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The Seven Common Money Mistakes Dentists Make by Garrett B. Gunderson

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How to Increase Your Bottom Line (Without More Work)
by Garrett B. Gunderson

As a financial advocate to dentists, I’ve discovered that more than 93 percent of dentists keep far less money than they should – in most cases up to thousands per month. Cash is lost unnecessarily in taxes, hidden fees, flawed insurance coverage, mismanaged credit and more. Here are the top money mistakes I routinely see docs make. By fixing these, you can recover 10 percent or more of your income.

Mistake #1: Using a Tax Preparer, Rather than a Tax Strategist
My firm performed a study and found that of 117 doctors, 107 were overpaying on their taxes. Most dentists have a CPA who simply prepares their taxes just before tax time. If you don’t communicate with them and strategize before the end of each year it creates a reactive rather than proactive situation.

Instead of anticipating and strategically solving potential tax problems, accountants typically scramble to prepare returns each tax season. After the year is over, they usually tell you to dump as much money as possible into a qualified plan, or recommend other things that you otherwise wouldn’t do except to save on taxes, which creates even more problems.

In contrast, a tax strategist makes tax season a non-issue. For example, if, like many dentists, you own your building, an effective but under-utilized accounting technique called “cost segregation” can make a drastic difference in deductions due to depreciation. Structuring your business entity correctly can have major impact on your taxes, as can the method you use for withdrawing income (e.g. salary versus dividends or distributions). How you title assets can also help. Great accountants know how to use new legislation, such as the recent economic recovery act, to your advantage.

Mistake #2: Poor Debt, Credit and Cash Flow Management
By not negotiating the best interest rates and not knowing how to improve a credit score, a dentist can overpay interest and take longer than necessary to pay off loans and debt. Debt and repayment structure is critical to minimize interest payments while maximizing cash flow.

For example, one simple technique to have the government assist you in paying off loans is to refinance non-deductible interest into tax-deductible loans. When it makes sense, roll credit card debt into mortgage debt. You should also buy business-related items with business lines of credit, rather than general credit cards.

Short-term, high-interest loans can also be rolled into long-term, low-interest loans. This improves your debt-to-income ratio and improves your credit score, which enables greater flexibility in paying down debt.

Most advisors will tell you to pay off your loans with the highest interest rates first. But the safest and smartest way to pay down debt is to start with loans that free up the greatest cash flow with the least investment. These are the loans with low balances but high payments. Knock out those high payments first – while paying the minimum on all other loans – and you free up cash to work on other debts. For example, suppose you have a credit card with a balance of $13,000, a 10 percent interest rate and a minimum monthly payment of $260. You also have an auto loan with a balance of $10,500, an 8 percent interest rate and a $450 monthly payment. Even though the credit card has a higher interest rate, it makes more sense to put extra payments toward the auto loan and pay that off first. By doing so, you free up much more cash flow more quickly that can then be used to pay down other loans.

Mistake #3: Risky Investments
Dentists with discretionary cash either lose it to Parkinson’s Law or do what the traditional financial industry tells them to do: “invest” in the market. Given that most dentists are unable to retire at age 65, it’s clear that this strategy isn’t working.

If you don’t know what you’re investing in, how it is creating value, how to control or improve the investment, or how to limit losses, then it is gambling, not investing. It’s the “buy, hold and pray” method. Buy and hold has been academically proven, especially in the last four years, to be the best way to build wealth. Unfortunately, many dentists invest foolishly.

Most retirement plans contain investments that are usually burdened by fine print and hidden fees that drain your profits. And most “investors” fail to create an exit strategy, so they’re often hit with unexpected taxes and penalties when they withdraw their investments for income.

Traditional financial advisors sell dentists on the tax “advantages” of qualified plans (SEP, IRA, 401(k), etc.). But the tax deferral locks up money, and defers it into an uncertain future tax rate with unnecessary tax burdens that are never addressed. Most financial advice fails to mention strategies available for utilizing qualified plan funds without penalty.

