78: Personal Spending habits: Why Dentists Struggle to live Beneath Their Means

Welcome, listeners, to another episode of the Dental Boardroom podcast. It's Wes Reed, your host, CPA and certified financial planner, and owner of Practice cfo. I have been out of pocket a little bit lately, everybody, and I do have a legitimate excuse. It is tax season around here, and although we are first and foremost for our clients, an investment advisor, a financial planner, a wealth manager, I. E. We are driving financial freedom for our clients, we are also, and very specifically, a dental CPA firm because we need the dental CPA work like the financial statements, tax returns, payroll reports in order to clinically assess and develop a treatment plan for our doctor's money. And that's why it's been so busy lately for us. I've always found it strange that the IRS essentially opens up their filing window in early February, sometimes late January, and then it's due essentially six weeks later on March 15 for entities like S Corporations, and then only a month later for the 1040s. So if you ask why your CPA often has to extend your tax return and not file on time, that's why a lot of that really isn't even their fault. The IRS just doesn't give them much time at all. Now, that said, a practice cfo, it is a huge priority to get as many tax returns out the door as we can because we are always focused on the future. And it's difficult to plan for the future when you don't have the tax return done. So we are working nights, weekends, you name it, to get tax returns out the door here at Practice cfo. All right, let's pivot into the subject of the episode. And I don't want to scare you. I don't want you to run away when I tell you what the subject is, because I'm going to explain to you why you should listen to this podcast. And perhaps it could be one of those critical influencing moments to drive certain behaviors, needy behaviors in your life. Here it is. We are going to talk about how you spend your money. Some people call it a budget. I don't like that term. It feels cold and stodgy and boring. I would rather call it your spending plan. What is your plan? To allocate your money to resources, ultimately to give you a rich, fulfilling life. Does that sound more exciting? I think it does. We're going to talk about this subject of spending now. I want to kick it off with a few stats, and hopefully these stats will drive home why I think you need to be listening to this podcast. Number one, people underestimate their actual spending by 40 to 50%. So if you ballpark in your head, you're adding up your rent, mortgage, you're adding up your car cost, you're adding up maybe some weekend spending, groceries, eating out, etc. You're going to come up with a number. And let's say that number is $10,000 a month on average. You're probably actually spending 14 to $15,000 a month when you actually look at the numbers. Now, I'm going to talk about an activity that I recommend everybody does periodically, especially if you have a spending problem that I think can help curb that problem. So that's the first stat. The second statistic is that if you saved because you managed your spending effectively to where you could detour some of your money into a savings account. And there's various types of savings accounts, IRAs, 401ks, brokerage accounts, 529 education funding accounts, trust accounts, There's a lot of different types of accounts. But if you could redirect some of your money that would have been spent into the savings account, and if you can save $100,000 a year, roughly $8,000 a month, at 8% growth, you would have about $7.3 million after 25 years. So let's say you could start that when you're 35, you save $100,000 a year, $8,000 a month. When you hit 60, you have $7.3 million, which by the way, is dramatically more than your average dentist has when they retire in their early 60s. Now, if you let that keep going for another five years, because of the incredible effect of compounded growth and the steepening of the curve, you could get to $11 million. That's where you would be at $11 million in 30 years, at 8% growth, at $100,000 a year that you set aside. So that is an interesting stat. That is a fact. Those numbers pan out exactly as I stated.

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Number three, the average dentist isn't retiring until 68, even though the average American is retiring at age 63, in spite of the fact that dentists have a much higher than average income. Why is that? The ADA came out with a stat that this was about eight years ago. Only 3% of dentists could retire at age 60, early 60s and maintain their lifestyle. And I think that that number actually dropped to 1%. Don't quote me on that, but it's a very low number. Now do dentists retire earlier? Yes, but a lot of them just are not able to maintain their same lifestyle. And if they want to maintain their same lifestyle, especially because once you retire and you have a lot more time on your hand, you actually end up spending more money than when you're working. That is often the case. So what do doctors do is they simply have to work longer. 65, 70, 75 and even plus if their hands and eyes and physical.

Condition can allow them to keep doing that. Alright. Number four, High income earners. This is another stat. High income earners feel on average as much financial stress as median income earners and sometimes as low income earners. Now sometimes many of you maybe have heard of there's a sweet spot where if you make less than say $40,000 a year, you are going to feel a lot of stress from money. And then there's this spot from I don't know where, somewhere around 50 to 80,000 bucks, all the way up to maybe $400,000 plus or minus. That's kind of the place where statistically speaking, most people.

Have the best relationship with their money. And then for some odd reason when you get above that, suddenly a lot of people feel even more stress. I think it's because when you get above a certain level, it's probably because you have a certain income and you want to present yourself in a way that matches.

