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I'm Out, I'm Ready, I Owe How Much? by Douglas Carlsen, DDS

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Congratulations on becoming a doctor! You’ve waited seemingly forever as your non-doctor friends now have nice cars and have purchased a home.

Now it’s your time to shine! That first BMW M4, Porsche Panamera or Tesla Model S is so right! These cars are going to rip your non-doctor friends’ hearts out. And you deserve it!

Not so fast. You may be able to diagnose most common cases with ease and treat patients as fast as your mentor, yet an accurate diagnosis and long-lasting treatment takes years of practice. The same is true of your financial strategy. Student loans now average more than $250,000 at public dental schools and swell to over $450,000 at private dental schools. These loans present a formidable financial challenge. Decisions made early in your career have huge effects on your financial stability in the future.

However, using common sense and some basic wisdom from dentists who have been through the financial trenches, even in today’s changing dental financial environment, the future for the young dentist looks extremely exciting and potentially lucrative. Yes, potentially lucrative. First, let’s look at some comments from Dentaltown.com users in a message board thread called Financial Mistakes I Wish I Had Never Done.

Ntextdent (Dentaltown.com username):
  1. Wish I never bought the home before setting up the office.
  2. Wish I bought a small home instead of buying the “dream home.”
  3. Wish I bought life insurance and disability when I was younger and healthier.
  4. Wish I didn’t buy that swanky car.
  5. Wish I knew who had the time machine…


bkoenitzer:
  1. At the top of the list for financial mistakes (and general life mistakes) is marrying the wrong woman. Nothing else, other than losing your dental license, will be more expensive.
  2. I totally agree with getting your practice established before buying your house.
  3. Never spend more than 16 percent of your income on your mortgage, maximum.
  4. Pay cash for your toys. If you can’t pay cash, save until you can.
  5. If you are over 35 pay cash for everything that isn’t a home. Everything. Boat, CEREC, kitchen remodel ... everything.


ChipPayet:
The number-one mistake I made: Arguing with my wife way too many times about changes that should have been made. If I had listened and made the changes she thought right, we’d have gotten out of that deep hole I dug much sooner.

Doc-itis
Should student loans be paid off before taking on other loans or should they be paid off over a long period of time? Low interest rates and income-based repayments often entice doctors to pay as slowly as possible.

For insight, I provide my favorite abridged comments from author and TV personality Dave Ramsey. (see sidebar)

A Conversation with Dr. A
Below is an email exchange with a real doctor from the Southwest U.S. He wished to remain anonymous though has been verified by Dentaltown.

Dr. A: I have worked with financial advisors to try and get stuff together from health insurance to whole- and term- life policies. My whole life policy of $ 2 million dollars is supposed to allow me to pull monies from it in the future or even take all at once when it is matured. I like the insurance guy and he said he has the same policy, but I see that a lot of people feel whole life is a waste of dollars. I also have whole life on my kids at $ 5 0 ,0 0 0 a piece for the sake of possible future medical denials. My wife has term life of $500,000.

Carlsen: Whole life’s investment portion often provides growth at only the rate of inflation. But you’ll hear promises of much more from the agent. Understand that the agents normally have little investment training other than sales. Of course you like your agent. He’s your friend — until you change agents! These people feed on your emotions. Note that Obamacare now protects your kids. There is no reason at all for any life insurance on your kids. You should have a $2 million term and your wife may not need life insurance if she’s not working.

Dr. A: I’m 32 years old and have been out of school for two years. I’m married with three kids, ages 5, 3 and 1. My wife and I have followed some of Dave Ramsey’s advice but have kind of fallen off the wagon.
  • I have $440,000 in student debt with a current income-based loan, with no payment until the next tax season. My wife has about $40,000 of school debt.
  • I own a home that is worth $165,000.
  • My 1995 Honda is paid off.
  • We purchased a 2012 minivan for my wife and owe $28,000 on it.
  • We have $13,000 of credit card debt. We were going to pay this off but may need the money for a practice purchase.
  • I associate at an office and take home $9,000 - $15,000 before taxes each month.
  • I hopefully will be closing on a practice before the end of the year costing $500,000 with a cash ow of $200,000 . I plan to continue working as an associate as I grow the practice.
  • We need $4,000-$5,000 a month to live on.

Between all my accounts we usually have about $30,000 cash in business and personal accounts. However, we felt that if we were not to move to a large home, we would remodel our kitchen, the only room in the house that hasn’t been remodeled. It cost $15,000. I know we shouldn’t have spent the money, yet IKEA had the 20 percent off kitchen sale. We remodeled as gift for Christmas, paying cash, and after another few paychecks we will be back to $30,000 of cash in the bank.

Carlsen: Your student debt is your main financial obstacle and is not your fault to have. It is your responsibility to pay it off before any other large purchase.

