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


 

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

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Mentioned on the Show

Episode Transcript

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

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

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

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

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

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

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

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

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

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

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

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

Tim Baker: Which we were surprised by that.

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

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

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

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

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

Tim Baker: Yeah.

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

Tim Baker: Sure.

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

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

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

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

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

Tim Baker: Yeah.

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

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

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

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

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

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

Tim Ulbrich: Yeah, right about there. Yep.

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

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

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

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

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

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

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

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

Tim Baker: Yes.

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

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

Tim Ulbrich: That’s it.

Tim Baker: OK. Alright.

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

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

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

 

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YFP 048: Mo Money Mo Problems: Making the Financial Transition to New Practitioner Life


 

On Episode 48 of the Your Financial Pharmacist Podcast we spotlight Dalton Fabian, a soon to be pharmacy graduate from the Drake University College of Pharmacy & Health Sciences. We ask Dalton about his current financial situation and help him think through how he and his wife can prioritize multiple competing financial priorities when making the transition from student to new practitioner.

About Our Guest

Dalton Fabian is a soon to be 2018 graduate of Drake University College of Pharmacy & Health Sciences. In addition to obtaining a PharmD, Dalton has a minor in Data Analytics. His career interests include health data science and using technology to make patient care more efficient and effective. During his time at Drake University, Dalton was heavily involved in various leadership opportunities focused on advocating for the profession, including serving as the Chapter President for APhA-ASP and planning health fairs for the Des Moines Community.

Join APhA

Join APhA now to gain premier access to YFP facilitated webinars, financial articles, live events, resources, and consultations. Your membership will also allow you to receive exclusive discounts on YFP products and services. You can join APhA at a 20% discount by visiting www.pharmacist.com/join-now and using coupon code ‘AYFP18’. For more information about our financial resources, visit www.pharmacist.com/financial-education.

Mentioned on the Show

  1. The Total Money Makeover by Dave Ramsey
  2. The Dave Ramsey Show
  3. The Pete the Planner Show
  4. YFP Episode 026: Baby Stepping Your Financial Plan – The 2 Things to Focus On First
  5. YFP Episode 032:Find Your Why with Tim & Jess Ulbrich – Part 1
  6. YFP Episode 033: Find Your Why with Tim & Jess Ulbrich – Part 2

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 048 of the Your Financial Pharmacist podcast. Tim Ulbrich here, alongside YFP team member and owner of Script Financial, Tim Baker. We’re really excited to have on today’s show a soon-to-be, literally this week, 2018 graduate of Drake University College of Pharmacy and Health Science, Dalton Fabian. I had the pleasure of meeting Dalton at APhA annual in Nashville in March 2018, and when I heard a little bit about his financial story and his interest in personal finance, my first thought was, we have to have him come on the show because his story is going to resonate with so many new or recent graduates that are making this transition from student to new practitioner. So Tim Baker, excited to have you back on the show, I know you were in the weeds for a couple weeks on wrapping up the student loan course, right?

Tim Baker: Yeah, something like that, Tim. So good to be back and contributing to the podcast again. It’s a labor of love with the student loan course, but the course is out there. Our beta testers are hard at work, hopefully, testing everything out and making sure it does what the course says it’s supposed to do. But yeah, glad to be on the podcast and glad to talk to Dalton today.

Tim Ulbrich: So before we jump into hearing from him, I’m curious from your perspective, from the planning perspective, obviously you work with so many new graduates or recent graduates. What are the challenges that you’re seeing that they’re facing in terms of making this transition from student to new practitioner? Where are they getting stuck? And obviously, why is this transition so important?

Tim Baker: Yeah, I think this time period in the course of the career of a pharmacist new practitioner is so critical because it really sets the stages for their financial life now going forward. And it’s funny because you know, I have a lot of meetings last week and this week with clients or prospective clients similar to Dalton, and I’m hearing words like “terrified,” “unsure,” “uneasy.” And I think a lot of the backdrop is how do I handle this behemoth that is the student loans. And hopefully the course fills in some of the gaps there, but that’s one part of it. And I think that to set sound behaviors and to kind of have a plan going forward is going to be vitally important because if you just leave this thing kind of on autopilot, it can get away from you fairly quickly. And that could be in the form of just your spending going awry or just not being intentional with, you know, your student loans or whatever goals that you might have. And we’ve talked about being intentional in the past, but I think that this part of the pharmacy timeline is crucial, especially depending on what your goals are. So I’m definitely interested to hear more about Dalton and his story, and I think it’s going to resonate with a lot of our listeners out there.

Tim Ulbrich: Yeah, I think overwhelmed is the one word we hear over and over again of you know, I’ve got all these competing priorities. Where do I start? Where do I go? And when I had a chance to talk with Dalton, obviously he’s got a lot of things going on that we’re going to hear about in the show, but I also love his passion for learning about this topic, and I think that’s really going to help him set a sound plan for the future. So here’s how the format of today’s show’s going to work. Tim and I are going to interview Dalton, we’re going to ask him a series of questions that’s going to allow him to share his financial story, and in turn, we’re going to discuss various strategies about how he could think through this transition. Now, important disclaimer here is that obviously, we’re not intending to give Dalton financial advice. So we acknowledge everyone’s situation is unique. We aren’t necessarily going to gather every piece of information about Dalton and his story. So we’re going to help ask some questions, get him thinking about it. But ultimately, we recognize and acknowledge for each person listening to this show, it’s going to an individual, unique decision when it comes to your own financial plans. So without further ado, let’s jump into today’s interview with Dalton Fabian.

Tim Ulbrich: So Dalton, welcome to the Your Financial Pharmacist podcast. We’re excited to have you.

Dalton Fabian: Thanks for having me.

Tim Ulbrich: And by the way, congratulations on completing your final year of pharmacy school. And knowing this is the week leading up to graduation, thank you for taking time to come on the show, I’m sure it must be somewhat a busy week. And didn’t you just finish your rotations last week?

Dalton Fabian: Yep, so we finished them last week, have a week off, and then graduate on Saturday.

Tim Ulbrich: Awesome. So thank you for taking the time to join us in the midst of all that craziness. And as I alluded to the introduction, we’re going to pepper you with some questions to learn more about your financial situation, some of the challenges you’re facing, maybe some of the decisions that you’ve already made during this transition period from new graduate, obviously into new practitioner life. We know that, as I mentioned already, we know many of our listeners are probably in a very similar, if not somewhat the same boat that you are, either making this transition, going to be making this transition or recently making this transition. So why don’t you, to get us started here, why don’t you tell us a little bit about you, where you grew up, why you chose pharmacy as a profession, what some of the career goals and interests are that you have.

Dalton Fabian: Sure. So I’m originally from Waukesha, Wisconsin, which is a suburb of Milwaukee. I’ve been going to Drake — did undergrad and pharmacy school at Drake. Drake has a two plus four program. Immediately when I get on campus, I knew that’s where I wanted to be. The professors were friendly and all of that, so I just knew that that’s where I wanted to do my pharmacy school. I chose pharmacy — kind of first, I was interested in you know, helping people, interested in learning more about medications. But as I got through pharmacy school, I think that kind of transitioned to just seeing how progressive the profession was, and that made me motivated to go through pharmacy school with immunizations and all those different sorts of things. And then while I was in pharmacy school, I got introduced to informatics and programming. I got really interested in that, and that’s where I plan to pursue additional training.

Tim Baker: And that’s news, right? Dalton, you recently got accepted to — what is it, a Master’s program?

Dalton Fabian: Yeah, so I got accepted to a Master’s program, so it’s the Master’s of Science and analytics. Interested in kind of getting into the Health Data Science and Data Science career path. So yeah, just found out a couple weeks ago that I got accepted there at Georgia Tech.

Tim Baker: Oh, very cool. Very cool. Congrats on that. I guess the question for you, Dalton, is, you know, when you were going through pharmacy school and you know, you were looking at the loans that you were accruing, when did you start really thinking about the whole idea of personal finance? Or when did you get interested in learning more about it? Can you walk us through kind of that discovery for you?

Dalton Fabian: Yeah. I really didn’t focus too much on my student loans until I got interested in personal finance. So I’m a big runner, and got in — couple years ago, got into audiobooks and podcasts and came across “The Total Money Makeover” by Dave Ramsey. I had heard of it before, but came across it as an audiobook, listened to it. Dave Ramsey’s the one who narrates it, so it’s kind of cool to have the author and kind of a well known person narrate the book. So that kind of got me excited about just personal finance in general. And then it kind of made me realize that with being a pharmacist, having a high income and high student debt, that I would need that information in the future. So after that, got into some other personal finance podcasts to kind of get different perspectives on personal finance.

Tim Ulbrich: So for our listeners, Dalton, that are personal finance nerds out there, obviously, we hope they’re listening to the YFP podcast, but what are some of the other personal finance podcasts that you like?

Dalton Fabian: In addition to YFP, love the Dave Ramsey show, so it’s on a podcast also. And then probably one of my other favorites is Pete the Planner, really like his podcast.

Tim Ulbrich: Yeah, good stuff. OK. Cool. So Tim Baker, before we start rapid firing Dalton with some questions, where do you typically start from the planning perspective with a client like Dalton? I mean, what are some of the things that you’d want to know? And how would this typically play out, you know, when somebody signs on to work with you in terms of getting some of this information?

Tim Baker: Yeah, I think when I first meet with a prospective client, basically, the things that we’re going to talk about are like, what are the main pain points or what are things that are kind of top of mind for you? And we kind of just go down that process of discovering, say ‘OK, what are the things that are of concern?’ Whether it’s student loans, whether it’s retiring at a decent age, building a real estate empire, could be credit card debt, could be how to cash flow a certain financial goal. So to really kind of uncover those things that are providing some discomfort. And then just to see if we would be a good fit to work with each other. You know, I think that type of relationship, you’ve got to have obviously trust, but the way you communicate and the way that recommendations are shared I think are vitally important. So I think we would kind of come to that type of period where we say, ‘Hey, does it make sense to go forward based on here are the things that you’re looking at?’ And if we kind of get that, yeah, let’s do this, the client would get into that get organized phase, which we talk about in the student loan course. But this would be the get organized phase of everything, so this is where, Dalton, we would look at all the things financial for you, whether it’s you know, your checking, your credit cards, any student loans that you have, car loans, all that stuff we would basically go line-by-line and basically build out that dynamic net worth statement. And I think that, coupled with a look at a retroactive budget, just to see where cash flow is going, those are kind of the basis for the relationship that I build with clients initially.

Tim Ulbrich: So speaking of pain points then, you kind of mentioned that you start with some of the pain points, Dalton, I’m assuming just from our previous conversation, student loans is top of mind or at least close to the top. So talk us through a little bit about your student loan situation. And if I recall, both you and your wife have student loans, correct?

Dalton Fabian: Yeah. So we both do have student loans. My student loans, just alone, are a little bit over the national average for pharmacists. So I’m about at $190,000 in student loans. So that’s definitely a major financial priority.

Tim Ulbrich: What about for your wife?

Dalton Fabian: Hers are about $90,000.

Tim Ulbrich: OK. So I remember, I think when you and I talked, about $280,000 all in is what we were talking about.

Dalton Fabian: Yes.

Tim Ulbrich: Yes, OK. And remind me — I mean, one of the things I think we’re thinking of, especially as we’re in the context of the student loan course and trying to think through strategies of, is it loan forgiveness? Is it refinancing? Is it keeping them there and paying them off? Tell us a little bit about the interest rates of those loans.

Dalton Fabian: Sure. So I went through and kind of created a weighted interest rate, and so for that $190,000, it’s about 5.9% for my interest rate.

Tim Ulbrich: OK. 5.9%, and then for the $90,000, for your wife, do you have the same thing?

Dalton Fabian: Yeah, similar. Yep.

Tim Ulbrich: OK. So Tim Baker, obviously we’ve got one big variable, one big pain point on the table, about $280,000 in student loan debt, which I think as Dalton, as you mentioned, for you, that’s a little bit above the national average, but not too far off, so I’m guessing many people listening are facing a similar situation, especially if they’re in a relationship with somebody else for their shared student loan debt. What else, Tim Baker, what else are you thinking about besides student loans here when you think paint points?

Tim Baker: Well, I guess before we come off of the student loans, I would just ask the question — Dalton, and what’s your wife’s name, Dalton?

Dalton Fabian: Elizabeth.

Tim Baker: Elizabeth. So when you and Elizabeth talk about the student loans and what that looks like for your financial picture, I guess what are kind of the feelings that are centered around student loans? Is it confusion? Is it anxiety? Is there — you know, how do the loans make you feel?

Dalton Fabian: Sure. I mean, there’s a little bit of anxiety just with when you see that number, $280,000. But we both know that we have both have good careers and high income earning potential. So kind of anxious about the amount but know that with dedicated effort, that we can kind of control the student loan debt and pay it off quickly.

Tim Ulbrich: And Dalton, as a follow-up to that, you know, we’ve had people on this show that you know, have kind of gone all in over two or three years and really just minimalist lifestyle, paid off all their loans, and then obviously others — I took a little bit longer — and others say, ‘We’re going to get this done, and we’re going to get it done quickly. But we also potentially want to be balancing some other priorities that we’re thinking about in the future,’ whether that’s family priorities, home buying, etc., travel, vacations. You know, where do you and Elizabeth stand on that spectrum of wanting to get these paid off?

Dalton Fabian: We probably fit somewhere in the middle. So one of the kind of interesting things of being married during your P4 year is that you’re living on that one spouse’s income. And so kind of how we framed that the whole year was kind of let’s learn how to live on this income, and then once I would get a job, all of my income would be going towards student loans or other financial priorities. So that was kind of an interesting dynamic throughout rotations.

Tim Baker: When you talk about the other financial priorities, Dalton, is there other things on your balance sheet, like on the liability side. Do you have credit card debt or car debt or anything? What does that picture look like?

Dalton Fabian: So no credit card debt or car debt. The main other financial priority, which I’m sure we’ll talk about, is buying a home since we rent right now and we’re interested in buying a home at some point in the future.

Tim Baker: OK. So no credit card debt, no car debt. So are both cars paid for, then?

Dalton Fabian: Yes.

Tim Baker: OK. Winning, right? We talked about this on last week’s episode, so that’s great. So no credit card debt, no car debt. We talked about the student loan debt, we talked a little bit about kind of your feelings, philosophy toward paying that off. Other thing I’m typically thinking about, which we talked about before on this show is emergency fund. So you know, we’ve talked before about 3-6 months of expenses, roughly is what we’re shooting for. Where do you and Elizabeth stand in terms of your emergency fund?

Dalton Fabian: So, right now, we’re at about two months. And we definitely want to increase that amount, though, up to the 3-6 months.

Tim Ulbrich: So as we’re starting to formulate a list of goals, Tim Baker, I’m hearing a plan around student loan debt and paying that off. I’m hearing a plan around increasing or building the emergency fund. And then obviously, Dalton had also thrown in there some aspirations around home buying. So what else and other variables or questions are you thinking at this point?

Tim Baker: Well, I think the big one is I think the big elephant in the room is — we alluded to it a little bit — but the, you know, getting the Master’s and how are we going to — is that more student loans? Are we cash flowing that? What does that look like? That would be another big part of this that I would press Dalton on and say, ‘What does that look like for you? And what do you envision?’ So I guess Dalton, what does — in terms of paying for that part of your education, how do you envision that happening?

Dalton Fabian: Sure. So the goal is to pay for that program in cash. So aside from the prestige of Georgia Tech’s like computer science, data science program, that was also one of the considerations was that it’s a very affordable program. So the goal would be to pay for that one in cash.

Tim Ulbrich: That’s awesome. And what is that program roughly going to cost you?

Dalton Fabian: So over the whole program, which I’ll probably complete over two years, it’s $10,000.

Tim Ulbrich: That seems like a good deal.

Dalton Fabian: Much better than pharmacy school tuition.

Tim Ulbrich: Right? I know, I’m thinking of — I don’t know why I was thinking, oh it’s $30,000 or $40,000 to do that Master’s program, so cool. So $10,000, and you kind of also snuck in there the reality that one of the things that you guys have learned obviously while you’re — you got married while you were still in pharmacy school is that you’re living off of your wife’s income, so you kind of put yourself in a position that as you start thinking about achieving these goals, you’re going to try to do them largely on the back of your income, correct?

Dalton Fabian: Exactly.

Tim Ulbrich: OK. And your wife, remind me, is she an accountant? Do I have that right?

Dalton Fabian: Yes. She is.

Tim Ulbrich: Tim, what else? So we have kind of four goals that we’ve set up there — student loans, emergency fund, home buying, cash flowing the education here, the Master’s degree. What else are we trying to get in the pot? Or other questions we have.

Tim Baker: Yeah, I guess the other things would be just, you know, I would probably press about like what are some other things like in the future like major purchases. So it could be a car purchase, maybe having a baby or expanding your family could be some other things that are on the docket. But I mean, typically, typically — and we’re kind of doing this in a very much accelerated mindset, which is great because I think we can kind of compress a lot of the conversations that I have with clients is alright, you know, if we’re a good fit to work together, and we have a nice, clean snapshot of your balance sheet, kind of where your spending is and then we have a nice, clean snapshot of your goals. So obviously, the missing piece here would be to bring Elizabeth in, and similar to what we did in Episode 032 and 033 where it’s kind of find your why that I did with Tim and Jess Ulbrich, we would basically go through and say, what is important to you? What is your why? And then start to build kind of like a success timeline. So you know, over the next two years, if we were to blast forward to May 2020, and we look back over the last two years, what does success look like? Is that, you know, having the emergency fund completely funded? Is it having school paid off completely and not worrying about that? Are we being aggressive towards the loans? So you kind of start to build a picture of success and then begin to work our way through it. So that’s kind of what we do. So obviously, the big missing piece here is having Elizabeth’s voice here and having her be part of this. But ultimately, when we’re building a financial plan, you know, — and this is something that we talked about in Episode 026, which was baby stepping your financial plan, the two things that I look at first is what is the consumer debt look like? And it sounds like for you, Dalton and Elizabeth, that looks good. There’s no consumer debt. We’re not paying high credit card interest fees, we’re not paying that type of thing. And then secondarily, what does the emergency fund look like? And you know, you cited correctly, Dalton, that you know, typically, with a dual-income household, which you soon will be, right?

Dalton Fabian: Yes. Yep. While I’m doing the Master’s program, I’ll be working part-time as a pharmacist.

Tim Baker: OK. So as a dual-income household, you need three months of nondiscretionary monthly expenses, which basically means expenses that go out the door no matter if you work or not, so things like your rent or your mortgage, groceries, utilities, student loan payments, all that stuff needs to be calculated. So if you guys have $5,000 of that that goes out the door no matter what, times that by 3, you need a $15,000 emergency fund. If you’re a single income earner, it’s basically times that $5,000 by 6. You need a $30,000 emergency fund. Now, you can, you know, for me, and it depends on what the strategy that you take, I think there are different areas or shades of gray for that. Typically, you know, we can kind of talk through that in terms of what, you know, you need for your particular situation. The textbook basically says, 3-6 months. So if the credit card and the consumer debt looks good, and the emergency fund is in place, then we can start to look at how can we fund or how can we support the goals that you have of buying a home, paying for Georgia Tech and then have a good strategy in place for the student loans. So everything is kind of built on that foundation of, you know, basically funding your goals moving forward.

Tim Baker: So before we continue, I just want to talk a little bit about our sponsor today, “Seven Figure Pharmacist: How to Maximize Your Income, Eliminate Debt, and Create Wealth,” and it’s actually authored by our very own Tim Ulbrich and Tim Church. And much of what we’re talking about today with Dalton is actually covered in the book. So things like prioritizing your goals, saving for an emergency, elimination of debt, they also talk about things like minimizing taxes and what types of insurance policies that you need. If you’re a pharmacist out there, this book needs to be on your shelf. You have to get it, you have to read it. It’s excellent. So head on over to sevenfigurepharmacist.com. Use the coupon code YFP and get 15% off the book.

Tim Ulbrich: So one thing I wanted to dive into a little bit deeper, Tim, is I mean I’d love to get even more specific about, you know, a potential plan of attack for Dalton on these. So he mentioned he’s got two of those three months, we obviously know the student loan figures. What we haven’t really addressed is, you know, one of the things I like to think about home buying is what would actually be that dollar amount or figure that is needed for down payment. And then how many months do we have until that goal is going to be realized? And then on the education, you mentioned $10,000. Dalton, when would actually those bills come due if the goal is to pay cash for those?
Dalton Fabian: So it would be at the start of the fall semester, spring semester, and then again the next year.

Tim Ulbrich: OK. So roughly $2,500 over each of those four installments?

Dalton Fabian: Right. Exactly.

Tim Ulbrich: OK. OK. So Tim, take us down into the weeds here, then. Like what would you be doing with Dalton or a client in terms of, you know, we’ve got the detail here that he’s going to be working part-time, so we obviously could get to a rough budget of OK, what is that dollar amount? And then how are we going to allocate it? You know, how would you walk through a client of OK, I’ve got these student loans, I’m going in the grace period, do I cue up the emergency fund? You know, do I start a sinking fund for home buying? Do I make sure I have that cash for that tuition bill? I mean, how do you help somebody actually prioritize those, No. 1, and then 2, what I’m thinking about is the processing you really helped Jess and I implement with the sinking funds and actually putting that on automation. Can you talk us through a little bit of that?

Tim Baker: Yeah, so part of it is again, it’s a conversation that we would have in that why meeting. So part of it is, once we kind of get through what are the things that are most important to Dalton and Elizabeth, then — and a lot of the themes are going to be very similar. And that’s one of the things that’s actually cool is that, you know, I think in our world, you know, it seems like everyone, you know, can be — there’s a lot of division there. But I think when we zero in on the things that are important to, you know, a family or an individual, a lot of it is life experience, it’s giving, it’s basically providing for people close to us. And I think once we kind of zero in on those things, then, you know, one of the things that we’ll talk about is kind of what you said, is OK, what are the major purchases that are kind of going to be up on the horizon? And what’s the timeline? So we talked about the $10,000 for the education, the home purchase. So one of the things I would say is, you know, what would you guys expect to pay for a home if you’re staying in Iowa? Are you doing this remotely, Dalton? Or are you actually going to Georgia Tech?

Dalton Fabian: Yeah, so this is an online program. That’s one of the reasons it’s $10,000.

Tim Baker: So we would kind of drill down into like what do you expect to pay for a home? What kind of down payment do you expect to provide? When’s the timeline for that? And basically back into that. And obviously, a big part of this is, you know, Dalton, when you’re working full-time, what do you expect to basically take home from that? And then if that number is, you know, if we say that number is $5,000 — and I’m just making a number up — basically our goal here would be to divide and allocate that $5,000 among the goals. And if you know, that kind of would be what this looks like. So if we look at your particular sets of buckets, you know, obviously I would say, you know, plussing up the emergency fund to three months I think would be the first thing that I would tackle. So get that, put that into high yield savings account, and then call it a day. Obviously, a near term goal would be let’s basically run the $2,500 into a savings account, get that money in place, and then you know, figure out how much we need to save per month to get to the next $2,500 push. So that would be part of this. And then, you know, in terms of — Dalton, what do you guys anticipate in terms of your home buying timeline? Is that something that’s going to happen next year, 2020? What do you guys anticipate for that?

Dalton Fabian: We’re expecting probably in the next five years or so to make that type of purchase, so looking at potentially reapplying for residencies next year, so that would be a couple year process. And that potentially lead us out of Iowa, but then planning on coming back to the Des Moines area. In terms of pricing — so out here in west Des Moines, the real estate is a little bit more expensive than other parts of the metro area, so probably housing would be $300,000-350,000.

Tim Baker: OK. Is the expectation to kind of come to the table with the 20% down, which would be about $70,000 if it’s a home for $350,000? Or what’s your thought there?

Dalton Fabian: Yeah, so our goal is definitely to do the 20% down to kind of avoid the PMI.

