4 Common Ways Dentists Lose Money – Episode 69

Did you know the average American wastes 55 minutes a day, or about 12 days a year, looking for things they own but can’t find (Newsweek)? If it’s lost keys, you could be late for your morning staff meeting. If it’s important financial information, the setback is likely more severe. In this episode of Dentist Money™, Reese & Ryan discuss common ways dentists lose money simply because they don’t know where to find the right information. They explain the preparation that should go into each decision-making scenario and calculate the cost of being unorganized.

Podcast Transcription:

Reese Harper: Welcome to The Dentist Money Show, where we help dentists make smart financial decisions. I am your host, Reese Harper, here with my trusty old co-host, Sir Ryan Issac.

Ryan Isaac: Good afternoon, everybody. The rolling sir…siiiiiirr Ryan Isaac.

Reese Harper: Ryan, we have been on a hiatus, I’ve been doing some interviews with guests.

Ryan Isaac: Yes, I feel rusty. I feel uncomfortable right now, a little nervous.

Reese Harper: Well, the topic of today is going to make you get right back into things.

Ryan Isaac: Ohh, good.

Reese Harper: I am excited to get going on it.

Ryan Isaac: Cross fit?

Reese Harper: No, nothing like that. We are not working out. How about you give us an idea of what we are jumping into today, we have done some good planning around it, I’m excited for the episode.

Ryan Isaac: The concept today is that our future and our retirement is delayed when we spend too much time looking for lost things. That’s the concept of today. Wasting time looking for lost things. The point we are going to make is that being unorganized leads to making poor decisions and leads to making decisions with less information. It can cause you to lose $100 here, and $1000 there. If we do this enough over our careers, it will just make a huge negative consequence in our wealth over time.

Reese Harper: One thing I thought was really cool was that “getting organized” was actually the second most popular new year’s resolution for 2017. If you look at the data it consistently ranks in the top three.

Ryan Isaac: Ya, it is always up there. It is top three with getting healthy and saving money. I think it is interesting because we place a lot of value on that with clients and the people we work with, but to hear that the general public feels that way makes me wonder how other people are viewing that. We view it through a financial mindset.

Reese Harper: I would list that for myself outside of the financial context. I would just be like, “my garage, all the time.” There are my skis, my snowboard, I’ve got these skis for this powder day, I’ve got this board for this kind of a groomer day.

Ryan Isaac: I can’t relate to that as much. I am the guy on a Saturday that is like, “can we throw a lot of stuff away today?” Even though it is all in a neat labeled box in my house. That is how I am.

Reese Harper: Really??

Ryan Isaac: What spurred this was the article in Newsweek where they shared some research from a Boston Marketing Research firm that showed that people were wasting up to fifty five minutes per day looking for lost things. I thought that was crazy. Almost an hour a day looking for things that are lost. IKEA does this survey on what the most common lost items are and the number one is keys. I have been in the office plenty of times when you have looked for a left shoe, a wallet, and car keys.

Reese Harper: My phone strangely enough, I don’t lose it as much any more because I am never without it. It is always within a foot of me and if it is not in my pocket or a foot away from me than I am crawling around looking for it. Keys, I only need once or twice a day. I don’t even have a wallet anymore, it is now inside of my phone case. It tucks in there.

Ryan Isaac: About time, it’s 2017. I did a little bit of math. I assumed that if we are wasting 55 minutes a day, this is a dramatic case, but it is interesting. An 80 year old person that wasted that much time every day, assuming that since they were a baby they were wasting time on lost things, ok?

Reese Harper: This is reasonable because you could live to 90, and you are only saying until 80.

Ryan Isaac: Let’s say age 10-90, it is a total of 1.6 million minutes, 27,000 hours, 1100 days, or 3.1 years of our life, looking for lost stuff. It is basically two weeks per year we are looking around for lost stuff like an idiot. We are just wandering. That is a lot! When we talked about that story, we started wondering how does that apply to people making financial decisions and when it comes time to make a big decision, if you don’t have ready access to your data and you don’t have good information to make that decision, what else besides time does that cost us? We started kind of wondering about those things.

Reese Harper: We found a Wall Street Journal Article that has to do with executives like me, that walk around like Ryan said, looking for lost things.

Ryan Isaac: Shoeless.