I see about $4,500 per month total in student loan payments, mortgage, minivan and credit card interest. That’s close to $55,000 per year for debt payment. If you’re earning $140,000 per year, your taxes are about $30,000. You have $55,000 left to live on. That matches your $4,000-$5,000 per month listed above.

Your biggest mistake was not the whole life purchase. It was buying a home before paying off your student loans. Your home is not expensive, yet any young couple is going to spend a large sum of money making it their own. You wouldn’t remodel a kitchen in a rental.

You are not currently keeping up as your credit card debt of $13,000 reveals. To spend $15,000 on a kitchen is nuts! Your money would have been better spent paying down the credit cards.

Purchasing whole life insurance was a mistake but not a critical one. But purchasing a practice with all the debt you have hanging over your head right now might prove fatal.

Currently you have a total of about $675,000 of debt, paying about $4,500 per month or about $55,000 per year. Brian Hufford, a medical financial analyst, says your total debt for personal and practice should never go above 25 percent of your net income. Right now it is between 3 0 and 3 5 percent. If you purchase a practice for $500,000 your total debt grows to $1.175 million. Your total monthly payments, assuming a 10 -year practice loan, grow to about $10,000 per month or $120,000 per year. That’s 60 percent of the $200,000 annual income you mentioned that the new practice earns, far above Hufford’s recommendation of 25 percent. You’d have to have an annual income of at least $160,000 just to pay your debt. That doesn’t include groceries, gas, car servicing and repairs, home upkeep and utilities, insurance, clothes for your family, cable, medical insurance, co-pays and deductibles or going out to dinner. Can you live on $20,000-$40,000 per year with three kids?

A practice loan puts a ton of pressure on young doctors. What do I recommend? Since you are familiar with Dave Ramsey, his Financial Peace University would be great for you and your wife.

You feel that your family deserves at least a few of the better things in life. This is very common. But $440,000 in student loans makes that impossible for the first five to eight years after school. The fatal mistake is buying a nice home, nice cars and starting a practice as soon as you can. At least you didn’t buy a huge home! I know docs who did all the above and are now in their 40s with no savings and huge pressure to produce at the office with over $100,000 in credit card debt. It’s sad.
1. Dear Dave,
I’m 33 and a resident with $250,000 in student loan debt. Next year I’ll finish my residency and increase my income dramatically. The interest rate on my student loan is just 3.5 percent, so I’d like to postpone paying it off and make house payments and begin saving for retirement instead. I’d put off paying the student loans as long as possible. Is this a good idea? – Derrick
Dave's Comments
2. Dear Derrick,
That loan hanging over your head is unbelievable. I’ve worked with many doctors over the years where 20 years later they are still playing math games with the student loans like they’re a stupid pet! If you’re not careful, you might catch a nasty disease called “doc-itis.” Some of the symptoms include two or three leased BMWs and a fully furnished house with a pool on the golf course. That student loan can just wait a while to be paid. It’s a financially debilitating disease.

You’ve been used to living on nothing (less than $40,000) for a while now. Just keep on doing that for a little bit longer … you can have that student loan debt knocked out in a few years.

I’d postpone any retirement savings and buying a home until you’ve completely knocked out the loan and have an emergency fund ($50,000+) in place… – Dave


A Conversation with Dr. B
Here is quite a different email exchange from a Southwest U.S. doctor. Again, this doctor wished to remain anonymous. This is from February and March 2012.

Dr. B: I graduated in May 2011. I perused your articles and I believe you offer great advice on paying off my school debt. However, I’ve been pondering this subject since graduation, and I was wondering, currently at age 28 with $273,000 in student loan debt, when can I open my own practice and still be able to retire by age 50? I’m slowly paying off my debt at $3,000 per month but would like the financial stability to buy my own practice.

Carlsen: You’re doing great to pay down the loan at $3,000 per month! With incredible savings habits, dentists traditionally could retire by age 50. But that was before huge student loans became common. Age 55 for great savers is more realistic today. It all depends on your lifestyle.

First and foremost, you need to pay off the student loan before purchasing anything expensive such as a house, condo or practice. Those who let student loans linger have incredible stress in a private practice. If you think working at a clinic or as an associate is tough, try working for payments you can’t make each month. That’s happening out there to thousands of young doctors who have bought or started private practices with home or student loans still bearing down on them.

I assume you have a 10-year loan. If you could increase payments to $4,000 per month, you’d be done in seven years total, or about six years from now. You’d be about 34 years old. To start saving in earnest at 20 percent of your net income per year, you’d normally be able to retire sometime between age 55 and 58. With real frugal habits, and an expected improving economy from 2020-2035, you might be able to retire by age 50.

