Category: Podcast

On Episode 057 of the Your Financial Pharmacist Podcast, Tim Ulbrich gets practical to talk about why automation matters when it comes to achieving your financial goals and specific ways you can automate your own financial plan. We will hear from the YFP Community about different ways that they automate their financial plan.

Mentioned on the Show

• YFP Facebook Group
• YFP Episode 008: Developing a Millionaire Mindset
• I Will Teach You To Be Rich by Ramit Sethi
• YFP Episode 048: Mo’ Money, Mo’ Problems: Making the Financial Transition to New Practitioner Life
• YFP Blog
• YFP Podcast
• YFP Episode 026: Baby Stepping Your Financial Plan – The 2 Things to Focus On First
• YFP Budget Template
• 5 Steps to Creating Your Best Budget
• Script Financial
• Public Service Loan Forgiveness Program
• Student Loan Refinancing Resources
• Ally Financial Inc.
• YFP Email

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 057 of the Your Financial Pharmacist podcast. Not going to lie, fired up about this episode. When it comes to automating your financial plan, it’s so obvious, so effective, so easy to implement, but yet so many people are not optimizing this to achieve their own financial goals, and that would be myself included. I’ve made some recent changes to my own financial that I’m excited to share with you in this episode when it comes to automation. Whether it’s student loans, retirement, college savings, vacation, maybe it’s saving for a down payment on a home, setting goals and carving out money in the budget and automating those goals is powerful. And I know that I’m not alone that when I say that for some time, I was feeling that when you have multiple financial priorities that are swirling around, that can easily become overwhelming, and automation helps to put these goals into action and takes the stress out of wondering whether or not they’re actually going to become reality.

So let’s jump in as we’re going to talk about different ways of automating your financial plan. And as I was preparing for this episode, I couldn’t help but think back to Episode 008, Developing a Millionaire Mindset by YFP team member Tim Church, because when I think about automation, I think that’s a key piece of developing a millionaire mindset. For those of you that have not read the book, “I Will Teach You To Be Rich” by Ramit Sethi, I’ll link to it in the show notes. It’s just a great, quick, easy read, but one of the things he talks about in that book at great extent is this idea of automation and the power of automation and taking the decision-making out of the hands and taking some of the behavioral components where we tend to make mistakes and putting in processes to help to minimize those mistakes.

So before we dig into the weeds to talk step by step about exactly how to automate your own financial goals, let’s talk about why in the world you’d want to set up an automatic process for your finances in the first place. You know, the first thing that comes to mind — we’ve talked a lot about this on the podcast, throughout various episodes leading up to here now in Episode 057, and we’ve mentioned several times that so much of personal finance is behavioral decision-making. You know, I once heard about four or five years ago, about 80% of this whole topic of personal finance comes down to behavior and about 20% is really digging into the math and the numbers and the strategy. You know, as I’ve made more mistakes, had more successes along the way that on both sides of that, I would argue 80% may not be enough. That might actually be more like 90%.

And for me, when I think about automation, I think about out-of-sight, out-of-mind because I know at the end of the day, if all of that money is just sitting in my checking account and I haven’t automated it towards the goals that I’m trying to achieve, whether that would be getting out of credit card debt, whether that would be paying down student loans fast or retirement, college savings, vacation, home buying, repairs, whatever, I know that human nature and behavior is that I’m going to spend that money — I’m going to hope that something’s left over, but more often than not, nothing’s going to be left over, and I’m going to spend that money. And when I think about automating a financial plan, I think about intentionality. I think about paying yourself first and making sure you’re then really budgeting around the rest of it rather than hoping there’s something left over at the end of the month. So first off for me is that human behavior says that we’re better off taking the decisions out of our hand because we’re prone to making mistakes when it comes to finances. You know, one of the things that gets personal here for me is I think about my own retirement savings, I’m in the state teachers’ retirement system here in Ohio, so many of you know I work as a faculty member of Northeast Ohio Medical University College of Pharmacy, been here for about nine years, and in the state teachers’ retirement system, we essentially are forced to put in a percentage of our paycheck each and every month. And that number is actually I think now approaching 14% that we are forced, no decision in our hands, to put that money into retirement. We then also have an employer match, but as I think about where I am today, nine years later with my retirement assets, I think the only that is possible is because that decision was taken out of my hands. I cannot say that I would have had the discipline, that I would have prioritized putting 15+% of my paycheck each and every month into retirement, so I think that’s a good example as we talk about areas for automation, retirement is certainly one. But again, end of the day, if that money were in my checking account and that decision wasn’t made for me, I probably wouldn’t have achieved the success I have so far as it relates to retirement saving.

And so I think that’s a humbling moment to think that the only reason, the only reason my retirement is on track and ahead of progress is because that decision was put on automatic, because that decision was taken out of my hands. Now, we know that another reason automation is important, besides a behavioral decision processes associated with it, is that for many listening, whether you’re a student, if you’re a resident, maybe you’re somebody who’s transitioned out within the last five or 10 years, regardless of where you are in that spectrum, we know that you’re facing lots of different financial goals that you’re trying to juggle. You know, in Episode 048 we interviewed Dalton Fabian in the episode called Mo’ Money Mo’ Problems: Making the Financial Transition Into New Practitioner Life, and what stuck out to me about that episode with Dalton is he, like many others transitioning from student into new practitioner life, have all of these things that are coming at you at one time, student loans, emergency fund, retirement, down payment for a home, maybe kids’ college savings, lots of different things that are coming. And how do you strategically prioritize those and achieve those? And I think as we’ll talk about here in a minute, I’ll share some examples from those within our Facebook group, having a plan in place with a budget that’s executing those and then automating that plan each and every month is the key to success there.

So let me give you some quotes from those YFP members in our Facebook group, and this is what they had to say about automation in their own financial plan.

So Brianne from the YFP Facebook group said that “I automate as much as I possibly can, including savings, on the first of the month, all fixed bills and student loans as well. To me, that makes it easier to budget because I only ‘feel’ like I have whatever is left over rather than my whole paycheck.” I think there’s such wisdom there from the sense that when you pay yourself first, first of the month, you automate paying yourself towards your goals, all of a sudden, you get used to living on the rest rather than living up to your full income and hoping you can fund your goals after the fact.

YFP team member Tim Church says, “Love automating as much as possible — bills, everything, all bills, student loan payments, HSA contributions and TSP contributions.” That’s his retirement component with the VA. So when it comes to automation for Tim Church, he’s automating as much as possible.

Matt from the Facebook group says that, “I automate most of it but still need help for the leftover. I auto-deposit 529 college savings accounts every 15 days, one for each kid, auto-deduct 401k every check, have a separate target date fund that comes out once a month. I pay my bills as soon as I get them from the mailbox because I like to actually see the balances, which is the only reason they aren’t on autopay.” And I think that’s an interesting point, Matt, that maybe some may say, you know what, I like to not necessarily automate all of my bills — maybe you do, maybe you don’t — but for Matt, he looks at that and says, you know what, if I get my bill, whether it’s water, sewer, cell phone, whatever it be, that he likes to see the balance in the process of it to make sure that everything is accurate.

Brian says that “We automate 401k contributions and savings account for sinking funds.” We’ll talk about sinking funds a little bit upcoming in this episode. “However, we don’t currently automate 529 contributions or IRA contributions. Still not sure which approach is better, but I do find that not automating everything actually requires you to think about it every month as opposed to a set-it-and-forget-it mindset. I think there may be some benefit to that, depending on how you’re wired.” Building off what Matt said, Brian says, you know what, for some things, set-it-and-forget-it is great when you think about 401k contributions, 529, IRA contributions, but for some other things, maybe not so much if you like to have that reminder of exactly what you’re doing.

And Brandon, the last one from our YFP Facebook group, says so when we don’t see it, the importance for him of automation is that “When we don’t see it in the checking, then we don’t spend it.” And Jess and I have noticed the same exact thing. First day of the month comes, auto-withdraw to a separate savings account, different funds, I’ll talk about those here in a minute, boom. Whatever’s left over, that becomes our monthly spending in our budget. But we have already funded our goals because we know the reality that if it sits in our checking account, we’re going to end up spending it. So if it sits in our checking account, we’re going to end up spending it.

So let’s now move into where exactly to get started with this process. We’ve heard from those in the YFP Facebook group. And if you’re not yet a part of that community, you’re missing out — great conversations, come on over to the YFP Facebook group, we’d love to have you a part of that group and a part of the conversation.

So where do you get started? For me, it comes down to two major things: goal-setting and budgeting. Both of which we’ve talked about in the YFP podcast as well on the YFP blog, and if you’ve heard us speak at a live event, you know for us, goal-setting and budgeting are absolutely critical to having a solid financial plan. Now, let’s take a step — and I think goal-setting can be an overwhelming process, but just like you were taught in pharmacy school, when it comes to setting your financial goals, they have to specific. They have to be measurable. They have to be action-oriented. They have to be realistic. They have to be time-oriented. You’ve heard of SMART goals before, right? And they also, in our opinion, they have to have a “why” behind them. What is the motivation for why you’re going to achieve that goal? Now, you all know as you’re working with patients, maybe you’re working with a diabetic patient, trying to get them to make a lifestyle change, achieve an A1C goal, whatever you’re doing, it’s the same thing when we talk about our financial plan. We have to put behavioral pieces, we have to make conscious choices, and we have to have those motivations, specifics, that measurable component, the time-oriented piece, we’re going to have a higher likelihood of achieving that goal. So whether it’s helping a patient with their diabetes or helping yourself with your own financial plan, goal-setting is a critical part. And the other piece of this, which I’ll mention here in a minute, is that when you work on your monthly budget, your monthly budget is simply an execution of your goals.

So for those of you that are listening to this — and I know many of you are sitting here right now, thinking, I feel so overwhelmed with all of these different competing priorities that are out there. I’ve mentioned several of them already. We’ve talked about emergency funds before, we’ve talked about getting credit card paid off before, we’ve talked about making sure you have a solid retirement savings plan in place. What about your student loans and kids college? And the list goes on and on. And you have to first put all of those things on the table and say, OK, I have all of these goals, all of these competing priorities, which of these are the ones that I’m going to go after first? Maybe you’re somebody that says, you know, I’m going to go all in on this one goal, and then I’m going to move to the next one because I know that if I tried to focus on many different things, I tend to get overwhelmed and really just end up spinning my wheels. So some of you may say, you know what, I’ve got credit card debt, and I’m going to go all in on my credit card, knock that out, and then I’m going to move on to something else. Now, others of you listening may say, you know what, I think I can handle more than one goal at the same time, so now I need to look at the top two or three or four goals to make sure that I’m achieving these things in the right order. And I would reference you back to Episode 026, we talked about baby stepping into a financial plan, specifically around emergency funds and credit card debt as the two areas that you want to — more often than not — focus on first. So if you’re hearing this thinking about, I don’t even know where to get started, go back to Episode 026, Baby Stepping into a Financial Plan, I think that will help you get along the path to coming up with how you could prioritize these goals.

So you lay out all of the goals on your paper, and you start to prioritize them. And I literally like to put a number by them. So maybe it’s credit card debt, 1. Emergency fund, 2. Student loans, 3. Whatever the goals that you’re working on. Then you move into the budgeting process. Now, I’m not going to go into detail here on this episode about the budgeting process because we’ve chronicled it before on previous episodes. I’d point you — we have a great budgeting resource at YourFinancialPharmacist.com/budget. Again, that’s YourFinancialPharmacist.com/budget where we have a template, an Excel template, that will walk you through step-by-step how to create a zero-based budget to achieve those goals that we just discussed. I also would reference you to, we have a blog post out there at YourFinancialPharmacist.com, “The Five Steps to Creating Your Best Budget.” So both of those resources we’ll link to those in the show notes, I think will be a great starting point to make sure you can execute your goals through that monthly zero-based budgeting process. Now, if you take the time to sit down and do a zero-based budget and really work through this process, what you will come to at the end of that budgeting process is you’ll determine your total take-home pay, you’ll determine your necessary expenses, you’ll determine your discretionary or nice-to-have expenses, and then you’ll come up with a number that is determined to be your disposable income. Essentially, what amount of money do you have left over each and every month, each and every pay period, that you can allocate towards your financial goal. So if we did the goal-setting process and then we worked through the budgeting process, you may say, OK, at the end of the month, I’ve got $1,000 left over after I pay all my necessary and discretionary expenses. I’ve got $1,000 left over, and here are the three goals that I want to work on. Boom. That’s where the automation begins to happen. So if you were to say, you know what, I’ve got $1,000 left over, and I want to start doing two things. I want to pay off my credit card debt, and I want to build an emergency fund. Maybe you take that $1,000, auto-withdraw the first of the month $500 goes to your credit card bill as one example, $500 goes into a long-term savings account to save for an emergency fund. That decision is now out of your hands, you’ve identified your goals, you’ve set the budget, and now your goals are on automatic. And that provides an incredible amount of peace and confidence when it comes to your financial plan.

Sponsor: So two big pieces to get started here: setting those goals and then getting that budgeting piece in place so you know what that disposable income is, and you know exactly where you’re going to put that money. Now, once we have those two pieces in place, we can then begin to think about the actual processes for automation, and we’ll talk more specifically about where you can put the money in different areas when it comes to automating your financial plan.

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

Tim Ulbrich: OK, welcome back. In the second half of this episode, we’re going to talk about the areas specifically that you can consider for automation, which builds upon the discussion we talked about in the first half of the episode of the goals that you’re setting. And then I will walk you through step-by-step exactly how I think you can set up your automation of your financial plan and more specifically, I’ll show you exactly what Jess and I are doing with our own financial plan when it comes to automation.

