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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Dr. David Willis combines his experience as a practicing dentist, educator, MBA, and certified financial planner in this breakthrough text about managing a dental business. Rather than a checklist of steps for success, Business Basics for Dentists describes business, economic, marketing, and management principles and explains how to apply them to the dental practice. Dental students and new practitioners will learn how to use the core strategic and operational business philosophies to develop an effective dental practice. He provides the essential elements of a business course--management principles, economics, business finance, and financial analysis--without bogged down in too much detail. These are then related specifically to various aspects of running and managing a dental practice, including office communications, billing, inventory, and marketing the practice. All aspects of practice transition are approached: career opportunities, buying a practice, starting a new practice, multi-practitioner arrangements, practice valuation, and planning and developing a practice. Last, Willis included personal financial planning to ensure that the dentist is also planning for his own finances and retirement beyond the bounds of the practice.
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Contents
Preface
About the Companion Website
Section 1 Personal Financial Management
Concerns of the Financial Management Process
Objectives of the Personal Financial Management Process
Chapter 1 Personal Money Management
Personal Money Management
Personal Lifestyle Issues
Developing Personal Savings
Personal Banking
Managing Credit
Family Budget
Buying a Car
How to Improve Spending Habits
Preventing Debt Problems
Getting Out of Debt
Financial Planning Phases
Chapter 2 Personal Insurance Needs
Understanding Insurance
Medical Insurance
Disability (Income) Insurance
Accidental Death and Dismemberment (AD&D) Insurance
Life Insurance
Automobile Insurance
Homeowner’s Insurance
Personal Excess Liability Insurance
Tax Consequences of Personal Insurances
Chapter 3 Planning for Retirement Income
Components of a Retirement Plan
Principles of Retirement Savings
Factors that Determine People’s Ability to Reach Retirement Goals
Common Individual Retirement Plans
Plans for Small Business Owners
Nontax–Advantaged Plans
Taking Money at Retirement
Stages in Retirement Planning
Example Strategies
Chapter 4 Reducing the Personal Tax Burden
Federal Income Taxes
Basic Personal Tax Formula
Tax Rates
Components of Form 1040
Other Income Taxes
Issues for the Self-employed Dentist
Tax Planning for the Individual
Tax Audits
Chapter 5 Estate Planning
Purpose of Estate Planning
What Constitues an Estate Plan
Methods of Property Transfer
General Estate Planning Issues
Section 2 Business Foundations
Major Goals of the Business Foundations Sector
Objectives of the Business Foundations Section
Chapter 6 Business Entities
Entity Decision Points
Types of Entities
Sole Proprietorship
General Partnership
Corporations
Limited Liability Company
When to use the Various Entities
Chapter 7 Basic Economics
Microeconomics: The Individual Buyer and Seller
The Economics of Dental Services
Macroeconomics: The Big Picture
Chapter 8 The Legal Environment of the Dental Practice
The Source of Laws
Resolving Disputes
Criminal Law
Civil Law
Employment (Labor) Law
Consumer Protection Laws
Laws Regulating the Dental Profession
What to do if Sued
Personal Inquiry
Lawyer’s Inquiry
Summons and Complaint
Chapter 9 Financial Statements
Personal Financial Forms
Corporate Financial Forms
Chapter 10 Basics of Business Finance
Time Value of Money
Present Value of a Future Dollar
Capital Budgeting
Borrowing Money
Lease–purchase Decisions
Chapter 11 Business Taxes and Tax Planning
Principles of Business Taxation
The Basic Business Income Tax Formula
Employer Taxes
Unwithheld Expenses for the Employer
Miscellaneous Hiring Issues
Other Business Taxes
Business Tax Planning
Chapter 12 Management Principles
Characteristics of Dental Practice
Definition of Dental Practice Management
Functions of Dentist–Manager
Resources of the Practice
Roles of an Owner–Dentist
Chapter 13 Planning the Dental Practice
Practice Stages
The Environment of Dental Practice
Environmental Analysis and Planning
The Practice Planning Process
Section 3 Dental Office Success Factors
Major Goals of the Dental Office Success Factors Section
Objectives of the Dental Office Success Factors Section
Chapter 14 Financial Analysis and Control in the Dental Office
Steps in the Financial Control Process
Profitability Analysis
Critical Success Factors
Tracking the Factors
Chapter 15 Maintaining Production
Part 1: Duty Delegation
Types of Dental Staff Members
Levels of Supervision
Labor Substitution
Principles of Duty Delegation
Steps in Delegating in the Dental Office
Using Delegation in the Dental Practice
Part 2: Scheduling Patients
Purposes
Treatment Time Codes
Constructing Appointment Plans
Making Patient Appointments
Example Schedule
Appointment Issues
Part 3: Dental Fee Policy
Professional Fee Objectives
Fee-Setting Methods
Implications for Dental Practice
Raising Fees
Chapter 16 Maintaining Collections
Part 1: Patient Financial Policies
Elements of A Financial Policy
Presenting Financial Plans
Effect of Financial Policies
Part 2: Office Collection Policies
Accounts Receivable
Billing Systems
Collection Policy
Writing Off Accounts
Keys for Effective Collections in the Office
Chapter 17 Generating Patients for the Practice
Part 1: Generating New Patients
What is Marketing?
Why do Dentists Market?
What do Dentists Market?
