79: Emergency Reserves: Why, How Much, and How to Invest

Welcome everybody, to another episode of the Dental Boardroom podcast. It's Wes Reed, CPA certified financial planner and owner of practice cfo, coming at you. I am continuing on my segment about personal finances or personal financial planning. In my podcasts, we talk a lot about the practice. We talk a lot about running your practice financially. Well, well, this one's going to be related to both the practice and also personally. But this very much falls under the umbrella of financial planning, personal financial planning and business financial planning. Now, the subject of today, I think is a little bit related to my prior podcast subject, which was on having a spending plan as a dentist, both in, but particularly I focused on outside of the practice. Well, if you handle that right, you should be able to do this, which is what I'm going to talk about in this episode. It's to build an emergency reserve or a cash balance to protect you for the unexpected and for many reasons. So today the subject is why you should have a emergency reserve both in and out of the practice. And then we're going to talk about how much money should you have as an emergency reserve. And then we'll also talk about how you can get a little bit of return. How do you put that money that you just have sitting there that ideally you never have to tap into? How do you get that to actually do something for you in the meantime? So it's not just losing its purchasing power from the erosional effects of inflation. Let's dive into this subject of emergency reserve. I oftentimes will call this sleep insurance to my clients because that is very much what it is, the number one cause. And this is not me pulling from a research study. This is me just pulling from about 16 years of working with dentists. My anecdotal experience working with dentists. The number one cause of financial stress for dentists is not having enough cash in their account. And let's start off in the business. In the business. Thankfully, dentistry is a fairly reliable and resilient cash flow model. This is why banks love to lend a dentist. It's a remarkably low default rate, I think somewhere around 0.3%. It's remarkably low and it's fairly resistant to market cycles. Now, not entirely, but let's say the market, the stock market, declines by 10% in a given period of time. They call that a recession. Officially, let's say we go into a recession, your dental office may only see a 3 to 5% decline in revenue, which is a lot less than the overall economy. So you have a fairly resilient business that said, there is still absolutely, and everybody listening to me who owns a dental practice knows there are still absolutely fluctuations in your cash balance and your collections in the practice. Now here's the difficult challenge that you have as a dentist. Your cost structure, meaning your overhead, meaning those things that demand your dollar every month. Your expenses are mostly fixed expenses, meaning Whether you earn $10,000 of collections or million dollars of collections in a given month, most of your overhead is still going to be the same. Unless you're, unless you're paying employees based off of collections generally is not the case. Other than maybe your associates, yes, but everybody else, no, they're still going to come in. They're, they're 8 to 5, 74, whatever it is, your staff are pretty much going to get paid the same. There may be some bonuses they don't get, but by and large your staff are going to get paid the same even when you have down months. Also, your rent is going to stay the same, your debt payments are going to stay the same, your subscription costs to the millions of softwares we all use now and pay every month, it's going to stay the same. And when your collections fall and most of your expenses, let's say 70 to 80% of your expenses, remain the same, it can get precarious quickly. And so having money in the bank is going to help you ride through that. And you're going to sleep at night knowing that this is just normal ebbs and flows in the business. And depending on where you live and the type of dentistry you do, you may see different cycles. An orthodontist sees some cycles related to the school season. For example, I have clients in Palm Desert, California that during the summer they just don't have as much business because everybody goes back to Canada or New York or wherever they are for the rest of the year to avoid the heat. We, where you are can have an effect on that. And you've got to be very keenly aware of what are the cycles in your own practice. And if you look at a 24 map, a 24 month map of your collections, you should see a fairly reliable view of your ups and downs at practice. Cfo Every month we provide what's called a CFO analysis report, which is an add on to the financial statements and, and it will provide those longer term views and compare year over year to help see those cycles a little bit better. Do you ever feel lost in your practice finances? And how about your personal finances? Ever wonder where your hard earned money goes and why you're not seeing the financial progress you've worked so hard for? If so, listen up. As a dental CPA and financial planner, I've created our company Practice CFO just for you. With almost two decades of experience experience, Practice CFO integrates great CPA services like accounting and tax with customized financial planning, both business and personal. Think of it this way. Our dental focused CPA services give us the x rays we need to clinically plan your global finances and be effective financial planners. It's a highly customized approach we call the CFO model. Historically, having a CFO or chief financial officer was an advantage of large corporations only. But today, Practice CFO gives that same advantage to private dental practice owners. As a client of Practice cfo, you'll be assigned one of our dedicated CFO advisors. You'll receive insightful financial reports each month, have regular financial review meetings, reduce taxes, grow your wealth, and feel more in charge of your numbers. Because we believe that in the competitive landscape of dental practice ownership today, you have to be an effective business owner, not just a capable clinician. Reach out to learn more at www.practicecfo.com.