So let’s talk about the different areas that you can set up for automation. And lots of these came from personal experience, from Tim and Tim — I know that they do also, YFP team members Tim Baker and Tim Church, as well as what I’ve heard from other pharmacists and those within the YFP Facebook group. Now, one we already mentioned in the beginning comments from the YFP Facebook group, areas of automation of course would be your monthly bills. So this, for me, is more out of convenience than anything else, so I don’t look at automating my monthly bills as being a point of, say, strategy as I do that it’s one less thing that I need to work on in terms of writing a check, making sure that that’s all set and ready to go. And that’s automatically happening each and every month.

Now, to build on what Matt and Brian said in the earlier comments, I, too, am someone that does not automate all of my monthly bills. And the reason is when it comes to those bills that I know fluctuate — water, for example, could be cell phone usage if there’s potentially overage charges — any bill that I know may have variance based on usage, I like to see that and track that and to be able to identify any discrepancies that may occur. Now, if I have bills that I know are the same each and every month and that’s not necessarily going to change, then for me, automation on bills really becomes a point of convenience. So area No.1, of course, would be bills.

Area No. 2 is student loans. And one of the things that Brandon said in our Facebook group is that automation is a must when it comes to student loans if you’re going for the loan forgiveness program. There, he’s referring to the Public Service Loan Forgiveness Program. That way, you are for sure making on-time payments. And Brandon, I think that’s great wisdom there because when it comes to Public Service Loan Forgiveness — and really, in my opinion, any student loan payment — you certainly do not want to have delayed payments for a series of reasons. One, if you’re in Public Service Loan Forgiveness, those then will not be qualifying payments. And then otherwise, you just don’t want delayed payments to be impacting your credit score, your credit rating in any significant way. So I think automation with student loans is great. That’s one where I’m thinking a little bit more about strategy, making sure that I have a plan, I’ve worked through my goals, I’ve worked through the budget, I’ve determined that this much each and every month, I can put toward my student loans. Boom. I’m putting that on automation, and I’m paying my loan servicing company on-time, right out of my paycheck, first thing before I hope that I have that money left over at the end of the month. The other thing I think that’s important to note with student loans and automation is that when it comes to refinancing your student loans, you’ll notice that the various quotes that you’ll get from the refinance lenders, those private companies, is they will typically give you a quote with the assumption that they’re giving you some discount to automate those payments, to set up the autopay on that. So if you do not automate those payments, then you may not get that quote that they’re advertising. So if you need more information on refinancing or have questions about what I just said there, head on over to YourFinancialPharmacist.com/refinance, we have a great page, great resources about where to get started with refinancing, who it’s for, who it’s not for, and if you’re ready to get started, companies that you can pull quotes from that we recommend and that our YFP community gets cash bonuses for.

So area No. 1 was bills, area No. 2 was student loans, area No. 3, for me, is college savings. So here, I’m thinking about 529 plans. And similar to retirement savings, which would be the fourth area, whether that’s 401k’s, 403b’s, Roth IRAs, whatever that would be, now, we’re really talking about automating the savings for the future. So you may look and say, OK, I’ve got three children. I’ve determined that I really want to start saving for kids’ college, and I’m going to start at $50 a month, $100 a month, $150 bucks a month. And you can set up a 529 plan where not only does it auto-withdraw the money each and every month, which then also gives you a deduction on your state income taxes, but it also then will auto-determine where your money’s going in terms of the allocation. So example, for my Ohio 529 plan for my kids, I have I think it’s $100-150 per month that goes toward each kid. And then from there, that $100 or $150 is being distributed in five different investing funds that I have set up automatically. So not only is the money going into the account, but then it’s automatically being invested in those accounts. When it comes to retirement savings, Brandon from the Facebook group says, “I have my retirement set to take out 15% with the employer matching 5%. And what we know from some of the studies that are out there is that the average automatic deferral rate for an employee is only about 6%. And we talked on previous episodes about probably needing closer to 15-20%, depending on your individual situation, needing 15-20% over the course of your career to achieve your long-term savings goals. So 6% is probably not going to cut it. And I think what Brandon’s doing with 15% automatic withdrawal, out-of-sight, out-of-mind, employer matching 5%, obviously then he’s getting closer to that 20% or is getting to that 20% goal. And I think this is an important one because you think about the evolution of retirement savings over time. What used to be more of a traditional pension model is now almost — for most listening — is probably 100% on your back in terms of the responsibility, whether it’s a 401k, a 403b, a Roth IRA, some combination thereof. We have to take the ownership and the work, and I think automation of retirement savings is a great one.

Now, the last one that I want to talk about, which I think is a really tangible for the listeners to get started today is setting up a series of what we call sinking funds. Now, these are established based on the set of goals that you have. So examples of sinking funds that I would throw out there could be an emergency fund, maybe it’s vacation, it could be setting up a sinking fund for purchasing a car or a car repair fund. It could be a gifts fun, so whether that’s birthday gifts throughout the year, Mother’s Day, Father’s Day, Christmas gifts, etc. It could be a sinking fund for a home down payment. Maybe it’s a separate sinking fund for home repairs. Maybe if you’re somebody who has significant medical expenses, you have a separate sinking fund for medical expenses. So what I’m trying to drive home here, the point with sinking funds, is that once you determine the areas and the priorities, instead of having all of this money in one lump sum in a checking or savings account, you start to separate out these funds into separate accounts, and you name them for specifically the goal that you’re trying to achieve: emergency fund, vacation, car, gifts, down payment, home repairs, medical expenses, etc. And what we know when it comes to behavioral finance is that once you name a fund something, you’re more likely to achieve the goal because it’s not in a general pot or pool of money that you lose track of in terms of where it’s going, and then obviously, you’re more likely to spend that money.

So what does this actually look like? And I mentioned before that Tim Baker, owner of Script Financial, helped Jess and I get this set up just a few months. We actually have several of these funds that are set up with an Ally, Ally.com, which is one example that you can use, many others you could do, even with your own banking institution. And so once we set a prioritized list of our goals with the dollar amounts, which, of course, came from the goal setting and the budgeting process, we then — after the budgeting process — we came up with and said, OK, each and every month, we have this total amount of discretionary, disposable income that we can assign to our goals. We then listed our goals out on paper and then based on that total dollar amount, we then said, OK, each and every month, we’re going to put x dollars toward giving, x dollars toward gifts, x dollars toward vacation, x dollars toward home maintenance. And so then what happens is each and every month on the first of the month, those dollar amounts are auto-withdrawn from our paycheck, and the rest of our income becomes what we spend for the rest of the month on groceries and all other expenses for the month out of our day-to-day checking.

So for me, there’s four basic steps here. Is No. 1, Step No. 1 is you have to have a list of prioritized goals with dollar amounts attached to them. No. 2 is you have to be able to know what that disposable income is that you have available each and every month so you can assign those dollar amounts to the goals that you’ve listed out. No. 3 is you then need to create and set up a long-term savings sinking funds account. So for us, what this looked like and it only took about 10-15 minutes for us to set this up is if I log into my Ally.com account, I have an interest checking account, which is basically the base account that we use where we need to spend money out of and then have a debit card if I need to use it. And then I have a series of separate sub-accounts. I have an emergency fund account, I have a giving account, I have a gifts account, a vacation account, and then we have a home maintenance account. And then Step No. 4 is you put those on auto-withdraw. So once you identify the list of goals with the dollar amounts, once you set up the separate sinking funds and you know exactly how much you’re going to put towards those, then you can set up the auto-withdraw so your paycheck into your checking account, once it hits your checking account, it’s an auto-withdrawal into your long-term sinking funds and those sinking accounts.

So that’s the process that we use to put our financial plan on automation, and as I began the episode and talked about why, for us, it’s about the intentionality. It’s about knowing that when it comes — when push comes to shove, if that money’s just sitting in our checking account, more likely than not going to spend it. So it puts our financial goals on automatic, and it allows us to be on the path towards achieving those goals each and every month.

One last point I would make here is that for me, the importance here of automation also comes to an important point of having accountability throughout this process, whether that’s a spouse or significant other, whether that’s a friend, whether that’s a financial planner, somebody that can keep you accountable each and every month, each and every quarter, whatever it be, to check in and say, Hey, we said these were the goals. What’s changed? What’s different? How is the progress going in terms of achieving those goals?

So I hope this episode has been hopefully a moment of inspiration, maybe even empowerment to say, think about your goals, what are those goals, how much do you want to put toward those goals each and every month, what’s the prioritization of those goals? And then setting up the sinking fund accounts to automate those goals each and every month.

So as always, thank you so much for joining us on today’s episode of the Your Financial Pharmacist podcast. We appreciate you listening each and every week, and as always, we would welcome any ideas that you have for future episodes. So you can shoot us an email at [email protected] or jump on over to the YFP Facebook group, and we would love to hear your ideas and input for future episodes of the Your Financial Pharmacist podcast. That’s for today’s episode. Have a great rest of your week.

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On Episode 055 of the Your Financial Pharmacist Podcast, Tim Baker and I talk about the variety of ways in which financial planners get paid and why you should care about how a financial planner charges (Hint: It can impact the quality of the advice that you are getting).

Mentioned on the Show

• What to Look For in a Financial Planner and Nuts & Bolts Guide to Hiring a Financial Planner
• Script Financial
• YFP Episode 054: Why Fee-Only Financial Planning Matters
• YFP Episode 049: Ask Tim & Tim: Should I Pay Off My House Early or Invest?
• Unshakeable: Your Financial Freedom Playbook by Tony Robbins
• YFP Blog: Are You Making This $1 Million Dollar Mistake?
• How a 1% Fee Could Cost Millennials $590,000 in Retirement Savings
• Bankrate Simple Savings Calculator
• YFP Episode 032: Find Your Why (Part 1) – 3 Life Planning Questions
• YFP Episode 033: Find Your Why (Part 2) – The Path to Success
• YFP Facebook Group

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 055 of the Your Financial Pharmacist podcast. Excited to be here again with the one and only Tim Baker. Tim, did you see the love Jess was giving you on the Facebook page today? I mean, seriously.

Tim Baker: I know. It’s pretty awesome. Like I said, I finally got to meet Jess for the first time in California when we went out to speak to USC, and it was awesome. And yeah, thanks, Jess, for the shoutout. I know you’re an avid listener of the podcast because I think you guys are en route to puppy-ville, that was the bet. So yeah, it was pretty awesome.

Tim Ulbrich: Yeah, puppy is coming here in a few weeks. So we were just talking last night, actually, about getting excited for puppy to come. And last time I had a real puppy was back growing up, I had a golden retriever. That’s what we’re getting this time, so excited. I think we’re probably underestimating work related to puppy, but so be it, right? You can’t be rational in these situations. Well, what we’re going to do here in Episode 055, we’re going to build off of last week’s episode where you and I talked about your old financial planning firm that you worked for and why you made the jump in 2016 to start Script Financial, obviously a fee-only financial plan for pharmacists. Why fee-only financial planning matters is a lot of what we talked about last time, and so if you haven’t yet done so as a listener, check out Episode 054 because I think that’s a great precursor for what we’re going to talk about today in our conversation here as well. So Tim, why don’t we just bridge that episode and this episode and kick it off with the idea of why somebody should care about how a financial planner charges. And we talked a little bit on the episode last week of, you know, often it can feel like smoke and mirrors, and there’s so many different models that are out there, and we’ll talk through those on this episode as well. But at the end of the day, why should our listeners care about how a financial planner is charging them and how it may impact the advice they’re receiving?

Tim Baker: Yeah, well I think what’s surprising to a lot of people is that majority of advisors out there can put their own interests ahead of their client’s, which — you know, like you said, as someone in healthcare and you’re working with patients, you would think that inherently, that position of trust whether you’re someone in medicine or an attorney or even a financial planner that obviously you’re looking at a very intimate part of someone’s life, that they would be legally bound to act in their client’s best interest. And what a lot of people don’t know is that that’s not true. There was a lot of noise — and it would be noise for financial nerds like me that happened recently with the Department of Labor where they basically wanted to push through this fiduciary role, which basically would force advisors that manage retirement assets — because that’s their jurisdiction is like 401k’s and IRAs — it would force advisors acting in that capacity or advising in that capacity to follow that fiduciary, that best interest standard of care. And a lot of people just don’t know that that’s not — and to be honest, like when I said last episode about not knowing that I wasn’t in the best model, I thought that the suitability standard of care was the best thing. And it’s not. So I think oftentimes, you know, you have to follow the money. And there’s a lot of conflict out there. We referenced that the last time we had done an episode was when we answered Michael’s question — you know, before last episode. His advisor — not that this is right or wrong, but I think there’s a little smoke there — wanted him to basically take the equity in his house, lower his payment and refinance and really invest that. Well, the problem with that is is that because of the way advisors get paid, investments stir the drink in a lot of ways. So you know, most advisors are not going to care about the credit card debt that you have or the fact that you have student debt or that you want to invest in things other than the stock market. They’re really going to care about how can I look at, you know, Tim Ulbrich, the $300,000 or $400,000 that you have in assets and how can I get in, how can I position it so I can benefit — not necessarily benefit — but get them where I can make a profitable business out of working with this particular client. And that, again, that’s not to say that everyone is like that. But I, even myself, you know, when I would look at clients in my own firm, I was like, OK, they have no real assets. They have some cashflow, so maybe I could put them in A Share mutual fund that would pay me 5 — so obviously, like inherently, I want to do what’s in the best interest of my client. But at the same time, I’m like, I also need to earn a living. And for me, it’s like, why even have a system that does that? And I think separating — like going back to that separating the scale of product with the advice that’s given — that has to be the way you go because anything else, human nature’s going to take over. Even if I’m doing well, it’s like, well, we want to add on to our kitchen or whatever. So maybe I sell this annuity to a client that pays me that 8 percent. And I think these are just things that advisors don’t really want to admit. It’s just kind of something that we talk about in closed circles, but it’s human nature, you know? It’s just how it is. And to me, if you can separate the sale of those products with the advice that you give, to me, you’re setting yourself up for success both on the advisor end and the client end, in my opinion.

