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Famous economist, Josiah Stamp said, “It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities.” Although most dentists acknowledge the value of good financial planning, busy schedules keep them from addressing the essential components of wealth management. In this episode of Dentist Money™, we discuss three of the most powerful actions you can take on a monthly basis to grow your net worth.
Speaker: Consultant advisor, conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor. This is Dentist Money. Now, here’s your host, Reese Harper.
Reese Harper: Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I’m your host, Reese Harper, here with my cohost, Sir Ryan Isaac.
Ryan Isaac: Hello, Reese. I’m going to jump right in today. We’re going to get it started off the right way with a timeless quote, if that’s okay with you.
Reese Harper: As long as it’s not about being best friends because those ones still are-
Ryan Isaac: That was a tough one.
Reese Harper: Those are haunting me to this day.
Ryan Isaac: We’ll let that go.
Reese Harper: Yeah, that works for me. Let’s stay focused right off the bat, going right into a quote.
Ryan Isaac: Your wife actually provided this quote.
Reese Harper: Yeah, she did. It’d be pretty hard for either of us, but particularly you, to know what to say without the help of a hardworking, hardy, behind-the-scenes crew.
Ryan Isaac: It’s a good quote. It’s from an economist named Josiah Stamp.
Reese Harper: Yeah, that’s a strong name. That’s a well-done name. Sounds like a mountain man to me, who’s someone I can actually respect. Probably somebody named Jebediah is a dear friend of his. Jebediah.
Ryan Isaac: Most of the lessons he learned about economics actually came from his dealings at the local trading post and from beard grooming-
Reese Harper: My kind of guy.
Ryan Isaac: … and trapping.
Reese Harper: Yes. He’ll probably teach us how to trade venison for raccoon hats.
Ryan Isaac: Yeah. Here’s the actual quote from Josiah. He said, “It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities.”
Reese Harper: That’s pretty solid.
Ryan Isaac: You can take a moment.
Reese Harper: It’s really hard to argue with that.
Ryan Isaac: It is, and it’s a perfect way to get our conversation off the ground today because today, we want to talk about the cause and effect relationship between your approach to financial planning and the quality of your retirement.
Reese Harper: Just like anything else in life, when it comes to your financial planning, there’s actions and consequences. You should know that of all people.
Ryan Isaac: Yeah.
Reese Harper: If you make smart decisions, you’ll be a wealthier person who has more financial options. On the other hand, if you make wrong choices or you neglect your responsibilities, you’re going to be less wealthy and have fewer options. Things just don’t work themselves out despite what you might think. It’s not magic. It’s math.
Ryan Isaac: Math, not magic.
Reese Harper: Yeah. Think about that.
Ryan Isaac: I am thinking about it.
Reese Harper: Please take that home.
Ryan Isaac: Is that from Josiah?
Reese Harper: He talked a lot about that in his articles.
Ryan Isaac: You can have the credit. Well, with that in mind, I’m going to take some liberty with the actual Josiah quote here and put a financial spin on it.
If Josiah was on the Dentist Money Show, which I assume he would’ve been honored to-
Reese Harper: Yeah, he’d been a guest: industry expert series.
Ryan Isaac: … he might say, “It is easy to dodge your financial planning, but you can’t dodge the consequences of dodging your financial planning.”
I think there’s a reason we wanted to cover this topic today, is because we see a lot of dentists who could be a lot further ahead if they would just have someone do real financial planning for them.
Reese Harper: Yeah, and that’s the reason we do this show. We’re trying to make sure that people realize that when… There are people that really focus on this 24-7.
Ryan Isaac: It’s a real thing.
Reese Harper: We love it. Everyone at some point in their life will hit a moment when they realize they’ve done a few things that aren’t super smart. We’re just trying to minimize those moments. There’s nothing worse than thinking you’re on the right track, only to realize you did something that cost you hundreds of thousands of dollars.
Stats show that dentists are going to retire five years later than the average person, who, in many cases is making hundreds of thousands of dollars less than they are.
Ryan Isaac: We talk about this all the time. You talk about that in your presentations that you give. Dentists have a lot more-
Reese Harper: That you never attend, by the way.
