A great big pile of money may seem like the answer to all your hopes and dreams. As an advisor to private practitioners for more than 40 years, I want all the dentists who come to me for guidance to reap the benefits of wealth built to last for generations. The catch? The goal cannot be immediately centered around a lavish lifestyle. A truly abundant mindset revolves around financial acuity, and more specifically, consistent and intelligent investing.
It might seem counterintuitive, but hiring the right accountant is key to your wealth-building journey. For more insight about the integral role that accounting plays in the creation of generational wealth, I spoke with Bill Ladd and Jared Duckett with the accounting firm Duckett Ladd. As CPAs and cofounders of the firm dedicated exclusively to the business of dentistry, Bill, Jared, and their team have established an irrefutable framework for lasting prosperity.
Where buckets come into play
Instead of viewing wealth as a single entity, they encourage clients to see it as a plurality. In essence, money shouldn’t be lumped into a pile, but rather allocated into distinct buckets. For example, take your business bank account. Dentists whose bank balance has enough to meet all their expenses are poised for success, provided they know what to do with the remains. Tempting though it may be, the blance shouldn’t go directly toward a lifestyle upgrade. Yet that’s the number one mistake struggling private practitioners make according to Bill and Jared.
As mentioned earlier, aspiring wealth-builders need to tend to their buckets, with the first one being adequate reserves. Emergencies happen. Think a line of credit can get you out of a jam? Think again. Routinely piling on debt due to insufficient funds can ultimately squelch your means to profitability. While it’s unreasonable to accurately forecast when equipment will break or when your office will need a new HVAC unit, it’s safe to say that snags will occur.
As long as you maintain ample liquidity in a dedicated fund, any emergencies that creep in won’t negatively impact your bottom line. How much should you have on hand? A solid cash position equivalent to 10% of annual revenue is a good benchmark. Additionally, an emergency fund requires maintenance. On those occasions when you make a withdrawal from it, you need to refill the hole during the coming weeks or months. It might seem obvious, but those who forgo this crucial step will eventually chip away at their reserves until nothing remains.
Once you’ve developed a proper safety net, or contingency fund, it’s time to build your tax reserves. Unlike emergencies, taxes are not only inevitable, but their cost is fairly predictable, which is why you need a dedicated account apart from your rainy-day fund. Draining your emergency reserves to pay the IRS on April 15 is a precarious proposition, particularly since your tax liability will likely outweigh what you’ve set aside for emergencies.
There should be no springtime scramble to pay your tax bill, especially when the deadline is so well known. You simply need a second bucket from which to pay your obligation. Setting aside 30% of net revenue is a good rule of thumb. If you’ve hired a great accountant, you’ll likely have a sizable leftover sum in your account after you’ve paid the IRS. Leave this for subsequent tax years and you’ll reduce the percentage you’ll need to continually earmark in the future.
Growing your wealth
When both these buckets are full, you’re in a highly enviable position. You’ll have no issues maintaining day-to-day operations, and no IRS or unexpected predicaments will pose a threat to your existence. The growth of your wealth can now take center stage. In comes the third bucket, which is less defined than the first two and can be further broken down into various sub-buckets, all in the category of investments.
Expected returns on your investments will determine your course of action, specifically which new buckets to focus on. Bill and Jared have a belief about investing that I wholeheartedly espouse, which is that the highest ROI comes from investing in yourself and your business. However, strategy is paramount. Before you shell out tens of thousands of dollars on brand-new dental equipment, you must have a sense of the profits such an investment will yield in the next one to five years. An accountant can give you a rough idea. You may learn that you’re better off buying gently used equipment.
Aside from upgrading your toolbelt, there are numerous other investment buckets. In addition to helping you with traditional investments such as retirement accounts and similar savings vehicles, your accountant can help you navigate opportunities outside your dental practice. Creating substantial future wealth for you and your family might include real estate ventures or joint collaborations with other stakeholders, within or outside the scope of dentistry. There are no limits other than what’s both profitable and appealing to you.
If the thought of taking on more projects makes you apprehensive, know that it’s perfectly acceptable to go slow. If you’re comfortable with your current rate of growth, you can shift your focus toward paying down debt, particularly if you’ve financed it with high-interest loans. Paying off your loans might not be as exciting or lucrative as, say, purchasing a second practice, but it’s an infinitely better use of your resources than prematurely buying a boat. It’s true that accountants tend to be disciplined and cautious in their approach to finances, which may lead you to wonder if there will ever be a time when you can upgrade your lifestyle. The answer is yes. However, an accountant will tell you exactly when and by how much.
If having generational wealth is the goal—and Bill, Jared, and I all agree that it can be yours if you want it—then your level of luxury can’t outpace your degree of prosperity. For it to be sustainable, your lifestyle can only have a negligible effect on your bottom line. Once you’ve got all your buckets in a row, so to speak, then the dividends they yield will support the luxury you deserve.
Editor's note: This article appeared in the November/December 2024 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.
