by Brian Hufford, CPA, CFP®
Are you realizing your financial potential? The dictionary definition of the word potential is "possible versus actual." Capability, on the other hand, is realized potential, or the ability to actualize one's potential.
When we work with new dental clients, we start a Discovery Mind-Mapping Process with two questions: 1) How do you define financial success? and 2) How do you define wealth? These two questions seem to stop most dentists. Most of us really have not created a process to turn financial potential into a capability; nor do we even know how to think about capabilities.
Clayton Christensen, author of the book How Will You Measure Your Life? has taught formal strategies in the Harvard Business School for students to transform the potential for success in business into capabilities. He has created an equation that determines a person's or an organization's capabilities.
Capability equals Resources x Processes x Priorities. This equation is a helpful tool for how to think about financial success and wealth in dentistry. Most dentists define financial success in terms of income from practicing dentistry. Wealth is defined in terms of freedom in making financial choices.
Perhaps if I had to paraphrase most dentists' definition of wealth, it would be "I can do what I want, when I want, and money doesn't decide." Dentists also define wealth in terms of better work/life balance. Most do not seem to define wealth as the ability to retire or to quit practicing dentistry.
Again, how does a dentist turn financial potential into the capability to be financially successful and wealthy? A deeper look at the Capability Equation provides some enlightened insights.
Financial frustration typically comes from only looking at financial success and wealth as a "resource" issue. In other words, a dentist might believe: If I had more income from my dental practice (more resources), I would be more successful and eventually wealthy. Resources are only part of the Capability Equation.
In consulting with hundreds of dentists, I have found that achieving financial success and wealth is rarely an income or resource issue. It is almost always related to the other parts of the equation – processes and priorities.
In fact, I have found that maximizing financial success and wealth in dentistry comes about by having formal processes that properly align each dentist's financial priorities within the dentist's resources or income. Every dentist can have the capability to realize maximum financial potential with a formal process that properly aligns financial priorities in a way that supports wealth creation.
With wealth defined as more freedom, the path to success has to be about increasing the capability to save and invest. Will you save 20% of your income this year? Will you save 20% of your income throughout your career in dentistry?
If not, then you simply do not have the capability to realize your financial potential. You may have a great income from dentistry, but without adequate processes and priorities to create freedom or wealth.
Perhaps the great irony of turning financial potential into capabilities is that the processes that are frequently used miss the mark. It would seem that financial planning should be the process that expands the capabilities to create freedom or wealth.
If the focus of financial planning is tax planning, insurance planning, estate planning, and investment planning, none of these are processes that necessarily lead to the ability to save 20% of income, nor – by themselves – the capability of creating wealth. It's not that financial planning is not important; it's just that deeper processes are needed to support the ability to save.
There is great news on the capability front. If you have the burning priority to save 20% of income, the processes that support the savings goal are relatively easy to create. Loan payments can be restructured. Lifestyle spending can be managed. Levies (income and payroll taxes) can be minimized. Large purchases, e.g., college tuition, can be planned to support the realized capability of wealth creation.
One simply has to view the inability to save 20% each year as a priority and process problem. You can create capabilities to realize your financial potential within your current financial resources by learning processes that align your financial priorities properly to create the ability to save.
Brian Hufford, CPA, CFP®, is CEO of Hufford Financial Advisors, LLC, an independent, fee-only planning firm that helps dentists achieve financial peace of mind. Contact Hufford at (888) 470-3064 or [email protected].
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