What that role is, what that job is, what that career is, what that title is that you have. And so we tend to spend more money above that. And the more we spend, the more we live on the edge financially, the more stress we feel. Now, I'm going to talk about all this stuff in more detail here, but I just want to lay out some key stats there about how our money and the relationship between our money and us oftentimes is misunderstood and oftentimes leads us in a direction in our life that ultimately isn't optimizing what we could be achieving with the relationship between our money, ourselves, and our lives. Why should we budget? Let me give you a few key reasons here. Number one, you can talk about having a strategy for your life. We all do it in our heads, at least mentally we've talked about or thought about. What do I want out of life? Maybe your faith is driving you to live a certain way. Maybe you've just designed a life that you believe will have the most happiness to it, and you want balance and you want to achieve things or do things that are meaningful to you. But ultimately none of this really means anything if you don't align those aspirations and those values and those goals with the way you allocate your time, money and energy. Now, money being one of those three things, time, money and energy is one of the key resources you have to drive your fulfillment in life. In other words, how you allocate your resources is really where the rubber meets the road. The second reason why you should budget is a budget is you taking control of your money so it doesn't control you. And rich people stay rich by living like they're broke. And broke people stay broke by living like they're rich. And one thing that I've observed as a financial planner for dentists for the past 15 years is that how much a doctor makes, how much is on their W2 and their K1, how much cash flow they have out of their business. Most of you are s corporations if you're a single doctor, and regardless of how much money you generate out of this machine known as your practice, and translate that over to your personal life actually has very little determination or correlation to how wealthy you ultimately become. And that's because your offense may be strong, but if your defense is terrible, you're going to lose games. Defense wins games as much as offense wins games. Now, ideally you have a strong offense and a strong defense, then you're winning Super Bowls. When it comes to money, sometimes it's easier to have one than both of them. But in this podcast, we're going to focus more on that defense, on the spending. Another reason why you should budget is it's not about accumulating money for money's sake. It's not a game. And we all know somebody who has got to a perception of their money where the end game is simply stacking that number higher and higher and higher. And I'm going to read from one of my favorite books. Let me grab the book here. It's called Enough, and it's by John Bogle. John Bogle is the founder of Vanguard, a company that we love. We have a lot of our 401ks set up at Vanguard. John Bogle started Vanguard. It's one of the big sort of investment companies out there. You've heard of, you've heard of these, Vanguard, Schwab, Fidelity. Well, Jack Bogle essentially coined the index fund. And I'm not going to go into the index fund here in detail, but the index fund is basically a way to invest in the entire market at a very low cost. Close your eyes and let it grow over time. And I'm a believer, we here at practice CFO are a believer that timing the market and day trading and stock picking funds for most people is a loser's proposition. And so asset allocation being disciplined, properly allocating across different geographies and different styles of company and periodically rebalancing and removing the emotion out of it, that's going to win you most. That's more than anybody else. That's pretty much going to win you every game. It's a lot of singles and a lot of doubles. Periodically, maybe there's a home run, but that's not the game strategy. That's what when people's. That's what, that's what wins the people. Now, Jack Bogle started the index fund. I'm a little tangent on Jack Bogle. He's somebody I highly admire. But in his little book, it's called Enough, he starts off with a little story and he says this at a party given by a billionaire on Shelter island, which is some. Those of you in New York will know this place. I didn't know this place, but it's, it's near the Hamptons out there, Shelter Island. Kurt Vonnegue informs his pal. Kurt Vonnegue was an author. He informs his pal Joseph Heller that their host. So they're at this party and the host of the party is this hedge fund manager. And Kurt Vonnegue, I hope I'm saying that name right. He tells his friend, this guy named Joseph Heller, who wrote a famous novel called Catch 22, and he goes, their hedge fund manager the host made more money than in a single day as a hedge fund manager than Heller had earned from his wildly popular novel Catch 22 over its whole history. Heller responds, yes, but I have something that he never will have enough. And I love that. That's the introduction to Jack Bogle's book, the very first paragraph. What does it mean to have enough? As I meet with clients at practice cfo, we always start relationships by going through the exercise of blueprinting what a fulfilling life looks like. In other words, what is enough for you to be adequately happy? If you don't define that, external voices are going to define it for you. There's no way of escaping that, not if you're human and not if you live in our system where advertising voices scream at you everywhere. It will, whether you know it consciously or not, start to influence the way that you define your needs and draw that line between needs and wants. It's almost inevitable unless you set up structural controls around how you spend money. And I'm going to talk about that in this podcast.

