By: Edward J. Leach, CFP®, MBA
In the fast-paced world of dental practice ownership, making informed financial decisions is crucial for long-term success and stability. In this informative video series, a financial expert, Ed Leach, guides dental practice owners through the complexities of managing their finances. The series introduces a straightforward framework designed to help owners make smart money decisions, whether just starting or looking to optimize their financial strategies. By understanding and applying this framework, dental practice owners can ensure both their short-term needs and long-term goals are met, paving the way for a secure and prosperous financial future.
Introduction
Hi, this is Ed Leach. Welcome back to our series of videos for dental practice owners, helping you make good decisions around money. Today, I want to introduce you to a simple framework we use for all our clients, not only our dental practice owners, to help you make good decisions around your money, both short-term and long-term.
Common Financial Mistakes
Earning Money and Structuring Accounts
One of the most common mistakes we find when practice owners start earning money, either right off the bat when they start their own practice or later on in life, is figuring out what type of account to use and how to structure their personal balance sheet, specifically when it comes to their assets.
The Simple Framework
Visualizing Your Financial Structure
Imagine a field with a fence going right down the middle. On either side of the fence, you will have two buckets.
Side One: Short-Term Financial Goals
Emergency Fund Your emergency fund, cash reserve, or short-term emergency savings. Knowing you have the unforeseen covered, this is the money you need to help you sleep at night.
Short-Term Goals Your short-term goals. Think of these as anything that will come up for you in the next zero to three years. Maybe a big vacation, saving for a first home, buying a second home, or sending a child to college. This money, earmarked for the next couple of years, belongs on that side of the fence.
Importance of Short-Term Security
The fence is to help you decide how to invest or save this money—what type of accounts or investments to choose. You want to make sure you can make the most of this money. We explain to clients that the most significant risk with that money is the risk of loss. In the short term, investment markets are unpredictable. To eliminate that risk, keeping that money in high-yield savings accounts and being smart about how much money goes into these two buckets gives you a sense of security. Whether it be something unforeseen like a leaky roof costing $10,000 to $20,000 or a vacation to Europe costing $25,000 to $35,000, it's secure. That's what those two buckets are meant for.
Side Two: Long-Term Financial Goals
Retirement Accounts Your retirement accounts, which could be your 401(k)s, IRAs, Roth IRAs, or cash balance pension plan if you have one for the practice.
Long-Term Investments Your long-term investments, such as a brokerage account or any money invested for the long term.
Managing Long-Term Risks
Why do we call this the risky side of the fence? Your most significant risk for long-term money is not the risk of loss but the risk of inflation. Over the next 10, 20, or 30 years, you will experience inflation, say 2.5% to 3.5%. For your money to maintain its current level of purchasing power, you need at least a return equal to inflation. However, no one enters our office just to maintain purchasing power—they want to create wealth and enhance their future lifestyle. Having a long-term investment plan and staying disciplined will be your greatest weapon. History has shown that if you stay invested in good and bad markets, you will have a good experience and a return greater than inflation for taking the risk of staying invested.
Coping with Market Fluctuations
How do you deal with short-term market fluctuations like the COVID-19 pandemic or the great financial crisis? By having those short-term buckets funded and knowing you have cash set aside if needed. In an earlier video, I talked about the importance of liquidity and how powerful it is to have liquid assets to help you feel in control of your financial situation. This simple framework allows clients to feel secure, knowing their short-term buckets and goals are taken care of and their long-term money is on a path to creating wealth for the future.
Conclusion
Summary
To summarize, we introduced a simple framework to help you make good decisions around your short-term and long-term money, ensuring you're on a path to financial freedom.
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Ed Leach, CFP®, MBA, is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ, and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their businesses while creating efficiencies in their business and personal financial plans. He is also a member of NAPFA, which is dedicated to serving fee-only advisors.