Here'S a few other reasons why in your business you should have an emergency reserve. What I call your capital base, your working capital base. How much you should have we'll get to in a minute. But why? Why you should have these so fluctuations. High fixed costs. We talked about those. Also, you don't want to spend a lot of time managing the movement of your money between accounts just so they don't go negative. Now, many of you listening to this podcast will have experienced that. Maybe in your business and in your personal life, maybe you have a couple checking accounts, maybe you have, you know, a couple credit cards. And sometimes you're just constantly so low that you're having to move $5,000 here or there at different times just to have money to pay that bill that you know is going to come out or to make your payroll. And that is not only anxiety inducing, but it's also time consuming. Sometimes there's a term for this called treasury management or treasury services, which is managing your your treasury, which is your dollar. All right? Also, you may have equipment failure that you didn't plan on. And I really want my clients to avoid the debt cycle, which is whenever you have to buy a new piece of equipment, you buy a new sensor, you take out a $25,000 loan, a $50,000 loan, and you're constantly cycling through your debt. And so your balance sheet at any given time has five or six loans on it. I would prefer that you use some cash to pay for a lot of that smaller stuff and not constantly have to rely on debt and taking out debt and paying the interest on the debt in order to fix that chair or fix that X ray machine or get the new sensors or whatever that is that that you need. Also, sometimes losing a key staff can be very detrimental on a practice. Losing a key hygiene or really good front office who's great at scheduling and knows your patients and, or a great associate and. And if you lose a great staff, sometimes you'll go a couple months until you recover and find a replacement and sometimes even longer. So there are those and many other reasons. The last one I'll just emphasize here, or I'll punctuate this point a little bit more is the psychological comfort of just knowing that you can weather.

An extended down period, which in my opinion, three months is an extended down period. One month, two months, very common. Once you get to three or four months that are lower than your historical 24 month average, then you start, you got to start asking questions why? And it's usually one of these triggers I've just brought up here that can cause that. And so here in a minute we'll get into what is the right amount to hold in your emergency reserve and how to do that. All right, let's talk about reasons personally to have a personal emergency reserve fund. Number one, one of the leading indicators of bankruptcy or leading causes of bankruptcy is unexpected changes in your health condition. And as you all know, it can be extremely expensive, as noted by all the political events right now around the murder of the CEO of UnitedHealth. And that was a big deal. And there's a lot of concern right now among a lot of people about the insane costs of our healthcare system. And I've seen this firsthand where if you're not prepared, you may be out of pocket a good amount of money. Now, hopefully you got some good health insurance to help cover a lot of that. Other things, for example, just unexpected life events, a death or a divorce or a loss of a job entirely as well, a lot of reasons to have a personal emergency reserve fund. And again, I'll drive home the point of that. It gives you this, what I call the sleep insurance. I mentioned this insurance that just allows you to sleep well at night even if things go bumpy for a period of time. So these are the motives, and there's many more, but these are the motives for me that drive me to have an emergency reserve fund both inside my practice, at practice, cfo and also in my personal life. All right, let's jump into how much this subject of how much is too much and how much is too little. I want you to compare yourself four minute to a bank and you may or may not know, but banking, the financial sector in the United States has become the most profitable sector. And at one point, many decades ago, it might have been. It might have been manufacturing, it might have been farming, it might have been these other things. Right now, the financial sector is just enormous in our country. Why? Because they banks have learned to become incredibly effective in the way that they manage their own dollars, their own reserves. And here's what I want you to do. Pretend that you are a bank for a minute. Your business is a bank, you personally are a bank. Banks are required to keep in their vault a certain amount to maintain protection for that bank and for its customers. And the Federal Reserve, there's laws around this that define that. And banks generally would prefer that to be lower, which allows them to then invest money, the deposit that they get or the money that they borrow at a lower interest rate from the Federal Reserve and what's called the open market window, that they pull this money out, they want to go and invest that in loans for mortgages, loans for cars, loans for business startups, loans for various other things, because that's how they make money. And they make a lot of money doing that successfully. And those banks that don't do that successfully either don't have enough earnings to really stay viable as a business, or if they get too risky and don't have enough money in their emergency reserve, it could be cut like the Silicon Valley bank. And these things can go under pretty quickly. If there is a run on the bank. Well, there can be a run on your own bank in your practice, and there can be a run on the money in your personal savings account if you're not careful for all these reasons that I talked about. So if you think of yourself as a bank, you're going to say, I got two things I want to accomplish with the management of my money. Number one, I want to have just enough to get through 99% of those unexpected downturns in my business and my personal life, most the vast majority of them, you're never going to protect 100% of them, nor should you even try to be honest. You got to play your odds here. Your probabilities. 