that used them and they’re unresponsive, they don’t help out in a timely fashion. If the air conditioner breaks, you don’t want to wait two weeks for them to repair it. So make sure that the company that you’re using is very, very reputable and has a really good response time because when this stuff goes down, it’s a major inconvenience you want fixed right away.

Tim Ulbrich: Absolutely. So Nate, we covered a lot in these two episodes covering the six steps to consider throughout the home buying process. And again, we have these available through the first-time home buying quick start guide that you can download at YourFinancialPharmacist.com/homeguide. And I’m guessing as listeners digest all of this information, we have some listening that are in the process of buying or selling or have questions, and they want to work with another pharmacist that has this expertise in real estate. So what’s the best next step that people can take that want to get in touch with you?

Nate Hedrick: Yeah, definitely. I’m always available for questions. I love working with pharmacists, especially, but really anybody that wants to reach out, I’m available. And as part of our partnership, you can find us right on YFP. So you can go to YourFinancialPharmacist.com/realestateRPH. That’s YourFinancialPharmacist.com/realestateRPH, and you’ve got a contact form there. Fill out a little bit of information about yourself and ask anything you want. I’ll be available.

Tim Ulbrich: Awesome. And as we continue this month-long series on home buying, next week, I’m going to talk through some mistakes that I’ve made throughout this process. And you know, you go in thinking, I’ve got this covered, I’ve been through it. And here we are, the reality of topic, I’ve learned a lot through this process, doing it again. So I look forward to sharing those. And at the final episode of September, we want to take your questions related to home buying. So questions from the YFP community. We’re going to do a rapid-fire Q&A. We’re going to bring Nate back onto the show and fire some questions at him. So the best way you can get us your home buying questions is you can jump onto the YFP Facebook group and join us if you’re not in there already, pose your question, we’ll grab it and bring it on the show. Or you can shoot us an email at info@yourfinancialpharmacist.com. So as we wrap up another episode of the Your Financial Pharmacist podcast, I want to take a moment to thank our sponsor of today’s show, Common Bond.

Sponsor: Common Bond’s on a mission to provide more transparent, simple, and affordable way to manage higher education expenses. Their approach is no big secret. Lower rates, simpler options, and a world-class experience, all built to support you throughout your student loan journey. Since its founding, Common Bond has funded over $2 billion in student loans and is the only student loan company to operate a true one-for-one social promise. So for every loan Common Bond funds, they also fund the education of a child in the developing world through its partnership with Pencils of Promise. Right now, as a member of the YFP community, you can get a $500 cash bonus when you refinance through the link YourFinancialPharmacist.com/commonbond. Again, that’s YourFinancialPharmacist.com/commonbond. Nate, thank you so much for taking time to join us and looking forward to having you back on in a couple weeks.

Nate Hedrick: Yeah, always a pleasure. Looking forward to it.

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YFP 064: 6 Steps to Home Buying (Part 1)


 

6 Steps to Home Buying (Part 1)

On Episode 064 of the Your Financial Pharmacist Podcast, Tim Ulbrich is joined by Nate Hedrick, the Real Estate RPh, as they kick off a two part series covering the 6 steps to home buying every pharmacist should consider during this exciting process.

Summary of Episode

Nate Hedrick, PharmD and licensed real estate agent, talks with Tim Ulbrich about the benefits of home buying for pharmacists and the first three of six steps to take when you are considering buying a home. These steps to home buying are found in the Home Buying Quick Start Guide. They are a great framework to follow whether you are buying your first or fifth home or are just starting to think about the home buying process.

Nate first lays out the benefits of home buying including being able to change the house and property how you wish, being your own landlord, increasing equity, taking advantage of tax credits and breaks that pair with home buying, and several others. Then, Nate and Tim dive into the thick of the episode, discussing the first three steps to home buying.

steps to homebuying

Step one involves making sure you are ready to buy a home. Knowing your budget, understanding your current debt-to-income ratio, as well as being aware of the additional costs of a mortgage are all important aspects of this first step. Step two urges you to think about what is important in your home search by narrowing down your must-haves. Be sure to think about location, size and space, and flexibility of the home you are looking for before beginning your search.

Step three is all about assembling your team. By bringing in professionals like real estate agents, financial planners, accountants, lawyers, the Your Financial Pharmacist community, and family or friends to be a part of this home buying journey, you will be supported with knowledge and guidance.

Be sure to listen to part two of this series to learn all about last three steps in home buying.

About Today’s Guest

Nate Hedrick is a 2013 graduate of Ohio Northern University. By day, he works from home as a hospice clinical pharmacist for ProCare HospiceCare. By night, he works with pharmacist investors in Cleveland, Ohio – buying, flipping, selling, and renting homes as a licensed real estate agent with Berkshire Hathaway. This experience has led to a new real estate blog that covers everything from first-time home buying to real estate investing. Nate’s blog can be found at www.RealEstateRPH.com

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Nate, welcome back to the Your Financial Pharmacist podcast. How you been?

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

Tim Ulbrich: So we’re excited not only to be doing this month-long series focused on home buying but also this two-part series outlining steps that pharmacists should take in the home buying process. And the good news is there’s no need to take notes. So Nate along with the team at YFP has worked hard on developing the first-time home buying quick start guide. You can get access to that at YourFinancialPharmacist.com/homeguide. Again, that’s YourFinancialPharmacist.com/homeguide. So Nate, it wasn’t too long ago, episodes 040 and 041, we had you on to talk about 10 Things Every Pharmacist Should Know about Home Buying, so are you ready to dig a little bit deeper here on this topic?

Nate Hedrick: Definitely, let’s get into it.

Tim Ulbrich: Awesome. And I’m excited also just to introduce Nate in a more formal role to the YFP community. I know, again, we had you on episodes 040 and 041, but we’re really excited about this partnership between YFP and the Real Estate RPH. We’ve got some awesome content coming to the YFP community. And we’re excited to leverage your expertise and bring you to the YFP community. So to our listeners, stay tuned. You’re going to see a lot more and hear a lot more on real estate from Nate Hedrick, the Real Estate RPH. So Nate, we’re excited to be on this journey together.

Nate Hedrick: Yeah, I’m really excited. I think it’s the perfect marrying of our two kind of entities. It’s going to be a great opportunity.

Tim Ulbrich: Absolutely. Alright, let’s jump in. Six steps, as you think about six steps for the home buying process. And I think before, Nate, we jump in to these six steps, I think let’s just start with kind of a high-level discussion of the benefits of owning a home. So for those that are listening that maybe are renting now or thinking about buying in the future, as you’re working with clients or potential clients, what are some of the things that you’re thinking of as benefits of owning a home to begin with?

Nate Hedrick: Yeah, definitely. I really write these down into the financial benefits and then I would call them the emotional benefits, if nothing else. The financial benefits are things like the equity that you’re able to build. You know, if your home goes up in value — and in general, the home market is going up in value. Obviously, we’ve got scenarios where it may not do as well, but generally, your home’s going to go up in value. You’re building equity in that home, your home is going to be worth more down the road. So it’s almost like an investment, makes for a great investment in your future. And then there’s also things like tax breaks. You can write off your mortgage interest and there are tax credits for first-time home buyers. You can deduct loan points, right, when you go and buy your first home. Energy credits, all that stuff. So there’s financial pieces that a lot of people benefit from, and then there’s also, like I said, the emotional side. You know, you’re the landlord now. You don’t have to answer to anybody. You can tear down a wall or put in a garden. It’s all kind of up to you. And there’s no maintenance department you have to call to make sure it’s OK and all that. So I think you have to key in on what’s the most important part to you. But you’ve got all these different aspects that make home buying really something to look forward to.

Tim Ulbrich: I’m glad you broke that down to the financial and the emotional because I think often when I’m talking with community members, I hear kind of that comparison just dollar-wise of renting and buying. And there’s a lot to consider there, of course. But you also have to consider some of those emotional aspects, as you mentioned. And you know, one of the great things of owning a home is just having a place to call your own. You mentioned being a landlord but also that sense of community that you can develop in your neighborhood and having that sense of stability of a place that you can come home each and every day. So as we jump into these six steps — and we’re going to cover three of them on this first part in Episode 064 and then we’ll cover three more in Episode 065. So Step No. 1, Nate, is making sure that you’re ready. Obviously incredibly important as I think this is a step that people jump over, jump past. They’re excited about getting a home, and buying a home, as you just outlined, can be a great move. But you have to be in the right position. So as you’re talking to a pharmacist, and you’re talking to them around this concept of making sure they’re ready, how does somebody know if they’re ready or not?

Nate Hedrick: Yeah. And just like the benefits, there’s an emotional side and there’s also a financial side that you really need to be able to weigh in on. Financially, I think because this is Your Financial Pharmaicst, that’s kind of the bigger focus here. But, well, we’ll touch on both. So the very first thing you want to look at is your budget and understanding your budget. It’s really easy to get out of school or be out of school for a couple of years, you’re making this great salary, and we’ve talked about this on the podcast before, but it’s easy to go to that bank and they say, ‘Oh yeah, you’re approved for a $700,000 home based on your income and your debt.’ But you have to know what your budget is. And there are 10 different ways you can calculate your appropriate housing budget, but you first need to know what that number’s going to look like because if you’re not able to wrap your head around that new payment that you’re going to be having every single month and all the aspects that go with it, you might run into some trouble down the line.

Tim Ulbrich: Yeah, absolutely. So knowing your budget, you mentioned there’s lots of different ways to get there. Are there general rules of thumb or things that you’re advising people to say, ‘Hey, this is roughly what you should be considering’ because we know, of course, the bank will help you set a budget, but ideally, as we’ve talked about before on this podcast, you as the lendee are better off to set your own budget than the bank is. So what are some general rules of thumb? What should people be looking for?

Nate Hedrick: Yeah, I’ll tell you what I use because it’s worked for me for years, and it’s a really simple but effective way to kind of get the raw numbers. So I use what’s called a 50-30-20 rule. And 50% of your budget of your take-home budget — that’s important, not your gross but your take-home budget — should go to your needs, things like food, clothing, shelter, everything that you absolutely need day-to-day. 30% of your budget, 50-30-20, the 30% should go to your basically your wants, excess stuff, so things like going out, entertainment, paying off loans faster, all those things that aren’t absolutely necessary but are important in having a comfortable life. And then the last 20% should be really your savings. Again, this is take-home pay. So 20% of that should be going into your savings or some sort of, again, you could throw a little bit more of this at paying off your loans or bumping up your retirement, something that is going to basically increase your net worth with that last 20%. So if you break those numbers down and we just look at the 50% for your needs, housing fits right into that. And so if you already know your food costs, and you know your clothing costs and all that other stuff that goes along with your needs, you can figure out how much is left over for a housing budget. And use that number with a couple of online calculators to easily get to a final housing number and what you can probably afford in a monthly payment. And that’s just one option. There are a lot more, but that’s one that’s worked for me because of its simplicity.

Tim Ulbrich: Yeah, I think that’s a good general rule of thumb. Obviously, this is going to be highly individual, right? So we know that people that, somebody that has $300,000 of student loan debt and credit card debt versus somebody that has no or a little debt, or of course cost of living can vary significantly from one area to another. I like your guidance there. The rule of thumb that I’ve heard before that I’ve used, and Jess and I are actually working through this right now as we’re on the home buying process down in the Columbus area, is no more than 25% of your take-home pay in terms of principal, interest, taxes and insurance. And obviously, again, in some areas, it’s more feasible or reasonable than others. But I think the point that we’re trying to get here is avoiding this idea of becoming house-poor and ensuring that your financial house is in order before you add on what arguably would be the largest payment and the largest purchase that you’ll ever make. So what will the bank give you? What are the rules of thumb that a bank’s giving you? Because I will say, going through this process in 2008 when my wife and I bought our first home — no, excuse me, 2009 — versus 2018 now, it seems like in 2009, we were put through the ringer. And it seems like now in 2018, it’s pretty much like, hey, whatever you want, we’re willing to give you. So what are the numbers, if there are any anymore, that banks are using?

Nate Hedrick: Yeah, it’s definitely getting a little lenient, which is a little bit scary, I’ll be honest. But the big numbers that you want to recognize is really what’s called your debt-to-income ratio. And no matter what type of loan you’re going to be getting, the conventional, FHA, VA, private, any of those, one of the biggest things they’re going to look at is your debt-to-income ratio, which is exactly like it sounds. How much debt are you carrying right now? What are you paying every single month toward your debts? And then what are you bringing in every month? And how do those compare? To give you some perspective on what they’re looking at, a bank for a conventional loan will use what’s called the 28-36 percent rule, 28-36 rule. And what they’re looking for here is that if 36% of your annual gross income, no more than that can go to your housing debt. So if you already have a significant amount of debt that’s taking up a lot of your income, basically that housing allowance can’t push that number over 36% because otherwise, they won’t be able to lend to you. So they do put some hard stops in place, and you can extend those hard stops with different types of loans, FHA pushes those numbers a little bit higher. VA has different limits. But there are some hard stops where they will say either your income is too low or your debt is too high, and you cannot take out this loan, basically.

Tim Ulbrich: Yeah, and I think the take-home point being here that you’ve got to obviously have a good budget in place already. You mentioned one method of doing that. We’ve had previous posts and podcast episodes talking about the zero-based budget, which we highly recommend on behalf of the team of YFP. I think, too, it’s worth, Nate, here thinking about the future on some level. So as you think about your month-to-month expenses now, what might, if anything, change in the future? So family situation, job changes that may come down the road, are there home repairs or other things, get an idea of what other portion of your monthly income might change as you move into the future and how that might impact what you’re ready to buy. And I think living this in-the-moment, right now, I cannot emphasize enough setting your own budget versus letting the bank set it for you. I know if Jess and I would not have done that, what we got back from the bank basically for the pre-approval was double what we had said was the high end of what we wanted to purchase. And so the bank doesn’t necessarily know exactly all the financial goals that you’re trying to achieve and other things that you’re working on, so making sure you’re setting that budget yourself before you go into this process. So what are the costs that our listeners should be thinking about associated with a mortgage? Of course you’ve got a down payment, so talk us through that. And then on a conventional loan, what that means, maybe, versus some other loans. And then other costs that individuals should be thinking about when it comes to the home buying process.

Nate Hedrick: Yeah, the biggest thing that you should keep in mind are, first of all, the costs that you’re going to have to basically take on up front. And this is basically before you move in, what kind of cash you’re going to need in-hand because obviously, you’re going to have the loan payment, and you’re going to have those monthly payments, but you’re also going to be making monthly income. So those are manageable, and you can easily budget for that. But we still need to go to the table with quite a bit of money in hand. So the first, like you said, is down payment and having that ability to basically secure the loan with a significant amount of cash. And that can be anywhere from as low, there are some that are 0 down, 3.5% down, all the way up to 20% down for a more conventional, traditional mortgage. But you have to have that money in hand or if you’re going to get that from a family member, you have to have basically a letter indicating where that down payment is coming from and so on. But that’s probably the biggest chunk you have to account for. And it’s the one that most people know. But what you often overlook is things like earnest money and closing costs. And earnest money is basically what you bring to the table to the seller that proves that you’re a legitimate offer. It’s basically money that’s held in escrow that if you back out on the deal for something that’s not due cause, you just say, ‘You know what, never mind. I don’t want this house.’ They actually get to keep that earnest money, generally anywhere from $500-2,000. It’s basically something that can prove that you’re serious. And then they get to keep that if you back out for any kind of unforeseeable reason. And again, the other thing I mentioned is closing costs. So anywhere from 2-4% of your total loan amount is going to be charged to you by the bank in closing costs. These are things like your loan application fee, your appraisal fee, the title loan search fee, there’s all these little things that the bank tacks on, and a lot of them are negotiable. But these are things the bank is going to tack on that, again, you’re going to have to have in some capacity at the time that the deal goes through. Now, closing costs is one of those things where it’s a little bit more negotiable because you can actually have the seller cover all or some of your closing costs. But regardless, you should have that money in hand because if you can’t get that into the deal, you don’t want the deal to fall through because you couldn’t come up with the extra couple thousand dollars you needed for closing costs.

Tim Ulbrich: Yeah, and it seems like the list of those closing costs go on and on, and it’s this fee, that fee, like you mentioned. And we outline these in the guide as well. But I think too, in terms of those being negotiable — and I don’t know your experience as the realtor — what I’ve been experiencing as the buyer in what is a seller’s market is that it seems hard to get those items to be paid for by the seller in this type of a market. But I’m sure obviously, that can vary by region and vary by the type of market and what’s going on.

Nate Hedrick: It definitely varies. And it comes a lot to how long has the house been on the market? You know, if you’re coming in with a couple thousand off, and the house has only been on the market for five days, there’s very little change that they’re going to be assisting you with closing costs. They’re just going to wait for another offer to come. So it totally depends on where you’re looking.

Tim Ulbrich: So Nate, regarding the down payment, I’m guessing some of our listeners are wondering — and we’ll come and talk a little bit later in this episode about the different types of loans that are out there as well — but there are loans, as you mentioned, that you can get out there as low as 0% down or a 3.5% down in an FHA situation. So why would somebody consider 20% and a conventional loan? What are the benefits of doing that?