Reese Harper: It said the average U.S. executive wastes 6 weeks a year searching for missing information on messy desks and in files. Every lost piece of paper costs a business about $120. In fact, 15% of all paper handled in business is lost and 30% of all employees time is spent trying to find lost documents.

Ryan Isaac: That is so crazy!

Reese Harper: 30%!!

Ryan Isaac: I also think that applies to electronic files and documents.

Reese Harper: Yes, it totally does. We have a super organized internal filing system. Everyone is always like, “What? You have perfect filing labeling and dates on your PDF’s, everything is perfect.” I am like ya it takes us a lot of time to know where things go but I feel like that has been a big investment of time. Other family members computers though? I just don’t know how they live with their computer.

Ryan Isaac: Oh, my wife’s desktop is covered in files, covered in files.

Reese Harper: They should not stay there!

Ryan Isaac: Her Yahoo email has like 37,000 unread emails. It kills me.

Reese Harper: I looked at the headline and I knew that I didn’t need to do anything with it.

Ryan Isaac: Oh man, it is so bad. We started wondering how it affects individuals decision making abilities and the outcome of the decisions they make. We are going to talk about some examples of how being unorganized can cost a dentist time and money. The first example we will start with is knowing when and how to refinance a loan. I will give you this scenario, ok? You’ve got a dentist that started off with a ten year practice note, and you have just been making minimum payments and it has been going for a few years. There are bigger things in his life that are more demanding and need more attention, the loan is fine and it is going to go away eventually. What he doesn’t realize is that now, on the market, he has got seven years left on his loan. On the market, the seven year notes carry a lower interest rate than his original ten year note. If he was organized enough to be looking at this frequently, knowing what his rates are, knowing how much time is left, and knowing what is out there in the market. He could switch his ten year loan with seven years left onto a new seven year loan that carries a lower rate and over the next seven years save quite a bit of interest. I use this example because this is one we see every single year for multiple clients. When we analyze their debt, this exact situation comes up. The doctor started on ten years, you paid for three, you’ve got seven years left and seven year notes carry a lower interest rate. Let’s refinance and save you money and interest. A lot of times it can be hundreds of thousands of dollars over the rest of that seven year period. The same could be said for a five year loan or three year loan. The first example is just being organized enough to know when to look at that and how to analyze it. You have seen this a bunch of times, with your clients, any thoughts on that?

Reese Harper: I would say that over time, not knowing your financing really well, and not being able to find what your interest rates are in the current payment that you are at on your debt, a lot of times you don’t get accurate feedback from other vendors about your situation. You will get generic advice and sometimes it will actually make people refinance into a worse product. It might have a slightly lower interest rate than what you have, but I have literally seen people refinance their debt to an interest rate that is worse because they thought the interest rate was better.

Ryan Isaac: It wasn’t.

Reese Harper: It wasn’t, and in many cases bankers are not verifying that. They are just re-financing debt.

Ryan Isaac: It is not their job, ok?

Reese Harper: They are not fiduciaries, ok? Most of the bankers we work with would never do that.

Ryan Isaac: They would never do that.

Reese Harper: But, I have seen it happen.

Ryan Isaac: That would be a big red flag.

Reese Harper: Just being able to know what your interest rates on your loans are being able to pull that up and quickly glance at all of them and know exactly what payment you are at. That is not a hard thing to build or to have, but it is really important to know when you are trying to decide if you should pay extra on your debt or not. If you can’t find that information than usually people just kick the can down the road. You can’t quite find their loan documentation and there is a reason why banks don’t send you out an amortization schedule every time you make a payment. That information is very valuable and you have to go and request it. You will have to request that information.

Ryan Isaac: I was going to comment on the example of refinancing into a worse loan. We have also seen people do that, not necessarily with rates, but not understanding that they go from a loan with a fixed rate to one with a variable rate. The rate gets better, they refinance to a better rate, but it goes into a variable rate or with a balloon payment, or from a favorable pre-pay penalty to an unfavorable one. I think that is a good example. The other side to choosing the right loan, or being organized with your loans, is then when it does come time to do that, when you are paying attention to it, how do you pick the right loan? I mean if you don’t know some things, for example, if you are not clear on how liquid you are, than the down payment you make on a loan, if it requires one, is going to have a big effect on you. Maybe you can’t afford to put that big of a down payment on the loan that you think you can to get the rate that the bank is offering if you to make that down payment. It is going to put you in a bad situation. Maybe you don’t have liquidity. The other side is that you are plenty liquid and you could afford to make a bigger down payment and save money on interest on the life of that loan. If you don’t know the balance of liquidity that you have, if the money in your practice checking is adequate, versus the money in your personal investment, than you might feel apprehensive about putting money on a loan.

