Top Wealth Tips for Dentists
Christopher Bowlby - Apr 26, 2023
We know that as a dentist, your time is often divided between running and growing your dental practice while balancing your personal life and finances.
Top Wealth Tips for Dentists
We know that as a dentist, your time is often divided between running and growing your dental practice while balancing your personal life and finances. As you progress through your career, there are many considerations between your personal and professional finances that can have a significant impact on you and your family’s wealth. Our team specializes in working with dentists and we have complied some of our top considerations for each stage of your career.
- Disability Insurance: The greatest investment you have made in your life has been your additional training and education to become a dental professional. Your investment in your skills and physical capital is extremely important as it has the ability to provide you a great standard of living for you and your family throughout your career. Unfortunately, as a dentist, you are responsible for your own insurance coverage, and it is extremely important to have disability insurance in place to cover you and your family if anything happens. It is important to continually review your disability coverage because as your life changes and spending increases, the more you will need to protect.
- Paying off Debt: The average graduating dental student finishes their schooling with over $200,000 in debt. When you first become an associate dentist, one of the top personal financial considerations is to start paying down your debt and to create a strategy to do so. Debt is one financial tool that can be extremely powerful, but if mishandled it can make you feel like you’re on a never-ending treadmill. As interest rates have risen significantly in the last few years, it is more important than ever to lower your debt to allow you have more opportunities both personally and professionally.
- Creating a Strong Foundation: When starting a career as a dentist, it is important to create a strong administrative foundation and support team. This includes having an accountant and lawyer in addition to a financial professional to help you manage all aspects of your personal and professional life so you can focus on your career. By having the right team of advisors who have experience working with dentists and their families, they are able to help proactively to save you time and energy.
- When to Incorporate: One of the big benefits as a dentist in Canada is the ability to incorporate your dental practice into a Dental Professional Corporation. Typically, the best time to incorporate is once have begun to pay down your debt and are starting to build up savings. A Dental Professional Corporation is a great investment vehicle and can be combined with registered savings accounts such as an RRSP to help you meet your financial goals.
- Creating or Buying a Dental Practice: The natural step for many associate dentists after paying off their debt is to consider creating your own practice. This is a big step in your career as you transition from being a practicing dentist to a full-time business owner who is responsible for everything from payroll and HR to making financial decisions on how to structure your practice. In the present market, there are many pros and cons for buying or buying into an existing practice versus creating your own. BMO Commercial Banking in combination with your trusted team of advisors can create a plan for you to reach your goal of being a practice owner.
- Cash Flow Management: Cash flow is the most important consideration in both your personal and professional financial life. Cash flow is essential for your dental practice to succeed and there are many ways that you can improve your cash flow, such as non-assignment of benefits, building a cash flow forecast and regularly scrutinizing expenses, having access to capital either through savings or a line of credit and staying on top of accounts receivable and payable. It is important to try and automate as many of your payments as possible.
- Leasing or buying: When you are looking to build your practice, there are many considerations that go into whether you purchase or lease, both your physical space and your equipment. This choice can have significant impacts on both your cash flow and your opportunities in the future if you decide to sell your practice. Leasing can be quite beneficial by allowing you to acquire equipment on a lower monthly cost and maintain your capital, but there are many financial conditions in leases to be aware of. The same goes for your real estate, there are many benefits to leasing, especially for a younger practice owner with lower cash flows. It is important to discuss with both your commercial banker and accountant when looking to either purchase or lease new equipment or real estate to determine which is the best fit for you.
- Review Wills, POAs, and Insurance as Life and Career Changes: As your career and life progress, it is important to periodically review your legal and insurance documents. Typically, when we talk to new clients, it has been a few years since they have reviewed these documents and many life changes have taken place. As your practice grows, you will want to review your disability insurance and whether it’s enough to manage your cash flow if something were to happen. You will also want to to review whether you need to increase your life insurance, and whether your POAs and Wills are up to date. Typically we recommend clients review these documents annually and/or when they have a significant life change.
- Create a Savings Strategy: When working towards any goal, it is important to have a plan. This is true for financial goals as well. As a wealth advisor, our team will work with your and your family to create a multi-faceted financial plan that incorporates working towards retirement and everything along the way. By creating an actionable plan, you can construct a savings strategy that uses your registered savings accounts and your corporation to achieve your goals. It is important to automate your savings as well, if possible, to make sure you pay yourself first.
- Manage Your Growing Personal Life (Family, Property, etc.): As you get older and your family grows, so does the complexity of your finances. Between annual RESP contributions for children’s university savings, creating an estate strategy for things like passing on a family home or cottage to future generations, and making sure you are on track for retirement, there are a lot of things that can be overlooked on top of running a successful dental practice. Our team’s role as wealth advisors is to be a primary contact to ensure you remain on track to reach your goals by working with you and your trusted advisors.
Preparing for Retirement
- Have an Exit Plan and Start Planning Early: When looking to sell a practice, it is important to build your transition team early so that you can figure out what improvements are necessary to maximize your practice valuation, purify your corporation and understand your personal finances. By working with a wealth professional, you are able to have a holistic financial plan that incorporates both the sale of your practice and the savings you have built up over your career. Our team is one of three teams in Canada with specialized training in financial transitions and can help you and your family prepare for the sale of your practice and your transition into retirement.
- Purify your Professional Corporation: One potentially large tax mistake is not purifying your Dental Professional Corporation as you enter towards the sale of your dental practice. With a Dental Professional Corporation, you are eligible to use the small business capital gains exemption of $971,190 (for 2023) on a sale of the professional dental practice. To qualify you must pass the Small Business Corporation Test, Holding Period Test and Asset Use Test for 24 months prior to the sale. To learn more, click here.
- Maximize the Valuation of your Dental Practice: There are many ways to increase the value of your practice, and this should be a consideration when you are looking to sell you practice and increase your sale valuation. These include renewing your lease agreement, make sensible upgrades to equipment, technology, and facilities, and reviewing and updating your pricing strategy to ensure it is in line with the rest of the market. A dental practice consultant can help streamline your practice, make it more efficient and be more attractive to potential buyers to ultimately have a higher sale valuation.
- Sale and Life after Practice: When you are looking to sell your practice, you are entering a period of transition for you and your family. For many dentists, your practice can be a main part of your identity. With our team’s expertise in financial transitions, we are able to help you plan for your life in retirement and how to manage the proceeds from selling your practice.
Dentists have an incredible opportunity to build and grow a practice, but the more success you have, the more complex your finances can be. It’s no small feat running a business, and our team has unique training to understand the considerations and support you will need throughout every step of your career.