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Your Financial Pharmacist mailbag

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Your Financial Pharmacist By Timothy Ulbrich, PharmD

It’s time to open up the mailbag and answer the pressing financial questions of today’s New Practitioners.

Q: I have been wondering more recently about refinancing loans. Both what exactly that means, and since I am paying my loans off as quickly as possible, would it help to get a lower rate overall to save money in the end?—Mitchell Howard, Toledo, OH

Dear Mitchell,

This is one of the most common questions I get when presenting to student pharmacists and New Practitioners, so thank you for bringing up this important topic!

Refinancing is the process by which a private lender takes your student loans and combines them into one loan payment with a lower interest rate. It is important to differentiate this from consolidation, which is simply the process of collapsing multiple loans into one monthly payment that does not effectively lower the interest rate but rather results in a weighted average of the interest rates from the loans being consolidated.

Refinancing tends to be most advantageous for those who have high interest rate student loans (e.g., greater than 6%) and are willing to aggressively pay them off by making large monthly payments.

The most obvious benefit to refinancing is that it should save you money on the total amount of interest (aka, cost of borrowing money) you pay on a loan. For example, if you had $150,000 in loans at 6% interest and opted in to the 10-year Standard repayment plan, you would have a monthly loan payment of $1,665. At the end of 10 years, you would pay out a total of approximately $200,000 ($150,000 in principal and $50,000 in interest).

If instead you were able refinance your $150,000 in student loans at 4.5% for a 10-year repayment plan, the result would be a monthly payment of $1,555 with a total payout of approximately $187,000 ($150,000 in principal and $37,000 in interest). In this case, the refinance would result in a total savings of approximately $13,000. The greater your student loan balance and the greater the difference between your current interest rate and refinance interest rate, the more you will save!

It is important to note that by refinancing, you are taking your loans out of the federal loan repayment program and placing them with a private lender. Therefore, by refinancing, you are foregoing any benefits associated with the federal loan repayment program, such as the option of accessing an income-driven plan and/or seeking forbearance in the event of financial hardship. Also, if you are pursuing the Public Service Loan Forgiveness (PSLF) Program, you will not want to refinance any PSLF eligible loans since doing so would disqualify you from the benefits of the PSLF program. Lastly, depending on when you refinance, you may be giving up a grace period for making your first payment. However, that may not be a bad thing since most of your loans are likely accruing interest during the grace period, anyway.

My recommendation is to consider the pros and cons of refinancing and to then do the math to see how much you would pay with and without refinancing to see if the potential amount saved with refinancing is worth the cons associated with the refinance. 

There are several companies out there to consider for refinancing, including Credible, which enables APhA members to save thousands on their student debt by refinancing education loans. I would recommend shopping around to find the lender to refinance that: is attentive to your needs, takes time to answer your questions, and has good customer service; has no fees to initiate the refinance; and does not have any fees for making early payments.

Remember, you don’t have to refinance every loan. Another option to consider is that, if you have some low interest rate loans and/or only want to refinance some private loans, you can keep other loans in the federal loan repayment program.

Q: I am at the point in my life now where I have little debt and I am starting to be able to save more and more money. I am beginning to think it is a good time to start investing. Unfortunately, I don't know anything about investing! Where is the best place to start?
Mark Huffmyer Lexington, KY

Dear Mark,

Congratulations on paying down your debt and being able to move on to more fun things to do with your money. Don’t shout this question too loud or your pharmacy peers who owe six-figures or more in student loans might start sending some hate mail your way. For those facing mounds of student loan debt, I hope they find my response as motivation to pay off those loans. After all, that is when the fun starts happening with managing your money.

Now that your debt is almost gone, I don’t want you to forget about other important parts of your financial plan before you jump knee deep into investing. These would include making sure you have an emergency fund in place of 3 to 6 months of expenses, have appropriate insurance coverage in place (e.g., life and disability), and if applicable, have a good down payment (20%) ready for a home.

Ok, so assuming those are accounted for, it’s time to move on to investing and building wealth for the future. A good rule of thumb to shoot for is to save 15% to 20% of your income toward retirement. So how do you work up to that amount? First, consider taking advantage of any match that your employer offers inside a retirement plan. This is most likely a 401(k), 403(b), or Roth 401(k), depending on whether or not your employer is for profit or not-for profit and depending on the options they have available for retirement savings. The maximum contributions you can make to a 401(k), 403(b), or Roth 401(k) is $18,000 per year. The $18,000 per year maximum does not include any employer match contributions. You can also then contribute to a Roth IRA (outside of an employer retirement account) or a backdoor Roth IRA (if you exceed the income limits for contributing to a Roth IRA). The maximum contribution you can make to this account is $5,500 per year.

For most pharmacists, maxing out a 401(k), 403(b), or Roth 401(k) as well as a Roth IRA would achieve the goal of saving 15% to 20% of income toward retirement. Saving $18,000 in a 401(k), 403(b), or Roth 401(k) plus $5,500 per year in a Roth IRA would result in $23,500. Assuming no employer “match” and a pharmacist salary of $120,000, this would be saving approximately 20% of the gross salary.

Here is the cool part. Saving $1,958 per month ($23,500 per year) for 30 years at 6% growth would result in a nest egg of approximately $2 million!

If you want to dig into the weeds and learn more about investing, including asset allocation, diversification, dollar cost averaging, investing strategy, and other fun and nerdy topics, I would recommend doing some reading. First, Personal Finance for Dummies or Investing for Dummies by Eric Tyson are both good resources for high-level overview of investing terminology that is helpful to understand before getting into any books on investing strategy. Second, I would recommend reading Money Master the Game by Tony Robbins. Third, I would recommend reading Seven Figure Pharmacist: How to Maximize Your Income, Eliminate Debt and Create Wealth. This one might seem self-serving since I co-authored the book, but I confidently believe this gives a very good overview of personal finance issues relevant to the pharmacist and includes four comprehensive chapters on investing and saving for the future. You can access these books and others I recommend at www.yourfinancialpharmacist.com/recommendations

Ask away
These are excellent questions. Keep them coming and maybe I will answer yours in the next issue of Transitions. Send your financial queries to npn@aphanet.org, and write "Your Financial Pharmacist" in the subject line. Till next time, and remember, when it comes to a secure financial future, you can do it!

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