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Dr. Joe Vaughn

A New Dentist’s Financial To-Do List for 2019

WSDA member Dr. Joe Vaughn shares financial tips for new dentists on the ADA's New Dentist Blog.
WSDA member Dr. Joe Vaughn shares financial tips for new dentists on the ADA's New Dentist Blog.

There’s no better time to start taking control of your financial life than the beginning of a new year. It’s a clean slate. All those poor money choices you made last year? Not a problem. New Year, new you.

You may be drowning in debt. You may be struggling to get by as a dentist (who knew that actually happens?). You may have even opted to join the majority of Americans in the Rat Race and embrace the paycheck to paycheck lifestyle. You adrenaline junkie, you.

It doesn’t necessarily have to be this way, though. Yes, our debt-to-income ratio as New Dentists is laughable. But what I’ve found is that regardless of any of those numbers, when talking about managing debt and building wealth, the same financial principles apply to everyone- no matter your income, your debt, or your profession. So as we look to a new year, and plan on taking better control of our finances, try these out for your 2019.

1. Set Financial Goals

Your goals should drive all of your financial decisions. I used to not think goal setting was that important, but the more I learn about finances, the more I realize that your goals are the main thing that determine how you should spend your money. In fact, if you hire a financial advisor, your very first conversation will be largely centered around - you guessed it - your goals. Without establishing goals, you’re sure to find yourself running in circles with no idea where you’re going.

For example, let’s say your number one priority is to own a home, but you currently don’t have enough for a down payment. Each month, after you put back money for retirement, after you pay your bills, and after you pay enough on your student loans to at least cover the accrued interest, you will hopefully have money left over. For a home buying goal, you would put all or most of that leftover money into savings and continue to do this every month until you have enough for a house down payment.

But if becoming debt free is most important to you. Then all the leftover money you have at the end of each month should automatically go towards paying extra amounts on your loans in order to knock it out as quickly as possible. Your goals drive your finances.

2. Max Out Retirement Accounts
If you aren’t already doing this, then you should start tomorrow. It’s very likely that your job offers an “employer sponsored” retirement plan such as a 401k or a 403b. Many times your employer will even match a portion of the money that you put in, which is essentially a free raise.

You should do everything you can to max it out in 2019 and every year after that. Have no doubt that we will make every excuse under the sun of why it’s not feasible to max it out, but honestly I can’t stress enough how important this is. The more money you have in your retirement account, the more freedom you will have in retirement and possibly even get the chance to retire early.

If there’s one thing that everyone in the financial world agrees on, it’s that steady, consistent contributions and time are two major keys to building wealth. Waiting 5 years before making your first retirement contribution could end up making a difference of hundreds of thousands of dollars.

If you find that you still have money left over after maxing out your 401k, consider contributing to a Roth IRA or a traditional IRA, which will only add to your growing nest egg.

3. Do Your Homework
If all of this seems new to you, that’s okay. There’s a lot to learn about personal finance, but the good news is that all of this information is available online for free, and it’s pretty easy to understand after you get the hang of all the definitions and finance language.
This is the point where many people skip this step completely and hire a financial advisor instead. “I don’t have time to learn about all that, nor do I care about it, I just want to focus on dentistry.”

And that’s fine. Maybe you truly don’t care. But I would caution you on hiring a financial advisor without at least a base knowledge of personal finance.

Don’t get me wrong, I think there can be great value in finding help if you truly don’t have time or an interest in the subject. But please be aware that not everyone knows what they’re talking about, and if you personally have no knowledge of finance or investing, then it’s possible for your financial advisor to actually run your nest egg straight into the ground by making poor financial decisions.

No one will ever be more invested in your personal well-being than yourself. So if you hire a financial advisor, try and find one that works with the dental profession and comes highly recommended by your peers.

4. Invest
The biggest point I want to make here is that simply putting money into a savings account isn’t enough to get you to financial freedom. Savings accounts are not always your friend, and in certain situations, they can actually end up hurting you.
A great way to go about building retirement wealth is by investing the money within your retirement accounts. Let’s look at an example.

Going back to your employer sponsored 401k, you can save $18,500 per year within this account (the limit just increased to $19,000 for 2019). Usually by default, that money gets put into what’s called a Money Market Fund, which usually has about a 2% return each year. If you were to start today contributing the maximum amount and left all the money in that default fund, after 30 years your account balance would be about $985,000. Keep in mind that inflation is also about 2% each year. So even though you are better off than you would be inside of a bank savings account (closer to 0.06% returns), you’re still barely keeping up with inflation.

Now, let’s say you take that $18,500, and instead choose to invest it in large index funds that closely follow the returns of the stock market. Historically, these have returns of around 6-8%, but for this example let’s lowball it and say you get a 6% annual return. After 30 years of investing, your balance would now be a little over $1.8 million. Even though you have contributed the exact same amount over that 30 years, you ended up with twice the money in retirement simply because you chose to invest instead of save. That is the key to building wealth. Use this free 401k calculator to try out different scenarios specific to your situation: https://smartasset.com/retirement/401k-calculator

5. Be Disciplined
I think one of the toughest things for new dentists today is starting out our careers so far in the hole. The Baby Boomer and Gen X generations for the most part never experienced the type of debt loads that we are facing today.

And that is why it is so much more important for us to set goals, make a plan, and stay disciplined. We won’t get rid of debt overnight. You won’t build a nest egg overnight.
That’s why it’s probably not a smart decision to buy a house, a car, and a practice all in the same year.

This has been a hard pill to swallow for my wife and I. But it’s about choices. We choose to live in Seattle, among the top 10 most expensive cities in the country. We realized that with this decision, we wouldn’t be able to buy a house right out of dental school.
Recently while speaking at a dental school about debt and wealth management, one of the students brought up some very real concerns. He was going to be $400,000 in debt. He and his wife had hopes of buying a house within city limits upon graduation. He felt helpless with his debt load, knowing that his first job would likely be paying a fourth of what he owed. How can he afford to get out of debt and buy a house in the city? It seemed like a hole he could never dig out of and had him questioning his career choice altogether.

Unfortunately, the answer sometimes is that you can’t have everything you want. At least not at the same exact time.

This all goes back to #1 on this list, setting your priorities. What’s at the top? If getting rid of your student debt is your absolute priority, then you should not buy a house. You should not buy a new car. Honestly, you should probably leave the city. Because if you don’t, your #1 goal will probably take decades to accomplish. But on the other hand, if you’re like my wife and I, living in the city while you’re young might be worth adding a few extra years of debt payments. That’s why personal finance is so well...personal.

No matter who you are though or where you live, the principles are all still the same. Set your goals. Spend less than what you make. Invest what’s left. And stay disciplined and focused on accomplishing your goals. All of your hard work will eventually pay off.
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