Nate Hedrick: Yeah, there are two big benefits to the 20% down. For a conventional loan, it basically removes what’s called Private Mortgage Insurance. Now again, as you said, things are getting a little bit more lax. I actually had an offer come into me a couple weeks ago for a house that I was selling, and they managed to find a loan from a very reputable, very large banking organization. It was 10% down with no PMI at all. So it’s not unheard of. I think the 20% down loan requirements are going to start going away. But the requirements going away doesn’t mean that you shouldn’t have the 20% down. And I’ll explain what that means. If you put that 20% down, your mortgage payment obviously is going to go down considerably. You’re going to have a lot more equity kind of built into your home to begin with. If you go at that house with a 3.5% or a 0% down, and something goes wrong or your budget is really tight as it is, that very high payment is all of a sudden going to be much more of a problem. So if you’re able to save that money and put that money down initially, you’re going to have a lot more equity built into the home to begin with and that payment is going to be just that much more comfortable because it’s going to fit that much more easily into your budget if you’ve planned for it like that in advance.

Tim Ulbrich: Yeah, and I think that’s really critically important because I’m sure a lot of people are hearing that number and thinking, my goodness, I want to buy a $300,000 or $400,000 house, so now we’re talking about $60,000 or $80,000 cash in hand, and I think to your point, obviously — and I’m speaking here from a personal mistake I made on my first home of not having that equity in the home. You know, obviously if the market switches, something happens, maybe you want to pick up and move in two years because of a job change and the cost of moving overrides any equity that you really have or built in the home. So I think it gives you not only a lower monthly payment, it obviously gives you a better interest rate on these loans but also because of that built-in equity, it allows you, gives you some more options in the event that some of those unforeseen things happen — the market changes, you have to move, whatever may happen over time. The other thing I think it does — and maybe this is theory and not proven fact, Nate, you can tell me — but what I think it does is I am now in the buying process. If I hold true to that 20%, it kind of forces me down on what I’m willing to buy. So if I didn’t have to put anything down, I think it’s much easier for me to sign the papers on a $400,000 or $500,000 house. But if I stay true to that 20% down, and now I look at that and say, ‘Wow, that $400,000 house, I’ve got to put $80,000 in cash on the table.’ You know, I think that really helps bring down our expectations. And that’s been the experience for Jess and I and I think also helps people get in a better financial position when they’re ready to buy, even though it obviously will take longer to get to that point of building that down payment.

Nate Hedrick: I completely agree. I think it’s something that it’s a rate-limiting step for you. If you can save that 20% down, you’re going to really set yourself up for success rather than trying to stretch everything and going for that 10% down and then pushing your mortgage payment limit anyway. Yeah, I agree. It’s going to set you up for a lot better chance of success.

Tim Ulbrich: And so I think there’s a reason why we started this episode with the benefits of home ownership, right? Because we’re talking now about costs, and we heard 20% down, you mentioned 2-4% closing costs, and people are like, oh my goodness, why am I going to buy a home? Right? And what we haven’t talked about are taxes and insurance and maintenance and utilities. And so these are the ones that I think you can really make some headway or at least be aware of. And I know what Jess and I experienced as we’re buying in Columbus is that depending on the area, you know, you can, we have some homes we’re looking at that property tax is between $4,000-5,000 and other areas that were upwards of $8,000 or more. And so obviously, what that means on a monthly basis is significant. So talk to us about taxes, insurance, maintenance and utilities. What should we be thinking about there?

Nate Hedrick: Yeah, definitely. And I can tell you, it’s funny that you mention that because my investor clients, the ones that are really savvy and really know the markets and really understand the rate-limiting steps of house buyings, one of the first questions they always ask me about a property is what were the yearly taxes on that? Because again, that’s kind of that hidden cost that 1, you don’t really expect and you don’t really plan for if you’re not paying attention, and 2, it can actually go up. So your mortgage payment isn’t really going to change, you know? You’ve set it up, it’s a 30-year loan, it’s a fixed rate or whatever. And it stays the same. But your property taxes, those can easily go up. And if a value of a home is reassessed, then all of a sudden, you’re paying more on it every month. So it’s definitely one of those easy-to-miss kind of hidden costs that I think a lot of people ignore and really need to pay attention to. So it’s really simple. You can actually look up your tax rate for any given property. If you’re on Zillow or Realtor or you’ve got a real estate agent like myself, they can actually look up exactly what they paid last year. It’s all public record to see what the property taxes are. And then you can just break that down into what’s this going to cost me every month or every year? The important things to kind of keep in the back of your head is that a lot of times, banks want that money for taxes, especially taxes, but also insurance to be paid in escrow. What that means is that you’ll pay the amount and a little bit extra into a fund that the bank is going to basically hold onto and twice a year, they will pay out to the county or the city or whoever, they’ll pay out your tax payments. But they get to hold your money, and again, it’s usually a little bit of extra. I think my escrow, they have like $2,000 of mine that I want back, and they —

Tim Ulbrich: Ugh.

Nate Hedrick: I know, it’s awful. This is my poor negotiation skills when I bought my first house. But they’re going to hold onto that, and they’re going to use it as basically an overage to make sure that I don’t mix my tax payments.

Tim Ulbrich: Yep.

Nate Hedrick: So one of the biggest things I recommend to my clients is that you negotiate that, try to get on the plan where you’re paying the taxes directly, not the bank, because they’ll try to swindle you a little bit and hold onto extra money. So all important things to keep in mind.

Tim Ulbrich: Yeah, so you’ve got your property taxes, you’ve got obviously your homeowners insurance that they’re going to require at the point of finalizing your lending. And then I think a portion that a lot of people don’t think about is local income tax that may or may not be there as well. I know I experienced this living in a township, I don’t have it, but potentially going to other areas where you do. And that could be 1-2%, depending on the area. So again, these are the small things but the things that matter because when we talk about the difference of $100, $200, $300, $400, when it comes to either paying taxes or getting a better deal on an insurance policy or having or not having local income tax, for those that have been listening to the podcast for some time, you know that that money, if used elsewhere, paying down debt, investing for the future, etc. certainly can have a monumental effect over time. So you want to be in the details, not only looking at the sticker price of the home, which is I think where most people stop. And often, even if you go into a mortgage calculator, making sure you’re looking at the whole picture and looking at taxes and insurance and obviously, the last piece we have here is maintenance and utilities. And I think a best practice that I learned from others and I’ve heard you talk about before too is just getting an accurate record of what that seller, what the owner of the property has been paying in the maintenance and utilities so you can plan accordingly and making sure it fits in your monthly budget along the way.

Nate Hedrick: And many sellers will provide that to you if you ask. I’ve not had too many issues in the past with people not being upfront. They’ll say, ‘Yeah, this is what I paid last month for sewer, water, trash, electric and gas.’ And that way, you can get a really good estimate of what you might be into once you got into that home.

Tim Ulbrich: OK. So that’s step No. 1, making sure that you’re ready — so again, you defining the plan and the budget, not letting the bank do that for you. No. 2 is determining what’s important. So before you start the home search — because we all know how that goes, right, Nate? You start the search and all of a sudden, you go down the rabbit hole and all of a sudden, you’re signing a contract. You’re like, what just happened? So before you start the search, really narrowing down what you want, your must-haves in a few key areas. So what should people be thinking about here in terms of determining what’s important?

Nate Hedrick: Yeah. This is a really good exercise, I think, for everyone to kind of take away and do before you start that Zillow or that Realtor.com search because if you can define some of these parameters, it’s kind of like hunting for a car, right? I don’t go in and just say, I want a car. I ultimately decide, OK, I need a vehicle that’s going to fit three rows, it fits seven people. Or I need a vehicle that’s going to be really fuel-efficient or whatever. You’re defining something to begin with before you start the hunt for that vehicle. You have a general purpose in mind. This is no different. You know, you want to kind of figure out location as a big key factor. Are you moving for work? Or are you working from home and can move anywhere? You know, do you have to worry about where your kids are going to go to school? Or if you’re going to have kids down the road? You know, all those things can buy into location. But it’s one of those very first, narrow-down steps that you should be taking. So first, looking at location. The next thing you want to look at is probably size and space. You know, how much space are you going to need for you and your family if you have one? You know, do you need three bedrooms or do you need five? Is one bathroom going to be enough? Or do you need multiple? How important is an outdoor space? Or are you living in the city? You know, all those little things about size and space can really help narrow down your search as well. And then the last thing I’d have you look at is flexibility. And flexibility is how dynamic do I need this home to be? Do I need the room to grow into it? Or have I already got my family established, and I know how many bedrooms I need and so on. Or am I only planning on staying here for a couple of years and then I want to rent it out? A lot of people that I know utilize house hacking, which I’ve talked about in the past. And their plan is basically, live there for a year and then move out and rent it out. So making sure that that house is going to be an appropriate rental property as well. So all those little pieces I think will help really narrow down your search so that you’re not just swimming in this sea of available homes. You’ve got a targeted focus as, OK, we’re looking for things that need these given parameters in this given location, and you can jump off from there.

Tim Ulbrich: Yeah, that’s really great advice. And I would even add on top of that trying to prioritize some of these things because I think the home search creep is such a real thing. And I think the danger — and Jess and I felt this in real-time — is when the market is so hot like it is right now, if you don’t go in with a rock-solid idea of what you want and you’re getting pressure from a realtor that hey, we need to make an offer on this, it’s moving, it’s above asking, whatever, and you don’t hold true to those things, all of a sudden you look up and 24-48 hours later, you have a home and you’re like, wait a minute. What happened? Did we veer off from where we initially started, what we wanted? And you know this from looking at homes, maybe you have yourself set on something, like we really need a fourth bedroom or we really need a home office space or we really need whatever, but then you walk in and they’ve got the beautiful cabinets and the countertops and all of a sudden, you’re like, wait a minute. Like it doesn’t have the bedroom that we needed or the home office or whatever. So I think making the list and prioritizing it. We’ve got a set of questions you can consider in the home buying quick start guide, again, at YourFinancialPharmacist.com/homeguide. So check that out, and that will help you here in step No. 2, determining what’s important. So step No. 3, wrapping up this first part of this two-part series, is about assembling your team. And I really like this one because I think often we think you’re going to work with a real estate agent, which obviously is key. But you stop there, and really the right team and having that team in place before you get started can really make sure you stay on track in terms of what you’re looking, it aligns with your goals, but also in having a competitive offer and a plan. So talk to us about assembling this team throughout the home buying process.

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Nate Hedrick: Yeah, definitely. And everybody’s team is going to look a little bit different. And I think some people when I talk to them about, OK, what’s your team look like for this? That can sound overwhelming, like oh gosh, I didn’t hire an accountant yet. You don’t need all of these pieces, but these are all pieces that might be part of your team if it’s appropriate. The very first and I think the very most important piece is going to be a real estate professional. You can definitely negotiate and navigate the real estate world without one, but in general, especially for home buying, it’s really nice to have someone that’s an expert about the documents and the markets and just how to work through everything. And ultimately, if you’re buying a home, the real estate agent is free. All of the proceeds for that real estate professional in terms of getting them paid comes from the selling side of things. So it’s really to your best interests if you’re going to be buying a home to have a real estate professional in your corner, someone that understands your priorities but also knows how to make that a realistic possibility based on the market and what’s available to them. So if there’s nothing else that you add to your team, a real estate professional has got to be, I think, one of the top ones. I’m probably biased as a real estate agent myself, but I think that’s really key. And I’ve seen some people make some mistakes basically not by having one. So that’s first and foremost. From there, again, it’s going to matter based on your individual situation. Things like a financial planner can be really beneficial, helping you identify, you know, OK, what does our budget actually look like? I design my budget, but does that actually make sense based on my financial future and everything else I need to allocate for? Some states require an attorney. In fact, many states require an attorney be part of a real estate transaction, so you may need to have one of those as well. If you don’t know an attorney or don’t know where to look, ask your real estate agent. Again, that’s why that’s the first step because they’re going to be able to direct you to somebody that’s good with real estate law. Again, you might need an accountant. That might go hand-in-hand with your financial planner, somebody that’s going to help you with not only determining maybe things like your budget or your allocations, but more importantly, helping you get those tax breaks we talked about earlier. A good accountant is going to be able to identify every little piece that you can claim, all the little nuances in the very extensive tax code that you should be indicating when you’re finally filing your taxes at the end of the year. So having that accountant can be really beneficial. And then really the last component, the last two components, is going to be just people to help you out. And that’s like your spouse or your brother or your mom. Whoever you’ve got in your court that’s going to be that extra piece to help you out. And the YFP community, it can be part of that as well. Just people that are going to be unrelated to the transaction but still have your best interests in mind. I think that’s really important to bring with you because, you know, my wife and I ran into this years ago. We looked at a house, and we fell in love with it. And it was this Frank Lloyd Wright-style, gorgeous property on like 15 acres. And we had absolutely no business buying this place. It was totally run-down, but we just, we zonked in on it. We wanted it so bad. And we brought our family through for the second walk-through, and they’re like, what are you guys doing? And we finally kind of shook out of it. And not having them there, we probably would have made a lot of mistakes, so it was really nice to have those — again, they’re not going to be a part of the transaction, but they still have your best interests in mind.

Tim Ulbrich: Yeah, I think accountability is key here, whether it’s a financial planner or, you know, if not, making sure if you have family or friends in the process, making sure they’re not just enabling the emotional component here but really checking you to say, ‘Hey, remember you said these things were important?’ And the story that you just gave there, too often we’re in left field, looking at something else. So there you have it, we got the first three steps of six that we’re going to cover. So we talked about making sure you’re ready, setting an appropriate budget, prioritizing this in the context of other financial goals, determining what’s important. We talked about location, size and space, and flexibility and assembling your team to be involved in the real estate buying process. So again, you can get access to all this information and more detail, these three steps as well as the other three that we’ll cover on the next episode of the podcast. You can download that, again, for free on YourFinancialPharmacist.com/homeguide. So Nate, I’m guessing we have some listeners that are thinking, OK, I’m going to be buying, maybe I am buying, I’m selling, I really would love to talk to a real estate agent that is a pharmacist. So how can people get in touch with you? What’s the best next step that they can take?

Nate Hedrick: Yeah, definitely. And you know, getting in touch with somebody and having someone to ask questions to can be a really big benefit. So we, again, as part of our partnership, you can actually go to YourFinancialPharmacist.com/realestaterph, and there’s a great contact form there you can fill out. It’s just some basic information about yourself, and that will kick right to me. And if you’re interested in having a discussion or need a real estate agent or really just want to ask some questions, I would love to be that resource for you guys.

Tim Ulbrich: Awesome. Again, that’s YourFinancialPharmacist.com/realestaterph. And so as we wrap up another episode of the podcast, I want to take a moment to again thank our sponsor of today’s show, Common Bond.

Sponsor: Common Bond’s on a mission to provide more transparent, simple, and affordable way to manage higher education expenses. Their approach is no big secret. Lower rates, simpler options, and a world-class experience, all built to support you throughout your student loan journey. Since its founding, Common Bond has funded over $2 billion, with a b, in student loans and is the only student loan company to operate a true one-for-one social promise. For every loan Common Bond funds, they also fund the education of a child in the developing world through its partnership with Pencils of Promise. Right now, as a member of the YFP community, you can get a $500 cash bonus when you refinance through the link YourFinancialPharmacist.com/commonbond. Again, that’s YourFinancialPharmacist.com/commonbond. Nate, thank you so much for joining and looking forward to next week where we’ll tackle the last three steps of these six steps of the home buying process.

Nate Hedrick: Yeah, thanks so much for having me.

 

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YFP Bonus Episode: How A Couple Left Their Careers to Travel the World


 

YFP Bonus Episode: How A Couple Left Their Careers to Travel the World

On this Bonus Episode of the Your Financial Pharmacist Podcast, Tim Ulbrich, founder of Your Financial Pharmacist, interviews Matt and Nikki Javit from Passport Joy about their journey of walking away from their successful careers to travel the world full-time. Matt and Nikki talk about what inspired their journey, how they are managing to do this financially and travel tips and hacks they have learned along the way.

Summary of Episode

Matt and Nikki knew that they wanted to travel full-time before retirement and had been dreaming about the day they could do so. They took several exotic international trips together through Matt’s career as a technology services sales professional and met so many others traveling the world. This inspiration eventually sparked Matt to purchase a one-way ticket to Santiago, Chile turning their dreams into a reality.

Prior to their departure 18 months ago, Nikki worked as a clinical pharmacist for a number of years. She realized that she was solely identifying herself by her pharmacy career and came to the understanding that there was more to life than her job. Although she invested hundreds of thousands of dollars into her pharmacy career, she knows she will be able to step back into it if and when she feels ready. She hasn’t stopped reading and learning even though she isn’t practicing. Matt also left behind a successful sales career and is confident of an easy transition when he’s ready to return to the workforce.

Matt and Nikki worked diligently to pay off their student loan debt, as well as other debt they had accumulated, and saved so they could travel without thinking about any financial burdens. They travel with a set budget which allows them to explore places all around the world while connecting with different cultures, volunteering their time and, of course, making forever memories.