So this isn't a game. Spending, you know, accumulating wealth is not a game. It's not just an ego competition. The goal is to live life on your terms. And our relationship to money has this interesting dichotomy. On the one hand, it's a cause for a very unfulfilling life. I have personally seen how money has, I would say, siphoned out happiness from people's lives because it owned them. On the other hand, money can enable an extremely fulfilling life. Not that you have to have a lot of money, but it is a very powerful enabler of a fulfilling life. If the way you use money is dictated on your terms, if you control that relationship, and if you don't, a lot of other people are going to get paid ahead of you. Why do dentists not, generally speaking, have a plan around how they spend their money? I'm going to give you 10 reasons now. I'm going to enumerate them fairly quickly. But think about these 10 reasons and try to be as self reflective as you can. As you probably know, we are generally, it's very difficult. Okay, here's a metaphor that I think will explain what I'm trying to say. You can't read the ingredients on a bottle from the inside of that bottle. In other words, it's really hard for us to assess our own selves when we are stuck inside our metaphorical bottle, inside our own mind. What I want you to do is try to extract yourself out of that bottle For a minute. I want to look at the ingredients. I want you to look at the ingredients. What's on the inside of your psychology as it relates to the way that you interact with that thing called money in your life, that thing that you've gone to so much school for, that thing that you work so hard for and bear a lot of stress for, and get up four or five days a week and go into the office for and meet with so many people and took on debt for and all of that. Why don't we have a great plan around the use or, or allocation of that money? All right, Number one is, I believe dentists have this thing I call pent up consumerism, which means you've gone to school longer than most people have gone to school, significantly longer than most people have gone to school, and you had to continue to live like a student, significantly longer than most people have to live like a student. And so it builds up. It's like that bow, and you're pulling back on that bow. You haven't let the arrow yet go, and it's getting tighter and tighter and tighter and then boom, you let go and that thing just goes flying. Well, that's what happens sometimes when we get out of dental school and we get a job and suddenly we're making a couple hundred thousand dollars. I mean, when you're in dental school, you weren't making anything. Maybe you're on a stipend or something, doing 30, 30 grand a year, 40 grand a year, but suddenly you're making 200 grand a year. And you haven't fully matured into that place where you recognize the relationship between your spending needs today, your spending needs in the Future, and that 200,000. Yet there is an important relationship between those two, between those three you today, you in the future, and that $200,000 that you just earned. And so what do we do? It's there, we spend it. And what I always say is spending moves up or down in our lives as fast as a cork on water moves up or down. As that water moves up or down, it's just immediate. That's human nature. And it takes discipline and self constraint and a plan to counter that very natural human tendency to spend what is sitting there right for the taking. And part of being successful around the implementation of a spending plan is psychology. And the way you view money and discipline and, and your values and all that. Yes. But I would say, if not more important than just sort of your will to live less than what you earn is you have to put in place a system that structurally doesn't make you feel so wealthy. And I'll explain what I mean by that. In other words, we have to put in place a system where that money isn't always easily accessible and it's parked or moves to a designated destination. And I'm not talking about budgeting that. You're spending $1,000 on groceries and $500 on travel. I'm not talking about that. But specific designations on your personal balance sheet that's going to grow your wealth. That's what we do every day, all day at practice. Cfo. And that's what I'm going to talk a lot about is how we do that and how you can implement that in your own life by intersecting good financial planning with your business cash flows. Okay, so pent up consumerism, business school, you come out, boom, I want to buy that brand new BMW. Whatever. Pent up consumer number two is you just feel you deserve it. You've got DDS after your name or dmd, or you're a specialist or you've been to school for a long time and you're a doctor. So you, you deserve it. That's another reason why we tend to go and spend quite a bit of money. Number three, you're allowing the world to dictate your needs versus your wants. Number four, there is simply an easy access to credit. Credit being debt. Credit cards, home equity lines equity out of your practice. You can do margin lending on other investments. You have car loans. There's just debt is extremely available today. And it's been so commoditized to the credit score. That score that banks almost like have an automated way to assess your worthiness to take on debt. Banks get their money from depositors or from the Federal Reserve. And they get their money and they're able to lend that out. And banks make money. When they lend a lot of money out, they're very motivated to put money in your hand and you're very motivated for them to put money in your hand. So, so you can go and consume that whole system of credit and debt. To me, it's always been a little bit ironic. Like you have to go and get a credit card which allows you to spend money so you can prove to future credit card or creditors of yours that you can handle credit wisely. So you have to use. It's like fighting evil with evil. You have to use debt to go prove that you can handle debt. Now I get that, I understand it. But what happens is this whole system of essentially a very streamlined Access to debt with a commoditized way to assess people's risk levels such that they can determine whether or not to lend to them, has just created this flush flow of money throughout people's bank accounts that allows them to spend more than they earn. And that's the way we've been doing it here in our country for a while, which is why debt is so high. And Big Brother Uncle Sam, that is the government has been worse than anybody at roughly, I think we're at $36 trillion of national debt for the first time. We're spending more money servicing our debt as a country than on defense spending. I mean, it's not the first time. That did happen during World War II, but since World War II, that's hopefully not a big turning point. But my point is, we've all become so accustomed to living in a system that facilitates spending that we think it's okay to spend an amount of money that is beyond our means. Well, it's not. And it ultimately will catch up to you when the music stops. Alright, number five, you doctors, at least you who own your own practice, have access to a backup ATM known as your business checking account. And it's too often as we bring in new doctors that we look through their, what's called their general ledger, we see all their transactions. We realize that when a doctor doesn't have enough in their personal account, they will then just go transfer money from their business to their personal account. Or they'll run everything from their trip to Hawaii to their pool guy or girl through their practice. Now let me pause and say here at practice cfo, we are very aggressive when it comes to tax planning. Very aggressive. I always say we toe the line, but we don't cross the line because we got a dual mandate to save you in taxes, but to also keep you out of the IRS's crosshairs. And once audited, you are just sitting in their crosshairs for a good five to seven years. And so we have to put up a wall somewhere to say, nope, that needs to be run personally or we call it a draw in your practice, not a tax deductible expense. So we work as a team with our clients on that. But for you doctors, my point here is why do we often not budget or have a spending plan or spend too much? It's you have that money sitting your business checking account that you can go and dip into. Now at the end of the day, the money in your business account ultimately should be to support your personal life. The business doesn't exist to service itself, only it exists to service you. But when you don't have a good plan of how and when you pull money out of your practice to support your personal spending, what happens is, a, you spend too much and B, you oftentimes don't have enough in your business account to cover all of your business needs, which includes your tax liability. Oftentimes, tax time comes around you didn't make your payments appropriately as an estimated set of payments or through payroll. And your cpa, who hasn't looked at your numbers all year, suddenly says, hey doc, you owe $85,000. And you're like, Wait, what? I only got $20,000 in my business checking account. How am I going to do this? Well, then you're trying to solve that problem and play catch up. There was no system in place to determine when to use that backup ATM known as your practice checking account. So that's another reason. Number six. I call this the anxiety cycle. We buy because it gives us a moment of thrill that blunts our anxiety. Life is throwing a lot of anxiety at a lot of people these days, and for a lot of us when we buy something, it just gives us a moment of reprieve from that anxiety. It blunts and it gives us a momentary thrill. After a few days, though, the newness wears off of that thing that you just bought and the anxiety gets worse after a bit. We may have our afterpay or Klarna accounts where you're basically buying things when you're checking out and choosing to pay for it later. Buy now, pay later. These things are going crazy these days. That gets high. Your cash runs low, your credit card balances are rising, and anxiety only gets worse. That's the anxiety cycle. So what do you do? Sometimes you go out and you buy more. It's not unlike in your practice. At the end of the year, you got to go buy, pay for some equipment so you can bonus or section 179 deduction it so that you can reduce your taxes and you get the full tax benefit even though you took out a loan on it. And so let's say you took out a $100,000 loan to buy a CAD Cam. Great. You just took a 179 deduction and got $100,000 tax deduction. Just saved you 30 grand. Awesome. Problem is, now you're paying back $100,000 and you're not going to get any tax deduction for it because you took it all in year one and so you got money going out the door in the future with no tax benefit other than a little bit of interest expense deduction. And what do you have to do the next year? You had to go buy another piece of equipment to save you from that first decision. And that's why you got to be very careful in the way you use section 179 deductions. All right, that's a bit of a tangent there. Everybody, number seven, everybody wants you to spend. Perhaps if you're, if you chose right, your spouse doesn't. But most people want you to spend. Your kids want you to spend, your vendors want you to spend, your employees want you to spend. Retail everywhere you go wants you to spend. Ads want you to spend. Subscriptions want you to spend. Everybody wants you to spend. And so that's another reason why we don't have a good spending plan is because we give in to other people who are vying for your dollar. Apparently they're vying for it and winning it more than your future self, who I believe you need to enforce them to buy more for your dollar over other people that give you something today. Mostly a consumer item that's not going to be anywhere around in five years and worthless. All right, number eight, we want to live in a high cost area. Now, one of the easiest life arbitrage, as I call it, one of the easiest life arbitrage is an arbitrage is when you can quickly engage in two transactions almost simultaneously and, and by doing so you come out with more money because of that. I'm sure there's a better explanation of arbitrage. But in this case, if you're in California and you have a house worth $2 million and you want to move to Arizona and buy a house worth $100 million, that's the same square footage and size right there, you can land a million dollars by selling and then buying, which could literally occur in the same month. That's a life arbitrage. Now, a lot of us want to live in sunny California or we want to live in some of these states that are high, higher cost, California being the highest, maybe New York's the highest, I don't know. But we want to live in these areas. Well, there's a cost to that and you have to look hard in the mirror and say, can I afford to live in this space? All right, that's number eight. We want to live in a high cost area. Number nine, this concept of, of marginal thinking. Marginal thinking, which is if you spend an extra $100, you buy this new Amazon item or you go out to the nicer restaurant or you spend on that nicer Airbnb. Marginal thinking is that this one transaction isn't going to affect anything because the consequence is so small. Well, it's the accumulation of all that that creates the problem. So marginal thinking, this relates to our health, this relates to our relationships, this relates to a lot of. Well, it certainly relates to the way that we approach money in our lives. And number 10, finally, and I'm sure there's many more reasons why we spend too much money, but how we present ourselves to the world, materially speaking, matters too much. It matters too much to too many people. I'm sure you've heard the quote from Will Rogers. Too many people spend money they haven't earned to, to buy things they don't want to buy things they don't want to impress people they don't like. We tend to feel a need to present ourselves in a way that indicates or reflects our success. And that's very much a human habit and one that I think needs to be managed and suppressed very carefully. All right, now I want to. Those are the 10 reasons why I believe we tend to, and particularly dentists, don't mean to be accusatory here. I just know you very, very well. And there's a very big spectrum on this panel. Some of you are just so naturally good at being disciplined and giving meaning to your life that isn't just about how you allocate money. Some of you are excellent with this and others really struggle for all these reasons I'm talking about and maybe nuanced reasons unique to you. All right, but one thing I want to emphasize here is what is your personal spending as a business owner dentist? If you're an associate dentist or an employee, ignore this. But as a business owning dentist, you essentially are spending your, your personal spending is coming out of both your business checking account and your personal checking account. And a lot of times you just think about what's going on in my personal credit card or my personal checking account. And if I just add that up, that's my spending. No, the reality is, for most of you, you're running a lot of car costs, a lot of Amazon, a lot of Costco, a lot of travel, a lot of meals, maybe in some entertainment. You're running a lot of that through your business. And the reality is your spending, your total global spending is the sum of your personal spending and then also the personal items in your business spending. And I'm going to talk here in a little bit about an exercise you can do to get a better grip on what that is. Now what I want to talk about is the consequences of overspending because there are real harmful consequences and some of them are extremely dire and extreme and negatively affect not only your life, but oftentimes the life of those around you. Sorry to sound so serious, but hey, money can be serious and it has a huge impact in the way we feel about ourselves and our lives and our relationships, our self confidence and so many other feelings and self perceptions. So this is important. What are the consequences of overspending? Well, number one is you're simply put, you're not providing for your future you. I always tell my clients, I got two clients, I got you today doctor and I got you tomorrow doctor and you're both equally important to me. And I'm going to advocate for your future you because a lot of times we don't advocate for our future selves enough. And so I drive that. I try to drive that balance better now at the end of the day. My job at the end of the day is simply to provide education that if you live like X now, that means you're going to live like Y later. And ultimately you get to make that choice. I don't control any of that, but I'm going to paint a clear picture for you of what tomorrow looks like based on how you're living and spending your life today. So the consequence of overspending is one, you're simply not providing enough for your future self. And I promise you, you will come to regret that. I absolutely promise you. And I promise you because I've seen it so many times in one version of this statement or another. When we get clients in their 60s and 70s. Are you looking to buy or sell a dental practice? If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow for dental practice sales. In such a fragmented market, many dentists selling their practice feel discouraged. That's why I built practiceOrbit.com PracticeOrbit is modernizing how dental practices are bought and sold. It's a platform technology. Y' all know them. Zillow, Airbnb, Uber, and OpenTable, just to name a few. These technologies do two things. First, they help match buyers and sellers by centralizing the marketplace. Second, once the match between buyer and seller is made, these technologies help them navigate the sale to a successful close. Here are a few of the features inside a practice orbit. Users can determine a reasonable sale price for practice in just minutes. All they need is the most recent business tax return. Practice owners can use the directory to find important service providers like practice brokers, attorneys, accountants and bankers. Practice owners and their brokers can invite those service providers into the platform so all parties are coordinating the sale together. Practice owners will have a beautiful digital listing of their practice like a home on Redfin. And importantly, the listing will be anonymous and personal information like your address, name and pictures are only released after an NDA is signed and approved approved by you or your broker. Practice buyers can create saved searches to be auto notified when new listings come on the platform that fit their desired specialty and location. And hey, dental practice brokers, you can list all your practices on the site for free. By doing so, you'll get access to Practice Orbit's large pool of buyers, all of whom have created profiles and saved searches to be auto notified when new listings come for sale. You can use the platform to introduce your listings to a top targeted set of buyers. Additionally and optionally, you can use the platform tools such as a built in NDA, a customizable LOI, and a workflow tool to navigate the sale from LOI to closing. In fact, you can manage all your listings on the system from listing the practice to NDA to LOI and finally to closing the deal. Create your free account today at www.practiceorbit.com.