Tim Baker: OK. So obviously, so looking at that, one of the things that we would consider is do you look at with a five-year kind of timeline, you know, horizon, do you save that in, you know, a regular high-yield or do you actually go and, you know, open up a brokerage account and invest and you know, take some, you know, risk with the market and see if the market can return something a little bit better than 1.5%? So that’s obviously one of the questions, you know, or things that we would talk through is does it make sense to go that route? Or does it just make sense to, you know, take the 1.5% over the next five years and go with that? So that would be probably one of the things that we would talk about. And then finally — and again, this is going to figure out, we would have to determine where this fall on the timeline is, you know, what is the overall strategy with the student loans? Is it, you know, is it a forgiveness play? What does that look like for PSLF or non-PSLF? Is it an aggressive strategy where we start knocking through some of these goals and then we become more aggressive in the future so kind of a Phase One or a Phase Two plan? So for you guys, you know, when you guys — you said initially that you kind of fall somewhere in the middle. Are your loans currently in repayment now? Or no? Your wife’s.

Dalton Fabian: So my wife’s, yes. Hers have been in repayment since November 2017 because she went back to grad school to get her Master’s.

Tim Baker: OK. And then is she currently in like a standard plan? Or one of the income-driven plans?

Dalton Fabian: She’s in the income-driven plan.

Tim Baker: Do you know which one she’s in?

Dalton Fabian: Pay, I believe.

Tim Baker: So and then typically, those are, you know, pay or revised pay-as-you-earn is going to be typically the two income-driven that we like, just depending on what the strategy is. So we would basically do a, you know, kind of a student loan analysis and figure out, basically match your strategy with the goals that you’re trying to achieve. So that could be anywhere from keeping the loans in the federal system and driving down your adjusted gross income just so you can have, you know, the least amount paid toward the loans. Does she work for like the government or a 501c3 or anything like that?

Dalton Fabian: No, she does not.

Tim Baker: So do you guys anticipate, you know, seeking forgiveness or anything in the future?

Dalton Fabian: No.

Tim Baker: So if that were the case, then I would probably look at probably staying in — and similar with you, Dalton, you know, as you get through your grace period, enrolling in a income-driven plan and probably drive the payment down as much as possible. And for your loans, the income-driven plan, if you’re at, for $190,000, your loans are probably going to have a payment around $900, $900+, so that would probably be part of the equation. And then what we would do is stick with that until some of these other goals are funded and then with the potential to pivot out and be more aggressive, either through a refinance or something like that in the future. So you know, given your situation — and we did a few case studies with this in the student loan course, it would probably be a two- or a three-phase where we would say, OK, between now, you know, year, for Years 1 and 2, as you go through school or if residency is in the future, stay in this particular repayment plan. And then Year 4 or 5, let’s look if it makes sense to refinance and save and maybe be a little bit more aggressive on the loans at that point in time. So that’s essentially where we would look for, you know, funding those particular goals.

Tim Ulbrich: I would agree. And just to build on that, Tim, especially you mentioned the residency piece, and since there’s kind of these variables in play that he may end up going back and doing residency, which may mean, Dalton, a move right? Potentially that has other variables of moving expenses or costs or unknown variables. I think longer term, you know, depending on the situation, a refinance may be the play. But obviously giving yourself that flexibility to see how that shakes out, knowing that you can go into an income-driven plan, pay extra, pay down the loans and then seeing what happens in the next year or so, especially as you navigate some of the grad school options and whatnot. So Tim, it’s kind of taking me back to the, you know, at the end of Module 1 and into Module 2 of the course where we come up with this idea of finding your number. How much can you put towards your loans each and every month? And then you’re really just executing the plan. And as I hear Dalton’s storyline, kind of the way I’m starting to think through this obviously, and we want to get Elizabeth’s input as well, is that they’ve identified his income is kind of going to be the portion for these various goals. So what that dollar amount is, and then you start dividing it up between, OK, we’re going to finish off the emergency fund, we’re going to save for the education, you know, maybe x dollars per month over five years goes toward a down payment, and then we’ve got this chunk of money that’s available and ready to go towards student loans. And then that repayment strategy may pivot as income changes and residency does or does not come into play. So talk through, just briefly, I felt like it was a huge win for Jess and I — we, Dalton is getting into this point 10 years sooner than I did. So Dalton, No. 1, that’s awesome. But you helped Jess and I get to this point, Tim, where we kind of were able to finally articulate what these things were, put a dollar amount to them, and then you really helped us establish this idea of sinking and sort of automating it. Can you talk through that for a minute?

Tim Baker: Yeah, so, I mean — and I think that’s really the missing piece here is not having Elizabeth and her input. I think ultimately, I don’t really do anything special except ask the question. And a lot of us, either we feel uncomfortable, you know, talking to our partner about this or it’s just not a conversation that is naturally brought up. It’s kind of the same thing of like, you know, estate planning or like who’s going to take care of our kids if something were to happen to us? Or how much life insurance? It’s just not something that comes up in the natural course of conversation. So I think for me is to ask good questions and really get out of the way. But, you know, I think once we kind of identify those buckets, I think for a lot of this is to identify or try to put a number to it in terms of what is the most important thing? So if it’s more important to be in a home in five years versus being aggressive on the student loans, then you know, if I’m doing some quick napkin math, if you’re student loan payment for at least Dalton, if I look at yours, it’s say $900, and then we know that it’s going to go out every month, and then if you want to save $70,000, which is 20% of $350,000 in five years, if we don’t account for any type of interest at all, that’s basically $1,167. So if you combine that with your $900 payment, that’s $2,066. So depending on what your pay looks like, that’s where the conversation will begin and end. Now, essentially, I probably would say, start with the emergency fund. Get that plussed up, and then basically turn that off. But when we talk about basically setting up the emergency fund and sinking funds, what I like about having multiple sinking funds is although money — and we talked about this term before — money is fungable, meaning it’s interchangeable. So we look at money differently depending on like the sources. So if I find $20 in my couch, I’m probably more likely to spend that money on something frivolous, you know, and similar to like a bonus that we get versus if that is something that’s just income. So although money is interchangeable, for clients that I see have the best success is be able to say, OK. This is my emergency fund. It’s labeled emergency fund. I have $15,000 or $20,000, whatever it is. If something happens, if it hits the fan, I have that money. But then I think it’s also equally powerful, whether it’s an investment account or it’s a high-yield savings account, a sinking fund, that it says, this is Dalton and Elizabeth’s first home purchase fund. And every month when I log in, I can see, OK, that account is worth $20,000, $25,000, $30,000. It’s the same thing with, you know, your cash, the cash for your home. So we probably would set up an education fund that would probably just be a sinking fund for that that every quarter, we know that we need $2,500. So we’ll basically infuse the cash, pay it out of that fund, and then basically backfill that with the $2,500. And then when that goes away in two years, then we have that money to basically either throw it towards the house or whatever. So I like the idea of basically having an allocation sheet towards these savings to say, OK. What is the target? What’s the target amount that we need? Where — how much is the monthly deferral? So is that $250 a month of the $3,000 worth of income? And basically, work through it very systematically like that because I think if you’re kind of willy-nilly, you don’t have set figures, then the money gets lost. You know, if you say, oh, just throw it into a sinking fund, and that sinking fund is partly for education, partly for an emergency fund, partly for the down payment for a house, then we can’t really see straight lines. So that would probably — we talk about setting up buckets, those would be the buckets that we would set up, and we would basically just try to figure out how much to fill that, you know, every month. And that’s the purpose of the sinking fund.

Tim Ulbrich: Yeah, what I love about that too is just hearing you talk and thinking about the work you’ve done with Jess and I, I mean, part of the plan is prioritizing and articulating goals, but then the whole other part of this I’m thinking about even looking at Dalton’s situation, is helping execute the plan and the accountability of the plan. And I think there’s so much power and value in having somebody help you through that. And Dalton, I just love that you’re thinking about this, that you and your wife are talking about it. I love that you’ve articulated these goals of tuning up the emergency fund, paying cash for school. You know kind of what you’re looking at home buying, you obviously have inventoried your loans, so you know the details. And I think for those that are listening that maybe aren’t at that point, that’s really step No. 1 is kind of knowing what you’ve got. Obviously, debt-wise, knowing your current financial position and then getting organized with what those goals are and then obviously, at that point, you can start to prioritize and put a plan of action around them. So Dalton, really appreciate you coming on the show and appreciate you being willing to share your story. And I think many others listening are going to value from hearing the position you’re in and just hearing the thought process of how we went about this episode and asking the questions that we did. So thank you so much for coming on today’s episode. We appreciate it.

Dalton Fabian: Thank you for having me.

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YFP 047: Best Practices for Car Buying


 

On Episode 47 of the Your Financial Pharmacist Podcast, YFP Founder Tim Ulbrich, PharmD talks about the best practices for car buying and how to ensure car buying doesn’t get in the way of achieving other financial goals. In addition to Tim sharing his own tips and experiences, car buying recommendations from the YFP community are shared throughout the show.

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Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 047 of the Your Financial Pharmacist podcast. Tim Ulbrich here, flying solo and excited to be talking about car buying. And as I alluded to in the introduction, we’ve got some great content for you and specifically, the YFP community has shared lots of their own opinions and experiences on car buying that I’m going to share with you throughout the show. So here’s how we’re going to break down today’s episode. I have three different sections that we’re going to tackle this topic of car buying. First, I’m going to present some data and statistics, just make sure we’re all on the same page of exactly what are we talking about in terms of the costs associated with car buying. Then, I’m going to share the community members from the YFP Facebook group and some of the lessons and advice that they have around car buying. And finally, I’m going to share some of my lessons learned and blunders when I had my most recent car purchase of my 2009 Honda Odyssey, my Swagger Wagon, which I’m extremely proud of. Learned lots through that experience. I’m excited to share that with you as well.

OK, so before we jump in and talk about the numbers and data surrounding car buying, I have to get this out there. And I recognize I’m not going to become the most popular person by talking about this topic. We, myself included, we love our cars, right? That’s just a reality. And I have fallen into the trap before of putting my car buying priorities above other financial priorities that I’m trying to achieve, most notably when I was trying to pay off my student loan debt. And so we obviously have a love for cars, and I think often, it’s easy for us to defend that purchase. And so my goal with this episode is for us to take a step back and say, ‘OK. Maybe you’ve made great car decisions. Maybe you’ve made bad or poor car buying decisions. How can we really look at and evaluate where car buying fits in with the rest of your financial plan? And whether or not that’s being prioritized appropriately.’ So as you think about other goals that you’re trying to achieve and that you’re working on, maybe it’s student loan debt, maybe it’s credit card debt. Maybe some of you are out there, trying to build an emergency fund or save more for retirement, kids’ college, more vacations, whatever that would be, where does car buying fit in? So here’s the one question that I want you to ask yourself after you hear today’s episode: Is my current car situation and car payment getting in the way of me achieving other financial goals? And if so, is it worth it? Let me say that again. Is my current car situation and payment getting in the way of me achieving other financial goals that I’m working on? And if so, is it worth it?

OK, so one more thing I have to get out there before we jump in and talk about the numbers and continue on with today’s episode is that I’m all about safety when it comes to driving vehicles. And let’s work with that assumption as we go throughout the rest of the episode. And I think it’s also safe to assume that all of the cars that we’re driving, with maybe a few exceptions out there, all of the cars that we’re driving are safe vehicles. Now, commercials we watch and other things may make us believe that this car has a better safety rating than another car, but relatively speaking, across the board, I think it’s fair to say that our cars are safe. And therefore, I am not suggesting that you drive an unsafe vehicle just to save a few bucks. And so let’s be clear with that as we talk about some of the considerations around car buying.

So let’s jump in and talk about some of the data and statistics surrounding car buying. And one of the things that you’ve often, I’m sure, heard before is that cars are a depreciating asset. Cars are a depreciating asset, meaning essentially that they are going down in value from the moment that you purchase that vehicle. Now contrast that with other things that are appreciating in value, such as your home — hopefully, depending on the market that you live in — maybe investments that you have. Cars, on the other hand, for the most part — unless you have purchased some type of a rare vehicle or you collect vehicles that have significant value — for most listening to this podcast, your car is a depreciating asset. Now, why is that an important thing? It’s an important thing to consider because when we talk cars, whether it’s a new car, a lease, a used car, whatever be the case, I want you to think about a car in the context of the other goals that you’re achieving and whether or not it’s an opportunity cost.

Now check out this data here from Edmunds.com. If you had a $30,000 new vehicle that you purchased, the second that you drive off that vehicle from the lot, it depreciates by over $3,000. A year later, it’s down about $7,500 later. And then fast forward to five years after purchasing that vehicle, that $30,000 car now has a value of approximately $11,000. So that vehicle, $30,000, five years later on average is worth about $11,000. So you can see that for most new vehicles, there is a significant amount of depreciation that happens within the first five years. Now, hold onto that thought because one of the things we’re going to talk about is if you buy used, when might be the right time to buy? And hopefully that data gets you thinking, is there a period where a car may have a lower number of miles and has still taken a fair amount of the depreciation and the hit on the value of that car? And the answer to that is yes because if you look at a car that’s at the third, fourth or fifth year of its lifespan, it’s probably still relatively low mileage but also has taken a hit of the depreciation, meaning that you have a good value that will be in front of you.

OK, so cars are a depreciating asset. Now, check this out as well. If you look at the data from Experian, who publishes a report, which is really fascinating — I’ll link to it in the show notes — it’s called the Automotive Finance Market Quarter Four Report from 2017. Now, what they found in this Quarter Four report from 2017 is that the new car loan average monthly payment is $515 per month from that 2017 report. Let me say that again. The new car loan average monthly payment is $515 per month. Now, what if you lease a new car? You’re looking at an average payment of $430 per month. What about a used car? The average monthly payment for a used car is about $371. Now, hopefully you’re thinking, holy cow, that’s a lot of money. Especially as we think about other financial goals that you’re trying to achieve. Now, I know some of you are going to be right in line with those averages. Others of you maybe have paid cash for a vehicle. And others of you maybe have a loan, but that amount of the loan is significantly less than those averages. So based on that data, if we look at used car payments ranging from $371 up to a new car payment ranging at the top end of $515, if you are somebody that’s listening to this episode, and you think that you’re struggling with other goals that you’re trying to achieve — debt repayment, getting in control of your monthly expenses — car buying, your car, is an area that I would highly recommend you take a look at to see if cutting back may be worth it. And I think that if you talk with other people that have gotten rid of a car or scaled down their car, I think you’ll find that you probably won’t miss your car maybe as much as you think you will to begin with.

So what is the opportunity cost here of a vehicle, whether we talk about a lease, a new purchase or a used? So the question I want to pose to you is what if you were to take that monthly payment — and where you have that current average there of $515, what if instead you paid cash for a car every six years? And let’s just assume for this situation that that vehicle that you’re paying cash for is going to cost you $10,000 every six years? Now, some of you are thinking, can I really buy a decent car for $10,000 that’s going to last me six years? And I would say yes. If you actually do a quick search on cars.com, depending on what you’re looking for, you can find a lot of decent cars at a relatively low mileage rate, 50, 60, 70, 80,000 that’s going to be somewhere in the $4,000-10,000 range. So remember here, we’re going for safe and functional, right? So we’re not going for top-end features, we’re going for safe and functional. OK, so if we play out this situation, a $10,000 every six years that we pay cash for, if you divide that out, that would cost you on average, $139 per month. Now I got that by taking $10,000, and I divided it by 72 months. So if we were to take the difference, let’s say you’re somebody listening that has that average new car payment of $515 per month, if we would take the difference and you’d say, ‘OK, what if I sold that and instead paid cash for a $10,000 car every six years?’ That was $139, and if we take that difference, that difference is $376 per month. Now, here I’m talking the savings that you could have, which relates to the point that I made about the opportunity cost that come along with buying a car. So if you took this difference, $376 per month, and you instead invested that money in a mutual fund — better yet, let’s say an index fund, maybe within a Roth IRA, and that earned 6% growth per year, check this out. In 10 years, that would be worth approximately $62,000. In 20 years, that would be worth approximately $175,000. In 30 years, you’d have about $378,000. In 40 years, about $750,000. And drumroll — in 50 years, you’d have about $1.4 million. So there it is. The potential to save more than $1 million by strategically buying a car that’s at a lower monthly payment. And for some of you, maybe that’s leasing a car at a lower monthly payment. For many others of you, maybe it’s selling your vehicle and buying a used car like I mentioned in this example, $8,000-10,000 or so that you can have for five, six, seven years, maybe even a little bit longer. Now, some of you are hearing that math and thinking, OK, well obviously the cost of vehicles are going to go up, and you’re going to have to have some maintenance — all great points. So maybe it’s not $1.4 million. Maybe instead, it’s $800,000, $700,000. The figure doesn’t matter. I think what we’re really highlighting here is that there’s an opportunity cost that can come with having too much money tied up in a depreciating asset, which is your vehicle.

So what does the YFP community have to say about car buying? Now, the other night I wanted to throw out a question to the community because I know that based on the data that I just shared, and knowing that I have a bias toward buying used cars, I really wanted to get some more input from the YFP community. So just a couple nights ago, I posted these two questions inside of our Facebook group. Question No. 1 is: What lessons have you learned through your car buying experiences that you’d be willing to share with others? And No. 2: Do you buy or lease your vehicles? And why? And if you buy, and you buy used, where is the sweet spot in your mind in terms of having the best value? Now, the comments I got from this post were just awesome and further inspired me to do this podcast because I could tell for many, there’s a lot of passion around car buying and a lot of discussion about the different strategies and tricks and tactics to consider when you are car buying? So let me put a plug here. If you’re not already a part of the YFP Facebook group, I would highly encourage you to join us. I’ll link to it in the show notes. You can also just search on Facebook, Your Financial Pharmacist Facebook group. Join the conversation. There’s so much education, motivation and feedback that’s happening amongst this community. And this is really just one example of that happening.

So what I’m going to do, I’m going to read you some of the responses that I got because I think as I was reading these, it really helped for me reinforce a point that I think is great for you all to consider or even brought forward points that I had not even thought about talking about on this show. So Latonia, who’s a very active member of our Facebook group, so shoutout to Latonia, her response to this is that “I learned to not buy new and to buy used because it depreciates once you drive it off the lot,” just like we just talked about. Shop around and continue to bargain as much as you can. So for Latonia, she said, “I buy instead of lease since I don’t feel a desire to drive a new car every 2-3 years. I also want to finish car payments and not to have present in the long term.”

Erin from our Facebook group says, “I’ve purchased new and used, but prefer used. If you feel uncomfortable, walk away. Also, don’t fall victim to them asking what you want to pay each month instead of telling you the whole price of the car. They’ll try to get you in a five-year or longer loan to get you into your monthly budget. Haggle the price down instead. Again, if they can’t get the price to where you want it, walk away. They’ll probably call you the next day, offering what you wanted. It helps to finance your credit union too if you’re a member. Our credit union actually talked the price down for us before.” Well, Erin, great advice you’ve packed in there. You mentioned very briefly preferring used. I think you have great advice there about walking away in the negotiation process, which I’ll talk about here in a little bit. I love your advice about not falling victim to the monthly payment. Instead, looking at the whole picture about what it’s going to cost you over the life of the loan.

Cammy, who actually is not a pharmacist but has joined the conversation, actually works in the auto industry, who messaged me yesterday and has enjoyed being a part of this group, she says that buy used about three years old with preferably about 40,000 or under for mileage. So her advice is three years old, preferably about 40,000 or under for mileage. She says that “I’m struggling now as our van is or has been paid off and is turning 100,000 miles. She just put $1,200 doing the maintenance, still needs to get a few more fluid changes to the tune of $600. This weekend, the air has seemed to gone out in the vehicle. It’s a 2010.” And she goes on to talk about her vehicle being a Honda, and she’s really at that point trying to figure out, you know, when are you going to continue to invest money in a vehicle versus looking at something else. So shoutout to Cammy for joining the conversation. Also love to have fellow Honda Odyssey owners in the group as well.

So Scott says buy the cheapest car that you’re comfortable using. He says, “I refuse to pay sales tax on an expensive car that depreciates so quickly. 3-5 years used with a single owner is the best way to go for most people.” Scott, one of the things I didn’t think about, and I’m glad you brought that up, is the cost of the sales tax. So obviously, the higher the buy, the more the sales tax is going to be on the purchase, so I think that’s great advice and input.

Courtney says that “If you’re buying used from a private party, have your own mechanic look at it. If the selling party isn’t comfortable with that, you should probably find a different car. This allows you to know what you’re getting into.” And as somebody who’s completely incompetent when it comes to vehicles, I can attest to the importance of having somebody else give you a second set of eyes and give you some advice to make sure you’re not overlooking things that maybe you have blind spots when it comes to buying a vehicle.

David says that “We bought a four-door Toyota that was six months old with only 5,000 miles and got it for half the new sticker price. That was several years ago and haven’t come across anything nearly that good, but the dealer said it sat on the lot because that specific vehicle wasn’t real popular at the time, and nobody wanted a stick shift. We learned to look for cars that had been sitting on the lot for a long time in order to get a good deal.” Great advice, David.

Rachel says, “Go to the dealership with a plan.” Amen to that, Rachel. “Do your window shopping online only. My goal was to buy a used, reliable, safe vehicle with under 50,000 miles. I purchased with a low-interest loan, but I could have paid with cash, which made me feel really good. Research the cars you’re interested in before going, and research the cars that the dealers have on their lot. Last time I was car shopping, I knew more about the car than the salesperson, which made me look and feel confident in negotiations. Be patient,” Rachel says. “I didn’t budge on the price I wanted the vehicle for. And in a few months, I ended up getting a better model of the same vehicle for the price that I wanted.”

Brianne says, “I’ll tell you the truth and admit that I’ve leased for the past five years. Previously, I bought a used car, and when it started breaking down on a regular basis while I was on rotations, I needed something reliable quick and didn’t have time to shop around for the best deal. I had a great experience at the dealership and extremely low monthly payments for a brand-new car, and best of all, never had to worry, which was worth its weight in gold to me. When the lease was up, I re-leased because I was about to be fresh out of training with little savings. I feel like it was the right decision for me both times, and now I’m saving for a used car that I’ll have time to research and look for and hope to pay close if not all of it up front.” Brianne, I’m so glad you jumped in the conversation because I think you bring up a great point that this is not a black-and-white decision in my mind of buying a car used is better than lease new versus used and so forth. You know, I think back to a couple years ago when Volkswagen was having some of their specials because of some of the PR troubles that they were having where they were running — I think it was a Jetta, I believe — they were running for $89 or $99 a month with nothing down. It’s hard to beat that when you look at the math on a vehicle. And so I think when you, you bring up some good points about the point you were at in terms of transitioning out from rotations and through residency, in terms of some of the comfort that you were looking for and not wanting to deal with the hassle. And I think that highlights the importance of this really being an individualized situation and to do the math to see what might be best for your personal situation.

Kelly says “I lease and love the idea of renting a car. The important mindset of leasing is to know it’s not your car. I don’t have to do much except take it in for regular maintenance, and I haven’t had hidden costs. I won’t lease forever, but it’s convenient. And since cars are not really investments, it’s a good option for me now.”

And finally, Sandy says, “I’ve had two cars since I graduated in 2001. One I bought new and have driven for 13 years, still going strong and probably turning to 150,000 miles today or tomorrow.” And actually, she confirmed that. She put a screenshot of the odometer onto the Facebook page. So Sandy, thank you for doing that. She says that, “Now that my husband has had a few more vehicles than me, the biggest mistake was getting the extended coverage on one of his vehicles. Won’t do that again if I were to buy new.”

So thank you to those in the YFP community who jumped into the conversation. This was really only about a third of the comments, so for those of you who are thinking about car buying, thinking about is this the best decision for me? What might I be looking for in the process? Or maybe some of you are thinking, I might want to get rid of my car, sell my car, look for something else. I would encourage you to ask those questions inside of the YFP Facebook group and to join the conversation.

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 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 clout 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.