About Today’s Guests

Matt and Nikki Javit are currently traveling the world full-time with just a single backpack each after leaving the US in February 2017. They have been to places like Machu Picchu, the Galapagos Islands, and The Taj Mahal and amazing cities like Hong Kong, Venice, and Cape Town. During their travels, they find creative ways to keep down their costs, get involved in the communities, and network with locals while having a great time.

Before they left to travel full-time, they loved their careers in Indianapolis Indiana where Nikki was a clinical pharmacist and Matt was a Technology Services Sales Professional. They enjoyed hanging out with friends, spending quality time with family, and volunteering in the community but they loved to travel. So after dreaming about it for a while, they decided to take the leap of faith. They document all of their adventures and share travel tips to save time & money on their podcast and blog at PassportJoy.com.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Matt and Nikki, welcome to the Your Financial Pharmacist podcast, excited to have you and thank you for joining me while you’re in and traveling in Osaka, Japan. So thanks for coming on.

Nikki Javit: Thanks for having us.

Matt Javit: Thanks so much.

Tim Ulbrich: Well, I am so excited. And as I shared with you all before we jumped on the call today, I am inspired by your journey, following your podcast and your blog. And when I heard a little about your journey, what you’re doing, and I found out Nikki is a pharmacist, I said, ‘We have got to have them on the show to learn a little bit more about their journey.’ And also, shoutout to Tony Guerra who interviewed you recently who brought your journey to my attention. So as we get started here, I’m going to read a brief bio of who you are, your journey and what you’ve been doing. And then I’m going to have you introduce yourselves, and we’ll kick off the conversation from there. So Matt and Nikki Javit had stress-free lives in Indianapolis. They love hanging out with their friends, spending quality time with their family and making new connections in their vast network. They were both considered very successful in their careers, and they loved their bosses and coworkers. But the desire to travel full-time was already on their mind, and they knew the window would be soon closing to turn a dream into reality. So on February 21, 2017, with a single backpack each, they flew to Santiago, Chile with a one-way ticket that would start their journey around the world, checking off the bucket list locations like Machu Picchu and the Galapagos Islands, the Sistine Chapel and the Taj Majal, creating new and exciting lists every week on where they want to explore next. So again, thanks for joining. And Nikki, I just have to know — as I listened to your first episode and I heard you launch that background to tell the story, coming downstairs and you found out Matt had booked that one-way ticket, which became the fulfillment of a dream you had been talking about for a long period of time. What were your thoughts and your emotions when that day happened?

Nikki Javit: Well, the first time he came down, I thought to myself, we can reverse this situation. We had talked about this, and it was — I mean, it’s always been a dream of ours. We probably, prior to him purchasing that one-way ticket, had talked about it for at least 3-5 years. But it was always just a dream. It was something that was like, we would meet someone on vacation or meet someone well younger than us, and they were doing something like that, traveling the world, they’d left everything behind. And you know, for me, it was, wow, that would be so fun and amazing to be able to do something like that. And so Matt and I, while we were out amongst each other over dinner or at home in the privacy of our home, we had these conversations and say, ‘Oh my gosh, how cool would that be to travel around the world?’ Like get our affairs in order, figure out what we need to figure out at home, and then go travel for an extended period of time. And then when he told me that he purchased that one-way ticket, I kind of — it all just became like a reality for me, but I still in the back of my mind was like, holy crap. I’m working, we haven’t really laid out any solid plans for this. We’ve just been talking about it for so long. And not that I didn’t think he was serious, but I was just like, wow, now is the time. So yeah, it was kind of scary.

Tim Ulbrich: So Matt, I have to give you credit. That’s a bold husband move. I mean, I feel like in my household, I probably would get kicked out the door if I did that. So props to you. Obviously, you guys had been talking about, and we’ll get to that a little later. What I want to start with is for the audience and our community here, a little bit more about your background. Because I think for both of you, your background is very interesting in terms of your careers and the success that you had and obviously leaning to the decision to pick up and travel for several years. So Matt, share a little bit about your background, you know, I heard on the podcast, growing up in a military family and then some of the positions you’ve had since then. Share with our audience a little bit more about you.

Matt Javit: Yeah, thank you. So at a high level, moved around a bunch as a kid, went to three high schools. But I played basketball throughout that, so it was great and easy to get friends and meet new people. And it was a lot of fun. Played Division I basketball, so I had a Division I basketball scholarship out of high school but then ended up bouncing around, just because of playing time and situational stuff. Ended up going to four different undergrad colleges and finished at University of North Carolina Greensboro where I’m proud to say that I did graduate on time, though, and went to a fifth university to get my MBA and coached junior college basketball for two years. And then from there, started a clothing line, moved from Texas back to Indianapolis to do that with my brother. And at that time, I bartended at night and hustled during the day. And towards the end of that bartending, kind of running that bar for three years, met Nikki, and that changed the course of my life, obviously. Decided to get what was deemed a ‘real job’ in the mortgage industry and then did that for three years when I got a promotion to go out to Las Vegas to run an office for about a year of that while Nikki was finishing up her doctorate degree at Butler. And then I ended up coming back home because that’s when the recession hit. Came back home to Las Vegas after we’d lived apart for about a year. And was very fortunate and blessed to get hired by a technology company, a technology services, international technology services company, to do sales in that field, which was all brand new for me. I didn’t know anything about technology, but I did know how to sell at some level and then just cut my teeth, grinded really hard for two years, put in a ton of time and effort, and then finally hit my stride probably two and a half years in, and turned that into a wonderful run of nine years at that company, ending in five straight international sales achievement awards, which also fueled our love for travel because at the time, that took us to different parts of the world because those incentive trips were in exotic places like Chiang Mai, Thailand; Goa, India; Cape Town, South Africa; and Istanbul, Turkey.

Tim Ulbrich: Yeah, I love that part of your story and the success you had at work and incentive trips that helped fuel your passion for travel. These weren’t Disney World trips, right? These were obviously seeing different parts of the world, which helped fuel that passion, which is cool. And Nikki, your background as a pharmacist and, you know, doing undergrad and then making that decision to go into pharmacy school — lay that background for us because I think that’s going to be important for our listeners to hear as we talk a little bit more about your decision to pick up and leave the profession of pharmacy. So how did you get into pharmacy? And then tell us a little bit about the work you did after graduating from Butler.

Nikki Javit: Yeah, so I grew up in Chicago. And then I went to undergraduate school at Indiana University Bloomington. And I studied biology. And I wasn’t sure if I was going to go to medical school or not, so I kind of just took a limbo year, so to speak, off. And in that limbo year, after I had graduated from undergrad, I moved from Bloomington to Indianapolis with a girlfriend I had lived with in school. And she was going to nursing school at IPUI, and I had to get a job to pay the bills. So I applied at a pharmacy, and I started working at a long-term care pharmacy with my biology degree, and I helped manage a long-term care pharmacy. And I knew at the time that I wasn’t done with school, and I had met a really wonderful mentor who I still talk to to this day, who was the pharmacist in charge of that long-term care pharmacy. And he really had great conversations with my about just my career path and what I wanted to do. He noticed that I really took an interest in my current situation, and he was the one that suggested to me that I apply to pharmacy school. I honestly had never even thought about it before. And my biggest concern was is that I had moved from Chicago to Bloomington then to Indianapolis, and I was like, I really don’t want to move to Lafayette and not know anyone. And he was like, why don’t you just apply to Butler? So I didn’t know that Butler had a pharmacy school, so I applied to Butler Pharmacy School, and I was accepted in as a transfer student. So that’s where, essentially, my journey began as a pharmacy student. During school, I worked, I got a job. I switched from the long-term care pharmacy and a lot of my friends that I met at Butler were working in retail pharmacy settings, and I just felt like I could learn a lot more that way. And so I got an intern job at CVS. So I interned throughout pharmacy school at CVS and then upon graduating Butler, I was a staff pharmacist for about a year and then transitioned into a pharmacy manager role for about two years before moving onto a hospital pharmacy position. I was just a little burnt out, I had a couple things happen to me during my time at my retail pharmacy, and I just felt that it was time for me to move on. So I started working at Indiana University, and I started at just basically a staff pharmacist, verifying orders, etc. And their program there is awesome and unique in the fact that it’s a teaching university. And they pair you up with clinical pharmacists and you can specialize in basically a patient population that you like. So they have ICU, they have organ transplant and then they’re associated with the Simon Cancer Center. And I really liked working with oncology patients, so I worked with oncology patients for two years solely. And then I was presented with an opportunity where IU Health was opening up a startup company. And they were having a brand-new specialty pharmacy. And I was asked if I would want to try to apply for the position because there was several other people that were interested in it. And so I interviewed for that, and I got that role. And I helped manage these specialty pharmacy and oncology patients, MS patients, and CF patients and a couple other subsets of patients, but essentially, prior to me living on this journey, my last role as a pharmacist was in an outpatient setting as a specialty pharmacist.

Tim Ulbrich: Got it. So you’ve got a successful career, you’ve got your doctorate degree, you’ve worked in community practice, you’ve worked in obviously you mentioned the long-term care connection initially, you end up in the specialty world. So I think the one thing our listeners are going to want to know that I want to know was you spend all this time, money, invest in the doctorate degree — and we’ll obviously talk a little bit more about your journey of traveling and what you’re doing now — but tell us about that decision, when you made that decision that I’m willing to pick up and leave this career, how hard was that decision? And what fears were you facing, if any, when you made that decision?

Nikki Javit: The decision, for me, was actually a very difficult one. I think it was more difficult for me than it was for Matt. I think I defined myself by my profession, and you know, for awhile, I think that I let that get the best of me. I remember having conversations with Matt and saying, you know, ‘I really do want to travel. I want to go around the world, and I know that now is the time. But I just fear if I walk away from my profession right now after everything that I’ve worked so hard, this is the ideal position that I want to be in, you know, that it’s just not a good thing.’ And you know, the conversations between Matt and I were, well, what makes you happy? It’s just like, does your job make you happy? Well yeah, it makes me happy. But what would make me happier would be is to travel the world with someone who also wants to travel the world with me. And the more I thought about it was is that no matter how long I step away from my profession, I’m always going to have my degree. Like no one can take that away from me. No one can take away from me that I went to school, that I have my doctorate in pharmacy. And yeah, there’s going to be people that are going to say, ‘You haven’t practiced pharmacy for x amount of years.’ But I still think that they can’t take away the fact that I’ve had, you know, 10 years of experience prior to that or I still do continuing education. And it’s not like I’m done reading. It’s not that the knowledge just goes away. And of course when I go back, I’ll be rusty if I choose to go back to that profession, but I think what happened was that I just let my career solely define who I was as a person when I don’t think that’s necessarily a healthy thing to do. There’s so much more to life than just what you do for a job. And once I got to that point and I was OK with that and letting go of that and realizing I can always come back, and I can always be a pharmacist or do something in healthcare, then I was OK with leaving.

Tim Ulbrich: That’s great, and that was part of what inspired me as I was listening and following your journey is seeing you be able to make that decision and obviously not that you don’t value what you’ve done education-wise because obviously, you do, but what I heard through the podcast is that your desire to enter pharmacy was a passion out of helping people. And as I was listening to the journey and what you’ve done, you’re finding a way to fill that bucket of helping people as you’re on this journey of traveling the world, right?

Nikki Javit: Exactly.

Tim Ulbrich: So Matt, talk me through — one thing that stuck out to me on the first episode of the Passport Joy podcast, which I’d highly recommend our audience and listeners check out, you talked about a trip to Cape Town where you met a couple from the Netherlands that were engaged in some long-term travel and that that interaction and that conversation had a profound impact on both of you in terms of the impact that it had on the journey that you’re taking today. So tell us a little bit more about that story and impact that it had for you and Nikki in deciding to take this journey of traveling the world for several years.

Matt Javit: Yeah, so we were in Cape Town, South Africa for one of the incentive trips, my final incentive trip. This would have been March of 2016. And there was a couple there — so essentially, there’s about 15 different executives, about 30 different sales professionals from around the world go to these incentive trips with our spouses. And part of that time is you get a great chance to interact with the people. And one of the couples there were from the Netherlands, and he was actually 30-31 years old. And we ended up hooking up one night and just having conversations over drinks, and they were telling us an amazing story of how they had traveled from — they actually did it a different way. They got a Land Cruiser, put a bed in the back, and drove from the Netherlands to I believe it was South Korea and then shipped the truck from South Korea to Vancouver, Canada and drove down to Patagonia, Chile. And over three or four hours listening to this guy tell the story and all the amazing tales along the way of these two years of traveling, it was just, it was so inspiring and it just moved me in a certain way. And prior to this, Nikki and I, we actually had written down goals of traveling the world. I’m a big goal-setter, I believe if you write things down, they become real and they can become achievable. So we had actually written down the goal of traveling the world probably for the last, I don’t know, 3.5-4 years as a far-reaching, in-the-future goal. But we were — at that point, we were getting closer and closer of financially being able to achieve it. So we come back from just having those drinks that night with that couple, and we got back to that room, and it was just one of those situations where we just looked at each other like, what else, what other signs do we need that this is possible and this is something that we should do? And then I took that and on the flight home, we probably had another week in Cape Town, and we enjoyed our time. And the flights home were always the hardest for me. Every time that we’d fly home from a week or two-week vacation that we were taking, or during these incentive trips from exotic places where the flights are anywhere from 8-12 hours long, that’s when I’m always grabbing the back of the seat where they have the map of all the locations around the world, and I’m just looking at that thing, thinking, OK, where are we going next? And this trip was just different. I just, I was just so moved by what I had heard, and I’m looking at that map, and I’m just saying like, let’s do this. Let’s see if we can pull this thing off. And like Nikki said, within six or eight weeks, that’s when I came down and told her I had booked that first trip because in my mind and looking at all our financial stuff, that we could do it. If we had a lot of things line up over the next 10 months, we could pull it off and feel confident when we left that we could do the journey right. So it was amazing, it felt really good that we could pull it off. And that was — I have since had a chance to circle back with him and tell him that he was the motivation of it. And it’s really cool to know that it was that one deciding thing that put us over the edge.

Tim Ulbrich: That’s awesome. And let’s go there and talk about your financial house and how getting that in order prior to your departure — you mentioned having a runway of time when you were making that decision before you actually left, and I think it’s important because I know as I was listening to your journey, in my mind, questions were swirling about student loans and just practically saving up for the move and how you’re making it work month-to-month and what about retirement and all the questions that I think sometimes are the barriers that can get in the way to us taking bold moves. So let’s talk through some of those, and let’s first talk about student loans. So Nikki, I heard you got through undergrad debt-free, but obviously I’m assuming a PharmD brought some student loans into the equation, so talk us through for both of you where student loans played a role and how you were able to manage those and get those to a point where you felt comfortable that they weren’t going to impede your ability to take this journey that you wanted to take.

Matt Javit: Yeah, so — I’m sorry, Tim, I’ll jump in on this — but it was a situation where it was an early — so where we got engaged, Nikki started school, and within our first year, she was in school, of marriage. And she had done four years in front of that.

Nikki Javit: Five.

Matt Javit: Five years in front of that. And I tell you what, man. It was one of those things where the financial loan system in America is just flawed. It’s so flawed.

Tim Ulbrich: Yes.

Matt Javit: We would just look at these bills coming in, and this was a time where I had gone from making money and then the recession hit, housing crisis is what it is, so I wasn’t making any money. Then I started a new field where I was making severely underpaid. And Nikki was doing her part-time gig, she was amazing in that where she was going to school full-time and working 30 hours a week, which was unbelievable. So we really struggled for probably 2.5 years. We really haven’t talked about that at all to anybody. But it was a very difficult time for us. We stayed extremely minimal, we had a condo that we continue to live in for 15 years now. And at the time, we were paying her father rent on the condo. And we lived extremely, an extremely minimal lifestyle. So much that Nikki drove the same Toyota Corolla for 10 years. I drove a Ford Escape for at least 9 or 10 years.

Nikki Javit: At least 9, yeah.

Matt Javit: And I was in this new profession, and the student loans kept growing and growing and growing. And those things are unbelievable because the interest is what kills you.

Tim Ulbrich: Yes.

Matt Javit: And what was (inaudible) was because I come from a financial background, I understand all this stuff, and I could break it all down, so I would work with Sallie Mae, and I would say, split all these loans up. I want them itemized, I want them split up, and I want to know where I should attack. And when you do that and you see that some of the loans are like 14% and 12%, it’s just unbelievable. So for any of your listeners, when it comes to financial freedom, that is — and I know you guys have spoken about this on your podcast — that’s the main thing is you’ve got to itemize those things. I’m not sure if they do it that way today, but you’ve got to understand where your biggest pains are coming from. And so that’s what we did. So we itemized those things. And I’m talking to an audience that understands all this. We walked out of that with I think it was $289,000.

Nikki Javit: Yeah, so I think it was $287,000 was the total. But we started paying back on my loans about two years into —

Matt Javit: We were doing the bare minimum.

Nikki Javit: The minimum, the bare minimum, just to make a dent.

