Question: How much did you save last year? Answer: I saved everything that was left over. Question: How much was left over? Answer: There wasn’t anything left over.
In dentistry, there is a tendency for cash outflow to rise to meet any level of increased production. Many doctors complain that they have worked hard year after year, and have realized significant growth in their production. Yet, they still are unable to create significant savings. We call this dilemma the Breakeven Syndrome™. What causes the Breakeven Syndrome, and how do you overcome it?
Let’s start with how doctors typically define financial success. If I asked how financially successful you were last year, the first thought that probably comes to mind is how much production was achieved - or perhaps how low your overhead was, or how much net income was earned. When you reflect on these definitions of success, it really won’t matter - at age 65 - how much dentistry you produced or what your lifetime net income was. At age 65, financial success is defined by your accumulated savings and assets. Some of the most financially successful doctors I know really don’t have a high-production practice. The most successful doctors have an asset-based paradigm instead of an income-based paradigm. They have a plan each year that puts savings first, instead of saving whatever is remaining. They define financial success by achieving annual savings goals.
Step 1 - Set an annual savings goal
To overcome the Breakeven Syndrome, the first step is to establish an annual savings goal. If you saved less than 10 percent of your gross production last year in pension and personal savings, you need to assess your financial management capabilities. If your production was $700,000 last year, your savings goal should have been $70,000. So, I would recommend that your savings goal for this year be 10 percent. The interesting aspect about setting a goal is that your mind begins to reorganize your priorities and questions arise. Goals are the best teachers. If you set a 10 percent goal this year and save just 2 percent, what was the reason? In order to save more, is the answer to either produce more or spend less? The next step should provide some answers.
Step 2 - Assess savings potential
Ideally, production and collections will increase in your practice this year. But, assuming collections are the same as last year, the way to assess savings potential is by planning and controlling five categories of spending. These categories are overhead, taxes, debt, lifestyle spending, and major expenditures. If a doctor’s collections are the same as a year ago, overhead and taxes typically are close to the same. Likewise, debt payments will typically be the same as last year, unless a loan is paid off or new debt is incurred for lifestyle spending or major expenditures. So, is the key to significant savings merely controlling lifestyle spending and major expenditures? Is the Breakeven Syndrome related to lifestyle spending and major expenditures? There certainly is a relationship. We can dramatically reduce cash outflow with the next step.
Step 3 - Create a breakthrough savings plan
A normal financial plan forecasts that large amounts of savings are created if one gets out of debt and lives like someone who earns half of what you do. Also, if you want to purchase a new car or new equipment in your practice, you should try to pay cash if you can. If that’s not possible, you should pay off these items as quickly as possible. Other than living like a pauper, these philosophies and tendencies are what create the Breakeven Syndrome. I frequently meet 50-year-old dentists who have accumulated almost no savings because they always save only what amount is left over. They maintain they are frugal in lifestyle spending. The truth is that, by always paying off debt quickly and by paying cash for large expenditures, they have delayed compound growth by 20 years.
To make saving your first priority, you should adopt three habits: 1) Structure existing debt with the lowest monthly payments possible; 2) Pay your living expenses from your home checking account, and pay yourself a fixed salary from your practice; and 3) Don’t always pay cash for large expenditures (like a car or dental equipment). By saving first and by controlling lifestyle, you could add $1 million or more to your assets at retirement.
Escape the Breakeven Syndrome. Make saving your first priority, and stop saving just what’s left over.
Brian Hufford, CPA, CFP®, is president of Hufford Financial Advisors, an independent, fee-only planning firm dedicated to helping dentists achieve financial peace of mind. Many dentists attend Hufford Financial Advisors’ Financial Breakthrough Workshops. Upcoming workshop dates and locations are listed at www.huffordfinancial.com. Contact him at (888) 470-3064, or at email@example.com.