We cannot expect politicians to put food on our tables.
William J. Davis, DDS, MS,
Joseph J. Massad, DDS, and
Gary J. Rathbun CLU, ChFC
For most of us, the opportunity to be a self-employed dentist is one of good fortune and, possibly, luck. With this opportunity, we become responsible for our own financial future. We have the responsibility to ourselves and to our family to know how wealth accumulation and financial planning work. Unfortunately, many of us make some typical mistakes as we travel down the road toward retirement. The following are 10 of the most common mistakes made by dentists (as well as other business people) as they try desperately to control their financial future.
Not taking a financial snapshot.
If you don`t know where you are, how will you create a road map to get where you want to go? It is very important that you have a starting point in your financial plan that is accurate. If you don`t know where to start, the odds are that you won`t start.
Start with a financial snapshot. A clear picture of exactly where you are today. Sit down with tax returns from the last few years and your check registry for the last year. Look at all of your expenditures on a month- by-month basis to determine your monthly cash flow. Hopefully, this will be a positive number.
If your cash flow is a negative number, your top priority should be to achieve positive cash flow. This can be accomplished in one of three ways:
- Reduce the amount you spend each month
- Increase the income you receive each month
- Win the lottery (unlikely)
Once you have a positive cash flow each month, it is important that you do not adjust your lifestyle up to absorb the extra money. It is critical that you invest the leftover cash for the future.
Now that you have determined monthly cash flow and gotten a handle on income and expenses, the second financial snapshot that is needed is your net worth. Net worth is defined as your total assets less your total liabilities.
Once your cash flow and net worth have been defined, then you are ready to start putting together your financial plan.
Not having well-defined goals.
If you don`t know where you are going, how will you know when you get there? We cannot stress the importance of this strongly enough. Unless you have well-defined objectives with a specific timeline, you have a dream, not a goal.
Not only must you have specific objectives with a timeline, you also must write down these goals and review them periodically. It is recommended that you review your goals on an annual basis and make alterations. Minor adjustments are easier to make throughout your financial life than it is to make major leaps shortly before you retire.
Finally, your monetary objectives must not only be specific and written down, they also must be based on reasonable assumptions. With all of these components in place, you then can develop subgoals to use as periodic benchmarks.
The key is to begin today. The sooner you begin the easier it is to reach your goals.
Not considering risks.
Risks and financial returns go hand in hand. Although volatility can characterize investing, the greatest risk is failure to act. Assuming that you are willing to take the risk of action, certain risks must be built into your plan. These risks include:
- Inflation risk
- Interest rate risk
- Market risk
- Economic risk
- Specific risk.
Inflation has been very low in recent years, causing many of us to forget that inflation can be an issue. It wasn`t that long ago that inflation was running at double-digit rates. It is likely that, sometime between now and the time you retire, inflation rates will soar again and greatly affect your ultimate goals.
Interest rates rise and fall in a similar manner to inflation rates, and they do affect the results of your investments. If interest rates rise, the corresponding value of your holdings could fall.
Changes in government policies and tax law in this country and with our foreign neighbors constitutes market risk. These changes are highly unpredictable and can drastically beat up a portfolio in a sensitive market.
Economic conditions can greatly change the value of your portfolio in specific industries. Many industries cannot change quickly enough to compensate for these changes. The automotive industry is a classic example of an industry unable to change quickly in response to economic conditions.
Specific risks are very difficult to predict and accommodate. The death of a company president or a key individual could cause the value of the company to drop dramatically. Government regulations and quickly changing technology are also specific risks that are difficult to plan for.
The solution to allowing for these kinds of risk is simply to understand the different risks and build your portfolio to reduce exposure to these risks.
Not understanding the value of time.
In this era of instant gratification, the mentality of many people is, "Get rich quick!" (usually with "no money down"). Con artists constantly take advantage of people who believe in stock tips and a quick buck. It has been said you can lose money fast in the stock market, but it is very difficult to make money fast in the market.
One should invest for the long term. Long term has been defined as investing for three years or longer. Choosing investments that are "brand new" with no proven track record is an excellent way to make a small fortune from a large fortune.
There is no question that you may miss out on some opportunities, especially in a market such as the one we have today. However, by not rushing in, studying the investment, and understanding why it should appreciate, you will obtain most of the rewards without the start-up risks and sleepless nights.