Ryan Isaac: I know.
Reese Harper: You’re not showing up to them.
Ryan Isaac: I wrote them.
Reese Harper: Yeah, you pretty much wrote them, so it gets a little boring.
Ryan Isaac: Sure I did. So dentists, they have a lot more complexity in their financial situation than the average person. They have more assets usually. They usually have a lot more debt than the average person. They tend to spend more. It’s hard to adequately address all the-
Reese Harper: Well, they spend more because they make more.
Ryan Isaac: They spend more because they make more. It’s hard to adequately address all the things that should be looked at every year because there’s just more to look at. So much of their planning, it’s just being put off or delayed because it takes a lot of time, and who wants to do that?
Reese Harper: Do you want me to tell you an analogy that I was thinking about just the other day?
Ryan Isaac: Yes.
Reese Harper: It’s a farm analogy.
Ryan Isaac: Oh, yes.
Reese Harper: We’re going to go back to Mother Nature. If you have a small farm, you can easily take care of it, maintain that farm with pretty simple techniques and not a lot of resources. It’s not that simple for a large farm. Things like planting, irrigating, weeding, and harvesting on a small farm are pretty easy, but the bigger the farm gets, the more complicated it becomes.
Think about your irrigation. It goes from a really simple hand-laid pipe system on a small farm to a really large pivot irrigation system, sometimes run by large GPS satellites.
Ryan Isaac: I didn’t know that.
Reese Harper: It can happen.
Ryan Isaac: Fascinating.
Reese Harper: Planting and harvesting for a big farm, you have to have multiple tractors and harvesters and dozens of vehicles to effectively manage your acreage. Even though you can produce more with that large acreage, the maintenance, oversight, and management of everything is a lot more complicated.
If you neglect the requirements of having a large farm, you simply have less money. You have a big farm that makes about the same amount of money as a small farm. You can’t just have more stuff and neglect the maintenance and the complexity of it without having less yield.
Does that make sense to you, a non-farming person?
Ryan Isaac: A non-farming… Actually, we were talking about this the other day. What I thought was interesting in this analogy is when you talked about having hundreds and hundreds of acres. Some have thousands, tens of thousands, right?
Reese Harper: Tens of thousands.
Ryan Isaac: It’s easy to imagine how a good corner of that could just go unproductive. Nothing grows on it. It happens.
Reese Harper: To the person who owns the ten thousand acres, it seems like it’s not a big deal, but when you look at the actual dollar amounts, it could be hundreds of thousands of dollars that just went up in smoke because you missed three acres of a corner of a field that were neglected by accident.
Ryan Isaac: So I’m wondering if there is, though, by chance, maybe a little story coming up about how you maybe helped birth a cow.
Reese Harper: No. There’s nothing about that. We are not going down that road.
Ryan Isaac: So what are you saying then? How does this apply to a dentist?
Reese Harper: When a dentist starts out, he has a very small farm. The farm is the dentist’s wealth, and the larger his wealth becomes, the more difficult it is to manage.
Ryan Isaac: So you’re saying that, even though dentists have more assets, bigger businesses, and maybe even more potential, they don’t always reap the rewards because the added complexity to do it the right way just gets bigger and bigger.
Reese Harper: Right. That’s one of the reasons financial planning isn’t very straightforward for dentists.
Another reason is that there’s so many different definitions for what financial planning is. It’s a relatively new industry. Doing financial planning means different things to different people. You’d think that there’d be some kind of common consensus about what you’re going to get when you hire a financial advisor.
Ryan Isaac: I wish.
Reese Harper: Anyone who’s seriously tried to find someone and research different financial advisors, you’ll see the huge differences in their approach and the advice that they deliver about different things. It’s pretty crazy, actually.
Ryan Isaac: There’s probably a lot of people out there who will tell you that financial planning is maybe just putting money into a retirement account, like, set up a 401(k), and that’s plenty. Or buy some good insurance, and that’s your plan.