OK, so we’ve talked about some of the data and statistics surrounding car buying, and we’ve gotten some input from the YFP community about what they prefer in the car buying process and what is some of the advice that they have and things to consider. So what I want to do to wrap up this episode is talk about five lessons that I recently learned when I went through the process, Jess and I went through the process, of buying a car a couple years ago. So this is our most recent Swagger Wagon. And I have to be honest, if you had asked me five years ago, would I be excited about getting a good deal on a used minivan, I’m pretty sure I couldn’t have honestly said yes, but that’s the reality of three young kids, and I have a lot of pride in our used minivan in getting a good deal on that buy. So here’s the backstory. In 2014, Jess and I were still trying to get rid of our student loans. And at the time, I had an itch to get a new car. And that itch turned into going to the dealer. Going to the dealer turned into me trading in a paid off Nissan Sentra that had less than 50,000 miles on it and instead buying a used Lincoln MKX that had more miles on it and obviously was a greater expense.

Now, in the moment, the Lincoln MKX looked great. Great leather seating, great — I think it had a Bose sound system, actually, which was incredible — had the moonroof, had the whole nine yards. But here we were, almost about to pay off our student loans, and we took a step backwards financially. Now, six months later, kind of looked back on the situation, said probably shouldn’t have done it, actually turned around and sold that car and ultimately used the difference that we gained in that sell to finish paying off our student loans in October 2015.

So was it a massive mistake? No. But did it cost us some money and some stress along the way? It certainly did. Now, fast forward a little bit further from that. And we went through our second experience of buying a used car and paying cash for that used car. So just about two years ago, we went and we were in the business of needing a new used minivan, a new used, new used minivan. At the time, actually our sliding door had fallen off. Thankfully, one of our friends had helped us put it back on. But nonetheless, it was time for a new used minivan. And so as we went through that process of looking for, talking about, buying that new used minivan, there’s really five lessons that I learned from buying that minivan that built upon the lessons I learned when I went through the process of buying and then selling the Lincoln MKX. So those five lessons, I’m going to walk through briefly.

No. 1 is cash is king. Cash is king. So when you pay for a vehicle with cash, if you can do that, what I have found through doing that twice is that you ultimately get a better overall price. There is real power in the negotiation with cash. The other thing that I really like, which is kind of the silver lining with paying cash, is in my opinion, it forces you to buy down on the car that you’re looking for. What do I mean by that? If I’m going to write a check for a car, I’m probably not going to be willing to write a check for or $20,000 or $30,000 car. And it’s going to force me to look down into something that’s a little bit lower in overall price, maybe $8,000, $10,000, $12,000. And again, back to the earlier point that cars are a depreciating asset. I’m always trying to figure out, what’s the lowest dollar amount that I can spend to get the best value. And I think cash forces you to buy down because you’re writing a check.

So why else is cash king? Ultimately, you own the vehicle. No payments, which means that you’re using those payments elsewhere to achieve your financial goals. Now, the caveat here is if you’re going to pay cash for a car, I would highly advocate that you have a good emergency fund in place before you make that decision because in the event that anything goes wrong, obviously you want to be able to make sure that you can fund it. However, if you have no monthly payments on that car, chances are you’re going to have some margin in your budget to be able to do that. So No. 1, cash is king.

No. 2, patience pays off. So in my opinion, the best time to buy a car is when you don’t actually need a car. When you don’t have that pressing moment of, I need to have a vehicle. So if you can plan a month, three months, six months out, know that it’s coming, but be in the position to make sure you can do your homework and to be patient. It’s going to allow you to find the best deal, and it’s going to make sure that you’re not emotionally reacting to that buy. Because just like I mentioned, when I went and bought that Lincoln MKX, it started one day in a very casual search on cars.com, quickly turned into a feeling of, man I’ve really got to have this, quickly turned into me ending up at the lot and making that decision. So patience pays off in the car buying process.

No. 3, having an educated offer equals savings. Having an educated offer equals savings. And this really builds on No. 2 that if you have time, and if you can be patient, you’re ultimately going to be able to start looking and doing your research and making sure you’re coming with a very detailed, educated offer. And I can remember when I came to buy that Honda Odyssey recently, I could tell you a 2009 Honda Odyssey in the EX model that had this many miles on it, what was the going price for that car. So when you go into the dealer with that type of information, you’re obviously ready to negotiate. So I would recommend that you first start by looking up features and reviews of the car that you’re interested in in a site like Edmunds.com or a similar site, which I’ll link to in our show notes. Then you can start to work through Kelly Blue Book and other sources to really get to the nitty gritty on what is that car worth, what’s the value of that, and what price might you want to go into when you begin the negotiation process?

No. 4, used cars most, not all of the time, buying a used car most, not all the time, is going to be the better move. Now, I cannot emphasize that enough that it’s most, not all the time, as we’ve heard through some of the comments in the YFP Facebook group and in the community. So really this goes back to the point that we talked about, depreciation, right? So that if depreciation has already happened, and you’re buying at the right point of a used car, you’re really going to get that sweet spot where the hit of depreciation has already been taken, and you’re still going to be in a relatively low mileage position that it’s not going to require a ton of maintenance. Again, this is also highlighting the fact that if you can buy at the right price of a used car, it’s going to help free up some cash each and every month that you can use that difference to throw that money towards other financial goals that you have.

Now, things to think about that if you buy used at a dealer versus you buy used, let’s say from a private party. With a dealer, typically — not always, but typically — the car is going to be a little bit more expensive. It’s going to be a little more difficult to negotiate because those people are trained to negotiate. Now, the plus side of a dealer environment is it’s usually a little bit easier, and they’re going to help take care of all of the paperwork. And if you’re going to finance the vehicle, obviously they may have financing options that are available. Also, if you’re somebody that says, ‘I really want to be certified pre-owned,’ working with a dealer is going to give you that option. Now, working with a private party, there’s going to be more work on your end. You’re going to have to handle a lot of the paperwork and the processing, although I can tell you that’s fairly easy, and there’s a lot of great resources out there that can help you. It’s going to probably, not always, probably going to be a little bit easier to negotiate if you’re comfortable with that. Now, the downsides here is that you’re going to really have to do your homework on the inspection, making sure you’re feeling comfortable with the quality of the vehicle. And you’re going to, of course, have to pay cash typically for that vehicle unless you’re going to have some type of private arrangement with that person to finance it. So No. 4 is used cars most, but not all the time, are going to be the better move.

Now, No. 5 is I would highly encourage you, if you’re looking at a lease versus an own is to do the math. Do the math to see is this a better financial move when it comes to a lease or an own? And then on top of the math, make sure you’re factoring in things like your comfort with taking care of the maintenance and your comfort with having a used car that you might have a few things that go wrong here or there. So let me give you an example of what I mean by doing the math. If I were to be shopping today for a Honda Odyssey van, and I was looking at, say, a 2018 lease versus buying a older, used, decent mileage Honda Odyssey. I just pulled up today, actually, if you look at a 2018 Honda Odyssey LX, the current offer that they have with good credit is a 36-month lease that’s $369 a month for $2,500 that’s due at signing. Kind of sounds like a commercial, right? $2,500 due at signing at $369 per month for 36 months. So in this example, the total payout comes to $15,783. And that’s combined with the monthly payments as well as what you’re due at signing. And if you take that dollar amount, and you divide it by 12 for how much that would cost you per month, that’s going to cost you $438 per month, assuming that there’s no damage to the vehicle, there’s no overmileage, etc. when you turn in that car. So a lease option, as I’m looking at the numbers here on a Honda Odyssey LX, is going to cost me about $438 a month. Now, what if instead of leasing, I were to buy a used Honda Odyssey vehicle? What would be the difference there? And what are some of the considerations? So I was looking at today a 2012 Honda Odyssey EX, which is actually a model up from the LX, has about 60,000 miles. That car is selling for approximately $11,500. So if I were to convert that into a monthly payment, if I were to take that to convert it to a monthly payment so I could do an apples-to-apples comparison to the lease, that comes out to $319 per month. So instead of the lease costing me $438 per month, here this buy would cost me approximately $319 per month. So if you just look at that on the surface, that looks like $120 per month of savings. But in reality, at the end of 36 months remember, in this situation you have no more payments. So every month that goes by that you own that vehicle that you’re not reupping a lease, you have to then of course factor that into the savings. But you also, on the flip side, need to factor in that you’re probably going to have some cost around maintenance that maybe you would not have with the lease. So if you look at this example, I think if you’re comfortable driving a car that’s got 60,000 miles on it, the math is pretty clear that that’s a better option when you consider what you could do with that $120 per month plus whatever you save when your payments are done. Now, some of you may be driving vehicles that the lease numbers look much more favorable than that. So what I’m advocating for in point No. 5 here is to do the math and to make sure you really evaluate the difference between leasing and buying used.

So just to recap five lessons there that I learned from buying those two most recent vehicles, the Lincoln MKX and the Honda Odyssey:

  • No. 1, cash is king.
  • No. 2, patience pays off.
  • No. 3, an educated offer equals savings.
  • No. 4, used cars are superior most, not all of, the time.
  • And No. 5, do the math on a lease versus an own.

Now, here is my call to action for you is to go back to the question that I asked at the very beginning of this segment. And that question was this: Is my current car situation and payment getting in the way of me achieving my other financial goals? If so, is it worth it? Is my current car situation and payment getting in the way of me achieving my other financial goals? And if so, is it worth it? And some of you might answer that question and say, no, it’s not. And that’s great, continue on with the plan that you have. Others of you may take a step back and say, you know what, I think my car is getting in the way of achieving whatever financial goal you’re working on: student loan, credit card debt, retirement, etc.

And so then the question would be do you have an opportunity to sell your current car? Could you potentially sell your car and buy down on car so that you could free up some money each and every month to help achieve those goals? If you have a question about that, please jump over to the Facebook group and pose that question.

Now, one last thing that I’d like to end on here is if you’ve never read the book, “The Millionaire Next Door,” by Tom Stanley, I would highly encourage you to do it. He does a great job of outlining the financial behaviors and mindset of those that have a net worth of $1 million or more. And one of the things he spends a lot of time on the book is car buying because what he evaluates and recognizes is that those that have a net worth of $1 million or more often look at a car as a depreciating asset and are instead looking at where else could I be putting my money that is appreciating or that is growing in value? And through his research, he concludes that more than 50% of millionaires never spend more than $30,000 on a new car. And only about 23% actually own a new car. So 50% of millionaires never spend more than $30,000 on a new car. And only about 23% own a new car.

So thank you for joining me on this week’s episode of the Your Financial Pharmacist podcast. It’s been a lot of fun to be alongside here to talk about car buying, and I hope you’ll jump over to the conversation in the Your Financial Pharmacist Facebook, and I look forward to next week’s episode and hope you’ll tune in as well.

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YFP 046: The 5 Big Mistakes Pharmacists Make With Their Student Loans


 

On Episode 46 of the Your Financial Pharmacist Podcast, YFP team members Tim Church, PharmD, BCACP, CDE and Tim Ulbrich, PharmD tackle the most common mistakes that pharmacists make with their student loans. Whether you are a student pharmacist or a practitioner in active repayment, this episode will help you avoid the common pitfalls surrounding student loan repayment.

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 046 of the Your Financial Pharmacist podcast. Excited to be here alongside Tim Church to talk about common mistakes that pharmacists make with their student loans. So Tim Church, not that we would have any experience when it comes to student loan mistakes, right?

Tim Church: Oh, not at all. I did everything, executed it perfectly and right on the right path. No, actually, it was funny when I was thinking about this episode. And we talk about common mistakes that pharmacists make. Really, it’s the five mistakes that Tim Church made. I mean, we could have made that the name of it.

Tim Ulbrich: Seriously, it brings me back to when you and I were writing the “Seven Figure Pharmacist,” and we wrote all that student loan content and much of the other content based on the mistakes that we made. But I had, actually, the pleasure this weekend to go to Mercer University in Atlanta, Georgia, and talk with a group of their graduating students about personal finance and transitioning to new practitioner life. And as I was going through the section on student loans and had a chance to share from the mistakes that I’ve made and all the wisdom that you’ve shared and the YFP community has shared, all I could think was, man, I wish I would have had this information, right? When we graduated. Wouldn’t that have been nice?
Tim Church: That would have been great. There’s so many things I wish I could go back and do because I would have saved a ton of money in interest and just the amount I’m going to pay over the life of my loans.

Tim Ulbrich: And stress, right?

Tim Church: Yeah, definitely.

Tim Ulbrich: So where are you — quickly — where are you at in the journey of the payoff? So the Church household, where are you guys at?

Tim Church: So me personally, I have about $8,000 left. My wife, she’s got substantially more. But we’re looking at probably within a year, year and a half, we’ll knock it out.

Tim Ulbrich: So $8,000 left of how much? How much have you paid off on yours?

Tim Church: I think with capitalized interest, when I started residency and after the grace period ended, I think it was about at $189,000.

Tim Ulbrich: Wow, that’s incredible. That’s awesome. Great work.

Tim Church: Yeah, it’s a good feeling to kind of be at this point. It’s taken a lot of sacrifice and hard work just to get there.

Tim Ulbrich: So before we jump into common mistakes, and we’re going to walk through that Top 5 list, let’s just talk about current landscape. And we’re not going to go too far in detail here. I would reference listeners back to Episode 004 and 005. Episode 004, we talked about the landscape of student loans in pharmacy education. Episode 005, we had on Dr. Joey Mattingly to talk about the impact of rising student debt on a pharmacist’s income. But you know, we’re not trying to be gloom-and-doom here, we are optimists, both of us I think by nature, but the reality is new graduates are really facing an uphill battle, primarily due to rising debt levels. So Tim, kind of give us the really high level situation of what pharmacists are coming out with now and what they’re facing.

Tim Church: If we look at the most recent data from the AACP graduating survey, pharmacists are now coming out with an average $163,000. And actually, that number’s quite low. If you went to a private school, it’s actually much higher. If we go back a couple years to 2010, that figure was approximately $100,000. But one of the big problems is that if you look at pharmacists’ salary over those years, it’s not keeping pace with the average debt load that pharmacists are facing. And so this gap actually continues to widen. And so you and Joey Mattingly had talked about that before that you look at every new generation of pharmacists that’s coming out is they actually have less available income. So it’s really important, you have to a good strategy in place.

Tim Ulbrich: Yeah, I’m glad you mentioned the salary piece. Because I think obviously, the debt load gets a lot of attention — rightfully so — but one of the variables we’re always looking is, well, if salaries are keeping up with the debt load, not that that’s good that debts are still going up, but still, at least it’s accounting for that increase. But the reality that we see, as you mentioned, is salaries aren’t even keeping pace with inflation for the most part — oh, and by the way, you’ve got the interest rate component, with many students dealing with these unsubsidized loans with 6% interest rates, private loans that are even higher. So all of this to kind of give you the backdrop that we know it’s a problem, we know it’s increasing, and all the more reason that we have to be diligent in terms of those making that transition into new practitioner life to say, ‘What’s my game plan? What am I going to do to tackle these loans? And how can I avoid some of the common pitfalls and mistakes surrounding them?’ So Tim, let’s walk through five common mistakes that pharmacists make when it comes to student loans. No. 1 is not knowing all of the options that are out there. So just quickly, walk us through the options that are out there. And we’ve obviously talked about some of these on other episodes, but helping especially maybe those that are listening about to graduate or even those that have been out for a couple years and haven’t thought about this or even younger students who are trying to get ahead of this. What are the major options that are available to graduates when it comes to repayment of student loans?

Tim Church: Well, I think the first one and the most important one is you really want to look at are there any tuition reimbursement or repayment programs available where you’re currently working. There’s a lot of federal programs out there, such as the VA or the Indian Health Services and some of the military programs. And then a lot of states actually offer reimbursement programs. And those are essentially free money because you’re going to work for an employer for x amount of years. In exchange for that service, they’re going to help pay back some of your loans. So I think that’s really the first thing to look for. I know one of our friends, Alex Barker, he actually was able to get through the VA in his position something the Education Debt Reduction program. He was able to save a lot of money because the VA picked up a lot of the bill there. So I think those are the programs you want to look for first. And then if you’ve kind of exhausted that and say, ‘Hey, I’m not really eligible for that,’ it really comes down to two options. It’s forgiveness or non-forgiveness. And when we talk about forgiveness, really we’re talking about the Public Service Loan Forgiveness program in which you work for a government or a nonprofit 501c3 company, and essentially if you make qualifying payments over 10 years, you can have your loans forgiven tax-free. There’s also an option to get forgiveness through non-PSLF where you make income-driven payments for 20-25 years, and your loans are forgiven. Once you kind of go outside of that, it really comes down to do you keep your loans in the federal system and pay them off based on the term? Or on your term and pay them off at a pace that you want to accomplish that? Or do you refinance them out of the federal system and try to get a better interest rate?

Tim Ulbrich: Yeah, and I would reference your point about PSLF, I’d reference listeners back to Episode 018, where we talked about maximizing the benefits of the Public Service Loan Forgiveness, talked in a little bit more detail about what that program is. So just to recap what you had said there is first, you’re really looking for the tuition reimbursement repayment plans that are out there. So is there free money available? You gave the example of the Education Debt Reduction Plan. And then if not, you’re really looking at forgiveness or non-forgiveness. Within forgiveness, you’ve got the PSLF or non-PSLF forgiveness. And then with non-forgiveness, you’re either going to pay them off inside the federal system or you’re going to pursue a refinance. And we’re going to talk a little bit more about refinance as we go through these five options here. So Tim, as we were working on the course — and I think Tim Baker and I have talked about this to the listeners, but I don’t know if I’ve talked about it with you is that we’ve really laid you out there as the mastermind of this student loan course that we’re getting ready to launch. And we’ve certainly helped along the way, but you really have been the brains of getting this thing together. And No. 1 thing you were talking about not really knowing all the options. We spend a ton of time inside of the course walking through this. Would you say that’s fair?

Tim Church: Definitely. I mean, this is really the bulk of the material that we get into because it’s also going to determine how much you pay over the life of the loans.

Tim Ulbrich: Yeah, absolutely. And I think as I think about the big takeaways of that course, this is a big option is knowing, making sure you know all of the repayment options that are available to you and then making sure you can walk away with clarity to say, ‘This one repayment option is the best for my situation.’ And as we’ve been working through that course, what we have come up with, which I think is probably one of the biggest takeaways of the course, is what we’re referring to as the YFP Decision Table. Talk us through what that is and why that’s so powerful in terms of coming to the best decision for a payoff plan.

Tim Church: Well, I think one of the things that it does is first of all, it brings all of the options to the table. So it really lays out everything that you’re eligible for. And then once you’ve put those in place, actually do the math. So over the life of the loans, whether you’re refinancing through a specific term, whether you stay in the federal government, whether you’re going for forgiveness, is to really calculate over the life and figure out from a mathematical standpoint, what is going to be your best option? Now, as you and I talked about it, math is definitely important and a lot of times, the most important thing. But there’s a lot of other factors that go into that kind of decision. And I think that’s really a key component of what we break down in the course is how do you combine that math with all of the other factors that you’re facing?

Tim Ulbrich: Yeah, absolutely. And I hope if there’s students listening to this episode right now, even if you’re in your first or second or even third professional year, I hope you’re hearing that, hey, now is the time to really kind of learn what these options are, talk with your financial aid officer, begin to learn more about what is forgiveness? What is PSLF or non-PSLF? What are the income-driven plans? And for those already in active repayment, you know, it’s never too late to make sure you’re in the best repayment plan. And I think that’s really what we’re honing in on in a big way with the course. And I’m speaking here out of mistakes that I’ve made just wandering through the grace period without any intentionality, which really takes us to our second common mistake and the second thing we address is not being intentional. So the idea here that people kind of are passive and not having a plan. So talk to us, Tim, in terms of what you’re seeing with graduates and what you’re hearing with graduates about not being intentional. And what are some things that they could do to be intentional?

Tim Church: I think the thing to keep in mind is that if you have federal loans, you’re going to get dropped right into the standard repayment plan, which is a 10-year term. What’s interesting is that I think we pulled up that article from Credible, and they were estimating that pharmacists will take on average 14 years to pay off their loans. So keeping that in mind, it could be even extended further than the standard 10-year repayment plan. But what I tend to see is that whatever repayment plan kind of starts, whether that’s standard or maybe something less aggressive, either graduated or extended, is that people tend to stay in those repayment plans, and they’re just making the minimum payments over time. But the term itself is not, in my opinion, really a strategy. It’s just the default in terms of what you have to pay. But if you take that a step further and say, what is my game plan? Is it to pay the loans off faster than the term in order to save money in interest? Or do I have a low interest rate, and I’m trying to make sure that I’m putting enough in retirement, putting enough for a down payment on a house? There’s a lot of those variables that go into play. And so I think you have to really look beyond that term.

Tim Ulbrich: Yeah, and as you’re talking here, Tim, it reminds me of you know, when I graduated — and I’ll humbly admit to the audience, I couldn’t tell you a single thing, not really much at all about my loans. I didn’t know if they were unsubsidized, subsidized. I probably didn’t even know what those terms meant, didn’t know the interest rates, didn’t know repayment plans. So I wandered into the standard 10-year period. I wandered through the grace period without really understanding what that meant for interest accruing. And one of the things I look at in hindsight is that I could have either refinanced or I could have probably done PSLF. And looking at my situation and kind of beliefs and wanting to get those paid off, I probably would have went with an aggressive refinance. But because I wasn’t intentional, I basically sat there for 10 years with most of my loans at 6.8%. And that hurts when I know I could have refinanced probably below 5%, and I think that just speaks as one example about the power of doing your homework and trying to make sure you can put a plan in place and take advantage of at least trying to minimize the interest you’re paying or for those that choose forgiveness, making sure you’re intentional about going after forgiveness as well.

Tim Church: Yeah, I mean, I think about that for my personal situation. Here I am, I’ve worked for the VA now for about seven years. And had I known about — No. 1, had I known about PSLF, I would have made the right moves at that time to figure out what I had to do to accomplish this because really, I’d be looking at three more years, and I’d have all my loans forgiven.

Tim Ulbrich: Yeah, and remember when we were in Baltimore back in February, I think you and I after we both had the realization we could have done PSLF, we went back and did some of the calculations to say, hey, what if we would have actually lowered our AGI? What if we would have went all in on retirement savings? What would that have been? What did we come with? It was like a few hundred thousand dollars, right, was the swing?

Tim Church: Yeah, it wasn’t a small chunk of change.

Tim Ulbrich: Yeah, lesson learned, but that’s OK. That’s OK. Alright, so moving onto No. 3 here, we have choosing the wrong repayment plan. So I mean, we’ve kind of alluded to that a little bit already, but what — is there a wrong repayment plan here? Or what is the meaning behind this common mistake?

Tim Church: Well, I think definitely if you’re pursuing forgiveness, whether that’s through PSLF or non-PSLF that you have to be in the right repayment plan to make sure that you’re getting qualified payments, and you’re getting those to count. And a lot of people that haven’t been doing that, they’re actually a lot of the payments they’ve made over the years don’t actually count, and the clock has to start over. So I think that’s one area where it could be a mistake if you’re not in the right repayment plan. And then I think a big one is during residency. And again, this is another mistake I made. I actually put some of my loans in forbearance because I didn’t feel like I could make the payments, but in reality, if you use some of the income-driven repayment plans, even if you don’t make a payment, even if it’s $0 or a very small amount, there’s some really perks with using some of those plans to actually minimize the interest, depending on what your overall payoff strategy is.

Tim Ulbrich: Yeah, and I think this goes and feeds nicely into what we talked about there, point No. 2 about being intentional because if you’re doing the math and you’re doing your homework and you’re learning about these plans, you’re more likely going to be opting into the right strategy. So you gave that example of PSLF, you have to be in a qualifying plan to ultimately obviously eventually have that money forgiven. So if you’re intentional and you’re doing your homework, you’re going to pay sure that happens. OK, No. 4, which I know you and I both talk about a lot between each other and we’ve talked about it on the podcast. And I would reference our listeners back to Episodes 029 and 030, which was all about refinancing student loans. So No. 4 is not considering refinancing. Now, we specifically put here considering because for some people, they shouldn’t refinance. But for many others, they should at least evaluate it. So talk to us about just briefly refinancing and why this is a common mistake that you see.

