Hugh F. Doherty, DDS, CFP
Planning Makes the Difference
If you want to become financially secure, you have to spend a few hours once a month thinking about it. Doctors put off financial planning or ignore its importance, they claim they don`t have the time, or assume they are not good with money. They are making costly mistakes.
Determine Net Worth Annually
Before you plan ahead, you must find out how much you are worth now. Many doctors avoid doing this exercise because they don`t know how to do it or just don`t want to face the reality of their financial situations. Your net worth is like the gas gauge in your car; no driver would ignore that.
Calculation is easy, and most people who do it are surprised to learn they are worth more than they thought. You can determine your net worth simply by making a list of your assets and another list of what you owe (your liabilities).
Don`t forget to include the market value of your practice, home, retirement savings or other investments, as well as the cash value of your life-insurance policy.
Do not include the market value of cars, furniture, or personal possessions. They are never worth as much as you expect, and you are unlikely to sell them anyhow.
Liabilities include your mortgage, home equity or car loans, and any credit-card debt. Subtract total debt from total assets. The result is your net worth. Keep track over the year. You`ll see how your wealth is growing...or not. Your net worth should increase 10 to 15 percent annually.
If your net worth isn`t growing as fast as you would like, an item in the debt column may be increasing faster than your assets. It`s time to evaluate the cause.
Keep Track of How You Spend Your Money
If you aren`t sure where all of your money goes each month, you can`t develop a smart plan for saving and investing. It`s easy to account for a fixed expense that arrives in a single bill, such as a mortgage or a car payment, but keeping track of discretionary expenses - gifts, entertainment, and dining out - is just as important.
Try this for the next three months: Keep a record of your purchases in a pocket-sized notebook. It also may help to go through old checkbook registers and credit-card statements to get an idea of where your cash is going.
Personal-finance software programs such as Quicken are an efficient, user-friendly way to track cash flow. They can keep your checkbook organized and current, track expenses by category, and compare year-to-year data.
Think About Tomorrow
Most people recoil when asked to consider planning goals. Often, they hardly know what they will be doing next weekend, let alone in five years. Simply list two or three major expenses that you are going to have to deal with over time. These could include college tuition, a vacation home, or early retirement.
Determine What You Want Out of Life
Before you determine what you want out of your practice, both you and your spouse should determine the quality of lifestyle that is important to you. You also may have to prioritize goals, since many tend to overlap. The cost of your children`s college educations, for example, could coincide with when you plan to retire. You might have to postpone retirement until your children have completed college.
Pay Off Credit-Card Balances Monthly
This cannot be stressed enough. If you want to be financially comfortable and reduce emotional stress, you must reduce debt. The typical credit-card rate - 17 to 18 percent - is exorbitant. If your debt is draining your income, consider taking out a home-equity loan at a lower interest rate to pay off your credit-card balances. Interest payments on that loan are tax-deductible.
Plan for Retirement Early
Many people say they can`t contribute the maximums to their retirement plans or IRA because they need the money to live on. If you fall into this category, you need to find a way to live on less so you can take advantage of what is probably the best investment you`ll make. Retirement-plan contributions are deducted automatically from your paycheck before taxes. Earnings that accumulate grow tax-deferred.
Get Smart About Investing
Saving and investing are the only sure ways to amass wealth. If you hope to achieve financial security, your strong allies are discipline, delayed gratification, time horizons, and compound interest. Pick funds with good 10-year records that suit your financial objectives. In the years before retirement, invest up to 80 percent of your assets in stocks or stock mutual funds. Over the long term - 10 years or more - these investments have delivered greater return rates than bonds.
With longer time horizons, there is much less risk since you will be able to weather major corrections in the market.
Hugh F. Doherty, DDS, CFP, is a national lecturer and CFO of Doctor`s Financial Network and financial advisor to the health-care profession. For personal financial consultations and information about Florida workshops, call (800) 544-9653.