by Paul H. Naden, CPA, JD
How to stop worrying about money and start living.
Despite the widespread perception that dentists make a lot of money, many dentists, like many other people, find themselves in financial trouble and in need of an efficient way to deal with it. Let's start at the beginning.
Are you in trouble?
If the answer is "no," you do not need to be reading this article. However, if your take-home pay is inadequate, or your monthly office note payments are too numerous, or your office needs new equipment you cannot afford, or your home/office budget for next year shows a negative cash flow (accounting talk for insufficient funds) - keep reading.
First, a word of explanation. Chances are you developed your attitude toward money from your parents when you were between one and five years old. It may have ranged anywhere from "we can't afford it" to "spend it before he/she does" to somewhere in between.
As a result of early parental influences, people have different attitudes and comfort levels about money. Your level could stem from what you learned as a child, individual personality traits, or your present stage of life. Do you have young children with all the attendant costs? Do you have college costs to worry about? Are you an empty-nester thinking about retirement? Each factor changes your comfort level.
How much can you spend on a purchase without becoming uncomfortable? A hundred dollars? A thousand? Ten thousand? What's your tolerance of indebtedness? Ten thousand dollars? A hundred thousand? A million?
Indebtedness itself is not bad; the issue is whether you can handle it. To resolve differences in handling money requires frank, adult-to-adult communication with your spouse at home, or your associates at the office, or both.
How did you get in trouble?
First step: Take an X-ray of your personal expenses. Start with your cost of living (CL), which is made up of four categories:
- Basics (B), which includes food, clothing, medical expenses, and everything that "basics" implies
- Discretionary (D), which includes travel, luxuries, contributions, and supporting relatives
- Housing (H), which includes mortgage or rent, utilities, and property costs
CL = B + D + H + T
Second step: Add taxes (X) - federal, state, and Social Security - before you get to break even (BE).
BE = CL + X
Now, look to the future. How about debt service (S) and retirement funding (R)? These are needed to establish the basis of staying solvent (BOSS).
BOSS = BE + S + R
Final step: Add business expenses (BEX). Now you know the fees needed (FN) to be collected.
FN = BOSS + BEX
Let's analyze the X-ray you have just taken. Do you have to re-evaluate spending patterns? Look over your chart with an eye to setting priorities and quantifying items in each category. Look particularly at discretionary expenses - contributions, entertainment, country-club memberships, a boat, hobbies, home improvements, personal gifts, and lavish vacations. You certainly can control expenses to some degree.
A red flag with many people is the use of credit cards. A credit card is meant to be a convenience, so you can track expenses and avoid carrying large sums of money or paying for each purchase by check. But often credit cards become a crutch or get used in a crunch. The goal is to pay your credit card bills in full each month. If you cannot, slow down on the use of plastic. If you cannot do that, cut up your cards and use them for confetti.
Here's another red flag: See what tax-deductible items are in your day-to-day spending. Check your car, meetings, conventions, entertainment, education, travel, legal fees, and telephone use for a possible 40 percent savings on those items - savings you can use for debt reduction.
Perform a business X-ray too. Use a profit-center approach to forecast the next 12 months: fees generated by dentists and auxiliaries, expenses for each center, overall general/administrative expenses, and dentists' compensation. Also do not forget debt service and retirement costs - good old S and R.
How do you get out of trouble?
First, ask yourself if your debts are symptomatic of another problem. You have heard of Alcoholics Anonymous and Gamblers Anonymous. There should be a Spenders Anonymous where people with an uncontrollable urge to buy can get together and support each other. Your group could be members of your immediate family or practice associates. If you really cannot budget, get thee to a financial shrink. Your financial guru can be a friend, lawyer, banker, advisor, accountant, or religious figure. Talk to him or her about solutions.
Assuming your trouble is just poor financial management, of course, you can still talk to an expert on financial matters. But, you should also consider consolidating all your debts into one loan large enough to cover unpaid taxes, credit card debts, business loans, personal debts, and education costs. However you do it, plan on securing the loan with collateral. It can be a second mortgage - assuming you do not already have one - accounts receivable, property, or any item valuable enough to be used as collateral.
A unique way of consolidating is the "friendly banker" route. This could be a loan from someone who has major liquidity, or a well-to-do relative, or even a friend's pension plan. Don't laugh - it is a win/win situation.
Let's look at it from the potential lender's viewpoint. He or she is probably making about 8 percent annually on his/her money. You are now paying 14 percent to 18 percent annually on your credit card debt. You offer to pay the "friendly banker" 10 percent to 12 percent on the following terms:
A For one year, you pay interest only. This gives you time to catch your breath, and since this interest is tax-deductible, it costs even less.
A Then, for the next five years, you have a 60-month amortization of principal and interest.
Think about it. Whoever you approach has your collateral securing the loan, and he or she makes much more interest than before. Meanwhile, you've wiped out all debts and are paying a lower rate of interest. See why it is a win/win situation?
Of course, there are alternatives. You can take out a home equity loan, or talk to your primary bank, or borrow from your retirement plan. But, because of banking regulations and other legal restrictions, it is not likely you can strike as favorable a deal as you can with the "friendly banker" option.
In our practice, we have found that most clients choosing the "friendly banker" option were out of the woods in six months to two years after they started. In every case, by the end of six years all were out of trouble.
How can you stay out of trouble?
It is simple in theory, but hard to do in practice. Once you have made a plan, stick with it. If you can, teach your children in a way that, perhaps, you were not taught. Form a Spenders Anonymous group of family or associates. If you are still not sure what to do, tell yourself what you tell your patients: Get a second opinion.
Reprinted with permission from the Maryland State Dental Association Journal.