Young Doctors’ 10 Most Common Financial Mistakes And How To Avoid Them (Part Two)
By: Wes Lyon, CPA, CFP®*
Last month, we discussed 5 major financial mistakes young doctors routinely make that cost them thousands. Below, we cover the remaining 5 mistakes that can derail your finances and how to avoid them.
- Paying Excessive Taxes – Many young doctors are overpaying their taxes by $10,000-$20,000 or more a year! One reason is that they aren’t taking full advantage of strategies to convert otherwise personal expenses into legitimate business expenses. We met with several young doctors last year who were spending more than $40,000 annually on personal vacations. Through using the strategies outlined in our July 2017 article “How To Pay And Categorize Travel, Meal, And Entertainment Expenses To Maximize Your Tax Savings,” these doctors could convert almost all travel from personal to business and save over $16,000 annually in taxes, assuming a 40% marginal federal and state income tax rate.
- Being “House Poor” – One of the biggest mistakes young doctors make is crowding out their savings capacity by “overbuying” a new home. The high mortgage payments, property taxes, insurance, and repairs and maintenance expenses prevent them from paying down their student loans and saving for retirement. This financial pressure leads to increased stress and insufficient saving to retire on time.
To avoid this financial disaster, spend no more than twice your annual income on your home purchase (e.g., with a $150,000 salary, you can afford a $300,000 home). And finance 80% of the purchase price using a 15-year mortgage in order to secure the lowest interest rates.
- One House/One Spouse – Our number one secret to a successful financial life is having “one house and one spouse.” After getting ownership of their first home under their belt, some ill- advised young doctors can’t wait to buy a second. You’re much better off avoiding the extra costs of second home ownership (averaging $3,000-$4,000 a month) and simply renting instead. This avoids being married to a single vacation destination, and keeps your stress level down.
We’ve seen alimony and child support payments topping $300,000 annually in some cases when marriages crumble! When we perform an autopsy on the failed marriage, more often than not, money problems were the underlying cause.
So make sure you have a budget that both spouses agree on, and hold each other accountable to it. This increases your odds of having a successful marriage, as well as reaching your financial goals. Sometimes, we recommend that couples have an “other” allowance each month for a specified amount that fits within their budget. This way, neither spouse feels guilty about spending that amount, while they can still hold each other accountable to the overall budget. See our February 2017 article “Are You Cheating On Your Spouse?” for additional ideas on how to successfully budget together.
- Not Taking Advantage of HSAs – Want to know the fastest way to become a millionaire? Make the maximum tax-deductible contribution ($3,500 if single / $7,000 if married in 2019) to a Health Savings Account (HSA) each year, and invest the funds. Assuming an 8% return, a 30 year old married doctor can accumulate $1,302,715 by age 65. It’s that simple, but over half of young doctors aren’t taking advantage!
- Trying to Be a Financial Expert – Many young doctors believe they can be a financial expert as well as a successful practitioner. While many doctors do a great job with the financial information they know, it’s what they don’t know that ends up costing them big time! That’s why the most common feedback we hear from clients after years of making mistakes is, “I wish I would’ve come here 10 years ago for help.”
Many of the mistakes listed above cause doctors to work an extra 5-10 years or more to reach their goals. Young doctors need a customized tax and business plan to reach their financial goals as early as possible, while slashing their taxes. Then work with a dental-specific CPA to ensure all these recommended tax deductions are claimed on your returns. By getting on the right track early, you can stay ahead of the pack!
* Wes Lyon is a CPA and CFP® specializing in customized tax and business planning for young doctors. For more information on his services, call 877.306.9780.
Wesley W. Lyon, II
Wes is a tax and business planning advisor for John K. McGill & Company, specializing in helping dentists and specialists nationwide. Wes is a graduate of Virginia Tech and holds degrees in both accounting and finance. He has obtained his Certified Public Accountant Certificate as well as his Certified Financial Planner™ certificate. Prior to joining John K. McGill & Company, Mr. Lyon worked for a global asset management firm in Charlotte. Before relocating to Charlotte, he served as a financial planner and business advisor to high net-worth individuals in the Washington,
D.C. metro area. Mr. Lyon began his career in public accounting specializing in tax and audit for non-profits.