Top 10 Secrets Of Financial Success
February 2018Personal Finances General/Other
We’re often asked by our doctor-clients for financial advice they can provide to their children and/or those enrolled in dental school or specialty programs. Based upon multiple surveys of millionaires, as well as our own experience, we’ve compiled the following list of powerful wealth-building strategies designed to assure financial success.
- Choose the right occupation – 80% of millionaires are first-generation rich, and not because they inherited it. Rather, they achieved wealth through discipline, sacrifice, hard work, and good saving and investment habits. Few doctors ever achieve financial freedom if they are “working for the man” (as a corporate employee). Rather, owning your own business or practice holds many business and tax advantages. It provides an opportunity for increased income through building a practice, as well as an asset to sell to help finance retirement. Practice ownership also provides significant tax advantages such as converting personal expenses into legitimate business tax deductions and the ability to significantly increase retirement savings on a tax- deductible basis.
- Spend less than you make – You can’t spend your way to financial independence, although some doctors (and even more spouses) have almost died trying. Millionaires recognize that spending more money doesn’t bring happiness. As a result, they live well below their means in terms of spending on homes, cars, vacations, clothes, etc. This allows them to establish a simple, but highly effective, financial budgeting program. They routinely save 15-20% off the top, give away 10%, and live off the rest. As their income grows, their savings increases, they give away more, and their personal spending also rises while still maintaining their gameplan for financial independence.
- Avoid excessive debt – Millionaires recognize the difference between “good debt” and “bad debt,” and plan their finances accordingly. Debt that allows you to increase your income, such as practice, investment, and student loan debt is “good debt” as long as the returns exceed the interest rate paid. Personal debt to create high lifestyle (home and auto) should be limited, while high interest rate credit card debt should be avoided altogether.
- Start saving early – Three doctors agreed to save the same amount ($2,500 a month) and each earned the same investment return (6%). Larry starts at age 30, even though that means he can’t pay off his student loans early or buy a McMansion (larger home). Curly delays his savings program for 10 years until age 40, so that he has a chance to pay off his student loans first. Moe delays savings until he reaches age 50, since he wants to pay off both his student loans and home mortgage first. At age 65, each doctor has paid off his home mortgage and student loan debt and has the following investment balances:
Larry – $3,579,585
Curly – $1,741,147
Moe – $730,682
Even though each saved the same amount each month and generated the same investment return, Larry accumulated $2,848,903 more than Moe by age 65! That’s the magic of compound interest, dubbed the “8th Wonder of the World” by Albert Einstein. The best time to start your savings program is yesterday. The second best time is TODAY!
- Automate your savings – A client well on his way to achieving financial independence in only five years once confided that the best advice I ever gave him was to set up an automatic saving and investing plan. That’s because it made savings happen, as he observed that “if I can’t see the money, then I can’t spend the money.” Psychologically, as doctors see their savings piling up, it motivates them to increase their automatic draft amount in order to save even more. Investing the same amount in the market each month also improves investment returns through dollar cost averaging. Finally, those who save and invest automatically each month are less inclined to make emotional decisions, such as selling out at the bottom of a market correction, which has proven disastrous for many doctors.
- Invest in themselves – Millionaires typically spend at least 30 minutes a day reading for education, career, or self-improvement. While they’re on the road to financial success, they realize there’s still much that they don’t know and are eager to learn for continued improvement.
- Spend time, energy, and money on planning – Most millionaires are dreamers, setting both short-term (1-5 year) and long-term (6-10 year) goals. Those who are successful financially know what they know, and more importantly, what they don’t know. That’s why they’re willing to pay their CPA, attorney, and other financial advisors for advice, since they consider this an excellent investment that will provide above-average returns.
- Take on some financial risk to develop multiple sources of income – Millionaires take calculated risks with their money to create multiple revenue streams, like investing in real estate or side businesses. Your top priority should be owning your own office, since it can provide a guaranteed return on investment, tax advantages, as well as another asset to sell to provide a financially secure retirement. Rental properties and other real estate should be the next priority, provided that these investments generate a positive cash flow. Investing in side businesses involves much greater risk, and should only be undertaken if you have experience and expertise in that business.
- Follow the “one house, one spouse” rule – Studies show that marriage can benefit your financial life, since married couples tend to be much wealthier than never married singles. But beware, while doctors spend years building their wealth, a divorce can prove wickedly costly, with doctors experiencing an immediate wealth drop averaging 77%. Also, doctors who own second and third homes experience a negative cash flow averaging $4,000 per property, significantly impairing their ability to save. Since doctors have limited time each year to enjoy a second or third home, it’s much more cost-effective to rent, rather than own, these properties.
- Experience the joy of giving – Why do Warren Buffett, T. Boone Pickens, and other multibillionaires continue working even though they have way more money than they, their children, or even grandchildren can ever spend? They’ve discovered that happiness is an “attitude of gratitude” for all that they’ve received, and that giving to others brings richness to life that money can’t buy. They found a purpose in life in helping others, giving both a large percentage of their current income, as well as 80-90% of their future estate, to charity to help those less fortunate.
The McGill Advisory content is provided for informational purposes only and does not constitute legal, accounting, or other professional advice.
Copyright © 2019 John K. McGill & Company, Inc.