Reese Harper: What you are saying is the more information you have in front of you, you have more confidence when you make that decision.

Ryan Isaac: Yes.

Reese Harper: This is a bigger concept here than just loans, we are talking about. But the solution here is to track, like Ryan side. Track your current personal net worth and your balance sheet. That is a big statement, not everyone knows what to do when I say that. It will show you if you keep your net worth updated and you know how much you are worth and how much money you have in each of these categories: cash, investments, retirement plans, etc. Then you can make a decision about how much you can part with in order to stay solvent, diversified, and balanced. That is really important. If you don’t have access to your net worth or balance sheet then it is really hard to make a decision about debt. The other thing is that if you do not have full amortization schedules on all of your debt, an amortization schedule is a big statement of every payment, every interest amount of every payment, every principal amount, and the interest rate that is being charged to each payment so you can see each payment that reduces your debt. I am sure a lot of you have seen it, but some of you haven’t.

Ryan Isaac: You can build your own too. You can call your lender and build your own with excel. You can google Microsoft excel amortization schedule.

Reese Harper: That way you can keep your rates and your terms and store your pre payment penalty information, so you know what it is. Store any information like a balloon payment, or if the rate resets, and then review it once a year and compare it to what is available in the marketplace. Like Ryan said, if you are at a ten year loan when you started but a seven year loan now if you have all of that information accessible all you have to do is forward that on to a lender and you can get absolute closure on whether making a change matters. If you can’t find that information though than it will be tough.

Ryan Isaac: Every dentist out there knows a lender too, typically several of them. They are very helpful and more than willing to take a look at what you have and see if they can do something better, and when they bring back an offer if you are detailed enough and organized than you will know right away what you are looking at and what you can afford. Can you afford extra debt payments right now? Maybe you can! If you have been tracking your spending and savings rate and you know you’re hitting a good target savings rate and you still have money left over than you have money to pay down loans faster. You might have seven years left, but maybe you can take a five year loan because you have enough cash flow to afford it and pay it off faster.

Reese Harper: I like it! I like example number one, we should go on to example number two.
Bum, bum, bum, bum…intro music.

Ryan Isaac: Yup, that sounded original. Did you make that up? Never heard that before…

Ryan Isaac: Example number two is deciding when to bring on an associate or a partner. This one is always an interesting conversation because usually the impetus for hiring an associate comes when the doc is starting to feel really busy. He is working more days than he was planning on, collections are growing, income is growing, they are booked out quite a ways, and he starts going, “I think I’m busy enough to scale back a little bit and bring in an associate.” This is very common. It is typically based on a feeling or something. When these conversations start, and you have had a lot of these conversations, Reese, there is not a lot of data behind it. You start wondering what are new patient numbers, how much of your production will go to the associate versus just new patients, or how much marketing will keep him busy versus you? There is not a lot of data behind it. So what we find is that an associate comes on, and there is missed expectations with income and debt. Revenues grow because now you have two producers, and longer hours in the office, but personal income for the owner stats are going down. When you file your first tax return with an associate, you collected more, you made less money, and you are mad. Year two could be like that, and year three might be the break even if you get that far. Not being organized in knowing your revenue in the practice, knowing where new patients come from and how many are coming in, knowing your own income and production and profitability numbers, without that you will have a hard time setting the right expectations for what is going to happen to you income and net worth over the next few years as that associate steps in and ramps back up. I know you have seen that, a lot. Touch on it.

