124: Money Well Spent: How Dentists Can Buy Happiness - Part 1

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Welcome everybody, to another episode of the Dental Boardroom podcast. It's Wes Reed, your host, coming at you. And today I want to talk about the relationship between money and happiness. As a dental practice owner, you've taken on a lot of responsibility, a lot of debt, and a long journey to get where you are today. And one of the things that you are aspiring for is, is financial security. We all want to feel a sense of purpose in our job. I get that. And we all want to really enjoy each day of what we do. However, at the end of it, we need to feel financial security. Financial security does have a close relationship to our sense of contentment and well being. And so I want to talk about that relationship a little bit today. So I've been working with dentists since 2008, and I've seen all ranges of financial success among dentists, and it's actually remarkable how large that range is. There are dentists who literally would make more money working at In N Out Burger than running their dental practice. And it speaks less about who they are and their competence and just a lot more about the challenge of what it is to run a dental practice. But then I've seen people step up to that challenge, become very intentional about they are, the way they run their business, the way they self educate, the way that they learn communication and leadership skills. And I see that those practices produce remarkable levels of wealth in dentists as well. We have dentists who have over $10 million of saved assets in their early 60s, and that came because they learned those characteristics of what it means to be a great business owner. And they coupled that with a systematic way of reducing expenses, taxes, and saving. Consistently, it's the combination of all of that that produces incredible financial security. So what I want to talk about today are the following. Number one, what does the research say about the relationship between money and happiness and how does it apply to a dental practice owner? And I want to be nuanced about this. I don't want just the generic kind of tone that money doesn't buy happiness. There's a lot more to that conversation than that. One quote I think of often is, money is a tool. It will take you wherever you wish, but it will not replace you as the the driver. That's by Ayn Rand. And that is very true. Money will get you a lot of places, but ultimately the destination is your choosing. And there are a lot of destinations that the money will get you to that actually will create a significant amount of unhappiness. If we're not careful with our intentionality of the effect of money in our lives. So we're going to talk about what the research says. We're also going to talk about the sources of financial stress for a dentist. And then I want to talk about some of the characteristics of millionaires in our country from a very famous book called the Millionaire Next Door by Thomas Stanley and William Danko. And I want to tie those two together. How does that book and the characteristics of millionaires relate to specifically dental practice owners and all of the sources of financial stress that they have? Then in a subsequent podcast episode, I'm going to talk about how to spend for happiness. There is an efficiency of acquiring happiness through the way that you spend your money. And then lastly, I'm going to talk about aligning money with a purpose. All right, so let's dive into this. What does the research say about the relationship between money and and happiness? Well, I'm going to quote two studies here. One is a study from Kahneman and Deaton in 2010. And there have been a lot of studies, as you can imagine, on this subject. And as a certified financial planner, I read a lot journals in my space around financial planning for people, the consequences of wealth, how to manage wealth, strategies, tactics, all that stuff. That's just what I live in. That's what I swim in every day as a CPA and a financial advisor, helping our doctors.

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And so the first one Kahneman had in 2010, this was a survey. It analyzed 450,000 responses and there were two things that they were measuring. The first one was emotional well being and this is simply your day to day happiness. And the second measure was life evaluation. What was the overall satisfaction as they thought about their life, these respondents? So those two things emotional well being and life evaluation. And here's the key takeaway. I'm just bottom lining this emotional wellbeing being rises with income up to around $100,000 today. And that's sort of where we are with inflation since that study which was in 2010. Beyond that emotional happiness plateaus though, the life evaluation continues to rise. So I have a few thoughts on this takeaway. The first thing is I want to emphasize or decouple the difference between.