Tim Church: Well, when you refinance your loans, your main goal is to really get a lower interest rate. You’re trying to pay less money in interest over the course of the loan. I think the big thing is is that if you’re going to plan on staying in the federal loan system and pay off your loans because either you’re not eligible for forgiveness or you don’t want to be in debt for 20-25 years using non-PSLF forgiveness, you have to take a strong look at refinancing. And I kind of go back to your situation, Tim, where most of your loans were sitting at I think over 6% you said, but you probably could have been getting anywhere from 3-4% during that time. And you would have paid substantially less in interest. But the faster you make that move, the less you’re going to pay over time, obviously. I think one of the big things is there’s a lot of myths out there about refinancing. This may have been true a number of years ago, but a lot of people, they feel that they’re losing all of the protections of the federal system when they refinance. And it’s true. There are some things that you’re probably not going to have if you make that move. One of those is access to income-driven plans. So if you have a situation where your income’s not steady or you plan on changing jobs and you have some uncertainty, then yeah, that’s something that you probably don’t want to give up. The other thing is death and disability. So this is interesting because some companies offer that same protection. So if you die, your loans are forgiven in that event or if you become permanently disabled, so that’s same with the federal government. Others are not. So that’s certainly one thing you have to keep in mind. Obviously, one of the biggest ones is that if you’re currently pursuing PSLF or you plan to pursue PSLF or forgiveness, for that matter, you definitely don’t want to refinance because you disqualified yourself. But again, if you’re not going for any forgiveness program, then it’s probably going to be a great option again, going back to the interest that you’re going to pay.

Tim Ulbrich: Yeah, and I would point listeners back to yourfinancialpharmacist.com/refinance. We’ve got a great page about refinance education, what to look for, what are must-haves before you sign up with a company, who should, who should not. And we’ve got a great calculator on that page. So if you’re thinking, how much would I actually save in a refinance after you get a couple quotes, we’ve got a tool on there that will help you figure that out, determine if it’s worth it, and so I would highly encourage you to check that out. And even thinking, Tim, back to the course that we’re building, I think that’s one of my favorite parts is we talked about the decision tables, it’s really helpful to see everything from PSLF all the way to a five-year refinance, which is very aggressive. And I think that’s what we’re trying to do is get people to see all of the options, weigh the pros and cons, look at the math, and then as you mentioned already, layer onto that math the emotional component and other factors that will ultimately determine the best payoff strategy. But refinance has to be at least considered in that mix, correct?

Tim Church: Definitely. I mean, I think it’s probably the single most powerful strategy for tackling your loans if you’re not going to pursue forgiveness because if you look at current interest rates in the federal loan system are 6% or higher, even now you can get interest rates, I’ve seen quotes in the 3’s to 4’s. Even that change by a couple percentages, depending on the balance of your loan, I mean, we’re talking $20,000 and up. I mean, it depends on your balance. I mean, the bigger your balance you have, the bigger the savings that you can get. And I know for me, I think I’ve calculated over time because I’ve actually refinanced my loans twice and was able to get a better interest rate each time, but I know my savings over that point of starting out with $180,000+, it’s probably been about $30,000-$40,000 in interest that I’ve saved.
Tim Ulbrich: Yeah, and I think you’ve done that calculation before. I’ve seen it either on the website or one of the resources that if you take the average indebtedness of a pharmacist and you assume, you know, various interest rates that are normal with what’s in the market right now, the average pharmacist could probably be saving somewhere around $30,000. Now, obviously that’s highly dependent upon personal situation, interest rates, debt-to-income ratios, what rate they get on a refinance and so forth, how fast they want to pay them off or not. But I think the point being here is that it is for some people, it is not for other people, but it at least has to be a consideration and a part in evaluating. So again, yourfinancialpharmacist.com/refinance. And we also have a lot in the course about refinancing and making sure you’re considering it amongst other options. OK, No. 5, hopefully Dave Ramsey is not listening to this podcast. I’m pretty sure he doesn’t listen to our podcast. But No. 5 we have here is not taking advantage of employer match while paying off loans. So obviously, I’m giving Dave Ramsey a hard time. I like a lot of his content. But this is one that he would disagree with us on. So why are we adamant of the employer match, even in the midst of that time period of paying off loans?

Tim Church: Well, I think you really want to take advantage of that free money. And if that’s a tool that’s available to you, you’re really missing out if you’re not getting that free money each and every year and taking advantage of compound interest. I think one of the things with Dave Ramsey is that a lot of the people, they don’t have the same debt load as the average pharmacist, and so we’re looking at — we talked about that Credible study that the average pharmacist, they were talking about 14 years in debt. And obviously, that depends, and there’s a lot of factors involved with that. If you do absolutely nothing for retirement for over a decade or several years, you’re going to be way behind where you need to be if you’re trying to plan on retiring before the age of 90.

Tim Ulbrich: Yeah, and I think I was having a discussion with a student at Mercer this weekend — and I know we talk a lot on this podcast about this balancing of debt versus investing. And I think it’s such a hard question for lots of reasons. And here, I think this is a no-brainer. You take the match is what we both I think philosophically believe in. But you know, then the question becomes, what beyond that? And to me, one of the variables is where are you in your trajectory of retirement savings? And how much you either have and what’s your timeline to retirement? So there’s a fair number of nontraditional pharmacy graduates that maybe it’s their second career, and their answer to that question looks very different than a 24-year-old graduate, right? So I think putting all those factors together and not just making this a black-and-white answer, but certainly I think the match is a no-brainer, although it seems like, Tim, would you agree — you know, I’m thinking of discussions in the Facebook group and others — it seems like most companies are still offering a match, but it seems there’s actually a decent amount of variety between companies, and it seems that that match component has actually gone down over the last few years.

Tim Church: Yeah, I don’t know. I think it varies so much because I feel like you guys in academia and hearing from my wife, you get these pretty awesome matches like 8-10% I’ve heard. So I think it just varies in terms of what company you work for. But I think you bring up a good point is that that number’s going to be variable, and then sort of beyond the match, that’s probably one of the most controversial topics in personal finance. And everyone has an opinion on that, and I think there can be a mathematical answer, but again, there’s so many different factors that play into that.

Tim Ulbrich: So is there any reason, Tim, you can think of why somebody wouldn’t take a match? So I’m thinking of situations like somebody who has lots of credit card debt or has no emergency fund. Like is there any situations where you could say, maybe it would be in their advantage to really focus on these other things? Or do you think pretty much across the board, it’s a good general rule of thumb?

Tim Church: I’d say probably for most people, it’s going to be a good idea. But like you said, if you have credit card debt at 14-15%, you’re probably better getting the return on knocking that out first before you start putting in towards the retirement. I think that for most people, it’s definitely a great idea. You want to take advantage of that free money. But if you’re swamped in credit card debt, and you’re having trouble even making your bills every month and putting food on the table, and you’re in some extreme situation, then yeah, maybe temporarily you don’t even put anything towards retirement until you can get to a point where you can actually breathe.

Tim Ulbrich: Yeah. And I would add to that too, you know, because I think somebody might hear that and say, ‘Well, even if it’s credit card debt at 15% or 18% or whatever, like I’m getting 100% free money.’ And maybe Dave Ramsey would like this part, but I would add to this discussion is don’t forget about the behavioral components of this, right? So if I’m contributing let’s say 3% towards retirement because my employer is matching 3, even if I’m doing that, that’s on autopilot and I’m not necessarily taking a very active role in that process. If I’m intentionally taking money and paying down a credit card bill, and I’m seeing that reduction happen, that is a piece that I’m taking a very active role in. And there’s power and value in that process. So again, all the more reason that these aren’t necessarily black and white answers, but what we’re saying here in point No. 5 is that for most people listening that the employer match, even in the event of student loan debt, is probably going to be a good play. Alright, so there we have it. Five common mistakes that we see pharmacists making, many of them we have made ourselves. So we hope this has been insightful, and I would just point you back to this is a very small sampling of what we are going to be talking about in a lot of detail in our student loan course that we’re getting ready to release very soon. And as I mentioned, we have 14 lessons across three modules. It’s packed with lots of content taught by Tim Church, Tim Baker, myself, we’ve got a Facebook group that’s going to be exclusive to the people that are in the course, so lots of great information, all really designed to give you confidence in having a repayment strategy that is going to be best for your personal situation and getting clarity on that strategy. So as a final reminder, if you head on over to courses.yourfinancialpharmacist.com, if you use the coupon code LOANRX, that will be good until Friday, May 4. We’ve got 19 seats left in our beta testing group until Friday, May 4. At the time of this recording, 19 seats left, and we’ll take the remainder of those at first come, first served. Have a great rest of your week, everyone.

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YFP 045: How to Determine Your Disability Insurance Needs


 

On Episode 45 of the Your Financial Pharmacist Podcast, YFP team member Tim Church and Certified Financial Planner Tim Baker discuss some of the key features of disability insurance and walk through how to get the right coverage.

PolicyGenius

Several reputable companies offer disability insurance but it can take a lot of time and energy to get multiple quotes. YFP has partnered with Policygenius, an online independent broker to help you quickly shop multiple companies for the coverage that’s right for you. They have a very user-friendly interface and their team will help you through the entire process from application to signing a policy. You can even get an estimate without entering your personal information https://www.policygenius.com/yourfinancialpharmacist

Episode Transcript

Tim Baker: What’s up, everybody? Welcome to Episode 045 of the Your Financial Pharmacist podcast. I am taking the host seat today. And I’m joined by Tim Church, who hasn’t been on for quite a bit. Today, we’re going to be talking all about disability insurance. Last week in Episode 044, Tim Ulbrich walked down the path for him and his family, talking life insurance and term life insurance, more specifically. So this week, to kind of continue on the insurance theme, we’re bringing on Tim Church, and we’re going to talk all about disability insurance, what that picture looks like for him, how to basically price disability insurance and what that looks like, and hopefully you walk away from this episode with a little bit more confidence in the disability insurance arena. So Tim Church, welcome back to the podcast.

Tim Church: Thanks, Tim. Great to be back on as always. I thought you guys did an awesome job last week talking about life insurance. And I think that and disability insurance are probably some of the least sexiest personal finance topics, maybe just a step above taxes, but obviously, I think it’s something that’s important.

Tim Baker: Yeah, it’s funny because like when I meet with clients, you know, one of the things — and we’ve talked about this in terms of how I price working with clients, it’s about income and net worth. So you know, what I tell clients is when I give them recommendations, I’m trying to figure out, OK, what’s the best way to help them grow and protect their income and grow and protect their net worth while keeping their goals in mind. And the life insurance and the disability insurance are all about that. And it’s definitely — I know you guys talk about in the “Seven Figure Pharmacist,” it’s definitely a defensive posture because you’re basically trying to protect what you have. So it is super important, and I think it’s one of the more overlooked things that pharmacists, at least in my experience, will have in place with their financial plan. So we’re going to get into disability insurance and kind of unpack that whole issue. But before we jump into that, why don’t you tell everyone what’s been going on with you and what you’ve been up to since the last podcast?

Tim Church: Well, I’ve just been kind of hanging out here down in Florida, getting some nice weather, starting to warm up. But other than that, I’ve got three words: Student loan course. So basically, I’ve been knee-deep, trying to get everything ready for our beta group that’s going to be starting in a week or two here. And really, it’s just been a labor love and really excited to see it all come together. Looking back when we first started out the outline, I think I underestimated and think all of us did, all the moving pieces that were going to be required to get it up and running and how many Saturday morning marathon sessions that you and I would have. But basically, you know, it’s been fun. And I think it’s interesting how every time you and I talk, we somehow keep adding more and more content. But CEO Tim Ulbrich is basically putting the hammer down and saying, we’ve got to get to the finish line, which I think is a good play.

Tim Baker: Yeah, and when we had our last T3 conference kind of in Baltimore, this was one of the big points that we were working on is working through the course, and it’s always great to have you and Tim in Baltimore and working through this stuff. I think when we did that way back when, I don’t know if it was March or February or when it was, but we thought we were pretty close, and then we looked at it some more, and we’re kind of at the point where we’re shaving the ice away from this perfect statue, this ice statue. So yeah, I think for me, I just need to sit down and get my videos finalized. I feel like they’ve been there waiting to be recorded. So I’m anxious to get that done, and I think that will be done this week. But we still have some spots left for the beta group, so if you still want to get in on that, it’s 50% off, so you can go to courses.yourfinancialpharmacist.com and enter code LOANRX. So go to courses.yourfinancialpharmacist.com and enter code LOANRX, and that’s for 50% off. And what we’re really trying to get at here is is this course delivering everything that we say it will? And basically, what we believe that this course will do is for one of the major pains for pharmacists, 89% of pharmacists that graduate pharmacy school will have loans is really to provide some type of clarity with their loans in terms of inventory, what they actually owe, who they owe, inventory their feelings about the debt, and then come to a strategy that basically fits their situation and what — there’s a lot of information and sometimes misinformation out there in terms of the student loans and the forgiveness programs out there, and then really how to optimize your situation and get everything you can, either out of forgiveness or even a nonforgiveness strategy. So Tim, do you have anything else to add on student loans before we jump into disability?

Tim Church: No, I think you covered it pretty well. I mean, just excited to get it off the ground. I think it’s going to provide a lot of value to people.

Tim Baker: Yeah. So do I. OK, so let’s get into this. So I think one of the things that we probably should talk about first — and I think this is one thing that we often talk about with financial planning in general is why should we have disability insurance? So Tim, for your particular situation, you know, you look at your financial picture. What are the big reasons why you think disability insurance is important?

Tim Church: Well, I think what it comes down to simply is could I survive if I suddenly was unable to work? And whether that’s because I got in an accident or because of an illness. And at currently, basically it’s not going to happen. My wife and I are dependent on me bringing in an income right now. And she works as well, but it would be very tough, especially with still paying off her student loans and just to be able to live the lifestyle that we currently have. So I think that’s really the biggest thing when I think about disability insurance.

Tim Baker: Yeah. And I think for a lot of people, one of the things that we mentioned in the lead-up here was that for a lot of pharmacists and really, young professionals, it’s one of the things that is often overlooked. And I think part of it is is that feeling of invincibility, part of it is it just doesn’t make the cut when we talk about all the things that we have competing for our income. But it is really imperative that pharmacists have it in place. And like we say time and time again, the average pharmacist will make $9 million over the course of their career. $6 million of that will flow through their bank accounts. And you know, our listeners, Tim, you and Andrea, you guys spent a lot of money to get this degree, which affords you the ability to earn more than kind of the average American. So I think it’s best to protect that. And outside of kind of the time factor with a lot of my clients, their second biggest asset is their ability to earn. So I think a proper policy in place, whether it’s between the employer-provided or a supplemental disability policy, which we’ll get into, I think it’s imperative for this part of the equation. And just to give you guys some context, you know, life insurance is typically — I don’t want to say it’s the sexy part of insurance because I don’t know if there is a sexy part of insurance — but life insurance, typically when people think of insurance, I think, you know, and buying policies, they think of that because it’s, oh, I have a $1 million policy or a $500,000 policy. It resonates more with people. But disability, you know, disability insurance I think is as important, if not more, in the sense that you know, according to the Social Security Administration, 25% of today’s 20-year-olds will become disabled. And I think it’s for a period of at least three months before age 65. And we know that a lot of people out there don’t have the prerequisite emergency fund or things that they can do to survive that three months or even beyond. So again, it’s important to have that policy in place.

Tim Church: And I find, Tim, is that a lot of my friends and colleagues, they seem to be very underinsured in this area. And when I say that, I mean they basically either don’t have a policy or something that’s very minimal, and I think it kind of goes back to that feeling that you know, you may be young and healthy or that something really bad would have to happen, but what’s interesting is I actually personally know some pharmacists who became disabled and couldn’t work for over a year. And a couple of those were really freak accidents where they experienced some head trauma and basically, they had cognitive deficits and they weren’t able to work because of it. And I know another pharmacist, she actually had really bad rheumatoid arthritis. And that really put her in and out of work, and sometimes she was only able to work part-time. But these are actually real cases that I know of where I don’t know their situation, but essentially, they would have needed disability insurance unless they had some significant wealth already accumulated.

Tim Baker: Yeah, and it’s crazy — and I shared this story last week about a colleague working with clients that were widowed or widowered — I don’t know if that’s a word — but basically, they had life insurance in place, and thank goodness that they did because they had three young kids. But you know, this usually hits home when you know someone or you have real life experience. And it’s really not a question of if, it’s when for people to come into contact that are going to go through this type of thing. So you always think that it’s going to happen to someone else, and I think there’s a bias out there, and I should know what that bias is, but you always think it’s going to happen to someone else until it happens to you.

Tim Church: Overconfidence.

Tim Baker: Yeah, and maybe it is overconfidence. So I think it’s definitely important to kind of hear that and just take — like again, a lot of our listeners, you guys have worked so hard to get to a point where you can earn that six-figure income. And you want to protect it for the sake of your lifestyle and for your family, you want to make sure that you’re protecting that. And it really doesn’t take much in terms of effort to kind of get the protection that you need. So hopefully, this episode brings a little bit more clarity to that. And I know you guys brought it up in “Seven Figure Pharmacist” quite a bit. I think it’s hopefully something that, you know, maybe after the third or fourth time of us talking about it, it empowers our listeners to get that insurance in place.

Tim Church: Yeah, and I’m always curious as to the reasons why people don’t. And I think we talked about just that feeling of invincibility, especially if you’re young. But I think the cost also sometimes deters people. When you look at life insurance and some of the other insurance coverages, we’ll get into this, but disability insurance is a little bit more expensive than some of those. And so when you look at just the cost itself, you’re looking at that and saying, ‘Wow. Can I really afford that much extra?’ But then you have to look on the flipside is really can you afford not to have it?

Tim Baker: Yeah, and it should just be baked into your monthly budget, in a sense. And one of the things of life is that, you know, back in the day, you know, your employer used to cover it just like they covered a lot of other things, and it’s not necessarily the case anymore. So again, it’s very important to kind of take control of the situation and get the type of policy that is going to work for you. So what do you think, Tim? Do you think we should kind of break down the types of policies?

Tim Church: Yeah, let’s unpack that. I mean, one of the things that I’ve seen just in my own research and things that we got ready for “Seven Figure” is that disability insurance policies can be very complex. There’s a lot of extra features, add-ons, things like that. And I know when I applied for coverage before, it was like buying a car. You have your base model, and then there’s like 20 upgrades, features, things you can add. So Tim, can you kind of break down the two basic types of disability insurance?

Tim Baker: Yes. So the two broad types of disability insurance are going to be what’s called short-term disability and long-term disability. And I would say not to get caught up in the semantics of what short-term and what long-term is. It’s kind of a moving target for every carrier, every company out there. Essentially, what you want is a policy that covers you in the event of your disability. And we’re going to talk through some of the different aspects of that. Typically, you want a longer term disability policy in place that will last a period of years, if not until basically retirement age. But there are other policies out there that are more kind of stop gaps that a short-term policy would fill in for. So those are the two broad ones are short-term disability and long-term disability.

Tim Church: And wouldn’t you say, Tim, that when you’re looking at kind of that benefit period or the time that you would have the disability insurance coverage, it really kind of comes down as how long would you actually need those benefits in terms of you know, could you accumulate enough wealth by the age of 50, 55 and maybe not need it all the way until retirement? So you could break it down, if you wanted to, in terms of where you would expect to be retired or when you would actually need that income support. Is that a good way to look at it?

Tim Baker: Yeah, I mean, I think what I often say is that I would recommend just like we would recommend an emergency fund or life insurance policies or whatever, I’m going to recommend basically what the textbook suggests. So typically, the textbook would say, ‘Get a long-term disability policy that would last until your Medicare age,’ which would be like 65 — I think it’s 65 — until retirement. So typically, that would be where we would start with a client. And then from there, you know, you might look at that policy like, ‘Gees, Tim, that’s like really expensive. I don’t think I’m prepared for that.’ And that’s kind of when we start looking at some of these other variables that we’ll get into or these key features that we’ll get into that we can slide around to see, OK, what is more in line with your budget. But typically, the textbook would say, ‘Have a policy until retirement age.’

Tim Church: Gotcha. And then when we talk about how much coverage you actually need, when you break that down, so how do you usually walk through clients to talk about the actual needs?

Tim Baker: Yeah, so typically, you’re going to want roughly around 60% of your gross income. So that is before taxes are taken out. And typically, it’s quoted or it’s priced based on monthly amount. So if you make $10,000 per month, you’re going to want something that’s going to cover you for around $6,000. And the reason that that is is you know — and it depends on who is actually buying the insurance, whether it’s you or your employer. It depends on if your employer buys it, then the benefit comes to you taxed. If you buy it, so you’re buying a policy with after-tax dollars, the benefit comes to you as tax-free. But 60% is typically the number that you’re going to want to look at. But again, it’s the same thing with the coverage period. You might get to that point and you say, ‘Wow. 60% until I’m retired is going to cost me this much.’ And that may be where you say, ‘Well, I can probably get by with 50% or 40%,’ and it’s basically a conversation that I have with clients. Obviously, I want to push them to protect as much of their income as they can, but at the end of the day, it is a cash flow concern.

Tim Church: Yeah, and it comes down to also too what kind of lifestyle would you want to have if you become disabled? And do you need that amount? And I guess that’s probably where you can talk with your clients about determining maybe some more specific needs, client-to-client and just kind of asking, do you want to maintain your current lifestyle? Would you be OK if it was reduced a little bit?

Tim Baker: Right. Exactly. And then that’s kind of where you know, the more of the human side comes into it is if a disability event were to happen, what do you see yourself doing and that type of thing. And how do you see yourself living.

Tim Church: Yeah. So we talked about coverage amounts. So the percentage of your income that you’re actually getting a policy for, so that’s going to have a big impact on the cost of the policy. And then also how long those benefits that you would actually receive. And then the next thing that comes into play a lot is the elimination period. So basically, what’s the waiting period between the time that you put a claim in for your disability and you actually receiving benefits. And sometimes, I think that’s where it can be interesting to talk about do you need a short-term and a long-term disability policy? Or could you just have the long-term disability policy? And I guess that really comes down to is whatever that elimination period is that you choose, is do you have a good emergency fund to cover you in that gap or that window?

Tim Baker: Right. So the elimination period or the waiting period or you could think of this as like a deductible that you pay in time before your benefit gets to you should match pretty closely to what your emergency fund is. So if your emergency fund reserves is for three months, 90 days, which I think is typically best practice, especially for a dual-income earner, that’s probably where your elimination period can come out. But again, you can toggle this in a way that you can get policies that have elimination periods after 30 days or you can wait a whole year, and that basically makes the period or the premium a lot cheaper if you wait a year. But then you’ve got to ask yourself, if I become disabled, can I wait a whole year to get my benefit? And for a lot of people, it’s no, but it depends, again, on a case-by-case basis. I would say best practice is probably look at 90-day, so a three-month waiting period once you submit your claim and then price the policies from there.

Tim Church: One of the other things that typically comes up on policies for disability insurance is own occupation or gainful occupation. So can you talk a little bit about that, Tim?

Tim Baker: The big definitions — so these are basically definitions of disability. So your policy is going to have a definition. And the big ones out there are own occupation, which is basically the inability to engage in one’s own occupation, so like a pharmacist. And that’s typically the most expensive because it’s basically the most limited in terms of your ability to receive that or the most inclusive for your ability to receive that benefit. And then there’s something that’s called any occupation, typically referring to is basically if your policy is any occupation or any occ, you might hear, or own occ. Any occ is the inability to engage in any occupation. So this is if you’re a pharmacist, Tim, if you have a policy that is any occupation and you become disabled, but you can’t necessarily be a pharmacist. So maybe you have some, like you said, cognitive disability, but you can still be a greeter at WalMart, as an example, then your claim for your disability insurance would be denied because they could say based on the definition of disability, you can still hold gainful employment, but you just can’t do what you’ve been trained to do. So any occupation is one that is more liberal in terms of your durability to say whether you’re disabled or not. And to me, I would say this would be one that’s definitely kind of a nonnegotiable. I would want clients to make sure that you have an own occupation because think of all the things that you could theoretically do for work. And for you to be denied that benefit would be a tragedy, I think.

