BY Brian Hufford, cpa, cfp
Dr. North drives a used Ford F-150 pickup truck and lives in a moderately priced home. Dr. South drives an expensive BMW and lives in a luxury home. Dr. North has $8 million saved at age 65. Dr. South has nothing saved and will die at work. I have read comparisons like this since I became a financial advisor. Comparisons like this one have two implications: One is that North is always better than South, and the other is that the key to accumulating wealth is being frugal. I'm not sure that I agree with either of these.
I find myself questioning why North is always better than South. Is it because North is viewed as up and South as down? Is it because we live in the Northern Hemisphere? I'm also not sure that I have ever met a dentist who would self-describe as frugal. I'm mystified that frugality and wealth creation are nearly always described in terms of automobiles and houses. Isn't there more to wealth creation than the type of vehicle one drives? Most financial writers publish books for a broad audience, which means that the solutions for wealth creation always seem to relate to how much is spent to support a lifestyle; thus the houses and cars. Presumably, income is fixed with a W-2, and the only variable is the amount that is spent on lifestyle. The solutions are almost always related to getting out of debt as quickly as possible and/or being frugal (whatever that means).
In spite of driving 10-year-old vehicles and living in moderately priced homes, dentists who try to implement a North-versus-South solution to create wealth in their own lives typically end up frustrated when they are still unable to save significantly each year. Could it be that there is more to this problem? The answer is definitely "YES!" To find the answer to the problem of wealth creation in dentistry, I had to turn the whole problem upside down. In other words, how does one make Dr. South the hero? I had to view the solution in different terms than houses and cars. What would Dr. South have to do to save 20% of her income each year? Dr. South would have to do more than simply be "frugal." Some powerful principles would be needed to save 20%.
To save 20% of his/her yearly income, a dentist must align Needs, Wants, and Savings. Fifty percent of cash flow can be used for Needs, 30% for Wants, and 20% for Savings. But what is a Need, and what is a Want? I define Needs and Wants in a unique way. Needs are only two cash-flow items: loan payments and tax payments. They should require no more than 50% of a dentist's income. Wants are only two cash-flow items: lifestyle expenses and large purchases. A large purchase is anything that costs more than $3,000 and that does not involve recurring payments, such as a used Ford pickup truck, paid for in cash. For the last decade, I have supported dentists in saving 20% of their income and found that most dentists can do it by creating a strategic plan to align Needs, Wants, and Savings.
Now, let's make Dr. South the hero. Let's say that Dr. North had two large purchases in the current year: he paid $20,000 to purchase his used Ford pickup truck, and he paid $25,000 in cash to remodel his moderately priced home. He is paying an extra $2,000 per month on both personal and practice-related debts. Dr. North is frugal, and he doesn't want to incur fees for a 401(k) plan, preferring to save for retirement with a SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account). Dr. North contributes $12,000 to his SIMPLE IRA this year. Cash flow has been tight, in spite of Dr. North's frugal ways, with income taxes viewed as the primary culprit. Dr. North has $225,000 in accumulated savings.
Dr. South carefully manages large purchases to avoid sabotaging her cash flow, and she saves 20% of her income. She is paying off her debts more slowly than Dr. North. Dr. South has paired a 401(k) plan with a cash balance plan and is contributing $110,000 per year. Dr. South pays $40,000 less in taxes than North. She has $1,600,000 in savings and enjoys long weekend drives in her BMW.
Brian Hufford, CPA, CFP, is a wealth advisor and dental practice thought leader with Buckingham Advisors, a national, independent wealth and financial advisory firm with a specialty in helping dentists achieve their most important goals. To connect with Brian and Buckingham, visit BuckinghamAdvisor.com, call (866) 545-8816, or email [email protected].