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, with transaction costs so high, many dentists selling their practice feel discouraged. That's why I built practiceOrbit.com practice orbit is modernizing how dental practices are sold. It's an online marketplace marketplace platform. And it brings together buyers, sellers and their teams to smoothly navigate a transition. When you list your practice for sale on Practice Orbit, you'll present a detailed and polished profile of your practice to a large pool of potential buyers. Think of it like a Zillow home profile, but for your practice. And importantly, that profile will remain anonymous, which means you can showcase your progress practice without worrying about the public or team members finding out. Only after an interested buyer signs an NDA will that buyer see your name, address and practice pictures. And at Practice Orbit, we have a team deeply experienced in dental practice sales. Our broker and support team will hold your hand each step of the way. 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And so let's talk about the business. I generally will tell clients as my starting point to have enough money in the checking account after credit card is paid off. So assume you've just created paid off your credit card. I've said have one month of total outflows, not one month of P&L expenses. That's different. One month of total outflows. Because what is, what are you paying for that's not on your P and L? You're paying off debt. You may be paying 5,000, 10,000, $20,000 going to pay off your debt. Now the interest portion of that payment does go on your P and L because interest is deductible. It's the expense you paid to a bank to to let you use some of their money for a period of time. That's a deductible expense. Paying the debt off itself is not deductible. And you're like Wes, why is it not deductible when I pay off my debt? That's money out of my pocket for my business. Well, it's because when you got that money, let's say you got a million dollars to buy a practice. When you got that million dollars, did you have to recognize that as taxable income? No, you didn't because it wasn't earned income. Therefore it's not taxable income, it's not an investment income, it's not earned income, it's not portfolio income, it's not real estate income, it's not income. It's simply borrowed money. And thankfully, the IRS tax code does not require you to pay taxes on borrowed money. But when you pay it back, neither do you get a tax deduction because you're just paying somebody back money that they let you use. And so when you're paying that money back, it's not showing up on your P and L. Let's say you make a $10,000 payment and let's say $2,000 of that is interest and $8,000 is principal. The 2,000 is going to show up on your P and L as a deductible expense. The 8,000, it's not even showing on your P and L. So you got roughly 100,000 there rounding up, you got $100,000 there of money going out of your pocket that, that you do not get a tax deduction for. And if you're not careful in your cash flow planning and forecasting, which all business owners should be. Cash flow planning and forecasting. It's what we do every single time we meet with the client. And in that we do a tax plan embedded into the broader cash flow plan for the business. Sometimes you gotta grab your cpa, shake them by the shoulders and say, don't just file my return, sit me down, take my P and L numbers, run a forecast for me and tell me where's my cash going to go based on my historical trends and what decisions can I make to strengthen my cash flow that is going from the CPA model to the CFO model, which I am the biggest proponent of. I use it for myself and my business. It's helped me grow my business a lot. And yes, I even pay for some good softwares. It's something to invest in. Obviously I'm self promoting there, but I believe so strongly in what we do at practice CFO that yeah, we're more than a bookkeeper, but it's at your cash flow level and at a lot of your tax level. Small mistakes have an outsized negative effect. Good decisions have an have an outsized positive effect. Strategic decision making and an effective use of your time is incredibly important. In fact, I read a quote today. Let's see if I can remember it it's that management is doing things right, leadership is doing the right things. And as a leader in your practice, if you're stuck inside your own head and you don't have other people helping you assess yourself from the outside in, especially in very specific areas that you weren't trained on, like finance, tax and accounting, then it's going to be very difficult to do that. You can, because