Who have not had a good plan around their money and they come to understand what a CFO model is, what a good financial, well orchestrated financial process is in their lives. They say, wes, had I only had you 20 years ago, I'd be in a much different condition. And the truth is I will be better in 20 years if I don't have somebody that I account to. And I'm not of the opinion that you should not talk about money. In fact, I think that whole taboo thing I think is wrong. I don't think you should go flaunt your money. I don't think you should be overly sharing with it. But it's important that you talk about people who understand how money works openly so that you can become educated on money. So a lot of times a client will come to practice CFO and say, hey practice cfo, you know, you pay, you charge twice as much or three times as much as my current bookkeeper. And that's because your bookkeeper doesn't set into place the structure that builds wealth. There's a big difference between having a cfo, both personal and business, and having a bookkeeper. And the model is for you to choose naturally. And of course I'm going to say this, but I deeply believe this. And this is why I started practice cfo, because I believe those clients who engage a thoughtful, independent advisor who is compensated in a proper way, that motivates proper behavior. Because there's a lot of improperly motivated financial advisors out there with the right advisor who really understands dental, who really understands cash flow, who really understands your P and L and your balance sheet in your business, and also who really understands your personal goals, that person can have a dramatic impact on the rate at which you accumulate financial security and the financial stress or peace of mind that comes with that plan. Okay, so the consequences of overspending, one, not providing financial for your future, you, number two, is just, simply put, financial stress. Number three, you have an inadequate emergency reserve. And that relates to, number two, financial stress. If you could go to bed every night knowing that you have a nice cushion in both your personal checking account or your personal accounts and your business accounts, you are just going to sleep and breathe and live a lot better. You just are. And it's too often that we don't put some money in emergency reserve because we always think, I got a line of credit on my credit card, I'll just use that. Well, that may not always be there. And sometimes things can hit you financially, like health or other life events that can strike you deep. And a lot of times you can't put certain things on a credit card. And so having an emergency reserve is, I always say it's the first rung on that ladder. The first rung on that ladder. Perhaps you could say paying off credit card balances would be the first rung on the ladder, but it's definitely the first rung or two on that ladder of building your financial security. All right, number four, consequence of overspending, you have a low cash balance in the business account. Now, if you're spending too much personally, I can almost guarantee you that your business checking account is lower than it should be. It's because most of you know you can go tap into that cash. And if you don't have cash personally, we tend to go and pull that money. And if you don't have enough money in your business now, you're going to compound your stress. And you got to make payroll. You got to make payroll because things can spiral down south fast. If you're not paying your employees what you owe your employees or paying the related tax withholdings from those employees, you can end up in jail. If you're not remitting the tax withholdings from your employees. Remitting that to the tax agencies. Hopefully your payroll company does that automatically. But my point here is, if you spend too much, you're probably riding a low cash balance in your business account, and that is not fun. Number five, you are missing out on compounding growth. And as most of you know, Albert Einstein said, one of the great mysteries of the universe is the power of compound interest. That is very true. Very true. And I always emphasize to doctors that curve, that growth curve, when you invest money and the compounded growth, if you don't know what compounded growth is, compounded growth is when you put in money and it earns money, and then that money that was just earned on the original contribution earns money on itself, and then that money earns money on itself, and it compounds upward. If you put in $100 and you get a 10% rate of return, now you have $110. The next year you get 10% on $110. And so you just made $11. So that extra $1 is compounded growth dollar. And over time, that curve steepens. And this is really important to understand this conceptually and economically, that compounding grows not at the same pace. So the curve feels flat for the first five, seven years. It feels pretty flat as you're building.