Reese Harper: They might be doing other things, like investing in real estate. They might recommend that you save for college or pay down debt. These are all good things, but the problem is the dentist isn’t making a conscious decision to build wealth in a balanced way. They’re just pursuing a kind of check-the-box approach rather than something strategic. I think that’s really important. You need to have a plan, not just doing things.
Ryan Isaac: Yeah, like 401(k), check; mutual funds, insurance, check; emergency fund, check. I did the check motion if you were watching, with the hand. It’s pretty common to hear dentists tell us, “Yeah, I’ve got a 401(k),” as if the battle’s been won. It’s over.
The problem with that, though, is that might be okay for one person, but it could be totally wrong for somebody else. So you have to adapt the plan to the personal situation.
So let’s talk about three specific examples of financial planning activities that you should be doing but maybe haven’t thought about so much.
Reese Harper: This is where we’ll get into… people are like, “Okay, enough of the theory. Let’s get into the meat.”
Ryan Isaac: All right. Here’s some meat.
Reese Harper: So here’s some examples.
Ryan Isaac: Here’s your rib eye.
Reese Harper: So let’s say you and your advisor sit down and try to make an estimate about the amount of money you need to retire, kind of a basic thing to do. One of the things, in order to do that, you’ve got to estimate your personal spending or have an idea of what you think you need at retirement to live on.
If you look at national research from Chase Bank or even our own internal research, what we show that clients will estimate their spending somewhere between 20% and 40% lower than what they actually spend. Everyone always assumes they’re spending slightly less than what it is. That’s a big problem.
Ryan Isaac: That’s because spending isn’t something you can just change easily. Lifestyle, spending habits, it’s kind of like your diet: it’s not something you can just change just because it’s time. “It’s retirement time. We should just cut our spending off.” It’s years and years of habitual patterns that are really hard to adjust. Those habits, they increase over time, and especially as dentists are more… like you said, they tend to spend more.
Reese Harper: An easy way to avoid this is to track what you actually spend. You just connect all of your bank accounts and your credit cards that you spend from into a tracking system that stores all of your data over time. That way we’re not making guesses at what you think you spend. We’re actually tracking what happens.
Ryan Isaac: Our firm does retirement projections every year. When we do this, we take into account large vacation expenses, car purchases, or spending fluctuations so our estimates of when you can retire is really accurate based on your actual current lifestyle, what you’re really spending. There’s just a much more precise way to do retirement planning, and it’s a lot easier than you might think.
Reese Harper: The bigger your farm is, the more these minor tweaks start to make a huge difference. A miscalculation of a few thousand dollars per month in spending can result in a shortfall of over a million dollars.
Ryan Isaac: So let’s talk about another example, then. What’s another financial planning activity, Reese, that dentists often neglect?
Reese Harper: One more that comes to mind is doing regular practice estimates or appraisals, the actual value of your practice. It’s really important to protect the value of your practice and know if it’s growing as an asset because it is a huge part of your net worth. It’ll be a huge part of after tax capital that you’re going to get at retirement. It’s not something you can just casually hope you don’t need because, for most people, it’s going to be a pretty important part of their retirement.
It’s also hugely important to know the value of your practice so that you can know how to invest your money leading up to retirement, which is something people don’t think about.
Ryan Isaac: Say that again Obi-Wan? This might be a new concept.
Reese Harper: Yeah, this is new, or maybe it is. Think about this. If you know how much your practice is worth, you can make better investment decisions. Here’s why, young Jedi, now that you threw me into the Star Wars mode here.
Ryan Isaac: It’s appropriate.
Reese Harper: Every investment you buy has an expected return. An expected return is the historical average that a type of investment has over time. If you know how much your practice is worth, you’re going to be able to predict how much money you’ll receive when you’ll sell it at the end of your career, which will affect the type of investments that you pick.
If you know you’ll be getting a lot of money from your practice at, let’s say, age 62 when you sell it, you can extend the timeframe for when you’ll need to start withdrawing from your retirement accounts. That’s going to really change the type of investments that you select by understanding how much money you’re going to receive at retirement from the sale of your practice and how long that can last you.