Tim Church: Yeah, and it kind of goes back to what we talked about. I mean, how many years of school and training do we go through in order to be able to generate that income? And so of course, you’ll want to protect that and that ability to make that salary.

Tim Baker: Yeah, and some of the other definitions out there that you might see would be like modified any occupation, which would basically be inability to engage in any reasonable occupation that one might be suited by education, experience and training. So that’s maybe kind of an in-betweener. And then the other one you would see is social security definition of disability, which is probably the most stringent. And they basically define that as a mental or physical impairment that prevents the worker from engaging in any substantial gainful employment. The social security definition of disability is the most stringent. So if you have a policy that follows that guideline, you’re definitely going to want something outside of that policy to cover yourself.

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

Sponsor: As a pharmacist, you’re going to make millions of dollars over your working career, and you’ve worked hard to get where you are. Take a minute to answer this question: Would you be able to support yourself and your family if you were suddenly unable to work because of an accident or illness? Disability insurance provides you with money to cover your bills and expenses if you’re unable to work. Your employer may offer some coverage, but it may not be enough, and it may not follow you if you were to change jobs. That’s why it can be a good idea to have a private, long-term, disability insurance policy. We want to provide the YFP community with an easy, one-stop solution to help you get the coverage that you need. Therefore, we have partnered with PolicyGenius, America’s No. 1 independent, online insurance marketplace, so you can quickly get quotes from reputable companies rather than wasting time having to make phone calls and shop multiple websites online. You can get your estimate today by going to yourfinancialpharmacist.com/insurance. That’s yourfinancialpharmacist.com/insurance.

Tim Baker: Now back to the Your Financial Pharmacist podcast. So Tim Church, I know we’re talking lots about these different features. Why don’t we jump onto PolicyGenius — and actually, listeners, if you go to yourfinancialpharmacist.com/PolicyGenius, you can actually go through the process that I’m going to take Tim Church down. And just to kind of reiterate this, I talked about this with Tim Ulbrich in terms of the life insurance. You know, one of the reasons we like PolicyGenius is because when you get on there, you’re quickly seeing how clean their interface is. So a lot of these insurance companies that I worked with in the past, you know, their websites are difficult to navigate and just not great. And I guess I’m more of an Apple snob, so I like nice, clean interfaces. And they don’t disappoint in this regard. I think more importantly, you know, from being a fee-only guy, not really liking the commissions, their agents that you might interact with do not get paid a commission. They’re basically paid a salary, so not really incentivized you to put you in a policy that is going to be in your best interests and not yours. And then the other thing that I like is they’re more or less a broker. So they can go out to all of the best companies out there and price the insurance carriers and quote the insurance carriers from across, basically across the board. So you know, for these reasons — and I would say too is when I work with them for clients and I’m sure with our listeners, if you have a question — and the education centers there are great — but if you have a question about your policy or about the process, super eager to help and super responsive, even if you have existing policies, they’ll look at that and kind of give you some advice. So I’ve been nothing but impressed with them in terms of being a good partner for Script Financial and I know with Your Financial Pharmacist, I think they’ve taken care of some of our listeners out there, and we appreciate them and their place in the space of insurance. So Tim Church, are you ready to kind of hop on here and do this thing?

Tim Church: Yeah, let’s do this.

Tim Baker: OK. So again, you can go to yourfinancialpharmacist.com/PolicyGenius and basically, follow this. And Tim, the first page is going to basically take us to life insurance or disability insurance. So obviously, we’re going to go through disability insurance on this episode. So you are a male, what is your date of birth?

Tim Church: 08/14/1985

Tim Baker: You reside in the state of Florida.

Tim Church: The Sunshine State.

Tim Baker: Alright, so the next page is going to be talking about your occupation. So what’s your occupation, Tim? I forget.

Tim Church: Professional drug dealer.

Tim Baker: Alright, so pharmacist. You do work at least 30 hours this week in this occupation, which is unfortunate. How many years have you worked in this occupation?

Tim Church: So a little over seven.

Tim Baker: OK. And then highest level of education? So we have basically JD or MD or PhD.

Tim Church: We’ve got to get on them about that, about putting a PharmD selection, right?

Tim Baker: Yeah, I’ll write a strongly worded email. And then your individual income, so don’t income from a spouse or partner. So what’s that?

Tim Church: So base salary is about $125,000.

Tim Baker: OK, $125. And we’re going to assume no existing coverage. So let’s hit next here. OK. So basically, we’re going to be talking about selecting your monthly benefit. So the default here will default to 60%, which is basically the textbook recommendation. So if you pay the premium, which you will in this case, you’re going to get all of the benefits. So in your case, the recommended benefit or 60% is going to be $6,100 per month.

Tim Church: And that sounds pretty close to what actually my net take-home pay is. So that seems pretty reasonable or realistic of what I would need.

Tim Baker: Right. And that’s kind of the idea is to match that. Now, you know, listeners can’t see this, but on the page, basically it says for a 42-year-old male living in Florida, the monthly range, so this is kind of the first place where you’ll see kind of a quote, so that is $111-151. And the plan features, it says existing coverage of $0, benefit amount of $6,100, a waiting period of 90-days and the benefit period up to age 65. And then this is own occupation, residual disability coverage, which we’ll talk about, and then non-cancellable feature, which we’ll talk about. So this is kind of like the first page where you see more or less, it gives you an idea of where we’re going. So it asks the question, do you expect your income to increase significantly over the course of your career?

Tim Church: I hope so.

Tim Baker: So we’ll put yes. And the reason that we do this — and this is a good point maybe to discuss briefly about employer-provided disability insurance and then basically individually owned disability insurance, which is what we’re doing now. So if you were to answer yes to this question, basically they’ll run quotes with a future increase option, which allows you to increase your benefit amount when your income increases, regardless of any changes in your health status. So the example here is if Tim knows that “Seven Figure Pharmacist” is going to continue to sell, and you’re going to sell it to every pharmacy school out there, whatever the case is, and you’re making a lot of money, you want to make sure that your benefit matches kind of the income that you’re pulling in. So that option gives you the ability to buy more. Secondarily, if you have an employer-provided benefit, they’re going to pay you some type of benefit, which is going to be taxed because they pay the benefit of the premiums, but if you were to leave that job, and you go to another pharmacy job that doesn’t provide disability insurance, then the policy that we’re buying now will give you the option to basically buy more or a future increase option to kind of make up the gap. So basically, that supplemental policy that you would buy now becomes your main, your primary policy and will make up the gap in terms of what you need. So hopefully that makes sense to our listeners out there. So now we’re going to talk about the waiting period. So this is basically that time deductible. And this particular tool will default to 90 days. So policies have waiting period of anywhere from 60-365 days. So if it’s a 60-day waiting period, then that’s typically a higher premium because you’re getting your benefit quicker. If it’s 365 days, you’ll get your benefit a year out. And that’s typically makes the policy a lot more affordable. So Tim, what would you like in terms of your waiting period?

Tim Church: Given I have a pretty decent emergency fund, let’s go put that at 180 days.

Tim Baker: OK, so you’re going to move it out a little bit. OK, so then the benefit period, so basically this is how long the policy will pay you if you become disabled. So policies typically have benefit period of two, five, 10 or up to retirement age, which could be 65 or 67 for a lot of our listeners. Obviously, the longer the period, the higher the cost of the benefit. So what would be a good age for you, Tim?

Tim Church: So I think the default of 65, that’s a good place to start.

Tim Baker: OK, I agree. OK. So then this next page is basically wrapping it up. So it does include own occupation, so this is your occupation. It also asks you about a residual disability. So basically, these are riders or clauses in the disability, and what the residual disability asking you is basically saying, do you want to be paid for partial disabilities that could potentially cause loss of income but doesn’t necessarily prevent you from working completely. So typically, the default here is to say yes. And then the final question is do you want it to be non-cancellable, which basically means as long as you pay the premiums, the insurer can’t cancel the policy or change the premiums or change the benefits. So you basically lock into all aspects of your policy. So typically, you want that as a yes as well. So is that good, Tim?

Tim Church: Yeah, that sounds good. And I was wondering, Tim, if this is a good point to talk about that if you have coverage through your employer only, and let’s say you switch jobs and your new employer doesn’t cover that and you have to get your own policy, you’re probably going to also have a health evaluation. And if you’re not as healthy as you were when you had the previous policy, this could really have a huge impact on cost and your ability to even afford a policy like that. And so even like life insurance, this may be a point where it’s good to even have something outside of your employer, just so you can avoid having the reevaluation.

Tim Baker: Yeah, it’s a great point. So that particular rider, I think if you know that potentially could happen to you or you suspect that could happen to you, I think it’s good to have that in there, so that’s another great point. And actually, Tim, the next part of this just basically asks you some basic health details. So unfortunately for these policies, pre-existing conditions are not covered. So if you have something that could potentially disqualify you, you know, as an example, if you have arthritis and then you submit a claim for arthritis, that won’t be paid by the insurer. So that’s something to be aware of. So the next question, Tim, is going to basically ask you about some conditions like asthma and sleep apnea. I know you’re a healthy guy, so instead of kind of listing all these out, we’ll just skip through those. Is that cool?

Tim Church: Sounds good.

Tim Baker: OK. So now we basically get to the end here, and your quote for long-term disability coverage is going to basically be $115 and $155. You’ll receive a benefit of $6,100 a month up to age 65 after a waiting period of 180 days. And then, and this page, you basically can toggle your all those things that I just listed out, so if you say, ‘Hey, I can get by with $5,000,’ or ‘I want my waiting period to be 90 days,’ it’ll adjust that period. But from there, you basically will go out and put in kind of your name and your email and some contact information to go get actual rates from, you know, insurance carriers like MassMutual or Guardian or some of the other ones that are out there. The tool is great in terms of giving you an idea of where you’re at to get rate proposals and actually receive those and then move forward on your policy. So Tim, does that give you a sense of kind of the process forward for disability insurance?

Tim Church: It sure does. And I think one of the things to mention here, Tim, is that if you use PolicyGenius to get life insurance, you can actually get quotes from individual companies. But for disability insurance, it’s a little bit different because you’re going to get a range of what it could cost you. And basically, PolicyGenius looks and they partner with some of these companies, and they’re trying to find you the best deal. And that’s something that one of their agents will actually provide to you.

Tim Baker: Yeah, and basically, they explain that on the website of why is it a range instead of an actual price. And they’re going to look at all the different riders and things like residual disability and own occupation, and the proposals will try to get that back to you in terms of what the policy offers. So it’s a good point. You know, one thing that I do want to circle back on before closing up here for the day — one thing I do want to circle back on is you know, a lot of pharmacists out there do have disability policies, and you know, how does this all play into, you know, buying your own? So I would say in general, you typically, if you do have a long-term and a short-term care disability policy through your employer, I view that as a benefit. OK, so Tim Church, your quote comes out to between $115-155. Is that more or less what you expected when we started going through this process?

Tim Church: Yeah, I mean, that’s essentially pretty close to what I’m actually paying for my policy now. That gets me almost the exact same benefits, up to 60% of my income. So that’s pretty — at first, I will say, after I’ve gone through the process, it’s not very shocking. But initially, it was because it’s significantly more than life insurance that I pay for and some of my other insurances. So it’s definitely a lot more expensive than some of the other things out there.

Tim Baker: So I think another for listeners to be aware of is a lot of your employers will provide disability insurance. And typically, short-term disability insurance is you know, it’s kind of icing on the cake. Typically, we don’t advise clients to go out and buy a short-term disability policy. We’ll basically say, you know, to make sure you have a good emergency fund. From a long-term disability policy, if you do have long-term disability through your employer, know that the benefit is probably not going to be enough to kind of cover your needs. You know, also understand that it probably makes sense to buy a supplemental policy to your employer policy, so a supplemental insurance policy that’ll be maybe a reduced benefit or basically to give you some additional coverage in case you do leave your job or you want to have that future purchase option in there. But again, the reason that you get a supplemental policy is the benefit might be too small, the benefit period may be too short, or it’s not the right definition — so like any occupation versus own occupation, and you want to make sure you have own occupation in place. And again, you could lose your disability insurance if you switch jobs. So if you have the disability insurance in place that has that future options, that supplemental policy that you bought to kind of cover down on some of those shortages would then become your primary insurance policy, disability policy. So it makes sense to have that in place. So Tim Church, I think we explored disability fairly in-depth. I’m glad we were able to go through the PolicyGenius quote process to kind of give an idea of what that looks like for you. So thank for coming on the podcast, and hopefully our listeners get something out of this and at least get the wheels turning in terms of what they need from, you know, their ability to protect their income.

Tim Church: Definitely. Thanks, Tim. I think it’s so important and just, like I said, like we’ve been talking about, that you worked so hard to get to where you are and also you’ve got to think about yourself and your family and who’s dependent on that income just like life insurance. So at the end of the day, it can really make you feel pretty good to have that protection in place.

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YFP 044: How to Determine Your Life Insurance Needs


 

On Episode 44 of the Your Financial Pharmacist Podcast, Certified Financial Planner and YFP team member Tim Baker interviews YFP Founder Tim Ulbrich to evaluate his life insurance needs and whether or not his current coverage is adequate. To learn more about whether or not you need life insurance, the pros/cons of different types of life insurance policies, how to determine how much coverage you need and where to go to get a quote from a reputable independent broker, click here.

PolicyGenius

Several reputable companies offer life insurance but it can take a lot of time and energy to get multiple quotes. YFP has partnered with Policygenius, an online independent broker to help you quickly shop multiple companies for the coverage that’s right for you. They have a very user-friendly interface and their team will help you through the entire process from application to signing a policy. You can even get an estimate without entering your personal information here.

Mentioned on the Show

  1. YFP Life Insurance Resource Page
  2. PolicyGenius
  3. YFP Episode 010 – Is Whole Life Insurance a Good Investment Strategy for College Savings?
  4. YFP Episode 032 – Finding Your Why (Part 1) – 3 Life Planning Questions
  5. YFP Episode 033 – Finding Your Why (Part 2) – The Path to Success

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 044 of the Your Financial Pharmacist podcast, excited to be alongside Tim Baker where he’s going to be interviewing me to determine my life insurance needs. And if you’re thinking, what do I need? What are my life insurance needs? What should I be looking at? You can head over to yourfinancialpharmacist.com/life-insurance. We’ve got a whole educational page built out that we’re going to draw from that information and this podcast, but no need to be taking notes. You can head on over to that page and get all the information that you need to determine your own life insurance needs. Just as a preview to next week, Tim Baker’s going to be interviewing Tim Church in a similar format regarding disability insurance. So this week, we’re going to cover life insurance. Next week, we’re going to cover disability insurance. So I’m excited to do this two-part episode around insurance needs. So Tim Baker, are we ready to do this?

Tim Baker: Let’s do it.

Tim Ulbrich: So I’m actually excited. This is actually on the punch list for Jess and I to do, and I think it’s well known right now by the listenership that you are the financial planner for Jess and I, and we’re working down our list of things. In Episodes 032 and 033, you interviewed Jess and I all about finding our why, and we did a live recording of what you normally would do with a client. And we’re going to do that same thing here. One of the questions I asked you at the very beginning of us working together is, hey, I’m not sure I’ve got enough life insurance coverage. I really didn’t make this decision intentionally, and I need your help and guidance to help me figure out what we might need in addition to the coverage. So we’re going to a sneak peek live conversation, and whatever I learn here, we’re actually going to be taking back and implementing as part of my life insurance plan.


Tim Baker: Yeah, and I would say Tim, you’re probably ahead of the curve when it comes to most because when I bring up life insurance to clients, it’s one of those things where it’s like, eh, I don’t really want it. And it’s one of those things that you don’t really like to talk about your premature death or disability in terms of what we’re going to go through next week with Tim Church. But you know, it’s kind of in along the lines of estate planning. We’ve talked about that a little bit when we talked about legacy folder and having proper wills and power of attorneys. It’s just one of those things that’s just not that sexy compared to maybe investment and some of the other things. So you know, I think kudos to you in terms of having some coverage in place. And for a lot of people, it’s kind of on the back burner. And it really shouldn’t be, and I’ll preface this with — not to be doom and gloom, but I have a planner that I work with in my study group who recently lost a client. She was 38, had breast cancer, three kids, so fortunately for me, that hasn’t really happened to any of my clients, but it’s not really a question of if, it’s a question of when. It’s just one of those things, and I think me working with clients, it’s important to have a lot of these policies and documents in place because you don’t know what will happen. And the thing that you think will happen to someone else could very well happen to you. And not to be Debbie Downer, but I just think it’s important to get this on the radar of a lot of people to at least start to think about it and get that protection in place.

Tim Ulbrich: Yeah, absolutely. And we’re going to do a sneak peek into the Ulbrich household here, and I’m going to try to be as honest and vulnerable as possible. And I’ll share here in a little bit that you know, there was a period where I didn’t have coverage, and I needed it. So there’s really three things we want the listeners to walk away with today is to answer these three questions. One, do you need life insurance? We’ll talk about who does and who does not need it. Number two, you know, how much coverage do you need? And how do you determine that? And then ultimately, where can you go to begin purchasing a policy if needed from a reputable company that’s going to get you what you need? So ultimately, the question that we have here in front us is knowing I have some life insurance policy and protection in place, do I need additional coverage? And ultimately, how do we get into that number? But Tim Baker, before we do that, and before we jump in there, let’s just set the stage for what we’re talking about in terms of life insurance and knowing that some may be familiar with the different types of life insurance, what’s out there and ultimately, we’re going to be operating under the assumption of shopping for term life insurance. But just talk us through briefly the different types of life insurance that will set the stage.

Tim Baker: Yeah, so typically, the two types of — so just to talk about I guess life insurance as a whole. You typically have two broad types. You have what’s called term, which covers you for a period of time or a term, usually 10, 20, 30, 35 years. And it doesn’t cover your whole life, which is the comparison or the other type of policy that’s out there is the whole life policy. So the whole life policy basically is in force throughout your entire life, and it’s more of a robust type of insurance. So the term policy is usually the simplest and most affordable, and it’s probably best for probably 80-90% of people out there. It’s a straightforward, easy to understand, and it’s basically stripped down so, you know, it’s pure insurance. So there’s no savings component or maintenance fees or anything like that. And you essentially pay a monthly or annual premium, so that’s basically the cost to keep the policy in force over the course of that 10-year or that 30-year term or whatever that may be. And then if you die during that term, the person that you name as beneficiary will receive that death benefit. So if I have a 10-year term that covers me ‘til 2028, and I die, then the person that I name as beneficiary will get that million dollars or that half a million dollars. And then at the end of the term, the policy expires. So basically, nothing happens. The 10-year goes away, and in 2029, I’m not covered. And then to kind of compare that with the whole life policy is that you basically pay that premium, and part of that premium is paid for premium pays for the policy, the life insurance part of it, and then the other part of it goes into cash value, which is kind of a savings component. So it’s kind of a mix between an investment or a savings type vehicle and then insurance itself. It’s a little bit different, it’s a little bit more complicated, a little bit more sophisticated of a product. And I think for the majority of our listeners, Tim and I included, the term type of policy is where you’re going to want to be.

Tim Ulbrich: Yeah, and we encourage you, head on back to Episode 010, which was the first Ask Tim & Tim question that we did around whole life insurance. And the question was actually around whether or not it’s a good investment strategy for college savings, but we use that episode to really break down the difference between term and whole life. And as Tim mentioned, and I would agree, for most of our listeners, we think term is the play. And for the whole life lovers that are out there, again, we said most, not all, so there’s some exceptions to that rule. But knowing our audience, a lot of people are in student loan debt, a lot of people have competing priorities, a lot of people may or may not actually be taking advantage of the other investment vehicles that they have in front of them and retirement plans and so forth, so we think for most listening in terms of playing, we’re going to use that as the assumption throughout the rest of the episode when we talk about my personal situation, what are some of the needs that you can ultimately use that as an example to compare and think about what your life insurance needs should be. So Tim Baker, I’m in the client seat, and we’re trying to sit down and figure out exactly how much life insurance policy I may need. So what do you want to know to get started?

 

Tim Baker: Yeah, so typically what I do in this scenario, just kind of to back up a little bit is clients will get an insurance/benefits presentation. So it goes through, and it kind of educates what the purpose of insurance is in general, and then kind of breaks down the differences between life insurance, disability, health, homeowners, renters, liability, auto, so we kind of do a nice broad picture of all the different types of insurance that you need. And typically, the big one, most of the attention will go towards the life insurance and then the disability insurance. Health insurance is a big one, usually in the fall with open enrollment, but that’s typically where we’ll kind of begin in terms of assessing current policies and then basically filling in the gaps with some additional individually owned policy, which is what we’re going to do today. So typically, Tim, what I would do with you is after going through the kind of the presentation, based on your current situation with life insurance, this is where you’re at. And this is probably where you need to be. And we kind of will sit down and talk through that calculation. So typically what I would do is I would just kind of reaffirm income and current protection. So I would say for you, Tim, your current income right now is $135, correct?

Tim Ulbrich: Yes, thereabouts. Yep.

Tim Baker: And then your current policy that you individually own, that you purchased, is about — the death benefit is $1 million, correct?

Tim Ulbrich: Yeah, so $1 million death, $1 million, 20-year term policy. I purchased that back in I want to say 2014. I should know that off the top of my head, but I don’t. The reason that I remember that date, actually, is because there was a point in time where Jess was at home, not working, and I know for sure we had my oldest, Sam. We may have also had my middle, Everett, and we had no term life insurance policy in place. So you know, I guess looking back at that now, that seems pretty high-risk. And one of the things I think we want the listeners to think about is you know, do I need a life insurance policy in place? And usually the two things I’m thinking about are does somebody depend upon your income? And might you have any student loans that would not be forgiven in the event of your death?

Tim Baker: Right.

Tim Ulbrich: And thankfully, that one we did not because they were all federal loans that would have been covered, but the answer to that first question was yes, absolutely. And I had no protection in place, essentially meaning if I would have passed away in that time period, you know, that would have been obviously a significant financial hardship on Jess, either forcing her back to work, we didn’t have a great emergency fund, so I think at that point, using this just as a learning moment for the listeners really to ask themselves those questions. And as we’ll dive in here in a minute, the cost of that coverage is not very expensive for what it ultimately provides for us. So to answer your question, yeah, million dollar policy, 20-year term, and we’re about 3-4 years into that term.

Tim Baker: OK. And then you are currently covered through NeoMed. What is it, 2x your base up to $100,000?

Tim Ulbrich: Yeah, so we have employer-sponsored coverage here that’s 2x salary, up to a max of $100,000. Yes.

Tim Baker: OK. So essentially, basically what we’ve gathered so far is that if you were to die today, you would have a policy or a benefit that would go to Jess of $1.1 million. So essentially, I think what we would say is we kind of set that to the side and put that number in the parking lot, and then kind of do a deeper dive into what your overall number would be. But I would say just as kind of an aside, you know, a lot of people will look at what is provided by their employer. It’s typically 1 or 2x, and you can buy — I’ve seen it where you can buy up to $1 million in coverage. But I would say, you know, as a general rule of thumb, to look at these employer-sponsored programs, these group life insurance programs, as really a perk and not necessarily a robust life insurance plan. So typically, Tim, your NeoMed policy isn’t portable. So if you ever were to leave NEOMED, you can’t take that $100,000 with you. The stats show that the average employee will leave their job within five years. So if you were to leave, if we were to assume that you’re five years older, you’re looking for additional coverage outside of your group policy, so you’re going to pay a little bit more money. Important things to kind of be aware of when you’re factoring your employer policy into your overall life insurance calculation. So from here, Tim, I would basically kind of go through and say, ‘Hey, these are the main ways that we can kind of come to your insurance calculation.’ So it can be as simple as the general rule of thumb is 10-12x your income. So in your case, if you’re making $135, that tells me that you should have a policy between $1.35 million and $1.62 million for using 12x income. So that typically is a very fast, easy and simple way. And typically, that’s pretty close to what I see with a lot of clients. Now with your case, with Jess being home full-time, the exercise of actually going through and calculating this either using a human life value method or a financial needs analysis method, which is two different methods that I use with clients, it’s probably worth doing. So why don’t we go through and I’ll ask you a few questions about the financial needs analysis and see if we can basically come to a number here and see where you land and see what your gap is. Sound fair?