doctors are the smartest people I know. But a lot of it's a matter of time to actually set out and do that. So going back to the subject at hand, I would say one month of total outflow. So if, if you in a month do an average of, let's say, $130,000 of collections and you generally have $100,000 going out to your labor labs, supplies, facility, marketing and admin, and your Debt and your 401k and your tax payments and paying you. And if you have spouse or kids on payroll, everything, every dollar going out, you could literally do an export to Excel from your business account and your checking and credit card accounts, add it up over the past 12 months, divide by 12, see what that number is. And for me, that's the starting point. And I emphasize starting point because of this. Different people have different risk levels around money. This is just like how you invest in the stock market and what most investment advisors do. And if they do it right and they do it well, they have a thorough discussion about how you are going to react if the market falls 50% and your hard earned money falls by 50%, how are you emotionally and psychologically going to react in that moment? And some people are like, hey, I know how the market works. Just like in the.com era or 2008, 2009, it fell dramatically. And you know what? Gave it a few years and you're higher than you ever were. And so, Wes, I don't even care. I don't even look at it. I can ride through that. I don't need it right now. My risk tolerance is very high. Other people find that if they lose even 5%, they're wanting to talk, why? Why did I lose 5%? And we have to have a conversation around what it means to be invested in a diversified way. And so this risk tolerance in your relationship to your money also plays into the decision not just how to invest, but also how much money to have. And for some of my clients, they literally need two to three times more than that starting point of one month, total outflow. And that's okay. And that might be if a practice is doing, let's say $130,000 a month in collections, they might want three or four hundred thousand. Now, I generally try to scale them back because I'm saying the amount of money you're losing, you're losing 5 to 7% every year on that extra $200,000. That 5 to 7% could end up being 10 to, let's say, $14,000. That if you invested for 20 years per year, that is actually a decent sum of money which can go toward your financial independence, which is what I'm trying to drive at. And so I'll try to scale them back. And then some clients are just so comfortable with a low balance that they're often transferring money to and from just to make make payroll or to make a bill. Paying your bills does not mean you're financially planning just to emphasize that it's paying your bills smart and well in keeping enough cash in the account that you're not having to spend and waste time transferring money and being concerned about that just to make your bills meet. So some clients want every last dollar invested and they're willing to do that. I prefer someplace in the middle, which is that one month. And then I'm very tolerant. If you want to go a little bit lower than that, say 20, 25% lower than that, I'm probably okay with that if you've got a stable cash flow and maybe you have access to a line of credit or other access to credit if needed. But I want to be very careful about not constantly getting on that credit cycle with debt. And if somebody wants to go up to 2x that, and let's say they do every month, 130,000, and they want 200,000 or 250,000 in the cash at all times, I'm probably okay with that too. There's a psychological element here where it creates a spectrum of an acceptable amount that I'm somewhat tolerant with because I realize that as much as I want math to drive decisions financially, as much as I want the numbers to drive the decisions, because based on probability, that's going to maximize your speed of getting financially free. I also know that between now and when you become financially free and even after your state of mind matters, how you feel about your money matters. And the more I can educate you to feel the right way for making the right mathematical decisions, the better. But sometimes math will never fully get you to conform your emotions to the math, the statistics and the probability. And I've just accepted that as a financial advisor. And so if somebody wants to invest in, invest more conservatively. Even though they're 35 years old and have 30 years till they need to touch their money at the end of the day, it's going to be their choice. I want them to sleep at night, but I'm always going to try to educate you on the right decisions mathematically as the probabilities.

I want to play the probabilities all the time in my financial decisions because if you play your probabilities right, you are optimizing the the speed at which you become financially independent in life. Okay, so that's in your business. What's the takeaway there? Go ahead and you could ask your CPA or advisor if you're with Practice cfo, we sort of define this with you automatically and we post it every month in your financials to show you where you are over or under relative to that 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 practice orbit 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. 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 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 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.

