By the time most dentists earn their degree, they typically owe $200K-300K in student loans. At the same time, the majority of new dental graduates will start their career earning six figures. The risk for dentists is that their high earning potential can blind them to the ramifications of carrying a lot of debt. That’s why I’m here to preach the gospel of fiscal discipline. Reducing debt and saving money early in their career puts newly minted dentists on a fast track for building wealth.
Let’s look at a few specific areas where a little forethought can make a big difference down the road.
Keep Your Mortgage Modest
I can name seven banks who will loan dentists up to half a million dollars to buy a house, with no down payment required. It’s a pretty tempting offer – who doesn’t want to live in a nice house? But do the math. If you earn $10K per month and buy a $500K house with no money down, your monthly payments will be around $3K. That severely limits your ability to pay down your student loans. It also makes it harder to save the 10% deposit you’ll need to buy a practice. Until you’ve retired your student loans, keeping your monthly house payments closer to 20% of your income will put you on a more financially secure path. It just means waiting a few years to buy your dream home.
The Magic of Compound Interest
When you’re starting your first job as a dental associate, saving for retirement may be the last thing on your mind, but consider this – by putting money into a retirement account when you’re in your 20’s, you maximize the power of compound interest. Compounding means a little money saved when you’re young can result in big rewards later, giving you a huge advantage when it comes to building wealth for retirement.
Stay Current on Taxes
Some associates choose to work as independent contractors but neglect to pay income taxes, a mistake that creates unnecessary debt. If you’re paid $10K per month as a contractor, you’ll need to pay quarterly federal and state income taxes, as well as FICA, which is your contribution to social security and Medicare. As a W2 employee, the deductions are automatically taken from your paycheck, but as an independent contractor, it’s your responsibility. There are good reasons to be an independent contractor – for instance, you have more options to reduce your taxes. Just be sure you understand how much money you’ll have to live on after taxes and set up a system to automatically transfer the taxes you owe into an account, so you don’t accidentally spend it.
If you want to learn more about how a little fiscal discipline now can pay big dividends later, give us a call. Engage Advisors has helped hundreds of dentists build wealth and enjoy the benefits of financial security. Let’s talk about how we can support you. Contact us today.