Matt Javit: Yeah, because we got all of our other stuff out of the way as far as — like I said, the car payments were gone, we were living minimal. Like I said, we did travel much early in that phase. We were doing mostly like U.S.-based vacation trips until I hit my stride in my job. And then —

Nikki Javit: But we don’t, we never lived on credit cards. And I think that’s really important. Like if we went on a vacation, we had that money, and we paid that vacation off then, at the time that we did it. So if we were going to go to let’s say — I’m just going to pick a random place — San Diego, California, for a week, we would go to San Diego, and if it cost us $5,000 to take that, that $5,000 was already saved up. So we never, we never purchased things on credit cards ever. And if we did, we paid that off at the end of the month. And it was just to get travel points, it wasn’t because we needed to use credit cards, it was strictly just to get travel points. So when he says we lived minimal, it was really, we were only paying our bills. I was working to pay bills, and him the same way.

Matt Javit: Yeah, so we went through this cycle where, like I said, I was with that job for nine years. The first two years was extremely difficult, but everything began to line up for us because I hit my stride so I started making money. And my job, in full transparency, was a base commission and bonus. So I’m very much in the sales world where there’s not a ceiling when you’re doing technology service sales, so I could make nice pay. And then Nikki got a chance, she hit the workforce full-time, so then she was making great money at CVS. And then we just went about it, and we attacked it. And like I said, the breaking down, the itemizing of the loans, I think that because we did that the way we did, we could get rid of those the fastest way we could because if we kept them clumped up, those things are going to stick around forever. So we would just break these all down, and we would just attack them. When we paid off a loan, we would celebrate together. And it would be a big thing because I think at one point, there was maybe 14 different —

Nikki Javit: I had 14 different loans.

Matt Javit: 14 loans, so we would pay off the high one, and then we would celebrate, and we would just zone in on that next loan and we’d just keep going, keep going, keep going. And finally, we got them paid off, and then we could start working on our other things to help us get financially free. And then at that point obviously, Nikki was deeper in her career, I was in a situation where I was deep with my clients and making great money doing what I was doing. And it continued to just, we continued to accelerate and set bigger goals and work on skills. I’m real big on you build skills for yourself and not for your job. Just continue to get better as a human, whether it’s personally, spiritually or for whatever profession you’re focused on. So that’s how we spent a lot of time doing that stuff. And we just continued to grow and get better, and the compensation followed.

Tim Ulbrich: I don’t know if either of you have read “The Compound Effect” by Darren Hardy, but what you were just saying, Matt and Nikki there, you know, your discipline but your cumulative hard effort and work and goal-setting and, you know, even the steps of itemizing loans. You know, I hate to throw Sallie Mae under the bus, but I’m going to since they inflicted a lot of pain on my life is that they, you know — I think that business, obviously there’s that effect where when everything is in one lump thing, and you can’t necessarily see all the details, it’s hard to get the motivation behind having a plan to take care of them. When you itemize them and you see how that interest is accruing, you see the different interest rates, like you all did, you then start to say, ‘OK, let’s put a plan together to pay off this $287,000 of debt. Let’s pay off one of these, let’s celebrate. Let’s pay off another, let’s celebrate it. And let’s keep moving on.’ And I think that, to me, is the essence of “The Compound Effect,” that it’s easy to look at a number like $287,000 and say, forget about it. It’s so big, I can’t even do anything about it. Whereas what I heard you did and your journey is say, let’s break this down. Let’s work together, let’s celebrate. And let’s get after this. And obviously, be appreciative of the income that you have and the ability to do that along the way. And so the question I have to ask here is that if you would have had that debt hanging around, if you would have not been able to live a minimalist lifestyle, if you would have chosen to buy a half a million dollar home, if you would have taken a different route, how would that have impacted your decision in terms of making this bold move to go on this journey to travel the world?

Matt Javit: It would have delayed it. We would have never left if we wouldn’t have gotten in a situation. Because the reality is is I was probably ready almost a year before.

Nikki Javit: Yeah.

Matt Javit: But Nikki wanted a number. She wanted a certain number that we had to have in our assets and our savings in order for us to go. Nikki’s a lot more conservative than I am. Because I’m in a mindset where I worked for — when I did the mortgages, I had zero-based payment. I was 100% commission. I’ve lived in a world where there’s nothing guaranteed. And so I’m comfortable with that. I’m comfortable with that mindset of, hey, if we don’t have any money in the bank, I’m alright with that. We can figure this thing out. Where she’s a lot more conservative and she gets really nervous about money and things like that. So we have a lot of these conversations, and we just got to a point where I got her to commit to a number, and I showed her how we could get to that number and put it all on paper so she could understand it, so she could be comfortable with us leaving. And then that’s when we made the decision. Without that, there was no way. We would have never left with loans and debt hanging over our head because it wouldn’t have been enjoyable. It would just be a different situation. So for me, I’m 42 now. And for us, I felt like it was my window was closing on the opportunity, but I still think we had room. If it would have took two or three more years to make it happen, we still would have been OK because this is definitely a dream and a goal of ours. We would have made it happen, but luckily we made it happen at the time where we’re enjoying it now, and I can get back into the workforce when I’m 44, 45. And I think that I’ll still have that value when I reenter out of the market for three years or so.

Tim Ulbrich: So month-to-month for you guys — I think you’re 18 months into this journey, correct?

Matt Javit: Yes.

Tim Ulbrich: OK. So month-to-month, what is your strategy for month-to-month, just making it, covering your expenses? Obviously, you’re living a minimalist lifestyle. I’m sure it sounds like you’ve got some good budgeting behaviors and practices, but are you finding, you know, work? I heard you reference workaways on the podcast. Are you purely living off savings? Are you getting creative with how you’re funding things? What does that look like month-to-month in terms of paying the expenses as you’re on the road?

Matt Javit: So yeah, we’re absolutely budgeting month-to-month. We’ve done a lot of creative things from Workaway that you described — that’s essentially volunteering our services to places — Workaway’s a website that has hosted certain places that you can stay at by volunteering your services, and they’ll give you a free place to stay and sometimes food as well. We’ve done house-sits with a website called Trusted Housesitters where we watched two cats in Zurich, Switzerland. They gave us, the owners of the home gave us a free place to stay. It ended up being a gorgeous house for three weeks while we just watched their cats.

Tim Ulbrich: That’s awesome.

Matt Javit: We’ve done extremely cheap Airbnb’s, hostels.

Nikki Javit: We have a budget when it comes to the places that we stay. And we know what we should be spending per month. And then when we search for Airbnb, we typically only stay in an Airbnb. In Asia, you can find budget hotels and not have to stay in a hostel. But we know what our budget is for an Airbnb, so we don’t really want to spend more than $50 a night. So when we scroll on the Airbnb website, we just look for places like that. And it’s funny because you can actually, when you’re in Asia, like if you go to Vietnam or Indonesia or, you know, other places in southeast Asia, there’s places that are $10 a night, and they’re absolutely amazing, like gorgeous, places that you wouldn’t even think would be that nice. But they are that price point, so we’ve saved by going to even just different areas of the world, by traveling —

Matt Javit: I mean, we were Paracas, Peru. We stayed there near the coastal place. But we stayed in a campsite. It was like a little cabin for like $12 a night. And we did that consciously, knowing that we’ve got to save money, we’ve got to — there’s going to be peaks and valleys. We knew Europe would be really expensive. So that was the whole mindset is, OK, some months we’re going to spend more, other months we’re not. And then be as smart as we can with the flights because those can really hit into the budget. And then dips and valleys when we’re thinking about going out certain nights. Like we’re in Japan, we’ve been eating at 7-11. You’d be surprised how amazing 7-11 is in Japan. It’s so good.

Nikki Javit: Yeah, that sounds absolutely disgusting.

Matt Javit: LIke nobody would think 7-11, but the good thing is I’ve watched enough foodie shows that they talk about the 7-11 all the time in Japan, that coming here, we were very open-minded. And now that we’re here, we’re like, OK, I get it now. It’s the whole culture, it’s amazing.

Nikki Javit: They make fresh sushi and fresh fruit salads and stuff. They have edamame in 7-11’s. It’s not like a 7-11.

Tim Ulbrich: Is it the same brand we know, 7-11? Or is it a different company?

Matt Javit: It’s the same brand, but I think it’s treated a little bit differently here. It is amazing. So doing things like that when we know that Japan is really expensive. But there’s things you have to cut back on in order for us not to crush our budget. But at the same time, getting a chance to get involved with the culture and see things, experience it, experience the realness of it and have a great time. And that’s the thing is when you do some of these alternative housing situations like a shared space on Airbnb, like where the host is there, and you’re just basically living in one of their rooms, but that also gives you the chance to talk to somebody, understand their culture a little bit better, see how they’re going about their day. And you come away with a different experience than staying in a hotel. And that’s what we set out to do. We didn’t want to travel for two years and just say, yeah, we went to hotels around the world, and it was great, we saw these sights and we saw the Taj Mahal. We wanted to come back changed, in a way. Like we loved who we were in our life in America, but it’s like, it’s an opportunity to put a chapter in our life that maybe changes the next chapter. And that’s what we were hoping to get out of it by all these different experiences and different cultures and get to know people and how they interact on the subway and just all the different things. I mean, I went to a baseball game this weekend in Osaka, and my mind was blown. I mean, I grew up an athlete, and just being around those people at a baseball game is — it just changed how I looked at their culture. So yeah, that’s our hope and that’s when it comes to budget, all of that plays together because it’s hard to month-by-month because now we just set out our plans for the next three months. So we had to book stuff in advance, we had to book a ton of little flights. And so it’s going to hit our budget in September, but then hopefully October and November are easier on the budget if that makes sense.

Tim Ulbrich: Right. Absolutely. So you’re 18 months into this journey, and as I was following along on the podcast, it seems like you’ve seen some of the most beautiful and incredible places in the world. So I want to know from both of you, what’s been your favorite stop so far, I guess if you had to choose one?

Nikki Javit: It’s so hard. So many people ask me this question, and I hate like just saying one. But my go-to is San Pedro de Atacama in Chile. So it’s in the middle of the dryest desert of the world, the Atacama Desert. And it’s like no other place I’ve ever been. The landscape changes just from a couple miles away. You can see geysers that are shooting out steam from the earth, you can see mountains and snow-capped volcanoes, there’s hot springs that you can swim in. I mean, it’s just neverending. There’s red rocks and lagoons and all types of things. It’s like an outdoor — like if you’re an outdoor person, and you just love nature in general, it is paradise. There’s salt flats that you can walk on that look like you’re walking on clear glass. It’s just, it’s phenomenal. They have some of the best stargazing — it’s actually the best stargazing in the entire world. And we were just able to do so many different things in four days. Like we were hiking, we were swimming in hot springs, we were climbing up mountains, we were spelunking in caves. I guess it was the first time I’d ever been to a place like that. I’ve been to California before and Colorado where you see the mountains, and you’re like, OK, I can go on a hike. But you can’t go on a hike and then take a half an hour car ride away and go swim in a hot spring and then drive an hour away from that and then go climb in some caves and walk on salt flats. So for me, it was just like mind-blowing. I just had never seen anything like it before.

Tim Ulbrich: What about for you, Matt?

Matt Javit: For me, it’s tough. So man, I loved Lisbon, Portugal. It might just be because of the people there and the time — we’ve gone now twice in the middle of June, and I just loved Lisbon. But India is just — India is just a different place on this planet. And it’s just, it’s so raw. And 1.3, 1.4 billion, it’s crazy, it’s chaotic, it’s definitely third-world in parts. But the love and just the kindness of the people and how amazing they are. It’s just like nothing else on the planet. And I’m just so intrigued by how people act and how they interact and how they view us and their thoughts and just the chances you get to really look at a part of the world that is so different. So that probably stands out the most to me is when it comes to travel and getting into a different culture, India really, it hits me because I had a lot of fun there. Vietnam is also one of those things that we talk about all the time that we just love. And we’re excited to get a chance to go back there. We’ve got some friends that are going to visit us there. So that’s, Vietnam is an absolute highlight. But it’s hard. Tim, it’s such a hard question because everything is just, has its own uniqueness. Now we’re in Japan. And oh my God, this is amazing. It is just so amazing. And we’ve got four more weeks here, and I could just see it turning into a place that we love. The language barrier is massive, but I think that with some studying or whatnot, you could figure out the phrases to get through the daily life. But yeah, it’s a hard question. But those are probably my highlights.

Tim Ulbrich: So I just have to know, you know, how is being together, traveling the world, sharing this journey — No. 1, do you guys ever get sick of each other and No. 2, how has this strengthened your marriage? Because obviously, I’m assuming it has, being on this journey together.

Nikki Javit: Yeah, so in the beginning, I think it was difficult for us just to figure out like a flow to our day because, you know, prior to us leaving, I had worked my job, I was gone during the day. And Matt was similar, I mean, he had a different schedule. He’d work during the day, and at night, sometimes he’d have to take out clients or he had conference calls. And we pretty much lived separate lives during the week. And on the weekends was our together time, time that we would spend to hang out and do whatever. And you know, I guess our extracurricular time was spent with me, if I wasn’t doing something with Matt, you know, hanging out doing girl stuff with my girlfriends or, you know, working out at my gym that we had at our home or just doing things that I guess kept me busy. And then now, all of a sudden you are with this person 24/7 365, and you’re in tight quarters in an unfamiliar space. And you heavily rely on each other because, you know, it’s like, I don’t know anyone here. So it’s not like I could call up a friend and be like, OK, I’m going to go hang out with this person tonight and go to dinner. But at the same time, you don’t always want to make your significant other think that, well, I need to hang out with you 24/7. So I don’t know. At first, it was hard. And we did, we fought — I mean, full disclosure, we would get in just like tiffs over dumb things. But I think it really stemmed from being frustrated I think from having to be in a tiny, tiny space. And by no means do we live in some huge mansion back at home, but at least we had separate quarters that we could go to. Like I could retreat to the living room and go watch Netflix. And Matt could go to his office and do his own thing. But now, it’s like sometimes, we are legit in something that just one room, and then there’s the bathroom. And so where do you go? So we found ways to, you know, kind of zen out, even if we have to be in the same room. So I’ll throw some headphones in, and I’ll listen to music or I’ll read a book. And even if I’m sitting in a different corner of a room and he’s still there, I’ll try just to get in my own little world. And sometimes I’ll go out and walk around and go for a walk or just go to the grocery store or just have that be my alone time. And then other times, you know, Matt, he’s real big on going on hikes by himself. And he likes to find a gym membership wherever we go or some sort of park where he can work out and do — he does this thing called Foundation training for his back, and so he’ll go and do that just to have some sort of alone time because I don’t really think that it’s healthy to be with someone 24/7, so that has definitely helped us. And I think it’s gotten a lot, it’s just gotten a lot better.

Matt Javit: Yeah, no, it is. It’s a long time, and most people don’t, most married couples — so we’re 13 years married now — don’t get to do what we’re doing until a later stage in life.

Tim Ulbrich: Right.

Matt Javit: And so then they don’t spend that much time together until they’re in their 60s or 70s. But so we’re definitely doing something that’s not, it’s pretty unique in the fact that we’re around each other 24/7. And I would be, Tim, back in my former life in Indianapolis, I would probably be considered a guy’s guy. So I had a lot of my buddies that I would hang around with, I’m a big sports nut, I like drinking bourbons with my buddies and just talking about stuff. But I definitely miss that. But I still text my buddies, call them, and I get a chance to interact with them. It’s not always easy, but it’s been amazing. To be able to see the world with somebody that I love and to be able to share those moments together and knowing that we’re going to be able to reflect on this at some point and understand how lucky and fortunate we are to be able to live this life, that all the positives outweigh any negatives. Yeah, it’s been a blast.

Tim Ulbrich: So what does the future hold? I mean, what’s the plan? You probably hate this question, maybe, but what’s the plan for, you know, I heard kind of a multi-year travel plan, you’re 18 months in, so I interpreted that to mean there’s a desired end date where you may come back stateside, reenter the workforce, you both alluded to that. But is there a chance that may not happen? Or have you kind of set a definitive end date? What’s the game plan going forward?

Matt Javit: As of now, May 2020 is the end date on paper as far as budget goes. What that means is we’re still working through some things. We both have some creative things we’re working on. We’re doing the podcast, we’re doing the blog site. If any of those outlets can turn into revenue streams, could that make the journey longer? Not sure. Are there things that could take us off the road personally? Probably, but we don’t like to think about those things.

Nikki Javit: Yeah.

