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Practice Administration

Young Doctors and Money: Part II - Savings

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Be sure to check here for Part I about Debt, which presents recommendations for managing student loans early in your career along with practice loans and mortgages. This post is going to focus on savings – starting with the importance of an emergency fund. In the last video, Dave Ramsay talked about having a $50,000 emergency fund. That’s more for a dentist in mid-career, not for young dentists – for whom $25,000 is more appropriate.


Emergency Funds 

You should keep your emergency savings in money market funds. I’ve talked to young dentists about this, and they often think that they need growth for their money. No, you don’t! This money has to be safe and, most importantly, needs to be liquid in case of an emergency such as injury or illness.


I can share two personal examples of this. One dentist had a stroke at age 55. He was out of commission and out of the office for 6 months, but he had an emergency fund of well over $100,000. After 6 months, he jumped back in, went on his way, and he retired a few years later, before the age of 60. He was not affected that much by this emergency.


Another younger dentist had an athletic accident in which he broke several bones in one of his legs. He was out for four months. Six YEARS later, he was still taking care of the debt caused by this injury, and he had no savings for that period of time; it really affected him financially. So you do need to have liquid emergency funds. Keep them in a money market account.


Retirement Savings 

When should you start saving for your retirement? How much should you save? Different people have different opinions on this. Brian Huffard of Huffard Financial writes for Dental Economics, and I really like what he offers on this topic. According to him, dentists should try to save 20% of their net income every year consistently. That’s really difficult to do, but if you do, you may be able to retire by age 55.


Fifteen percent is probably more practical. If you can do that, you’ll probably be able to retire by your early 60s. I went through a Monte Carlo softeware analysis a few months ago and came up with different scenarios for 20%, 10%, 15%, starting at different ages and coming up with different scenarios. Fifteen percent consistently saved from your early 30s will get you to retirement in many instances by your early 60s.




Beyond retirement savings, where should your money go? One book I’d recommend is The Little Book of Common Sense Investing by John Bogle. Bogle, founder of Vanguard Index Funds. His book covers passive investing in index funds allocated broadly, not just in large cap, ,small cap, or American stocks; he talks about international stocks, bonds, fixed income, everything. Buy the market; don’t just buy a few funds.


Passively invest. Do no ust active management.. Active managers rarely beat passive investors over the long term; that’s been proven over and over again.


Bogle’s book will give you the basics of investment, but where should you go for additional help? Do you go to a traditional stock broker or financial management company? In my experience, the fees never overcome what you might make compared to passive strategy. Passive strategies have performed best over the last 120 years.


Should you use stock brokers, bankers, insurance salesmen? Again, no, no, and never.


What about a certified financial planner? To be sure, a lot of them are really knowledgeable. They can set up a nice estate plan for you; they can work with you on insurance and investments. But if they’re actively managing your funds--- if they’re buying and selling and trying to tweak investments to “only follow the winners”---they’re not going to do as well as those that have index funds which are passively managed. If you’re using active strategies, you’re going to lose in the long run.


One thing worth mentioning on this subject before moving on is the fact that you can go to Vanguard, Fidelity, Schwab, or another discount brokerage and for very little money have a proper allocation planned for you..


Target Date Funds, of life cycle funds, offer an excellent way to invest with low fees and no work on your part.  Vanguard is my best recommendation, as they have the lowest fees.


Making Sense of Diversification 

Let’s take an example. The “Lost Decade” is a term that refers to the years between 2000 and 2010. If you invested a million dollars in the S&P 500 in 2000, by the end of 2010 you’d still have your million dollars, and nothing else. But the S&P 500 contains only the largest 500 companies in the United States. There are also small cap stocks, medium cap stocks, growth stocks, value stocks, international stocks, emerging country stocks, and then there are fixed income funds including municipal bonds, treasury bonds, corporate bonds, high-yield bonds, and other income-producing investments. Invest in the whole market, not just tiny segments.


So, while the S&P 500 saw zero growth between the years 2000 to 2010, people who had a diversified allocation of 50% index stock funds and 50% index bond funds saw a 4% to 6% gain per year over that decade.


If you started out with a million dollars, after those 10 years -- just by rebalancing and not adding any money -- you would have 1.6 to 1.7 million dollars in 2010. It was only the Lost Decade for those either tried to time the market by jumping in and out, or invested in only a small segment,  such as the S&P 500.


Many dentists have invested in gold in the last few years.  Gold is a high-risk investment, as is any commodity. Investing more than 5%  of your total portfolio in individual stocks or commodities increases your risk factor to a level most dentists do not tolerate with wise strategy.




Insurance is great for cars, your home, your life, disability, long-term care, your office, and health, Insurance companies generally do not offer good investments.  A big hype in the last few years has been the insurance salesman query, “Hey, would you be interested in an investment wherein you will never lose money, and you get the gains of the Market along with it?” The promise is that you will never lose money, and you’ll see a guaranteed rate of return every year. These are commonly Equity Index Annuities or a type of variable annuity.  The SEC has been investigating these policies and claims  for several years. Yes, you can lose money and your gains will be much lower than a corresponding index fund because  of all the fees attached to these investments. Salesmen rarely disclose what all the fees are, but they do know what their commissions are! So please, whenever an insurance company tells you about something that sounds fantastic, remember there are always going to be hidden influences and fees that you’re not aware of.


Free seminars with meals attached are another big no-no. This is normally to sell insurance products. If there’s a free seminar that doesn’t have a meal attached, it may be fine.


You may also find day- trading threads on the Internet posted by those who own only 20 stocks, run options, and try to  beat the market via timing strategies. Over the long run, you can’t beat the market.


Day trading is a loser’s game. Even those who day-trade full-time rarely make any money.  Don’t believe the traders’ hype on the airwaves.



A big pet peeve of mine is vacation timeshares. Tom Stanley of The Millionaire Next Door series wrote a book recently, Stop Acting Rich and Start Acting Like a Real Millionaire, where he states that  deca-millionaires, those who have more than 10 million dollars in savings (not including their home), rarely have a second home or a timeshare. The reason: it’s too much work, a waste of time, and there is no profit. They’d rather go visit a website, find a similar place, pay less than the maintenance fee for your timeshare, and not be tied into anything.


This is the end of Part II of this post about dentistry and savings. Click Here to View the Video.