Why Consumers Buy
Marketing Plan Development
Marketing Strategies
The Financial Impacts of Marketing
Part 2: Managing Continuing Care
Value of Preventative Services
Economic Value of a Continuing Care Patient
Cost of a Periodic Maintenance Patient
Periodic Maintenance Management
Chapter 18 Gaining Case Acceptance
Part 1: Communication in the Office
The Communication Process
Methods of Communicating
Nonverbal Communication
Verbal Communication
Written Communication
Communication Issues in the Dental Office
Special Patient Problems
Part 2: Case Presentation and Acceptance
Types of Consumer Purchases
Patient Treatment Acceptance Decision Points
Steps In Case Presentation
Chapter 19 Controlling Costs in the Practice
Types of Costs
Typical Dental Office Cost Allocation
Break-Even Analysis
Categories of Cost Control
Specific Cost-Control Techniques
Chapter 20 Promoting Staff Effectiveness
Part 1: Selecting and Hiring Employees
Attracting the Best Applicants
Selecting the Best of the Applicants
Working Interviews
The Hiring Decision
Probationary Period
Integrating the New Employee into the Office
Part 2: Compensating Employees
How to set Staff Compensation Levels
Staff Pay
Benefits
Processing Staff Pay Checks
The Cost of a Staff Member Leaving
Part 3: Motivating Employees to Perform Well
Leadership
Why People Work
The Work Environment
Employee Motivation Concepts
Incentive Plans: Using Money to Motivate
Part 4: Assessing Employee Performance
Performance Appraisal and Reviews
Disciplining Employees
Terminating Employees
Chapter 21 Maintaining Daily Operations
Part 1: Office Operations
Efficiency and Effectiveness
Capacity
Capacity Utilization
Increasing Patient Visits
Daily Scheduling
Ways To Become More Efficient
Part 2: Office Accounting Systems
Accounting for Income
Tracking Who Owes Money (Accounts Receivable)
Recording Expenses: Payments to Others
Petty Cash and Cash Control
Protecting Against Embezzlement
Example Patient Accounting Transactions
Part 3: Instrument Management Procedures
Center for Disease Control and Prevention Background
Dental Office Requirements
Sterilization and Disinfection Procedures
Other Office Instrument Issues
Part 4: Office Supply and Lab Management
Inventory Systems
Laboratory Case Management
Part 5: Dental Insurance Management
Payment Mechanisms
Policy Limitations
Method of Reimbursement
Other Insurance Terms
Characteristics of Third-Party Plans
Dental Insurance Plans
Managed Care Plans
Government Payment Plans
Processing Insurance Claims
How to Manage The Traditional Indemnity Insurance Plans
How to Manage the Managed Care Plans
How to Reduce Managed Care in Practice
Chapter 22 Managing Risk in the Office
Part 1: Office Risk Management
The Risk Management Process
Office Insurances
Professional Risk Management
Patient Treatment Records
Avenues of Resolution of Poor Work or Poor Outcome
Malpractice Insurance
Information Security and Management
Part 2: Regulatory Compliance
Licenses and Registrations
Osha and the Dental Office
HIPAA in the Dental Office
HIPAA Rules
The Privacy Rule
The Security Rule
Electronic Transactions and Code Set Rule
HIPAA Required Forms
Medical Waste Disposal
Radiographic Machines
Part 3: Quality Assurance
Quality Assurance Terminology
History of Quality Assessment and Quality Assurance in Dentistry
Current Focus on Quality Assessment and Assurance Activities
Implications for Practicing Dentists
Quality Assessment Reviews in Dentistry
Section 4 Practice Transitions
Concerns of the Career Development Process
Objectives of the Career Development Process
Chapter 23 Career Planning
Characteristics of Dental Practice
Common Myths About Dentistry
Professional Options
Career Paths
Career Choice Points
Location Decisions
Chapter 24 Employment Opportunities
Methods of Compensation
Employee Benefits
Associate–Owner Arrangements
Working for Corporate Networks Practices
Employment Contracts
Chapter 25 Practice Ownership
Characteristics of Practice Ownership
Individual Practice
Solo Group Practices
True Group Practices
Franchises as Ownership
Chapter 26 Practice Transitions
Starting a Dental Practice (Cold Start)
Buying an Existing Practicing (Buy-out)
Buying Into an Existing Practice (Buy In)
Chapter 27 Valuing Practices
Why Value Practices?
General Rules of Practice Valuation
Methods of Valuing Assets
Four Asset Classes
Methods of Practice Valuation
Corporate Practices
Speciality Practices
Tax Implications of Practice Sales
Chapter 28 Securing Financing
Sources of Loans
Effect on Credit Rating
Types of Professional Debt
Tax Implications of Debt
Negoitiating with Lenders
Chapter 29 The Business Plan
The Written Part of the Plan
The Financial Part of the Plan
Checklist for Business Plan and Loan Application
Index
This edition first published 2013 © 2013 by John Wiley & Sons, Inc.
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Cover design by Nicole Teut
Preface
Surveys of new dental practitioners consistently rate practice management as the area for which they were least prepared and in which they found the most problems in practice. Dental schools do an excellent job of preparing the graduate to handle the technical and patient treatment aspects of dentistry, but they do a less-than-excellent job of preparing graduates to run a dental practice.
This problem comes from several sources. Most students do not enter dental school with a business background. They have taken scientific-based courses to prepare them for the rigorous dental curriculum and have not taken a business class in their predental curriculum. Many students have never had a dental-related job in the private sector. They depend on the professional mentoring of the faculty to prepare them for the world of dental practice.
Students are concerned with the immediate needs of learning dentistry, completing clinical requirements, and passing licensing exams—and that is where their efforts should go, to their most immediate and pressing needs. They can not run a successful dental practice until they graduate dental school and earn a dental license.
For years, national boards have tested students on basic scientific and clinical knowledge and not on how to operate a successful practice. Because many dental schools teach, in part, to prepare their students to pass these boards, curriculum time and faculty efforts are heavily weighted to preparing students for this important milestone.
