Helping New Dentists Realize Their Dreams, Three key pieces of advice for graduates

Bev wrote this article for the May issue of Ontario Dentist

It’s no surprise recent dental school graduates are eager to kiss their student budgets goodbye and reward themselves after years of intense study. With a much-improved cash flow, thanks to steady employment, they’re ready to spend their hard-earned money. But, graduates, beware. Some sound advice may be just what’s needed before reaping those well-deserved rewards.

Mary’s Story
Mary Brown recently graduated from the University of Toronto’s Faculty of Dentistry and has begun working in an established dental practice near her downtown Toronto condo, which she rents from her parents. After years of hard work and studying, she has a guaranteed salary — and many wants. To start with, she wants to buy a $30,000 Toyota Prius, and she also wants to take a trip to Mexico.

The balance that Mary needs to find is to enjoy the fruits of her chosen career now, while saving for future goals.

However, Mary owes her parents $25,000 in education-related expenses. Fortunately, for her, her parents are only charging her one percent interest on the student loans, and they expect “interest only” to be paid monthly, similar to bank practice. However, if Mary were to have borrowed the $25,000 from a bank, typically she would be charged prime (currently at 2.25 percent) plus the secured rate of one percent, or prime plus the unsecured rate of 4.99 percent. Should she wish to eliminate this student debt, Mary would need to make payments to her parents of principal and interest.

Mary also plans to buy the condo she rents from her parents. According to her realtor, the condo has a resale value of $225,000, which means she needs a minimum down payment of 20 percent of the resale value to qualify for a conventional mortgage. It’s to Mary’s advantage to save the 20 percent down payment ($45,000) to qualify for a conventional mortgage, as this type of mortgage does not need to be insured by a federal regulator. In contrast, a high ratio mortgage, where less than a 20 percent down payment is made, must be insured, adding an additional one percent to the total carrying cost of the mortgage. High ratio mortgages are more expensive to carry, and the total cost of the mortgage over its entire duration is increased because of this additional insurance.

A quick tally of the initial financial expenditures that Mary is contemplating is about $100,000. How will she handle this? What is her plan of attack?

Our First Piece of Advice: Mary Needs a Financial Plan
Dentists are in the enviable position of being able to earn significant incomes from the beginning of their careers and they have the potential to build substantial wealth over their lifetime. In a recent Workopolis survey, the typical base salary for a dentist in Ontario ranges from $80,000 to $124,000. Contrast that with the typical salary range for a high-school teacher — from $40,000 to $60,000, or a new electrician — $38,000 to $53,000. One of the best pieces of advice we can give to recent graduates, such as Mary, is to work with a personal financial planner. By going through the financial planning process, she will gain a better understanding of her current situation, including the amount and details of her debt, and she’ll clarify and prioritize her financial and other life goals over time via this roadmap.

There are several ways Mary can find an appropriate personal financial planner. One of the best ways is through a referral. She can ask her parents who they work with, or she can speak to her bank manager for a referral. Another option is to ask work colleagues for a recommendation. If Mary gets several names, she should book introductory meetings with each to assess his or her credentials, his or her experience in working with someone such as herself, her comfort level with the planner, whether he or she offers a financial plan as part of the service and how the planner gets paid.

The financial planning process identified several financial goals for Mary, including student debt-reduction, saving the down payment to buy the condo, buying the new car and being in a position to buy a dental practice in five years. A financial plan developed various funding strategies and alternatives for her goals and, more importantly, showed Mary where those goals may have to be compromised. For instance, Mary cannot afford to buy an expensive new car. The plan showed her that by delaying a car purchase and using urban transit (and occasional car rentals, if necessary), she could pay off her student debt in two and a half years and save the down payment for her condo purchase in four and a half years — as opposed to seven years, if she bought her Toyota this year.

