Financial Planning for the Future: The Young Dentist by Douglas Carlsen, DDS

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 and had my little fun for three years on it.
5. Wish I knew who had the Time Machine...
Ntextdent 1/18/2012

• 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.
• I totally agree with getting your practice established before buying your house.
• Never spend more than 16 percent of your income on your mortgage.
• Pay cash for your toys. If you can’t pay cash, save until you can.
• If you are over 35 pay cash for everything that isn’t a home. Everything. Boat, CEREC, kitchen remodel... everything.
bkoenitzer 2/07/2012

…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.
ChipPayet 2/6/2012

The Psychology of Debt
Psychotherapist Phil Tyson lists two factors pertaining to the psychology of debt:
First is a principle he labels future discounting. We often take on debt giving little thought to how we need to change our lives to accommodate it. Madison Avenue has used this approach effectively for years. Dr. Tyson’s second principle is the relationship between consumption and personal identity. “Advertising has brainwashed us all to consume brands that provide us an identity. Our self esteem becomes captive to products.” ¹

Student Loans
Dentists attending public institutions often graduate with more than $200,000 in student loan debt, while those attending private schools often end up owing $400,000.

Should the loan be paid off before taking on other loans or should it be paid off over a long period of time? Low interest rates often entice doctors to pay as slowly as possible.

For insight, I provide my favorite comment from Dave Ramsey, author and TV personality.

An abridged version:
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

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

The full interview can be accessed at:
http://a1611.g.akamai.net/f/1611/23575/9h/dramsey.download.akamai.com/
23575/audio/mp3/MyDRS%20Blog/04022008__dont_get_docitis.mp3.

One who stretches out that first loan as long as possible has two strikes against him.

First is the fact that debt structure will be more complex and saving more difficult in the future.

Second, the young dentist will set up 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 that doesn’t. This is the most important message in the article: Debt is never your friend. Many will tell you to use debt for leverage, tax advantage and other ploys. Nonsense!

The only reasonable use for debt is a home mortgage and a practice loan.

What can a young dentist do with onerous student debt? Unfortunately, suck it up and live like a student for a few years after becoming a doctor. One who pays off student debt quickly will have real savings by age 50.

How Much Debt is Appropriate?

Auto
An example involves two dentists, Dr. I.B. Smart and Dr. Wanda Beemer, who became financially prudent at slightly different ages. The first dentist, Dr. Smart, from age 30 until age 65, always paid cash for a two-year-old moderately priced, yet nice vehicle, such as a Toyota Highlander, and replaced every four years. The second dentist, Dr. Beemer, did the same, except for one slight difference. She splurged at age 30 and took out a four-year loan for a new BMW 7 series. Four years later, she became enlightened to the high depreciation inherent in a luxury auto and prudently bought two-year-old Highlander-type vehicles for the remaining 31 years of her career.

That one-time purchase created a difference in savings of $35,480 for those four years between our two dentists that compounded to $309,000 (in age 30 dollars) by age 65, or the equivalent of $14,000/year for life! After all fees and taxes, the average sale amount of a dental practice is near $300,000. In other words, an expensive capital purchase early in one’s career can have an effect as powerful as the sale of a dental practice.

A dentist will spend vast amounts of potential retirement savings taking out loans or leasing new autos frequently. Start a good habit. Always pay cash.

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, CPA, CFP 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 five percent to large personal or practice purchases. ²

For a young dentist, age 35, with a $180,000 income, total annual loan payments should be no more than $45,000. Two auto loans at $1,250 per month eats up $15,000. A student loan of $2,500 per month ends the process. No practice or home loan is possible. Kill that student loan early, docs!

For a young dentist with no student loan or auto debt and an expected net income of $180,000, a 10-year $300,000 practice loan at a rate of seven 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
Charles Farrell, JD, LLM, in Your Money Ratios: 8 Simple Tools for Financial Security, points out that the maximum amount of mortgage debt should never be more than twice your net family income. By age 50 it should be down to 1.5 times income to retire by age 65. By age 65 it should be completely paid off.³ Full table is found at citation listed below.

Therefore, our 35-year-old dentist making $180,000 per year should not have a mortgage of more than $360,000. And that’s contingent on Hufford’s total loan amount, including any practice loan or auto loans, of 25 percent of $180,000, or $45,000. Not easy, is it?!

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

Farrell also makes it clear that your primary residence value increases only at the rate of inflation over many years.⁴ You will not be able to fund your retirement via your personal residence. And the more mortgage you have, the less you’ll have 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.

Carlsen Debt Recommendations

• Read The Total Money Makeover by Dave Ramsey.
• Pay off student loans as quickly as possible and before taking out any other loan. This means always paying cash for autos. That BMW X6 M is a wonder, yet pay cash.
• Set up an emergency fund.
• Take out a practice loan, if applicable.
• Take out a home mortgage. The home mortgage always comes last and should be for 15 years.