Tim Ulbrich: Yeah, I agree wholeheartedly. And to me, that’s the whole point of why this fee-only thing matters. I mean, why take on those extra biases if they don’t have to be there?

Tim Baker: Right.

Tim Ulbrich: And you said last time, and you articulated well, there is no such thing as bias-free advice. But why not do everything you can to minimize those biases? If I’m a consumer, I really want somebody helping me to look at my best interests across my entire financial plan — not necessarily pick out one part of it because maybe the pricing model of how they’re getting paid, whether that’s insurance, investments, or whatever, may skew their attention in that direction. And you know what stuck out to me? You read “Unshakeable” by Tony Robbins, right?

Tim Baker: Yes.

Tim Ulbrich: So he talks about it at some point in that book — and we can link to “Unshakeable” by Tony Robbins in the show notes — at some point, he gave a percentage. I’m going to say it was less than like 3 or 4% of all financial planners that are actually acting in a fee-only fiduciary-only type of way. Do you remember what that number was? It was low, right?

Tim Baker: I think he used 3%. I typically will say 5 because I’ve heard different. But yeah, I think it’s like 3-5% is that. 3-5% are legally bound to act in their client’s best interest.

Tim Ulbrich: Which, to be honest, as I said last time on the show, as a pharmacist is just mind-blowing. So the statement I usually lead with is most of you that are listening to this podcast right now or attend a talk that we do, whatever be the case, if you’re working with a financial planner, more likely than not they legally are not obligated to act in your best interest. Now, that doesn’t mean they’re bad people. It doesn’t mean they’re giving terrible advice, it means you need to be really vetting that advisor, in my opinion, in a significant way and really asking yourself and taking a step back, ‘Is this person really giving me the best, holistic, as close as can be non-biased advice that I can get?’ And for those that don’t yet have a planner and will ultimately seek one, making sure you’re asking the right questions, which we have in the guide that I referenced there at the beginning of the show — YourFinancialPharmacist.com/financialplanner — asking those questions to make sure you’re finding out whether or not they have that fiduciary type of responsibility. So we really, I hope, made the case in Episode 054 that fee-only matters. So now, let’s work under the assumption that we’re buying into fee-only. But the reality is there’s a whole other layer then of pricing models within even a category of fee-only advisors. So let’s for a moment assume that, you know, commissions are out the picture, so people if they’re fee-only, they’re not getting payment via insurance products or not getting payment via investments. But still, even in terms of how the client is charged, there’s a variation of models. And we touched on these a little bit last time, but I want to lead into and start with the most common one, Assets Under Management, and then work into what you’re doing in terms of net worth and income. And I first want to lead with — and jump in here, Tim, as well — I first want to lead with I’ve talked with so many pharmacists who think they’re getting financial planning for free. And I’ll hear things like, well, I met with so-and-so from, you know, X Big Box Financial Firm, and they offered a financial plan for free. There is no such thing as a free financial plan, right? The money is coming from somewhere now or later, and so now let’s assume fee-only most common pricing model that’s out there is Assets Under Management, at least that I’m familiar with. So talk us through exactly what Assets Under Management is and how that charge works.

Tim Baker: So typically with Assets Under Management, this is where basically, the client has investable assets, meaning, you know, they can roll it over from a 401k or an IRA that they are currently managing or maybe their present advisor is managing. Or maybe it’s an after-tax investment account. So it’s basically divorced or outside of a typical 401k or a 403b. So those are the investable assets. So what the advisor often does is this where you typically will say, you’ll see advisors say, ‘Hey, I have a minimum of a quarter of a million or a half a million.’ So if you don’t have that amount of investable assets, I can’t help you. And typically, what happens is that, you know, in that model, they’ll say, you’ll get a financial planner or maybe sometimes it’s just investment advice. It just depends on what they actually offer, but they’ll say, ‘Hey, for a set fee, a percentage of what I’m actually managing, you can be my client,’ essentially. And that can range anywhere from, you know, .5% on kind of the low end to 2% and up. You know, as an example, if you have $200,000 and you’re moving it over to your advisor to manage, he might do that for $2,000. Now, sometimes that includes comprehensive financial planning, so you’re looking at things outside of just the investment management like insurance and maybe debt management and estate planning and retirement planning and that type of thing. But sometimes it just includes that. So the problem with that model is that especially for a lot of young professionals, you don’t have $100,000 or $200,000 — now, some people will take you no matter what you have, they’ll have no account minimums, but again, that kind of goes back to you have to follow the money. So if you are working with an advisor that works predominantly with people that have half a million and more, and you have $50,000 with your advisor, you’re probably not going to talk to him or her very often. So again, this is kind of because of the advisor is paid based on the investments, they’re investment-centric. So what the Certified Financial Planning Board says is a financial plan are your fundamentals. So that’s going to be your debt, your cash flow, your emergency fund, insurance, investment, tax, retirement, estate. So if they are paid based on the investment, although it’s a big part of the financial plan, it’s only a piece of the financial plan. And sometimes, that investment can really drive the boat. And especially for younger people where they’re just not, they’re not there, it kind of can degrade other parts of the financial plan that they should be focusing on now to get to the point where they have a larger portfolio. So that’s the problem is that typically, there’s not enough there for a younger client to be profitable for that particular advisor. And then I think that the advice is just skewed a la — I think the question with our Ask Tim & Tim with Michael, I think it’s skewed in a sense because the advisor benefits anytime the client puts more into those investments. So what I say when I talk about it is, you know, in an AUM model, Tim, if we record this podcast and you trip and fall over $100,000 walking to your car to go home, that would be great. And it’s more akin to the wealth transfer that’s going to happen from baby boomers. But if you’re working with a financial advisor that charged you based on AUM, it’s in his or her best interest for you to invest all $100,000 in, you know, a mutual fund that he’s managing or that she’s managing.

Tim Ulbrich: Yeah.

Tim Baker: And that might not be your best interest. Maybe you want to buy that cabin that you and Jess were talking about. Or maybe you guys want to go on that vacation or pay off some debt or pay off the house, you know what I mean?

Tim Ulbrich: Yeah, what if I had loans, right?

Tim Baker: Exactly. If you have loans. Or if you’re one of the pharmacists out there that have — I’m seeing a lot more pharmacists with credit card debt, the advisor is not incentivized for you to pay off the credit card debt. They’re incentivized for you to really get as much in the investment, which is not necessarily a bad thing, but they’re incentivized for you to get into the investment so they can raise kind of their percentage of what they’re managing.

Tim Ulbrich: Yeah, and I think one of the challenges, building on what you said there, one of the challenges I really see, back to your point about the younger clients, as we know, the YFP community, I would say the vast majority of people are within 10 years of graduation, graduating students or making this transition out into this first career phase of the pharmacist life and career. And in my opinion, that’s probably where the most help is needed. You’ve got student loan debt, you’ve got all these transitionary items. I was thinking about all the things you were talking Jess and I through, and we’ve been out 10 years. You know, you’re balancing now that we’re post-student loan debt, we’re balancing investing and life stuff and kids college and savings and all types of things. And if the pricing model is not such that it incentivizes somebody to work with that individual because you may not necessarily have a lot of assets, who is helping that group? And obviously, we believe at YFP very strongly that getting a quick start during that transition period is so successful to being successful long-term with your finances. And so if the industry is built in a traditional AUM model where it’s like, hey, we’ll see you in 20 years, well, what about from now until that point? So and I think your point is so spot-on that if somebody has cash or they’re balancing multiple things, credit card debt, student loan debt, maybe they need a good emergency fund, and AUM model does not incentivize an advisor to build a good emergency fund.

Tim Baker: Right.

Tim Ulbrich: It doesn’t mean they won’t give them that good advice, it’s just again, the model is not built in such a way that it does that. So when I think of AUM, talk us through typically what you’ll see. I mean, is it pretty standard somewhere around 1-1.5% of assets?

Tim Baker: Yeah. You know, it’s funny. I was evaluating a client’s, actually his mom’s portfolio, and her money was a couple hundred thousand dollars was at kind of a broker dealer, independent where I was previously. And the fee that she was charging, she had literally no idea. It was like 1.75.

Tim Ulbrich: Wow.

Tim Baker: On top of the 1+% expense ratio. So the expense ratio, we’ve talked about in the past. It’s basically the funds that she is invested in has a mutual fund manager somewhere on Wall Street that’s managing that fund, takes a percentage out basically to pay himself and to pay the office space on Wall Street and the analyst and all that kind of stuff. So basically, on two counts, she was paying — in my opinion — way more than she needed to. So, you know, I was saying like, in my models, you know, from an expense ratio standpoint, she was paying 1 — I think 1.25. I think you can build a very good portfolio, if not a better portfolio, for less than .1% versus 1.25%. And then she was paying another 1.75 on top of that. So you know, generally I see — and I’ve seen some well-known firms out there charge kind of in that 1-2% area. Typically, in the fee-only world I see more of the kind of 1% is probably pretty prevalent. Now, what a lot of — you know, I mentioned XY Planning Network. What a lot of young planners will do is they’ll charge kind of a flat fee for planning. So they might say, hey, it’s $200, $300, $400 for planning. And then we’ll charge you maybe .5% or even less for AUM investment management. So they kind of delineate their two. And I still think that there is a conflict there, in my opinion, that’s why I don’t do it that way. But then you can kind of go all the way down, you know, the ladder to a service like Betterment, which is the roboadvisor that charges .25% basically, you know, manage it with algorithms and things like that. And by the way, Tim, that is up for Script Financial.

Tim Ulbrich: You’re live!

Tim Baker: Well, I wouldn’t say we’re live. We have the robo that’s set up for us, and I have to figure out — but yeah, it’s pretty close. But for those individuals that — we get a lot of questions about, hey, how do I manage my student loans? And then how do I open up a Roth IRA? We kind of have a solution for that now, that they can do it within 15 minutes and fund it — even less than that. So more to follow on that, but yeah. But you can see anywhere .25% all the way to 2%. But again, it just depends on what you actually get for that because sometimes that 2% includes full financial planning, maybe even tax work, I don’t know, but all the way down to the .25%, which is just kind of the algorithmic, you know, investment model.

Tim Ulbrich: Yeah, and I think to your point too, to the listeners. Don’t forget about it’s not just the fee to the planner here in an AUM model, Assets Under Management. It’s also the fees on the funds. So if you’re not doing due diligence to make sure you’re in well performing, low cost funds, you could be — I’m sure you’ve seen this in clients — upwards of 1.5% to 2% on advisor fee and then you’re maybe getting hosed another percent on top of that or more on a fund fee. And so we’ve written a couple articles, and we’ll dig them up and link to them in the show notes on the impact of fees. And we’ll also link to in the show notes just a simple savings calculator from BankRate. Just run some examples to see and feel the impact of those fees. I mean, if you were to save $100 a month for 30 years and say it’s 7% and another example, you only got 5% because of somebody’s fees and other things, that’s a big, big deal when it’s all said and done. So everything you can to obviously maximize and hold onto those returns, you want to be doing. So let’s transition here then into your planning model because I remember when you and I met, and I really feel like you’re trailblazing looking at pricing in a different way. I think you tend to trailblaze, that’s just how you roll.

Tim Baker: Mic drop.

Tim Ulbrich: That’s how you roll. But I think it’s really pushing the industry to think differently, and as I think about our group and the YFP community, I think it really is obviously allowing for model that’s in their best interest is a fee-only model, but I also think it’s charge and charging in a way that really makes a whole lot of sense. So talk us through this idea of charging based on net worth and income and how you arrived to that point.

Tim Baker: Yeah. So I would say probably outside of the actual like logo and branding of Script Financial the firm, when I had that epiphany to unapologetically go after pharmacists or design a business that is catered to pharmacists, probably after the branding and maybe even moreso, I spent time thinking about how I would charge, what my pricing model would be because I’m very sensitive to conflict of interest and transparency. I think you have to be — because this is the one career that I can think of — and maybe there’s others out there that I’m missing — but it’s the one career where like my compensation kind of directly flies in the face of like the client’s ability to kind of achieve their goals. It’s kind of like — you know, and I think obviously, the value that you get working with a planner, working with Script Financial, I think exceeds the fee. But to me, I’m super sensitive to those types of conversations and that outlook. So you know, again, I think this was on a podcast that I heard one firm doing it in the Midwest that says, hey, the fee is based on income and net worth. And I think once I kind of wrapped my head around it, I really didn’t — again, I was unapologetic about it. I really didn’t look at any different model because to me, it makes the most sense to me because if I am incentivized to help the client grow their income and net worth and protect their income and net worth, to me, that’s an alignment of interests. I think if we’re both in agreement that those are the two things that kind of show progress and overall financial health, then it’s in my best interest for you to do that while kind of keeping your goals in mind. So I think it — for one, I think it reduces the conflict of interest because, again, in that example, if I’m an AUM type advisor, I’m trying to — whether I want to believe it or not, I’m trying to get the client to invest as much as I can because that’s how my compensation is affected. But for me, the net worth — so when we talk about net worth, to kind of back up, the net worth is all of the assets, so the things that you own, subtract all of the liabilities, the things that you owe. So a quick example — if you have $100,000 in a 401k and you have $200,000 in student loan debt, then your net worth is technically — and that’s all of your assets and your liabilities — technically, your -$100,000 in net worth, which is very typical of how my clients or most of my clients are in that negative net worth area. So I am incentivized to help them dig out of that and get to positive because that’s one of the components in which I charge. So to me, it aligns interest. And I think it’s overall best aligned to comprehensive financial planning. So if an AUM model guy, and I say, ‘Hey, Client, I got you 15% return, theoretically a return on your investment year over year,’ that’s great. But I’m not smart because I believe the market has a mind of its own. I think over the long term, the market will take care of you. But I’m not out there beating the S&P 500 or anything like that. I think that’s foolhardy in the grand scheme of things. So I’m not out there saying, hey, I can beat the market or anything like that. I’m saying, hey, I’m going to help increase your assets, lower your liabilities, while keeping your goals in mind. So I think year over year, if you have a -$100,000 net worth, then the next year, I want that to be -$80,000. Then the next year, I want it to be -$40,000 and then we’re in the positives and we’re getting that snowball rolling in the right way. So those are some of the reasons why I think income and net worth are really the big — I think the best way to do it.

