Always Know Where Your Money Goes
My colleague, Katie Collins, recently discussed the role that knowing where your money should go plays in accumulating and protecting wealth over time. This is essential to ensure you are planning the best possible outcomes for your current financial situation while also making progress toward future successes and your most meaningful financial goals.
However, knowing where your money should go is meaningless without context. That context is the knowledge of where your money is going now. This matters both in your dental practice and in your personal life. So, how do you firm up your understanding of where your money is presently going? Track it!
We see dentists using a variety of financial tracking mechanisms in their practices. The choice of accounting/bookkeeping software impacts not just the practice’s operation, but also your ability to quickly and easily view important information about its finances. When selecting accounting software, be sure to prioritize what you get out of the system as well as what you put into the system. The best software options we see provide robust reporting, both in real-time, by providing concise and meaningful income statements, and over the long term, by providing historical data to allow trend identification within your expenses. These systems share data in meaningful ways with other software you use in your practice to provide financial visibility and transparency to practice management. What’s more, we often see dentists choose software that provides remote access to key professional service providers: accountants and financial planners. With the right system in place, you can compare your practice to industry benchmarks and to itself over time.
When benchmarking your practice, it is important to remember that this information is valuable not necessarily to answer financial questions, but to give you the appropriate questions to ask. If you deviate from the norm for your specialty, it’s a call to dig into why. Not all practices are the same; geography can play a role in certain price categories, the age of valuable staff members can impact figures, and technology and dental equipment can shift cost classifications. If differences relative to a benchmark are purposeful and can be answered within your strategic approach to running your practice, then it’s a good thing. If the differences are unexplained or unfounded, it presents an opportunity to increase your practice’s efficiency and profitability.
On the personal side, it is important to understand how your dental practice’s profits are extracted. Are you utilizing non-cash compensation in a way that both benefits you and your family while also not exposing you to audit findings if the IRS were to look into your tax returns? Are you taking the appropriate level of W-2 income versus distributions to maximize your ability to fund your pension plan while avoiding unneeded taxes? Once profits make their way from the practice to home, do you know where they are going? When we make a financial plan that incorporates our current lifestyle goals along with our long-term financial goals, we can back into a “balanced” budget. The financial balance guideline states that 50 percent of income should go to needs (taxes and debt service), 20 percent toward savings (preferably tax-deferred savings at certain income levels) and 30 percent to lifestyle.
In this realm, there are a variety of tracking tools we see put to good use: Mint.com, emoney.com and some credit cards provide great tracking tools. (For example, I use my American Express card for its tracking features.) If you are weary of these tools or are just getting started, there is a very easy way to check your monthly spending. Look at your checking account: the Starting Balance + Deposits – Ending Balance = Monthly Expenditures. This equation works great IF you are using credit cards responsibly and paying them off every month. (Confession: I have not always used credit cards responsibly. Looking at my monthly expenditures compared to my monthly income gave me the information I needed to clean up my financial picture quickly, and I believe the experience has made me a better wealth advisor.)
When you know where your money is going, and you are aware of where it should be going, you have the context to put your financial life in balance. When your financial life is in balance, you will have less stress, greater flexibility in your financial picture and a greater ability to focus on more important things, like family, clinical skills and your practice’s production growth.
This commentary originally appeared August 23 on DentalTown.com
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