The economic environment of dental practice is changing rapidly, and educators have not kept up. In years past, if the new graduate knew dental techniques and treated their patients well, practice success was virtually assured. Today, new practitioners face a bewildering array of insurance plans, consumerism, corporate practices, large student debt payments, and regulatory requirements. In the face of this uncertain future, graduates want additional information to help them compete effectively in this new reality.
This book is primarily for dental students about to graduate, new graduates (both in a private practice and in other clinical settings), and recent graduates who have been out of school for five years or less. It is not written for well-established dentists who have practiced for 20 years, although they may find pearls to apply in their practices. Rather the basic business information that new practitioners can apply in their practice situation to compete effectively is presented. It is not intended to be specific management advice for every management problem—readers should consult with accountants, management consultants, or mentors about specific problems—but, if the issues can be understood, then the dentist can communicate more effectively with advisors and will understand and implement solutions and advice more effectively.
A dental practice is a small business. It responds to business concepts and rules the same as any other small business. The only difference is that dentists sell dental services, not hardware, clothing, electronics, or automobiles. So it is important to understand a business principle and then apply the principle in dental practices. In this way, a practitioner in New York City or in Mayfield, Kentucky, can use the same business principle in different-looking practices.
The numbers that are given as examples or illustrations are intended to represent the country as a whole. Some areas, especially large urban areas, have higher costs and higher fees than other, small town and rural areas. For example, typical wage rates for hygienists in large urban areas are currently in the range of $50.00 per hour; in many small to mid-sized towns, rates for hygienists are in the range of $25.00 per hour. Likewise, the fees that are charged are also generally higher in those urban areas. Therefore, the numbers that are shown may not represent a practice situation exactly, but the business concept behind the example is valid regardless of the practice area.
This book surveys the topics of operating a dental practice. As such, it is only an introduction to each of the topics. For example, although several pages are devoted to the methods of valuing a dental practice, experts have written entire manuals and even entire books on this subject alone. Other excellent texts, Web sites, and how-to manuals cover each of the topics in this book. For example, the American Dental Association produces an excellent series of books that cover practice transitions, regulatory compliance, and many other management topics in a level of detail that can not be put into one book. This book, then, is only a starting place for studying management in the office.
This book is the result of more than 25 years of teaching practice management to dental students and 20 years as a practice consultant, primarily with new and new and young practitioners. In this time, I have listened to problems that new practitioners face, helped them solve those problems, and guided them into successful careers. This book is not a spellbinding read. Instead, it is a text and a reference book. If the reader is a student, he or she may be required to read certain chapters to pass a test or course. A practitioner having a problem with staff interactions in the office may pick up the book and read the chapter on how to motivate employees. Either way, the intention is to understand how business people think about a problem and develop specific solutions to specific management problems. I hope that you find the information useful in that regard.
David O. Willis
About the Companion Website
This book is accompanied by a companion website:
www.wiley.com/go/willisdentistrybusiness
The website includes:
Handouts
Checklists
Forms that can be used in the classroom setting
Section 1
Personal Financial Management
When it is a question of money, we are all of the same religion.
Voltaire
Money is central to US life. It has the power to build up or to tear down. It can grow and appreciate if properly managed or depreciate if mismanaged. Money can produce anxiety or joy—so can the lack of money. Money can lead to the gamut of human emotions, from happiness and jealousy to covet and rage. Money touches everyone in some way or another. It is used to buy power, control, and pleasure. It can easily be counted, and it becomes a surrogate for peoples’ personal worth.
Money is also pervasive. There are entire broadcast networks devoted to money and investing. Daily publications and monthly magazines provide news about money and advise people how to make it and how to keep more of it. Money dominates the news. Whether the collapse of a country’s economy, wars over resources, or riots and civil disturbance between those who have money and those who do not have any, money is the precipitating factor in many news stories. Money elects presidents, and financial scandal brings ruin to promising politicians and other leaders.
Millions of dollars will pass through a dental office throughout a career. Dental employees depend on a dentist for their family’s financial safety and security. Dentists will pay bills and taxes and still have a significant amount of money left over for enjoyment. They then have to choose what to do with that money. It can be spent on themselves or family, gambled away, saved for retirement, or given away to churches or other worthwhile community organizations. Regardless, money needs to be managed to be spent wisely, to save it, and to invest it appropriately. A plan to manage financial affairs is needed to accomplish these ends. This is called financial planning. Financial planning is the development and implementation of total coordinated plans for the achievement of one’s overall personal and professional objectives. It is a long-term process that requires knowledge and work and may also require the expertise of professional money managers to help a dentist establish and reach financial goals.
Concerns of the Financial Management Process
The financial planning process really is concerned with three major goals:
Objectives of the Personal Financial Management Process
Given these three main concerns, the objectives of a financial plan can be grouped according to common categories. However, these categories can not be viewed in isolation because they each overlap and feed into every other category. The issues that dentists should examine in their own financial planning process include the following:
Chapter 1: Personal Money Management As dentists move through their career, they begin to accumulate things of value, both physical (such as houses) and financial (such as investment portfolios). Paying the principal on loans yields a similar result because eliminating a debt is equivalent to gaining a corresponding asset. These assets are then used for further investment, family purposes, or to build an emergency fund that is used for risk protection.
Chapter 2: Personal Insurance Needs Dentists face financial risks every day of their lives. These include the risk of premature death (before they have accumulated enough assets to care for their family’s needs), the loss of income through a disabling condition, medical care expenses, and property and liability loses. Dentists often use insurance to protect themselves from these potential financial problems.
Chapter 3: Providing for Retirement Income No one provides business owners retirement income except themselves. The government provides several tax incentives to encourage business owners to save for their own retirement. If a retirement plan can be integrated into the office expenses, it can provide a comfortable income when business owners choose not to work.
