In my years as a financial advisor, I’ve found that most people I work with didn't have in-depth discussions about money while they were growing up. It was mostly a taboo topic discussed privately between parents, and if their college and career paths were medicine, they weren't exposed to personal finances in a meaningful way as young adults, either.
So it’s no wonder that many dentists make mistakes when it comes to their money and finances. Here are some of the top ones I’ve found, and what you can do to fix them.
Mistake 1: Refinancing loans without understanding your options
Recently I met with Melissa, a dentist in her late 30s. She’s in a good spot financially, and as her fortieth birthday approaches, she wants to get a better handle on her finances and make sure she's doing the right things.
She grew up in another country and had to jump through many hurdles to be a practicing dentist here. By all measures, she’s an example of the American dream come true: she owns a home, works in a career she finds fulfilling, and makes a six-figure income.
Some of her concerns include managing her student loans, saving for her retirement, and saving and investing for her daughter’s college education.
As we talked, I learned something important about her situation. Her student loans, which were double the amount of income she makes annually, had been refinanced several years ago.
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Depending on your income to student loan ratio, it often doesn't make sense to refinance. The reason is that you can benefit from the income-driven repayment plans offered for federal loans and eventually have a portion of your loans forgiven. The decision to refinance should be analyzed via a student loan calculator that considers the total (true) cost of refinancing as compared to staying on an income-driven plan. Some good calculators are available online, but you can also consult a planner who has experience with student loans—either a Certified Financial Planner™ or a Certified Student Loan Professional (CSLP).
In Melissa’s case, her private loans are taking up a big chunk of her cash flow. Had she stayed in an income driven-program, she would have had extra cash to put toward the investments important to her: saving for college for her daughter and for her retirement.
This is a common mistake, and one everyone should be aware of. Make sure you understand your repayment options and the cost of refinancing. Remember, the refinancing companies make money when you refinance through them, so they're not acting in your best interest. And the decision is one and done: once you refinance, you no longer qualify for the federal loan repayment plans.
Mistake 2: Keeping too much cash
This mistake is one that many people make, and dentists are no different. I often meet young professionals who have accumulated massive amounts of cash. (What’s massive? Typically anything over $100K in cash raises that question.)
Most people need between three and six months’ worth of living expenses in cash/liquidity in case of emergencies or life changes. You might love your job today, but there could come a point when you feel burned out and need to take a break. Having that cash liquid gives you options and flexibility. There’s also the “sleep-good factor”: people can feel differently about risk and how much cash helps them sleep well at night. Some of us need more than six months’ worth of expenses to reduce our anxiety levels, and that’s OK.
The good news here is if you're able to get to six figures in cash savings, it means that you're very good at saving, and you have good money habits. Spending less than you make is the most important habit necessary to building wealth.
However, cash sitting in the bank just isn’t the best way for you to build wealth. In fact, it's a painfully slow way to do that.
Currently you can have a high-yield savings account at many online banks paying roughly 3%-4%, which is much higher than traditional banks that still pay 0.01%, but historically this still lags the rates of return we can expect in the stock market (anywhere between 7%-10% over the long haul).
Your money works harder for you when it's invested in the market. And because you spend so long becoming a dentist, it takes more years to actually make money—so it makes sense to put that money to work and not keep it in the bank.
Mistake 3: Waiting to get disability insurance
Many dentists I meet wait to get disability insurance until they've been practicing for 10-plus years, but there are disadvantages to that. Your health can decline and you might become uninsurable, no longer getting resident discounts for other student discounts. As well, the older you are when you apply for disability insurance, it’s more expensive, simply due to age.
So, it makes sense to get this done sooner in your career. You have to protect your ability to earn an income because that is the key to your financial security.
Mistake 4: Not recognizing financial blind spots
Sometimes you simply don’t know what you don’t know. Whether it’s financial planning, estate planning, or taxes, get the help you need and do your research on the options you have and the best fit for your needs.
There are plenty of financial planners today who don't necessarily have to manage your assets. Even if you're comfortable managing your investments, it's worth getting an expert to look at your finances and help you find those blind spots.
One of the most common ones I see with dentists is estate planning. Many are doing a great job saving and investing and using all the tax advantages and optimizing their money, but they don’t have the documents to ensure their hard work transfers to their children in the most efficient way.
I often see families who don't have wills, living trusts, or power of attorney documents, and that can be a downfall. You need to have your affairs in order to protect your loved ones If something were to happen to you prematurely.
Mistake 5: Not truly enjoying your success
You’re so used to living a frugal college student lifestyle that you forget the difference between being frugal—and being cheap. I think of being “cheap” as making price the only factor when making purchasing decisions: for example, you’re shopping for cars but instead of considering safety, features, or technology, you’re laser-focused on picking the least-expensive one. While this can help you save money and build wealth, it’s really no way to live.
On the other hand, being frugal is about being intentional with money—spending as we wish on the things that bring us joy in life, and limiting spending on the areas that don’t add value.
After spending my 20s living a “cheap” mentality and not spending much on anything I enjoyed, it's now my belief that finding balance with things like experiences with my family, traveling the world, and education is key to true happiness and true wealth. Your mindset around money will change and evolve, and that’s a good thing.