Sometimes it doesn’t even make sense to invest. For example, high-interest loans should be paid off first because they are a guaranteed interest cost, versus unknowns in the market. There are much better cash accumulation vehicles that give you more control, less risk and greater overall profit than 401ks and IRAs.

Mistake #4: Good Dentist, Busy Entrepreneur
Most dentists signed up to become, well, dentists. But they then discover they are business owners. Hiring and managing employees, marketing and creating systems are time-intensive and can seem overwhelming. As a result, dentists feel stressed and frustrated. They work too hard for too little money. Furthermore, they can’t build a business that can sell for enough money to retire like they want to.

This is where having the right team is vital to help you plug the leaks, build your business and maximize your income – and a financial planner alone can’t do the job. A team of financial advocates can keep you organized and on track, and identifies and addresses your blind spots.

Mistake #5: Disjointed and Costly Insurance Coverage
Insurance seems like a necessary evil – especially when agents don’t educate you on how to integrate it into a coherent financial plan to actually increase your profits. Because agents are basically commission-based salespeople, they’ll sell whatever they can get you to buy. This results in jumbled and expensive coverage. It exposes you to massive risk in critical areas, while overly protecting you in less important areas.

For example, by increasing your deductible for car, home or health insurance or increasing your elimination period on your disability insurance, you can get more insurance with a lower monthly payment. You should also utilize an umbrella policy, rather than having high limits of individual liability on car and homeowners insurance. Analyze your coverage and eliminate supplemental policies already covered by major insurance (e.g. accidental death and dismemberment). Proper insurance coverage reduces your risk, increases your productivity and integrates into a full financial plan.

Mistake #6: Lack of Knowledge and Clear Plan
Dentists often think they’re covered because they have a financial planner. But does that planner coordinate with your accountant, attorney, insurance agents, banker, realtor, etc.? Financial literacy is as critical as having a plan. As experts in one area themselves, dentists can often develop the mindset of handing off their finances to financial “experts” and letting them handle the details.

Without a comprehensive team, most dentists don’t have a financial plan – even if they have a “financial planner.” Most financial planners are essentially mutual fund or life insurance salesman, not your advocate. It only takes one test to become a planner. When I was 20 years old, while going to school, I took some time each day over two weeks and got a series six licenses, meaning I could sell mutual funds. Before I came out with my book, I thought it might be a good idea to take the series 65 test (Registered Investment Advisor) and passed it after studying for one day while watching basketball. I couldn’t imagine anyone feeling comfortable going to a dentist that wasn’t required to go to school or only had to take one test.

No one cares more about your money than you do. You don’t have to become a certified financial planner, but you do need to have a great team, be involved in the process and continually educate yourself.

Mistake #7: Disconnect With Passion and Purpose
Financial prosperity goes much deeper than dollars and cents. My prosperity equation is this: (Passion + Purpose) x Productivity = Profit Therefore, the single-best way to increase your income is to tap into passion and purpose.

Furthermore, personal knowledge that serves, solves problems and delivers value to people is what drives financial capital. In other words, dollars follow value. It’s typical for dentists to love certain aspects of their profession while loathing others. By hiring others to perform the tasks you don’t like and focusing on your strengths and interests, you increase their income while reducing your frustration.

By being innovative and building and strengthening relationships, you’re able to create more value for more people.

Boost Your Bottom Line
By overcoming these mistakes, the average doctor who works with us saves $11,700 per year in taxes and increases their monthly cash flow by $1,600. How would your life be improved with an extra $30,900 per year without working harder? You’re already earning enough money. Now you simply need to learn how to keep more of it.
Author's Bio
Garrett Gunderson is a financial advocate to dentists and the author of Killing Sacred Cows: Overcoming the Financial Myths that are Destroying Your Prosperity, a New York Times, Wall Street Journal, USA Today, Businessweek and Amazon bestseller. Get a free hardcover copy of his book at FreeBookForDentists.com or by calling 877-235-8324.
Dentaltown Magazine
April 2024
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