Matt Javit: Because they’d be extremely negative. But so as of now, yeah, we’re 18 months in, we’re going to come back to the United States in May of 2019 and spend the summer visiting with friends and family and get a chance to explore the U.S. a little bit like we’ve been doing on the road and get a chance to hang out with different people in the States and accelerate some important milestones in some of our family’s lives and stuff like that. And then the hope is to go back out in September of 2019, see more of the world, explore some places that we thought we’d get a chance to see on our first trip out, but we didn’t. And then come back in May of 2020. And at that point, obviously we’re not going to get back to the States and decide what we’re going to do. We’ll understand. A lot of this will happen organically over the next 12 months or so that we’ll know that, OK, we’re going to reenter the workforce. And then we’ll start to line things up the four, five, six months prior to because that’s who we are. I mean, we’re both very career-focused, we love — and I’ll tell you something, that’s why we’re doing the podcast. That’s why we’re doing the blog. There’s something that’s built into humans that makes us want to give back. Either give back in a positive way either to inspire people or just the knowledge and hopefully to help people in some capacity or just give back to other humankind, you know what I mean? We’re just built that way. You can’t just cruise around the world and sit on beaches in Bali and hang out and drink cocktails all day and think that you’re going to improve as a human. It’s just not who we are. And I think Nikki and I are even at a — we didn’t grow up that way to do that. So even when we’re trying to relax, we always have massive “To Do” lists.

Nikki Javit: Yeah.

Matt Javit: The “To Do” lists are growing and growing. But the coolest part about it is is these creative projects we’re working on, we’re excited about them. It’s one of those things where we wake up every day, and we’re like, hey we’re going to do this and hey, let’s make sure we document that. Let’s go walk through the market and check out all these things. So it’s an amazing journey, and it’s a fun phase or a fun chapter. And we’re not really sure what that next chapter is yet. But no matter what, I think we’re going to really prepared for it, mentally, spiritually, physically. I think we’re going to be ready for that next chapter.

Tim Ulbrich: Well, you guys have done an awesome job with the podcast. So first of all, congratulations. I think the content that you’re bringing is awesome. I’ve enjoyed it. And I would just urge our community, check out PassportJoy.com to follow their journey on the blog, listen to the podcasts on whatever podcast subscription service that you use. And I think one of the things, Matt and Nikki, that I really enjoyed about the podcast is obviously, I’m not somebody who’s going to necessarily pick up for a year or two or three and travel, but what you’re talking about is applicable for long weekend getaways, a week vacation, you have an episode around financial security when you’re traveling that I really found interesting. And so I think for all of our audience, make sure you check out PassportJoy.com, listen to the podcast, check out the blog. You’ll hear their latest travel stories, tips to have amazing trips on a budget, hot locations you may not have heard of and how you can get involved and volunteer on the road. And I really appreciate, I would love to meet both of you when you get back stateside in Indianapolis, I’ll be in Columbus. So we’re not that far away. And you’ve inspire me personally and my wife to be thinking about, you know, traveling and how that can impact us as individuals and our family. So thank you for taking time to come on the show and to share your journey with the YFP community. We really appreciate it.

Nikki Javit: Thanks for having us so much.

Matt Javit: Thank you so much.

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YFP 063: Intro to the Side Hustle Series


 

Intro to the Side Hustle Series

Summary of Episode

On Episode 063 of the Your Financial Pharmacist Podcast, Tim Church, YFP Team Member, introduces a new segment called the Side Hustle Series to talk about ways pharmacists can create additional streams of income to reach financial goals faster and to highlight pharmacists who are doing this to help you get inspired. In previous episodes, topics about how to budget, limit and cut expenses, and being frugal have been talked about, but what hasn’t been discussed as much is increasing or maximizing income. As you may know, there is incredible buzz and interest around the topic of a side hustle for pharmacists and many have a side hustle to earn extra income and pursue other interests and passions.

Mentioned on the Show

Episode Transcript

Tim Church: What’s up, everybody? Welcome to Episode 063, which is all about side hustles. Now, those of you listening may be thinking, who is this imposter and what happened to the other Tims? Well, don’t worry. They will return. I’m just giving them a break. They really do an incredible job, which is evident by all of your positive comments and feedback, and we truly appreciate that. Well, I’m the other Tim and have made a few appearances on the show over the past year, but I decided to take the lead on this topic of side hustles. That’s something that really interests me. We talked a lot in many episodes about how to budget, limit and cut expenses, and just being frugal in general, but not so much about increasing or maximizing income.

As you may know, there’s an incredible buzz going around and interest around this topic of having a side hustle or side hustling. And there’s many pharmacists out there who are doing this to earn extra income and pursue other interests and passions. Some of our most popular episodes have been highlighting those who are working in some unique roles and pursuing non-pharmacy careers on the side — and I’ll definitely put those in the show notes. So because of this, we wanted to make this a regular series to continue to highlight these stories because we believe they’re truly inspiring and can help spark some creativity. So what the heck is a side hustle? Well, a very basic definition is a way to make extra cash beyond your main source of income. So really, that could be many different things that would fall under that. It could be something as simple as working a second pharmacy job besides your full-time gig, so working at a hospital while you’re working your full-time job as a community pharmacist or vice versa. Sometimes, people also refer to a side hustle as a passion project, something that they’re really called to pursue. And again, that could be something that’s not even pharmacy-related. For example, I know a pharmacist who has driven for uber on the side, and he absolutely loved the experience. Back in Episode 053, the other Tims interviewed Tony Guerra, and some of his side hustles include real estate, writing books, and podcasting. In Episode 009, we had Carrie Carlton on the show, and she discussed how she acquired 18 rental properties. So real estate has just been huge as a side hustle for her. My friend Alex Barker of TheHappyPharmD.com, who has been on the podcast a few times has been side hustling for a long time, doing many different things with providing career coaching to other pharmacists and creating online courses, just to name a few. He actually has turned his side hustle into a full-time job as he just recently had his last day at the VA hospital. So I want to shout out to Alex and just say congratulations. But the bottom line here is that there’s a lot of options out there.

So oftentimes, the questions comes up, why even pursue a side hustle? Pharmacists make a great salary, right? But I think a lot of people are interested in making more money, and that’s what it comes down to, what people really think about when that topic of side hustling comes up is I want to make extra money. There’s certainly nothing wrong with it, and that point is one of the major reasons why I pursued, started side hustles. But I think many times, it really goes deeper than that, and you have to ask yourself the question, Why do I want to make more money? I think there’s some current realities going on in our profession on why it really does make sense to consider a side hustle. Since 2011, the average debt-to-income ratio is rising as pharmacists’ salaries are not keeping pace with the rising student loan debt. And this means that more pharmacists are starting out in a worse financial position than pharmacists who have graduated in previous years. Traditional pharmacist positions also typically have a salary where it starts out high, but then small raises occur over time, typically based on some merit or time being spent there at the job or a combination of both. And furthermore, some companies are cutting pharmacists’ full-time hours. So instead of full-time being 40 hours or somewhere around there, it’s now down to 32 or something less. And that’s actually leading to some substantial pay cuts for pharmacists. So I don’t think you can ignore the reality of what’s happening with pharmacy jobs out there.

But besides that, I think a lot of people, the reason for wanting to pursue a side hustle is they want to accelerate their financial goals and get them done quicker. For example, student loans, obviously a big problem. And that was one of my main motivations is really getting these student loans out of my life a lot faster. A lot of people want to retire at an early age, and in order to do that, they have to save more money for retirement and invest more, and they have to get a side job in order to do that. Some people want to donate more money or help other family members and friends out financially. Perhaps you want to upgrade your lifestyle. A lot of people want to go out to better restaurants, go on better vacations, buy better clothes. There’s certainly nothing wrong with that. But as we’ve talked about many times, there’s a tendency to live up to and even beyond your means, and so sometimes making more money can actually make your financial situation worse.

The other reason for wanting to pursue a side hustle or why you may consider it is that relying on one source of income can be risky. Although many pharmacists’ jobs are thought to be secure, with the changing job market, things are not what they used to be. And so the demand is not as high as it was. There’s still definitely a demand out there, but everybody is susceptible to losing a position. And so having a second stream of income or multiple streams of income can give you that additional layer of security.

Beyond some of the monetary reasons behind pursuing a side hustle, I really think the big one is passion. So something you truly feel passionate to work on that’s meaningful, that gives you the results or feeling of happiness and self-satisfaction. And oftentimes, that’s a great combination, that you’re working on a project or doing something that the end result may be that it provides you with some additional income but is something that really fires you up, something that gets you up in the morning.

So I want to spend a few minutes talking about my personal experience with side hustles. By no means am I the expert on this; there’s definitely a lot of pharmacists who I mentioned earlier that are bringing a lot more money and are a lot more successful, but I want to just give you a few tips on kind of how I started with this.

So why did I start exploring side hustles? This was a couple years after I started my full-time job and after I finished residency. And initially, my main motivation was getting extra cash so I could get in a better financial position. I came to this realization that I was broke and that student loan debt at the time was totaling about $200,000, which is a combination of undergrad and graduate school. And I had to make some changes to get myself in a better position. Now, of course I scaled back on spending. I got on a tight budget. But I was looking for some opportunities to maximize my income. So I really wanted to reach my financial goals faster, that was my main motivator, that’s why I wanted to do it.

Now, my full-time job is working as an ambulatory care specialist at the VA hospital, where I have clinics to manage, chronic diseases, diabetes, high blood pressure and a number of others. My schedule is 7:30-4 Monday through Friday. Most of the time that I have available for side hustling is in the evening and on the weekends. Sometimes I’ve heard in books people who do a lot of their side projects on the weekends, they’re called “Weekend Warriors.” So that’s kind of how I viewed myself during some points of time when I’ve been doing this. The easiest thing that I came across on what I could do to earn some extra income was just do some staffing, some in-patient staffing at the VA after I would finish my day as an am-care pharmacist. And so that was a really easy thing to do because literally, all I had to do was press a button and go down an elevator a couple floors and really start my side hustle there. So that was a really easy, very convenient way to get some extra cash. It wasn’t always that consistent but definitely was a great opportunity early on.

The other thing that has come up is some special projects where I was able to get overtime. And still occasionally, this happens. But the opportunities don’t come about as much as they used to. So while those things were definitely great, they weren’t consistent. So I wanted to get something where I could have a more reliable extra income coming in. And for the first year and a half, I didn’t have a Florida license because I had graduated from a school of pharmacy in Ohio, and so that kind of limited my other options of what I could do working as a licensed pharmacist in other areas. So eventually, I became licensed in Florida, and I started looking at other opportunities that I could do working at another hospital or community pharmacy nights or weekends. And it took me a couple months, but eventually, I was able to find an opportunity at a local hospital. And this was really great because they were very flexible with my schedule, as soon as I was done at the VA, I could come in and work for a couple hours in the evening. And really, weekends were available too. And so this was a great way to really put a big chunk of extra money every month towards my student loans. So I was easily bringing home an extra $1,000, sometimes $1,500 a month. And I thought this was just a great opportunity.

But what started happening was is after about a year and a half, I really was getting burned out by all these extra hours. So sometimes, I was working close to 60 hours a week. And the other thing was I wasn’t getting really excited about the work that I was doing. The other element that came into play was I got married during this transition when I was doing the extra staffing. And so it’s another element that came into it and made it a little bit more challenging because I was spending so much time working. So at that point, I kind of said, what else can I do? Or what are some other opportunities where I don’t have to physically be present and work all these additional hours but still try to figure out how to get some additional income?

Well, after I finished my residency program and through this time that I was working the hours at another hospital, I really became a voracious reader, focusing on the areas of personal growth, business, psychology and personal finance. And really, because of that, I developed an interest in trying to pursue other things than just a traditional pharmacist’s role. And that led me to my first side hustle sort of outside of just a traditional pharmacy role, which was book writing.

And so after I read a couple books on how to write books because the technical aspects were a little intimidating for me, I felt like I could give it a try. So given diabetes management is one of my specialties, I thought writing a book for patients was a great idea since I can only reach a limited amount of patients in my full-time job. I was so excited about this and thought I was going to sell this thing like crazy through Amazon, I wouldn’t have to do anything but look for the money to be deposited in my checking account. Well, long story short, that’s not what happened. And to this day, I still have not recouped the money that was invested into the book, which was really only about $1,000 since I went the self-publishing route. But what’s interesting though is that every couple months, one or two people will buy the paperback book or Kindle version, and that actually brings in a royalty of a couple dollars. So I get a good laugh out of that because of how far off my expectations were. But at the same time, I did the work once, and it still has the opportunity to bring in more income. And so this is obviously a much more passive stream of income than physically being present and working in a traditional pharmacy role like I was doing when the extra staffing.

Well, this failure with my diabetes book or what I’m going to call it, a learning project, was really important, though, because it kind of helped set the stage for my next project, which was writing “Seven Figure Pharmacist” with Tim Ulbrich. Now, that has actually brought in some consistent revenue every month. My first book gave me the confidence in the process of not only writing and getting all the pieces in order, but really to get from that vision to reality and figure out how to actually get a good reach and sell the book.

And so besides the book, my other side hustle — as probably you could have guessed — has been working with YFP, Your Financial Pharmacist team, creating content, managing the website, among a bunch of other things. And this is something that I’m truly passionate about, and I’ve believed in Tim Ulbrich’s mission since he started the company in 2015. As I shared on previous episodes, I struggled with my finances for awhile, so the idea and the opportunity to help others and help prevent them from making the same mistakes that I did is just a great experience and something that really does motivate me and want to continue to work on this project and work on this side hustle.

So that’s really a quick snapshot of my experiences that I’ve had with side hustles. And I mentioned that when I started off, really it was really mainly money. I was looking for additional income; it was the bottom line. I mean, it was a very cut-and-dry reason. I wanted to get my student loans paid off faster, so what can I do to get more income? But eventually, it really — passion has been a huge driver for me for a lot of the things that I’m doing.

So if you’ve thought about a side hustle or are thinking about what else can you do to bring in additional income or what can you do that is something that you’re very passionate about, what are some things that you can do to get started? So I think the easiest thing to consider is that if you’re really just looking for an additional stream of income, you don’t care how you do it, then obviously looking at other pharmacy jobs out there where you can do some shifts, maybe even at your own institution or organization where you work, looking at different special projects that they have, something that’s a different time than your main hours, I think that’s obviously, that’s an easy one. And that’s what I did. But if you’re thinking about something other than that, then here’s some questions I think you can consider.

The first one is what knowledge or experience do you have that others would find useful or valuable? So obviously, you have very high competency with pharmacy-related topics and things when you graduate, but everybody has a very unique background and experience. And I had a lot of pharmacists in my class that had other careers, even prior to pharmacy. And I think that has helped shape a lot of what they’re doing now. And I think that’s something that you really have to consider is to bring into the picture because it doesn’t always have to be something pharmacy-related or it could be a combination of something pharmacy-related and something that’s not. Is there a hobby or passion that you have that you could actually monetize it? So I think that’s another one to think about. And the other one is, are there problems out there that people are willing to pay to have solved? And I think this is a big one and just a great way to think about entrepreneurship in general. When I started getting interested in this idea of side hustles, I was listening a lot to the Smart Passive Income podcast by Pat Flynn. And he always makes a point of this, that when you’re looking at different businesses and opportunities that you’re really looking to solve people’s problems. Can you solve them better than what the options are available now? Or do you have new and innovative ways on how you can solve people’s problems? So I think that’s a great way to think about that.

And as I mentioned, there’s a number of different motivators for wanting to do a side hustle. Maybe purely financial, maybe some other reasons, but I also think you have to have the right mindset. One of the most inspiring books I’ve read over the past couple years is a book called “The Go-Giver” by Bob Berg. And in this book, there’s really a story that goes on, and he talks about a lot of different laws that apply. And one of them that really stood out to me is called the Law of Compensation. And that basically states that your income is determined by how many people you serve and how well you serve them. So a lot of times, instead of asking the question, how do I make more money? I think a better question is, how can I provide more value to others? And by doing that and providing more value to others that the income eventually will come.

Now, if you’re looking to get some ideas for side hustles, I recommend you check out my friend Alex Barker. He has a post called, “53 Side Hustles Any Pharmacist Can Start Today.” And you can find that on his blog called TheHappyPharmD.com, and we’ll put that in the show notes. And in future episodes of the series, we’re going to talk about some more specific ideas and some things that you may not have even considered.

So moving forward with this series, I’m going to be interviewing other pharmacists who have a side hustle and really get into some of the details of what they’re doing, how they actually make money, how much money they’re making — when they’re comfortable with sharing that, of course — and how the heck they balance being a full-time pharmacist, having a personal life, and then also their side hustle. Because I think a lot of people manage this differently and depending on your personal situation and where you are, even the thought or the idea of doing something extra I think can be very daunting, especially if it’s something that you’re not truly passionate about. So I think it’ll be great to hear some of those experiences moving forward.

Now, if you have a side hustle and you want to be featured on the show, please reach out to us at info@yourfinancialpharmacist.com. Even if you’re in the beginning phases and just starting out, we would love to hear from you. So we’re really looking forward to hearing and learning about your stories in episodes to come. And so I’m just really excited about this series, so please if you have any comments or feedback, please reach out.

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YFP 062: The ‘Other’ Loan Forgiveness (Non-PSLF)


 

On Episode 062 of the Your Financial Pharmacist Podcast, Tim Baker, owner of Script Financial and YFP Team Member, and Tim Church, YFP Team Member, talk about the ‘other’ forgiveness through the federal loan system. Many borrowers aren’t aware that this program exists, so Tim and Tim spend this episode shining a light on the details of the program and who should consider it.

