For many of us, the opportunity to put the skills we have learned over many years and be highly rewarded for it is a gift and joy. With this opportunity, we become masters of our own destiny and thus responsible for our own financial future.
We have a responsibility to ourselves and to our family to know how wealth accumulation and financial planning work. Unfortunately, their are many pitfalls people fall into as they look to build a Financial Plan travel down the road toward wealth. The following are 9 of the most common mistakes made by dentists and doctors (as well as other business people).
(shhh…. don’t tell anyone but you can skip to the end for a shortened list if you like)
Not sketching out their financial position.
Have you ever seen someone at a sporting event or rally who underestimated how much space their sign would need and the writing gets smaller and smaller as they run out of room? This is someone who didn’t sketch out a plan before they committed ink to paper.
If you don’t know where you are, how can you create a road map to get where you want to go? It is very important that you have a starting point in your financial plan that is accurate. If you don`t know where to start, the odds are that you won`t start.
Start with a financial snapshot. A clear picture of exactly where you are today. Jot down your income, outgoings, assets and liabilities. Look at all of your expenditures on a month- by-month basis to determine your monthly cash flow. Hopefully there is more coming in than going out.
If your cash flow is a negative number, your top priority should be to achieve positive cash flow. This can be accomplished in one of three ways:
– Reduce the amount you spend each month
– Increase the income you receive each month
– Win the lottery (unlikely)
Once you have a positive cash flow each month, it is important that you do not adjust your lifestyle up to absorb the extra money. I see this mistake all the time. It is critical that you invest the leftover cash for the future.
Now that you have determined monthly cash flow and gotten a handle on income and expenses, the second financial snapshot that is needed is your net worth. Net worth is defined as your total assets less your total liabilities.
Once your cash flow and net worth have been defined, then you are ready to start putting together your financial plan.
Not starting with the end in mind.
If you don’t know where you are going, how will you know when you get there? We cannot stress the importance of this strongly enough. Unless you have well-defined objectives with a specific timeline, you have a dream, not a goal.
Not only must you have specific objectives with a timeline, you also must write down these goals and review them periodically. It is recommended that you review your goals on an annual basis and make alterations. Minor adjustments are easier to make throughout your financial life than it is to make major leaps shortly before you retire.
Finally, your financial objectives must not only be specific and written down, they also must be based on reasonable assumptions. With all of these components in place, you then can develop sub-goals to use as periodic benchmarks.
If life happens and those goals change that is ok but without having a direction to head in your won’t know what progress you are making.
The key is to begin today. The sooner you begin the easier it is to reach your goals.
Not understanding risk.
Risks and returns go together like The Sea and Salt. Although volatility is a necessary part of investing, the greatest risk is failure to act. Assuming that you are willing to take the risk of action, certain risks must be built into your financial plan. These risks include:
– Inflation risk
– Interest rate risk
– Market risk
– Economic risk
– Specific risk.
The solution to allowing for these kinds of risk is simply to understand the different risks and build your portfolio to reduce exposure to these risks.
Not understanding the value of time.
In this era of social media and instant results, the mentality of many people is, “Get rich quick!” (usually with “no money down”). Scammers constantly take advantage of people who believe Forex or Crypto-currency is a sure fire way to make a quick buck. It has been said you can lose money fast in the stock market, but it is very difficult to make money fast in the market.
Research has shown that time in the market is more important than timing the market. It’s important to remember why you are investing. Investing should be about helping you achieve what you want in life, be it a comfortable retirement or another, more tangible, goal over the long term. Investing can help with that. The equity market in the United Kingdom has averaged a return of 5% after inflation since 19001 .
By being disciplined and taking a robust, repeatable process driven approach to investing we can be more confident of our outcomes than by focusing purely on short term results.
Not protecting your assets.
Protecting your assets can also be called risk management. You want to protect the gains you have already made as well as your income. Too many people rush into investing before they adequately take cover off risks they are exposed to.
Make sure that you have adequate amounts of life and critical illness insurance and income protection. You are by far and away your most important asset and insuring yourself with specialist cover is of utmost importance.
When it comes to investing diversification will provide you with added safety and over time greater investment returns.
Most important of all, have an emergency fund that you can tap into anytime so that you will not have to sell other investments at an inopportune time.
Not making or keeping a budget.
When I say this to clients I often get eye-rolls but I don’t mean a to the penny budget. This is more about paying yourself and consistent amount and putting your most important goals on auto-pilot.
As your grow your practice and income don’t follow like for like on the expenditure side and make sure you review your commitments regularly. Do you really need 6 TV streaming services?
Keep your expenditures at a lower rate than the increase in your income. Not having or not staying within your budget and not keeping your cash flow under control are two of the major barriers to any wealth accumulation plan.
Not considering the effects of taxes.
The old saying goes: It is not how much you earn, it’s about how much you keep. In other words, after taxes, how much are you really making on your investments?
Is it better to make 5% tax free or 7% but subject to income tax?
It all depends on how much tax you pay but most Medical Professionals are higher or additional rate tax payers and a 40% tax charge would reduce your 7% return to just 4.2%
This can easily erode your returns to a below average standard while you are trying to reach financial objectives.
Part of your plan should include tax incentives and shelters to maximise the potential of your investments
Not thinking about liquidity.
Have you ever had friends and family who had cashflow issues? Do you consider the liquidity of your portfolio in your financial planning?
When your money is tied up in assets and a short term cash need comes along it can be hard and expensive to release funds.
With bank lending becoming rightly more stringent the need to consider adequate liquidity in your portfolio is more important than ever before.
Not seeking advice.
Best-selling author Malcolm Gladwell writes about the “10,000 Hour Rule.” He claims that the key to success in any field is, to a large extent, a matter of practicing a specific task for a total of around 10,000 hours.
You know this in your own work. It takes at least 5 years to even begin to practice not to mention the countless hours of CPD and additional courses to become a true master of your field.
A good Financial Planner with specific knowledge of working with Doctors, Dentists and Medical Professionals can be invaluable in avoiding all these mistakes but perhaps more importantly helping your stay accountable to yourself, understand your goals better and have honest conversations with your about the plans your are making.
Here are those mistakes again in a shortened list
- Not sketching out their financial position.
- Not starting with the end in mind.
- Not understanding risk.
- Not understanding the value of time.
- Not protecting your assets.
- Not making or keeping a budget.
- Not considering the effects of taxes.
- Not thinking about liquidity.
- Not seeking advice.
1. Barclays Equity Gilt Study 2016.