Reese Harper: I think the problem here that you are highlighting is that big decisions like expansion often get short changed because we give up after being frustrated by trying to hire someone and not having it work out. Then you end up back where you were with more work on your plate than you were starting to delegate. It is a very frustrating moment and I think it is hard to get through any amount of business growth unless you have clean financials and really clean business financials that give you confidence in what you are doing. A lot of times even though your personal income is going down as you expand, it might be a good thing to have that happen for 12, 8, or 6 months. Maybe even as much as two years. You might want to have your business become more valuable. People will pull the plug because they feel like there is less money, they made their success to soon. I think there is a way to remedy that. The way to fix that, which Ryan touched on, is something everyone can anticipate. It’s something everyone should be doing, but I don’t feel like people actually do it very often as well as they should. Which is keeping really, really clean practice financials. You need to review those periodically with a bookkeeper, CPA, or financial advisor. If you are thinking that my bookkeeper, my CPA, or financial advisor doesn’t know how to do this, than you need to find a new bookkeeper, CPA, or financial advisor. A good one will have an idea of how to advise you on this and if they don’t than there is probably someone that will know. You might not be getting the full benefit of the service that you are paying for. You will need that kind of clear history of collections and clear history of your own profitability. If you are going to hire an associate and you are doing 1.5 million by yourself and you are just buried, when you bring that associate on you are going to be giving away some of your production. It is not going to be a totally clean, magical full time schedule for that other guy. He might not just want to come on a day a week. He might want to come on full time. There will be an income hit. When you get to 2.4 or 2.8, this will be a success at that point. You have to have tangible numbers that you are sticking with and goals that let you say, “when I am at 2.2 million then it will have been worth it because my income will be more than it would have been had I just stuck and done this myself.” Too many people just jump into that decision before they have a clear understanding of what is going on and they don’t have access to that information. It is just lost in this world of taxes and financials and even though they know it is there, they don’t know how to access it and it is not that clear. It is not an easy solution.

Ryan Isaac: Ya, it is tough. On the personal side of finances, knowing when you have some confidence in where your money goes. If you know that spending is under control, or the tax rate is under control, or you’re saving enough money. When you go through that period of growth when your income does get reduced, if you have the confidence of where your personal stuff is and how it has been trending, and the path it is heading on, I don’t think you will be as stressed out. You will be able to look at this and say my liquid savings rate is going to dip a little bit but my net worth will increase because of the equity I am building in my practice. In two years or three years I will have broken even and now not only am I worth more because of this bigger business but now I am actually earning more money. You just have to have that data. As I’m saying this I can remember going through spreadsheets with clients on this exact same stuff. Having some frustrations and feeling like, “man this isn’t working out.” Then looking at the data saying, “ya, you made less money year one, year two you almost went back to break even, and year three you are back to making more than you were three years ago. Your business is worth half a million dollars more than it was though and you’ve paid down debt.” Just having those numbers can give a lot of confidence to stick through it and make the right business decision.

Reese Harper: You are right, I totally agree. It is not just bringing on an associate, it is any kind of an expansionary move. It is any type of increase in overhead that is tied to growth. It could be marketing, it could be a marketing expense, or something related to marketing. It could be new people, salaries, an office manager, a business manager, an associate. It could just be somebody that will have an impact on the growth of your practice but you may not see the result right away. All of this is super central, Ryan. It is really important that people take the time to make sure that their financials are really dialed in. Also that their personal finances are organized with their net worth statement because it lets you get to the point where you can make really good strategic decisions in your practice. Let’s take a quick break and when we come back we will give you two more examples of lost things and ways to find them.

Ryan Isaac: Let’s go to example number three.

Example number three is something we have been working on with a few offices lately. It is deciding what type of retirement plan to implement at the office. How does this relate to lost things and not being organized? How about you tell us that, Reese? How does knowing what type of retirement plan relate to lost items? The lost boys?

Reese Harper: Well, it is very hard for people to know sometimes exactly all of the provisions and details in their retirement plan. They know that they are putting away a certain amount of money in a certain type of plan. There is some type of match and some type of deferral. But in my experience, people are very unclear on the details. Sometimes what we find is that because they are not very clear on the details sometimes they are giving a lot more money to employees than they are even giving to themselves. I have seen this in many cases. Some doctors aren’t even aware that it is happening but the amount of money they are matching or providing to employees far exceeds, or can double or triple what they are getting for themselves. Unfortunately, in a small practice like this, that is just not sustainable. I wish it were. It would be nice to just have a nice retirement plan for everyone in the office and then have that not really help you, but just lower your profitability. That is just not how it works in the dental market. Employees don’t go work somewhere else because they know they are getting a massive retirement plan. It is usually an hourly rate, or better work environment. That’s just how the industry is. In many cases, we will find that the retirement plan at the office is not helping the doctor. If you are a massive organization, if you are a huge DSO, than there could be some rational to that. Typically, not the case.