Tim Ulbrich: Yeah, that’s actually good because I don’t think I shared this, but when I bought that policy three or four years ago, I literally put my finger up in the wind and said, ‘$1 million.’ I knew the general rule of thumb of 10-12x, I’ve heard 8-12x whatever, but I really had no rhyme or reason. And I didn’t even have much thought behind, well, is it 20-year? Is it 30-year? And I think that was why ultimately, I posed the question for Jess and I to you to say, ‘OK, here we are now, three kids, different life situation. Is there enough coverage here or not?’ So yeah, let’s walk through that.

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

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Tim Baker: Now back to the Your Financial Pharmacist podcast. And I would say to back up, one of the questions like do you need life insurance? Typically, the question is, does someone other than yourself depend on your income? Do you have dependents? That type of question is, yes, absolutely. The other one you said is, are there any debts that won’t be forgiven in the event of your death? So for a lot of people, it’s going to be your mortgage and then in some situations, if you do a private student loan refinance — a lot of the pharmacists out there that are going through this — if you’re not forgiven upon death and disability, then having disability and life insurance, the covered amount on that is going to be hugely, hugely important. So Tim, basically the financial needs analysis method — to nerd out a little bit — basically what this does is it examines all of your recurring expenses to dependent survivors and basically any unusual expenses that may result from your death. So things to consider would be marital status, role of spouses meaning who is basically working, who isn’t, the size of your family, and then basically your dependents’ or your spouse’s willingness and ability to work after you would die prematurely. So in this case, basically I look at mainly six variables here. So the first one being final expense. So I’ve seen a lot of different numbers out there in terms of if you were to die, what it would cost for someone to be buried, whether it’s $10,000, $25, $35, $50,000. So Tim, do you have an idea of what it would take in terms of funeral costs and those types of things?

Tim Ulbrich: I don’t. And you know, I think this is a good point of discussion. And as we are going to revisit some of the end-of-life stuff, you know, Jess and I have talked about means of being buried versus cremation, etc. I guess the question for me is what would it cost to be cremated and ashes spread over the Buffalo Bills stadium — no, I’m just kidding. But no, to answer your question, we haven’t. Is there a general ballpark that you use to…

Tim Baker: Yeah, I mean, Tim, the ballpark that I typically use is about $25,000. I mean, obviously, you can go a lot cheaper than that or a lot more expensive. But typically, if I look at clients and I ask the question, most of them look at me like I have three heads because it’s not something that we think about unless they maybe had a parent that died recently. So I typically would just pencil in $25,000 into that basically that space.

Tim Ulbrich: Let’s do that. Yeah.

Tim Baker: Now the second one is basically a readjustment period. So typically, the rule of thumb is a two-year readjustment period, which would be basically for Jess to basically say, ‘OK. What the heck just happened? How can I basically find a little bit of continuity for the boys and just figure things out?’ And that’s typically 1.5x salary. So this is typically what we’re going to do here is have a conversation of what is your wish, what is your thought process if you were to die, would this be something that Jess would go back into the workforce? Or would you want her to stay home? Or what does that look like?

Tim Ulbrich: Yeah, we actually had this discussion, which makes for a really somber Friday night at home. But yeah, we’ve talked through this. So she’s staying at home with the boys right now, we’re doing homeschooling with our three boys, and we’d want to continue that for the foreseeable future. So I think our thought would be to establish this coverage need with the assumption that she would not go back to work. And ideally, really, be able to do it in a way that she would never have to. But certainly, we could look at the numbers and readjust that. So would that change, then, that time period? So you mentioned a two-year adjustment. Is that under the assumption that somebody is going to go back to work after a certain time period?

Tim Baker: Yeah, I think so. I mean, that’s typically what it was for. And sometimes, it might be for additional training, it might just be trying to figure out daycare or other childcare needs. But it’s basically a buffer for life to kind of resume some type of normalcy.

Tim Ulbrich: OK.

Tim Baker: So if we assume just for the practical exercise of this that 1.5x salary, we’ll call it $202,500, we’ll pencil that in because at the end here, we’re going to talk about kind of a lifetime income and what that would look like for Jess. The second part here, the third number here, is basically dependency incomes. So what are the household and childcare needs? So for this, if Jess is not going back to work, then this would really be $0 or close to $0 unless there would be things like babysitter or you know, maybe — I know she’s doing homeschool, maybe the kind of like “after-school” type needs where summer camps and that type of thing. So again, there’s a little bit of play here in terms of what you actually should put here and plan for. So if you were to look at this number in terms of the dependency period of income, knowing that Sam is 6, Everett is 5, and Levi is 3?

Tim Ulbrich: He’s 3, yep. He just turned 3.

Tim Baker: Knowing that where they’re at in terms of their schooling and all that, what would you assume is a good number for household and childcare needs?

Tim Ulbrich: So let me talk this out loud because I’m not sure I know off the top of my head. My current thought would be basically, as you mentioned, childcare needs would be I would assume $0 because she would be at home. Obviously, there could be some buffer there, but then that presents an income need, so replacing my current income, obviously. So what we know to be true is about of the income, about $5,000 of that would be true expenses per month. And my thought would be is that income would run up until the point that she could draw from retirement savings, which would be 59.5. So I don’t know if I’m answering your question, but that’s kind of the way that I’ve thought about it is that she would basically need that income with the assumption of no childcare expenses, but income for day-to-day expenses outside of childcare all the way up until the point of when retirement funds could be drawn.

Tim Baker: Yeah, absolutely. So it’s basically we’re trying to figure out how to slice it. So obviously, the big questions here are going to be, what is the household and childcare needs with Jess basically not working? And then what is the lifetime income pre-retirement? And we could also look at it post-retirement. If we assume for dependency period of income with the boys with Jess being home, I’m going to just do round numbers here in terms of what you may need. So I’m going to put $50,000 just over the course of the boys being home until they’re 18. Another, an easier number here — and then we’ll shift back to the lifetime income — is what is your outstanding mortgage liability?
Tim Ulbrich: Yeah, so our outstanding mortgage is $140.

Tim Baker: OK. And then, I know you and Jess are very interested in making sure that the boys have funds set aside for education, basically an education fund. Would that be something that you would want to bake into the retirement — or not the retirement, the insurance calculation?

Tim Ulbrich: Yeah, we’re kind of earmarking — actually, another thing I think maybe we should do an episode on that too once we get to that point — we’ve estimated at currently our goal is to shoot for about $100,000 per kid, so $300,000 total for college.

Tim Baker: And then really the big one here is looking at your lifetime income and basically trying to replace that. So if we assume very roughly that you’re going to be working for another 30 years, and then we multiply that by 5, and again, this is not assuming inflation or anything like that, that’s basically $4 million. 30 years times $135,000 is $4 million. So the idea here is basically to provide a lifetime income for both pre-retirement and retirement and try to figure out what that best number is best suited at.

Tim Ulbrich: Now let me ask you a question on that real quick. So I’m thinking that you know, knowing the life insurance benefit would be tax-free — so if I had a $2 million policy, for example, and I were to die, Jess would get $2 million tax-free versus obviously, my current income is taxable. So how you do reconcile those differences? Do you look at them as a wash knowing that you’re not accounting for inflation? Or how do you…

Tim Baker: I think typically, what I would do is I would take that number and just basically do a time-value-money calculation. So basically, say, ‘OK. If we were to get $1 million and presently and invest that over a period of time, would that provide her the $135,000 per year that she would need in recourse?’ So basically at the end of that 30-year period, that amount of the insurance calculation would be basically exhausted. So for simplicity’s sake, Tim, I’m just going to put $1 million in there.

Tim Ulbrich: So just to talk through that a little bit more, I think if I’m understanding you correctly, you’re basically saying that the listeners need to account for that that $1 million, a portion of it you would invest because you’re not going to spend it right away? And that some of that would be growing over the term.

Tim Baker: Exactly. Exactly. So that basically makes up the gap between the $1 million and the $4 million. And obviously, listeners are probably thinking, this is really, really rough math. And it is. So typically, when we break this down, we’re going to go through each of these line items and kind of make sure we have a clear, not just math, a clear number of what this looks like. So when we basically account for, you know, a $25,000 final expense, $202,500 in a two-year readjustment period, which is debatable if we need that depending on lifetime income, if we also say another $50,000 for dependency — so this would be for household and childcare needs, so I’m thinking like summer camps and things like that, babysitting, outside mortgage liability —

Tim Ulbrich: Is that per year, or one time were you thinking with that?

Tim Baker: I’m just doing a one-time lump sum.

Tim Ulbrich: Yep. Got it. Ok.

Tim Baker: So obviously, if you have a spouse that is working more, that number would be close, probably closer to the $1 million, and the lifetime income would be probably a little bit less.

Tim Ulbrich: So we’re switching that here.

Tim Baker: Right. And then you have the outstanding mortgage liability of $140,000, the education fund at $300,000 and then lifetime income, we’re saying approximately $1 million. That puts your financial needs analysis amount at $1.7 million, essentially, which is pretty close because I typically will tell pharmacists that they need probably right around that $1.5 to $2 million on the high end of things. So you’re right in there. Now, if we can do it really quickly, this is a lot faster of an analysis is basically the human life value. So basically, it takes your annual earnings, it discounts your own consumption and taxes and things like that. So if we look at your annual earnings at $135,000, do you know your effective tax rate, Tim? I know we just filed taxes. Is it like 20-25%?

Tim Ulbrich: So no, when it’s all said and done, it’s at 15.

Tim Baker: That’s really good.

Tim Ulbrich: Yeah, going down to 10 next year, by the way. I’m excited about that.

Tim Baker: Yeah. So your annual taxes are $20,250. Personal consumption rate, I’m going to estimate is basically this is — we’re going to assume that the cost of your monthly expenses are going to go down 10%, basically, essentially if you aren’t there. So that discounts it to another $11,475. So your Family Share of Earning, it’s called the FSE is $103,275. So if we assume that you’re going to work until 65, what’s your current age?

Tim Ulbrich: 34.

Tim Baker: So that means you have a work life expectancy of 31 years. If we assume a 3% increase in expectation salary, that basically means that you have a future value need of $5.1 million. If we discount that back to present value, and we assume an inflation rate of 3%, that basically says that you need a policy of $2 million.

Tim Ulbrich: So those are all pretty close. I mean, you did the general rule of thumb, that was $1.35-$1.6ish, then we got close to $1.7 in the second example where we went through the individual expenses. And then you got up to $2, so somewhere between $1.5 and $2 approximately.

Tim Baker: Yeah. And obviously, I don’t want — I really don’t want listeners to kind of get into the weeds, and it’s hard to kind of pick this over radio or over just audio. But the first analysis, you can really slice it thin and probably in your case, it’s worth going through that, but essentially, if you’re looking at, ‘Hey, I need insurance. And I’m not working with me, Tim Baker or a financial advisor,’ just say, ‘I make $125,000. Multiple that by we’ll say 10. Boom, $1.25 million.’ And then call it a day. So I don’t want people to get overly paralysis by analysis. Just keep it simple and then if we have to revisit or if you go back to it, you can always buy another half a million dollar policy or whatever that is. But I would say do what you did, and put your thumb in the air and say, ‘OK, I probably need about $1 million.’ And then we can always — what we’re going to do probably in the next stage here is go and use a company like PolicyGenius and start quoting what your gap is. So if we assume, Tim, that you need another $900,000, if we assume $1.1, then we’ll go to PolicyGenius and basically get a quote and fill the gap of where you’re lacking in terms of your life insurance.

Tim Ulbrich: Yeah, I really agree with your thought process because I think it’s so easy — and I almost felt, even just some of that paralysis of, you know, you kind of open up, you do a Google search, you start getting policies, and I was trying to keep it pretty simple, and I started a 20-year, $1 million policy. And even that can feel just overwhelming of where do I start? Am I getting ripped off? Am I not? What’s a good policy? And I think that paralysis by analysis is real. So if you’re listening, and you’ve determined, yes, somebody depends upon my income or we need to have a debt that’s taken care of in the event of my death, I would agree. Stick your hand in the water, get started, and then I think there is some value, depending on how detailed you want to get, to really going down and answering the question, What am I actually trying to do with this policy in the event of my death? And I know for Jess and I, I think there’s some peace of mind to know that you and I and with her are going to go back and actually dig into each one of these categories and come up with a final number so that we know in the event of my death, here’s exactly what we’re planning to do with that money. And I think that goes back to maybe even just a little bit of what’s your financial personality? And how much of this detail do you need or not need or does a spouse need or not need? To know whether or not you really need to get in the weeds of this. So Tim, if we determine — again, we’ll go back with specifics obviously with Jess and I — but let’s assume that we need another $900,000. Talk me through, then, the strategy of getting a quote, finding a policy. And you mentioned PolicyGenius, which is a broker, an independent broker that we really like. And the reason I’m curious about that is because the mistake I made back in buying that initial policy is I started doing a Google search, and I started entering all my information, and sure enough, within 24 hours, I’m getting all these phone calls, and I’m not sure about what’s good, what’s not good. What is the advantage of an independent broker of a company like a PolicyGenius?

Tim Baker: Yeah, so I like PolicyGenius because they kind of understand the fee-only model, for one thing. So back before I started Script Financial, I could actually sell life and health insurance, believe it or not. So I could go through the same exercise that we just went through, Tim, and say, ‘OK, we need $900,000. Let me go out and get a quote for you and basically help you write the policy,’ and then I would get a commission on basically on that policy. And obviously, term life insurance, he pays you one level of commission. And whole life pays you a little bit better. So the life insurance agents out there are incentivized to put you in a whole life policy, which is one of the problems. But essentially, what PolicyGenius does is that their agents basically work on salary, so the commissions that the policy yields goes to PolicyGenius, the entity and not necessarily the people that you are talking to. So I like that because they’re not incentivized really individually to put you in a policy that is not in your best interest. I also like it because the website is really clean and easy to use and basically because they can go out as a broker, they can go out into the market and find the best policies and the best rates instead of just using one carrier where you’re not going to get a whole lot of choice and a whole lot of basically comparison to other what’s out there. You can go to yourfinancialpharmacist.com/insurance and it’ll direct you right to PolicyGenius. And within a few minutes, you can go and generate quotes that won’t trigger a lot of those emails, Tim, that you received and kind of gives you an idea of where your quote’s going to come in at. So just kind of to give you a general rule of thumb, the average — for a 30-year-old that’s purchasing a $500,000 term policy, on average, they’re going to pay about $30 a month. So that’s pretty affordable, compared to what we spend our money on. So you know, if you’re looking at that $1.5 million policy, you know, that’s under $100 bucks that you’re going to be covered for. So just kind of give you a litmus test of where you’re at. Now, if you are a whole life believer, you’re going to pay probably 4x that.

Tim Ulbrich: If not more.

Tim Baker: If not more for that whole life policy. And that’s not to say that the whole life policy is bad, but again, I think it is kind of a forced savings, and that savings can be pretty conservative. And it allows — what it sometimes does is it will drive down the amount of insurance. So Tim, if I quote you a $900,000 whole life policy, you might look at that premium that you have to pay, and say, ‘Man, maybe I only get $250,000 policy,’ and that really is deficient in terms of what you actually need. So like I said, we like PolicyGenius. I work with them for clients because they’re super knowledgeable, so I have some clients that will come in the door with a lot of crappy policies that we need to examine and potentially replace. So they’re super helpful and very knowledgeable of the space and they take care of my clients, and I know they’ll take care of YFP listeners as well.

Tim Ulbrich: So again, that’s yourfinancialpharmacist.com/insurance. That will take you right to the PolicyGenius page that we’ve partnered with. So just as a point of reference, you mentioned some dollars there. When I bought the 20-year, $1 million term policy, it’s $38 a month. So essentially, I’m paying $38 a month for 20 years to get that protection. That’s really the definition of the 20-year term policy, which brings up the question — and one piece I want to wrap up on here is talk us through, just for a minute, the different variables that go into play when it comes to the price of that policy. So obviously, we’ve alluded to one in terms of age. And you mentioned earlier that as somebody gets older, obviously the likelihood of death becomes greater, so the policy becomes more expensive. What other factors go into play in terms of policies so people can think about where they might land in terms of their cost of coverage?

Tim Baker: Yeah, so definitely age and health history. So your sex, usually I think females are a little bit more expensive because they’ll live longer. Smoking status, so if you use tobacco or smokeless tobacco. Your driving record can come into play, including any suspensions and things like that. Unfortunately, something that you can’t control is family history. So if you have a case of uncles or parents dying prematurely, that’s going to affect your policy. So conditions like heart disease and diabetes. And this is really one of the advantages of the employer term policy, since it’s a group term, it’s usually a guaranteed policy so that you don’t have to go through the medical exam. And these individual policies that you will purchase yourself so you have to go through this. So obviously your age, your health history, the family history, your coverage amount — obviously, the more coverage and the more term will have a big impact on your overall premium. And then also lifestyle. So if you have risky hobbies, they’ll ask you if you bungee jump or scuba dive or things like that could potentially increase your premium a little bit. And you want to be open and forthright about how you live your life. It’ll affect the premium some, but you know, not terribly. And you know, insurance companies will cut you a break if you decide the entire annual premium all at once. They’ll be a little bit more expensive if you spread it out over the course of the year or so. I have some clients that they basically have a sinking fund that’s just covered for their insurance. So they put in their $100 a month or whatever, and then they pay out the $1,200 I think is what their current policies are and then they rinse and repeat that. And that saves them some money in the long run. So yeah, that’s basically some of the factors that they’ll look at when they’re quoting out some of your premiums and you know, you should be aware of those factors.

Tim Ulbrich: Yeah, I think many of the listeners are going to be hearing this and saying, ‘OK, I know I need a policy. I need to take action.’ And that’s, I think, one of our main goals if you’ve been following us at YFP for awhile is to help people build a strong financial foundation, whether it’s emergency funds, insurance protection, debt repayment plans, making sure you’re building a solid base. And obviously, this topic and this area is a good one in making sure you’re educated as you’re out there shopping. And we’ve talked about some things that you should be looking for. The last thing I want to mention, Tim, just to make sure we’re wrapping up this conversation here and people are thinking about their whole personal situation is that don’t forget any coverage for a spouse or significant other as well. And I know that’s one thing I’d overlooked is that you know, naively, I thought, well, Jess is at home with the boys, not necessarily earning an income. Why would I need life insurance? And obviously, the piece I forgot, which was naive, is what would be all the expenses that would come to be in the event of her death. Well, childcare, right? Additional expenses. So we actually went out and got a policy on her, a smaller amount, but making sure you’re accounting for some of those spouse or significant other considerations as well.

Tim Baker: Yeah, super important to figure that out. And I think in your case, I think, you know, when we interviewed you, you guys would want to move closer to family that would help you, obviously, raise the boys. But there’s still going to be an expense there that we’re going to need to cover down on in the event that something were to happen to Jess. So this is where it kind of gets a little bit tricky and having a planner kind of walk you through and ask those tough questions and try to figure out what does this look like? And by the way, what is the plan in the event that something happens in terms of how do we invest that? Or how do we appropriately plan for that? That’s kind of the next level of things. You know, obviously, coming into that windfall is going to be important to, again, provide some normalcy to life, but you know, you have to be smart with that sum of money and what to do with it. So yeah, lots of moving pieces and especially with kids and a mortgage and you know, one or two incomes, it’s important to kind of see how all those pieces fit together.

Tim Ulbrich: So as we wrap up here, let me just remind the listeners that if you want some more information about different types of life insurance, the pros and cons to those policies that out there, how to determine how much coverage you need like we’ve talked about on this episode and where to get a quote from a reputable broker, head on over to our educational page all about life insurance, which is yourfinancialpharmacist.com/life-insurance. And again, if you’re ready to go out there and start shopping for policies, you can head on over directly to the PolicyGenius page that we’ve partnered with, which is at yourfinancialpharmacist.com/insurance. So Tim Baker, again, good stuff and looking forward to the episode next week. You’re going to talk with Tim Church about disability coverage.

Tim Baker: Thanks, Tim.

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


 

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

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

Mentioned on the Show

Episode Transcript

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

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

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

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

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

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

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

Tim Baker: Yeah, definitely.

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

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

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

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

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

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

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

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

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

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

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

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

Tim Ulbrich: Hopefully not Facebook.

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

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

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

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

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

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

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

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

Tim Ulbrich: Yeah.

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

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

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

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

Tim Baker: Right, exactly.

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

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

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

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

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

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

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

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YFP 042: Ask Tim & Tim Theme Hour (Student Loans)


 

On this Ask Tim & Tim episode of the Your Financial Pharmacist Podcast, we take two YFP community member questions about student loans. We discuss strategies for managing student loans during residency and how soon to refinance or consolidate student loans after graduation.

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

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up everybody? Welcome to Episode 042 of Your Financial Pharmacist podcast. We’re excited to be doing two back-to-back “Ask Tim & Tim” episodes. And between this week and next week’s episode, we’re going to be featuring four listener questions: two this week about student loans and two next week about investing. As a reminder, if you have a question that you want to have featured on the show, shoot us an email at [email protected] and as a small thank you, we’re going to give you a super comfy YFP T-shirt. So Tim Baker, before we jump in to talk about student loans and get to these two questions, which are two really good questions, we need to share some awesome news with the YFP community. Last night, Derek Schwartz, if you remember our guest from Episode 014, 2014 graduate from ONU, Ohio Northern University, currently works with the Kroger Company in Cincinnati — last week, he made his final student loan payment. Three years, four months, paid off $192,000. So just an incredible story.

Tim Baker: Incredible.

Tim Ulbrich: And I still remember that episode and how fun that was.

Tim Baker: Yeah, it’s incredible. It’s amazing what you can do in a short amount of time. You know, I think for a lot of our listeners and a lot of clients I work with, they look at that six figures worth of debt, and they think it’s unsurmountable. And you know, this is another great example of someone that’s putting in the work and elbow grease to get through it. So kudos to Derek. Yeah, I’m just interested to see where he goes from here.

Tim Ulbrich: Yeah, Derek, congratulations. We’re obviously pumped for you, we appreciate you coming on the show and what you did in Episode 014, and we’re excited to see what you do with this lifestyle post-student loan debt. And I’m sure the YFP community’s going to be following that journey as well, so thanks for sharing that good news with us. So Tim Baker, we are here again obviously talking student loans. We’ve talked about this many times on the podcast. But I think it highlights we know how how important this topic is for our listeners that are struggling, obviously, with unprecedented amounts of student loans that they’re coming out with upon graduation. And I think this is a good chance — we’ve highlighted, mentioned, a couple times that, hey, we have a student loan course that’s going to be coming early this summer. And we’re actually getting ready to launch that course with a small group of about 50 beta testers. And for those of you that are interested in learning more about that course, potentially becoming a beta tester, you can head on over to yourfinancialpharmacist.com/studentloans. And Tim, do you just want to give them kind of a quick sneak peek preview into exactly what they’re going to get from that course?

Tim Baker: Yeah, I think the idea behind the course is to really answer a lot of these questions that we get about student loans, so I think there’s a lot of just such haziness about how to even take the first bit of the apple. So really what we’re going to talk about in this course is how do you inventory and just get a proper picture of what you owe and then really how do you assess all the strategies, whether it’s a forgiveness strategy and the PSLF program or maybe a non-PSLF forgiveness strategy, and then really how to optimize that. So when you walk away from the course, the idea is for you to know very precisely ‘This is my student loan strategy. I can walk confidently with it.’ And you know, kind of go down the road of a Derek Schwartz or not. You know, if your move is forgiveness and just be confident in that approach.