Chapter 4: Reducing the Personal Tax Burden Taxes are a fact of life in the United States. However, personal and professional affairs can be planned to decrease tax burdens as much as possible within the laws and rules established by taxing agencies.
Chapter 5: Estate Planning As dentists accumulate wealth, they need to develop a plan for what happens to that wealth when (not if) they die. As small business owners, the practice may be one of the larger assets dentists own. Proper succession planning helps protect the value of this important asset. Additionally, people who have not accumulated a large amount of wealth need to be sure that their heirs are financially protected in cases of premature death.
Chapter 1
Personal Money Management
Rule No. 1: Never lose money.Rule No. 2: Never forget Rule No. 1.
Warren Buffet
Many financial planning issues that young professional dentists face are the same as the general public. However, in other ways, the issues for dental professionals are unique. They often start with high debt loads but balance that with high income levels. Dentists are generally not employed by a company or organization that provides any benefits such as medical insurance or a retirement plan. They are often limited in how much income growth they can expect and must balance their income wants and needs with their desire for personal time. Because of these issues, new dentists must quickly become familiar with how to manage money.
Personal Money Management
Become a Good Money Manager
Dentists need to become good money managers, both in business life and private life. The first step is to learn all about money and how to use it. Becoming a good money manager does not just happen; it needs to be worked at, just like becoming a dentist. Dentists should study how to save, how to invest, and how to become a wise consumer. They should subscribe to Kiplinger’s or Money magazine. These are the two leading personal financial magazines, and they give valuable tips for saving and making money.
Personal Records
Dentists accumulate many important personal financial records, therefore, a personal record management system, similar to the one developed for the office, should be created. Dentists should not let the paperwork pile up; they should work on records every month. They should get a safe deposit box at the bank or a fireproof safe at home for important papers. These important papers include wills, insurance policies, names of advisors, certificates of ownership, among others. Dentists should keep all tax records and related items for at least 7 years and keep insurance policies as long as they are in effect.
Getting Professional Help
As a professional, dentists have skills and knowledge that the public does not have. Dentists not only work with patients to take care of a patient’s oral health but also direct and intervene as professional expertise dictates. The same is true for managing financial affairs. A dentist may have a basic level of understanding of financial management, but there are times when the guidance of a person with expert knowledge in a specific area is needed. Most dentists go first to their accountant for advice about both practice and personal finances. An accountant can be used to help with tax planning, setting up basic retirement plans, evaluating the numbers of the practice, and personal budgeting. Depending on the background and expertise of the accountant, additional help for investment planning, establishing estate plans, buying or selling or partnership opportunities, and a host of other advanced financial topics may be needed. In these areas, dentists often use a lawyer, financial planner, or management consultant. This later chapter was not included in the book. The crucial point is that dentists should become actively involved in their own personal financial management and planning but use the expertise of advisors when the situations demand it.
Personal Lifestyle Issues
Increasing Lifestyle and Income
New dentists are often like a kid in a candy store when they first start making money. They have been in school for 8 to 12 years, are often married, and have put off increasing personal spending and lifestyle while in school. Suddenly, with new-found wealth, they buy too much (often on credit) and struggle the next several years to pay increasing bills with the increasing take home pay. The tendency is for lifestyle expenses to increase along with income. Every dollar that a person makes, is spent on a bigger house, newer car, and new toys. Unfortunately, the solution is not a fun, warm process. Personal life expenses must be kept under control. It is easy to increase lifestyle to meet increasing income. Once accustomed to a certain lifestyle, it is difficult to cut back spending, for example, to start a retirement savings plan. A solution is to develop and use a family budget. If income increases, then take half the increase and use it to fund spending or investment plans. Use the other half to increase lifestyle. In this way, lifestyle increases (more slowly than without savings) and a saving or investment plan is painlessly funded. This approach does take discipline however.
Spend or Save
When money is earned, it can be spent or it can be saved. As previously mentioned, after years of training, most new dentists want to spend it immediately and enjoy it. Instead, they should get into the saving habit. Dentists should start each budget period by saving at least 20 percent of take-home pay, learning to live quite adequately on the remaining 80 percent. As income increases, they should save as much of the increase as is spent. As Table 1.1 shows, saving even a dollar a day adds up to a sizeable sum over time.
Table 1.1 Saving (and Investing) a Dollar a Day
Developing Personal Savings
Emergency Fund
One of the most important financial tasks is to establish an emergency fund. The emergency fund should consist of 3 to 6 months’ take-home pay, depending on the amount and type of disability income insurance and other liquid assets that are available in cases of emergency. The money should be put into a low-risk liquid investment such as a money market mutual fund or checking account. (Although this is not exciting, it is safe.) It is a form of savings used for emergency needs and not as a speculative investment. Emergencies that this fund might cover include a car that dies, a short-term disability, or paying for medical treatment. It is not a vacation or Christmas savings plan. Other than emergency purchases, this fund allows one to increase deductibles on all insurance policies, which saves substantial money in premiums. Establishing the emergency fund is one of the most important initial financial planning jobs.
Saving versus Investing
Saving is holding onto money, stashing it away so that it can not be lost. Gain is not expected. Investing is buying an asset (possibly a stock or a share of a mutual fund) that will possibly increase in value over time. When one invests, gain is hoped for, but loss is also a possibility. Both saving and investing are valuable goals in the right situation. If building an emergency fund or holding on to money for a short-term purpose, then the safest bet is to make sure it is not lost. Money should be saved in a low-risk fund, such as a savings account or money market fund. If retirement is planned for in 30 years, then the long-term gains that are hoped for by investing in a mutual fund is the better route. The value of the mutual fund may go down tomorrow, but it will hopefully (with wise fund choice) increase over the longer term.
