Learn to fly! The first lesson is free! For some reason, I had to see what it was really like to pilot an airplane. The first impression I had sliding into the pilot’s seat for my initial lesson was the overwhelming number of instruments and dials in front of me. A pilot of a 747 was asked, “How do you keep track of all the instruments in the cockpit?” His response was that he only needs to monitor continuously about five dials. If one of the five dials isn’t right, then the other instruments are designed to provide more information so that corrective action can be taken. So, the plane reaches its destination with the pilot continuously monitoring five dials.
These dials are a great metaphor for flying your financial airplane. I find most doctors are so overwhelmed with financial data that they don’t monitor their key financial indicators. If you don’t continuously monitor these indicators, you won’t reach your destination of financial freedom. Let me help you receive your financial freedom IFR (Instrument Flight Rating).
Dial #1 - The Retirement Dial. There are no road signs in the air. My first solo cross-country flight covered 90 miles. To reach my destination, I had to monitor continuously my compass, and try to identify major landmarks on the ground. If I asked you how much you needed to save in 2006 to be on track for retirement, would you know the exact number? Most dentists view retirement as an age, like 62, or as a type of retirement plan, like a SIMPLE-IRA. Your retirement dial should reflect the exact savings amount you need this year to be on track for retirement (like $44,654), as well as a cash flow plan to make it happen. What is your retirement dial?
Dial #2 - The Lifestyle Dial. How high are you flying with your lifestyle expenses? Do you have houses with views of both the Atlantic and Pacific oceans? Your lifestyle dial is how much you spend on living expenses each month. Most dentists don’t have a clue what this number is. Is your monthly living expense $6,473 or $36,591? Unless you track spending monthly, your financial plane could hit a mountain. What is your lifestyle dial?
Dial #3 - The Debt Dial. Achieving the proper altitude is a factor of the correct amount of engine power or air speed. Once the pilot applies full power to leave the ground and achieve the correct altitude, power is reduced to maintain altitude. Most dentists apply full power to their debt all the time. They apply their entire cash flow to repay debt and none goes to savings. Typically, to allow for significant savings, debt payments must be reduced. If you are unable to save 10 percent of gross production, most likely your debt dial or monthly payments are too high. Divide the total amount of annual debt payments, both business and personal, by the total amount of debt. For example, divide annual payments of $125,000 by total debt of $1,000,000 = 12.5 percent. If this percentage is greater than 10 percent, your debt dial is too high. You should restructure debt to reduce the debt dial. Most dentists throw away $50,000 of potential savings each year. What is your debt dial?
Dial #4 - The Tax Dial. Many doctors have not kept current with changes in retirement plans in the past five years. Pension benefits have been liberalized greatly. In certain 401(k) plans, a doctor can contribute $44,000 for 2006. By also employing a spouse, a dentist could contribute an additional $15,000 for a total of almost $60,000. All of this is tax deductible. Yet fewer than 20 percent of all dentists take advantage of this situation. Most have SIMPLE-IRA accounts. Many pension advisors in dentistry are on the wrong frequency. They are selling investment products instead of helping their clients maximize retirement savings. They can’t draft the best pension plans for dentistry. Is your tax dial on the right frequency?
Dial #5 - The Opportunity Dial. Every year you have opportunities to buy more dental technology, purchase a new home or car, or possibly invest in numerous speculative ventures. How do you decide? An opportunity dial is needed to touch all the bases. No matter how much you earn annually, there is a tendency simply to break even with no savings. To maximize savings, you need to make it your top priority - not just something that happens if money remains. Do you have an opportunity dial that helps you fly straight and level in all kinds of weather?
Your financial success is determined by the existence and accuracy of the five financial freedom dials we have reviewed. If any are missing, you must have them installed immediately. If you don’t monitor these dials continuously then ... watch out for that mountain ahead!
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. Contact him at (888) 470-3064, or at email@example.com.