Properly Align Financial Priorities: Needs, Wants and Savings
As my colleague, Tom Bodin, recently outlined, knowing where your money actually does go gives dentists the financial knowledge they need to put their work and personal lives in balance. The next question to ask is: What is that balance?
When we talk about financial balance, we mean ensuring that our dollars go toward the right priorities and in the right amounts. We break down these priorities into three categories: Needs, Wants and Savings. To achieve the ideal balance among these priorities, we recommend broadly that you spend 50 percent of your income on Needs, 30 percent on Wants and put 20 percent into Savings. Let’s explore those categories a bit more in depth.
Our Needs are fixed expenses over which we have less than total control. They generally fall into two principal categories: taxes and loans. It is important to have a firm grasp on these obligations at all times to ensure they take up the proper amount of your overall personal spending. Debt can be a very valuable financial tool for building your practice and your personal financial picture. However, debt must be handled properly to prevent it from becoming an obstacle you will need to surmount. Handling debt properly can mean both not paying it off so quickly that it prevents you from saving and not allowing it to build up to the degree that it becomes unmanageable. When considering a loan for a new piece of equipment or a second home, consider the expense it would add to your overall budget, and whether that might throw your financial picture out of balance. While we all have limited ability to control the amount of tax we will owe, it is still important to work with your accountant to stay on top of upcoming tax liabilities throughout the year so that you can do your best to anticipate what you will owe and account for it in your personal budget.
Our Wants are everyday living expenses, such as gas and groceries, along with other large purchases we have to make every so often, such as buying a new car or doing some work on the house. We recommend your Wants make up about 30 percent of your overall personal spending. Unlike your Needs and your Savings, which we will discuss next, you have complete control over how much you spend on Wants. This can be both a blessing and a curse. If your Wants constitute more than 30 percent of your overall spending, it is easier to change the amount of money you spend on going out to eat than it is to ask the government to let you pay less in taxes. However, this flexibility also brings with it the temptation to overspend. As Tom also mentioned, the knowledge that Wants should constitute 30 percent of your personal spending is helpful only alongside an ability to track it. We see our clients use a wide variety of methods to keep track of their personal spending. The most popular methods are programs like Quicken or websites like Mint.com. Ultimately, as long as you find a system that allows you to easily and accurately track spending and you commit to using it regularly, you will be able to confirm that your Wants are staying in line with your overall financial picture and effectively make changes if they are not.
The third category of personal spending, Savings, can be the most difficult to incorporate into our personal financial picture. But owning a dental practice provides a uniquely powerful opportunity to create an income stream for you and your family. Saving is the key to putting some of that income to work for you as a means of achieving financial freedom. Thanks to the power of compound growth, your first priority should be to incorporate Savings into your financial picture as soon as possible. Saving and investing earlier in life can provide a significant boost to your long-term investment returns, and thus an even quicker route to financial freedom. It is much more difficult to create sufficient wealth for retirement if you wait to start saving until the last few years before you transition out of your practice. Once you have integrated Savings into your personal cash flow, your next priority is to remain committed to meeting your savings objective each year. We recommend you treat your Savings goal the same as your Needs goal by assuming that both must be met.
Once you have your Needs, Wants and Savings properly aligned, you are in the best possible position to meet your most important financial and life goals.
This commentary originally appeared September 6 on DentalTown.com
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