By John K. McGill, JD, CPA, MBA, and Bradley A. Kucharo, CPA, CFP®
Many doctors do an excellent job with their practice finances, maintaining above average profitability. Unfortunately, many of these doctors' personal finances are in shambles because they lack the time to translate their practice profits into personal wealth.
Below are our top strategies to cure the problem.
- Begin tracking your monthly personal spending using Mint.com, Quicken, or iBank (for Apple users). Accurately determining this number is a critical first step in determining the assets the doctor needs to accumulate by age 65 or 70 to assure financial security in retirement.
- Once you're in the know about your total monthly personal spending tab, identify excessive spending areas in which to cut back. Many doctors can trim $2,500 per month or more off of their personal spending, slashing the assets required at age 65 to fund their retirement by over $800,000 or more.
- Got a certified black belt credit card junkie in your household? If so, studies have shown you can trim spending on discretionary purchases by 30% or more through paying by cash or check rather than credit card to slash impulse purchases.
- Do you have excessive credit card debt? Pay off card balances more rapidly by transferring high interest rate balances to new cards issued by lenders that offer 0% interest rate teasers for 12 to 24 months, but beware of one-time balance transfer fees.
- Establish a home equity line of credit to maintain liquidity, which allows you to use all existing cash to pay off high interest rate debt or significantly improve your investment return by investing all cash in higher yielding and longer term investments.
- Dramatically improve investment returns on a guaranteed basis by using all available cash (earning 0% to 1% now) to pay off higher interest rate debt, with rates ranging from 4% to 18% or more.
- Slash interest rates by consolidating existing high rate debt, including mortgages, investment, and business loans, and refinance to obtain a new home mortgage at today's lower interest rates.
- Take out the life insurance coverage you need using the ADA's annual renewable term to minimize premium costs. While rates rise with age, you'll need less coverage in the future as your investments grow. Once coverage is in place, drop your existing coverage for significant premium savings.
- Cut premiums further by eliminating accidental death riders. You need the same coverage level no matter how you die. Further cut costs by dropping the waiver of premium rider, since you should have sufficient liquid assets from which to pay premiums in the event of your disability.
- Reduce disability insurance premiums by obtaining the coverage level needed through the ADA (which has an occupation definition of disability) and thereafter drop existing policies for significant premium savings. Avoid expensive riders such as the future increase option since the amount of disability insurance coverage needed decreases over time due to increasing your liquidity.
- Cut auto and homeowners insurance premiums by bundling them with a single carrier, and increasing the deductible to $1,000 on autos and $10,000 (or maximum amount allowed) on homeowner's if you have sufficient personal liquid assets to self-insure, to reduce premium costs up to 50%.
- Switch to a qualifying high deductible health plan (HDHP) to cut health insurance premium costs and qualify for tax-deductible contributions to a health savings account (HSA). Invest HSA funds to build a second retirement fund to meet future medical expenses.
- Add the monthly amounts from debt payments eliminated, personal spending reductions, and insurance premium cuts to boost monthly savings and investment assets available to fund retirement. Make sure to set up an automatic monthly draft for a retirement plan, IRA, Health Savings Account (HSA), and personal savings. Doctors who do so have a 95% chance of reaching their financial goals since all "found" money gets saved, and investment returns are improved through dollar-cost averaging.
John McGill and Bradley Kucharo provide tax and business planning exclusively for the dental profession through John K. McGill & Company, Inc., a member of the McGill & Hill Group, LLC, a one-stop resource for tax/business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit www.mcgillhillgroup.com.
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