Avoid these missteps to pursue building yourself a stronger financial foundation
Contributed by Jeffrey E. Wherry, CFP®, CLU®, ChFC®
Are you a new dental practitioner? Whether you’ve just finished dental school or are just graduating from a specialty residency program, here are some common pitfalls you’ll want to avoid when it comes to managing your finances.
Mistake #1: Not having a cash cushion for emergencies. We can’t stress this enough (and we never tire of saying it, because most people come out of the gate without any cash reserves). Everyone should have, at a bare minimum, three months of their spending (not income, but actual spending) in a money market or savings account. We say three months because in the unfortunate event that you’re disabled, in the best-case scenario, provided you have purchased adequate insurance, it would likely take 90 days before you receive any replacement income from your disability income insurer. Over time you want to systematically save to create a six to nine-month cash reserve.
Mistake #2: Thinking your emergency reserve fund is ‘investable.’ You do not want to invest this money in the stock market or some other vehicle that is illiquid and at risk. The money needs to be readily accessible, available to you at a moment’s notice without any penalty. Put your cash reserves into a money market or savings account at your bank. If you want a slightly higher interest rate you may want to shop for an FDIC-insured bank online.
Mistake #3: Not educating yourself on the right way to repay student loans. Every situation is different. Federal student loans offer income-driven repayment plans with low initial payments that can be advantageous. You can temporarily use an income-driven plan to build an emergency fund, a home down payment fund, or pay off higher interest credit card debt. Income-driven plans do offer the potential for forgiveness of remaining balance after 20 to 25 years. However, the amount forgiven is taxed which could create a significant cash flow strain. Furthermore, payments increase with income and many practitioners may find that higher payments will be enough to pay off the loan. Because private student loan refinancing lenders often offer much lower rates than current federal rates, it may be a better, and lower cost choice to refinance when cash flow allows.
Mistake #4: Paying off student loans too quickly. Often people feel like they have to get their loans reduced because the sheer volume of the debt feels so overwhelming. Closer to the truth for most people is that if the loan is at a low interest rate and you can get a better return on your money in a retirement account or an investment that exceeds the rate of interest on your loan, you are better off not accelerating your debt payments.
Mistake #5: Getting lured into a variable rate loan. We’re currently experiencing the lowest interest rate period in our history, and it’s a great time to get low, fixed rates. But this great opportunity may not last as long-term rates may go back up. Some people fall prey to attractive, low introductory rates on mortgages and other financing, but these are deceptively low in the beginning and end up costing a lot more over time.
Mistake #6: Mistaking youth for being invincible. Lots of younger people disregard the need for insurance because they mistakenly believe that nothing bad will ever happen to them. Sadly, this is far from the truth. Every dentist should have disability income insurance: It protects your ability to generate an income in the event that you can’t work. Everyone should have an umbrella policy: it provides protection in the event that you are subject to a general lawsuit. Say you’re in a car accident and the other party sues you, your base limits on your auto and home may run out. You should maximize the liability in your auto and home coverage, and then buy an umbrella policy in case you are the subject of a personal injury lawsuit.
Mistake #7: Deferring their dream of practice ownership because of fear. Many graduates delay buying into a practice, because they fear that their student debt load may hurt their application. The fact is that many lenders finance close to 100% of a new practice even for borrowers who have student loans. What banks are looking for is cash flow. If it looks like you will have the cash flow to repay your loans in a timely manner, they may very well take a risk on you.
Mistake #8: Buying ‘too much house,’ or ‘too much car.’ After years of being in school and living a student life, many graduates have a pent-up need to splurge on something big. For some, it’s a fancy house, for others it’s a fancy car. Something to keep in mind is that you don’t want your debt (student loans, mortgage, credit cards, etc.) to exceed 30% of your gross income – even if banks will often lend you more. Banks don’t necessarily care that you are saving toward your retirement. You, however, should care about saving for retirement, and that may mean living in a smaller home so you can accomplish both goals.
Mistake #9: Not seeking professional advice. The internet, self-help books, webinars and a myriad of well-intentioned friends and relatives will all want to tell you what to do with your money. But these lay voices cannot provide the advice of an experienced professional versed in the financial life of dental and medical practitioners. Assemble a team to advise you from the start. You may not have much in assets to begin with, but the foundation you establish needs to be strong. Find an attorney, a CPA, a lender and a financial advisor – who all specialize in working with dental and medical professionals.
If you have any questions, don’t hesitate to contact us!
Treloar & Heisel is a financial services provider to dental and medical professionals across the country. We assist thousands of clients from training to practice and through retirement with a comprehensive suite of financial services, custom- tailored advice, and a strong service-focused support team. For more information visit us at www.treloaronline.com.
Treloar & Heisel, Treloar & Heisel Wealth Management, and Treloar & Heisel Risk Management are all divisions of Treloar & Heisel, Inc.
Investment Advice offered through WCG Wealth Advisors, LLC, a Registered Investment Advisor doing business as Treloar & Heisel Wealth Management. Treloar & Heisel Wealth Management is a separate entity from The Wealth Consulting Group and WCG Wealth Advisors, LLC.
Insurance products offered separately through Treloar & Heisel and Treloar & Heisel Risk Management.
Treloar & Heisel, Inc. and its divisions and WCG Wealth Advisors, LLC do not offer tax or legal advice.
Jerry E. Wherry is Director of Research and Planning, Treloar & Heisel Wealth Management