The best advice is to pay off your loan in total, start your practice, then buy a home when you can easily afford it. The stats are clear — renting is sometimes less expensive than owning, so don’t worry about missing out on home ownership! For doctors, home expense is the biggest obstacle to savings. Make sure you’re never spending more than 15 percent of your net income on your mortgage. In other words, a doctor making $300,000 in net income shouldn’t have a mortgage of more than $45,000 annually. In fact, 10 percent works better for those wishing to retire early.

Another thought: Doctors who never own a practice often have more wealth than those who do. Sounds weird, yet practice loans often bog down one’s ability to save. Also, docs who have their own practice tend to buy bigger homes and more expensive cars. In other words, they make more yet spend at a higher rate.

To have your own practice, though, provides huge psychological benefits in that you control your treatment. That’s a big plus.

Two years later. Dr. B: I wanted to give you an update from the invaluable advice you gave me two years ago. I really took everything you said to heart, and I really appreciate you! I am proud to say that I have finished paying off all of my student loans. I am officially debt free. Additionally, I just got married two weeks ago, paid off the wedding and currently have $30,000 in savings. I am very simple, very frugal, yet can be generous at the same time. I spend more money on others than I do myself. I was able to achieve this at 30 years of age.

Carlsen: I’m totally blown away by what really is possible. $273,000 in two years! Did all of the money come from working or was some of the money given to you? How did you budget?

Dr. B: I technically paid everything off in two and- a-half years ($9,100 per month was the pay down rate). My husband is an accountant and his skills have influenced me tremendously, and that highlights the importance of having a supportive spouse.

I am a general practitioner and the money was earned through a lot of sweat and tears. I initially practiced in an area where there was a high need, gaining experiences and learning to be more proficient.

As far as budgeting goes, it all comes down to what is important. For me, it’s paying off my debts and not having a lot of material things. It would only accumulate clutter in my small condo. I kept track of every dollar I spent in Excel and always paid off all credit debt I have for the month. I took what was leftover each month to pay off my loans.

I live by Thomas Stanley’s values from his book, The Millionaire Mind:
  1. Integrity
  2. Discipline
  3. Social skills
  4. A supportive spouse
  5. Hard work

Student Loan Principles
One who stretches out student loans as long as possible has two strikes against him.

The student loan creates a more complex debt structure, as seen with Dr. A, making saving more difficult in the future. The young doctor will buy into an insidious mental framework of debt being a natural part of life. It isn’t. If you tie your identity to debt, you’ll end up needing to work 10 to 15 more years than the dentist who doesn’t. This is the most important message in the article: Debt is never your friend.

I know doctors in their late 40s who still have a $1,500 monthly student loan payment along with a new home payment of $3,500 per month, revolving credit card debt of $50,000 with minimum payments including interest of $1,000 per month, auto leases of $1,500 per month, a practice loan of $6,000 per month and private K-12 school payments of $3,000 per month. This totals $16,500 per month or $198,000 per year without paying for taxes, food, clothing, utilities, insurance, home maintenance and upgrades, or cable!

How Much Debt is Appropriate?

Auto
A doctor will spend vast amounts of potential retirement savings taking out loans or leasing new autos frequently. Start a good habit — pay cash. As long as you pay cash, any amount for a car is fine!

Consumer Reports repeatedly states that the worst way to buy a car is via lease with its hidden fees. Second worst is dealer financing. The best way to buy is cash.

Practice Loan
Brian Hufford of Hufford Financial provides guidance with his Financial Balance Guide. From a dentist’s net income, Hufford indicates that one should designate 25 percent to personal living expenses, 25 percent to all loans, personal and business, 20 percent to savings, 25 percent to taxes, and 5 percent to large personal or practice purchases.1

For a young doctor, age 35, with a $200,000 annual income, total annual loan payments should be no more than $50,000. Two auto loans at $1,250 per month eats up $15,000. A student loan of $3,000 per month ends the process. No practice or home loan is possible. Kill that student loan early, docs!

For a young doctor with zero student loan or auto debt and an expected net income of $200,000, a 10-year $300,000 practice loan at a rate of 7 percent would have $3,500 monthly payments with a total yearly loan burden of $42,000. That’s within Hufford’s guidelines. Yet, there isn’t enough left for a home loan yet.

Please be careful to take out a reasonable practice loan, with plenty of wiggle-room in your personal and practice budget in case your practice production falls short of projections.

Mortgage
In Your Money Ratios: 8 Simple Tools for Financial Security, Charles Farrell points out that the maximum amount of mortgage debt should never be more than twice your net family income.2

Therefore, our 35-year-old doctor making $200,000 per year should not have a mortgage of more than $400,000. And that’s contingent on Hufford’s total loan amount, including any practice loan or auto loans, of 25 percent of $200,000, or $50,000. Not easy, is it?