Mentioned on the Show

public service loan forgiveness

Episode Transcript

Tim Baker: What’s up, everybody? Welcome to Episode 062. I am here with my co-host, Tim Church. We are going to talk all about the ‘other’ loan forgiveness program. Tim, I’m excited to be here with you. What’s going on?

Tim Church: Hey, Tim. Glad to be be back on and excited to hear that you and Tim Ulbrich are going to be heading down to south Florida coming up in a couple months.
Tim Baker: Yeah, this will be our — so I think Tim and I just booked our flights. We’ll be down for our T3 conference to talk Your Financial Pharmacist business in West Palm Beach, Florida. I think it will be our first meeting there, so we’ll finally be able to meet Andrea, and you’ll be able to not travel for one of our meetings for once, right?

Tim Church: Exactly. And I’m not going to have to go into the snow, and you guys are going to have to bring beach attire. Get ready to go.

Tim Baker: That’s true. I can work on my base tan. Yeah, so today, Tim, we’re going to talk about — you know, we talk, obviously, student loans a lot on the podcast, but we’re going to talk a little bit more about the non-PSLF forgiveness program, which a lot of people don’t know is a thing. So you know, I’m interested to kind of talk with you and kind of we’re going to take a more casual approach, I think, and just talk about the program and some of the details behind it. But what are the — I guess for you, what do you think are some of the reasons why, you know, people or pharmacists come out, and they don’t, they’re not aware of I guess some of the strategies that are out there. Why do you think that is?

Tim Church: Well, I mean I think we’ve talked about it many times that not every school is going to put personal finance in their curriculum and make it a priority. And some schools, they have it as an elective. But really, the bare minimum that students have is as they come out and as they graduate is they have the exit loan counseling, which as I think we heard from many people that that’s just not enough. It’s just such a small amount of information that they get, and so it’s really hard to sort of cram everything in there that you need to know about your loans. And with so many repayment plans and structuring and different dates and eligibility, I mean, it can be very overwhelming to kind of understand and know first of all, your options, but then all the nuances within all of those options.

Tim Baker: Yeah, it’s funny. I had a meeting with a resident, so I work with some students and some residents, and we were talking about her loans. And I was asking her what her strategy was, and we’ll break down the difference between strategy and repayment plans and things like that. And you know, she was kind of in this deferral period. I was looking at kind of some of the questions that I was asking, I was like, man, we need to switch this up. And I asked her about like had she considered forgiveness or PSLF, and she didn’t even really know what PSLF was. And you know, I think sometimes when I look at our Facebook group, and I see some of the conversations there, there’s a lot of people out there that are kind of in-the-know with their student loans, and I think they understand the different strategies and the plans available to them. But I think that there are also some that don’t know. And for this particular case, we’re talking $200,000 in loans. It’s a big deal. So I think having all of the different strategies and repayment plans kind of in front of you is important, and really breaking those down is important because, you know, you can make decisions, you know, in residency or as a new practitioner that are going to affect really the next 10-20 years of your life. So I think it’s important to kind of talk through those. So let’s talk about that, Tim. When we’re talking a student loan strategy versus a repayment plan, what are we talking about here?

Tim Church: Yeah, that’s a great point. And I think so many people get these two things confused because repayment plans, really, they’re going to dictate your minimum payments over a designated term, and that really could be in the federal system, could be a refinance, but basically, you have a set plan that says how much you’re going to have to pay a month and at least over a minimum period of time. But when you’re talking about a strategy, you’re really looking at your comprehensive game plan on the most effective way how you’re going to tackle your loans. And really, for most people, it’s going to be, well, what’s the strategy or game plan that’s going to save me the most money? And really, that strategy could be executed using a number of different repayment plans, especially if someone is going to keep their loans in the federal system and pay them off that way or whether they’re pursuing one of those forgiveness programs. So one of the things that we’ve kind of talked about is when you kind of look at very broadly, if you’re looking at your student loans, what are those main strategies that you can kind of look at and analyze? And really, for a lot of people, they’re going to be looking at really three different broad strategies. So the first one — and we always talk about this because a lot of people are unfortunately not eligible, but it’s great if you have it, is tuition reimbursement programs. So a lot of those are through the federal government, through the Veterans Affairs, Indian Health Service, Public Health Service, National Institute of Health, so there’s great programs that exist, just unfortunately, there’s not a lot of people and not always everyone is eligible because that’s essentially free money that your employer is giving you or matching you. And then so to the next big, broad kind of strategy is non-forgiveness, so everything that’s outside of the forgiveness realm. That could be refinancing your loans through a private lender or it could be keeping your loans in the federal system and just paying them off through one of the repayment plans. And then besides that, really you have forgiveness, and that can even break down, and that’s where we were kind of going with the Public Service Loan Forgiveness or what we would call non-PSLF forgiveness or the ‘other’ forgiveness.

Tim Baker: So when we say the non-PSLF forgiveness — so I guess to break that down a little bit, you know — so let’s first talk about, why don’t we first talk about PSLF, and we’ll just kind of walk through that. So you know, typically, when I talk with clients, and I’m looking at their student loans, typically kind of the rhythm of this is that they have to work for a certain type of employer, like you mentioned. And typically, that is a 501c3 nonprofit. So if you don’t know if your company’s a nonprofit, there are different resources out there that you can check it out and see if they are. You have to have the right type of loans, so that’s typically the federal loans that we’re talking about. You have to be in the right type of repayment plan, which is typically one of the income-driven plans, so the ones you’ve heard of, which are IBR and ICR, and then the newer ones on the block are pay-as-you-earn and revised pay-as-you-earn. You have to make the right amount of repayments, so in the PSLF, it’s 10 years. Those have to be consecutive, you’re basically looking at 120 payments. And then you prove it, and you typically do that with your employment certification form. And then when you do that, you apply for forgiveness, and you receive tax-free forgiveness. So that’s kind of the way it works, and like I said, we’re not going to spend too much time on PSLF, but — I don’t know, Tim, should we kind of talk about some of the updates now in terms of that program? And then we can kind of shift to the non-PSLF forgiveness?

Tim Church: Yeah, I mean really, not much has changed. There’s still the questions that are on the table about the uncertainty on the longevity of the program — you know, will it be capped at a certain level? Will it still exist in the future? I’ve kind of been searching off-and-on on the Internet to see how many cases of people that have been actually received forgiveness, and really, I still only see just a few out there.

Tim Baker: Which is amazing. It’s amazing when you think about it because of the problem — whoever is running PR for like the PSLF or fed loan servicing really kind of needs to look in the mirror because it has such a bad reputation, but I know it’s happening. We don’t know, but when we were making this student loan course, I called fed loan servicing just to kind of get an inside opinion of where PSLF is going, and you know — to kind of give a little bit more background on what PSLF is, it was put in place when George W. was in office and then basically, both administrations then, both Obama and the current administration under Trump either talked about capping it or eliminating it completely. So there is some risk to that. I think what is comforting in some regards is in March, which is probably the most recent news when it comes to the forgiveness program is that the Congress has allocated $350 million for those that were seeking forgiveness that didn’t quite line up everything for them to be in forgiveness. And actually, I just read an article from Forbes, who this lady was, I think she was like eight years into forgiveness, but she had FFEL loans, and FFEL loans, unfortunately, are not eligible for forgiveness. You have to actually consolidate those first, so — and I actually have a client that’s kind of going through the same thing. She was halfway through forgiveness, and not all of her loans were in the right type of loan, so she essentially has two different clocks, one that was in the correct type of loans, and one that wasn’t. So the point being is that Congress, the government, has allocated some funds for those, mistake cases that in all intents and purposes, they should be forgiven. So there’s that. Now, to shift gears here and kind of talk about the non-PSLF forgiveness. So if we kind of use the same type of rhythm in talking through non-PSLF is don’t — in terms of the right type of employer, it doesn’t matter who you work for. You could work for the circus and still receive non-PSLF forgiveness. So it doesn’t matter if your employer is a nonprofit or not.

Tim Church: Are there pharmacists in the circus, Tim? I wasn’t sure. Is that some of your clients that are in there?

Tim Baker: I think some of them either they feel like they’re working in the circus or they want to work in the circus.

Tim Church: Oh, OK.

Tim Baker: So sometimes, that’s the case. But let’s say we’ll keep it positive here, so it doesn’t matter who the employer is. They still need to be in the right kind of loan, so this is your federal direct loan. So again, no private loans can be forgiven here. They still have to be in the right type of repayment plan, so that’s one of the four income-driven plans. And they have to make the right amount of payments. Now, this is typically over 20 or 25 years instead of the 120, so this is the 240 payments over 20 years or 300 over 25 years, depending on what type of repayment plan. You don’t really have to prove it, you still have to re-certify your income every year, which is going to basically change your repayment, and then you apply and you receive forgiveness. Now, what’s left out of there that you heard me say with PSLF is that with PSLF forgiveness, it’s tax-free forgiveness. In the non-PSLF program, it’s taxable forgiveness, so what does that — Tim, what does that mean when I say taxable forgiveness?

Tim Church: So essentially, any amount of money that you have left at the end, any balance remaining on your loans at the time of forgiveness, the IRS basically treats that as income. So whatever you make 20 and 25 years down the road, your income from the previous year plus whatever amount is going to be forgiven will be tacked on as income. So essentially, you would be responsible for paying any of the taxes for that. And I think we’re going to break that down in a little bit more detail later on in the episode. But I want to kind of shift back to what you were talking about in terms of the years, in terms of the repayment period. So you’re kind of talking about you’ve got to have direct loans, you have to be in an income-driven payment plan, and actually, you can also be in a standard repayment plan actually counts, which doesn’t really make much sense. If you were in the standard repayment plan, you’re on track to pay it off in 10 years. But in case you started out in the standard plan, you could have made payments and then shifted over. But those would still count if you shift later, at a later point down into an income-driven plan. But when you looked at the different income-driven repayment plans, that’s where the timeline is a little bit different. So if you look at the revised pay-as-you-earn or re-PAYE, really it comes down to whether your loans are all undergrad or whether they’re going to be professional. So we’re talking for pharmacists, most of those are going to be for professional study, most likely. So if you have any loans that are for a graduate or professional degree, that timeline is going to be 25 years. So basically, you have to make those 300 payments over that timeframe in order for those to count. Now, and contrast that with the pay-as-you-earn or PAYE, that’s going to be a 20-year period. So the same thing will be true if you’re in the new IBR, or income-based repayment plan, it will also be 20 years — so if you’re a new borrower on or after July 1, 2014. And then for the old IBR, or the ICR, income-contingent plan, that’s going to be a 25-year repayment period.

Tim Baker: Who ultimately should consider this strategy when we’re viewing their student loans? Because like, you know, I hear a lot of, you know, I hear a lot of kind of chatter of, you know, looking at, you know, extended or extended graduated repayment plans that are out there, and which way to go in terms of, you know, if you’re not eligible for the PSLF program. So who ultimately should look at this program?

Tim Church: It’s a great question. And I mean, even just to kind of take a step back and think about it, like who wants to be in debt for 20-25 years? That’s a long period of time when you think about it. But I think there are some cases where it’s definitely something that you have to consider. There’s no perfect example of this, but I think the people that we’ve talked about quite a bit in the course and going through that is if you have a very huge debt-to-income ratio, so we’re talking at least 2-to-1. So for example, your income is $120,000, but you have student loans of $240,000 or more, then maybe this is something that’s on the table. And I think the reason that it becomes something that’s on the table is that if you start to look at the 10-year repayment for somebody with just massive student loan debt, I mean, that can be a huge chunk of your income every month, I mean, just to be able to make that payment. And then not only that, when you look at your other obligations, if you have other debt besides student loans or you live in a high-cost area, you know, that could be something that’s very difficult to do to even make that. And then you could say, well, what about refinancing to an extended period as well? And depending on how big the loan is, I mean, that can also be pretty difficult to pay. And again, if you’re extending that out for 20-some years, well, if you can get part of the forgiveness benefit, then you have to sort of look at that as being a potential option.

Tim Baker: Yeah, so whenever we talk about student loans, I always hearken back to the student loan course because I think one of the best things about the course is the decision table. So you basically, you look at your standard, the best repayment plan for non-forgiveness and non-PSLF forgiveness and PSLF forgiveness. And obviously, if one of them isn’t on the table, the PSLF, you cross that off. But it shows you very deliberately, you know, how long you’re going to — what the term of the loan is and what your total payment estimate would be after that. And the math, you know, the math typically doesn’t support any of the extended standard repayment plans. You’re either going to be looking at a standard plan or, depending on your strategy, looking at one of the two newer income-driven plans. And you know, the borrowers that have that larger debt-to-income ratios, anything that, like you said, Tim, is above 2-to-1, this would be something to consider. But the other thing that you have to really worry about is that tax bomb that comes at the end of that 20 or likely 25 years. So you know, if you have $100,000, which in some scenarios, that will definitely project out, that means that $100,000 that’s forgiven will be taxed. And if your taxed at a 25% income tax rate, then that’s a $25,000 tax bill, which is a little bit of a kick in the pants, you know, considering that you just were in debt for 20-25 years, and now you’re paying a large tax bill again. So I mean, there are different strategies to save for that, but you know, this is really a case where, again, if you’re in that. But I think one of the things that I think we’ve talked about amongst the Tims is at what point do we really — and maybe some pharmacists are at this because they understand the math behind it, but at what point do we view kind of that nonprofit status for the employer as almost part of your overall benefit packet. So like as an example, if I’m a new pharmacist and say I’m carrying $200,000 worth of debt, and I have a job for a nonprofit that pays me $100,000, and I have a job at a for-profit that pays me $120,000, I don’t think that we can look at that as well, this one place is going to pay me $20,000 more. I think that we really need to be a little bit more reflective and say, OK, if I look at this in totality and I look at the fact that, you know, you can’t argue with the math — I know I said this before — you can’t argue with math. And I know Tim Church, like we did this with your loans in retrospect. You can’t argue with the math of the PSLF. So if you are a believer, kind of like I am, that PSLF does have a little, that the program has legs, I think we really need to consider that as part of it. Like I did a student loan analysis for an individual, she’s actually a lawyer, so a non-pharmacist, and she walked out of the meeting saying, you know, I need to get back. She was in a nonprofit sector as a lawyer. She’s like, I need to get back to that because there’s no way that I want this hanging over my head for 20 or 25 years, and I don’t want to pay the I think it was $80,000 — or not $80,000, maybe like a $50,000 tax bill. I don’t know, Tim, what are your thoughts on that?

Tim Church: Yeah, I think you’re absolutely right that you have to consider that. And I think that a lot of times, people don’t. They’re looking at just standard salary, standard benefits and kind of what they’re looking to do. But as you’re going through that job search and how you’re going, I mean, that certainly is part of it. I mean, are you going to be working for a 501c3 or government entity? And is this something that could potentially change the course of how you pay your loans off? I mean, it’s a big deal because we’re talking over a long period of time, but also you have to look at that opportunity cost. So if you don’t pursue the PSLF or don’t go after it, then you’re losing that opportunity to potentially put a lot of your money towards retirement and other things. And I think that’s actually one of the things I wanted to go back to is that somebody that has a very high debt-to-income ratio and is coming out and just could feel extremely overwhelmed and they’re thinking, how do I even make these student loan payments? How am I even going to make those? Even if I refinance, maybe it’s going to be a huge chunk of my monthly income and even if I did that, how am I going to start retirement account? How am I ever going to get a house? How am I going to fund my children’s, my kids’ education? So I think like when you look at those, put that on the table that it can be very, very overwhelming. But if you’re sort of in one of these programs, in the program of non-PSLF, and you say, I can make income-based repayments, then I think that’s actually important to talk about as well. So how are those income-based repayments, how are those calculated? And I recently just put out a post on the website on how to define and how to calculate it because it has a very specific definition when you’re talking about these income-driven repayment plans. But most of the plans, so if we’re talking about re-PAYE, PAYE or the new income-based repayment, it’s going to be 10% of your discretionary income. Well how is discretionary income calculated? Well, that’s going to be based on your adjusted gross income, and that’s going to be — you’re going to subtract that from the poverty guideline. So those come out every year and change based on inflation and are relatively — they’re the same for all states except Alaska and Hawaii.

Tim Baker: All the Lower 48.

Tim Church: Exactly. And then your spouse’s income is only counted if you file jointly in most of the plans and in re-PAYE, it’s regardless of how you file your taxes. But when you look at that, when you break that down, you know, those payments can No. 1, they can be more manageable, but just like we’ve talked about with PSLF that funding retirement accounts and things like that, you can actually lower your payments that you’re making towards the loans by taking advantage of some of the tax benefits that are available.

Tim Baker: Yeah, so essentially, what you’re saying is that there are a few ways, a few levers to pull to lower your AGI, your adjusted gross income, and what you’re essentially doing is you’re deferring money into things like a 401k or a 403b or an HSA or a traditional IRA that allows you to kind of pay your future self but also lower the AGI, which will lower your payment and then hence, maximize your forgiveness.

Tim Church: Yeah.

Tim Baker: Go ahead, Tim.