That cash reserve target that we want, we have a specific page called the liquidity analysis that we show that on a monthly basis. All right? And then by the way, this is a little bit incidental, but going back to the concept of thinking like a bank, then what you want to do is every month when you have money above that working capital target, and what I love to do is to have payroll be on the 15th and the bank last business day. You don't have to, but most of my clients, I want them to change it. If they're bi weekly, I want them twice a month so that every month it's the same number of payrolls. Bi weekly. You got two months in the year where you got three payrolls. It just messes with the cash flow forecast. Besides, most people like to have a paycheck on the day really before the first of the month when a lot of bills are due. I love having payroll on the 15th and the last day. And if you do that on the last day of the month, so on the first day of the month after payroll just went out, if you've got more money than what is your capital, your working capital reserve target, then I want you to immediately put that money to use immediately. I want you to transfer it into your 529Education account, send it over to your brokerage account, let's put it into your profit share account on your 401k. Let's pay off extra debt, let's do something with it. Because every month that goes by that you don't use surplus cash that to get a productive return on you are increasing the friction at which you become financially independent. And so responsiveness, real time is really valuable here. So this is what, this is what we do with our clients is we define that target. Then anything above that, we say here's, here's the plan with it. And a lot of times that's us maybe transferring money to their investment accounts with their permission or adding additional debt payments, whatever that is. That's a way to move the needle the most every single month toward Becoming financially free. Let's now move into your personal checking account. How much cash should you have on hand in your personal checking account? I won't say personal check. What I just mean is your personal accounts and I recommend that your emergency reserve be in an account separate than your checking account. I think your checking account should have enough to cover somewhere between one to two months of expenses and, and really shouldn't go below that. So let's say you need $15,000 a month to live, to pay your student loans, to pay your home mortgage. In some states you're going to be like, wes, that's a lot of money. In other states, like California, some doctors are like, I don't think I could live off $15,000 because my mortgage alone here is $9,000. So that's going to depend a little bit of where you live. But I would say if your monthly spend is $15,000 on average, that's excluding savings and you know what now, but, but, but it's your spend, then I'd keep somewhere between 15 and maybe $30,000 at all time in that checking account. Now let's go into the emergency reserve account. For now, I'm just going to call that your savings account. And I think you should have an automated routing of money from the business to that account through payroll, where you're just dripping in 250 bucks per payroll or some amount per payroll because it adds up and it's a beautiful thing when you check periodically. Like, wow, that's adding up. Why? Just because I put a little bit of money in there and I almost didn't even feel it every month and, or you send it over to your checking account through payroll and then from your personal checking account, you transfer it into your savings. I love to sort of route through payroll money to specific destinations by, and automating it. So it just happens. There's various ways to set up what I call the piping and the automated flow of money to the right designations. I talked a lot about that in my last podcast on spending and ways to manage and take control of your spending habits. But this also relates here to building up an emergency reserve account. Get those pipings in place and just feed it. You don't have to do it overnight, just feed it a little bit. Now, how much should you have in that account? I again tether this a little bit to a base. And then what is your psychological tolerance for market, or I should say money risk and life risk. And I will generally say somewhere between three to six months is a baseline Target three months is getting a little bit low. I can be okay with that. There are other ways to access resources these days. Credit cards are being won. I'm not a fan of using credit cards as an emergency reserve because of the interest rate on those, and they can be predatory if you're not careful. But they are a way to get access to resources in an emergency. And if you're saying, I'll rely on the credit card, so I only need three months of savings so I can invest the difference and get 7, 8, 9% rate of return, I get that concept. And the math is going to say that's a pretty good. That's a, That's a pretty good decision. That said, I think we all will go through things that are unexpected, and three months of savings oftentimes will not cover that. So my target, and for me personally, I'm right around four to five months, but anywhere between three to six months would be good. So if, again, if $15,000 is how much you need, six months of that is going to be $90,000. So in that emergency reserve account, you're sitting on $90,000, you could even round up 100,000 bucks. I feel good. I've got $100,000 I can access. I don't need to tap in to a loan on my 401k. I don't need to stop funding my 401k. I can keep funding my IRS. I can keep doing my thing everywhere. And then if I had to pull, let's say, 40 or 50 grand out of that, okay, now maybe every month you just reroute an extra thousand or two into that account as you replenish that account over time. And you create an even, balanced approach to managing these unexpected moments financially in your life that are going to require you to dip into some. Some resources. Okay, so that's how much I recommend in the business, about one month of total cash outflow, plus or minus, you know, 50% in the personal, somewhere around three to six months. You can do a little bit more, a little bit less. You do need to do a budget so you understand what are your costs that you're in your personal life to define that amount. And remember from my last episode, I talked about how on average, people underestimate by 40 to 50% the amount of money that they spend in their personal life. It's really important that you get tuned into what you're actually spending if you want to control your money and not let your money control you. All right, let's go on to this Third subject. And the third subject is.

The third subject is, what do you put that emergency money into? Because a lot of you may just move it into your bank of America savings account, Wells Fargo savings account, whatever, and it's literally getting no return on it. Maybe 0.2% return. The banks love that. They love that because they're not paying you anything and you just gave them money to go and lend out and get 5, 6, 7% rate of return, depending on what, what that debt is that they're lending out on. They love that. Well, you can use this to your advantage because there's a lot of ways to get 3, 4, even 5% rate of return on this money. And think about it. If you've got, in your business and in your personal life, let's say $200,000 as emergency reserve. Let's say it's $100,000 in each, and you get a 3.5% rate of return on it on that. That is $7,000 a year. And imagine if I just handed you right now, $7,000 in $100 bills. You're gonna. You're gonna be like, wow, I just found some serious dough in the cash in my, my couch cushions that you're gonna have that elated feeling. Well, that's what this can do for you. And it will build up, too. So here's a couple options. There's a lot of high yield savings accounts, and those are. Those are good options. A lot of those will get you 2, maybe 3%.

