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Dental Finance 101: Where Does All the Money Go? (Or, How Does Your Income Pie Get Divided?)

I still remember where I was when I found out my wife and I were expecting our first child. Let me tell you, things got “real” real fast. I was still going to school, just finishing up my CFP® certification, and contemplating starting my financial planning firm (which eventually became Dentist Advisors). Although we had planned to have a baby, the reality of that announcement felt heavy, and suddenly money felt scarce.

Our first son arrived months later, just as my business was getting off the ground. Although our income far exceeded what we had made in the past, somehow that money didn’t give me the financial serenity I wanted. A question—which became central to how I approach financial planning—came to mind: “Where does all my money go?”

In dentistry, where business and personal finances are highly interdependent, you need a simple framework to help you understand where all of your money is going.

How to Track Your Income

The income you take home can only go to one of four places. Think of a pie with four slices. Both you and your financial advisor need to know how much of your income is going to each slice.

Taxes: Uncle Sam takes a massive chunk, anywhere from 0% – 40%+ depending on the state where you live and how much you make. And the government takes its share forcibly—you don’t have much choice but to pay it.

Personal Spending: You gotta live. Food, cars, vacations, pet spas, and the like. Your range of personal spending is highly dependent on your habits. You might be spending as little as 10% or as much as 80%+ of your annual income. What percentage of your gross income do you spend?

Debt: Dentists have significant student, practice, and real estate debt. If you’re not careful, the percentage you pay towards debt could be over 50% of your income! The rate at which you pay down your loans is integral to your overall financial plan. A financial advisor with experience can help guide you to select the right payback period for each of your loans.

Savings: The key ingredient for healthy personal finances is a high savings rate (the percentage of money you save). A healthy savings rate is around 20% for most dentists. If your income is below average, you might only be able to squeak out 10%—and you shouldn’t feel bad about that. Very high earners may need to have a savings rate of 30% or more to maintain their desired lifestyle in retirement. The goal is to simply do the best with what you have.

Prioritize Your Savings

Regardless of how much you make, it’s essential that you learn to build a healthy savings rate. It’s a good way to force you into a reasonable lifestyle. For example, if you always save 20% of your income via automatic withdrawals before it goes anywhere else, you’ll always be ok!

Of course, there are meaningful steps you can take to lower taxes, debt payments, and spending. But you’ll feel empowered when you have a healthy savings rate. It will give you greater control over your future lifestyle and wealth.

Work With Your Advisor Holistically 

As quickly as possible, get to the point where you can measure your personal income pie. You should be able to fill in the blanks and say: my taxes are __%, my debt is __%, my personal spending is __% and my savings rate is at __%.

As you work with your financial advisor, encourage them to help you think holistically about your income. The decisions you make on how to allocate your income will have a significant impact on the amount of wealth you can build over your lifetime.

At Dentist Advisors, we can help you take control of your financial future. To book a free consultation, go to www.DentistAdvisors.com and click “Book Free Consultation.” Or, call us at 833-DDS-PLAN to set up an appointment.

To learn more about the importance of liquidity, listen to our “Here’s How to Control Your Spending Without Budgeting podcast. {Link to: https://dentistadvisors.com/education-library/podcast/spending-podcast/}

Reese Harper, CFP® is host of the Dentist Money™ Show, a weekly podcast dedicated to helping dentists make smart financial decisions. He is also the founder and CEO of Dentist Advisors, a registered investment advisory firm which focuses exclusively on dentists and specialists. His trademarked planning methodology called Elements® is used by dentists all over the country to plan, invest, and retire better.


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