Your investment balance, your savings balance. And by the way, if you go put in a savings account giving you nothing, you're not getting any compounding. That goes without stating, but I'm going to state it regardless. You don't want to put your future investment money, your retirement savings, or your financial freedoms money. You don't want to put that in a savings account that needs to be getting 5, 6, 7, 10% rate of return. There's different ways to do that, but that's for another podcast. But once you get 10, 15 years into it, that's when most of the growth happens. 97% of Warren Buffett's wealth today was earned after he turned 60. And that's not because he made all of his great decisions after 60 or he started saving more, but that's because that's when the curve kicked in dramatically. So you got to start early. Time is like fertilizer. It makes money grow. And if you're, if you're overspending and not putting money earlier on, you're dramatically missing out on the beauty and the miracle and the wonders of compounded growth. All right, number six.

You may end up having unpaid and unexpected tax bills. If you're distributing money out of your backup atm.

Known as your Business checking account. You may not be remitting taxes on time. And as a business owner, you know that the IRS doesn't come and automatically pull money out of your account. You have to set it up either through payroll, if you're an S corporation, assuming you're an S corporation and you deduct it out of your own paycheck and or you remit quarterly estimated tax payments federally and depending on the state, at the state level as well. And if there isn't enough cash in there to do it, you will get behind. And a lot of times because you're not sort of tracking what your tax liability is, or you're not tracking the fact that if your income is going up because you're producing more or other reason, or you run out of depreciation, or your expenses go down or whatever, if that's going up and you're paying based on last year, you're going to end up owing something because nobody did a tax forecast during the year to help you budget accordingly. So here you are, making more money, more money sitting in your checking account. You're thinking, awesome. And you're forgetting that 30 or 40% of that, maybe more, needs to be earmarked to go to the respective tax agencies. Now, tax planning is a whole other subject and we do extensive amounts of tax planning here to take that money and avoid it from having to be exposed to the tax taxes. And there's ways to do that appropriately, primarily through a well executed 401k or defined benefit plan or a few other strategies. But the main point here is if you overspend, oftentimes you end up finding yourself in a tax trap. Remember that when you spend money personally, it's got to pass through what I call a tax screen. The tax screen is when money goes from your business, you earn money, you pay your expenses. What's left in your business then gets routed out to you either through payroll or through a distribution that is Draw. It gets routed to your personal account and it goes through the tax screen. And when it goes through the tax screen, you're going to end up with 25 to 50% less, 25 to 47% less than what you had before it went through that screen, meaning that you have to pay taxes before you can go spend the money personally. However, if you can reroute money to your future self via a retirement plan, like a 401k or defined benefit plan, then the money you would have sent to the IRS is now rerouted. The IRS never gets it. It goes in a Tax deferred account and the money that would have gone to the irs. Not only does it get in that account for you in the future, but now it gets earnings every year. Let's say it gets 7% rate of return every year for 10 years, 15 years, 20 years, 25 years. And yeah, you're going to pay money when you start to pull it out in retirement. But the fact that it compounded, grew for so long and never went to the IRS.