And depending on the bank. Just be aware of this. What a lot of banks will do is they'll call it their performance savings account. Capital One did this one time, and it was giving some really strong returns. So I moved a bunch of money, my emergency reserve, in there, and next thing I knew, within six months, it got cut by like 70%. And so they did it for a period of time to lure people in. And yeah, the interest rates may have been coming down, but not by that much. And so that was a little frustrating for me. I felt like it was a bait and switch. So maybe look at the historical trends. What have they been on average over the past couple years, maybe two to three years to get an idea on that, because it's kind of a pain in the butt to open up new accounts and transfer money. And I hate having too many accounts. I hate the clutter. I like simplicity in my financial ecosystem. Okay, so there's high yield accounts. There's also CDs. CDs are. Okay, just keep in mind that the reason for an emergency reserve fund is so you can tap into it if you need to. And if you're locked into a six month CD and you can't get it for four more months, that sort of defeats the purpose of having the emergency reserve fund. So if you get them, you may want to stagger them. So let's say you have $100,000. You may want to get one that's a year long cd, one that's maybe an eight month cd, a six month cd, a four month CD and you get the point and you stagger. That's called laddering. And they come due and you will reinvest it in that longer one or some level of laddering just to make sure that you, that it won't be long. You have some money now and if you were to wait two weeks, three weeks, a month, whatever, you have another chunk come due on those CDs, that's an option. And with the CDs you might be able to get a little bit higher than the high yield savings might be able to get three and a half to four and a half percent. Depends again where we are in interest rates now. I think the Fed fund rate right now is at 4.25 plus or minus. I think right now we are March 20, 2025. When the Fed lowers their rates, the return on all this stuff is going to go down. And when they raise their rates, the return is going to go up on new CDs, on new things that you get, anything that you bought, like a, like a short term bond and we're holding the value of that's actually going to go down if, if the, the Fed increases their, their rates. But let's go on to one more that I'll mention. One of the things that I'm encouraging our clients to do at practice, CFO and to do it and to do it through our partnership program. We have a partnership program with an expense management system called ramp. And this is an outgrowth in this space called Fintech. And Fintech stands for financial technology.

It's new software that is in the financial sector that helps you some way or another manage money in or out of your business. Fintech. And Fintech has got into the credit card game and now they're getting into the checking account game, the debit game. And what they've done is they develop a software and then they layer it on top of Visa or MasterCard or one of the traditional processors. And these things are really impressive. We've been using them for years here at Practice cfo. We use ramp. There's others. I really, really like ramp, and a lot of my clients are moving to Ramp. I really encourage that for many reasons. I'll explain a few of them right now. Do it, but do it through our partnership program, where we can get you a little bit more of a discounted rate. And also, if you do it through our partnership program, our ability to access your accounts for accounting purposes, where we can just view only and import transactions, is dramatically improved, which allows us to then get your financial statements done faster each month. There's a lot of benefits from these expense management systems. Well, RAMP has a credit card, and it has cash back. You know, depending on how much you have in there and how it's spent and whatnot, there's cash back just like all the credit cards. And I always want to emphasize, don't let the cash back or the points drive which credit card you use. Now, there are times for that. If you're traveling all the time to a given destination and there's a certain card like the bank of America, Alaska credit card, whatever, I can understand that. But particularly when it comes to your business, I know you like points on your supplies and all of that, but when it comes to managing the expenses of your business, these expense management platforms, which do require you to use their credit card in order to get access to the tech layer on top of it, are really, really beneficial. Here are some of the things that you can do. You create a card and you have a physical card, but then you can create a virtual card. You can create as many virtual cards as you want. Literally, you can create. I had one client who just loved it so much. He created a virtual card for every vendor, every major vendor, and put a cap on it to make sure that that vendor didn't go rogue and. And increase their fees or over bill. And then it would flag them when there was an issue. And then we took every card virtual card, and we tagged it to a given account in the chart of accounts so that it fed accurately into the accounting software and allowed us to get the financial statements out essentially in the first week after the month. And it's a. It's just a great system. It takes a little bit of time to configure it, but it's a great