It is very common for medical professionals to be so busy in managing the patient side of their practice; they end up neglecting the financial elements of their business. A few of these professionals find it difficult to get reliable financial advisors, while some are just complacent about their finances.
Regardless of the reason, not being on top of your practice’s finances can lead to costly errors that damage your long-term financial situation and create a much higher tax liability than you would have otherwise. So, what are the most common financial misconceptions– as a medical professional you must know what are those and how can you ensure you don’t make them?
Poor debt management
Being high-income earners, medical professionals can easily fall into the trap of living beyond their means. Whether it is credit card debt or paying back your student loan, poor debt management habits can quickly become a significant problem.
Repayments take away from both your day to day income and savings, as does any extra interest acquired. This can constrain your investment strategy and affect your retirement nest egg, ultimately reducing your ability to build wealth. Most of all, you’ll suffer from a poor tax outcome because you’re unable to make the most of tax-effective investments that grow your wealth and reduce your tax bill over the long term. There are strategies which assist you in converting non-deductible (bad) debt into tax deductible (good) debt.
If you’re suffering from poor debt management, you need to act – now! Sit down and devise a realistic plan that will see you from making monthly repayments to making monthly savings instead. If you’re unsure how to do this, enlist the services of a financial advisor who will be sure to help you get back on track.
Not saving for the long term
Earning a high income can lure some medical professionals into a false sense of security. While most people have four decades to save for retirement, physicians – due to the time it takes to complete medical school – have around three decades. An ideal saving ratio might be at least 25% of your total income if you intend to retire at 65, and this ideally should be combined with a smart superannuation and tax strategy that involves maximizing super contributions for the best possible tax outcome.
Too late to focus on super
Medical professionals often neglect superannuation because they’re commonly self-employed and therefore aren’t mandated to make contributions. This means some of you start making large contributions to your super much too late. When done right, your super strategy helps you realize your retirement goals and saves you a considerable amount at tax time each year. Last week we published a detailed article on the importance of superannuation for medical professionals and doctors. You can read that for more information on your superannuation.
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Not finding a reliable financial advisor
Not only medical professionals, anyone can benefit from working with the right financial advisor – even young practitioners with fewer investments and assets. One common mistake medical professionals make is retaining a financial advisor when your financial situation and practice – and therefore tax planning requirements – have outgrown your financial advisor’s experience.
Financial and accounting generalists may lack the knowledge and skills to deal with concepts such as Medicare fees and out-of-pocket gaps, along with the many complexities associated with running a medical practice. This can potentially mean you get stuck with a larger tax bill.
On the other hand, medical financial specialists are very knowledgeable about the nuances of allowable deductions for doctors and medical specialists. They will also know more about tax-effective structures for doctors such as service and investment trusts.
Not viewing practice as an investment
The practice produces the best returns with the lowest risk. Goodwill values are low and this means returns are high. It is not unusual to see rates of return of more than 50%, and even 100% or more in some cases.
If a medical professional borrows $100,000 against the security of a home and starts to earn an extra $50,000 a year profit above their time reward that is a 50% return on the person’s investment. It is very low risk. Most owner doctors earn at least an extra $100,000 a year profit and net cash flow every year. Often it is much more.
After two decades this extra net cash flow compounds out to a very large difference, millions of dollars of difference, in the net wealth position of owner doctors compared to non-owner doctors. Some practices bulk-bill and achieve high profitability. This is achieved through high patient numbers and fiercely controlled costs. Other practices privately bill patients, work on a strict appointment system, perhaps even closing their patient lists, and deliberately spend more on staff and other costs to improve efficiency and profits. They achieve high profitability too.
Its not all beer and skittles, and extra net cash flow. There is extra time and effort, and extra paperwork, too. This time has an opportunity cost: more time in the practice means less time for other activities, and for many the trade off is not worth it. Keep perspective, its not a bad life working as a doctor in someone else’s practice. Most doctors are quite autonomous, can control their work environment, and choose the times they work. Not owning a practice and keeping things a bit simpler can make a lot of sense too.
Not being properly insured
This problem is not exclusive to medical professionals since most people do not have adequate insurance. For medical professionals especially, having the right coverage is a must. This includes, but is not limited to, malpractice, liability, disability, life and umbrella insurances. The limits on each one of these policies will differ based on income, assets, area of specialty, and personal situation. Again, consulting with an advisor or an agent who understands your needs is key to securing the right plan.
Undefined tax strategy
Tax is one of the most complex areas for individuals with investments and retirement strategies, yet many medical professionals lack a defined tax strategy. Some doctors, for example, are content when see their net pre-tax income, and fail to realize that their after-tax position can be dramatically improved with smart tax planning.
Lowering your tax liability can involve implementing a smarter investment strategy and maximizing your superannuation contributions. A smart tax strategy takes into account every facet of your finances; given the complexity involved, it’s best set out with the help of an accountant or financial advisor.
Investing in high-risk schemes
Having plenty of disposable income means some medical professionals are drawn to high-risk schemes which promise high returns and high tax savings. What all medical professionals should do is identify their risk tolerance levels – a financial professional can assist with this – and manage their investments accordingly, preferably focusing on lower-risk investments. By investing in alignment with your risk-tolerance level, you’ll be able to generate stable income and minimize your tax deductions.
Not setting a realistic time line to launch your new practice.
Whether a doctor is finishing up their residency, or deciding to leave a hospital or group practice, they rarely ever give themselves enough time to start a practice the right way. Many times it’s a “I need to get up and running ASAP, maybe next month if I can”. Unfortunately it isn’t that easy. When starting a practice you have to take into account time to get credentialed for your new practice, time to find a staff, time to implement systems, time to find real estate. Be flexible with deadlines and unexpected delays.
Some of these misconceptions are not limited to medical professionals but to all affluent individuals. Doctors are simply too busy, and the demands of their professions are too great, for them to be able to tend to all aspects of their financial lives. However having the proper legal and financial counsel will help you to cover all your bases.
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