Tim Ulbrich: Yeah, I couldn’t agree more. And I think when I heard that from you, it just, it hit me instantly that makes so much sense. And again, as we think about our audience and the holistic planning and assistance that I think they need, just as you gave in that example, it allows you the flexibility to do everything from, hey, we really need to spend time on budgeting, build a foundation, an emergency fund. Or maybe we are ready to jump to that investment stage. But just to give the listeners an example — and Tim, I don’t know, you may not even realize this. So we, Jess and I started working with you I think it was actually November because we just got back from our anniversary out in Napa November 2017. Here we are, almost in July, and we are really now just starting to get in the weeds on the investment side to make sure we’ve got low-fee options, performance is aligned, risk tolerance is right. And to me, that’s so refreshing and speaks to the pricing model because we had all these other things that we wanted to talk about in terms of you getting to know us. We talked about the finding your why episodes and making sure we really understand long-term goals and priorities, and I don’t know if other models are designed in a way that allows that relationship to be built and that trust. And obviously, as you appreciate and I appreciate, if this is going to be a 30-, 40-, 50-year relationship, like that’s well worth that time to invest in it whereas if I may have shown up with, you know, Joe Schmo’s office with a few hundred dollars of assets, I can guarantee that conversation would not have been delayed for so many months until this point.

Tim Baker: Yeah, and obviously you’re in a different stage of life than a lot of the clients that I’m getting straight out of pharmacy school, you know. So, you know, there are assets there that we need to be attentive to. Some clients, we don’t even look at — outside of just making sure that they’re asset allocation is good for their 401k or 403b, we don’t really focus on it too much. And you know, and again, in an AUM office, that might be all they focus on. So it’s like, hey, your retirement looks good. I’ll see you in 10 years when you have something actually for me to manage. And to me, I’m looking at it, OK, how can we adjust behavior? How can we execute the strategy that we’ve picked out for them for student loans? You know, how can we protect, you know, the balance sheet and their income through, you know, insurance policies that are, again, in the best interests of the client? It could be if they have little kids, you know, and a home or something like that, it’s making sure that the estate plan documents are in place. So there’s just so many other things that, you know, to focus on. And again, the investments are just one piece of that. And I think, again, with a lot of advisors out there, they’re so hyper-focused on that because that’s what most people think of when they think of a financial advisor that stirs the drink in terms of compensation and things like that. And that’s, it’s kind of, I guess it’s like the cool kid or the bad boy in the room is the investments because a lot of people just think of, you know, maybe the movies or just it’s confusing to a lot of people. So that’s what they think of first.

Tim Ulbrich: So are there any challenges, downsides that you’ve seen to the model thus far? Or tweaks or things that you’re thinking about?

Tim Baker: Yeah, so the downside — and this is where I kind of have to really work on my communication skills is I think, if I’m perfectly honest, I think that I care more about the pricing model than the client. Typically, the client’s just like, Tim, shut up, just tell me what the fee is, and I’ll pay it. That’s fine. But I’m more like, no, no, no. But seriously, this is like, if we do this, you know, it’s kind of tailored to you, it accounts for complexity because it’s not just your fee is $258 because we did this formula and that’s what it is. And most people are like, just shut up. But for me, it’s telling a story of why I do it. And sometimes, you know, especially from a business perspective, it’s a lot easier just to say, hey, client. Hey, prospective client, it’s this. And the messaging, you know, is super clean and easy. Because I believe so much in this, my conviction has kind of stood in the way of just saying, hey, it’s just going to be whatever, x amount per month and that’s it. Because I believe to my core that this is the right way to do it. But from a messaging standpoint and getting the prospective client to say, OK, I kind of understand what you’re doing, takes some effort on my part to kind of tell that story as I’m explaining what we actually and how we do it. So that’s probably part of it. The other part of it is because it’s based on — and it’s a double-edge — because a lot of my clients pay me through cash flow versus an investment account, in the AUM world, it’s typically just — the fee that you pay is just a line item in your investment. So it’ll just say “Script Financial, -x amount of dollars for this month or quarter” and for a lot of clients, it’s kind of like an out-of-sight, out-of-mind. They don’t look through their statements, they have no — but the way that I do it, I leave, for the most part, I leave the client investments unadulterated. We don’t bill towards the investment accounts if they have them. So it’s all cash flow, so they get an invoice from me that says, hey, thanks for working with Script Financial. And then it’s kind of a regular draw. And you know, you know, the fee is the fee is what I say. But the fee is the fee, meaning it’s not out of sight or out of mind. You’re getting that invoice every month that says, thank you. And for me, I live with — we were talking off-mic beforehand, I live with a healthy level of paranoia because I want to make sure that my clients are receiving the value that I think they should with working in this model. So to me, where in most models it’s kind of out-of-sight, out-of-mind, I don’t really know what I’m paying. It’s full transparency, this is it. And for some people, that can be a little uncomfortable, especially if they’re working with their parents’ firm where they’re paying them who knows what. So I think that’s the big drawback for me is communicating what the value is and also showing them that it will be a cash flow strain on them, but I think that the value they receive outpaces that, especially over the course of 10, 20, 30 years.

Tim Ulbrich: Yeah, and even just like to counter that a little bit. I think one of the downsides of an AUM kind of out-of-sight, out-of-mind model is it waters down the quality of the advice from the planner because I don’t think the client is necessarily has the same expectation. I mean, we know that if I’m writing a check every month or I see it coming out of the account or I get the email reminder from Script, I’m more likely to be an engaged advisee, right? Which ultimately means at the end of the day, if I’m a more engaged advisee and I’m knocking on your door and you’re feeling that accountability like just the cumulative effect of that of 20, 30, 40 years of the quality of the planning advice, I think is worth noting. So as we bring this full circle and connecting this back to Episode 054, one of the things that I mentioned — and Tim, you elaborated on — was the reality that as I was starting YFP and I went out and interviewed a bunch of different financial planners to try to understand the industry, I left many of these meetings really not having a good idea of ultimately how they were going to get paid. And that, obviously, felt frustrating and as I learned more about the fee-only industry, and then I learned more about your pricing model, there is such clarity in when you think of a pricing model of income and net worth, there is no smoke and mirrors about where the cash flow is coming from. There’s lots of transparency in that model, and I think, again, obviously there’s a lot to feel good about that in terms of the fee-only approach and knowing where those dollars come from.

Tim Baker: Yeah, and I would say, you know, I would say this too is you know, a lot of planners even, you know, fee-only planners, they might say, hey, for this $300 a month in this AUM, you get two or three or four means a year, and that’s what’s included. But for me, like if I’m hiring a professional — and again, I’m looking at this from the client side of it — if I’m hiring a professional, I want access. So if I have a question about money, I want to be able to say, hey, let me get Tim on the horn or in an email or a text or something so I can basically work through this. So I don’t limit the — you know, this is kind of what you get — I don’t limit what the, you know, the interactions with clients because the more about clients and what’s going on with them, the better I can serve them. So you know, again, it’s on me to build a business that makes it, you know, where I can scale that and everything. But you know, I don’t limit that. And when we say the fee is the fee, but the fee is the fee, like the transparency there is that includes everything, includes filing their tax return. The only thing that really — it includes all the meetings, a lot of financial planners, they don’t focus on budget, and I’m a big proponent of that. So like, you know, I tell clients, you know, some clients will say, the fact that we meet every month to go through a 30-minute budget call is worth it itself because I know that you’re there to be my accountability buddy. And a lot of advisors overlook that because again, when you have minimums of $250,000 of $500,000, it’s just like there’s an assumption of wealth there, right? So to me, outside of hiring attorney to work on estate plan documents, which I’m a big believer in, especially if you have little ones, or buying a life insurance policy, a disability policy, the fee is basically inclusive of everything. It’s the investing, it’s the tax return and planning and all that kind of stuff. It’s all the meetings, the budget meetings. And I think that, to me, is kind of a warm blanket for clients because like I said in the previous model, I would say, oh, this year, I’m going to charge ou x% for selling you a mutual fund or you’re going to pay me a commission for an insurance policy or whatever it is. So it’s super confusing. So for here, it’s pretty much black-and-white. It’s based on a formula. And what I do is I reassess it every two years, so the idea is hopefully we grow together and not have these huge spikes like some of the other models do. And you know, we’re in it for the long haul, I guess. So yeah, transparency, I think, for my own perspective, is something that the industry needs to get a lot better at. And I’m trying to in my own corner of the world here to lead that a little bit, and I think in this model, it’s best served.

Tim Ulbrich: So as we wrap up this two-part series on why fee-only matters and how financial planners get charged and why you should care, don’t forget to head on over to YourFinancialPharmacist.com/financial-planner to get information on what to look for in a financial planner, to download our free guide, “The Nuts and Bolts to Hiring a Financial Planner,” and to learn more about the financial planning services that’s offered by YFP team member and fee-only Certified Financial Planner, Tim Baker. So next week on the show, we hope you will join us. We’re going to go rapid-fire Q&A on student loan questions — those that we’ve received via email and those that are inside our YFP Facebook group. So if you’re not yet part of the YFP Facebook group community, head on over there if you have a student loan question, throw it out there, and we’d love to feature several of those on next week’s show. So until then, have a great rest of your week.

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On Episode 054 of the Your Financial Pharmacist Podcast, Tim Ulbrich, PharmD interviews YFP team member, owner of Script Financial and fee-only Certified Financial Planner, Tim Baker about why he left his old financial planning firm in 2016 to start Script Financial. Script Financial is a financial planning firm dedicated to helping pharmacists meet their financial goals. Tim & Tim talk through why fee-only financial planning matters and why a revolution of fee-only planning is happening today. Head on over to https://yourfinancialpharmacist.com/financial-planner to get information on what to look for in a financial planner, to download the free guide ‘Nuts & Bolts to Hiring a Financial Planner’ and to learn more about the financial planning services offered by Script Financial.

Mentioned on the Show

• Script Financial
• YFP Financial Planner
• YFP Episode 049: Ask Tim & Tim: Should I Pay Off My House Early or Invest?
• YFP Episode 015: Financial Planning Series Interview with Tim Baker Part 1
• YFP Episode 016: Financial Planning Series Benefits of a Financial Planner Part 2
• YFP Episode 017: Financial Planning Series Questions to Ask – Hiring a Planner Part 3
• YFP Episode 032: Find Your Why (Part 1) – 3 Life Planning Questions
• YFP Episode 033: Find Your Why (Part 2) – The Path to Success
• XY Planning Network
• XYPN Radio: XY Planning Network Podcast

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 054 of the Your Financial Pharmacist podcast. Excited to have Tim Baker back on the mic to talk this week and next week about financial planning, specifically why fee-only planning matters and why you should care about how a financial planner is making his or her money. So Tim Baker, here we are, Episode 054. And after a few solo episodes by both of us, a couple guest interviews, it was all the way back on Episode 049 when you and I last did a recording together and that was the Ask Tim & Tim episode where we tackled the question from Michael in Columbus about paying off a home early versus investing. So it feels good to be back together on the mic. How have things been in your world?

Tim Baker: Yeah, it’s been great. Actually, the last episode I think was Tony, right? Tony Guerra, that was the first episode that I didn’t hear until it actually went live. So we pass along editing duties to our assistant Kaitlyn, who is doing an awesome job, so it was kind of weird being a full-blown listener last episode. So I’m excited to be back and record this epsiode.

Tim Ulbrich: Yeah, we’re excited. This is such an important topic and one that we get so many questions about. And I should say, we did address financial planning in a mini-series we did, episodes 015, 016 and 017, we chronicled a little bit of your journey from West Point to becoming a CFP, we talked about the benefits of a financial planner, and then we also talked about questions that somebody should ask when hiring a planner. So we’re going to dig a little bit deeper into those topics here in Episode 054, and then next week, we’re going to jump in even further about how financial planners get paid and specifically why you chose the pricing model that you did in Episode 055. So before we dissect why fee-only financial planning matters and hear why you were convicted enough by this fee-only movement to jump ship from your old firm, let’s go all the way back for a minute to your journey into financial planning. And again, I know we talked a little bit about this in Episode 015, but give us your backstory, the Cliff Note version into why you chose financial planning as a career, especially since — as I remember — at the time, you had a very successful six-figure income and career. So why did you make that decision to jump to the financial planning industry?