Pay Off Debt or Build Assets
Should extra money be used to pay off debt, or should it be saved? Paying off debt as quickly as possible has become fashionable. Being debt free should be a long-term financial goal. From a purely financial standpoint, dentists should look at the after-tax return of the investment and the after-tax cost of the loan and then choose the one that gives a better return. If the interest rate is higher for the investment, then they should invest rather than pay off the loan. If the after-tax interest rate of the loan is higher, then they should pay off the loan. (See the chapter on business finance for a discussion of this topic.) From a cash flow perspective, cash may be needed for immediate necessities for the family or at the office. It is better to have an asset (the cash reserve) with a corresponding liability (the loan) than to have no cash and less of a loan. In the former case, a dentist may not need to go to a banker for an additional loan. In the latter case, when an additional loan is asked for, the banker may balk, wondering why previously loaned money was not handled properly. Once an emergency fund is built and an asset base established, then it becomes easier to put additional money into paying off debt. Again, comparing the expected return of investing with the savings from debt pay down is important. A final factor is one’s personal temperament. A dentist must be a disciplined-enough investor to actually invest the money and not “blow it” on a purchase. Then the dentist must get the rate of investment return anticipated. If the loan is paid off, th dentist should have a plan for the monthly payment that had previously gone to loan payment. Finally, the dentist must invest that amount regularly or it will be spent with nothing to show for it at the end of the pay-off period.
Get Adequate Insurance
The chapter on personal insurance details the types of insurance a dentist might need. As a rule, dentists should not buy extended service contracts, which are a type of insurance. When buying a television, refrigerator, automobile, or any other major purchase, the dealer will try to sell an extended service contract. These cover most repairs needed over the term of the contract. It is better to see if the item fails and then pay to repair or replace it. The dentist should never buy additional (credit or mortgage) insurance. These types of policies insure that if one dies or becomes disabled, the policy will pay off a mortgage or car loan. These are expensive life insurance or disability policies. (Dealers sell them because they get a cut of the premium.) The dentist should have adequate life and disability insurance for his or her needs, and then remember to refuse these additional insurances when buying a major item. The dentist should never buy insurance from someone who calls because insurance policies should be investigated before being bought. As a rule, insurance should be shopped around for because it is a commodity item.
Personal Banking
Banks
Many new graduates have never had the problem and luxury of managing significant amounts of personal money. Establishing both a personal checking account and a professional (office) account are paramount. All checking accounts are not the same. Banks require different minimum amounts in accounts, charge different service fees, pay different rates of interest, and may limit numbers of checks that can be written. The dentist should shop around to find a bank that meets all his or her needs. Initially, he or she should find a checking account with low fees and low minimum balances. As assets and savings grow, the dentist should look for accounts that pay more interest and charge lower fees. Many banks allow and encourage patrons to banks electronically via the Internet. Monthly payments can be established, and transferring funds electronically to many different vendors instead of writing a physical check can also be done. If in a private practice and money was borrowed from a bank, the bank may require the dentist to keep all accounts with the bank. In this case, the “private” banking services, which add a tremendous amount of convenience to banking, can also be used.
Banking Services
Banks provide many services besides checking accounts. Most now offer e-banking, which improves convenience, and most banking can be done online. The banks loan money for small business or personal purchases and develop mortgages for large purchases. They offer credit cards for spending and often have accounts for credit card payments from patients. Many banks have special small business divisions that offer payroll and other services to the small business owner. They have safe deposit boxes for critical personal and business records. They often have investment advisors and retirement plan specialists to help a person develop and nurture these accounts. One of the first professional relationships that a dentist should make is with a banker.
Managing Credit
Credit Rating
Establishing a credit rating is another important step in financial planning. The major credit bureaus keep credit ratings on all Americans, using their Social Security numbers. This lets potential lenders quickly assess borrowers. The lender can decide if a person is a good lending risk by looking at how much he or she has borrowed before, and if the loan was paid off in a timely manner. With no credit history (i.e., someone has never borrowed money), the banker will probably deny the application for a loan. The problem is that the creditor simply does not know whether someone is a good credit risk. A credit rating can be established by acquiring a credit card and paying it off according to terms. A credit rating should also be nurtured by paying off all debts and credit cards on time. A bad credit history will haunt a person for many years. It can lead to denial of a practice, home, or other loan, denial of insurance or employment, or even the right to cash a check or open a bank or credit card account.
The lending companies commonly report a credit rating using a Fair, Isaac and Company (FICO) score, which was named for the company that developed the scoring system. (Some agencies use other, similar systems.) Scores range from 300 to 900, with most people in the 600 to 700 range. All credit scores begin at zero and a credit history is built up; it is not started at the top and subtracted down by poor credit choices. So without borrowing money or having any credit (e.g., credit card), a person does not have a credit history and is considered a poor credit risk in the eyes of the rating systems.
The higher the score a person has, the better his or her credit worthiness. A higher credit score means that it will be easier to get loans (and other forms of credit, such as credit cards), and the loans that are acquired will be at lower interest rates. Depending on the type of loan, lenders use the credit score, along with the full credit report, differently. They place more (or less) emphasis on particular components of the score, depending on their product. If a person is borrowing $200,000 for a house, the lender would obviously look at the person’s score and history differently then if it was a loan for a $10,000 limit credit card.