Your emotional well being, which is that day to day happiness, and how you're viewing yourself in the context of a broader life experience. And that the takeaway from this is, in my own words, it's that your emotional wellbeing is affected when you simply don't have enough take home income to support your life and your needs. However, after a certain point, which to me feels relatively low at a hundred thousand dollars, after a certain point, your day to day emotional well being doesn't rise. According to this study, however, as your income goes up to 1502-003004-00000 plus your life evaluation, how you view yourself as you go through life, that continues to rise, maybe that's a self confidence thing maybe it allows you to do sort of more hobbies, more travel, more experiences and that elevates the experience that you're getting out of life. But in terms of your day to day happiness, interestingly, the study says it actually has a very little effect on that. Now my second comment is, like I said, $100,000 feels very low. I'm sure that where you live in the country matters on this. Here in San Diego, I'm sorry, $100,000. If you're trying to raise a family even at a dual income home, it is extremely difficult to do that if you're not making at least 2 to $250,000 in these high cost areas where a very basic home is going to cost you 1.5 million. And if you want to live in the slightly nicer part of town, you're probably going to pay two to two and a half million in a house. So it becomes very difficult. And this is something that I predict is going to change over the next 10 years because it is completely. Housing is completely inaccessible for people like my kids, 18, 20 and, and 14. For them to come out of college, let's say they come out of college making a good income and let's say that's $75,000 which is good income coming out of college. To go buy a house anytime soon ain't happening. That's why essentially it has to be subsidized. At some point, gravity takes hold and things come back down to reality. I don't know when that's going to be, but I do think with housing things have to change. There's a bigger conversation there. I could have a whole podcast on why housing prices are up. From international investors to large mutual funds like BlackRock buying up a ton of real estate and private property and it's just jacked the prices up and it's a, it's an issue. But going back to the study here, $100,000 now again, that feels low to me. I'd say here in California, certain parts of California really should be at 200,000 plus. You think about the journey you went through, all the years of school, the student debt, the all of the kind of emotional burden of starting and running a business, all of that. I'm telling you, it's got to be higher than that. But that's what the study says. That's what the study says. And if you think about that, think of somebody, you know, who's probably making around $100,000 and are they able to have an Emotional stability, kind of a day to day well being with that, I think so as I think about people that I know, they, you know, they, they may not live in a big house, they may not live in a house at all. You know, it might be an apartment, which is totally fine. It might be driving an older car. But as I think about those people and I compare them to people I know who have a lot more wealth, I honestly don't see much of a differentiation in just the general day to day well being. Now I don't necessarily have deep talks with these people I'm thinking of every day. And so I could be wrong in that. But that's just my general observation that I'm extrapolating a little bit out of this study. Let's go on to the second study and this one is Daniel Kahneman and Matthew Killingsworth, 2021. So this is really a follow up study to that first one. And so in this one they track 33,000 working Americans via a smartphone app. It's sort of the simplified method. And unlike the 2010 study, this, this study found that happiness continues to increase with income well beyond the, at the original study, $75,000 inflated to $100,000 today, but the increase slowed down. And that's called diminishing returns. Diminishing returns. If you took a, an economics class, you'll hear a lot about marginal utility, diminishing returns, those, those kind of concepts. Well, this one makes a lot more sense to me because If I'm making $75,000 a year or I'm making $400,000 a year, there's definitely going to be an ease, financially speaking, in my life that creates a lot more breathing room. Now of course that does depend on my spending habits and I'm going to get there. But spending habits, all things considered, being relatively the same, I'm going to breathe a lot easier, I'm going to sleep a lot easier and that will, I think reduce anxiety and just have a more, a better emotional well being from day to day. However, I think it is very true that for every incremental increase in income, there's not a one for one incremental increase in your day to day happiness. And so that's called diminishing returns. So if you go from $100,000 of income to $200,000 of income, you're not necessarily doubling your emotional well being from that increase. You might be seeing a 20% increase on your emotional well being. Now, I'm completely ballparking that, but that's Just what my sense tells me as a financial advisor and in my own life as well, because I've gone through that whole chain, that whole journey. When I started practicing, in fact, my first year of business, when I left, I, I. When I left the big accounting firms and I started my own business, I went, this was back in 2009, I went from making about $115,000. That first year I made $29,000. Second year I made about $49,000 and about $80,000. And I had a stay at home wife with three kids. And for a period of time I was living in Southern Oregon. So that did help. However, I remember feeling intense amounts of financial insecurity during that period of time because I sort of launched into this.