Tim Church: No, and I was going to say too, now, some people may be listening to that and say, Well, if I’m lowering my payments towards my loans, won’t I be having a higher tax bill at the end of the forgiveness period, so whether that’s 20-25 years, and part of that is true. The balance may be a little bit higher, but I think the other thing to keep in mind is, you know, we talked — what did you mention? A $25,000 additional tax liability, could be something greater, but you also have to think that wherever that money is going to be in 20-25 years, is really going to be eroded. So it’s kind of hard to think about, I think, in today’s value because 20-25 years, you know, if you have to cover an extra $25,000 of income taxes, that may not be as — that’s really not going to be as substantial as what it would be today.

Tim Baker: So this might be a good part to bring up, we had a question on the podcast, Melissa from Salsbury, right down the street for me, asked, “You quoted on one podcast that after x number of payments, that one might qualify for non-PSLF. I’ve been paying on-time and extra for 16 years, didn’t know if I might qualify or soon qualify.” She talked about what she — looked like she had some proceeds that she could use, that could apply extra towards paying off the loan. So Melissa, thanks for asking the question on the Facebook group. I would say that if you qualify for non-PSLF, so you’ve been paying for 16 years, it’s really going to depend if you are in direct loans, so if you have Stafford or FFEL loans, those might not have qualified. So essentially what I would do is, you know, just look at your loans and see how long you’ve actually been paying. Those 16 years, are they all for direct loans? And you could be very well close to a forgiveness where you can actually apply and seek forgiveness, but it’s going to depend on really what kind of loans you’re in and what repayment plan. Typically, you’re probably in an income-driven plan. I think the second part of this is if you’re seeking a forgiveness — and this is kind of where we talk about you’re either forgiveness or you’re not. If you’re in a forgiveness strategy, whether it’s a PSLF play or a non-PSLF forgiveness play, you never want to throw extra money at the loan because essentially, you’re almost flying in the face of your strategy. So if you’re a Tim Church, and you’re being super aggressive on paying off the loans, he wants to plow as much money toward that loan as humanly possible because he’s not seeking any type of forgiveness or anything of that nature. If you’re on the other side of the fence where you’re trying to pay the least amount towards the loan, you want to basically maximize your forgiveness. So you wouldn’t apply any extra savings or money to the loan. So in your case, unless you find out that you are not on track to be forgiven for that non-PSLF time period, you would take that $25,000 and apply it elsewhere, whether it’s, you know, to plus up your emergency fund or apply that towards retirement savings or something like that. So I wanted to call that out, it’s really going to depend on your situation. So hopefully that answers your questions, but thanks for asking it. So what else, Tim Church? What else should we cover with regard to the non-PSLF forgiveness play.

Tim Church: Well, I honestly think if you’re really considering this option, I mean, one of the things I probably — if I were someone that was saying, this may be an option for me, a good play, I would really seek the help of an accountant. And the reason I say that is because No. 1, you have to think about the tax implications later on down the road. But you also have to think about what repayment strategy you should be in. And the reason that comes into play is we talked about that whether you have a spouse is going to depend on what kind of payments you’re going to make based upon that strategy and how you file your taxes. So really, it comes down to the repayment plan but also how you file your taxes and then preparing for that. So there’s a lot of different factors that go into the calculations, so I think having someone really go through and crunch the numbers and make sure that you’re on the right path that’s best for you, I think is really, really important. And then I think the other thing talking about is, OK, you’ve kind of said, OK, I’m comfortable with that tax bill coming up in 20-25 years. Well, how do you actually prepare for that? And you know, we’ve kind of talked about — you and I have before, that really, you know, there’s a couple different ways to go about it. One is you could just put money in a savings account and just have enough money for when it’s time to pay that extra taxes. But you know, why is that not a good idea, Tim?

Tim Baker: Typically, it’s not a good idea because you have such a long runway that, you know, if you — even right now, a lot of the better savings accounts out there are paying — they’re paying decent, you know, 1.5-2% interest, which is the highest it’s been in a long time. If you kind of believe in my philosophy, which is over long periods of time, the stock market will take care of you. And this is like 10+ years, so this would be 20-25 years. If you believe that over long periods of time, the stock market will take care of you, then you really should be investing your money there because you’re not going to touch it. Same thing with, you know, a lot of younger professionals with their retirement funds, you’re not going to touch it for a long, long time, so the market could go up and down and left and right, and so in a similar example, if you’re looking to build wealth for the potential tax bill that’s out there, I think some type of low-cost index fund is most appropriate to, you know, pay off the minimum amount of your student debt and then to put, you know, we’ve got to calculate it out, but to put a sum per month that you’re just buying into the market and letting it do its thing over time.

Tim Church: And so that should really be a separate account versus the retirement. You know, we were talking about —

Tim Baker: Exactly.

Tim Church: You can lower your AGI, and you definitely want to be saving for retirement over a 20-25 year period. But that’s probably not the best way to save for the tax implications because you could have penalties and other implications, and so really, you kind of have a separate type of investment account that you’re really designating for the tax bill. And one of the other things that I have actually heard come up in some political discussions is that that tax bill, there’s a potential that they could even eliminate that at some point. Now, obviously, that would be a good thing if you were saving and preparing for it all those times and then all of a sudden, the government said, ‘Hey, you know what, you actually don’t have to pay the extra taxes.’ I mean, that could be a great thing. But along the way, you’re doing the savings anyway.

Tim Baker: Yeah, and actually, you know, if listeners are interested in opening up that type of taxable or brokerage account, we actually put a link, you can open one up at Script Financial and fund it within like 15 minutes. So we can do that. But essentially, those types of accounts are, they’re not retirement — most retirement accounts if you take them out before 59.5, you have a penalty. This is essentially, you know, it’s like a savings account, but you can actually invest it. And that’s the idea. To kind of talk about that, yeah, there is some conversation about allowing all forgiveness to be tax-free, not just the Public Service Loan Forgiveness. And I think that could be an option. That definitely could be an option. I think to kind of circle back on the longevity of the program, I think it’s — it is a very political thing. I think it’s easier to eliminate the non-PSLF program, which is what we’re talking about today. I think it’s easier politically to do that, so I think if you start seeing things, forgiveness programs kind of be chopped, I think the non-PSLF would go first before the PSLF. So yeah, so I think — could they do that, where it’s, you know, it is tax free forgiveness? Yeah, they could. But then they could also say, ‘We’re going to keep PSLF, but we’re going to completely eliminate the non-PSLF,’ because you know, from a political standpoint, you know, it’s hard to say, ‘Hey, I’m a teacher or I’m a doctor, I’ve been paying into this program for eight years, and now you’re going to pull the carpet out,’ versus whatever profession. So that’s just kind of my thought is there’s a lot of ways this could go. Again, if you are uncomfortable with having the debt hang over for 20-25 years, or you’re really uneasy about the longevity of either the PSLF or the non-PSLF, you know, this wouldn’t be something that you would necessarily want to pursue. But I think again, the situation, you know, math-wise, especially if you have a higher debt-to-income, it’s going to be one thing you should at least consider to look at.

Tim Church: Alright so Tim, good work. I think we covered a lot on the non-PSLF forgiveness program. So just to kind of recap what we talked about here, so typically, this particular program is really for individuals or borrowers that they don’t have access to the PSLF program, typically this would be for someone that has a higher debt-to-income ratio, but the things that are similar across the board here is that in the non-PSLF, it doesn’t really matter who you work for. You want to make sure that you are in direct loans, those federal direct loans, that you’re making your 20-25 years worth of payment, most likely with PharmD’s, it’s going to be 25 years worth of payments in the re-PAYE, and that you are kind of certifying your income every year. And then at the end of it, you apply for forgiveness, and you receive taxable forgiveness. You have to worry about that tax bomb. So ultimately, lots of risks that play into this particular forgiveness program, but I think given those particular set of borrowers, it does make sense to at least consider. So Tim, good to have you on this episode as co-host and looking forward to next time.

Tim Baker: Thanks, Tim.

 

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YFP 061: Rapid Fire Insurance Q&A w/ Tim, Tim & Tim


 

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

Mentioned on the Show

Episode Transcript

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

Tim Baker: Let’s go.

Tim Church: Let’s do it.

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

Tim Church: Why not, Tim?

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

Tim Church: Oh, thank you. Appreciate it.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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YFP 060: One New Practitioner’s Lessons Learned Accruing $224,000 of Debt in 7 Years


 

On Episode 60 of Your Financial Pharmacist Podcast, Tim Ulbrich, Founder of Your Financial Pharmacist, interviews Brianne Porter, a new practitioner and faculty member at The Ohio State University College of Pharmacy, all about her journey of going into more than $220,000 of student loan debt, the plan she has put together to pay off this debt and the lessons she has learned along the way.

About Today’s Guest

Brianne Porter, PharmD, MS is Assistant Professor of Pharmacy Practice at The Ohio State University College of Pharmacy. She is primarily responsible for co-coordinating and teaching in Integrated Pharmacotherapy 1 and 2. Her research interests include community practice advancement and the scholarship of teaching and learning. In addition to her position with the college, she moonlights with a local independent pharmacy to bring those skills and experiences to the classroom. Brianne is actively engaged in APhA, serving as the Chair of the NPN Education Standing Committee, AACP, and OPA. She is passionate about community pharmacy practice and about getting students excited about and prepared for upcoming changes in community pharmacy practice.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: So Brianne, welcome to the show. Thank you so much for joining me.

Brianne Porter: Thanks for having me, Tim.

Tim Ulbrich: So excited for this recording, and I’m pumped up about your journey, and as I mentioned to you before we jumped onto the recording, we’ve done several debt-free episodes, but I think what I’m really excited about is your willingness to share your story as you’re really in the thick, in the weeds of this journey of paying off student loan debt. And you and I had a chance to meet all the way back — I think it was actually at AACP we met for the first time. Is that correct?

Brianne Porter: Yeah. It’s been a couple years.

Tim Ulbrich: Yeah. So at the time, you were just starting your fellowship — and we’ll talk a little bit more about your career journey and so forth — but your fellowship at Ohio State along with your Master’s degree. And at the time, I didn’t know anything about your financial journey. So I’ve learned more along the way, I know you’ve attended a couple presentations we’ve done, we’ve talked a little bit about student loan repayment strategies and options, and what I know from your story is that you obviously had a moment of conviction, an “Aha!” moment where you said, ‘There’s got to be a better way to do this.’ And I don’t know where that “Aha!” moment came from, but I’m excited to learn that on the recording and this episode today. So before we jump in to the details of your story, I first want to say thank you for your willingness to come on the show, for your willingness to be vulnerable with our listeners, and I’m confident that your story is going to inspire action from others in the community. So in advance, thank you for that.

Brianne Porter: Sure.

Tim Ulbrich: OK, so let’s jump all the way back — if I have my facts correct — all the way back, you graduated from pharmacy school at The Ohio State University in 2014. And it’s my understanding at that point, you had no student loan debt prior to starting pharmacy school. So you graduated in 2014, but prior to starting pharmacy school, you had no student loan debt. Is that correct?

Brianne Porter: Yeah, that’s correct.

Tim Ulbrich: So how did you manage to get through undergrad debt-free? Tell us a little bit about that story.

Brianne Porter: Yeah, so I was really fortunate. I actually went to undergrad at Ohio University in Athens. And I was really fortunate to get a scholarship that not only paid full tuition for four years, but it also covered my living expenses, I got a stipend in the summer to do some experiences, go travel and do some different things, and so really, when I was an undergraduate, during my undergraduate studies, all I really had to worry about was spending money. I had a job, and I made money, and I had spending money. But really, I didn’t have to think about what college cost or anything like that. I was really living a pretty good life at that point. I was very fortunate.

Tim Ulbrich: So you’re crushing it through undergrad, you’ve got scholarships, you have no student loan debt, so I guess one of the upsides of this story is it could be worse, right, if you had undergraduate student loan debt that was accumulating. So fast forward then, you graduate with your PharmD in 2014, tell us a little bit about your total debt load at the point of graduation. And then take us through your decision, your journey, in the postgraduate training and fellowship and ultimately why you decided to defer your loans through that period.

Brianne Porter: Sure. So I feel like this is the reason I reached out to you, Tim, is because as I’m looking back on this time and thinking about decisions I was making, I’m thinking, oh my gosh, how many people probably are making those same decisions. Like, please, let me help stop you from doing this. But yeah, basically, whenever I started pharmacy school, I’m going to go back even a little further because I think this part’s kind of important for the students listening. But when I started pharmacy school, because I had that experience in undergrad, I don’t think that I was very intentional. And I know we’ve talked about intentionality before, but I was not intentional at all about thinking about how much money I needed. I’d had four years paid for, and I think because I didn’t have any responsibility for my undergraduate education that I wasn’t really thinking about what it actually cost to go to college. And I had the same mindset that everyone has, which is that I’m going to graduate, I’m going to be making $100,000+ a year, I’ll be able to pay those off in no time, it’s no big deal. So every semester, whenever I did my applications for the student loans, I would just get like an offer. Like, ‘You’ve been offered this much. Accept all, or enter a different amount.’ And I think that if one slight change would have just been instead of offering me the max amount, they would have just had a blank and said, ‘How much do you need?’ I probably would have been more intentional, right? But you know, being a student and being fairly irresponsible at the time, I basically just rationalized in my own mind, well, I know what tuition is, and I know that I need to cover living expenses, and this is the first time I’ve lived alone. I live in a city, I’ve always lived in small towns, so instead of really thinking through or trying to estimate those costs, I just thought, you know what, I’m going to need it. Pharmacy school’s going to be stressful enough as it is, I’m just going to take the max amount. I’ll be able to pay it back, no problem. So I went through that, and even through school, I mean, I worked all through school. And I, again, used that money for maybe joining organizations or spending money or whatever else I needed. I mean, I had a car break down at one point. So like, it was kind of like an emergency fund, so to speak, as a student. And I think that even throughout those four years, it never really dawned on me like what this payment would look like whenever it came in, even that $160,000, which is what I graduated with. But even thinking about that total number, it never dawned on me like, how much money is that actually going to be out of my paycheck? And how hard would I work for that paycheck, you know? I felt very comfortable with that, oddly enough. But I had $160,000 of debt, and I was very comfortable with that.

Tim Ulbrich: Mmhmm.

Brianne Porter: But then I decided very last minute, I made a rash decision to apply for residency. And I was very lucky I matched, but at that point, I hadn’t really thought through the financial aspect of that. So when I was finishing pharmacy school, I had already accepted a job with Target, and I was going to be making about $120,000 at the time a year. And so even with that $160,000, I was like, well, I’m going to make $120,000. I’ll pay it off in a few years, no problem. Which is a funny joke now. But then whenever I matched for residency, I thought, oh my gosh, I’m going to be making like a third of what I was going to be making, what I was planning to make, so now I’m going to have more expenses with travel to conferences and different things. What am I going to do? And just a side note — I think it’s kind of funny how as a resident, we think we’re so poor. I think because we compare to what the pharmacists make, but if you think about it, people raise their families on significantly less than what we make as a resident. So I wish that I would have that moment of realization back then to know that, yes, you can very easily live on this much money. And yes, you can very easily make payments on your loans with this much money. But again, I think I was really good at talking myself into deferring or talking myself into I need more money because I just didn’t have that appreciation for my undergrad. So fast forward three years, I completed a PGY1 and then a two-year fellowship and a Master’s. And luckily, the Master’s was included in the fellowship, so I really did only have one degree to pay for, which is kind of sad that I landed at $224,000 with just one degree out of three that I have. But regardless, I finished my postgraduate training in 2017 and then suddenly, I got the final statement of $224,000. And that was a little more sobering, I think. That was a lot of money.

Tim Ulbrich: And I think that speaks to, you know, a few things that really stand out to me that I hope current students pick up on. I think your initial description of the process in which you borrow money — it’s very easy, almost like it begs you to take all that you need, right? And for cost of living and other things. And I think really taking a step back and saying, to your point, if this were a blank slate, and I really did my budget and did the math, what would I actually need and how can I minimize as much as possible what I’m borrowing because at the end of the day, an unsubsidized loan — as obviously you have experienced firsthand — an unsubsidized loan, that interest is accruing all the while that you’re in school. And so the other big takeaway for me is if there’s current residents, new practitioners listening — and I know certainly you’re not alone in this, Brianne — is deferment is real in terms of the impact it can have. And for you, obviously that went from $160,000 to $224,000 because of three years of deferment. And one of the things I always encourage resident or new graduates to think about is that even if you’re unsure about exactly how things are going to shake out, if you opt in to an income-driven repayment plan, because of how they’re calculating your monthly payment looking back at the previous year tax return, you’re going to have a very, very low — likely have a very, very low monthly payment. And so better than deferring, you can go into active repayment, and then obviously, you can start to pay it from there and get ahead of the interest over time. So thank you for sharing that. So you started with $160,000 from your pharmacy degree, you end up with $224,000. And I think my follow-up question to that is, as a new practitioner with life coming at you in many different angles and priorities, things that you want to do and accomplish, how does $224,000 of student loan debt, how does that practically hinder you as a new graduate? What impact has that had on you?