Five major factors go into the calculation of a FICO score. They are:
Table 1.2 Free Credit Reports
Company
URL
Annual Credit Report
www.annualcreditreport.com
My Fico
www.myfico.com
Experian Inc.
http://www.experian.com
Equifax Inc.
http://www.equifax.com
Trans Union Corp.
http://www.tuc.com
A person should check his or her credit history and rating on a regular (annual) basis. Each person can get one free from each of the major national credit bureaus. If a dentist is planning to buy a house, borrow for a practice, or make another major purchase, then he or she should check his or her history about 3 months in advance. If errors are found, this gives the dentist enough time to get them changed. Table 1.2 gives the Web sites of the major credit houses: Experian, Equifax, and Trans Union. They and the other sites also have a wealth of information on managing credit and debt. Depending on the study cited, 1 to 50 percent of consumer credit reports contain errors. Some may be simple and inconsequential (such as a misspelling). Others may affect a credit rating for years to come. Fraudulent activity, such as identity theft, may even be discovered. Inaccuracies can be irksome to correct. The Fair Credit Reporting Act requires bureaus to respond promptly. However, the bureaus will not necessarily change a history just because a person says so. (If they did, everyone would call and demand a clean credit history!) A person is essentially guilty until proven innocent. Proof and involving the creditor who sent in the inaccurate report are generally needed to clear a record.
Managing Credit Cards
Credit cards get more people into financial trouble than any other cause. Credit cards make it easy to buy things. When an item is purchased with a credit card, the issuing bank pays the merchant, essentially floating the credit card holder a loan for the amount of the item. The credit card holder can then “borrow” up to the limit on the credit card. (With debit cards, only the money present in an account can be used.) The credit card hold then does not have to pay the bank for the item until the end of the month. That works well if the credit card balance is paid off at the end of each month. However, if it is not paid off, the bank charges the credit card holder interest, generally about 1 1/2 percent on the unpaid balance. That 1 1/2 percent per month, when compounded, equals nearly 20 percent per year. So paying off a credit card balance is a wise idea. The problem is that it is easy to let the balances grow to overwhelming levels, and banks are too eager to let a person amass large credit card balances. The value of a credit card is being able to borrow money for purchases (up to the card limit) and the convenience of this form of payment. The obvious down side comes if balances are not paid off regularly or if a person borrows more than he or she can afford to pay off.
There are several common-sense solutions to the credit card problem, other than using credit cards carefully and paying them off monthly. If a person has a credit card problem, use a debit card (instead of a credit card) because only the amount of money in the account can be spent. The bank will deny the merchant’s authorization if there is not enough money in the account to cover the cost of a purchase. This way, a person can not overspend. Dentists should have one personal and one professional credit card. All professional purchases go on the professional card, and personal purchases on the personal card. This keeps him or her more aware of the total credit card balance and keeps the dentist from running up the total balance by having balances on several cards. (It is a good idea to have a “back-up” credit card that has no annual fee. If a primary card is lost, stolen, or for any other reason becomes inactive, the back-up card can be used.)
If using a credit card, the dentist should shop around for the best deal for the monetary circumstance. “Gold” cards have higher credit limits and more generous terms than regular cards. The catch is that a person needs to qualify by having a good credit history and income. “Platinum” cards have even higher limits and requirements. Both cards have more advantages if a person is careful and has more rope to hang a person financially if not careful. Many banks issue cards with the name of a sponsoring organization (such as an alumni association) on the card. A small amount of money goes to the sponsoring organization (instead of to the card holder as higher rebates). Dentists should avoid these cards; they are expensive. Most cards have an annual fee; this should be as low as possible. (Dentists should negotiate with a credit card issuer to eliminate the annual fee.) A low percentage interest charge is also ideal; however, there is usually a trade-off between the interest and the annual fee. Higher annual fees lead to lower interest rates. (The converse is true also.) If balances are paid off regularly, the lower annual fee is better. Interest rates should not affect this type of consumer. If balances are not paid off in full, the lower interest rates are better. The cardholder should check to see when the payment due date is on a credit balance. Some cards require payment within 10 days. Others give the credit card holder until the end of the month for payment. Finding a card that gives rebates, as either cash rebates or travel points (or miles), is also a good idea.
Family Budget
A budget is a statement of how money has been spent in the past and an estimate of future income and expenses. As such, budgets become a target for day-to-day financial living. Budgets are most frequently used when a family is having a financial problem. The family then helps set targets for spending and lets everyone know why spending is limited in one area or another. A budget can help coordinate savings and improve living standards by identifying areas of waste.
Although each budget is unique for the person, some general targets for expenditure categories can be developed. No more than 30 percent of take-home pay should be spent for housing costs, 20 percent for food (groceries and eating out), and 15 percent for other miscellaneous expenses (Table 1.3). Debt payments (including student loan payments) should total no more than 30 percent of take-home pay. The budget should also detail paying a minimum of 5 to 10 percent of take-home pay into savings (personal and retirement).
Managing Student Loans
Most new dental graduates carry a significant amount of student loan debt. This becomes a problem that affects every other area of personal financial planning. Unfortunately, there is no magic quick fix out of student debt. The rules on student loans change frequently, so no detailed advice is given here; however, the same rules apply to this as to other loans. Dentists should practice good debt management habits and be persistent to pay off the loan.
There are two general types (at present) of student loans, subsidized and unsubsidized. In subsidized loans, the government pays the interest while a person is in school, training, or certain other situations. In unsubsidized loans, the interest begins to accumulate when the loan is secured. The interest rate is lower on subsidized loans as well. Given a choice, dentists should take the subsidized loans first and defer payment until the interest begins.
Table 1.3 A Sample Budget
Category
Percentage
Housing
30%
Food
20%
Debt Payments
20–30%
Savings
5–10%
Miscellaneous or insurance
15%
Dentists should consolidate student loans, both subsidized and unsubsidized loans. Consolidation does not work like other loan consolidations because the resulting interest rate is between the two. Given a choice, the dentist should consider paying off the high-interest loan faster rather than consolidating.