Get a 15-year mortgage. The monthly interest isn’t that much more than a 30-year loan and will provide additional savings in your 40s and 50s.

Farrell also makes it clear that your primary residence value increases only at the rate of inflation over many years.3 You will not be able to fund your retirement via your personal residence. And the more mortgage you have, the less you’ll have to save for retirement. Never buy more home than you need.

It’s great to look successful, yet real wealth is measured by your Vanguard account, not the size of your kitchen, master bath accessories or the money you owe to Bank of America.

Why have I spent most of the article beating you guys up on debt? Debt is the main block to savings and real wealth. If you have nothing to save, investing is not important. And there are many dentists at 50 years old with little savings.

Savings

Emergency fund
This is funded after paying off student loans and before taking out a mortgage. It may be funded along with a practice loan. Note the home mortgage always comes last.

Have the emergency fund in liquid form (money market account) of at least six months of your expenses. For the young doctor, this is normally $30,000+. Why have the fund? I personally know three doctors, one who suffered a ski injury, one a stroke, and one cancer, which caused three to six months of disability. Disability policies paid little and they lost a huge chunk of income to medical co-pays and loss of work.

This fund is not an emergency-trip-to-the-Caribbean fund or I-really-need-a-new-golf-membership fund. It’s strictly for medical and family emergencies.

Retirement savings
How much is appropriate? Those who I’ve worked with that have saved 20 percent consistently have no trouble retiring between age 53 and 58. But 20 percent is very difficult for many of us!

A typical professional couple needs around $150,000 in annual income in retirement to keep his or her lifestyle intact. This is less than many doctors’ average of $250,000 peak income while working, yet lack of mortgage, savings and decreased taxes substantially lower the income needed in the non-working years.

Where does one invest?
You need to read three books before funding retirement savings.

  1. The Little Book of Common Sense Investing by John Bogle
  2. The White Coat Investor by Dr. Jim Dahle
  3. The Only Guide to A Winning Investment Strategy You’ll Ever Need by Larry Swedroe

This is paramount before choosing where to invest. After reading, you’ll know that 95 percent of the media moguls’ investing selections are garbage.

Paraphrased from Warren Buffett:
Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after expenses and fee) delivered by the great majority of investment professionals.

Conclusions
Insurance: Be careful regarding life and disability insurance early in your career. Whole life, universal life, infi nite life, or any product other than term life normally provides more in commission for the insurance salesman than you will possibly ever make. For reputable disability insurance carriers, go to the White Coat Investor website, WhiteCoatInvestor.com.

Student loans: The student loan often initiates a paradigm that large and long-term debt is normal and good for dentists. It isn’t. Pay off your student loans before taking out a practice loan or a mortgage.

Debt: Student loans, a home mortgage and initial practice loan are the only loans a doctor should ever have. Never take out a mortgage for more than double your annual family net income. Keep your initial practice loan payoff period to no longer than 10 years and do not take out a second practice loan. Doctors should pay cash for all other practice or personal items including autos, home remodels and high-tech practice equipment.

Savings: Once your practice loan is paid off, begin saving a minimum of 15 percent of your net income per year — 20 percent is even better. Your annual retirement savings should always be at least as much as your mortgage. Don’t take out a mortgage until you’ll be able to save an equal amount.

Investing: Read the three books mentioned and you’ll be in the 95th percentile of doctors in terms of fi nancial knowledge.

Is it really that simple? Just say no to loans whenever possible? Yes! Dentistry today has an incredibly exciting future with technology and comfortable treatment light years ahead of when many boomer dentists started their careers. Being prudent fi nancially will increase you chances of having an extremely satisfying career. You deserve it!


* Adapted from materials developed for Dr. Carlsen's seminar "I'm out, I'm ready, I owe that much?" American Dental Association Annual Meeting, October 11, 2014

References
  1. Brian C. Hufford, CPA, CFP, “Maximize Your Wealth: Improving Upon the Reality of Your Finances,” AGD Impact, February 2010.
  2. Charles Farrell, J.D., LL.M., Your Money Ratios: 8 Simple Tools for Financial Security. New York, NY: Avery, 2010, page 79.
  3. Larry Swedroe, The Only Winning Guide to a Winning Investment Strategy, Truman Talley Books, New York, NY, 2005, page 229.
Dr. Douglas Carlsen has delivered academic-based financial education since retiring from private practice in 2004 at age 53. He has no connection with any company or individual and speaks his mind freely.

Carlsen is very interested in speaking to your study club! Contact at 760-535-1621 or drcarlsen@gmail.com.

Over 25 videos available: search Dr. Doug Carlsen YouTube. Additional Carlsen Dentaltown articles are at: www.dentaltown.com. Search "Carlsen." Carlsen website is at www.golichcarlsen.com.

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