Tim Baker: I think it’s actually analogous to why a lot of pharmacists get into pharmacy. I was at a point in my career where I was making, I was actually making good money, but I didn’t feel, I didn’t feel like warm and fuzzy after going to the office all day. You know, the best job satisfaction I got was when I was developing my key members. And I got to a point where money’s great, but I wanted to actually sit one-on-one and help people. And you know, when I left that six-figure job, I did some soul-searching, and I think I took about nine months off, you know, thereabouts, and you know, I just did some traveling and I reconnected because at that point in my life, I was so distracted — not distracted, but I was so involved in my career, and I didn’t really leave a whole lot of room for anything else, which was a problem. So I kind of tried to return to basics and reconnect with my roots, and you know, I was looking at different career paths and what I wanted to do. And both of my siblings — I have a sister who is two years younger and a brother who is two years older — and they both kind of in separate conversations said, ‘Hey, this is why I think you would be good in financial planning.’ And for me, it was kind of like an epiphany that I had when I went to West Point that, hey, maybe I think I really could be good at this and would enjoy a career here. And I was looking for something a little bit more entrepreneurial, which financial planning, it typically is. And that was kind of the path that led me back from the West Coast back to the East Coast and landed my first job in a financial planning firm.

Tim Ulbrich: And Tim, I remember actually, I think it was when you and I were still in our probably in our, let’s call it our dating phase period when we were getting to know each other, post-our initial meeting at Bob Evans a couple years ago. I remember, we were down at your sister’s place in Columbus, great area, great community involvement there. And I remember you telling that story about your siblings saying, ‘Hey, I really think you would be good at this industry, financial planning, because you really like to help people.’ And at the moment, I obviously didn’t know you well; I didn’t understand it. Now that Jess and I have had a chance to work with you as our financial planner and obviously as I’ve gotten to know you over the past couple of years in much more detail, I totally get it because I think your obvious strength, in my opinion, is relationship building and really caring and understanding about people and their situations. And we’ll talk more about that when we talk about why fee-only matters, but I think that’s one of the reasons it matters because you really allow the space for you to get to know your clients. We talk so much on the show that so much of financial planning is the factors beyond money, right? And I think you really understanding, for example, Jess and I and what motivates us, where we get stuck, where we’re frustrated, and it’s genuine. And I think that that relationship-building piece is so important when you think about a financial planner who’s not just somebody that’s really tactically looking at spreadsheets and adjusting things and rebalancing portfolios but really trying to understand who you are as a person to guide ultimately, then, your financial plan.

Tim Baker: Yeah, it’s one of those things — and to be honest, I didn’t really quite understand it even when I was getting into it. And probably some pharmacists think the same things, like they don’t really understand the profession until you’re actually, like, in it. Because I get a lot of, I do get a lot of sideways looks when I’m like, ‘Hey, I want to help people. I want to be a financial advisor.’ People are like, what? That doesn’t really sound like a calling. And I think what often happens — this is probably what we’ll get into a little bit it — I think sometimes the industry, with the sale of product and things like that and how compensation flows, sometimes it can muck that up a little bit. And you know, it’s like whose interests are first? And that type of thing. I think ultimately, you know, when I looked at it from a very pure standpoint, meaning — I’ll use pure instead of ignorance — I just, for me, I just thought, OK, I can sit down across the table from somebody and look at their situation and try to provide, you know, a semblance of a plan or a semblance of that I care about where they are and where they want to go. And I think a lot of what happens in the industry is that just because of how it’s structured, some of that can fall by the wayside. And to your point, like I’m a big believer in behavior and the relationship, and you know, really managing kind of like a life plan rather than just a financial plan. The finances are just really a tool. What’s the bigger picture? And you know, I think oftentimes, we as people, we just get so busy and so — and a lot of it’s just asking questions. Like I’ve said this before, I try to ask good questions and get the heck out of the way and just really you know, course correct a little bit and ask those questions and really hopefully it be a period of self-discovery. So it sounds kind of maybe hippie and you know, like, very touchy-feely, and I think you joked about that before. But again, a lot of these things aren’t things that we necessarily slow down to talk about and really self-reflect. And I think that’s where I can step in and hopefully provide a little bit of that, you know, catalyst to do that.

Tim Ulbrich: Yeah, spot on. And I remember even Tim Church and I talked about this when we were writing “The Seven Figure Pharmacist” book, and you know, obviously the title, “Seven Figure Pharmacist” implies a net worth of a million dollars or more, but we all know it’s not about just getting to a net worth of $1 million or more. I think if you crush your student loans, and you do awesome with your investments and home buying and other things you’re doing, ultimately, if there’s not a bigger plan or purpose there, I think people will find themselves disappointed. And I think that’s so much of what, in my opinion, people should be looking for in a financial planner — somebody who’s really going to help them pull out those pieces and parts like you and I talked about with Jess in Episodes 031 and 032 — I hope I have that right, somewhere around there.

Tim Baker: You’re better at that than me.

Tim Ulbrich: About finding our why, and I think that’s such a critical piece. So I have to be honest that as I started to think about this episode, I thought about all the pharmacists I’ve talked to over the last few years that, in my opinion, have appeared to somewhat aimlessly walk into a relationship with a financial planner. So what I mean by this is I hear a lot of pharmacists say and refer to their financial planner as ‘my guy’ or ‘my gal’ or maybe it’s somebody who mom and dad used and so by default, it’s going to be their same person. And of course, trust and relationships and knowing somebody’s important, but I’m fearful that there’s a lot of naive trust in that financial planner without really a full understanding of what value that person may or may not bring and whether or not they are actually obligated to be acting in the best interest — really understanding even how they get paid. I mean, would you say that’s a fair statement in terms of clients that you’ve talked with initially?

Tim Baker: Yeah, I think so. I think there’s a belief that all financial planners are created equal. And I would say this as full disclosure, this is not meant to be like a bask session. A lot of people that work in these capacities that are financial advisors or that work with mom and dad are, I think are pure at heart and want the best for their clients. I just think that there’s a better system to basically clear away some of the conflicts of interest. And for a lot of it — and I put myself in this bucket — you just don’t know any better. You know, I was into the industry, I was in the industry for quite a bit of time before I actually discovered the whole fee-only model and what that meant. But yeah, I would say that’s a true assessment, and what I try to explain is that it’s not apples-to-apples in a lot of ways. I’ll give you an example. You know, when I was at my last firm, what we typically did was cater to the pre-retirees and the retirees. And that’s what probably 90 percent of the financial planning firms out there do because the way that pricing model works is based on assets that you’ve accumulated over the course of your career. And that’s just basically how an advisor gets compensated is based on that number. And things like budgeting and student loans are not even really in the curriculum of the things you’re taught. You know, you’re taught more about stock options and things like that that for most — even most people, that doesn’t really matter. And things that have huge implications, especially towards the younger population — and I just remember kind of, you know, surprisingly asking questions about this and really no one knowing. And I’ve seen that with prospective clients where they’ll say, ‘Hey, I’ve been working with this advisor for a couple years, and I don’t really have a plan for my student loans.’ And some of the mistakes are you’re talking tens of thousands of dollars just because of you know, not having a clear strategy or not knowing what to do. You know, there was a conversation that I had about student loans, and they were like, ‘Oh, they just amortize over time, just like a mortgage would.’ I’m like — and at that point, I knew more than — I knew less than I do now but more than the other guys — and I’m like, no. And at that point, I’m like, I need to become an expert in this and really drill down as to what is going on with this because — and it’s not just pharmacists, it’s a lot of young people, especially with advanced degrees. And the fact that the industry I think in a lot of ways has failed in terms of providing good advice is a huge issue.

Tim Ulbrich: So you take your advice of the siblings, you go the financial planning route, you determine that’s the right career path for you, and you begin that first job. So tell us a little bit about that firm where you worked prior to then jumping to Script Financial in terms of the pricing model — and I know we talked a little bit about that in 015, 016, and 017, but what was that pricing model? And building on what you already said about where the interest may lie in terms of the client versus really the products and services that are being served?

Tim Baker: Yeah, so the first firm, it was an independent financial advisor firm. It was a solo practitioner, and he — I think he was ahead of the curve in a lot of ways. His niche was actually the LGBT community. He basically charged kind of very similar to what a lot of fee-based advisors charge. So a fee-based advisor is really, you can really in your quiver pick any way in which to charge the client for it to be profitable. So obviously, we’re talking about a business here. So the relationship needs to be mutually beneficial. You need to take care of the client, give them the financial products and plan and then obviously be able to run the business. So he typically would have the model of dependent on where the client fell in terms of assets and basically stage of life, that’s how he would basically determine how and when he would charge it. So to kind of give you an example, if you came in as a pharmacist and you had $150,000 in student loans but you have no assets to manage, he might charge you a flat, you know, a flat fee for a financial plan and give you advice that way. And then basically, the idea was when the assets were there, you kind of counted on that as an income stream. So as an example, you know, you get a financial plan, you work for a community pharmacist for five or 10 years, and then at that point, you know, you would count on the fact that if you left that job, you would be able to roll that money over into an IRA for him to manage. And then basically, it would be a percentage of that. Or in the meantime, you would sell that person insurance products or maybe a commissionable mutual fund that would pay the advisor 5% or whatever. And it would just be little dinks and dabs, like a little bit of — but the problem was is that it’s not clear to the consumer. So you’re like, OK, how are you charging me? Like you could charge me — he didn’t really do this — but you could charge me hourly. But it was commission, it was different products, it could be a flat fee for a plan. It was kind of all over the place, but then like once you reach a certain asset level, so if you work for that company for five years and you roll over let’s just say $100,000 just as an example, $50,000, then you would charge a percent based on that. But the problem with that model, Tim, is that typically what happens is that the people that pay the most in fee get the attention. So typically, if you’re working with your parents’ firm, and they’re paying x and you’re paying a quarter of x, you’re not going to get the attention. And that’s what often happens is that you just kind of, hey, i’ll buy you a mutual fund for your IRA every year, and then we might have a conversation. And then that’s it, and unfortunately, what the industry says is that, oh, you’re young, you don’t really have assets, there’s no need for a plan, there’s no need for advice, which is completely false. It’s more of a pricing issue than a planning issue if that makes sense.

Tim Ulbrich: Yeah, I love that, just the comment you made about where the attention goes. Follow the dollars, right? I even think about this as people may be considering a plan that their parents use. Again, it doesn’t necessarily mean someone is inherently not a good planner, but I think about the life stage my parents are in. They’re in a very much a wealth-building stage. And they obviously have a lot more assets to manage than I do, whereas I think about coming out of school, I didn’t know how to do a budget, I was $250,000 in debt, I didn’t have financial goals, like I need a lot of love and attention when I came out of school as do a lot of new practitioners, right? And is the pricing model set up in a way that’s going to allow that? And I think — and I might be getting ahead of myself here in a few minutes — but when you think about a fee-only model, if I’m paying you for your advice and your services, and that’s relatively similar to what somebody at the next stage of life is paying, you know, I have, then, the power, if you will, to say, hey, Tim Baker, I need your attention just as much as my parents do because you’re helping me in whatever stage I’m in, and you may be helping them in whatever stage they’re in. So you articulated well on a fee-based model, and I would agree with you in terms of it’s really hard to understand where the money comes from. And I think as you’re interviewing, as people in the YFP community are interviewing financial planners, if you find yourself confused about where the dollars are coming from, stop and make sure you get those questions answered because that probably means somebody’s not in the fee-only model.

Tim Baker: Yeah, and I remember, Tim, actually I think this was post-our Bob Evans first date, I think I remember you saying to me, ‘I’ve met with how many different advisors just to understand it, and you walk out of there and you have no idea like how it works.’ And I think you paid me a compliment that you did understand how I charge, and I brushed off my shoulder a little bit. I’m like, alright, I’ve got something here, no big deal.

Tim Ulbrich: So if in a fee-based model, it sounds like it could be a combination of commissions, it could be from insurance products, it could be from investments, it could be in assets under management, it could be a flat fee for a plan. What are the inherent problems, then, with a model that’s priced like that in terms of where the client’s best interests really may lie or not?

Tim Baker: Yeah, I know. It’s funny because I joke when I talk to prospective clients about this. And you know, I say, when people at my last firm would say, ‘Hey, Tim, how do you get compensated?’ usually, that’s a cringeworthy question for a lot of advisors because, you know, part of it is because it takes awhile to explain. Another part of it could potentially take awhile to explain, like I said, these are all different ways that a fee-based advisors has in their quiver to be able to charge people. It doesn’t mean that everybody uses them, but for me, a young planner, I’m just trying to figure out a way to be myself and make a business out of what I was doing. I’d basically say, pull up a chair because this is going to take me awhile to explain it. So it could be, like you said, it could be an hourly fee, it could be assets under management, which I explained was 1% or 2% of whatever the assets that you are physically managing. It could be a mutual fund commission where, hey, you know, Tim, it’s a — let me give you $5,500 to invest, and then I’m going to charge you, you know, 5% on that, so it’s a $275 haircut. Or it’s a C-share commission, which is a 1% annual thing, and it’s a little bit more spread out. But those are more expensive over time. It could be an annuity, it could be life insurance. And typically, the life insurance that pays the advisor more is better for the advisor and not necessarily good for the person that’s buying it. So it’s just a hodge-podge of things, I thought at the time it was kind of obvious, but it totally wasn’t in terms of how it actually worked. I’m like, oh, it’s just this and this and then that’s how it works. But then like the next year, it could change to base on their circumstances. So there really wasn’t a clear path forward. And just things like — you know, I remember getting started, I would be doing happy hours and I remember — so these mutual fund wholesalers come into your office and they say, they whip out the glossy and they say, ‘Hey, this is why you should be our funds,’ which might sound maybe some more like drug reps or things like that.

Tim Ulbrich: That’s what I was just thinking, yes.