A career plan may lead to a professional opportunity that includes a given amount of loan repayment per year as part of the benefit package. Depending on debt and income levels, a person may qualify for a reduced payment scenario. Finally, student loan interest is deductible, up to an annual amount of interest. This deduction is limited for high-income earners. After a profitable practice is established, additional working capital to pay off student loan debt may be borrowed. Check the interest rates and tax deductibility of the interest before taking the loan.
Personal bankruptcy does not relieve a person of his or her student loan obligation. The only way to get out of student debt is to die. However, some unsubsidized loans become part of an estate’s debt, so that even in death a person is not freed of the obligation. Dental students should check with loan services to be sure that there is a death benefit or life insurance rider that pays the loan obligation. Dentists should check the price of this insurance because it may be less expensive to buy additional term life insurance in the marketplace, rather than insuring through a loan servicing company.
Family Planning: The Cost of a Family
For many people, becoming a parent is the greatest challenge in their adult lives. These changing responsibilities, obligations, and commitments last a lifetime–once a parent, always a parent. No other life event causes people to become as thoughtful, careful, and focused on the future as having the moral, physical, and financial responsibility of raising children.
Children involve both additional direct costs and the indirect costs of increasing family size. Box 1.1 details some of these costs. No matter what people say (“Children are cheap. They hardly eat a thing!”), the simple fact is that having a family is expensive. For the dentist, these costs often come at a time when the family budget is already thin because of the need to pay off student debt and initiate a dental practice. If one parent quits work to care for children, family income gets squeezed even tighter. Some estimates place the cost of raising a child to the age of 18 at nearly $400,000. This does not include the cost of college, professional, or graduate schooling. Having children is an expensive proposition indeed.
What should be done to financially prepare for children? The dentist should do the same type of financial planning as was done before children, have a budget and stick to it. The dentist should have a properly funded emergency fund, more so now than before. He or she should expand savings and save for purchases, educational needs, and children’s activities. The family should look closely at the impacts of having one or two working parents. One income means less money to spend and invest, but it also means that one parent will be available to care for children. Day care is expensive! Family finances will be different (costs such as day-care and work expenses), and the family dynamic will be different. The dentist should balance the trade-off in finances with the nonmaterial issues of family life.
Buying a Car
One of the first purchases a new dental graduate often makes is an automobile. However, he or she should consider driving the current car for another year; repair bills are generally less than monthly payments on a new car. If a dentist must have a new car, several strategies to maximize the dollar value of this purchase can be used. The dentist should pay cash and not finance the cost of the car. He or she should use an emergency fund to buy a new car and then replenish the emergency fund. If the automobile purchase must be financed, the dentist should not use dealer financing (unless they are running a really low interest rate promotion) because better rates can be gotten through a credit bureau or bank. The dentist should not buy a new car but buy a recent year, used car; the savings are substantial. Table 1.4 shows the amount that the price of a new automobile depreciates each year. Buying a 2-year-old car for about half the price of a comparable new car is more financially responsible, and it is often still under manufacturer’s warranty. The market is full of cars that private individuals, corporations, or leasing companies have leased. Many still have some of their initial warranty remaining; the dentist should look for one of these cars and save. The National Association of Automobile Dealers (NADA) puts out a booklet each month that gives average prices for all makes and models of used cars. The dentist should get one of these books at a local bookstore and check the prices of cars. By selling, rather than trading in an old car, he or she can get a better price. (Trading it in is more convenient but how much is that convenience worth.) The dealer may offer a high price for the trade in but not discount the price of a new car as much. A buyer should not give car keys to a salesperson. (“Give me your keys and I’ll have Fred check the car out to see what we can give you on trade in.”) The buyer is then a captive and can not leave; the salesperson is in control. Instead, the buyer should walk with the salesperson to view the old car but keep the keys.
Table 1.4 Car Depreciation by Year
Year
Depreciation
1
28%
2
20%
3
16%
4
8%
5
6%
6
5%
7
4%
8
3%
9
2%
10
1%
Automobile Insurance
Dentists can save substantially by managing automobile insurance. (See the chapter on personal insurances.) They should always shop for automobile insurance. This is really a commodity product. Insurance from one company is the same as insurance from another. They should buy comparable policies based on price and increase deductibles as much as possible. A $500 deductible policy will pay for itself compared to a $100 policy in about 3 years. (This is an example of the value of an emergency fund.) The drive should drop comprehensive and collision insurance if the value of the car is less than $3,000. Comprehensive and collision pay to fix a person’s own car. If a $3,000 car is wreck, the emergency fund should be used to buy a new one. (A liability policy should be kept. This covers the other person’s losses if the wreck is not his or her fault.) The driver should drop emergency road service and rental from the policy. These can be paid for out of pocket or by joining the auto club (AAA). AAA offers free road service and free maps. Buyers should shop for special discounts. Most insurers lower premiums if for good students, an installed alarm system, or if the VIN number is etched on the glass. The buyer should check to see what special offers a company has before insuring an automobile with them. Further, the buyer should integrate an automobile policy with an umbrella liability policy to avoid duplicate insurance or any gaps in insurance.
How to Improve Spending Habits
Whatever the present financial situation, there are only two things that can be done to improve it: earn more or spend less. Assuming a person has maximized earning, several steps can be taken to improve spending habits. First, a budget must be developed. Spending patterns should be examined, looking for areas of wasteful spending or areas that can easily be cut. The plan for financial improvement should be written down; it is too easy to come up with a vague plan. Until and unless the plan is written down on paper, it does not mean anything. Credit cards should not be used. Many people get into serious financial trouble using credit cards. Checks or a debit card should be used instead. Shopping trips should be separated from spending trips. Impulse buying leads to bad financial decisions. Expensive purchase items should be compared on the Internet or a shopping-only (not purchasing) trip taken. No purchases should be made on an initial trip. When a decision has been made, then the buyer should go on a buying trip to purchase the item; a better buying decision will be made in this way. Smoking and other costly habits should be quit. Saving a dollar a day and adding all pocket change will quickly accumulate savings.
