As a financial consultant, I have seen financial statements from hundreds of dentists. When judging success from a purely financial perspective, there is a definite pattern to what the successful dentists have done versus their unsuccessful counterparts. In this two-part article, I will share with you my observations and provide you with some strategies that you can apply in your own practice.
My observations are from my work providing commercial lending and financial consulting to dentists across the United States, from all specialties, from 1996 until today. All of my clients must expose all of their financial information, and are subject to in-depth analysis of their practice and personal lives.
While there are many ideas and concepts that can be gleaned from the data, I will write about what I feel are the 20% that comprise 80% of the results.
Wealth Creation Tip #1: Live far below your means
You cannot consume all of your household income and later expect to live without a household income while maintaining your lifestyle at current levels. Sounds like something Alan Greenspan would say. In English this means that you need to save part of your monthly income so you will have a nest egg when you decide to retire.
You are probably saying something sarcastic about my first observation. Who doesn't know that you need to take in more than you spend? Congress doesn't. The American people as a whole don't. They spent more in July 2005 than they earned according to the Bureau of Economic Analysis of the U.S. Department of Commerce. This is amazing to me. We live in the most abundant nation on the planet and our citizens cannot earn enough money to pay cash for their personal expenditures. This also implies that saving from current income may be near zero or negative. Where did people get the money for July's expenditures? Borrowing (credits cards, home equity), savings from previous periods (this is a paltry amount), or selling investments or other assets.
Dentists, on average, earn more than 95% of all Americans. Real median household income in 2003 was $43,318. The 80th percentile of household income in 2003 was $86,867. The 95th percentile for Household Income in 2003 was $154,120 according to the U.S. Census Bureau.
All of the wealthy dentists were living below their means. Some started doing so from the very beginning of their careers. If they waited, it was not long enough to cause great financial harm. In another article I will discuss where these shrewd people put their money.
Another interesting observation that I made about lifestyle is that if one spouse spends too much money, the couple is not likely to get ahead financially. If both people spend too much, they are doomed.
Here is an example. Our Financial Health Assessment is designed help dentists discover their current financial capabilities. Part of our process forces you to understand what you spend on lifestyle expenses. One of my clients discovered that his spouse spent $30,000 on clothing last year. Oops. You want to discover this as soon as you see bags coming in the door. I would imagine he saw new clothing or an empty bag just about everyday. For the financially curious, $30,000 invested once and left to compound for 20 years at 10% equals $219,843. The Opportunity Cost of those clothes is huge.
Wealth Creation Tip #2: Seek expert advice
The wealthiest dentists hire me the fastest. This used to be surprising to me. Then I realized that they understood the concept of Opportunity Cost, which says, "doing this does not allow me to do that." What you give up doing has a cost to it. A wealthy dentist thinks in terms of dollars per hour or dollars per day. He protects his time and only engages in activities that he is uniquely qualified to complete.
You should not hire an expert if you can complete the task yourself, equally as well, for less money. Compare the expert's price and potential result to your cost. Assume that your cost is your daily rate in the office. Wealthy dentists do not consider their day off as free--they apply the same daily rate for calculation purposes. Why? Because without time off your productivity will plummet. The mind must have time away to be at its creative maximum.
Another interesting point to consider is that experts do things for a living. They spend 2,000 or so hours per year focused on an activity. You cannot replicate their acumen. The question is do you need their level of expertise? The wealthy dentists seem to think so. The majority of them have a practice management consultant or some expert helping them, depending on the situation.
If you are going to do a project yourself, just remember that the people you are negotiating with do what they do for a living. You will likely not have an edge. For example, as a dentist you will probably borrow money. You can assume that the lender you are speaking to will know far more about what they are doing than you do. For instance, if you change the way you calculate interest on a $500,000 real estate loan from monthly to exact days your monthly payment will be $35 higher. You will pay an additional $10,557 in interest, but the quoted interest rate will be the same.
Wealthy dentists always seem to have experts helping them. If you are producing $2,500 per day and you want to produce $6,500 per day, don't spend any time trying to figure this out yourself. A wealthy dentist would spend his time finding the methodology or approach that makes sense to him and hiring someone to help him implement it. This ends Part One of this article. In the next installment I will discuss additional wealth-creating lessons gleaned from my experience helping dentists.
I want to leave you with an exercise that many people find helpful. Most banks will allow you to download your personal account into a spreadsheet. I want you to download at least three months of account information. This will include all of the ATM withdrawals, checks, and bills paid. Make sure you download your personal credit card, too. Once it is in the spreadsheet, you can easily sort it by whom you paid. What you want to do is determine where you spent your money. Do not make this complicated. Create some simple categories like utilities, mortgage, groceries, etc., and then sit down with your spouse and discuss it.
In the next article I will tie all of my observations together to create a model for developing wealth as a dentist.