The following post is a guest post from a regular reader of Debt Free DDS. He is a dentist who owns his own practice. We have no financial relationship. Enjoy.
I always look forward to the first week of January. I like the beginning of the year because it’s a chance to analyze my numbers from the prior year and set financial goals for the coming year. I’m a general dentist and I own my practice. Tracking my business numbers is just as important as tracking my personal numbers. The major business numbers that I track are new patients, gross production, net production, net collection, and overhead. As many of the readers are not practice owners, I won’t include a discussion on business numbers in this post. If you are a dentist who owns or would like to own your own practice, feel free to reach out and we can discuss business numbers.
So, why do I need to know my numbers? I want to be financially independent (FI). Recording my personal numbers helps me to analyze my progress toward FI. I track debt, total annual spending, total annual saving, savings rate, the growth of my investments, and practical net worth.
When tracking debt, it is important to monitor your total debt and the amount of each individual loan. We are all familiar with Dave Ramsey’s debt snowball. Whether you choose to pay off debt with the highest interest or lowest balance first, it’s important to record your progress at least annually.
At first, I found it frustrating to track my progression toward paying off my debt because I wasn’t paying it off very quickly. As my income grew and I began to educate myself on personal finance, I was encouraged to find that I was paying off my debt more and more rapidly. Remember that the snowball continues after you no longer have debt because the money that you were using to pay off your debt can now be saved and invested. I don’t track debt anymore. Can you guess why?
I track our annual spending down to the cent. Remember that personal spending should have no correlation with income. Make sure that you spend intentionally, meaning only spend on absolute needs and wants that truly improve your life.
While you have significant debt (like most dentists do early in their career), please consider minimizing the spending on wants. Don’t spend impulsively. If you feel like you want to purchase something that you don’t need, take a day to think about it. Will buying that want really improve your life and make you happier? If so, buy it. Often times you will be happy that you didn’t. Personal spending is especially important to track because your FI number is directly correlated to your annual spending.
Saving and Savings Rate
I also track our total annual savings. We set an annual savings goal and pay ourselves first. Savings rate is defined as the percentage of one’s income that he or she saves each year. What number should we use for our income? I choose to use total income. This is our income before any deductions or taxes. Savings is any money that you aren’t spending on living expenses. I include paying off debt and investing in my savings rate. If one is seeking to become financially independent at an early age, she or he has to have a high savings rate.
This can be hard with our society’s focus on consumerism, but most in the FI community enjoy saving because they know that they are buying their future financial freedom. Many financial advisors recommend a 15% savings rate. Jim Collins (the author of The Simple Path to Wealth) and Physician on Fire recommend a 50% savings rate. Most dentists accumulate significant debt related to their career. Despite this, with a 50% savings rate I believe that the vast majority of dentists can become financially independent before age 50.
Savings rate is probably the most important number if one is trying to reach FI. For example, it would be better to have a high savings rate and only invest in moderately performing investments than to have a low savings rate and invest in investments that perform better than the average portfolio. However, it is ideal to be smart about where we invest our money. The three most common areas in which to invest are stocks, bonds, and real estate. Which of these asset classes will perform best in the near and distant future? No one knows. That is why it is best to be highly diversified and keep costs low.
Buying low cost stock and bond index funds is the best move for average investors. Maximizing tax advantaged investment vehicles is also smart. Using a passive buy and hold strategy works well. Many dentists choose to actively invest in real estate and do well. I invest in real estate in three different ways. I would argue that these three ways are the most passive ways to invest in real estate. Can you guess how I invest in real estate?
Each year I track the growth of my investments. Compound interest truly is amazing. Unfortunately, I didn’t begin investing until I graduated from dental school. I also prioritized buying a dental practice, growing that practice, and paying off debt, so I didn’t begin investing aggressively until I was debt free. I still have a very high savings rate, so I am now directing the majority of that savings into my investments. This means that compound interest won’t have as much to do with me reaching my FI number as savings rate. I call this investing by brute force (I think White Coat Investor actually came up with this term).
Practical Net Worth
People define net worth differently. For me, I calculate my practical net worth. For example, all money (checking accounts, savings accounts, and any investments) count toward my net worth. I’m careful to be extremely conservative when I calculate my practice and office building (I own both outright) toward my net worth as I don’t know what I will eventually be able to sell them for someday (is it possible that I won’t be able to sell them at all?).
I do not count my house toward my net worth because we love where we live and are naïve enough to think that we will want to live in this house forever. If I knew that we would eventually move to a LCOL area or downsize, then maybe I could count a portion of my home value toward my net worth. If we eventually get a reverse mortgage then our home would absolutely be part of our net worth. When your practical net worth is equivalent to your FI number, you are financially independent.
Take Home Message
Why is it so important to track my numbers? Because I want to know when we reach the most important number, our FI number. FI is defined as the practical net worth at which you can maintain your lifestyle for the rest of your life without ever having to actively earn another dollar.
An FI number isn’t tracked, it’s chosen. How will I know when we are FI? We are currently living our ideal lifestyle. I calculate what that lifestyle costs us annually. I’ve added a cushion to our current annual spending to account for unknowns like increased healthcare costs. Once we have a certain multiple of that annual spending (we have chosen 33 times our annual spending), we will be FI. What will we do when we are FI? Anything we want.
What do you think? Are there important numbers that I missed? Please comment below or reach out to Debt Free DDS.
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