Ryan Isaac: The two cases that are most common when this happens is when a younger doc buys an older practice from a retiring doctor and takes over everything. The employees that were there, everything comes with it, including the retirement plan. We have seen that where the retirement plan for the exiting doctor in his fifties and sixties was really favorable for him because he was able to put away a lot of money compared to what he has got to give to employees. But when the new doc comes in, the testing and matching rules change because of ages and income and then ,all of a sudden, the new doctor has to give more money to all of the employees that are now used to it, and have been used to it for years..

Reese Harper: Don’t take away my doctor and health insurance!!

Ryan Isaac: It is so hard. It is so hard, man. I can think of two cases recently I’ve been through, and those conversations are not easy. You have to tell the doctor as his new financial advisor that it is just not feasible. When they see it they are not like, “that doesn’t make sense.” They know, but now you have got to go tell, as the new guy, new Sheriff in town, and you have to go tell everyone that they don’t get to keep retirement benefits anymore.

Reese Harper: I am thinking in most cases it is near impossible that if you show people the data that the employees are going to be like, “I don’t care, that’s what we used to have and we are sticking with it!” It is understandable. Your second scenario, your first is young replaces old. What was second?

Ryan Isaac: The second is super common. You put the plan in place years ago, and just haven’t looked at it again. You used a SAP IRA when you were young and had one employee, now you have five people on payroll and still have a SAP. You are giving them the same percentage that you are giving yourself.

Reese Harper: Yes, it get’s crazy.

Ryan Isaac: It used to be a 401k, but it is fifteen years old. You could have been putting a ton more money away that you actually had, and had to save if you had looked at it and added something different. You could have been saving money on taxes and saving money more efficiently that you had to save anyway. So what are some of the things though that someone is going to have to be organized with? What do you have to access to in order to avoid the “lost things” scenario? How do we go about this one?

Reese Harper: These are things that are really tricky. I could tell you what they all are but everyone is going say, “well, I don’t have hardly any of that.” You would expect your financial advisor to know the information, but in many cases, I am telling you, they won’t. If it is hard for you to keep track of this stuff, it is definitely hard for your advisor. Unless your advisor is very deliberate about keeping all of this information, it is not likely they will have it. You have to know your exact current gross and net income. That is pretty easily gathered if you take all of your practice tax returns and income sources you can know what your current net and gross incomes are. You can run that income through a tax rate calculator to show yourself how much income you have in the highest bracket. That is what will tell you, that number, right now it will be 39.6%, plus whatever your state rate is, that was last year, 2016…

Ryan Isaac: It is going to be a million times better in 2017.

Reese Harper: They are cutting it to 2%, flat tax.

Ryan Isaac: Yup!

Reese Harper: We have been hearing a lot of stuff from call-ins, that Ryan tends to disagree with sometimes.

Ryan Isaac: Sorry for yelling.

Reese Harper: You have got to know your tax rate because if you don’t know what it is going to be it is hard to know if it will be worth putting into a specific retirement plan. For example, should you do a lot and save hundreds of thousands a year into it or just save five or ten grand? A lot of that is based on your tax rate. The other thing it is based on is how much liquidity you actually have. If you don’t have a lot of cash laying around, and by a lot I mean not even one year of personal living expenses, than you probably don’t want to be maximizing all of your retirement plans to their fullest because you don’t have a lot of fall back cash in your practice or personal. Add up personal, practice and investments. If outside of retirement plans you don’t have more than one year’s worth of living expenses, it might be a little early to start trying to maximize all of your deductions.

Ryan Isaac: Yes, and to clarify, you would consider something liquid even if it is invested long term for the future. It is liquid if you can access it without a penalty. You are saying non IRA, non 401k, you don’t have to keep a year’s worth of expenses in cash.

Reese Harper: Yes, you are right.

Ryan Isaac: It just has to be something you can access without a penalty.