When it was earned, that compounded benefit is just significant.

And so there is a compounding relationship between how well you can reroute money because you're spending less in your personal life, allowing you to reroute money in your business before it goes through that tax screen to another destination for your future self. And therefore, the IRS funds your compounded growth on your balance sheet, your personal balance sheet. And remember, your 401k, your defined benefit plan, those are assets on your personal balance sheet. The value of your business is a separate asset on your personal balance sheet. But that 401k and that defined benefit plan, a lot of you won't know what a defined benefit plan, or called a cash balance plan, for certain doctors who really have high tax brackets and a lot of surplus cash flows. We set up a lot of defined benefit plans and they knock off about 60 to 70% of your taxes. They're a great option if you fit the right criteria for them. But I don't want you to think that because you never saw that money in your personal account, that it was never yours. It is absolutely yours. You just did the smart thing by paying it to your future self. All right.

Here'S the way I want you to think about overspending. I want you to think about overspending like a Ponzi scheme. And you've heard of a Ponzi scheme, you probably know what a Ponzi scheme is. But a Ponzi scheme is this. When money comes in from new investors and it's used to pay returns to earlier investors. Think of Bernie Madoff. Bernie Madoff, the largest Ponzi scheme in history, 80 something billion dollars investment advisor, was simply, he was showing these really good returns of consistent 14, 15% rate of return to his investors. But it wasn't actually capital gains and interest and dividends. It wasn't actually investment return. It was him taking money from new investors who thought he was giving all of his investors 14, 15% regularly, every year, year in, year out, which is virtually impossible. Nobody's done that. But everyone thought that he could do it because he had this high profile, a deep resume. He was, I think, on the board of the NASDAQ Stock Exchange. He was deeply in the Wall street scene. Everybody thought he had a secret weapon. And so they would give him money and he would take that money and he would use it really for two things. To pay his earlier investors and to go buy himself another house, because the dude had like 14 houses. That's a Ponzi scheme. How is you overspending a Ponzi scheme? It is a Ponzi scheme because when you take on debt to fund your lifestyle, you are stealing from your future self to pay for your current self. Isn't that essentially the same thing? You're stealing from the new or the future investor to pay for the old one. You're stealing from yourself in the future, the to pay for yourself today. And this Ponzi scheme is going to end when the music stops and you can no longer get additional loans or credit. And for some people, the only point at which they will stop is when they literally have no other resource to tap into. And when that happens, if they don't have a complete makeover, a complete turnaround in their relationship to money, they will have to file bankruptcy. And if they file bankruptcy, they're never going to be able to make the same amount of money, most likely. Now, some people do crawl out of it, but your credit is hammered for seven years, sometimes more. Good luck getting a loan to go start up another practice. You're basically not going to be able to be a dental practice owner. That's why savings takes discipline. And we allow ourselves to do this, to keep spending and borrowing, to spend this Ponzi scheme in our own life, because we are super subject to this concept that I talked about, marginal thinking, the belief that it's okay to neglect a small but important decision because the consequence of that neglect feels harmless. You have to overcome the concept of marginal thinking in your financial life if you want to have your spending a healthy place. The truth is, for most people to curve impulse control and spending is to set up and enforce a structure that routes money to the right destinations in the right amounts. For dental practice owners, I want you to know this starts not with your personal account. This starts with your business account. You do a treatment, that dollar lands in your account, insurance company deposits it, the patient pays either care, credit, whatever it lands in your account, that dollar is now going to plinko through your P and L and your balance sheet. And on the other side, it's going to end up Paying taxes and then go to you. Now a lot of times what you do is instead of you letting it plinko through the system, you take that money out personally. Or if plink goes through your labor supplies, labs, facility, marketing and general admin expenses, it hasn't got to debt and it hasn't got to taxes and you pull the money out. That's a problem. Or maybe you got to paying your debt but you haven't paid your taxes and you pull the money out, that's a problem. You got to pay all your overhead, all your debt and plan for your taxes. And one more thing.

Your future self.

Think of your break even in your practice this way. How much do you need to collect such that it plinkos through that system and everything is satisfied? Think of there's two break evens. Well, there's actually three if I want to be detailed. The first one is just keep your doors open, break even. Which is pay your business expenses and your debt, period. You're not taking home anything. Nobody goes into business for the keep your doors open break even. The second break even is your lifestyle break even, lifestyle breakeven. And that is where you pay all of your overhead, you pay your debt and you pay yourself a budget to live today personally. The third one and at practice cfo, we're the tip of our spear in our clinical service as your advisor and as your cpa, as your financial advisor, as your cfo. As we always say, the tip of our spear is you becoming financially free, free of stress, financially free of having to work for money at some point. That's at the tip of our spirit. And everything we're doing is to drive that success. And so the third break even is called your.

