Awise sage said: “Without goals we have no future; we simply relive the past, one day at a time.” Make 2006 the year that you greatly improve annual savings. You should be saving 10 percent or more of gross production annually. If you produce $800,000, then you should save $80,000 this year through pension and personal savings. We have created the Cash Flow Capture Template™ as a guide to greatly increase savings each year. Our process includes the following five steps:
Step 1 - Start each year with a savings goal
It is said that goals are the best teachers. As mentioned, a starting goal for savings is 10 percent of gross production. If you were to have a 2006 goal to save $44,000 in your pension and $36,000 in personal savings for a total of $80,000, how would this be accomplished? Is it possible? If not, why not? The next steps are intended to fix the major problems with achieving annual savings goals.
Step 2 - Properly structure existing debt
Make a list of the amounts owed on your debt, both practice and personal, along with the monthly payments. You may have a home mortgage, practice loans, auto loans, office mortgage, etc. Typically, these debts have been incurred on a transactional basis. In other words, there was no thought given to creating a comprehensive debt structure. You simply wanted to purchase new equipment for your office and borrowed money. Each debt, one by one, was incurred on a transactional basis.
Let’s say that you have $500,000 of total debt, practice and personal. Your monthly payments should be no more than 8 percent of total debt. This means that monthly payments should be no more than $4,000 (8 percent x $500,000). If your monthly payments are $7,000, you are throwing away $3,000 per month and $36,000 per year of after-tax savings potential. A dentist can lose approximately $2 million of savings in a lifetime by improperly repaying debt.
Step 3 - Plan annual large expenditures
Because of compound growth, your goal should be to pay debt slowly and not pay cash until you have $1 million in savings. Change your focus from paying debt rapidly, to saving more. It is very tempting to simply pay cash for autos and dental equipment. Instead, make savings your first priority. Plan to pay for major expenditures with a line of credit instead of paying cash in order to protect your savings potential.
Step 4 - Utilize home equity lines and/or a practice line of credit for capital expenditures
We recommend that our dental clients obtain lines of credit in their dental practices of $50,000 to $100,000. For new equipment or auto purchases each year, the amounts advanced are from either the practice credit line or home equity line (with tax planning). This is intended to stop the habit of always paying cash. Then, at the end of each year, a new five-year term loan is obtained to repay the line of credit back to zero.
Most dentists save the remaining cash instead of making savings the first priority. It feels morally superior to pay debt rapidly or to always pay cash. It is possible to have this mindset and end up at 55 years of age with no debt, but also no significant savings.
Step 5 - Pay yourself a salary
How do you control your family living expenses? Do you use Quicken™ or a family budget? We have come to believe that budgets frequently don’t work. They only serve as an alert that you have overspent in the past. They don’t help control spending.
Instead of budgets, get into the habit of paying all living expenses from home accounts. Don’t pay any personal expenses from your practice. That way living expenses won’t be hard to track because they are split among two or more accounts. Finally, pay yourself a monthly salary from your dental practice and live within the salary. By doing this, you will always know that living expenses are under control.
Capture your cash flow in savings. Start each year with a savings goal. Stop saving 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 protected].