Tim Baker: And then they say, and then they basically say, ‘Hey, let’s go out to lunch, and I’ll tell you the great things about what we’re doing at ABC Mutual Fund.’ And then it’s kind of like — and then at my point in the career, I was — they’re looking for, ‘Hey, Tim, how can I help you grow your business?’ And I’m like, ‘Well, I’m doing these happy hours, I’m just trying to generate interest, people to see me.’ And I remember this instance where the guy was like, ‘Well, I’ll foot half the bill if I can come and speak.’ And I’m like, ‘Yeah, that sounds great because money’s a premium, marketing’s a premium.’ But then afterwards, I kind of had, you have that slimy feeling like I’m in the pocket of this particular — and I know in a lot of business, we joke about Shay (?) and construction business, it’s kind of like that’s how business works. I don’t want to be beholden to anybody because they paid for a happy hour. So I just, I wanted to be free, just free of the product, free of like what I was choosing as the tools to implement and really keep the advice pure. And it can be difficult to understand because again, I think probably 95% of the industry, there is a conflict between the advice that you give and the product you sell, and it’s just not commonplace for the whole fiduciary, the whole separation of product and advice, it’s not commonplace in the industry.

Tim Ulbrich: And I think that’s why I struggled with it so much, just as a pharmacist and a healthcare provider, I very naively come from the mindset of you act in the best interest of the patient, period.

Tim Baker: Yeah.

Tim Ulbrich: That’s what you do. I mean, that’s what you do, right? And so you know, should have known better, but obviously as you look at the financial planning industry, very different just in terms of the models that are out there, and actually the vast majority of planners not having to legally act in the best interests of the client. But the example you gave of the pharmaceutical industry and pharma is spot on. I can remember during residency and after rotations, we’d have drug reps come into the office, and they’re presenting the research that was, of course, sponsored by the company. You know, they’re presenting on viewpoint, and obviously as the provider, like we’re obligated to step back and say, ‘What’s the whole body of research? What’s the evidence behind this?’ And I think it’s similar here is you have to follow the money trail. Where is the money going? And as we’ll talk about here in the second part of the show, in a fee-only model, the money is going to the planner for their advice, not for a product, not for a commission, not for insurance or investments, it’s going for their advice, everything from budgeting to paying off student loans to end-of-life planning and everything in between to really look at your plan in a comprehensive nature.

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

Tim Ulbrich: OK, so here we are, Tim. You mentioned, you know, holding some of those happy hours, really starting to understand kind of that fee-based model, trying to avoid, you know, some of that slimy feeling and really wanting to be objective in the advice that you’re giving, so tell us a little bit about ultimately, the pivot point of why you made that decision to leave and then give us that introduction into starting Script Financial. And I’ll start there and even jump ahead and say, why pharmacists specifically?

Tim Baker: Yeah. That’s a great question. And I would say, kind of back up a little bit. You know, like where I was in an independent financial planning firm, like I thought we were the bees knees. Like I thought we were it because we weren’t a big wirehouse or some of these bigger banks that you hear, you know, some of the not-so-great behavior. And we’re better as an independent because we can sell non-proprietary products, meaning we can basically sell any products that are out there. So in my mind, I had landed first time in the best model that was out there. And what I — I wouldn’t say quickly — what I very slowly realized was that I wasn’t in the best model and that there was a little bit more work to be done there. So basically, what happened was I was going through, I was kind of growing, I was slowly growing my business, and I just started to naturally gravitate towards younger people. You know, I kind of just remember retirees, pre-retirees coming in, and I just didn’t connect with them at all, like I just didn’t — retirement was so far away, and it just seemed weird that I would be sitting there, you know, talking about Monte Carlo analysis and things like that or long-term care insurance. And I just didn’t get, like I didn’t feel engaged. So i just started to really gravitate towards younger people. And at that time, it was actually my brother — and my brother works in a completely different industry, but he is very entrepreneurial, and he was researching — he’s a developer, so he’s researching the financial advisor industry and trying to figure out if he could build software that basically helped the industry. And he interviewed a guy named Alan Moore, and Alan was, is a young CFP, and he was starting something called XY Planning Network. And what XY Planning Network is is a group of fee-only CFPs that basically cater to Generation X, Generation Y. So he brought them to my attention and said, ‘Hey, are you fee-only? Like how do you charge? How does it work?’ And at the time, you know, he was basically saying like, dude, you’re wrong. The way that you’re doing it right now, it doesn’t work. This is a better model. And you know, what do you do when your older brother basically is trying to like tell you about your business? I’m like, get out of here. Don’t tell me about how to run my business.

Tim Ulbrich: Go do your developing, right? Go do your whatever.

Tim Baker: Exactly. And then I started to like crack open the book of what fee-only was, and I just started to listen to XYPN radio, which is the podcast they have. It just kind of chronicled different firm owners who are young and kind of worked for other firms and maybe there wasn’t a clear path forward or they saw that, you know, fee-only was better. Maybe they came from the broker-dealer, commission, fee-based world that I did. And I just started to just cram these episodes. And you know, at that time, most of my clients were pharmacists — and I’ll tell the backstory in a second, but I just started to like — wheels started to turn for me, and I’m like, you know, if I’m not comfortable as the consumer doing what I’m doing, why would I position myself as this? So I just started kind of planning from there. And you know, I wanted to make sure — you know, typically when you Google ‘questions to ask your financial advisor,’ typically they’re going to say, are you a CFP? Which I was at that point, a Certified Financial Planner. And then, how do you get paid? And typically, the fee-only model is, they’re very vocal in terms of this is the best model because it reduces the conflict of interest. But there’s still some there; there’s no such thing as conflict-free advice, but that was kind of the early makings of Script Financial, at least in terms of planning and all that. So that’s kind of how that started.

Tim Ulbrich: So talk us a little bit more then, you make this jump, you identify fee-only’s where you want to be, and you say, ‘I’m going to really own the pharmacist space.’ Because what we’ve come to realize after you and I met is that nobody was really — I mean, there’s people that dabble in healthcare financial planning at large, couple people that are out there working with independent pharmacies as a group, but nobody that we know of really niched down and said, ‘I exclusively want to work with pharmacists.’ So talk about that.

Tim Baker: Yeah. So part of the — you know, and I give credit to XY Planning Network, one of their big things is it’s all about niche, you know, owning a niche and really being — because I think what often happens is that financial advisors, financial planners say, oh, like you have a pulse, I can work with you. And you become, you become master of none, you know? You’re very general, you’re a generalist. So working with somebody who is a retiree, like you said, your parents versus you, is very different. And so I started to think about that, and I was like, that makes a lot of sense. And by the way, I’m more drawn to younger people, that kind of Gen X, Gen Y, and you know, the millennial generation’s like 80 million, so that’s not really a niche. It is, in a sense, but you can niche down further. So when I started in the business, one of my first clients was a West Point classmate of mine. He got out of the Army, moved to Baltimore, and that’s really one of the reasons why I’m in Baltimore. I came for an Army-Navy game many, many years ago and really like Baltimore. And they became early clients and then his wife was a pharmacist. And I just started to get referrals through them, and I quickly found that my small client base was mainly pharmacists. So I’m hearing this podcast, I’m hearing niche, I’m hearing fee-only, and I think I was on a drive out to Ohio to visit my sister, and it just clicked for me. I’m like, I’m doing it. Like this is what I’m doing.

Tim Ulbrich: Those are great moments, aren’t they?

Tim Baker: Oh, man. And I guess that was an epiphany moment for me too. I typically say I’ve really only had two of those, but that’s probably the third one where I’m like, this is what I’m doing. And almost like unapologetically like focused on that because I would even — because a lot of my friends in Baltimore are pharmacists. We joke that if 10 of us go out, typically, there’s eight pharmacists and two are non-pharmacists. But even some of my pharmacist friends, they looked at me like I was crazy. But I was unapologetic. I’m like, to me, this is what I’m going to do. So I just started this — like I said before, this thousand cups of coffee. So I would just talk to every pharmacist that I could get my hands on and say, ‘Hey, pharmacist. This is my idea.’ Or maybe not say it that bluntly, but what are the things from a financial perspective that are really kind of top of mind? What’s troubling you? And at the time, it wasn’t readily apparent that the big things were, hey, I’m overwhelmed with student debt, like at least for me. Like I wasn’t completely bought into the niche. So what my research showed me was kind of some of those major pain points being, hey, Tim, I’m overwhelmed with my student loans. I’m really unsure about how to properly save or budget or just invest for my future. And then I feel frustrated because I make a good income, but I’m not progressing financially. And I think once I logged into that, that’s what I often say to a lot of prospective clients, and they’re like, ‘Wow, Tim, you just described me. Check all three of those boxes.’ And for me, that’s not something you’re going to get from a typical, run-of-the-mill, like if I was Baker Financial Planning, and I was basically servicing anybody that was alive, I wouldn’t have the attention to be able to say — and it’s funny, I was on a prospective call yesterday who actually heard you on one of your recent webinars. And he was talking to me, and he assumed that I was — he didn’t know which Tim he was talking to. So he assumed that I was a pharmacist, so he like started to talk, and he’s like, ‘Oh, are you a pharmacist? I don’t remember which Tim.’ And I’m like, ‘I’m not a pharmacist, but I’m tracking all that stuff because I talk to so many of you guys that I understand the language and I understand kind of the transition from P4 to PGY1 and then kind of new practitioners and beyond.’ So to me, I think, you know, embracing that niche — and what I saw in the market, to your point, Tim, was you know, a lot of advisors will go after doctors because there’s kind of that inherent, they make big incomes and everyone wants to kind of go after that demographic of people. And you know, pharmacists and dentists were kind of like throw-ins, you know what I mean? So there wasn’t anybody that was saying, hey, you’re a pharmacist? You’re my guy or you’re my gal, let’s figure this out. And to me from a business standpoint, that just made a lot of sense to just try to own that and really, you know, immerse myself as much as I could. So I just talk to a lot of different pharmacists, and one thing I don’t think I’ve ever said speaking before is, you know, one of the things that I need to figure out when I did this career switch, even going from the firm that I was at to basically by myself where I’m basically trying to build a firm from nothing, really, is I need to figure out ways to generate income just in case the runway runs off. So things like uber and things like that, that was on my radar. But I actually — and it’s on my shelf here. I have — it’s the Pharmacy Technician Certification Exam. So I’m like, hey, if I’m going to be…

Tim Ulbrich: I remember that, yeah.

Tim Baker: If I’m going to trumpet “I understand the niche,” I should, you know — so I kind of got through, but then the business kind of started to take off. But that was always in the back of my mind was to kind of work inside of a pharmacy — and maybe I’ll still do it, work inside of a pharmacy and really understand that. So I was, Tim, I was all-in. And I think a lot of people probably still do, they’re like, ‘You do what?’ Because I’ll stand up at networking things, and I’ll say, ‘Fee-only financial planning for kind of the Gen X, Gen Y pharmacists.’ And people are like, huh? Because most people stand up, and they’ll say, ‘Our business does everything for everybody.’ And to me, this is the mark in a lot of ways.

Tim Ulbrich: Yeah. And I can attest to the fact that I think you’re the only financial planner that knows terms like PGY1, collaborative practice agreement, provider status. I mean, I feel like you read up on it, we talk about it, you get the market, you get the space, and it seems small, but it’s so important. And to your point, when you get up and talk with other planners, like, you know, trying to service everyone versus obviously what we’re doing is focusing specifically on pharmacists and building that community around pharmacists, that’s so valuable to really know that space to the depth and the detail that I think that pharmacists deserve and the clients deserve. So what — we’ve dodged around a little bit I think defining directly fee-only. So give me the 30-second pitch in exactly what is a fee-only financial planner? You know, the straight definition of that.

Tim Baker: So fee-only basically means that the firm or the advisor earns their fee — they earn no commission. So they earn their fee directly from the client themselves, so not through a mutual fund company or life insurance company. There’s no commissions on products that are sold, there’s no kickbacks for referrals or anything like that, and a fee-only financial advisor follows the fiduciary standard of care, which is opposed to the suitability standard of care. So the way I describe it, Tim, is — I think I’ve said this before is — if I’m selling you a suit, and I’m following the suitability standard of care, I just have to measure you and make sure that the suit fits. But that suit could be Philadelphia Eagle midnight green with Philadelphia Philly red polka dots. It could be like disgusting looking. If I’m following the fiduciary standard of care, not only does it has to fit, but it has to look damn good on you. It has to be in your best interest. So if you equate that to the industry, I could say, ‘Hey, Mr. Judge, I know we’re standing here in court because my client, Tim Ulbrich, is really upset about the annuity that I sold him that paid me 8%.’ I can make a case that it is suitable given his income and his assets and all that stuff, but I can’t make a case that it’s necessarily in his best interest. So it’s a little bit harder of a standard of care to achieve, so really, again, like when I work with clients, I say, ‘OK. What are the client’s goals? And then how can I help them grow and protect their income and grow and protect their net worth?’ And to me, those are the two lenses that I’m looking at. And that’s basically how I dispense advice, if you will. And to me, I think that’s the best model to do it.

Tim Ulbrich: Yeah, and just to get granular on this, so when Jess and I are working with Tim Baker as he is our planner — you know, I’m paying him on a monthly basis purely for his advice, input, guidance to Jess and I — but he’s not making any money off of insurance products, commissions, investments, etc. So just to give one example where I think this is beneficial. We had a call, I think it was last week or the week before, and we were probably on the phone for an hour and a half, two hours just talking about kind of bigger life career goals and where does the financial piece — we talked, as we documented in episodes 031 and 032 about kind of our overall purpose and goals. And that stuff is so critically important, as I’ve already talked about earlier on the show, and if I may work with a financial planner that’s not fee-only, they may see $300,000 or $400,000 of assets and really want to focus there, where obviously we’ve got so many other things we’re trying to look at and balance. And I think the value of that, we have experienced firsthand. So I believe, obviously, that I think many people could benefit from your services. And one of the things we realized recently, Tim, I think it was in the Facebook group. We had probably one of the biggest YFP fans out there ask the question of, hey, where can I find a good fee-only Certified Financial Planner? And what that told me is we have not done a good job of making it crystal clear that obviously YFP via Tim Baker and Script Financial offers financial planning services. So this is me from the mountaintop, shouting, saying, ‘Yes, we offer these types of services.’ So what is the best next step that people can take if they’re interested in learning more about your services?