system. We have a number of virtual cards here at practice CFO that I use for different things as well. And if you have a bigger practice and you have team members who use a card to go buy lunches or to pay for some supply orders, you can give a delegated team card. And although you can do that with some other credit cards, the level of granularity and management and insight on that card is so amazing. And then whenever they use the card, they get an automatic pop up on their phone to take a picture of the receipt, explain what it's for. It feeds into the system, it an expense management tool. The other thing that Ramp has is, and this is not a plug for Ramp. Ramp doesn't even know that I'm making this plug right now. I personally use Ramp and it's this concept of managing your money in a very, very effective, efficient way is that I'm focusing on. And these expense management programs like Ramp allow you to do that much, much better. But Ramp also has, it's in beta, but it's just coming out. And I've been wanting this for a while, which is this same type of technology, the same type of software, but for a debit account, for a checking account. And so they now have one called, it's called treasury and it gives back. And this is going now back to the emergency reserve. This is an option if you were to use Ramp, not only does it have all of those, those other features I talked about and benefits, but if you now keep your emergency reserve or your business reserve, this is only business, by the way. Ramp doesn't even do personal. This is only business. And you put your emergency reserve money in there. So let's say you keep maybe 40 to $50,000 in your main checking account and then you keep the rest in this Ramp treasury account or you use the Ramp treasury account. This is actually what I prefer. You use your main checking account to hold your emergency reserve. You don't actually need a separate account. Just know that you always want to keep in that account about, you know that one month, plus or minus. And that way you're getting back the cash back. On this Ramp treasury account, which is FDIC insured up to $250,000, you're getting an interest return on that of 2.5% just on the money in there. So now imagine getting 2.5% on just the money sitting in your checking account. And if you take a portion of it and you move it into their, their short term, they have a short term investment side of it. You can still access that back at any time. They give a 4.3% return on that. So those little amounts really do add up. In fact, when it comes to wealth building, a lot of it is just casting a wide net and saving a little bit of Money here and here. And automating this transfer into this account and just layering, it's a little bit like stacking dollars. You stack dollars and over time that pile becomes really high. But you got to get the system in place to stack those dollars and then don't disrupt it. All right, so those are different ways you can invest it. The last thing I will say is you could invest it in the stock market if you want to. So that hundred thousand dollars you have, let's now talk about your personal amount, personal funds. You could go put that in a, if you're with practice cfo, we're going to put that in a Schwab account, an investment account, and then it's going to have investment returns. Now if it's in there long enough over any five year rolling average, it's going to have somewhere around 5 to 9% rate of return, probably around 7 to 8% rate of return. Singles and doubles. It wins in the long run. And then it's not like an IRA or a 401K. You can access a normal brokerage account. You just need about four or five business days to sell the investment. So it converts into cash called settling, and then transferring the money back to your personal account where you can then use it. That's one disadvantage. The other disadvantage is if it's invested, you made that a hundred thousand dollars may turn into $60,000, especially if you concentrate it in a volatile stock. And so it's important that you untether yourself from the emotional and psychological desire, slash careful on greed, to try to, to use that emergency reserve fund for a different purpose as an investment vehicle. The main purpose of that money is to protect you in an unexpected downturn one way or another without having to disrupt the rest of your financial life. That's the main reason. Return on it is the second reason or motive into how you invest or place that emergency reserve money. Okay, let's now talk about other ways to protect yourself. In addition to having the emergency reserve. And if you have these other sort of protective measures in place, you may not need as much emergency reserve.

One of them is having short term disability. And short term disability is your business. What I recommend is called business owner's equity or business business owner's expense insurance boe, business owner expense disability. And this is a short term disability that's usually somewhere on the low end, around six months, on the high end to around 18 months to two years. Often I do it for about a year. And you look at your fixed overhead. And if your fixed Overhead is, let's say $60,000 a month. You may want to do something that is where you get covered for six months or a year at $40,000 a month. Because if you really had to close your doors because you're short term disabled, maybe you broke a finger, maybe, I don't know, you're in the hospital for whatever reason and you're just out for a period of time.