This is an exciting time in Mary’s life as she begins her career and looks forward to its rewards. However, the financial plan, to be comprehensive, must also factor in the potential for unplanned and unexpected events, such as critical illness, disability and premature death. It needs to encompass strategies to protect Mary’s savings and enable her to maintain her lifestyle. Critical illness insurance provides a lump sum tax-free benefit if one is diagnosed with a critical illness. For Mary, who, at age 30, is a healthy non-smoker, the cost for a $100,000 benefit could be as low as $50 a month.

Term life insurance is also relatively cheap at this point in her life. She has no dependents, and needs to only cover the cost of debts and a funeral, should she die early. A death benefit of $300,000 would cost about $160 annually, as an example. Disability insurance is necessary—but expensive. Mary should explore what’s available as an employee of the practice. Additionally, she should investigate the cost and features of buying private disability insurance with the help of her financial planner or insurance specialist. While the cost of disability insurance may be similar, putting in place her own private disability insurance will offer better features, including tax-free monthly income, should she become disabled and “own-occupation” coverage in the event she can be rehabilitated. Mary needs to know most group plans pay taxable benefits until the disabled individual can be rehabilitated sufficiently to assume any job.

A financial plan is not a static document. Mary needs to review it regularly and update it as her needs and priorities change and the complexity and sophistication of her situation evolves. If Mary is working with a financial planner, many offer this planning service as part of their overall service, and there is no additional charge to have the plan revisited and revised. There are some advisors who only offer financial plans for a fee. In this case, she needs to be aware of this upfront to decide on the value for the cost. Most banks have staff who will provide a simple plan for no fee.

Our Second Piece of Advice: Stay Out of “Bad” Debt
The second best tip we can give to Mary is, stay out of “bad” debt. There is “good” debt, where she is borrowing to get ahead, such as when one borrows to buy a dental practice. “Bad” debt is the high-cost consumer debt that funds lifestyle activities, such as dining at restaurants, buying clothing and jewelery, or using a credit card to pay for trips. If she is disciplined enough to pay off the monthly charges on time each month, then she’s fine. Problems arise when the monthly balances aren’t paid off and interest charges accumulate on items that have already been consumed and enjoyed. Typically, credit cards charge an annual interest rate of 18 percent to 19.50 percent on unpaid monthly balances. The monthly minimum payment is mostly interest payments and, if one only makes the minimum payment each month, it can take years to pay off that debt.

Here’s an example. Let’s say Mary buys $990 worth of clothes. If Mary’s interest rate is 18 percent and she makes only the minimum payment each month on the $990 charge, it will take her 152 payments — or nearly 13 years — to pay off the balance due. That’s a lot of interest!

Managing one’s cash flow is a fairly simple proposition. If Mary spends more than she earns, she’ll never stay out of debt and, more importantly, she’ll compromise her opportunity as a high-income professional to achieve her financial goals. The balance that Mary needs to find is to enjoy the fruits of her chosen career now, while having for future goals. For instance, in addition to her goal of home ownership, Mary likely wants to build savings to support her lifestyle during retirement.

Mary needs to understand her cash flow to know what’s coming in as income and what’s going out in the form of fixed expenses (such as rent or mortgage, heat, taxes, telephone) and variable expenses (such as food, entertainment, clothing, trips). Anything left over is available to help her get ahead and achieve her financial goals.

Our Third Piece of Advice: Establish Relationships with Trusted Professional Advisors
The third piece of advice we offer Mary is the importance of establishing relationships early in her career with professional advisors. Here, we’re thinking of the value brought to Mary through a banking relationship, an accountant, a lawyer and a financial planner. All of these professionals will be in a position to help educate Mary about important financial, legal and tax matters and will help to guide her as she grows in her career and as her financial and other needs evolve. Finding competent advisors is critical.

Mary’s Opportunity
With careful planning, some money management discipline and a strong salary that grows with her experience and client base, Mary will not only eliminate her student debt, but she will also be on the road to home ownership, a new car and be in a stronger financial position to buy a dental practice in several years.