Think back to when you first went to college. You were on your own for the first time, away from home and living life as an adult (or so you thought). With the fun of being away from Mom and Dad for the first time, though, came responsibility. Some of us were prepared for it. Others weren’t.
The problems you have now may be the same that so many young people have when they’re first on their own – and you might not even realize it. You don’t have a plan; or, if you do, it’s flawed or not fully realized. You may just be trying to survive one day at a time, paying things off as they come but never knowing what’s next. You may think you know and simply be wrong. Why does this happen? Because you weren’t properly prepared. You don’t know what you need. You’re not ready to be on your own yet.
The answer is a smarter plan, a plan that gives you exactly what you need to be able to handle the present and the future. Let’s get started.
The heart of the problem here is that dentists are expected to function as business professionals when they start a practice, but they aren’t properly prepared for it. They aren’t trained in business. Not a lot of business majors go on to dental school – most dental students studied chemistry, anatomy, or another life science in their undergraduate careers.
Then in dental
So how do you build a financial plan without years of practice? It’s really not as hard as you would
It’s easier said than done. But there are fairly simple steps a dentist can take to run a smarter practice that many dentists either don’t realize or choose to ignore.
The sooner you start planning for your retirement, the better. That goes for saving and investing money for sure, but it also means planning for what happens to your practice after you retire. This isn’t something that you do at the last
Read More: Financial Planning for Dentists: It's Not Too Late to Save for Retirement.
Tax time doesn’t start in April. There are two major steps you need to take to make sure your practice’s taxes are being managed properly.
There are two major steps you need to take to make sure your practice’s taxes are being managed properly. The first is to establish your practice with the proper corporate and income structure. There are three primary types – the C-corporation, the sole proprietorship, and the S-corporation.
The C-corp outlived its usefulness in the 1980s and is no longer advisable. The sole proprietorship is simple for accountants, but lacks the main benefit of the S-corp: the ability to take income both as distributions and in W-2 taxable income.
What does that mean for you? The fact that no taxes can be withheld from distribution payments – all taxes on this income must be paid later – makes planning extremely difficult. Any change in income or overhead has a huge impact on your tax bill when 100% of your taxes are being paid on a yearly or quarterly basis.
In an S-corporation you can still take some of your income through distributions but you also have the ability to take income in a regular paycheck like the rest of your staff, with taxes withheld. This way a percentage of your tax obligation is paid with each paycheck, and your end-of-the-year responsibility is smaller.
Your tax management also must be proactive rather than reactive – you must take actions to prevent problems from occurring, rather than just solving them after they do. Reconciliations should be done monthly by your accountant, with the smallest number possible of uncertain or uncategorized transactions. Regular tax estimates should be provided, based on changes in things like the financial forecast and the practice’s overhead. You need to get your monthly statements and other relevant materials to your accountant in a timely fashion.
In short, you can’t start worrying about taxes two weeks before your return needs to be filed. For the prudent dentist, tax time is all-year-round.
Listen to this episode of our podcast, The Millionaire Dentist, for some end of the year tax tips.
Ensuring that your money is being used properly is really what this is all about, and the area where you have the most visibility into that is in your personal and practice
And one of the biggest things you can do to make sure your cash flow is healthy is to manage your dental practice debt properly. Bad personal cashflow can manifest itself in similar ways as bad cash flow in your practice: wildly swinging bank accounts that never grow enough to make you feel secure.
People hate debt, and dentists tend to hate it even more than most. When buying equipment, many dentists try to avoid loans as much as possible to keep from building debt. When money is available, a lot of the time it goes towards paying off the debt that they already have. But that’s not necessarily the best way to do things.
There are two kinds of debt: good and bad. As the names suggest, all debt isn’t to be avoided. Good debt is something like taking out a loan to buy a new piece of equipment for your practice that will pay for itself, or your mortgage. An example of bad debt is a high interest credit card or equipment that does not improve efficiency in your practice dramatically. If you have a lot of bad debt, that should be eliminated – but good debt can be managed more gradually. This way you can concentrate on bringing on personnel and materiel that your practice needs to grow, without hamstringing your finances. It’s also crucial to live within your means, both at home and at work. While good debt is something you can use to grow, bad debt will crush you. High credit card bills, wasted money, and a lifestyle that you can’t afford all have the potential to doom your practice and destroy your career. Spend carefully. One area where you should probably be spending more than you are is on your retirement.
Read: How Much Do You Need to Save for Your Retirement This Year?
When you’re first starting out, your retirement is abstract – it’s a long way off, so you might not put the mental and emotional effort into it that you do for expenses that seem a bit more urgent. But if you think logically about it, your early efforts to save for retirement are crucial.
If you fail to invest now in your retirement, you will miss out on returns for every day your money isn't in the market. Money saved at age 30 ends up worth more than what you save at 50. The idea of compounding of interest over time makes this very clear. For
That’s why the prudent plan is to focus on saving more and taking less risk with that money in the market. Do not take unnecessary risks in the market by chasing big returns to make up for your lack of past savings – take control of what you can, and pump those numbers up.
That’s also why a fee-only advisor is better for your money. A commissioned advisor isn’t only working for you – they’re also working for themselves, and for the firm that pays their salary. That doesn’t mean they’re dishonest, or that they’re not looking out for you. But if an advisor is paid by commission on individual transactions, it’s going to be in their best interest to create a strategy that involves more transactions. That could be the best option for you. But it also might not be. Typically commissioned fees are 2 or 3 times higher than what you pay fee-only advisors, as well.
A fee-only advisor is only beholden to your interests. They’re paid only a flat percentage rate, by you, for their asset management services. Because of that, they can act in a more objective manner, and devise a strategy that’s truly the best for you and you alone. It’s in their best interest to do the best work possible for you, more so than other kinds of advisors. They are rewarded for upwards performance and penalized for declining performance – and that’s the way it should be.
The most important thing to consider when a financial plan is being created for your practice is that it has to be personalized for your practice, and it has to be comprehensive. A generic plan that’s devised by a single advisor is unlikely to fit all the unique needs and nuances of your practice. Your custom,
A comprehensive approach gives you visibility into the total effect of every financial decision you make. If you ask an accountant or a banker whether you can afford to remodel your office, you might get different answers from each because they come at the question from a different angle. To build long-term success and prepare for the retirement you deserve, you have to have all of your bases covered.