Goals based breakeven. Your goals based breakeven. So keep your door open, break even, your lifestyle break even and your goals based breakeven. And that goals based breakeven is adding the one thing to the lineup that your dollar plink goes through and that is saving money for your future. Okay, so I want to keep going on this subject just a little bit longer that in order to sort of curb your impulse control and your spending, you have to set up this system that routes money to the right destinations. And that, like I said, starts with your business. By doing so, you optimize the whole system. Think of, think of like the solar system. You've got this ecosystem known as your personal and business financial life that has all of these things vying for that dollar. Supplier, staff, taxes, debt, vendors, your personal self, your future self. The irs, they're all vying for your dollars. This ecosystem of your practice and your personal financial life, by optimizing that system, you prevent excess cash from being available for spending. And I can tell you that the best way for you to have a good spending plan and budget is for you to set up that structure to prevent that extra cash from building up to where you just go spend it. Now, you want your cash to build up, you want an emergency reserve, don't get me wrong, you want a certain amount of buildup and you want to guard that buildup. But like a bank, you want everything above your reserve requirements to be used to produce more wealth for you to get interest, to get dividends, to get rental income, to get capital gains. Now, I can tell you to go set up a budget app. There's plenty of budget apps out there. There's Quicken, there's you need a budget.com, ynab.com There's a lot of budgeting apps. And I find that most people will start those in a whim because they're feeling something. The vast majority of people don't continue them. Now, I'm not going to say that you need to do that. And the truth is I don't do takes too much time. That said, I think you need to do a budget periodically where you sit down and you actually write out how much you spend on the various categories in your life. If you come on board with practice cfo, one of the early things we have you do is to complete a budget. And we like the spouse there, your spouse there, and we all agree on that. And then we'll gross it up a little bit for a cushion. And then we spit and we shake on that. We say this is the budget, this is the budget. And then we structure your payroll to deposit that through your payroll provider. And if you're with practice cfo, we use rippling for many reasons. We use rippling as our payroll and HR software for our clients. And we set that up and it's an amazing system and it will deposit what that budget is. If Your budget is $15,000 a month, it will land $7,500 twice a month or whatever your payroll is, it will be $15,000 a month. That doesn't mean you can't go and pull out some extra money for a trip to Hawaii or for one time expenses. But this enforces the budget. And then if you do need to go pull out that extra money for a designated purpose, then what we do is we say you can do that because of X, Y and Z or you shouldn't do that because of X, Y and Z, you're going to owe more taxes, you're going to owe at tax time, you're not going to be able to pay your debt next month, you're going to run out of cash, you're not going to be able to fund your 401k, whatever that is. We give you the education. Ultimately you decide. But that's the most effective way. You ask me, Wes, how do I get a grip on my spending? You simply enforce a system that deposits in your personal account the amount that you need and reroute the money to the proper destinations before it ever even gets there. And if you do that, this is what happens, because this is what happens with wealthy people. Wealthy people put into motion this automated flow of income to their personal balance sheet. And two, they understand that wealth is a function of assets, not consumer goods. I want all of you to become a capitalist, and I love that term. A lot of people have a negative connotation with the term capitalist. So it's somebody's greedy out to use capitalism to line their pockets at the poor people's expense. I'm not talking about that. What I'm talking about a capitalist is a person who spends who their. The way that they earn money is by managing their own assets, by managing the income off of those assets. And they're not necessarily doing dentistry or doing CPA work or building a house. Their job is to manage their own capital. And capital is going to be your assets that produce income. It's going to be your stocks, your bonds, your IRA account, your 401k. It's going to be any real estate properties. It's going to be those things. We can all do this. And this is what practice CFO is driving our doctors to think, think liked and to set in motion that structure, that system that gets them there. Okay, I can't emphasize in this whole process of planning around your money to please simplify your life. Simplify, simplify, simplify. The only tangible things that you should have are things that provide meaning, not obligation. You have to eliminate the clutter and you've got to do it ruthlessly. Alright, let's talk a little bit more about how you fix the spending problem. How you fix the spending problem. Really there's two ways to do it if you think about it. There's get your income up and there's decrease your expenses. And I guess the third one would be both. When it comes to increasing your income, we Here at practice cfo, we're not practice management consultants, we're not marketers. But what I would say is that if you can get your practice and if you're. I'm going to assume a single doctor scenario. If you can get your practice to doing 1.5 million with a 40% profit margin, that's $600,000 before paying down debt, that's a pretty dang good lifestyle. That's a healthy situation. If you get to $2 million with a 35% profit margin, that's $700,000. These are good situations to be in. And I have clients making a couple million dollars a year. As a single doctor, I have had some clients. They generally aren't a good fit because either we just don't have enough income or they are not coachable who would make more money working at In N Out Burger than owning their dental practice and wouldn't have the stress related to it. The span of income across dentists is significant. Don't underestimate your potential to get your income to a higher level. Now a lot of times you do need to engage a practice management consultant. I would say one of the most important things you can do on this subject and I'm going to move on because this isn't my area, but is if you can develop incredibly effective communication skills and sales skills. Not to sell things people don't need, but to sell people what they do need and they still want to say no because they want some other consumer good rather than a healthy mouth. If you can sell and communicate extremely well and your case acceptance goes up particularly on more fee for service type stuff, you, you can dramatically increase your income. Too often, in my opinion, doctors will continue to spend endless amount of time honing their clinical skills, which don't get me wrong, I want you to do that, but not enough time honing their business management, their leadership and their communication skills. Those doctors that I know that are crushing it and almost every case, maybe certain specialists just make money no matter what. Oral surgeons, y' all just make money no matter what. It seems like endodontists, y' all just make money no matter what. But it most of the GP space and a lot of the other spaces and even in those two as well. Those doctors who are crushing it in every case, they are great communicators, they're really good at sales and they're decent at least at managing their team and the culture in their practice. If you have a $3 million practice generally I don't think you need a practice Management consultant. I could be wrong on that.