Reese Harper: Yes, I would never have more than two months of practice over head cash in my practice account and more than six months worth of living account cash in a bank account. That is as much as I would ever have in an actual bank account in cash. You would want to know what your net worth is and what your trajectory is going to be because you don’t want to build up too much cash there. You would want to know what you’re spending really looked like and your personal savings rate. We call these percentages of your income that you spend and save a rate. You need to know all of these things in order to make a retirement plan decision. Those are easily documented, but you have to look at your income each year and divide it by your spending or savings and say what percentage am I saving and how will that change if I do this thing or that? I do think it is important to run a census every year too. You have to run a census of all your employees…

Ryan Isaac: What is a census?

Reese Harper: You have to get all of your employees and gather their birthdates, how long they have been working for you, income levels, etc. Then you can run a new test and see if there is a better way for you to make your retirement plan work well. If you are not looking at your census every year you may be missing out on an opportunity to improve.

Ryan Isaac: Who would they ask to look at a census?

Reese Harper: Your financial advisor can do that for you. They can take your census and then go to a third party administrator or retirement plan person or maybe they know how to do it on their own. You go to your finance guy. Keep everything really organized. All of your plan documents, you know that big binder you got when you first set up that plan? That is called a summary plan document, it is usually a binder, or some type of big PDF, you have to look at that to understand what you want to do or not do with your plan. Everyone who is comparing that needs a copy of your plan, there are a lot of things, hopefully these are the bigger ones.

Ryan Isaac: The only thing I would add is being conscious of big purchases you need to make that are upcoming. We have seen years where people are making large retirement plan contributions and then they are like, “oh ya, I am going to spend a bunch of money updating my office.” Then they essentially wipe out their tax rate that year with depreciation and write offs and they didn’t need to lock up all that cash in the 401k or profit sharing account.

Reese Harper: I had that experience this week with somebody.

Ryan Isaac: You saw it?

Reese Harper: Yes, this person had made North of $400,000 and they had a tax rate that was, ya know, was in the 33% tax rate money, some 35% money, and their state taxes were a flat 5% so they were more like .40 on every dollar. They had plenty of cash to make a big retirement plan contribution. They were looking at putting between $70,000-$90,000 into a retirement plan and all of the questions I checked with them including liquidity, tax rate, and everything made sense. We just wanted to save the taxes. Then before we made the decision, I was continuing to ask my question set and one of the questions was what you just brought up. What major purchases are you planning on making in the next few years, if any? He had to think about it for a minute and then he is like, “oh ya, I will be moving my practice to next door. I didn’t think to tell you initially when you asked if I was moving. I am not moving, but I am building next door, and I will be re-equipping the whole thing and doing improvements and build a new space and it will probably cost like $470,000 or something.” I was like, “WOW!”

Ryan Isaac: There is his tax rate right there.

Reese Harper: His CPA had told him go get as big of a retirement plan as you can and sock away all this money to lower your taxes because you are going to pay a fair amount of tax this year and he was really stressed out about that. He was going to wipe out most of his personal liquidity in order to put this away and he would still owe taxes, it wouldn’t wipe them out completely but instead of owing $125,000, he would have owed like $65,000 or something like that. He was going to do this, but if you look at it, two things are going to happen. He is going to have a ton of tax write off from all that equipment and depreciation which wipes out the need for his retirement plan that year probably. That calendar year. You don’t want to do a deduction when his tax rate is down at the 15% bracket level, which it might have been. He is also going to need some liquidity to pay cash for some of this! Most of this is going to be financed but there will be a decent amount of out of pocket expenses for various things.

Ryan Isaac: You just want to be ready. You don’t want to be stuck in a bind where you can’t get the last computer. Great caveat that you bring up. That is the retirement plan benefit. If you don’t have your plan documents, your tax returns, with rates and you are not looking at your exact amounts of liquidity and how it is going to affect your future purchases, all of this stuff is hard to find. It is hard information to track down if you don’t know what to track. That is why it helps to have a really good financial advisor who tracks all of this stuff for you because if you don’t have someone who is tracking this for you, it is really difficult to round it all up and it takes a lot of time. A good financial advisor will track most of this stuff and have good access to find it for you before making recommendations, but it is sad to see that most of these get delivered that set the retirement plan up and go maximize it. That was the advice that a qualified CPA gave this person, but just probably didn’t know that they were planning on moving next door. Maybe they did but they didn’t quantify it as much, maybe the client was being so frustrated about taxes they just said, “fine, we are just doing it anyway.” You are yelling at me so much I’ll find something.