Ryan Isaac: Right. If I’m going to get a bunch of money, like you said, in my bank account when I sell the business, I could use that money for retirement income for quite a few years before I need to actually withdraw from my other retirement accounts.
Reese Harper: Exactly, and knowing how much longer your money is going to be sitting in a retirement account tells you and your advisor how much risk you can take with your investments and what type of investments you could buy. The more time you have before you have to start making withdrawals, the more risk you can take, and the better returns you’ll get.
Ryan Isaac: We actually saw this play out just recently in someone’s case. A dentist was given investment recommendations on his IRAs-
Reese Harper: By another advisor.
Ryan Isaac: … by somebody else, not Reese or me.
Reese Harper: And we didn’t know him at the time.
Ryan Isaac: We didn’t know him. The recommendation was overly conservative because the client or the advisor had not taken into account the value of the practice when he was going to sell it. So this client had a big IRA account, and he was seven years away from his expected retirement date. They planned assuming that they’d be withdrawing money from the IRA in seven years when he’d be done working.
As we looked at it, what did we find? We realized that, because of the sale of the practice, he wouldn’t need this money for twice that amount of time, 14-plus years. So if we take the sale of the practice into this account, his time for him for investing in the IRA would be 14 years, not seven. That dramatically changes our investment recommendations because it gives him more time. It ultimately creates a lot more money and wealth in addition to the net worth that he can use to spend in retirement, pass on, or use for charity, kids, or whatever.
Reese Harper: Yeah, because the income that he needed, by that point in time, social security was going to kick in, which made the time that he would need to withdraw from his IRA even be further out because, prior to social security was going to be withdrawing even more money, and once social security kicked in, he’d be able to slow the withdrawal down on his account making the sale of the practice last even longer than it would have in the other scenario.
It’s really important to look at the value of your practice and assess its value regularly, not to mention what would’ve happened if he’d have started with a more detailed approach earlier in his career.
Ryan Isaac: Yeah, years before.
Okay, let’s hit our final example then. We’re often surprised at how little attention some dentists pay to the changes in their net worth.
Reese Harper: That’s a big one. For those of you who don’t know, your net worth is what you’re worth if you add up all of your stuff… all your cash, your investments, your real estate, and your practice value… and then subtract all your debts. It’s what you’re worth when you add up everything and subtract everything you still owe.
Ryan Isaac: Usually, when I ask somebody the last time they checked this, it was the last time they filled out a loan. On the applications for loans, they ask you to add everything up. That’s usually really the only time they’re looking. It’s surprising how a dentist can go a decade or more without seriously calculating their net worth. It plays a huge role in calculating your future retirement needs.
Reese Harper: It’s super simple math, but you have to do it.
Ryan Isaac: Simple math. Math, not magic.
Reese Harper: Exactly. Your net worth needs to be large enough to support your standard of living in order to retire comfortably. The net worth change you’re experiencing month to month or quarter to quarter is probably the most important variable to review on a regular basis. We like to track this on a quarterly basis for each of our clients.
So, every three months that you’re working, we like to know how much you’re worth. Over the last three months, think about what’s happened. You’ve spent down cash or you’ve even saved money. So you’ve spent money and you’ve saved money. You’ve paid some taxes. Your investments might have gone up or down. Your real estate equity has increased, or the value of your building, house, or condos has changed. You’ve paid down some practice debt, some student loans, personal debt. And the value of your practice might have changed too, depending on the change in collections that you’ve experienced.
It’s important to stop, pause, and ask yourself how much more are you worth today than you were three months ago? Sometimes the assets keep getting bigger, but people don’t get wealthier, and they don’t actually make more progress.
Ryan Isaac: That’s right. Looking at these changes to your net worth over shorter increments of time, less than ten years… we do it quarterly, like you said… you can easily start to see how fast you’re making progress towards retirement. It’s amazing just looking at these numbers and seeing how they’re actually going to affect the decisions that we’ll make for retirement.
Reese Harper: Back to the farming analogy here. Think about how important that is. The bigger your assets get… the bigger your farm gets, the more stuff you have… the harder it is to make sure that you’re actually getting wealthier and it’s actually moving in the right direction. There’s a lot of moving parts, like we were just saying, all of that list I just listed of all the changes that are going to happen each quarter.