A lot of your expenses will go away. Like a lot of your team members, you can basically furlough them or you're not going to be buying labs and supplies. You may be able to put certain other expenses off for a period of time. And so you don't necessarily need to recover from the full amount if you have of your overhead, it's just a portion of that. So that's called business owner expense disability. We do that for a lot of dentists as we here can place life and disability insurance for our doctors. And they're very dental specific types of policies, policies and I think they're very effective. The other one, on the personal side there is short term disability. And sometimes through your benefit plan that you're signed up for with your company, a lot of times they'll have a short term disability option in there that you pay, you know, very small amount of money for every month. It's not a bad idea to have that. And there's a relationship between how much of that short term disability you want to pay for and how much you have in your emergency reserve accounts. They're like a teeter totter a little bit. Okay. The other thing you can do is if you don't have much of an emergency reserve and you're struggling to fund one, to build it up is you can go and restructure your debt. And when you restructure your debt, let's say you're halfway through your payment plan on your debt, it's a 10 year loan and you're halfway through five years. Assuming that your practice is has the same equity built into it as when you took out that loan, you could go take out either an equity line or. Actually what I'm preferring here is you could take that, take your equipment debt, let's say you have four or five debt, consolidate them in one new seven to ten year loan. And if you do that, your monthly payment may go from paying $10,000 a month down to five or $6,000 a month. And now you have four or $5,000 extra per month that you could use to build, build up this emergency reserve. Now you May say, yes, Wes, but I want to get out of debt, and I want you to get out of debt, too. But I will tell you, having an emergency reserve fund is more important than the speed at which you get out of debt, because having that emergency reserve fund is going to help you sleep better now today. And if you don't have it and you run into some really hard times, it may be hard to recover. And if you're struggling to recover, your collections may go down, your profit may go down, your cash flow to pay that debt may struggle. So I will say that the emergency reserve fund on the rung, what I call the wealth ladder, it's a rung lower than paying down your debt, especially if it's tax deductible debt. Now, the reason why this has been a little bit hard lately is everyone who's been getting debt over the past 10 years or so is, is at these remarkably low levels, 3%, 3.5%, 4%. And now interest rates might be at 5 or 6%. And so nobody wants to refinance that debt. And that's where you just got to do the analysis to say, okay, I'm going to end up paying X amount extra in debt, in interest, I should say in interest over the life of this loan. That is true. Remember, it's tax deductible. So let's say you're paying an extra percent more at your tax rate. You're. It's probably only an extra 60%. I mean, 0.6% more than the 1% because that 1% is tax deductible. Interest is tax deductible. By paying interest, you're lowering the amount of taxes you pay to the irs. So that's an analysis that a good advisor can help you do. We run that analysis all the time for our clients. Do we want to restructure debt? What about the interest rate differential? Doesn't make sense. And then you make a smart decision accordingly. All right, so that's restructuring debt, and that could help you build your emergency reserve as well. Also, just make sure you've got the right malpractice. That goes without saying. There's also something some people will do. I'm a little bit agnostic about this, but key man insurance, you can get insurance on yourself as a key person in your business. And then if you became disabled, you can have the key man insurance payout as well. And if you have a partner, there's essentially insurance you get on the partner becoming disabled to fund the business needs while they are disabled or even Death. And that's called buy. Sell life and disability insurance. Buy. Sell life and disability insurance. I highly recommend that if you are a partnership, all right, those are just other protective mechanisms in case you fall upon hard times. And I now want to emphasize, as I come to a close here, that I strongly believe that saving for an emergency reserve, that's not a luxury. And a lot of times people say, oh, I'll get there. You know, that's kind of a luxury. That's a luxury financial item on my personal net worth statement is an emergency reserve fund. I don't think that's a luxury. I think that is absolutely a necessity. And I drive that message home all the time to our clients. Let's build that emergency reserve. Let's make sure our credit card is under control. I'm not opposed to using a credit card. If you're responsible about it. You pay it off every month. If that's covered, the next rung on the ladder is let's have an emergency reserve fund. Once the emergency reserve fund is met. Now we start talking about investing the surplus dollar. Between paying off debt, investing in the stock market, going real estate, and avoiding at all cost crypto scams. I will just say that I know that sounds random, but it is happening all over the place. It's called butchering the pig. It's unbelievable how often this is happening. Please stay away from that kind of stuff. Whenever you have spare dollars, don't look at it as a luxury or a discretionary spend. Look at it as the sacred dollar that it is that you put so much time and hard earned energy and debt on your practice and student loans and going through all that to get that dollar. Now you want that. Get that dollar working for you. Don't go let that slip out of your hands. Be smart about that. All right, everybody. Hope you enjoyed that episode on why you need to have an emergency reserve fund, how to build it up and how to invest it. Keep listening for more episodes. Coming out on the financial planning series that I'm doing right now. I got some great subjects that I think you will find very, very interesting. Hope you're finding it valuable.