Tim Ulbrich: Yeah, we’re super excited about this. It’s been a labor of love with me, you and Tim Church has really taken a lead on a lot of this. And he’s just crushed it. And what I love about the course is I think what we’re hearing from the community members is that there’s so much uncertainty, there’s so much confusion, there’s so much stress around these student loans; ‘I don’t know what to do, I feel like I’m somewhat paralyzed.’ And I think what we’re going to be able to provide in this course is walking away with clarity of, ‘This is the repayment plan, strategy, the best option for your personal situation.’ So again, if you want to learn more what it means to become a beta tester, head on over to yourfinancialpharmacist.com/studentloans, and we’ll get some more information into your hands. Alright, let’s jump into our first listener question that comes from Bethany in Greenville, North Carolina.

Bethany: Hey, Tim and Tim. This is Bethany from Greenville, North Carolina. I had a question about consolidating and refinancing my student loans. How soon after graduation can I do this? And is there a limit to how many times I can refinance? Thanks.

Tim Ulbrich: Alright, thank you, Bethany, for taking the time to submit your question. We appreciate it. It’s a good one. Lots of people wondering about refinancing and consolidation. And obviously, I think your question’s specifically when to do it and is there a time limit to do it is certainly a good one that many others are probably wondering as well. Before we jump into answering, let me just reference listeners back to Episodes 029 and 030, where we talk about refinancing student loans in a lot of detail. And we’re going to hit some of the key points here in addition to answering Bethany’s question directly. So Tim Baker, I guess probably first since she mentioned both refinancing and consolidation, give us the quick breakdown of the difference between those two.

Tim Baker: Yeah, it’s a great question. And sometimes these are used synonymously, and that’s a misconception. I think the difference, you know, so define consolidation. Basically, when you consolidate your loans, you are taking two or more of your federal loans, and you’re making them one. And what happens is is that the loan that is consolidated takes the weighted average of your interest rate. So the example that I give is if you have $100,000 at 5% and then you have another $100,000 at 7%, when you consolidate those two loans into one, you’ll have $200,000 at 6%. So it just takes the weight. So it doesn’t really help you in terms of like you know, getting a better term or better interest rate. Most people do this for convenience sake, or even more importantly than that, they’ll consolidate their loans, so say like a Stafford loan to open up some of these income-driven plans. The income-driven plans would be things like pay-as-you-earn, revised pay-as-you-earn, ICR and IBR. Refinance, on the other side of this, is really when you go out into the marketplace, and you work with companies like SoFi or Earnest or CommonBond or LendKey, so these are some of the private student loan companies that we like. And you go out, and you submit your income and your credit, and they basically come back and say, ‘OK, right now, you’re paying 6%. If you refinance down to a five-year plan or a ten-year plan, we can get you down to 5% or whatever.’ So you’re basically going out into the marketplace to get a better rate. Now, the big thing with this to be aware of is that you are moving from the federal, the rec loans, to the private sector, which is important to know. But those are really the big difference. Consolidation is more of a convenience play/opening up more of the federal repayment plans, the income-driven ones. Refinance is where you’re throwing up the deuces to the federal system and saying, ‘Hey, I’m going to take a look at the private side and see what I can get there.’

Tim Ulbrich: Yeah, and I know Bethany’s question directly being how soon after graduation can I refinance is a good one because I know it seems like students, residents, new practitioners are more aware of refinance options, I think because of the higher interest rates that are out there on some of the federal loans right now, but also probably these companies doing a little bit better job on the marketing side of things as well. So what exactly are the requirements? I mean, how soon can somebody refinance after graduation? And I’m guessing there’s a technical answer to that question, but then maybe there’s also the reality of them being able to qualify for a loan.

Tim Baker: Yeah, so dependent on what strategy you choose — and again, we talked about the two overarching strategies that are out there are forgiveness and the basically nonforgiveness — dependent upon what you choose, is going to really define your timeline. So as an example, if you are looking at the PSLF, and you have a variety of loans, which most borrowers, most clients that I work will have a plethora of loans out there, you’re going to want to consolidate and get your loans into a loan that can get into one of the income-driven repayment plans and start paying or go into repayment as quickly as possible because the idea is to pay, you know, your 120 payments over those 10 years as quickly as possible. So once you graduate and you’re in the grace period, you want to look to get into the active repayment as quickly as possible. Refinance, on the other side, so this is typically where you’re not looking at the public student loan forgiveness program or any forgiveness program. Refinance is probably going to happen a little bit after that because what these private loan companies are going to want to see is income — so obviously, if you are — they want to see a history of income and maybe a history of repayment, so they want to see maybe a couple months of you actively repaying your loan in the federal system for you to get the best rate. Some of these refi companies will honor things like grace periods and that type of thing. But typically in the private refinance, you’re going to have a little bit more of a runway than you would if you’re going through consolidation and public student loan forgiveness.

Tim Ulbrich: Yeah, so I think technically the answer is yes, you can apply as soon as you want after graduation or if somebody’s in residency, but the caveat being it may be difficult to qualify because ultimately, they’re going to want to see probably a track record of payments being made. And also as you think about getting a competitive interest rate, obviously that’s in part determined based on a debt-to-income ratio. So unless there’s a situation where maybe somebody’s coming out as a student, and they have a spouse who aren’t working or a higher income-earning spouse and they can qualify, yes, you can apply, but ultimately, it may be difficult to get those loans over time. What about the limit? Is there any limit to how many times somebody can refinance?

Tim Baker: There isn’t. And, you know, there are some clients that I’ve worked with that have kind of hacked this a little bit. So they will either go out to each of the refi companies that we like and do a deal that way, or you can refi again and then refi again and then refi again all of your loans. So there’s really no limit to that. It will affect your credit score, you know, if you continuously refi because you’re basically doing a hard check on your credit when you go through the refinance program, but there really is no limit. And it’s kind of the same thing if you think about people that are homeowners out there. You can refi your home as many times as you want. Now, you’re going to be paying closing costs and things that aren’t necessarily present in the student loan refi arena, but the idea here is there are companies out there that understand that we have I think $1.3 trillion in student loan debt out there, and there’s interest payments to be had, so they’re going to compete, even actually offer those cash bonuses, so it’s nice for the consumer to be able to look at the landscape and say, ‘OK. Let me choose the best rate available and maybe get a bonus as I’m doing it.’

Tim Ulbrich: So you can hack the system Tim Church-style, right? And do a multiple refinance?

Tim Baker: Exactly.

Tim Ulbrich: I think he probably knows the rates to a T, the most competitive rate that’s out there, he’s got it nailed.

Tim Baker: He’s a machine.

Tim Ulbrich: He is a machine. And I think that’s the play is like, obviously, you want to consider the impact on credit. Just getting rate quotes will not impact your credit, but obviously, going through the process and ultimately refinancing with a company will impact your credit, so I think that’s a good point to be made. But ultimately, you can do it multiple times. Obviously, these companies do offer cash bonuses, so you want to weigh the benefits of that. And obviously, for some people, depending on maybe you were in residency and you decided to refi or shortly after school and your debt-to-income ratio didn’t look great — fast forward two years, rates may have changed, debt-to-income ratio looks difference, obviously, you’re a more competitive applicant in that process. I think it’s also worth here maybe for a minute just talking about what some of our community members may see in a refi is ultimately, these companies will typically throw in front of you a fixed interest rate, which doesn’t change for the life of the loan. So let’s say that’s 3%, 3.5%, 4%, whatever. That’s 4% for the time period that you’ve agreed upon: five years, seven years, 10 years. Or you’ll see a variable rate and actually even some hybrid rates that are out there now. And a variable rate meaning that can change during the life of the loan. So what advice do you have for people in terms of thinking about is a fixed rate the better play? Is a variable rate? What are some of those factors that should be considered?


Tim Baker: I think the big thing is basically the time horizon of the loan. So obviously, the longer that goes out — seven, 10, 15, 20 years — the more risk that you have, you know, interest rate risk. We are in a rising interest rate environment, meaning interest rates are probably going to go up since I guess the Great Recession, we’ve been stuck in lower interest rates, and they’re now finally starting to climb, which is good for savers, but not necessarily great for borrowers. So I think when you’re weighing the variable versus the fixed interest rate, obviously fixed, the information that you have there is known, so you know exactly what you’re going to pay over the course of the term. The variable interest rate, it might be tied to some type of index that will be adjusted annually to some type of index. If it is, it’s a three- or five-year or whatever, if you know that you can pay them off confidently, you might go for the variable just to kind of as that short-term play because you know you’re going to pay them off, so someone like a Derek Schwartz out there. If it’s going to be longer term, to me, if I was counseling a client, I would meet that with a little bit of pause, knowing that probably the rates are going to go through the roof. So it’s one of those things where you take a risk of getting a better interest rate in the near term, but you know, those particular rates could be jacked up, especially if the time horizon of the loan goes out further. So, you know, it’s not necessarily a bad thing to do, but you mentioned the hybrid loan. So the hybrid rates are kind of where you — if people understand what an adjustable rate mortgage is and arm, you basically, it’ll be fixed, the rate will be fixed for a set period of time and then it will adjust annually after that. So that’s another little bit of a hybrid model that will give you some fixed interest and then variable. So you could look at that particular solution to get a lower rate as well.

Tim Ulbrich: Yeah, absolutely. I agree on your input on the variable rate and evaluating that against the fixed. Other things I would throw out there would be looking at what’s your emergency fund situation? Know you have some extra cash if needed. What’s your appetite for that payment potentially changing? Do you have wiggle room or not in your budget? So if you look at your budget right now, and you’re looking at a fixed rate and that payment and say, ‘I’ve really got no room to squeeze out an additional,’ then obviously, that variable rate could be tricky. The other thing I would say is do the math. And we’ve got a great calculator if you go to yourfinancialpharmacist.com/refinance, that’s our page where we have all of our resources associate with refinance on there. You can run the math. So do the math and see, OK, best case scenario, the low end of the variable rate, if this were to stay as is — which to your point, in a short repayment period may be a good play — how much would I be saving against a fixed rate? And is that potential savings worth some of the unknown in the variables that you mentioned?

Tim Baker: Yeah, and I think looking at that dollar sign, you’re basically saying is $10,000 or x amount, is that worth the risk of, you know — and I think to quantify that in some regard can be very powerful.

Tim Ulbrich: So one of the things I want to end on here is if you go to our page, again yourfinancialpharmacist.com/refinance, we’ve got lots of educational resources that will help you out. But there’s some things that we fundamentally believe you should look for in a refinance company. And the good news is as these have become more popular, I think we’re seeing a lot more consistency in the market amongst some of these big players — SoFi, Earnest, CommonBond, LendKey, etc. The things that were looking at are, there should be no origination fee. So in fact, many companies are actually going to give you a cash bonus. But at minimum, you shouldn’t be paying anything to get this loan started. No. 2 is there should be no prepayment penalty. So if you take on a 10-year refi, and you want to get this done in five or seven because you got some extra cash or some additional money, you want to get it done faster, you should have the ability to do that without any penalties for making extra payments. Many of these companies are also going to offer you a lower interest rate with autopay. So if you can do that, of course take advantage of it. And one of the ones we’re always trying to hit home and we think is really important that you evaluate is ensuring that it has protection and a forgiveness clause in the event of a death or long-term disability. So if you only have federal loans, that protection is there for you. If you refinance with a private company, that can be dependent upon the company. And so you want to make sure 1, does the company offer that protection that those loans would be forgiven in the event of a death or permanent disability. And if not, do you have the insurance protection in place, whether that be from a life insurance policy, a disability insurance policy, to cover that in the event that it would occur? And then obviously, you’re going to see some nuances and differences between these companies about types of repayment options that they’ll give you. But ultimately, again, on that page yourfinancialpharmacist.com/refinance, you’ll see all of that information, you’ll see a guide that we have available, and we have links there where you can also click out and get some quotes with companies in a very short period of time. And we’ve got some really competitive cash bonus offers if refinance is the right play for you.

Tim Ulbrich: Alright, let’s take a quick break and hear a minute from our sponsor, and then we’re going to jump into the second listener question focused on student loans.

Sponsor: Student loans are a big problem for pharmacists. With many graduates facing interest rates above 6%, it can be hard to get traction and make progress. If you’re not pursuing the Public Service Loan Forgiveness Program, and you don’t need income-based repayments, refinancing can be a great move and could save you thousands of dollars in interest. Check out our refinance page at yourfinancialpharmacist.com/refinance where you can calculate your savings and check your rate with one of our partner companies that are offering exclusive cash bonuses to the YFP community of up to $450. That’s yourfinancialpharmacist.com/refinance to find out your savings today.

Tim Ulbrich: OK, let’s jump into our second listener question, which comes from Nate in Ohio.

Nate: Hey, Tim and Tim, this is Nate from Akron, Ohio. My question is, what is the best way for me to start managing my student loan debt during residency? And early in the career, what is the most appropriate balance as far as investing and managing student loan? I appreciate any input you have. Thank you.

Tim Ulbrich: Nate, thank you so much for taking the time to submit your question. We appreciate you’ve got a good one, actually two questions here around the best way to start managing student loan debt during residency, a question we get a lot, and the second question, which might be the most common question we get: What’s the most appropriate balance as far as investing and managing student loan debt? So your first one, what’s the best way to start managing student loan debt during residency. I think it’s a great question. You look at the average resident salary out there, obviously dependent upon geographic location, somewhere between $40,000 and $50,000. But we have an average indebtedness now of graduates of about $160,000. So that’s a common thought, and a question that comes out is can I afford residency training? Obviously, what are the financial implications of that? And if I’m in residency training, what do I do about these student loans? So Tim Baker, as you hear that question, obviously you work with a lot of clients that are residents as well. What are you thinking in terms of strategies around paying off student loans during residency training?

Tim Baker: I mean, I think it follows — and I think Nate, this would be a good chance to maybe look at the beta group test for the student loan course — I think that the very first thing, whether you’re a resident or not, is really to look at the inventory. And I break this down in terms of an inventory of what you actually owe and who you owe it to and then also kind of an inventory of your feelings toward those loans. So a lot of people, you know, unless we ask ourselves the questions, how do you feel about these student loans? If it’s like, ‘I feel OK about them, I know they’re going to be around for awhile,’ versus ‘Tim, I can’t sleep at night. I get anxiety.’ And these are things clients tell me about their loans, that’s really going to dictate, I think, how you approach them. I think in residency, the beautiful thing about residency, especially dependent on the approach you take in terms of your strategy, whether that’s, again, the forgiveness play or the non-forgiveness play, is that you can do some damage in residency for both strategies. So to me, the best way to start is to do the inventory. And basically what dictates that is going to be really two things. It’s going to be your NSLDS, basically your report, which basically is an inventory of all your federal loans, and then also your credit report, which is going to basically outline all of your private loans. So I think once you kind of inventory your thoughts and feelings toward the loans and then actually the amount you owe and the interest rate you’re paying, I think that is going to be the first basically jumpoff point to kind of begin the process of saying, ‘OK, how do I begin to, you know, peel this thing back and figure out the best way forward?’

Tim Ulbrich: So once you do your inventory of your loans and you assess your feelings, to me, the question then becomes, are you pursuing Public Service Loan Forgiveness or not?

Tim Baker: Yes.

Tim Ulbrich: And I think that’s a critical question. Nate, your question around residency — what we know about residency training and pharmacy is that about 90 percent of all residencies are in a hospital, health system setting. And of the hospital health systems that are out there, about 80 percent are considered not for-profit institutions, which obviously would be qualifying organizations for residency. So Tim, why is that question of PSLF or no PSLF so important when you think about strategies of attacking student loans or not in residency?

Tim Baker: Yeah, and I think again, one of the things that is not necessarily, you know, completely laid out in front of you is the information about your forthcoming career. And what I mean by that is, you know, if you do a residency, and you work for a 501c3 nonprofit, which is basically what qualifies an institution to be part of the PSLF program, you’re not necessarily sure that you’re going to be, you know, if you’re a PGY1, if you’re going to be nine years in the public service or a PGY2, if you have another eight years in public service. But if you’re pretty confident that you are going to be in the public student loan forgiveness program, and you’re going to be in one of those 501c3, you should start basically your repayment as soon as possible because the way that your repayment is calculated is going to be based on the previous year’s income. So if you’re a PGY1, how much did you make in your P4 year? Probably not much. So that means your payment is going to be close to zero, but you still get qualified payments toward your 10 years. And the same thing when you are a PGY2, it’s going to look back at your PGY1 year and basically look at your income. And your payments are going to increase, but not in terms of what you would normally make as a pharmacist. So there are ways to really optimize your situation to get through really the first third of the PSLF program if you’re in a two-year residency program and you’re working for a nonprofit. So that’s super to note because I think the default in the federal system is if you have a grace period or a deferment period or whatever it is, most people take it because they think it’s in their best interest. Like, ‘Oh, the government is offering this.’ It’s the same thing with some of these repayment plans, which a lot of these federal repayment plans are actually garbage. And that’s one of the things that we talk about in the course is we give you a little bit of shortcut of the ones to look for. But just because the government says, ‘Hey, you know, take these grace periods or these deferment periods,’ doesn’t mean that you should. It’s not necessarily in your best interest. And on the flip side of this, if you look at it from a non-forgiveness play, you know, if you’re a resident, you’re probably not going to want to go into the private refinance sector because it’s going to look at basically your principal and your interest rate, and you might not be able to afford those payments, especially if you’re looking at an average indebtedness of $160,000. That payment’s going to be in the $1,800 range in a standard 10-year plan. So for residents making $40,000 or $50,000, it’s probably not going to be the best move. So, you know, this is kind of where you have a bridge strategy where you’re looking at the income-driven, you know, similar to what you would do in the forgiveness strategy where you would just do an income-driven plan and then when you have more information, you can either pivot and, you know, stay in the federal system or pivot out and refinance at that higher income level.

Tim Ulbrich: Yeah, just to reiterate what you said early on in that response is remember that just because you’re in deferment — or even if you’re making an income-driven plan, depending on that calculation — it’s likely that your loan balance is growing. And I cannot emphasize enough to not just react to the payment that’s put in front of you without thinking about what your overall strategy is. So what do I mean here is obviously, many if not all of your pharmacy student loans are unsubsidized, accruing interest while you’re in school, through any grace periods. But then even if you go into an income-driven repayment plan, because of what Tim mentioned and how they’re looking back into your P4 year to calculate that payment, that payment — depending on your total debt load — probably isn’t going to even cover the interest that’s accruing each month. So I think to the point that was made, if you’re not pursuing Public Service Loan Forgiveness, what can you do to try to at least keep that total balance at bay so when you get out of residency, you can then really start to attack those loans without that loan balance growing during residency training. So I’ve personally seen way too many situations — and obviously, some of them are not preventable because of whatever variables — but too many situations of somebody graduating at $180,000, $190,000, finishing two years of residency, and all of a sudden, that balance is $210,000 or $220,000 because it’s grown over that two-year period.

Tim Baker: And I, you know, have a story with a client I’m working with. She had about I think $75,000 in debt. And that’s what she thought she had. But over the course of all these deferments and periods that she’s taken advantage of, you know, air quotes “taken advantage of,” you know, when I actually did the inventory for her, it was upwards of like $90,000, $95,000. And she was shocked because she’s like, ‘Well I only thought I had $70,000.’ The problem is that the interest has grown, and then kind of a gut punch on top of that is when she basically goes into repayment, now that $95,000, that interest that was capitalized is now going to be interest on top of interest. And that’s kind of a difficult thing to swallow, especially for some people that they look back at their situation and they say, ‘Oh man, I probably could have paid down some of that interest. Or I could have been more mindful of my loans when I was in this period of flux.’ So yeah, super important to be aware of and not just to take kind of the programs or the different status of your loans as they go through, don’t take those just at face value.

Tim Ulbrich: So for those of you that are listening that are either current students or residents or those that may qualify or think you qualify potentially for PSLF, if you’re looking to learn more, Episode 018, we talk about maximizing the benefits of the Public Service Loan Forgiveness program, so we’ll link to that in the show notes. Tim, what are you hearing on the latest and greatest with PSLF? It seems like it’s actually been somewhat quiet for awhile and then there was news that came out last week about some action as people are actually starting to seek that forgiveness.

Tim Baker: Yeah, so the latest news is that was put out is that Congress has authorized or basically earmarked $350 million to borrowers out there that thought they were enrolled, properly enrolled in the PSLF program but then were probably, that were actually in the wrong repayment system. So it’s kind of a two-step process to get into the PSLF program. So this is encouraging, I think, to me because as much as the Department of Education has fumbled this whole program since it was initiated in the Bush administration back in 2007, this is one of the first I think steps where you actually see money set aside, and this sounds like it’s oops money for that, you know, subset of people that raised their hand and said, ‘Hey, I want to be in the PSLF program,’ and thought that they were in it but just didn’t do the, I guess the logistic step properly where they needed to move from a standard or an extended standard into an income-driven plan. So to me, it’s somewhat encouraging. And some of the chatter that I’ve seen is that the $350 million might not be enough, and I guess it depends on who actually that $350 is for, but we’re starting to hear more chatter about people that are actually being forgiven. So the stats that I heard was that 13,000 people applied for forgiveness since you could in October of 2017, only 1,000 was expected to actually be forgiven or be qualified because of some of these errors in the program. So that’s a 7.7% rate, which to me that means that we’re failing in terms of this program. But it sounds like this particular earmark spending will capture some of those people that thought they were in the proper repayment plan but weren’t. So that’s good news.

Tim Ulbrich: Yeah, and one of the things that gets me so fired up about the course that we’re working on is that we really spend a lot of time and detail helping those going through it decide is PSLF the right move or not. If so, what’s a strategy to maximize this? And then really getting into the nitty-gritty of what are the numbers? What do the numbers look like? And if I’m going to assume this risk, what’s the potential upside? So again, those that might be interested in learning more, helping us with beta testing, yourfinancialpharmacist.com/studentloans. So Tim, the million-dollar question, which is Nate’s second half of his question, what’s the most appropriate balance as far as investing and managing student loan debt? And here, obviously it’s also in the context of residency. So what are the factors that somebody needs to consider knowing this answer is highly dependent upon the individual in terms of how might I balance student loan debt versus investing for the future?

Tim Baker: It’s such a great question. I think it’s one of the questions that we get asked the most. And you know, the stock answer that I give is it depends, which is kind of the worst answer to a question ever. And I think one of the things that, you know, in Episode 026, we talk about baby stepping into your financial plan, the two things to focus on first. And really, the two things that I focus on when I look at a client’s financial picture is what does their consumer debt look like, so credit card debt, and what’s their emergency fund. So the student loan piece is a completely different animal, and I think dependent on the strategy that you take I think is going to dictate when you get into the investment world. And there’s lot of different opinions out there of when to invest and when not to invest and how do you do that with student loans. So some of the factors that I would look at in terms of should I be investing or not is what does your debt situation look like. So if you have credit card debt, which a lot of pharmacists will take on credit card debt as they go through school, I see that more and more, if you have credit card debt, go ahead and fold up your investment policy statement, your investment plan and stick that in your back pocket until that is completely paid off. I think the other thing that we have to be mindful of is just what is your attitude towards the student loan debt. So if your attitude is, ‘Man, I need to get out from underneath this as quickly as possible,’ or if you take kind of a Dave Ramsey approach to debt, and you think that most debt outside of the mortgage debt is bad, then you probably are not going to want to invest anytime soon. The other thing is just like interest rates. So if you’re fortunate enough to have loans that your interest rates are super, super, super low, and you’re kind of, ‘Eh, I can deal with the debt,’ then maybe wading into the waters of investing is more important. And I guess I say this all in the context of, you know, also your employer, what they offer in terms of retirement. You’re probably, nine times out of 10 — and this isn’t investment advice — but nine times out of 10, you’re going to want to probably at least put into your 401k or your 403b what your employer is matching because that’s basically a 100% return on your money. So if they match 4%, you probably want to put 4% of income in there. And that’s typically a general rule of thumb. Some other things to be aware of is — I’m trying to think. So one of the stories that I recently saw too is that — I don’t know if you saw this, Tim — is about 20% of students are using parts of their student loan money to buy bitcoin.

Tim Ulbrich: Yes, oh gosh.