Ryan Isaac: It’s easy to figure that the busyness of it all must be producing something. You must be productive-
Reese Harper: I’m busier-
Ryan Isaac: I’m busier. It’s a lot.
Reese Harper: I’m stressed out. It’s way more complicated. I know from firsthand experience that busier and more stressed does not always mean that you’re making more money, though. You have to refine things and adjust things, make course corrections in a bunch of different areas.
The first step towards accelerating your growth is really understanding the rate of progress you’re making currently. That’s from the changes in your net worth. If you don’t monitor or review the changes in your net worth, you’re not going to know how much to measure… You’re not going to know how to measure your true success because the success of your decisions along the way need to be measured or reconciled by whether your net worth is really increasing. If you’re making all these decisions, but you’re not getting wealthier, you need to rethink your strategy.
It’s also going to help you anticipate your retirement date, make the right decisions about when to transition the practice, and how your lifestyle expenses need to be adjusted to protect your wealth.
Ryan Isaac: Very well said. I like talking about this, though, doing planning this way because it’s different from what most of our clients have experienced from our industry typically, which is getting some kind of retirement projection from some software that tells us what the stock market might do for the next 40 years and 50 years from now. “Here’s what you might look like.” It just brings a real sense of progress being made and gives you a better idea of how to project that forward.
You’re saying, “Look, last quarter you increased your net worth by $50,000. This is the pace you’ve kept over the last three years, so it’s reasonable to assume that we can maintain this pace. We know where that puts us with a lot more clarity than just printing out what we think the market’s going to do or do a projection or calculation on that.”
Reese Harper: It’s really surprising. I was doing a presentation at a university a few weeks ago. I had a bunch of students in the class. They were really surprised to hear me talk about the fact that we don’t do a bunch of investment forecasting models to determine someone’s retirement.
Ryan Isaac: Don’t they have those… That has its place. Monte Carlo simulations and forecasting models-
Reese Harper: For sure. There’s time… We do those-
Ryan Isaac: Yes. We do those.
Reese Harper: But they’re not the focus of your financial plan. It’s important to do Monte Carlo simulations and forecasts. Those things will have to go to another podcast. It’s over the scope of this-
Ryan Isaac: I wanted just to say that: Monte Carlo.
Reese Harper: Basically, what Ryan’s alluding to is, in a lot of situations, people do financial planning projections with all kinds of assumptions. What that does is it takes the honesty out of… it takes the reality check-
Ryan Isaac: What’s really happening.
Reese Harper: If you track your net worth growth over the last three years on a quarterly basis, you can’t lie to yourself. You’re either doing really good, or you’re average-
Ryan Isaac: The credit card balance did go higher, and your savings account did not increase.
Reese Harper: It’s just a reconciliation with yourself to make sure that you’re actually being truthful with the progress you’re making. Then you’ll course-correct, and you’ll be heading in the right direction. We’ll get off that bandwagon.
Ryan Isaac: It’s fine. That’s what Josiah would want us to wrap up with, I think.
Reese Harper: That’s right.
Ryan Isaac: Okay? We’re on a quest to make sure all the dentists are making good financial planning decisions based on real life situational data.
Reese Harper: If I was in the woods right now, and I was trapping for bar… that’s right. Just like Josiah, or Jebediah, his friend-
Ryan Isaac: Yeah, Jebediah, his buddy, twin cousin.
Reese Harper: … very similar quest to discover the secrets of dem dar hills, as I say. That’s what I do when I go skiing.
Ryan Isaac: Dem dar hills.
Reese Harper: Up in dem dar hills.
Ryan Isaac: Well played, Reese. Thanks to all our listeners for joining us. Remember to leave us a review on this podcast. If you’d like more information, follow us on Facebook. Go to the website dentistadvisors.com. You can sign up for our newsletter or schedule an appointment on our calendar. We also have our phone number on the website. Give us a call any time. We’d love to chat with you.
Reese Harper: Carry on.Spending, Practice Value, Tracking Progress, Behavioral Finance