Not protecting your assets.
Protecting your assets can also be called risk management. You want to protect the gains you have already made as well as your income. Too many people invest in the stock market before they can adequately take care of the essentials.
Make sure that you have adequate amounts of life and health insurance, disability protection, car and home insurance, business coverage, and an umbrella policy to cover the catastrophic liability loss.
Diversification will provide you with added safety and the highest after-tax return possible. It is necessary to diversify the types of investments as well. You should always have some growth, some income, and some liquid cash investments as well. Most important of all, have an emergency fund that you can tap into anytime so that you will not have to sell other investments at an inopportune time.
Not making or keeping a budget.
Pay yourself first; after all, who deserves it more? It is important to pay yourself first. And more importantly, you should save money first also. Capitalize on the miracle of systematically saving money and the effect of compound interest.
In addition to saving and investing every month, you should try to increase the amount you save every month. Try to increase your savings rate until you feel a small pinch. The pinch is where the level of your savings begins to have a slight adverse impact on your standard of living.
Keep your expenditures at a lower rate than the increase in your income. Not having or not staying within your budget and not keeping your cash flow under control are two of the major barriers to any wealth accumulation plan.
Not considering the effects of fees/taxes.
The old saying goes: It is not how much you earn, it`s how much you keep. In other words, after fees and taxes, how much are you really making on your investment?
It is important to consider how much of the investment is taken for fees, commissions, and other costs both before and after you invest. Some investment vehicles will have a "front-end" load that takes a percentage of your money before anything is invested. In addition, these same investments may also charge an annual fee on the account. Other investment vehicles may have no front-end charges, but they will charge you a fee when you sell or liquidate. All of these fees greatly affect your bottom line over time.
Another critical aspect to consider before investing is the affect of taxes on your total return. If you are like many dentists, you are in a high bracket for federal and state income taxes. This can easily erode your returns to a below average standard while you are trying to reach financial objectives. As an investor, you should consider the total impact of taxes on your investment strategy and consider tax-deferred and tax-free alternatives.
Not learning from others` mistakes.
How many of us have had parents or friends struggle through retirement because they did not save enough? Are you making arrangements so that you do not end up in the same position? Many people like you actually may be worse off than the generations before them.
As part of the "baby boomer" generation, many of us have not been in business long enough to amass large pensions. We are working hard in our practices and, as small business owners, we are concentrating on building the practice - not necessarily providing for our personal or our staff`s retirement.
Each day brings new information regarding the survival of the Social Security system - not to mention that inflation will have the greatest affect on the comfort of our retirement. It is no longer safe to assume that your expenses will be lower after retirement. Medical costs have risen consistently, inflation will continue to diminish your purchasing power, and we are living longer than ever before.
The need for adequate money after retirement is more important than ever before.
Not remembering that it takes work.
Many dentists are familiar with the phrase, "Play the market." The truth of the matter is that investing in the market takes work. It has been said that people will spend more time and effort planning their vacations than they will planning for retirement.
The work of investing involves not making all of the above errors in addition to exercising patience for investing for the long term. Discipline is critical. You need to be able to sell when you should and cut your losses when necessary. It is very easy to get sentimental about a particular holding. This can cause you to make erroneous decisions, which can be very expensive. Your decision to invest your own money requires you to spend time studying and evaluating your investments.
Not making your own decisions.
Many dentists rely on the advice of others to make their financial decisions. It is important for you to be fully aware of not only what you are invested in and its risk, but also why you are invested. A good rule to follow is: If you don?t understand, don?t invest in it. Warren Buffet has a similar investment philosophy; he will only invest in businesses he understands.
In addition, it is important that you include your family, especially your spouse, in your investment education and decisions. Take responsibility for your financial future. In working with a financial advisor, it is important that you trust that person. But it is just as important that you verify the information and make sure it fits within your financial objectives.
Pause for a moment. Visualize your thoughts. You may be feeling frustration about the need to think about financial planning at this particular point in your busy career. If that?s the situation, then consider getting a coach (advisor). Don?t wait until it?s too late. We all deserve a fruitful retirement for the years of good work in treating our patients. It?s time to treat ourselves. It is very important that you take control of your financial future and learn what you need to know to make informed decisions. All of the diplomas in the world may not lead you to financial freedom.