Financial planning is more than investing! Having a great financial plan should include a risk management component. We looked at the first “Commandments of Risk Management” in my last article (read it here), and now it’s time to finish out our 11 Commandments of Risk Management with the final six.
6. Thou shalt have cash on hand in thine practice.
A personal emergency fund is vital to your financial plan. Cash is King! When an unexpected expense pops up in your personal life, having cash to weather the storm provides comfort and stability. It is no different handling the finances in your practice. First, this commandment portends the idea that your practice and personal finances should remain separate. Assuming that you already have separate accounts and records, having a cash reserve in your practice as comforting as having a personal emergency fund.
There is no rule for the amount you should keep on hand. Some doctors insist on one month of expenses, while others keep a whole year. The actual amount is not as important as the stability, meaning you maintain the same amount of cash on hand in your business each month. In the months that the account drops below your threshold, you know that you must rebuild that account to maintain your practice’s financial health.
7. Thou shalt have a budget.
Everyone hates budgets. However, knowing what you have coming in and what you have going out, both personally and in your practice, is the bedrock of a strong financial plan. This does not have to be uber-painful or to the exact penny. Simply keeping track of fixed expenses can help you know how much money, if any, is being wasted.
For example, if your personal fixed monthly expenses at home add up to $8,500, and you bring home $20,000 each month, you SHOULD be adding about $11,500 to your savings each month … right? Seldom is this the case in any industry for any business owner. However, simply being aware of the amounts can help a doctor save more and control spending.
8. Thou shalt have a spending plan.
Most people either do not have a spending plan, or they equate it to their budget. A budget and a spending plan are different animals. A spending plan takes your personal budget to the next level by using recent data to look at the future and head off problems, while also taking advantage of opportunity.
An example might be figuring out that all your personal insurances and your property taxes all come due in October. Maybe there is a balloon payment due that month as well that adds thousands more to October’s outlay. A spending plan looks ahead to the future, identifies a month such as this example, and puts you in a position to plan ahead. An October that looks like that may mean the family vacation does not occur in September, and this helps put more cash into the till for October expenses.
Additionally, a spending plan can help you take advantage of opportunity. Consider the opposite from the above example. Maybe May offers the lowest outflows of the year, and cash is high. In that case, a spending plan can help you hold some of that “extra” cash back to smooth out October’s expenses. A spending plan uses your budget to increase the control you have over your money, and will help you plan ahead for good and bad spots throughout the year.
9. Thou shalt save for retirement.
According to the ADA, about 96% of dentists cannot afford to retire comfortably and maintain the lifestyle they enjoyed while practicing. This is unacceptable. Dentistry is a great career and a growing industry. There is no good reason this should be true.
While researching why dentists find it difficult to retire comfortably, and have found several factors, and the No. 1 factor that impacts a dentist’s ability to not retire comes down to not saving enough in a retirement account.
According to a study by Transamerica, people who habitually save 10% of their income each year have little difficulty retiring. For most dentists, this means having a retirement plan that is more sophisticated than the run of the mill IRA. There are retirement plans that will allow you to defer larger amounts of their income for retirement, as long as you contribute some for your employees.
Many doctors do not implement plans due to contributions they have to make for their staff, but the contribution amounts are generally small compared to the amounts of savings the doctor can put away for retirement. Bottom line: you need a retirement plan through your practice.
10. Thou shalt stay healthy.
“How can I get the most out of my retirement?” We hear this question a lot here at Slate, Disharoon, Parrish and Associates, LLC. Our answer is always the same: stay healthy!
The single greatest threat to retirement savings is the cost of health care. One of the best strategies to plan for health care costs is to simply stay healthy. Of course there are things that are out of your control, but diet, exercise, and an aggressive stress management program are proactive ways to stay healthy.
The need for long-term care in retirement is going up all the time. Some think that they can manage the costs themselves by self-insuring. This is a huge mistake that has no basis when dealing with real numbers. Many people also underestimate the cost of long-term care. Lastly, many people believe that long-term care is only for “old people,” or that they should begin shopping for the insurance when they reach 65.
These three mistakes can prove to be very costly. Planning for health care costs and long-term care in retirement can be very easy using long-term care insurance early in life while it is affordable. There are a variety of new products on the market, so talk with your financial advisor about your options.
11. Thou shalt NOT forget thy plan.
One of the worst things a person can do is create a plan, any plan, and then not revisit it on a regular basis. It is the same with your risk management plan. You should revisit these items at least once a year to familiarize yourself with your strategies, and determine if your risks have changed.
If you have questions about any of the 11 Commandments, or if you would like assistance assembling your financial planning team, reach out to me at [email protected].
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Will Parrish is a founding partner of Slate, Disharoon, Parrish and Associates, LLC, located in Knoxville, Tenn., and specializing in services for medical professionals, business owners, and corporate executives. Contact Will at [email protected] or (865) 357-7373. Visit their website at www.sdp-planning.com.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisers, Inc., a Registered Investment Advisor. Slate, Disharoon, Parrish & Associates, LLC, and Cambridge are not affiliated.
