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News Bulletin : ADA News Bulletin May 2011
34 MAY 2011 Compiled by Stuart Wemyss Most people think that they are 'above average' drivers and have no room for improvement. It's always the other drivers on the road that are bad, don't know what they are doing, can't drive and so on. My wife knows this better than most because I'm a highly talented driver -- just don't get in my way! To some degree, the same excessively optimistic sense of one's abilities exists when it comes to thinking about managing money -- people think they can do just as well flying solo. Recently, I conducted an anonymous survey of dentist's attitudes towards investing and seeking advice. This resulted in some interesting observations and is the topic of this article -- I'll keep my commentary as impartial as possible. The survey asked respondents nine questions about their fears and concerns with building wealth, attitudes to seeking advice, motivations for achieving financial freedom and so on. The sample size was relatively small with only 42 completed responses received. However, statistically, it's a large enough sample size to provide reliable information. The response to each question will be discussed below: When it comes to money, what are your top three fears? Most respondents listed not having enough money to enjoy a good lifestyle in retirement as their number one fear. The other two common fears included losing money (capital) on poor quality investment and paying too much tax. One of the side effects of being a successful dentist is that you get used to a healthy level of cash flow. This affords you a relatively high standard of living and most dentists would like to maintain this high standard of living into retirement. A (married / de facto) couple will probably need in the range of $100,000 to $120,000 per year to live. Assuming you retire at age 55 and live to say age 90, you'll need more than $1.2 million of unencumbered investments in today's dollars. This assumes a tax-free environment. However, I'd seriously question if a superannuation pension will remain tax-free in the future (so you'll almost certainly need more than $1.2 million). If not having enough money for retirement is a dentist's number one concern then how come very few dentists have a long-term strategy which plans out exactly how they will fund retirement? American writer, Elbert Hubbard said "A goal without a plan is just a dream". Stop dreaming and start planning. When it comes to working out what to do with your money (e.g., how much to spend, repay debt, invest, etc.), what are your three frustrations or concerns? While there were a variety of responses, the most common frustration with working out what to do with cash flow is knowing which option will be best for the long-term. Should you be saving cash, repaying debt, investing or doing something completely different? Cash flow management will always be the cornerstone of successful wealth management. If you don't keep tabs on where you are spending your money it will always seem to disappear. Budgeting is not about counting every dollar or about scrimping and saving. It is simply monitoring your expenditure and knowing where your cash flow is going. There is no point investing until you have good cash flow management. Falsely, this appears to be less of an issue for high earning dentists who can afford a good lifestyle and still allocate some surplus income to investments. Good cash flow management abilities are more important than a high income when building wealth -- I cannot stress the importance of this enough. In fact, cash flow management is more important when you have a high income as you can't always identify wastage and bad habits. If I could solve one money related problem, what would it be? Most respondents indicated the main problem they wanted solved was how to eliminate debt. Secondly, it was to show them how they will fund retirement. Arguably, these two responses are the same because a retirement plan should not only address how to fund living expenses in retirement but also how to eliminate or reduce debt. Normally, it is important to have more conservative levels of debt in retirement because you need to carefully manage interest rate exposure. In some situations, debt will become immaterial over time as investment values increase and the nominal value of debt remains the same (in real terms, debt actually reduces due to the effect of inflation). For example, if you purchase an investment property today for $500,000 and borrow $525,000 (i.e., total cost), in 16 years, the value of that property might be say $1.6 million (at an 8% growth rate). The loan will still be $525,000 or 33% of the property's value which is a conservative gearing ratio. If you don't have time until retirement for your assets to appreciate in value sufficiently, you need to have a strategy to reduce your debt levels. business perspectives DO YOU HAVE AN attitude problem?
ADA News Bulletin April 2011
ADA News Bulletin June 2011