My 3 million bucks, it's like all you got to do is get your overhead reasonable. If you get your overhead to a 25% profit margin on a 3 million dollar practice, that's $750,000 of take home income pre debt. That's pretty dang good. That said, that's for you to decide. And I very much support and find a lot of value in a good practice. Management consultant for you. All right, let's talk about ways to decrease your expenses on the defense. All right, number one, just create a budget. Just do it once. I know it's not exciting, but you can print out online, just google a budget and it'll give you a budget and just fill it out. Then what you want to do is you want to go and you want to pull out your credit card statement and pull out your checking account statements, export it to Excel. Ideally you understand Excel a little bit and you can go online to your credit card company, look up the transactions for the past maybe month or two, export them to Excel, and then a basic ad formula will add up all of the expenses. You may need to remove the rows where there's payments toward the bill. You remove those and just add it up and see how does that total compare to what is on your budget. Your budget is you designing your life. It's you taking control of your life. That doesn't mean that's what you're doing right now, even though you may have the best of intentions. So now you can compare your actual to what is your design and see how it stacks up in both how you're allocating the money relative to how you think you should allocate money and also what is the amount that you're spending relative to what you think you should be spending. Number two, you can move to a cheaper location. Yes, in some cases that may be selling your dental practice. You can limit your access to credit. You don't have to have a bunch of credit cards. And please people, I love you, but it's amazing how much emphasis you put on credit card points or credit card cash back or travel miles. And what it does is psychologically it drives you to spend a good 30% plus more than what you would be spending otherwise. And the credit card companies all know that. Otherwise they wouldn't be doing this because they know the house wins. This is like Vegas. The house is going to win. They're going to win. In this case, this is more of a sure bet to the house because they went on. Everybody Almost. Well, maybe not on everybody. Maybe some people discipline enough where they pay it off every single time. Awesome. Great. But even then, you may be paying it off. Don't confuse paying your bills with you having a strong spending pattern, because you may be paying off all your bills and still not funding for your future. And if you're not saving, at least at a minimum 10 to 15% of your gross earnings going toward your future self, you're overspending or you're not making enough or, you know, both. Number four here I'm going to mention is, is an activity, one thing you can do to decrease your expenses. And I talked about this a little bit. Go export all your transactions. And then for a month, I want you to ask, whenever you buy something, ask for the receipt. Take that receipt, go put it in a box at home. Don't put it in a drawer that you never see. Put it in a box that's out in the open. And if it's online, print it up really quick. Just do it for one month. One month. And if you can't print it for some reason, write it down on a sheet of paper and put it in that box. And once a week, pull that box out and go through each one of those. Now, what I'd love for you to do is to go in your credit card accounts and your personal checking accounts, export 12 full months to Excel, add up all your spending, then go in your business checking account, go to your P and L for the past year and look up how much you spent in office supplies, which most is mostly personal stuff. Look at your car costs on your P and L, look at your meals, look at some of that other personal stuff. Add that to the list that you just exported from your personal credit card accounts and checking accounts, add it up and then divide it by 12. What do you spend per month? Divide it by 365. What do you spend per day? You do that exercise, I promise you, you're going to be much more conscientious about the way you spend money. When you go to pull out that credit card, when you go to get that Airbnb, when you see that ad pop up on Amazon, when you go to that restaurant, you're going to be a little bit more conscientious about what level of that thing you're going to pay for. All right, everybody, we are an hour into this. Let me wrap up with just a few final thoughts here. I want you to know that you can fix this. The Millionaire Next Door, which is a famous book. It was the largest study ever done on the habits of wealthy people on the chapter around spending. It specifically states, what are the three words that profile the affluent? Frugal. Frugal. Frugal. It's the cornerstone of wealth building. I want you to know that you can do this if you do these four things. You build that piping to channel your cash flows to the right destinations in the right amounts. You may need a financial advisor. You may need to force your CPA to meet with you and think strategically about your dollar rather than just getting you a P and L and filing your tax return. You may need somebody to help you do that. Unless you're really good at numbers, really going to excel and you have the time to do that. That's number one. Build that piping. Get the money routed into that 401k, that DB, that emergency reserve fund, that education account, that IRA, that brokerage account, that additional debt pay down, get it out of accessibility to just go spend it on more stuff. Number two.

Meaning get it out of sight and out of mind. Number two, declutter your life.

So often we feel this impulse, this emotion that you need. Something ends up in the garage just gaining dust. One of the things you could do to create the most psychological breathing room in your life is go get rid of all that stuff in your garage and in your client, in your closet and elsewhere that you just don't use.

That's number two. Declutter your life. Get used to, get used to needing less things and remember that it's experiences that I think are more deserving of your dollar, not necessarily tangible things. Number three, sending yourself to a boot camp. Meaning do that activity of one month of keeping all your receipts, exporting from your accounts, reviewing it. If you're married, sit down with your spouse, review it together. It takes two. When you're married, do that exercise. I know it's annoying, but you do it for a month, trust me, you're going to be much more conscientious as a spender. Number four, hire a dental specific advisor and help them set up the mapping your money and guardrails to enforce discipline. That's obviously a nice shameful plug for you to check out practice cfo since everything we do here is to help you accomplish those things and become financially free and enjoy financial peace of mind between now and the rest of your life. Economic freedom is real, everybody. It's real. And you can have that financial peace. But it only happens if you do these things and are conscientious about your relationship to you and your money. All right. This episode was on a series that I'm calling the Personal Financial Planning Series. I just got off doing a series on dental partnerships. The benefits, the disadvantages, the how to structure them, how to split the bank account across partnerships. A lot of deep detail on partnership series. This new series I'm launching is going to be a lot more on the personal side. The personal financial planning side. I'm going to have other series on things like retirement plans, like 401k and defined benefit plans. I will have a series on investments, a series on insurance, estate planning. All of these areas that we personal financial planners have to touch on as we help our clients and have a financially secure and healthy life. Thanks everybody, for joining another episode of the Dental Boardroom podcast. We will see you next time.