Brianne Porter: Yeah. It has been — I’m not going to lie to you. It’s been pretty awful, actually. And not to say that I don’t have a lot of good things in life, I definitely have much to be grateful for. But I had no idea how much this was going to really impact not just how I felt but other people in my life, how it was going to impact the decisions that I got to make, the things I got to do with my free time. So you know, for example, because of some other poor decisions, I also had some credit card debt, and so my credit score isn’t fantastic. And then I got married, and we wanted to buy a house. And we were able to buy the house. My husband, luckily, he had his undergraduate paid for as well and went straight into a job and was saving for several years. So he was very financially stable, actually, which was very lucky for me. So we were able to get a house, but it’s like, now we have the house, we have things that happen with the house, you have to repair an AC unit or a furnace or whatever the case may be. Or you have to get new windows, and these things come up. And because of my student loan debt and my monthly payment, we’re so strapped that it’s like, we can barely pay the bills that we have. We have a little to go into our emergency fund for those sort of things with the house or other things that might come up. But we do not go on vacations, we do not spend a lot of money on anything expensive. I mean, I can’t tell you the last time I went shopping for fun. I mean, I guess probably if you’re financially responsible, you’re really not just going shopping without a budget anyway, but I just have felt very strapped, quite the opposite of what I thought in pharmacy school and residency, to be honest. And it’s a real bummer.

Tim Ulbrich: And I think what you’re describing is what Jess and I felt, what I hear from so many other graduates is this feeling of, you know, I had one thing in mind of what this income would provide in terms of, you know, the feelings of that income. And then all of a sudden, it’s like, wow, I really feel like I’m living paycheck-to-paycheck despite this income. How is this happening? And obviously, as we’ve talked about many times before on this podcast, big student loan payments, other big purchases, a home, other priorities, quickly will evaporate the income that you have in any given month. So what I really want to find out from you is I know in our conversations before — which by the way, I’m very much looking forward to becoming a coworker of yours soon at The Ohio State University — so I’m pumped up to be working with you, but I know as we’ve talked before in different venues and settings is that I can tell you have an energy and a passion and a motivation to get after this whole topic of personal finance. And obviously, through you journey, I think it’s fair to say that you kind of wandered into this and really maybe didn’t always have that passion, energy or motivation. So what was the “Aha!” moment for you where you said, “There has got to be a different way of doing it.” Was it seeing that balance of $224,000? Or was it a combination of factors and things that came together?

Brianne Porter: Yeah, that’s a great question. So there’s a lot of things to address in your question here. I think the big “Aha!” moment, honestly, was not the balance. It still hadn’t hit me because really, if you’ve never had much money in life, that balance still doesn’t really mean anything to you. $224,000 I’m like, OK, well that’s six digits. What does that really mean? OK, I’ll tell you what it means. It means when you make a little over $100,000 a year, and you get your paycheck and taxes and everything else come out, your health insurance, all the things that you don’t account for when you think about that $100,000 income. My student loan payment was one-third of my take-home pay, which is significant, I think.

Tim Ulbrich: Yes. For sure.

Brianne Porter: And what my lender did, which was kind of sneaky, is they kind of started throwing the loans back one at a time. So my first payment was like a couple hundred dollars and then a little more and then a little more. But then my final payment came in, like the final amount that it was going to add up to, the first time was $2,300. Now, that’s a lot of money. You know? So it really hurt to pay that out on the beginning of the month and be like, wow, I just lost $2,300 this month.

Tim Ulbrich: That’s when it gets real, right? When you see that number, and you’re like, OK, here’s my paycheck after taxes, here’s what’s going toward student loans, here’s the house payment. And like you said earlier, what’s left after that? I mean, I think that’s the moment where it goes from almost feeling like Monopoly money to, ‘Holy crap, this is real. And I’ve got to do something about this.’ So one of the things I know is that you’ve been a really active member of the Facebook group, the YFP Facebook group — which for those that are not on there listening, please jump over and join the conversation. There’s so much support and encouragement and helping one another, it’s been really fantastic to be a part of. But it makes me want to ask the question, like for you, what role has community played in terms of people being around you and helping you on this journey? Whether it’s your spouse, peers, coworkers, family or friends. Talk a little bit about community aspect and accountability for you on this journey.

Brianne Porter: Yeah, I think that’s a good question. To be honest with you, when this all first started to unravel or kind of maybe unfold is a better word — when it started to unfold in front of me and I really realized the impact of the decisions that I had made, I was really embarrassed because it’s like, here I am, a pharmacist, I’ve got a Master’s degree, I mean, on paper, I look like I should be very intelligent, right? So how did I make these decisions? And how did I justify them in my head? So I think that I was really embarrassed that I wasn’t more intentional up front and that I really didn’t take that responsibility to just learn more about finances. I mean, totally honest here, I still don’t know a lot about financial things, which is why I purchased your book because I wanted to learn more about that. And so that’s really what kind of, you know, drew me in, but I was really embarrassed by that. Like I didn’t talk about it to anyone, and I didn’t talk about my debt, I didn’t talk about the choices that I had made. And I certainly didn’t want to ask other people because I didn’t want to then feel obligated to share, so I felt like I was really — especially when I started getting that payment every month, that bill and making that payment, I was really feeling very isolated and kind of trapped and just feeling almost like I couldn’t breathe. You know, I really felt like I was struggling to figure out how to manage with it and how to make decisions and what to do with it. And I think that the community that really helps me the most really is the Facebook group, the Your Financial Pharmacist Facebook group, which is why I’m so active on it. And I think that the thing that is so nice is to just get on there and see that I wasn’t the only person who made these decisions, and I’m not the only person who doesn’t know what certain things are when it comes to financial things, I guess, you know, financial terms. I don’t have any background in business. I never had to take any classes like that in any of my training, and I never opted to, so I really don’t know anything about it. And that group just made me feel like I wasn’t alone. And then I think it gave me the confidence to start talking about things a little bit more openly, so that was really powerful for me, actually, that group.

Tim Ulbrich: And so I want to follow up with that and talk a little bit about how you got to the decision of what your game plan is with your student loans. You know, we’ve talked a lot about on this podcast when we’ve done speaking events, there’s so much to be said for getting it right when it comes to having the optimal loan repayment strategy. And knowing you work for technically a PSLF-qualified employer, I know you and I have talked a little bit about refinance, you have all your federal options. So just walk us through briefly, what was your process or strategy to come up with your game plan when it came with why, for you, this was the option that you were going to go forward with in terms of paying back your student loans.

Brianne Porter: I appreciate you asking that question because it was actually, as I’m sure you know from some of our conversations, a journey that I really struggled with a lot, even once I started to get educated and really understand what the different options meant because that’s the first thing, right? When you’re a student and you’re doing the exit loan counseling, for any students listening, that is not good enough on its own. You have to learn more about what’s going on because I went through that counseling, and I still really didn’t understand what all of my loans were and what the payback plan for those were and what compounded interest is. Like I really didn’t understand any of that stuff. But once I became educated, again, through the Your Financial Pharmacist community and the book “The Seven Figure Pharmacist” and really understanding what those options were, sitting them down side-by-side, I still really struggled. And I’ll tell you why. So I owe $224,000, and as you mentioned, I work for an institution that would qualify for Public Service Loan Forgiveness. So yeah, sure, it probably makes a lot of sense to the average person to just say, well, you’re going to pay a lot less if you do Public Service Loan Forgiveness, so why wouldn’t you do an income-based repayment plan and go for that? But I am very risk-averse, actually, so to me this idea that that could go away at any time and I would have all of these small payments that I made that are really compounding interest as I went was very unnerving. Like it was keeping me up at night thinking about, can I really do this? Could I make this leap? So for the first year out of training, my first year as faculty at Ohio State, I actually opted into the 10-year standard repayment. And I did not refinance, which was another mistake that I’ve made. I’ve made every mistake you can possibly make. Yeah, I did not refinance. And for that first year, I was making those $2,300 a month payment. And the reason that I did that was the uncertainty of PSLF but then also, I’m the kind of person that I just like to attack something and get rid of it as soon as I can. And so I really just wanted to be done with this. I wanted to try to get this done in 10 years or less and know that I paid it all, I don’t owe anyone anything, and I’ve moved on. But kind of what we were talking about earlier, how that really impacted me, we were — my husband and I just felt very, we felt very trapped. We felt like we couldn’t do anything that was fun, we created a budget, and we were living by the budget. And that was really great, we paid off credit card debt, we paid off all kinds of other debt outside of this, actually. But we still felt like, wow, this is really strapping and is really suffocating in a lot of ways. And it just feels like we’re not really going anywhere, right? Because especially at the beginning, you’re kind of not really going anywhere. So at that point I realized I needed to either refinance or just go bite the bullet and go with PSLF and hopefully everything works out and the program continues or I’m grandfathered in or whatever the case may be if things were to change. And when we looked at refinancing, we found that even with the lowest possible rate that we could get, down around 4%, with my husband co-signing and everything, it was still only a matter of $300 or $400 difference a month. And so for us, that didn’t feel like enough to justify to continue on that repayment plan. So ultimately, I decided to opt into the income-based repayment plan. I get my first bill tomorrow, and I’m really excited to see that it’s over $1,500 difference. So you know, we want to look into investing and building our emergency fund more and things like that as well, but we are excited to have a little extra in there to be able to do something fun, you know, when we get the time or when the opportunity arises, very first world problems I’m talking about here.

Tim Ulbrich: Yeah, but I think your story is such an important one that matches up with so much of what we preach here on this podcast and even in the YFP student loan course is that there is no one right solution that we can blanket cover everyone and say, ‘This is the best option,’ right? You said something like, you know, these could keep me up at night. And for somebody else, that may be a very different scenario. Or maybe the math looks better on a refinance. And maybe somebody isn’t as interested in investing or maybe they’re not as conservative. So all the factors come together, and I’m so glad to hear you’ve thoughtfully walked through those and obviously worked with your significant other to do those, to say, OK, collectively for us, this is the plan going forward. And that may be very different for somebody else, and certainly that’s OK. And I want to go there then, since you mentioned even before and also through that last segment there, you know, your significant other obviously has become a very important part. You guys are in this together, you’re doing it together. He came in with no debt, right? You mentioned that earlier.

Brianne Porter: Right.

Tim Ulbrich: So I think I would love to hear from you, just what you’ve learned through that experience where maybe for others that are listening, one person’s coming in with a ton of debt or all the debt, somebody else has no debt. And just some of the feelings that you’ve had around that and how collectively, you’ve come together to work it out and say, OK, yep, we came in at different starting points, but we are a team, and we’re trying to do this together. So talk us through that.

Brianne Porter: So we — obviously, he came in, like you said, with no debt. And I came in with a lot of debt, so that was our first point of kind of not really being on the same page. But then we were also raised very differently financially. And so we approached finances in general very differently. So I think I talked a little bit earlier about how I was embarrassed about my debt and how I got there. And so to be honest with you, I was not up-front with him at first. It took me years of dating to really come clean about what I owed in student loan debt. And because we weren’t married, because we weren’t paying on it, I wasn’t paying on it at the time, he really, he didn’t know. And poor guy, I waited until we were engaged to drop that bomb on him. So he was in a situation, you know, he’s like, wow, what am I going to do now?

Tim Ulbrich: He’s not out now, right?

Brianne Porter: Yeah, but he’s a good sport. So he has — you know, and I said we’re very different in how we approach finances. I’m much more the — nowadays, at least — I’m much more the let’s count every penny, let’s keep track of every penny, let’s budget every penny. You know, I want to know where all my money is going now. And I’m very intentional. I learned my lesson, but I’m very intentional now. Maybe I was too intentional. But he is a lot more laid back and he is of the mindset that it all works out. So he’s on the opposite end of the spectrum. But because of that, he was very relaxed when I shared with him my student loan debt. And he said, you know, we learn lessons. That’s what life is about. But what are we going to do moving forward? And I think that was the biggest thing is just coming clean about it and then really sitting down and coming up with a plan versus his motto, he’s very laissez faire about things, and he’s very comfortable being like, we’ll fix it out. But at that point, we both agreed, we need a plan. This is very significant. We need to plan moving forward.

Tim Ulbrich: Well and just kudos to him to embrace that and say, “Hey, this is what it is. And it’s now our problem collectively, and we’ve got to figure this out together to have a plan.” And I think that’s great advice for those that are listening that may be struggling through or maybe even people that are in that dating phase. And you know, I think my advice would be the earlier, the better. You know you can get some of these topics on the table. And I know for Jess and I, personal finance wasn’t something we talked about before we got married. And all of a sudden, you’re thrown into it, and you’re dealing with it. Now you’re coming up with the questions of should we merge our accounts and how do we budget together? What goals are we trying to achieve? You know, all of these factors come together and so obviously, the earlier the conversations, the better. So two questions I have left for you are a little bit lighter questions, but I think part of your journey here is to share with others to hopefully help them along their journey as well. So pharmacist peers that are listening or students that are still in school, what are a couple pieces of advice you would have for them in terms of, you know, how they can prevent maybe some of the mistakes that you made along the way.

Brianne Porter: For pharmacists, I guess I would say those of you who are in my shoes right now, you’re now practicing, you’re making a little bit more than a resident or a student would make, it’s just don’t be afraid to jump in. I know I’ve been at a lot of your presentations and on your webinars, Tim, and you talk about this a lot. Like the first thing is be real and look at your numbers and just get down with that. And so I think that’s, you know — I heard you say that, but I think that when you’re always thinking about what do I have and you haven’t really wrestled with the numbers yet, you haven’t been plain with yourself about what’s actually there, that looming concern about what might be there or what that looks like is sometimes twice as bad as what’s actually there. So I would say just take a look, be really honest (gap), think about what motivates you. I know you’ve also talked about motivation quite a bit. And I think that’s really what it comes down to. Like you said, there’s no right answer for anyone. But if you avoid and you don’t confront this problem, like no matter who you are or what motivates you, that for sure is not going to be a successful thing. I can tell you from experience, it’s not successful. I guess for the residents, I would say dont’ defer. Like you mentioned earlier, Tim, even that income-based — you’re a resident, your income-based payment is going to be next to nothing. There’s literally no reason not to make those payments. So I definitely would not defer during residency. And then for the students, my best piece of advice is if you’re being offered the maximum amount or fill-in-the-blank, just put your hand over the maximum amount and pretend like it’s not being offered to you and actually calculate what you need, even if you’re just making approximations and you want to just slightly overask to meet, that’s fine. But if you just automatically select, you know, taking out the max amount, you’re always going to use that. No matter what, you’re going to put that money to use, and you’re going to owe it at the end. And you, trust me when I say you cannot appreciate how much money that is right now when you’re a student. You just cannot.

Tim Ulbrich: Great wisdom there. I wish I would have heard all three of those things through my phases as a new practitioner, as a resident and as a student. So you alluded to earlier that, you know, I think for you maybe this topic is one that you haven’t necessarily had as much education previously on and maybe one that doesn’t come as naturally. But obviously, you’re committed to learning more about the topic in terms of your own professional development. So what works for you in terms of learning more about this topic? Is it books? Is it podcasts? Is it webinars? What is the strategy that you have to develop yourself in this area?

Brianne Porter: Well, obviously, Your Financial Pharmacist teaches me a lot.

Tim Ulbrich: That’s a good one, yes.

Brianne Porter: But in all seriousness, I do tend to really utilize the resources of the Your Financial Pharmacist community as my primary source. If you think about how you approach Pub Med searching — I’m going to go nerdy here for a second — but I always, you know, when you find a good article, and then you look at the other references that that article has referred to or referenced. I kind of approach this the same way. I have found this resource to be extremely valuable for me. The book has been very eye-opening as far as really putting things into perspective and being at the level for someone who doesn’t have a lot of background knowledge on the topic, that I can actually understand what’s going on. And then a lot of things that I hear on here or read in a book, kind of resourcing out from there. I think podcasts are really helpful for me because I can listen while I drive and then that’s where I do a lot of thinking versus the book where it’s easy to kind of passively read and not take it all in. But I definitely find this community to be extremely valuable and a great resource. And like I said, you can then find other resources from Your Financial Pharmacist. But it’s been my main source.

Tim Ulbrich: Yeah, thank you for the shout-out. And I think my encouragement to the audience would be, if it is YFP, great. I’m glad to hear that. If it’s not, find whatever resource is going to keep you motivated on this topic and keep you learning. It’s a lifelong journey of learning and making mistakes, and learning and growing and making mistakes, and learning and growing, and you repeat that cycle over and over again. So if it’s YFP, if it’s something else, making a commitment to develop yourself in this area of personal finance. So Brianne, I want to again just thank you for your vulnerability, your willingness to share your story with our listeners. And I know this topic can feel so overwhelming and weighty at times. And I think it’s easy to avoid the pain, as you mentioned, wish it all weren’t there, turn the other way. And what I love about your story is you are choosing differently. You’re choosing to embrace the pain, you’re choosing to dig in, make a commitment to turn the ship around and invest in yourself in the future. So what an incredible, and I’m hopeful we can have you back on the show to share your debt-free journey and to talk about what life is going to look like once you have all of those loans paid off. So thank you again for coming on the show.

Brianne Porter: Yeah, absolutely. Thanks for having me, Tim.

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