Tim Baker: Yeah, so I would say just go to ScriptFinancial.com. You’ll see a nice green button on the homepage that says, “Schedule a Free Call.” And it’s a little bit misleading because typically, I like to do video conferences or in-person meetings. So if you’re in the Baltimore area, obviously, we can meet in-person. But I like some face-to-face via video conference. I think Script Financial services, I think we service clients in like 15 states now. 15 or 16 states. So we’re growing, but a lot of it — even clients that I have in the Baltimore area, they have kids so they don’t want to deal with traffic, they’ll just do the virtual meeting through the video conference, and it works out well. So yeah, ScriptFinancial.com, you’ll see a nice green button that says “Schedule a Free Call,” and yeah. We can just chat and see if we’d be a good fit.

Tim Ulbrich: Awesome. Good stuff, Tim. And on next week’s episode, we’re going to talk a little bit more about the different pricing models that are out there for financial planners, why you should care about how a financial planner gets paid, and ultimately why and how you landed on the pricing model that you have at Script Financial that’s based off of income and net worth. So make sure to join us next week on Episode 055. As a reminder, don’t forget to head on over to YourFinancialPharmacist.com/financial-planner. Again, that’s YourFinancialPharmacist.com/financial-planner to get information on what to look for in a financial planner, to download our free guide, “The Nuts and Bolts of Hiring a Financial Planner,” and to learn more about the financial planning services offered by YFP team member and fee-only Certified Financial Planner Tim Baker. So that’s all for today’s episode, have a great rest of your week.

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On Episode 51 of the Your Financial Pharmacist Podcast, YFP Team Member Tim Baker, CFP talks the 8 things to do or avoid to evade financial purgatory after graduating from pharmacy school.

Episode Transcript

Tim Baker: What’s up, everybody? Welcome to Episode 051 of the Your Financial Pharmacist podcast. Tim Baker here, flying solo, I think for the first time. I guess when you hit Episode 050, I guess we’ve made, so we’ve only sent one Tim to the mic. But all kidding aside, I am happy to be here to host today, and I really want to speak to the recent graduates out there because of I think how important this particular time is in life and in your financial life and in general. So it got me thinking, Tim Ulbrich and I were out at the University of Southern California, speaking to the, basically the entire rising P1s and P3s and the recent graduating class who was hard at work studying for their boards and took some time to listen to Tim Ulbrich and I speak about personal finance. And I’ve got to give USC a shoutout, a well deserved shoutout, to Dr. Park, Carolina and Rocio, I think it was, our stay there and our interaction — Tim Ulbrich and I were excited to come speak, and I think we left even more fired up after our engagement with the students. Super impressive group across the board, and it really got me thinking, especially after talking to the recent graduating class about how important this time is for them. And it really sets the pace. And you know, my work with pharmacists across the country, oftentimes I speak with pharmacists who are five, six, seven years out or more, and they feel like they have nothing to show for it. And I mean, think about even Tim Ulbrich and Tim Church, kind of both admit to, you know, what happened to them after graduation. They were basically kind of sputtering a bit and not really sure how to approach the loans and, you know, not much in the way of making a dent in the debt, maybe a little saved. And I think what often happens is that the pharmacy salary or the promise of that six-figure salary lures you into thinking that everything will be OK because really, you know, as a student, you’re not really making anything. And the promise of making $120,000 soon, you know, once you pass your boards that is, it’ll figure itself out. And that tends not to be the case in a lot of ways. So hopefully, you know, if you are a recent grad, if you’re transitioning to a six-figure income or maybe to a residency program, or if you are a new practitioner and you feel like you’ve been sputtering and this really hits a chord that it’ll prompt you to change course and to right the ship in a sense and get your financial plan in order and really get that moving.

So one of the things that, you know, we discuss often is that, you know, pharmacists on average will make $9 million over the course of your career. $6 million will actually flow through your bank account. So think about that. That’s a lot of money, and I often say to pharmacists, ‘So what are we going to do about it?’ You know, and obviously if you’re transitioning to a residency program, and that might be a little bit of a delayed bird, and that’s OK. And you’re not going to have as much flexibility here as maybe a counterpart that is going, that is foregoing the residency. But I think it’s still important to kind of be mindful of the income that’s going to be coming in.

So back in Episode 035, I had Dr. Sarah Fallaw, who owns Data Points. And basically, that’s a tool that I use that manages a client’s behavior. And it’s based on the research that her father did, Dr. Thomas Stanley, who wrote “The Millionaire Next Door,” and essentially what he studied was that there are really six major factors of the millionaire next door is the people that have achieved a net worth of $1 million or more. You know, there are behavioral factors that come into play that really play a part into achieving that type of wealth. In the episode, we talk about those factors — basically, frugality, confidence, responsibility, focus, planning and monitoring and social indifferent. And these are all factors that play a part and that can be measured versus your peer group. A lot of what I do, you know, is not necessarily — or the value that I provide clients is not really in the order of, ‘Hey, Tim, where should I invest this money? What mutual fund or ETF should I pick? Or what insurance policy should I have?’ And those things are important, but they’re very technical. I think the overarching part of this whole financial planning piece is the behavior, is how we behave. So the message to a recent graduate is be on your best behavior. School is out, you are fixing to make a sizeable income, and not to go nuts. And I use nuts facetiously, but you know, the tendency as humans is that if there is an abundant resource, we’ll spend it. And that could be true as that paycheck flows through your account, you feel that, man, I have a lot of money, what can I buy? What can I purchase? And in the age of social media where everyone’s getting a new car and a big house and taking these trips — and those things are important, and those things, some of those things are important. Those things should be baked into your financial plan. You know, the social indifference part of it is that you’re not going to get caught up in the FOMO or the YOLO of things. And to be honest, I would say that you should, you just graduated, you should treat yourself. You should be able to splurge some and celebrate those wins. But do it in a way that is purposeful, that is maybe not long lasting. So don’t go out and buy, you know, a $50,000 car that you might not be able to afford because that one’s tough to get out from under, and now you’re stuck with that car payment. But I think the behavior is such a big part of this.

So aside from being on your best behavior, think about your goals. And it sounds trivial, and it sounds really not that important, but when I interviewed Tim Ulbrich and Jessica Ulbrich back in Episode 032 and 033 where we talked about find your why, these are often questions that we don’t ask ourselves or we don’t talk about with our spouse or our partner. And we should. And sometimes it’s just life gets busy, and we really don’t take the time to say, where am I going? Why did I go to school and get this degree? And why am I taking this job to earn this money? Like what’s the point? And I often say to clients, you know, because the way that I work with clients and the way that I price my services is based on the client’s income and net worth. And you know, because I think that is the best way to measure basically financial health and progress. And I think it has the least amount of conflicts of interest with regard to giving sound advice. But it’s flawed in a sense that if we work together for 30 years, and I help that client their nest egg number of $5 million or $6 million or whatever the heck it is and they can comfortably retire, but they’re miserable because they haven’t done things that they wanted to do throughout life like hike Machu Picchu or do that European trip or maybe have a family or buy this house or whatever it is, what’s the point? You know, what’s the point of that? And I think it’s a constant exercise in taking care of the present self and looking to the horizon and making sure that we’re taking care of the 30-year or 40-year-older self as well. And I often think that like if you don’t feel that push and pull, you’re probably not doing it right. And I think that’s the same with budgeting, the evil b-word. If you’re not feeling kind of the push and pull — and I think if you’re doing effective budgeting, you’re creating a sense of scarcity because you’re doing the things, you know, the proverbial things like paying yourself first, which is easier in theory, harder in practice.

So in terms of your goal, we subscribe to the what, when and why method. So that basically means that we have statements that basically look like this: “I will x by y so that z.” So what, when and why. So an example of that would be “I will save $5,000 by December 31, 2018 so I can protect my financial plan from an emergency.” That’s a pretty good one. And that actually might not be a bad one — obviously, this is not advice — but that might not be a bad one to look at. But I think another part of this — and we talk about this often is like, you know, think about your goals. But how do you feel about them? Like when you think about — obviously, the elephant in the room is student debt. And you might have heard us talk about student debt once or twice on this podcast. How do you feel about the debt? How do you feel about being able to retire at age 50 or 60? Or how do you feel about the prospect of hustling over the next few years to get through the debt? Or the prospect of investing and watching your, basically your nest egg grow? I think often that we try to — and I say we, maybe it’s my profession or whatever — but we try to out-math you and say, well, time value money and blah blah blah. And that stuff is important, but like if I have clients that are like, I can’t sleep or I’m anxious because these student loans are just gnawing at me, well, let’s do something about it. Let’s be proactive. And you know, the math might say one thing. But that doesn’t mean that that has to be our path. So really think about how you feel and you know, challenge yourself. What are 3-5 financial goals you can write down today and realistically achieve in the next five years? And what I often do with clients, and I think we did on the episodes with the Ulbrichs was transport yourself to that time in the future. So if you’re 26, and you’re thinking five years, uh, I don’t know. I don’t know what I would do in five years, think about it as if you’re 31. And then look back as a 31-year-old and think about that half a decade that just went by, and ask yourself, what does success look like? And I think if you can kind of start with the end in mind and look back, it makes it a little easier to do. I think.

So think about your goals. And really, the next step — and man, I’m going to say it. I’m going to beat the horse dead once again. But it’s the budget. It’s all about that budget. And you know, I think for people that have big, hairy, audacious goals or that — and one of them might be to get through the student debt as fast as possible. One might be to basically be in a position where they can retire comfortably early. It really could be anything. But really take the time — and you know, if you are a pharmacist that recently graduated, hopefully — you know, when we were talking to USC, a lot of their students, they were about ready to go to their residency, and obviously they knew what they were going to make or they had jobs from whether it was community pharmacy lined up, and they had offer letters. So you more or less get a sense of what you are potentially taking home every month. So determine that take-home pay. You know, do some calculations of what will come out because of taxes and different, you know, whether it’s health insurance or all that type of stuff. And then really next is determine what your essential expenses are. So in my world, we call these nondiscretionary monthly expenses. So these are things that are going to come out regardless of if you have a job or not. So things like your student debt payment. That could be argued because if you do have financial hardship, a lot of times, both with your federal loans and even if you were to do a private refi, a lot of those situations, you can get some reprieve. But I probably would calculate it as such. The essential expenses are going to be things like your mortgage or your rent, groceries, utilities, cell phone bill. We can’t live without our cell phone, right? So take a tabulation or make a list of all those expenses and add them up. And then really the next thing is to take and determine your discretionary expenses, so that could be entertainment like Netflix, Hulu, going to the movies, things that if it were to hit the fan, you probably could cut. And then from there, you can essentially determine what is left over, which is your disposable income. And by the way, part of what the essential expense probably should be is savings. So savings is actually categorized as an expense because you are foregoing immediate consumption. So what I often do with clients, and I do it with their client portal, we’ll do a retroactive budget. It’s one of the first meetings we go through. If we determine that, hey, we have $10,000 flowing through our account, and we can see it because of all the transactions and then we can see all the stuff that’s basically flowing out of their account, the exercise is basically to show if we have $10,000 flowing into our account, we essentially should have $10,000 flowing out. And that’s what’s called a 0-based budget. So every dollar has a job. And part of that $10,000 flowing out is hopefully savings. So if we determine after we go line-by-line through every part of their budget that, hey, the expenses actually add up to $9,000, then that tells me that we have $1,000 either to maybe put towards their loans, maybe if they have credit card debt, that would probably be the first thing we do. Maybe it’s to plus up their emergency fund or just savings in general. So we talk about sinking funds, and that’s kind of for those non-monthly expenses that pop up like home maintenance or car maintenance or things like that that aren’t necessarily an emergency, but they happen. So that’s essentially what that looks like. And I think, you know, and we talk about this in our student loan course. In module 1, Tim Ulbrich goes through this. I think having that disposable income number, knowing your number is so powerful because it really can dictate, you know, exactly where to go and how to fund your financial plan. I really encourage to do this, and you can use a napkin, you can use Excel, you can use something like Mint or YNAB or envelopes, that’s what Tim Ulbrich used when he paid off his debt. So I think if you have that number, you can very purposely apply what that disposable income is towards your goals.

And secondarily, you know, in talking, you might be a resident out there, and believe me, in the student loan course, we ran what a typical resident makes, and honestly, there’s not much left over. So I think when we looked at that — now, you’ll get a reprieve if you do look at an income-driven plan, obviously. And that’s one of the things to be aware of too. So if you’re a resident, there’s not a whole lot to work with, so I think the name of the game in that is really to kind of hold on and not incur additional credit card debt and really come out when you transition to that six-figure income ready to go. But the next part — and I’ll speak to residents on this part too — is really have a plan for your debt.