I'll say a goal or a kind of a professional dream to be a business owner, as many of you dental practices are. And I at the time, you know, I couldn't get a loan. I had to pull from my Roth IRA actually to get through those early years. However, one thing I love about our capitalistic system is it rewards entrepreneurs. And if you are diligent and you stick to it and you learn the characteristics of what it means to run a tax idea business with checking accounts and credit card accounts and debt and taxes and HR employees and marketing and compliance costs and all of that stuff, it's like this whirlwind of, of just stress buttons all over the place. And you really have to learn how to kind of harness what are these requirements, create processes around them, delegate. And then you start to experience the benefit of what it means to be an entrepreneur and a business owner. And I'm going to get a little bit more to those characteristics in my next podcast on this subject because I want doctors to find value and beauty as they increase their income. And I want them to have beauty. Key characteristics of income generation as a dental practice owner, which I highly encourage. If you haven't listened to my. I think I did 10 episodes or so on dental financial planning for a practice owner. I go through what are the four main stages of accumulating a wealth through an effective financial planning system. All right, let's come back now here to these studies. So the nuance for this second study in 2021, which was a follow up to the 2010 study. And again, this is Kahneman and Deaton. These are Princeton University professors. This was a study that came out of that university. The nuance was this. For people who are unhappy to begin with, money doesn't fix deeper issues. For those generally content Higher income adds incremental happiness. That's the takeaway right there. Beyond that, how you use money matters more than how much you have. How you use money matters more than how much you have. All right, here's a quote from Epictetus. Wealth consists not in having great possessions, but in having few wants. I actually love that. I remember, I remember going off scripture a little bit, but I remember when I worked for my first wealth management firms, 2008 company called Moss Adams Wealth Advisors. And I was talking to an individual whose name I won't mention, but he worked very closely with Steve Jobs at Apple. And his job was to set up all of the stores and their, their venues whenever they do new product releases. So their shows. And as you know, Apple has a very unique, chic, slick style in their stores and it's made them, It's a very catchy look. And so this guy was very much beloved by Steve Jobs and he made a lot of money. And he, I remember he was a fairly down to earth guy though, in his living, but he had accumulated quite a bit of wealth and he had rental properties and he had, of course, an investment portfolio and various things. And I remember him saying, I never understood and I never would have forecasted how difficult it is and how much time it takes to preserve wealth once you have it. You know, you think you just work so hard, you get it and then it kind of does its thing without any effort. However, when you start to grow a lot of wealth and you start to owe a lot of thing, own a lot of things, it, in an interesting way, it adds a complexity or layer of complexity to life that now you have to manage. If you have a second home, trust me, you're gonna feel an obligation to go to that home. And I know when you conceptually think about buying that second home, you're like, oh, it'd be so nice to have a place I could fly to on the weekends or drive to on the weekends and get away. And that's true. And, but sometimes I've heard this. Now I personally don't have a second home, but I have heard this, that people who have a second home often feel this obligation that now they need to go there because, well, they're paying a mortgage on it. And in some small way, yes, there's going to be a nice satisfaction that you derive out of that, but in a small way, it can start to own you a little bit and make you feel that obligation. If you get a third house, you get, you know, more cars, whatever it is. You get more things, you start to feel an obligation to use them. And they go beyond just providing that extra satisfaction to having that extra element in the life. I know when I go out of my garage and I see certain things that I haven't used in a few years and maybe used them once, I start to question was it worth it to buy that particular thing. Wealth consists not in having great possessions, but in having few wants. I think there's something to that statement. Okay, let's go on to segment two here. Sources of financial stress for dentists. I could talk about this a lot, but really I'm going to just spend about five minutes on this subject. Unique challenges for practice owners. All right, so you go to dental school and you come out of school with 4 to 600,000. Very common range these days for dentists coming out of school. If you're a specialist, you may be coming out of school with more debt than that. I've seen over a million dollars in student loans for certain oral surgeons coming out of certain schools, and that debt starts to feel heavy. Secondly, you buy a practice and you take on additional debt and then you have payroll and you have people who are relying on you for their very living. And so you have all these obligations of people who are not only vying for your dollar, they are literally.