Tim Baker: I would probably say that this is not a smart thing to do.

Tim Ulbrich: The crypto lovers are going to send us hate mail, by the way.

Tim Baker: Yeah, so. But yeah, if you were a client of mine, I would probably advise against that. Not because I don’t like cryptocurrency. I think that there is some longevity there, but I don’t think it’s necessarily looked at as a good investment in terms of using money that you’re 6 or 7% on to then put that there.

Tim Ulbrich: I think what all the things you’re saying is why the answer is depends. And to me, this is why it gets me fired up a little bit when a debate’s going on within a Facebook group or something about this topic because for everyone, the answer is different. I mean, there’s so many factors you just outlined: interest rates, philosophy or feelings toward debt, you know, in terms of what options, do I have a match, do I not have a match. Other ones I’m thinking about are what’s your horizon and timeline for saving? So if you’re a nontraditional student, and maybe you’re coming out, starting your career at 40, this answer might be different than somebody who’s graduating at 24. Are you pursuing loan forgiveness or not? If you’re going Tim Church-style, and you’re throwing massive student loan payments on a short period of say a five-year refi, and you can get your rate down to 3.5 or even less, that might differ than if you’re not doing that. So so many variables that come into play, and I think this also speaks to me the power of working with a really good planner that can help ask all these questions and help determine the answers to these. And we didn’t even talk about I guess your tolerance toward risk as being another one here.

Tim Baker: Yeah.

Tim Ulbrich: You know, and it can really help you wade through, you and/or a significant other to come up with a definitive answer to this question, to come up with a plan that can help you work through this and can feel confident in that plan going forward.

Tim Baker: And I think one thing that you kind of, that maybe we didn’t hit on completely is — and I think we’re seeing this now — is if I look at my student loans, and I’m paying 6%, but then I look at what the market has done over the last year, and I’m like, well, it’s up whatever, 15%. You know, isn’t it a no-brainer just to basically pay the least amount on my loans and then go into the market and get my 15%? And it’s not necessarily — I guess the rebuttal of that is it could easily be down 15%, the market could be down 15% next year. So it is a cyclical thing, and you know, right now, people are saying invest because it’s a no-brainer. But then, you know, if we go through kind of another dip in the market, that’s not necessarily a no-brainer. So the no-brainer in terms of what are the facts that I know is that if you pay off — your loans, they’re going to charge you like clockwork 6% every year. So that’s a given. But when you go into the investment market, you do take risks. So you’re not necessarily going to get that elevated return that you think you’re going to get. So although you can make a case that over the long-term, the market is going to take care of you, and it’s going to return 10%, that is true. If you’re looking at your student loans, that’s not necessarily a no-brainer that you’re going to get the return that you’re looking at in terms of the market.

Tim Ulbrich: And I think where this debate gets a little bit interesting is with some of the refi rates we’re seeing out there with people that are getting, that have top credit, that have a really good income-to-debt ratio and that are willing to pay it off in a really aggressive period, you’re getting rates down that low. Still, it depends, is the answer. But obviously, that becomes a little bit different discussion depending on their personal situation. ‘

Tim Baker: But usually if you get rates that low, it means that your $1,800 payment is now — what does Tim Church pay? $3,800 or $4,800? So there’s probably not a lot of money left over to actually go into the market and invest.

Tim Ulbrich: Great point.

Tim Baker: I think his thought, and I think we see this with a lot of millionaire pharmacists that we’ve interviewed is, you know, if you can train yourself to have the behavior to make massive payments towards your debt, you probably can do the same thing towards your investments. So any of that opportunity cost or any of that lost time that you invested, you can probably make up fairly quickly. And again, it just depends on your situation, your appetite for risk and all that. So it’s definitely a murky picture.

Tim Ulbrich: Yeah, don’t forget your timeline, right? So if you’re going to knock these out in three years, that’s a much different situation than if you’re waiting to invest because you’re going to pay them off over 10. So obviously that timeline and compound interest and time that could be lost is a critical factor as well. So Tim, great stuff as always. Thank you again to Nate and Bethany for submitting a question to be featured on this “Ask Tim & Tim” episode of the podcast. And as a small thank you, we’re going to be sending them a super comfy YFP T-shirt. And again, if you have a question you’d like to have featured on the show, make sure you shoot us an email at [email protected]. And we hope you’ll join us again next week as we feature two questions on investing.

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YFP 041: 10 Things Every Pharmacist Should Know About Home Buying (Part 2)


 

On Episode 41 of the Your Financial Pharmacist Podcast, we wrap up a two-part series on best practices for home buying by interviewing Dr. Nate Hedrick, The Real Estate RPh. In case you missed it, we interviewed Nate for part 1 of this series (Episode 40), where he provided the first 5 best practices for home buying. On this episode, Nate provides 5 more tips to round out the list of ’10 Things Every Pharmacist Should Know About Home Buying.’

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

Real Estate Investing Guide

Looking to learn more about real estate investing? Check out The Pharmacist’s Guide to Real Estate Investing at www.realestaterph.com/real-estate-investing-guide

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome back to Episode 41 of the Your Financial Pharmacist podcast. Excited to be here again alongside Tim Baker and again alongside Dr. Nate Hedrick, the Real Estate RPH as we continue our discussion on the top 10 list of things that pharmacists should know when it comes to home buying. In the first part of this series, I think Tim Baker, maybe you and I had some revelations about things that we did well and things that we didn’t do well. So Nate, thank you for reminding us of those things. We appreciate it. It’s a humbling moment, but that’s what this podcast is all about is sharing and helping those that are looking at this home buying process in front of them right now. So in the first part of this two-part series, we talked about five different things that people should be thinking about. No. 1, that the bank does not set your budget. No. 2, to shop around for mortgage lenders. No. 3, saving 20 percent down for a down payment. No. 4, not forgetting about the hidden costs of owning a home and buying a home. And No. 5, being ready for a lot of hurry up and wait. So if you didn’t catch that episode, go on back to Episode 40. We’ll link to it in the show notes, and make sure you catch up before we jump into the remaining five. So Nate, welcome back. We appreciate you taking the time to be here.

Nate Hedrick: Of course. Thanks for having me again.

Tim Ulbrich: Alright, let’s jump in. So No. 6 as we continue on this list. No. 6 that you had on this top 10 list is don’t skip out on the home warranty. So I think often we look at this, you know, as an extra add-on, an extra buy, so tell us why the home warranty is something we shouldn’t skip out on.

Nate Hedrick: Yeah, and it’s a good allegory for just in general, don’t skip out on things that it seems like a cost right now if in the long term, it may help you out. So really understanding, again, going back to that education piece we talked about in the first episode, understanding what these do. So an example of a home warranty like I talk about, a home warranty is usually a couple hundred dollars. An average one is about $300-400. Sometimes the seller will even provide them. And in general, a home warranty will cover all of your appliances — your furnace, your dishwasher, your refrigerator, everything else in between — it will cover that for up to a year, depending on how you buy that home warranty and what’s included in that. And one of the thing we talked about last episode was trying to save all this extra money for if something goes wrong or something breaks. Well, an average furnace is about $4,000. So setting aside an extra $4,000 is kind of crazy when you could set an extra $400 up front and in case something goes wrong, you’re basically covered, and they’ll come in and handle it. Now, I’ll fully admit that all home warranties are not equal, and some are better than others. And you really got to kind of do your homework on what’s going to be providing you the best outcomes if something does go wrong. But ultimately, it’s a good way to spend a couple hundred dollars up front and manage your costs for at least that first year where you’re trying to get your feet underneath you without having to pay a huge dollar amount if something does go wrong.

Tim Baker: Yeah, and I feel like this is one of the examples where, one of the points where, I think if you have an example — like I know I talked to a few clients who’ve bought in the Baltimore area, so you know, these houses were built in the 1880s. So it’s kind of a no-brainer, but I’ve had a few clients come back to me and say, ‘Thank goodness I did get that home warranty because this and this, this died after we moved in,’ or whatever the case was. So I think it’s a good point to make that not all warranties are created equal. And maybe that’s where kind of a good real estate agent comes in that can help you through that and what that essentially covers, so yeah, it’s a good point.

Nate Hedrick: Yeah, I personally experienced that. I remember distinctly, we were going back and forth through negotiations on our home, and our house was basically a slow flip. They took the time to redo it, but it was basically a flip for lack of a better way of saying it. And so everything was like brand spanking new, or so I thought. Turns out the washer was not in warranty when it broke, and basically what could have been a $300 home warranty cost me about $750 to buy a brand new washing machine.

Tim Ulbrich: And I think this too highlights, you know, in point No. 4, we talked about making sure of accounting for all the costs. Obviously, that fits in here as a cost. And also, while we would of course recommend that you have a fully funded emergency fund heading into a home, we know that many people may not, and all the more reason — even with one, you should have it — but of course, if you did not, it should be able to cover some of these expenses. So No. 7, Nate, is working with a real estate agent. It’s free, sort of. So obviously you being a real estate agent, there may be a natural bias here, but talk us through the benefits of working with somebody versus going at it yourself.

Nate Hedrick: Yeah, so certainly. So I think years and years ago, it was a lot easier to kind of go it alone. You can still do it today, there are many people that do for sale by owners, and they buy by themselves, but the advantage of buying a home and working with a realtor is that effectively, it’s free. So I’ll give you the behind-the-curtain of how real estate basically works. When a person sells their home and they use a realtor to do so, the real estate agent that’s selling that home negotiates a percentage fee. And they say, ‘OK, when your home sells, I want let’s say 6 percent of that home price. And that’s going to be my commission for marketing and for all the time that I spend on open houses and all the advice I gave you on what to set the price for and all the things that a real estate agent does.’ And so that actually is paid by the seller to the real estate agent. If a buyer comes in with their own real estate agent, those two agents basically agree during the process of acquiring the loan, they agree to split that 6 percent. So the buyer’s agent would get 3 percent, and the seller’s agent would get 3 percent. The nice thing is all of that 6 percent in general, comes from the selling side of the equation. So for a buying agent, for a buyer of a home, there’s no commission that’s coming out of your wallet and going directly that real estate agent. So you get this person that’s going to find you homes, they’re going to work with you every single day that you need it, you’re going to go to all these different showings, they’re going to give you access to the MLS, which we can talk about. All that stuff goes into it, and effectively, all you pay at the end is like a small desk fee. It’s usually $100-200 to do all the paperwork. So it’s a really nice tool that you have at your disposal that you almost don’t have to pay for if you’re on the buying side of the equation.

Tim Baker: So if I’m a pharmacist and I’m in Ohio or California or Louisiana or wherever, and I’m looking for a real estate agent that I like, know and trust, when you advise your pharmacy friends around the country, how do you advise them in terms of where to start with finding an agent?

Nate Hedrick: Yeah, that’s a great point. And that’s actually one of the things that I do quite a bit through my website because I agree, this can be a difficult part of the process. So the best thing you can do is ask your friends, ask somebody local that’s — like if you’re buying locally, ask somebody local that’s worked with a realtor recently. If they had a good experience, they’ll be more than happy to tell you all about it. The other thing that you can do is to go to someone like me who basically finds you a real estate agent in whatever area you’re looking for. This becomes especially important when you look at investment properties and certain types of buying of investment properties. You need certain types of realtors that are going to work very quickly, ones that are a little bit more savvy to the investment side of the market, and finding someone like that can be a little bit more difficult. So there are lots of different resources — again, our website is a great one for finding a local real estate agent. Basically, we’ll interview you, come up with an idea of what kind of an agent you’re looking for based on your needs, and we’ll set you up with somebody in that market that you’re trying to move to or in the market that you’re currently located in to help you go ahead and make that transition. So it’s definitely a part of the process and one thing that we’re trying to help out with quite a bit here at Real Estate RPH.

Tim Ulbrich: No. 8 is home ownership provides tax advantages, even for people that make “too much.” And I want your input on this one. I think probably as I talk with pharmacists about home buying, one of the most common reasons I hear about that itch to buy a home is ‘I need the tax advantages, I need the tax advantages.’ Despite student loan debt or other priorities they’re circulating. So talk us through exactly what are the tax advantages associated with a home. And then secondarily, how might those be changing under the new tax rules moving forward?

Nate Hedrick: Yeah, I’m glad you said that because it’s definitely changing quite a bit. So basically, if you make too much — again, that’s in air quotes there — but people like pharmacists in general make more than is allowed by the tax code for a lot of the standard, a lot of the deductions that we might otherwise benefit from. The one that always bothers me personally is the student loan deduction, right? My wife and I, again, make “too much” to get a student loan tax deduction, so even though we’re paying tens of thousands of dollars in student loan interest, none of that is deductible from our taxes, which is, again, frustrating personally. But if you look at the home, homes provide significant advantages in the tax area because a lot of those limits aren’t necessarily in place. So the first thing is that, you know, your state and local, your property taxes, are something that you can write off to an extent. Now, again, this is changing a little bit with the new tax code. They are limiting that property tax deduction to about $10,000, and that shouldn’t matter in all areas of the country, but it will matter in some. So New York, California, higher, basically more expensive homes in all those areas may start to kind of see an issue with that where your property taxes are now creeping over that $10,000 limit, and you’re not able to deduct all of that off of your taxes. So it’s something to kind of use but something to realize that also there’s a limit to it now with the new tax plan that’s in place. After that too, the other tax advantages that taxes are one of the few things — or excuse me, homes are one of the few things that there are limited or no capital gains on in certain scenarios. So if you buy or sell a stock, right, if I buy a stock at $100, and I sell it at $200, I’m paying capital gains tax on that $100 in profit. If I buy a home at $100,000 and sell it at $200,000, as long as I live there for two of the last five years, and it was my primary residence during that time, I pay no taxes on any of that profit. So not a single dollar of that goes back to the government on that profit that I made even though it was $100,000 over the course of just a couple of years. So if you’re looking at buying and selling your own personal home, if you’re going to stay there for a little bit of time, which we’ll get into, you can really do well for yourself in terms of not having to pay those capital gains tax where other investments, while maybe a little bit more tangible and easy to deal with than a home, are certainly taxed a lot higher.

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

Sponsor Message: This episode of Your Financial Pharmacist podcast is brought to you by Real Estate RPH. Founded by a pharmacist for pharmacists, Real Estate RPH provides the expertise you need when it comes to making one of the biggest investments of your life. Whether you’re looking to buy a home, sell a home, flip a home or learn more about real estate investing, head on over to www.realestaterph.com today.

Tim Baker: Now back to the Your Financial Pharmacist podcast. So point No. 9 is plan to stay for a few years, so you just alluded to that. So what typically is the crossover point or the break-even point for someone who is living in a house or purchased a house. Is it two, three, four, even five years? What does that look like?

Nate Hedrick: Yeah, great question, Tim. It totally depends on your market, unfortunately. I wish I had better information for you. They did an analysis on this on some of the low cost areas of the country and some of the high cost areas of the country. And places like Ohio, actually, where I’m from, are quite low cost in relation to the rest of the country. And you can actually get your money back or it’s worth it, basically, in just two or three years. If you look at some places like New York and Hawaii, it’s something crazy like 20 years. You’d be better off renting unless you were going to be in that home for 20 years. So it can really matter based on your market, doing your own little bit of research is best on that. But yeah, a couple of years is generally that sweet spot but totally depends on your market.

Tim Ulbrich: Yeah, and this for me is a plug back into the other things we’ve talked about with saving 20 percent down, not forgetting about all costs associated because obviously, when Jess and I were looking to move last year, we had been in our first home for seven years in a low cost market here in Ohio. But nonetheless, because we didn’t follow the 20 percent down, we didn’t have much equity, and when we looked at all the fees associated with the move, you know, it was not looking very good in terms of getting return on the equity we had gained. So I think that really evaluating and taking a step back and obviously, you can’t predict every factor, right, in terms of what may lead you to be there longer or not, but really trying to look at it. Say, is there a chance we might be here for a long period of time that we can absorb some of those fees and build up some equity in this home. OK, No. 10 for our real estate, maybe investing nerds out there, people who are excited about this potential about real estate investing, getting started on this, which takes me back thinking about Episode 9 where we interviewed Carrie Carlton about some of her real estate investment principles and experiences. What you have here is considered house hacking. I know this is something either you did or consider or recommend, right? So tell us more about that.

Nate Hedrick: I wish that I had done it. This is why it’s on my top 10 list because I just am kicking myself now, even still, that I didn’t get the chance to house hack when I bought my first home because I didn’t know what it was. So again, this is kind of what has gotten me to spreading the word on house hacking. House hacking, in a nutshell, is basically you buy a home with 2-4 units. So a duplex, a triplex or a quad. And you live in one of those units, and you rent out the others. And if you do it right, and you put your numbers in and everything works out, oftentimes you can actually have your renters paying your mortgage while you live there for free. Now, you’ll ultimately have other costs that you’re covering, and if you’re really good, you can actually get your renters to cover those costs as well. But I mean, think about it. If you could buy your first home, Tim, and I said you could live there for free, you’d be all over that, right?

Tim Baker: Where do I sign?

Nate Hedrick: Yeah, exactly. So the idea is that if you can find a popular market, something that is comfortable for you to live in that you can rent out quite easily at a good amount, you can easily get those other units to kind of pay off the rest of the mortgage. The beauty of this and where this gets really kind of lucrative is that the banks when they look at a duplex, a triplex or a quad, all the lenders, actually, they perceive those as being single family homes. They don’t treat those loans any differently than if you or I bought a single family home, so a one-unit kind of place. So you don’t have this crazy, like, apartment loan and there’s nothing fancy associated with it, you just get a regular loan and you get this multiple-unit place, and you can rent out the other sides of it. So it’s a really easy and convenient way to kind of dip your toe in the investing world of real estate. And I’ve seen so many people do this and just pay off their student loans so much quicker because they’re able to basically have someone else paying a mortgage, and they’re living for free.

Tim Ulbrich: And I think this is a good option, you know, as I think about a lot of pharmacists with student loan debt, obviously itching to get into a home, wanting to achieve other goals. Of course, again, with the principles we already talked about — 20 percent down and otherwise — but you know, getting in, you mentioned kind of dipping your toe and getting started, I think it’s a great way to do that, make some progress on your student loan debt. Obviously, not underestimating what’s involved in managing tenants, I think this kind of goes back to the learning process and making sure you’re prepared. So Tim Baker, from a financial planning perspective, we’ve just heard this list of kind of top 10 things that pharmacists should know when it comes to home buying. What are you seeing from pharmacist clients in terms of adhering to these principles? Or even from your viewpoint as an advisor to them trying to help them manage everything from student loan debt to home buying to investing? And any words of wisdom you could shed here.

Tim Baker: Yeah, I think from my perspective, probably the biggest word that comes to mind — and Shay and I recently went through this recently — was it’s emotion. So I’ll tell a quick story about this, and I’ll pivot to the clients. You know, we, Shay and I have talked about, we’ve been in our house a year, but we’ve talked about upgrading in 3-4 years, 3-5 years, and then renting out our home. We went across the street to look at a nicer, newer house and talked to the real estate agent and were talking about, you know, I rent space for my office for my work, and we want to have more kids and that type of thing. They’re like, well, you know, this house is a little bit out of your price range that you mentioned, so let’s go look at some that are in your price range. And we went through that, we went down the funnel of looking at different houses just to kind of check it out. And then, you know, we get in a house and Shay is like, we can make this work and blah blah blah. And the emotion just latches onto you because you can picture yourself in that house, and I kind of went through this. And it was almost like we had to shake ourselves out of this because, you know, we were not prepared, are not prepared to make that move. And I think, like, I do this for a living. I preach prudence. And I found myself going down that path and saying, OK, could we rationalize our way into this? I am paying kind of a mortgage and office space. Could I just combine that into one thing? And I see that with clients a lot is — and one of the questions that I want to pivot back to Nate here is — at what point do you actually start looking for houses in this whole thing? Because I think once you start looking for houses, you are, you’re kind of in that snare of, OK, I could definitely see myself in this spot. So from a financial planning perspective, it is a constant discussion about your ability to build wealth and the idea that your primary home is an investment or not an investment. And are there things outside of just paying your mortgage that you have to account for. Like I remember when I bought my first home in Ohio, we had all the costs and then we had to spend a couple thousand dollars just for blinds. You know what I mean? So what happened? Out came the credit card, and then that’s the kind of things that you just don’t think about. So yeah, I mean, I think it has the potential — real estate has the potential to help you build wealth, but it also can be a cash — we talked about Rich Dad, Poor Dad — it can be a cash flow crunch. So to kind of, you know, pivot back to you, Nate — at what point, if I’m a pharmacist out there and I’m looking, this question has been hanging over my head, my parents are telling me, ‘Hey, buy, buy, buy. It’s a great investment,’ what should like, at what point should I actually or where should I start? I think that would be a good question. Where should I start? Because it’s so easy to look at those emails that I get from Zillow or Redfin and say, Oh yeah, I could definitely afford this. So what would be your advice in that regard?

Nate Hedrick: Yeah, that’s great. And actually, you’re right. I get this question all the time as well, and I just put out a guide recently on how to get started in real estate investing. It translates exactly the same to first-time home buying. And really, the first step is to first assess your own finances. The fact that you’re here listening to this podcast means that you’re already good at that or at least taking the right steps, right? So assess your own finances, figure out what you can afford. Again, going back to point 1 from last episode, figure out what your budget is. So once you kind of have that, working down the road of get your team in place, OK? And your team might just be and your spouse. Or it might just be you and your dog. Your team doesn’t have to be this expansive thing. But get your team of support that’s going to be in place. So maybe you’re going to tour the house with your brother. Maybe you’re going to buy the house, again, with your wife or your spouse. Having that team is a really good next step. So knowing that you’ve got your support structure and who’s going to be in the decision-making process. Then you want to go ahead and basically, go ahead and get pre-approved. Find a lender, like I said, do that research, get pre-approved so that when you go to a home, what you don’t want to do is walk in to your very first home, fall in love with it, and they’re not accepting offers for people that aren’t pre-approved. You know? That would just be the worst because it can take a couple of days to get pre-approved. So go ahead and get pre-approved. Then at that point, really, I recommend again, trying to get with a realtor and help them help you find some homes. And you can do this on Zillow, you can do this on Redfin, you can do this by yourself. You don’t need a realtor, but it’s nice when you have one in your court, doing the extra work for you. And once you’ve got that realtor in place, then you start assessing your deals. You start looking at the homes available to you, and you know that once you go into it, you’ve done all the financial background, you’ve got your little team that you’ve built, you’ve got your real estate agent so that if you do need to make an offer, you’re ready to go and you’ve got all those ducks in a row before you get to the point where you can make that decision on when to buy a home. Because I think you’re exactly right, Tim, so many of my clients say this to me when they start. They go, ‘I’m just going to start looking. I don’t think we’re ready to buy for six more months. I’m just going to look.’ And that person inevitable is putting an offer on a home within three weeks. Guaranteed. And it just happens. So you have to be ready before you start looking. It’s really easy to jump on Zillow and get really kind of like, we should go look at that house! But I really encourage you to do that background homework before you jump in and start looking at homes.

Tim Ulbrich: Nate, great advice, and all I keep thinking through this episode and the previous one is I wish I would have had that chance to talk to you before I got started, you know, eight years ago. That’s what we’re here for, and hopefully our listeners, whether it’s first home buy, second home buy, interest in real estate, whatever, hopefully they’re getting some good advice here. So again, Dr. Nate Hedrick, the Real Estate RPH, you can learn more about the work he’s doing over at realestaterph.com. Nate, thanks for coming on the show as well as for filling this need. I think where pharmacists need more information and education on home buying. So thanks for joining us today.

Nate Hedrick: Of course, thanks for having me.

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YFP 040: 10 Things Every Pharmacist Should Know About Home Buying (Part 1)


 

On Episode 40 of the Your Financial Pharmacist Podcast, we begin a two-part series on best practices for home buying by interviewing Dr. Nate Hedrick, The Real Estate RPh.

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

Real Estate Investing Guide

Looking to learn more about real estate investing? Check out The Pharmacist’s Guide to Real Estate Investing at www.realestaterph.com/real-estate-investing-guide

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