Reese Harper: Sometimes if you complain too much about taxes, you get advice that lowers your taxes whether it is good for you or not.

Ryan Isaac: I like that quote. “Sometimes if you complain too much about taxes, you get advice that lowers your taxes.” I like that. That is not always a good thing. The last one we are going to talk about is insurance. In our process, the elements planning process, we just got done doing insurance rate month, in the month of March for everybody. This is where we are calculating three different scenarios. What happens if you passed away, what happens if you were disabled and couldn’t work, and what happens if you get sued? What happens to your debts, net worth, spending, families ability to live the same life style, are you protected in those scenarios? That was the point of running insurance month. What we come across is this is another really big category where people tend to be a little bit unorganized or not know what is going on or just not know their situation enough to purchase the right types of insurance. Let’s start with life insurance, ok? It is really common that people just buy life insurance up to the amount that starts to feel uncomfortable in a monthly premium. You are kind of like, “eh, that is more than what I want to pay, but that is my tolerance.” Your max tolerance is the life insurance you end up with whether it is too much or too little. It is based on your monthly payment like a car payment ya know?

Reese Harper: Usually the agent isn’t that much more opinionated either. They will sell to your comfort level of premium. I am not saying that they are totally doing this because that is how they get paid but they get paid to sell you as much insurance as you want to buy. When is too much life insurance , too much life insurance? I mean it is your family we are talking about here. You can buy as much as you have a tolerance to pay for, but at the end of the day if insurance were free we would own unlimited amounts of it, but it is not and it eats into our net worth and it slows down retirement. I think it is a great way of putting it. People have as much life insurance as they are willing to pay for it. That is not the right way to calculate it!

Ryan Isaac: What we would explain to clients is that the most conservative scenario in needing a life insurance death benefit is to pay off all of the family’s debts and business debts too so you are not forced into a mess of business assets and still have enough money left over on top of that to continue spending what they are spending without ever running out of money. Kind of like a retirement scenario. That is the most conservative, you could back out of that and say, “I am not interested in paying off that debt, I don’t have to. This student loan might go away so I don’t have to cover that.” But this is pretty much our most conservative level. We find a lot of times that people are not at that level. They are surprised too! They feel like they have a lot of insurance because the life insurance death benefits, especially with cheap term life insurance, it is in the multiple millions and that seems like an incredible amount of money. They think they have four million of life insurance, how would I not be ok?? if you are three million in debt and your family spends $20,000 a month, it is not going to balance out the way four million dollars sounds. That is one scenario. I know you are going to talk about a couple other ones with life insurance.

Reese Harper: When you buy disability insurance most people buy what will replace their current monthly spending or that is a way they look at it and usually they do that in their early thirties when they buy their first disability insurance. Spending tends to increase over time, but you also grow your net worth over time. Your need for disability insurance goes down. We look at how much people are worth and we multiply that by 3% a year. We just say if someone has got this much invested or this much value in their wealth between their practice, their real estate, their investments, if we just take 3% a year off of that, we could probably keep the principal amount of money in tact. We look at that as people get wealthier they need less liability insurance because they have more investments that would support a living expense, lifestyle, if they weren’t around or couldn’t work.

Ryan Isaac: Same with life insurance.

Reese Harper: As time goes the need for more insurance declines, but liability insurance is different.

Ryan Isaac: Except for liability is the opposite.

Reese Harper: Yes, liability needs grow as you get bigger and the more wealth you have the more likely you are to be in a lawsuit. Wealthier people tend to be sued more often than people who are not wealthy. The more wealth you have the more of a target you tend to have on your back as well. The more you show that wealth and the more people see the wealth. The way you travel, you live, the houses that you choose to own, the cars you drive, the vacations you take, it just continues to increase your visibility and so having liability insurance early on in your thirties, maybe you only had $500,000 worth of liability on your vehicles, which would have covered more than your net worth. You were worth negative $600,000! You had that new practice, student loans, and no assets. As you grow, that changes. We find that people tend to carry either too much or too little insurance. They carry way too much or way too little. They rarely carry the right amount. The right amount is something you have to calculate, which is why you need your policy documents. Those need to be easily accessible so people know what they are looking at. How much liability insurance do you have? I have to call my guy, I left him a voicemail and he wasn’t around, and then you just don’t look at it again. Life insurance and disability are the same thing. You have to be able to access that stuff easily and remember, “oh ya, that’s what I have.” You have to track your personal spending.

