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Practice Management: Place Savings First Douglas Carlsen, DDS

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Place Savings First
by Douglas Carlsen, DDS

"My net income is $200,000, my spouse earns $40,000, yet we never save anything!"

...A familiar cry in a dentist's life.

Brian Hufford's Academy of General Dentistry Survey of 2007 noted the average AGD dentist earned $200,000 per year. Roger Levin reported the average dental income increased to $223,000 in 2008. Because of current financial uncertainties, I've used the $200,000 figure for this article. Let's introduce that average dentist, Dr. Ben Lavish, age 40, and his lifestyle.
  • Family: Wife, two children, a dog and a cat somewhere in a cupboard.
  • Autos: 2006 Honda Accord and 2004 Chevy Suburban. The Suburban is almost paid off and now worth less than Dr. Lavish's Specialized Rockhopper bike.
  • Dining Out: Out to Ruth's Chris Steak House for special occasions, otherwise Chili's is the occasional exotic venue of choice with nightly fast-food dives.
  • Entertainment: Kenny Chesney or Dave Mathews Band concerts once a year, a couple San Diego Padres or Chargers games, the obligatory Alvin Ailey Dance Troupe gig and piles of DVDs.
  • Vacations: A summer road trip to Texas for family awareness training; a Spring Break flight to Grandma's for lots of "Huh's?" and Home Towne Buffet; a weekend of soggy smells, lost mittens and way-too-early mornings of Park City; and a romantic getaway to Cabo.
  • Second homes, country clubs? Nah. Too lavish for Dr. Ben Lavish.
Hardly luxurious, yet this lifestyle costs the average dentist $7,500 per month. Add a mortgage of $3,000 per month and $1,000 per month for credit card debt and Dr. Lavish's family is now up to $11,500 per month or $138,000 per year in consumption. Their $240,000 income quickly becomes $144,000 after paying the average 40 percent for federal, state and self-employment taxes. This leaves a paltry $6,000 per year for savings, an emergency trip to Dallas, a new transmission for the Suburban and that ill-advised adventure to Saks. Finally, Ben's best buddy, an orthodontist, feels his wife could use a little Invisalign help.

Get the picture? A $240,000 family income seems like a fortune to the typical American, yet there are so many obligations for the small business owner that it affords the mirage of high income with little in the way of affluence or financial security.
Home Purchase

For young doctors who have not yet purchased a home, or are in a small home, be careful! The old adage of taking a mortgage at no more than double your income works well in this economic climate. Most economists and advisors urge medical business owners to keep mortgages to six percent or less of practice gross production. Or, similarly, have a mortgage of no more than 15 percent of your net income. Sure, the banks might lend up to 30 percent, yet that is much too high to allow for any savings. Also, be informed that numerous economic forecasts in early 2009 predict home prices will bottom out somewhere between 2011 and 2012, not the proverbial "next quarter" you hear from the real estate profession. If you find that your home costs are too high to save properly, do not dismay. As indicated above, mortgage payments in real dollars will go down in the coming years. I am not an advocate for moving to a less expensive location unless the family situation dictates. Total moving costs today are in the 12-15 percent range, reducing much of the benefit.
How does Dr. Lavish approach this conundrum? I believe the typical management approach of increasing your income by increasing your production, by increasing your bubbly staff, by increasing your advertising, by increasing your mission statement, by increasing your equipment budget, which increases your cholesterol, which increases your time at the office, which decreases your time at home, which decreases your family by one, which doubles that $7,500 per month, doesn't work.

How can Dr. Lavish save?

Place savings first. Yeah, I know dentists rarely have a written budget, yet a saving mandate is a must. Dr. Lavish must base any future purchases or new loans on that saving mandate. The mandate comes first, all else comes second.

Sure, debt complicates the scene and in many cases delays the saving mandate. Yet once you establish the vision of preparing for the future rather than keeping up appearances in the present, a huge weight lifts.

How much to save? The experts give a range from 12 percent of net income for young savers to more than 25 percent for those starting after age 50. A prudent starting mandate for the Lavish's might be 15 percent of total income or $3,000 per month. A 40-year-old dentist who places $3,000 per month into a diversified portfolio of boring index funds with a discount broker, reallocating occasionally with no fancy market timing or active management at all, viewing the account each leap day, will have, according to many academic studies, a return of seven percent in real dollars, or a total of more than $1.5 million at age 60. This is in 2009 dollars. In my retiree interviews, I find the average dentist needs about $1.5 million plus the sale of his practice to retire by age 66. Let's now see how Dr. Lavish can save $3,000 per month on his existing income without having the wife and kids spend weekends standing on busy street corners spinning signs advertising the latest condo development.

First and foremost is Dr. Lavish's $1,000-per-month revolving credit card debt. In today's financial climate, nothing comes near the 18 to 24 percent rate of return realized by paying off credit cards. The average dentist has more than $20,000 in credit card debt and Dr. Lavish is no different. He can destroy the beast in 12-18 months using a two-step plan:
  • Delay any auto purchases until the debt is paid. Ben's 2004 Suburban will be paid off late in 2009 and he will realize a $750/month savings.
  • Delay home upgrades. A planned $6,000 carpet upgrade can be delayed for a couple years.
Continuing to pay off credit cards monthly and purchasing autos with payments that are reasonable will obviate future debt.

Second, Dr. Lavish needs to set up a proper tax deferral strategy to lower his income taxes. Using a competent CPA or CFP, Dr. Lavish might easily realize tax savings of $12,000 per year, or $1,000 per month. Numerous Simple IRA, SEP IRA, 401(k), profit sharing, and other plans are available to small businesses. Wonderful information can be found at: www.pathtoinvesting.org/fyp/smallbusiness_ptr/ptr2_smallbusiness_011.htm.

Using the above strategies will provide $2,000 per month savings in the near future. Let's find more:

Stage home upgrades in yearly $5,000 increments. After paying off his debt, Dr. Lavish might carpet his home one year, then wait a year to paint the outside of his home. If he pays $10,000 for bath upgrades, he would wait two years to install a new AC system. If the AC blows out before the above, as it did to me last year, swear a lot and lay your own carpet. Just kidding! Put off the other work for a year. This method will save Dr. Lavish $200-$400 per month.

Budget gifts. Ben has no idea how much he pays for gifts each year, but the national dental average is $5,000-$10,000. If his and his wife target gift limits for birthdays and the holidays, they will save a bundle, and the kids will feel more fairly treated, albeit with iUpdates less often. Savings here is about $200 per month.

An additional bonus: Dr. Lavish's $3,000-per-month mortgage (30 year fixed) will not rise over the years, and with four percent inflation will lower to an effective $2,500 in four years, $2,000 in eight years. Thus, he will be able to save an additional $500 per month by early 2013. And, Dr. Lavish, don't even think of buying a new house!

In total, we've found $2,500 in savings for the Lavishs in the next one to two years with an additional $500 on the horizon. With minor planning and minimal budgeting, the Lavishs might now easily begin to fund their retirement and college savings. And notice that Ben need not cut back on the San Diego Chargers, Dave Mathews Band, Ruth's Chris Steak House, or the trip to Cabo.
Author's Bio

Douglas Carlsen, DDS, owner of Golich Carlsen, retired at age 53 from a 25-year private dental practice and clinical lecturing at the UCLA School of Dentistry. He writes and lectures nationally on retirement and financial topics from the point of view of one who was able to retire early on his own terms. Dr. Carlsen consults with dentists, CPAs, and planners on business systems, personal cash flow, and retirement scenarios. Visit his Web site: www.golichcarlsen.com; call 760-798-0886 or e-mail drcarlsen@gmail.com.
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