Demanding. You are required. You have no out. Unless you want to sell your practice, walk away, maybe file bankruptcy, you have no out. You have to make these obligations. The last thing I will say is what I call lifestyle creep. You come out of dental school, you have pent up consumerism and you want to buy a bunch of stuff. And as a dentist, you're naturally motivated. You are a goal setting, naturally motivated person. And you like, you're probably competitive. And competitive people like, like to keep up or like to be ahead even. And a lot of times this is very difficult to untether ourselves from this psychological aspect of life that the things that we display, house, car, jewelry, what clothes, handbag, whatever it is. 10. We tend to feel that these are reflections of our success. Now, I am not going to diss on the handbags. I know you women, you love those handbags and they're amazing handbags. And I don't want, I want you to enjoy some perks. You deserve to enjoy some perks. So don't, don't read into this too far. My main point here, and I don't think that this was, is debatable, that people view our success financially simply by what they see. And that's because sometimes we are shallow in our understanding of what success is, but a lot of people have more displays of success than they have actually earned, I. E. They have a lot of debt or perhaps they've inherited some money. But the main point there is that life creep is a real thing. And incrementally you take on this loan, you get this additional car, you buy this, you're not setting aside savings, your emergency fund is really low in and out of the practice. And that lifestyle creep keeps you living on the edge.

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So student loans, practice loans you could throw on home loans, car loans. An incredible amount of debt. Dentists have an incredible amount of debt. It's not like you come out of school with $30,000 of student loans and you go get a W2 job and you know you're good. There's a tremendous amount of debt that you have. You have elected a lifestyle that comes with it. A lot of debt. Now you can control a certain amount of that, but a certain amount you can't control. You're going to need a loan most likely to buy a dental practice and you most likely needed a loan to get through dental school as well. All right, so now I want to do a research tie in how this sort of relates to that. Happiness increases when money does the following when money reduces Stress, that's when you get the most incremental gains out of your money. It's not necessarily that nicer car or that bigger house or that, you know, extended trip or that cruise. Those add an element of joy in the experience. However, when money makes the most impact is when it reduces your stress. And the reason why this is absolutely vital to understand. And me. One sec. I'm supposed to have a meeting right now. Let me just let her know I need a few extra minutes. A few extra. Thanks. Okay.

This is the main point I want to make before I try to stick the landing with this. In this episode, when you have an extra dollar.