Preventing Debt Problems
With debt management, prevention is obviously the best cure. Table 1.5 estimates what payments will be for various loans. This is important to ensure that payments fit the budget.
Keep a Reasonable Debt-to-Income Ratio
It sounds simple, but dentists should not borrow too much money. They should keep an accurate eye on the budget. Most lenders set a limit of 35 percent of total pretax income for the total debt load. This includes home mortgage, automobile loans, credit card, and other types of personal debt payment. In fact, a dentist may not qualify for certain types of loans if the debt payment-to-income ratio is too high.
Before Borrowing, Have a Specific Plan to Repay Debt
Dentists should work debt payments into the personal budget. This ensures that they will have the cash flow necessary to pay off the loan. If payments do not fit into the budget, something must be given up, either a present expense item or the anticipated purchase.
Table 1.5 Estimating Loan PaymentsMultiply the loan principal (in thousands of dollars) times the factor to determine the monthly payment amount.
Avoid Impulse Buying: Plan and Save for Purchases
Many consumers get into debt problems from their credit cards. They look at a bill at the end of a couple of months and realize that they have charged so many impulse purchases that they have reached their credit limit and now must aggressively pay down this expensive debt.
Pay Full Balances on Credit Cards Each Month
Credit card debt is one of the most expensive types of debt incurred. Most cards have a “grace period” built into payment schedules. The balance should be paid off in full each payment period so that interest payments on credit card accounts are not accumulated. If they are paid off, the borrower is borrowing the bank’s money free. That is a good deal. Paying 24 percent interest per year is a bad deal.
Getting Out of Debt
If prevention has not worked, and a person has too much debt, several steps to reduce the debt load should be taken.
Understand There Are No Quick Fixes
A person can get into debt quickly, but it takes time to pay off the debt. The first step is to begin now. The longer a person waits, the more the interest accumulates. The person should admit having a financial problem and begin working to solve the problem. If overwhelmed, he or she should seek professional financial help. A banker, accountant, or a certified financial planner can help a person solve financial problems.
Be Ready for Lifestyle Changes
Getting out of a large amount of debt will be painful. A significant amount of money will need to be paid to lenders for an extended time. Unless income increases significantly, a person can not maintain lifestyle and pay off debt. Lifestyle may need to be reduced. A written plan should be made because until it is written on paper, it is not real. The borrower should also take on no new debt. Credit card accounts should be closed and a written accounting of all income and expenses should be maintained. A personal financial analysis should be done and this information used to budget for spending. All extra income should be put toward paying off debt.
Work with Creditors
A person should not hide from creditors. Eventually, they will find him or her. Creditors want to be repaid. They will work with a person to develop a payment plan that can be met. However, creditors must be kept informed. They may help by offering slower repayment plans or other methods that help a person get out of debt, which helps the creditor get paid the money owed.
Consolidate Debt When Necessary
Debt consolidation is when a person has several high-interest loans. It may be so difficult to make these payments that the interest accumulates faster than it can be paid off. If a person can borrow money at 10 percent to pay off an 18 percent credit card, he or she is usually better off. (Origination fees and other requirements of the consolidation loan need to be researched.) In this way, the consumer can consolidate these expensive loans and, hopefully, pay off the debt more easily. Note that this technique is primarily for people who are in debt trouble. Consolidation is not the simple panacea that some lenders make it out to be. A person now has one lender who may not be sympathetic to problems.
Use Tax-Deductible Debt, If Possible
There are times that it is to a person’s advantage to use home equity loans or business loans (working capital) to pay off debt. The interest rates (effective after-tax rates) should be compared to decide which is best.
Accelerate Debt Payments, If Possible
As a rule, the faster debt is paid off, the less interest payments are made. Therefore, on the face of it, it is always a good thing to pay off debt as quickly as possible. However, there are several times when this rule of thumb may not be valid. A person may need to stretch a debt payment out to have adequate cash flow for other budget expenses. Or a person may have an incredibly low interest rate or generous terms on loans that make them attractive to keep.
A small additional payment makes a huge difference in the total loan payout. Box 1.2 shows what happens to the number of payments when the amount paid each month is increased. By simply adding $50 per month to a 10-year loan, it halves the number of payments made. (The principal paid remains the same, but it is paid more quickly and paid with less interest.) Greater savings are seen with larger monthly additions. Most loans (especially mortgages) do not have any prepayment penalties associated with paying all or some principal off early. So if cash flow will support it, a person can come out ahead financially by making an extra principal payment as often as possible.
Financial Planning Phases
There is a typical order of financial tasks for young professionals to consider. These will be different for different life situations. The dentist who is single in a lucrative practice will have different constraints than a married dentist supporting a family in a start-up situation. A person will enter the phases of financial planning more or less quickly and have different emphases within the each phase than another person.
Phase 1: Increasing Debt
The first phase typically is marked by high debt levels because the graduate purchases a practice and often a home. The dentist should keep borrowing and spending under control. An initial task is that the dentist has adequate insurance. Part of personal insurance planning is to set the appropriate deductible for the circumstance. As the emergency fund is built, the dentist should decrease deductibles and decrease the cost of personal insurances. He or she should build the practice or professional situation, increasing earnings by making the practice profitable through increasing production and decreasing costs. The dentist should be sure that family spending patterns do not increase faster than income and saving increase. He or she should start funding an individual retirement account as soon as able. This helps to build a savings habit or mentality, as opposed to a spending mentality.