So the first one I would definitely look at is the credit card debt. And I’m finding more and more new practitioners, when I speak to them, have said that they’re leaving school or they’re taking on credit card debt during school. And that’s one thing that even before we get serious with the student loans, the credit card debt gots to go. Secondarily, having a plan for your student debt, obviously is super important. Properly inventorying your loans, whether your federal loans or private loans, and then really selecting the appropriate strategy and repayment plan. So the two broad strokes in terms of strategy are the forgiveness option and the non-forgiveness option. And you know, basically the forgiveness option can be broken down by the Public Service Loan Forgiveness program, which obviously can be very controversial. But you can also be forgiven — a lot of people don’t know this — outside of that program. And they’re a little bit different of programs, but if you are a resident and you think that you’re working for the nonprofit or a government entity, starting the clock on that PSLF, that 10-year program, should happen for jump street, should happen immediately. And that’s one of the things that we discuss in the student loan course is how to really optimize that if you are in that situation. We have a lesson just for that. But if you’re in a non-forgiveness strategy, so you look at the forgiveness strategy and you say, thanks government, thanks, but no thanks, I think I’m going to do it on my own. And really this is probably more of a proactive. The problem with the forgiveness programs is they are more of a reactive. You’re kind of hoping and crossing your fingers that the programs will be around. And I think that they will be around in terms of at least being grandfathered in, that’s Tim Baker’s opinion based on some of the things that I’ve seen come out recently. And we probably can do a whole different episode on that. So if you listen to the podcast, and you’re part of our Facebook group, if that’s something that you want us to talk about, the PSLF program, the state of that, I can kind of give some thoughts and we can probably do an episode just around that. But if you’re in a forgiveness strategy, it’s more reactive, and you’re hoping, OK, government. Please follow through on the things that you said that you do. And if you’re in the non-forgiveness strategy, it’s more, OK, taking the bull by the horns, being more proactive and not necessarily be where you’re paying off $8,000-10,000 per month like we’ve seen some of our debt-free pharmacists do, but there’s a spectrum that you can fit in depending on what your disposable income number is and whether that is staying in the standard repayment plan or looking at one of our partners that does the private refinancing. There’s a lot of different ways to kind of, to look at it, and you know, you just want to make sure that you have a purpose. So I often see a lot of pharmacists, they say, ‘You know, when I got through pharmacy school, you know, I knew I couldn’t make the standard repayment plan, so I decided to go into IBR or ICR,’ and that’s one of the income-driven plans that’s out there and maybe not necessarily one of the best ones. But there’s really no intent behind it. And you know, I think oftentimes, what I see is people that are, borrowers that are kind of in between. And I think what we espouse in our course is that you need to really be either pursuing a forgiveness option or pursuing a non-forgiveness option and really fly one of those two flags. If you’re kind of in the middle, you’re in no mans land or no persons land, to be politically correct. So if you are a new graduate, and you’re hearing me talk about loans, and you’re looking for some clarity, like I mentioned, the student loan course for pharmacists is out, and it’s ready for you to sign up, so visit courses.yourfinancialpharmacist.com to enroll. And really, it’s a three-module course, each module taught by a different Tim. So Module 1, we start you off with getting organized, so doing a proper inventory of your loans, walking you through loan basics, the total cost of loans, budgeting. I teach Module 2, which is determine your payoff strategies. I walk you through exactly the two main strategies and where you potentially fit. I throw in some case studies, and also, there’s one lesson that is targeted just for residents. And then finally, Tim Church wraps it up with Module 3, which is optimizing your payoff strategy. So the course is chocked full of goodies and resources and really, when you are done taking the course, you should walk away with clarity and confidence about how to tackle your loans. So again, go to courses.yourfinancialpharmacist.com to enroll.

The next thing to really discuss is having an emergency fund. So the textbooks say — the emergency fund is basically liquid assets, we’re talking cash money, that is set aside for those unexpected, I can’t believe that actually happened and I need to spend money, events. And what the textbook says is that you need to have 3-6 months of those nondiscretionary or essential expenses. So if you’ve done your budget, thank you very much for doing your budget, but you should know that number. So as an example, if your loan payment is $1,500, and your rent is $1,000, and you are single, what that means is that you should have six months, — because if you’re single, you should have six months. If you are a dual income household, you should have three months, and there’s shades of gray in between. But if you were single and your rent and your loan payment combined are $2,500, multiple that by 6. Congrats, you need $15,000 to cover that. And that’s not even — that’s just covering that — that’s not even the groceries, the utilities, all those things. But you can see how much potentially you need for an emergency fund. So I guess what I want to say here and what I often say to clients is this is what the textbook says. But if you are looking at aggressively paying off loans or depending on where you’re at on the spectrum, you don’t have to basically build Rome in a day. Work towards $5,000. $5,000 will probably cover 75% of emergencies out there, maybe. Work towards $10,000. $10,000 will probably cover 90% of emergencies, maybe. So I think — so this is kind of what I have when I build plans out is have conversations, ask good questions of the clients, of my clients. And then basically say, OK, let’s phase this in. So Phase 1, by the time we get to this level of emergency fund, then we’ll work more aggressively toward this other goal and the next level. So don’t get discouraged, but having a properly funded emergency fund is super important to this whole thing, this whole financial picture.

The next thing that I want to mention that is attributed to a lot of the lifestyle creep that I see, not just with young pharmacists but also young professionals in general — so really what I’m talking about here are car purchases and home purchases. Now, Tim Ulbrich did an excellent job going through car buying in Episode 047, so if you haven’t listened to that, take a listen. So I won’t spend too much time on car buying. But you know, I would just say, and what I say often to young professionals and sometimes have to say this to myself is, you know, once you go in high-end Beamer, Lexus, Audi, it’s really hard to go back. So I’m not trying to dampen the spirit here, but you don’t have to have your dream car — and frankly, you don’t have to have your dream home — right off the bat, especially if you’re staring at $160,000, $250,000, whatever that is, that student debt picture. So because — and I know from experience working with some clients, they go out and they make that purchase, and those cars, they just depreciate so fast. So even if they want to get out of it, you know, they’re underwater, and now they’re stuck with an $800 car payment, and that’s no bueno. So really think long and hard before that happens. What “The Millionaire Next Door” says is that most people that achieve that $1 million net worth, they’re thinking that some other sucker, maybe — can we say sucker? — some other sucker is going to buy a car new, take that depreciation, and then the millionaire is going to come in three, four, five years later and buy that car when most of the depreciation has come off. So just a think to kind of marinate on.

You know, the other thing in terms of major purchases is the house purchase, the home purchase. And same thing with the car, you don’t have to buy your dream home right away. If you are faced with a massive amount of student debt, essentially, you’re broke. So to add another $300,000, $400,000, $500,000, that’s a lot of debt. So we’re a big believer in having as much money that you can bring to the table with regard to a home purchase. PMI, Private Mortgage Insurance, it doesn’t put any equity into your house. It just basically evaporates money from your balance sheet. You know, I think obviously, a very small percentage of people can come to the table — I think it’s like 10% come to the table with that 20% down payment. I would listen back to when we had Nate Hedrick on Episode 040 and 041 where we talk about home buying, that it’s important cash is king with this, it’s important to come to the table and really think about that. And I think if you can set the target of 20%, it really will force down your purchase price. So obviously, if you are looking at a $300,000 house — and I know those students out at USC are laughing at me right now — but if you’re looking at a purchase price of $300,00, that essentially means that you need to save $60,000. So maybe that $300,000 purchase becomes a $250,000 purchase. The point is is that what often happens is when you look at the decision to buy a house, I think sometimes we as a de facto because we’re told that the American dream is to purchase a home and build equity, that it’s almost like our birthright. And it really isn’t. It really isn’t. I think it’s something that should be done responsibly. And one of the tools that we talked about in our recent talk is that, you know, a $1,500 rent payment does not equal to a $1,500 mortgage payment because you need to factor in things like taxes and fees and closing costs and all that stuff, the maintenance of the home. And the New York Times has a great calculator that we’ll link in the show notes that basically looks at all those variables and basically tells you, you know, if we look at the purchase price, the interest rate, how long you plan to stay in the house, taxes, all that stuff, that there’s a break-even point that basically, the calculator will show it makes sense to buy or it makes sense to rent. So the word of caution here is not Debby Downer, but it’s just to think of that purchase not necessarily as an investment, because it’s really not. I think a home that you live in shouldn’t really be thought of as an investment. And again, once you sign those papers and you’re on the hook for a $2,000, $2,500, $3,000 mortgage payment, you really limit yourself in terms of flexibility with other parts of your financial plan.

So another thing to keep in mind is investment. So if your employer provides a match, absolutely should be matching that and getting the full match. Oftentimes though, what happens is I see people start a new job, they are delayed because they have to be at a job for a certain amount of time, maybe it’s six or 12 months, and then all of a sudden they’re like, well, I really like this paycheck, maybe I won’t put money into my 401k. And during that time when you’re not eligible for that 401k, you have that lifestyle creep. You buy the house or the car, and it doesn’t make sense for you. You’re basically, you’re capped out, and it’s hard for you to defer money into that 401k. So that’s something to be mindful during that period before you become eligible. And I would say, bank it in a savings account just like you were deferring it into a 401k.

The other thing to be mindful of is really what’s called 401k inertia. So if you’re employer matches 3%, you know, absolutely you should try to match 3% without question. What often happens is that it anchors the person to that 3%, whereas in reality what I tell clients, it’s kind of a race to 10%. You want to be — when we do those nest egg calculations, you need to be deferring some money away, stocking some money away for that 30-year-older self. So don’t get anchored down by that 401k match, whether it’s 3%, 5%, 6%, and just be mindful of that. And a lot of 401k’s now, you can basically build in like a percent increase every year, and I would totally tell you to do that. Just schedule it, 1, 2%, start that as soon as possible.

So the last part I want to mention is insurance. So the message here is beware, but be covered. So the two that I want to really discuss here is life insurance and disability insurance. And we’ve talked about life insurance in Episode 044 and disability insurance in Episode 045, and you know, I think that these are a crucial part of the financial plan. And really, we talk a lot about accumulation and growth of your assets and of your net worth. This is really the protection of that. And I think that is equally important.

So a few points about life insurance. If you are a new graduate, and perhaps you’re single, you don’t have a family, you don’t own a house, you probably don’t need insurance or you probably don’t need that much insurance. Pharmacists are often targeted, particularly with life insurance, because of the incomes that pharmacists make. And on numerous occasions, when I work with pharmacists, sometimes I have to unwind some of the policies that are sold them. And what I mean by that is you know, at YFP, we believe that term — if you do buy insurance, term life insurance is the best way to go. It’s pure insurance, which basically means that there’s no savings or investment component. It covers you for a period of time. So it could be 20, 25 or 30 years. And if you don’t die during that time, which hopefully you don’t, basically at the end of that term, it expires. It’s essentially done its job. Whole life or what’s called permanent insurance or variable life or universal insurance, there’s different types of permanent insurance out there, essentially, it is part insurance and part savings or investment. And typically, these types of insurance policies are five, six, seven times more expensive than a term policy. And I think that they are often, you know, they’re better for the person or the salesperson that is selling it than it is for the person, the pharmacist in this case, that is buying it. Life insurance I think is crucial. And just to kind of give you a sense of what a policy costs, you know, general rule of thumb — and I think we talk about this in Episode 044 — is 10-12 times income is essentially probably what you need. Say you make $100,000, you need basically $1 million to $1.2 million. So a healthy 30-year-old, so just to kind of give you a sense, so think 30/30/30. So a healthy 30-year-old who purchases a term life insurance policy for 30 years, basically will pay between $30-35 for that policy. So you know, double that, between $60-70 will probably cover you. And the sooner that you get it, obviously, so maybe you don’t have kids, but you want coverage. The sooner you get it, every year that goes by, those premiums go up about 8-10%. So you know, obviously, life insurance is crucial.

Disability insurance probably even more so, especially for you new grads out there. As we mentioned, $9 million over the course of your career, that’s what you’re going to make. You spend lots of time, lots of blood, sweat and tears to get your PharmD, to get licensed, to get going. You’re going to want to protect that. Having a policy to cover you — and we talk about this in Episode 045, and I encourage you to listen if you haven’t listened to that — is important. And to kind of give you an idea, if you were to buy a long-term disability policy on your own to cover 60% of your income, which is kind of best practice, you’re going to spend probably about $120-150 per month to get coverage. Now, some of you are going to be covered by your employer. So we often say that you should get a supplemental insurance policy to basically cover the gap because most employers won’t cover a full 60%, so you should get a full policy that covers that gap with the ability, what’s called a rider, to buy up in case you were to go to a job that doesn’t have that full disability policy. And the same thing with life insurance. Some of you are going to have life insurance through your employer, and it might be one or two times income, and you really don’t even have to do anything to opt into that, it’s just automatic. But oftentimes, it’s going to be far below what you actually need to be fully covered. And it’s also good to have a portable life insurance policy that basically doesn’t matter where you’re working to have that coverage.

You know, we covered a lot of ground here. And you know, and again, you know, the timing here is crucial. What you’ll do here in the next one, two, three years will really set the tone for your financial life and the outlook going forward. So you know, be on your best behavior. Think about what your goals are. Have a budget in mind. Make sure you have some type of emergency fund in place. Have a plan for your debt, whether it’s the credit cards or the student loan debt. You know, be mindful of how much you’re spending on those major purchases. Cash is king. Get into the investment game, whether that’s just taking the match on your 401k to start, that’s good. And cover yourself, but beware. So you know, life insurance policies and disability policies are important.

So you know, the Tim Baker challenge, you know, what are you going to do? What is your plan? If you’ve listened to this episode, and you’ve written down 3-5 of your goals that you’re going to achieve in the next five years, tag me on our Facebook group, call me out and say, ‘Hey, Tim. This is the plan.’ And you don’t have to be a new grad or a pharmacist. I encourage you if you haven’t done this yourself, put it out there. I will respond, and we can have a conversation about that. But I’m so happy that you guys joined me this podcast. It was a blast doing it by myself and looking forward to next time.

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