One of the most important things a good financial planner will do is they will help you think clearly and in a disciplined manner about how you allocate that dollar to the various demands upon you, financially speaking. And when life is good, the economy's good patient flow is consistent and everything feels stable. It's very easy to take that extra dollar and go and use it to buy a want instead of adding it to an emergency reserve fund or a savings account or building your business checking account balance to feel more comfortable. And at night, because we rationalize, oh, I'm in a good state, nothing's gonna change this. My practice is producing. Well, everything feels very consistent. Well, guess what? Life will absolutely change, sometimes for the better, but sometimes it's gonna change for the worse. And it's my opinion, it's actually not an opinion. We will go through a down cycle economically. This is not a statement about the current environment. It's not a statement about politics. It's not a statement about the one big beautiful bill or the Federal Reserve. It's simply a fact that economies go through cycles and they have these very large cycles of a hundred years of a very leveraged debt cycle. And then there's about every eight years or so. There's sort of your routine up and down cycles in the economy. Now, we have been flooding the zone, we have been flooding the economy with printed money for a very long time. And it's kept afloat our sense of wellbeing and financial growth in an incredible amount. But at some point, at some point, it has to come to a place of sustainability. And the national debt is not at a place of sustainability. We had essentially free money for a long time when interest rates were so low. And so there's an incredible amount of debt out there as well. And there's a lot going on that inevitably there's going to be significant changes. Are you prepared for that? Think Hard about that. If your collections dropped by 50% for six months, what would you do? How much money do you have in your business checking account or savings account to help you weather that storm? Now, the truth is in Covid there was some that was an example of this. The government stepped in and provided huge amounts of money to dental practice owners through the ppp, the eidl, the Health and Human Services grants that the government grants, the ERC Employee Retention Credit. I mean incredible amounts of money were dropped into the marketplace to keep things afloat. And we increased our national debt as a country by about $5 trillion because of COVID It was very expensive and we can't keep doing that. So imagine if your practice had to go through that type of event but didn't have sort of the government support and you had to shut down so much of your business. How long could you weather that? This is what an emergency reserve is for. And I promise you, if you were to increase your emergency reserve, most of you probably have, you have something in the bank, a few of you will have a lot in the bank, most of you will have something in the bank and a good portion of you will have very minimal in the bank. How much you have in that bank is a significant, has a significant effect on your day to day sense of ease and anxiety reduction around your money. That is a fact. I've seen this over and over and over. People call me nervous when their cash balance is is really low. Am I going to make payroll? Am I going to make rent? Am I going to be able to pull enough money out to support my personal needs? Am I going to be able to pay my debt? All of those questions. When you have a sufficient working capital base in your practice, which I usually say is about a month of total collections or in your personal account, somewhere around six months of fixed living expenses, you are going to feel so much more at ease. So what can you do with your dollar to get the most incremental value when it comes to happiness? It's to make sure first you have a very robust emergency reserve fund personally and a working capital base, which is essentially an emergency reserve fund in the business that is the most beneficial thing you you can do. Above that, starting to consistently save Money in your 401ks or IRAs or brokerage accounts then takes another level of cushion and increase to your sense of financial security. I know this may sound rudimentary and basic. It is. But I can't tell you how often the lack of discipline exists in humans, not just Dennis in Humans to build up that emergency reserve fund in and out of the practice to create that sense of stability. All right, the next thing I'm going to say is happiness increases money when it is used to reduce stress. Now for dentist number one, build that emergency reserve fund. Number two is start to delegate financial complexity, accounting, payroll, planning, bill pay, things like that. Less is more in this case. And what I mean by that is if you can live on less. If I go back to that quote from Epictetus, if I say that right, wealth is sort of having few wants. If you could go back to that and live longer as you're building your career, or just have fewer needs financially and therefore you are able to retain more money in your practice and you can use that additional money to delegate to, to hire a great roster of people. Gosh, how important is that? I don't mind if you pay 15% above market. If you have somebody who's simply 50% better than your average employee, trust me, you're going to get an roi, a return on investment on that particular employee. But if you can hire great people and pay for great people, you can hire a good consultant. You can hire a good external CFO to help you with financial organization and planning and tax minimization. If you are able to use some money to. You can't think of it as an expense. Your employees, try not to think of them as an expense. You're a good CPA or financial advisor. Don't think of it as an expense. Don't think of a good consultant as expense. These are investments. Why? Because investments have return on on those investments. And you need to do two things. Get your collections up and make maintain your overhead and taxes such that your net take home ends up being a strong number. And as a business owner, you've got to be so intentional about hiring, about your processes, about your system of delegation and how you motivate your team. These are the business skills I was talking about at the beginning of the podcast that as a business owner, life is probably. The business is probably going to own you and you're not going to own it if you don't figure out those aspects of business ownership, hiring, well, leading processes, delegation and motivation. All that to say all that in addition to better said, all that in addition to being a really good clinician. And I know it sounds like a lot, but you're very, very capable people. Dentists are some of those capable people who walk the planet. These amount of education, the devotion, the goal setting.

I don't know of many dentists who can't learn these things. It's just a matter of being intentional about it and setting aside the time to do it. They can feel important but not urgent, and therefore, like many things that are important but not urgent, they don't get tended to. Lastly, guard against overspending in your life. I know I've talked about that. But be very, very disciplined and intentional about how you spend every time you spend money on something that's a little more maybe a premium or maybe we're eating out a lot or what Airbnb you're going to get or hotel stay or vacation stay or car you're going to buy. Of course, house. That's a massive one. Ask yourself, how important is this, that I have this, and how much emotional sacrifice am I going to have to give to in order to sustain this purchase? How much emotional sacrifice am I going to have to make? Okay, here's my last quote on this Will Rogers Too many people spend money they haven't earned to buy things they don't want to impress people they don't like Will Rogers. Just like I said earlier, look in your garage. Look around. What have you bought that's got very little use? That at the time that you bought, it seemed great. Maybe other people had it and you felt it would incrementally make you that much happier. And in the end or the most part was just money deducted out of your account with marginal return on that. If you're like most people and like me as well, there are definitely items in the garage that reflect what I did, which means I probably fell victim a little bit to this. Too many people spend money they haven't earned to buy things they don't want to impress people that they don't like. With that, everybody, we're going to conclude this one. In the next episode, I'm going to go over what are the characteristics of millionaires. Then I'm going to go over how to spend your money to maximize happiness and how do you align money with a given purpose? Until then, have a great one.