Ryan Isaac: I was just going to jump in and say, especially the reason we carry those types of insurance are for really horrible situations. Especially in the case of life insurance. One of the sadder instances of being disorganized and looking for lost things is when a family member or spouse or children have to look and they don’t know where to turn to look for some of these financials if someone died. Having these things accessible and organized just because of the nature of what they are is really important, I cut you off, go ahead.

Reese Harper: One thing I was going to say about that. I have never seen this happen yet, but I could see it happening. A person thinks that they have life insurance, but they don’t. They thought they were making premium payments, but they never checked to make sure that it was in force. I have clients who thought they had more insurance than they did have and have seen that stuff lapse and not payoff things. All the insurance company will do is send you a letter or two telling you you have to pay a premium but a lot of people don’t notice it. I think one of the reasons you want to keep track of all this policy information is so annually you can review it and analyze. This will help you catch it when you have missed a premium payment or when something is off. Heaven forbid that ever happens to anybody, but you need to track those for that reason. But you also need to track your personal spending using some automatic softwear: mint.com, quicken online, you can use personal capital, or whatever free version of spending tracking software you want. We’ve got one that our clients use, if you know what people spend you can easily track how much insurance they need. People generally underestimate their spending by 30-40% less than what they actually spend, so if you can track what they actually spend and reference what they actually spend than you can have a lot more confidence that you have the right amount of insurance.

Ryan Isaac: Yes, and you are talking about things that change every year too! If the amount of insurance you are supposed to carry is based on things like your net worth, debt load, and spending, those should be reviewed annually because they are constantly changing.

Reese Harper: The last thing I was going to say to track is that net worth concept. Keeping a personal financial statement updated on a regular basis solves, you know, 90% of these planning concerns. From an insurance perspective if you track exactly how your net worth is growing each year than you know exactly how much insurance to reduce or to increase based on the change in your net worth. If you are not tracking that and being consistent with how you value things like valuing the practice and valuing your real estate and making your debts go down the right amounts, if you are not tracking a personal financial statement with every asset and every liability, you will not now how to reduce or increase your insurance amounts each year and you will just be subject to whichever sales person you are talking to opinion. They don’t have your personal financial statement in front of them either. A lot of times they make you write it down and you are guessing at most of the values in there because it is a pain to fill out that section on the application.

Ryan Isaac: Funny you say that, I was just talking to someone about that that recently they did know what their net worth was because they had to apply for a loan. They had to go through that a year ago when I got my loan. I had to write down everything I’ve got but its been a while and it was a pain to track it all down. I think that is a good wrap on a few different examples of how not being organized and wasting time looking for lost things can cost time and money. The statistic we have used in the past is that dentists time can be extremely valuable, some dentists can be worth 500-1000 dollars an hour. If the statistic is true and you are worth a thousand bucks an hour and you are spending an hour a day for lost things, that is a lot of money.

Reese Harper: Ya, what you are losing like $500 a day. Assuming your stat is right, it could be up to $1000 a day that you would be saving if you could just get organized.

Ryan Isaac: It sounds like a fear mongering marketing tagline we could use. Like, “You’re losing five grand a week and you don’t even know it.”

Reese Harper: If this podcast serves a few people with some inspiration to get better organized than that fear mongering was worth it I guess, huh Ryan?

Ryan Isaac: Thanks everyone for listening.

Reese Harper: Fear mongering, I don’t like that word. I am an encouraging statistical persuader.

Ryan Isaac: I am a fear monger. You are an encourager. That is a very encouraging statistic, you are losing five grand a week and you can turn that into a very buzz feed type article. Thanks for listening. We would love it if you would take a second to like The Dentist Money show on Facebook and Instagram. Make sure and visit dentistadvisors.com where you can see all of our episodes, and while you are at the site you can book a free consultation to visit with one of our advisors. You will see our calendar and you can schedule something at your convenience. We are always happy to talk to you. Thank you very much.

Reese Harper: Carry on!

Getting Organized