ACHIEVING ULTIMATE FINANCIAL SUCCESS!
By Ken Rubin, CPA, PFS
Financial success means different things to different people. What does financial success mean to you? Is it the peace of mind that comes from knowing you wont run out of money during your retirement years? Or is it being able to choose to work simply because you enjoy working, not because you have to for the needed money? Or to you does financial success mean being wealthy enough to spend the rest of your life luxuriously traveling around the world and enjoying all the best things life has to offer?
Regardless of your definition of financial success, anyone can achieve their own financial success with proper planning and following their plan.
The first step is to save money every year. Start early. Let time and compound interest be your most powerful allies. Financial planners call compound interest the 8th Wonder of the World. As an example, if a 21 year old would set aside just $2,000 per year into an IRA (or other tax-deferred account) for 30 consistent years earning 8% per year, the money would grow into $1,000,000 by the time they were 65 years old!
Be sure to always use the best IRS qualified retirement plan (IRA, SEP, SIMPLE, Profit Sharing, Money Purchase, 401k, Defined Benefit Plan, etc.) for your situation. And be sure your plan takes advantage of Social Security integration and is cross-tested, if applicable.
IRS qualified retirement plans have five main advantages: First, you receive an immediate a tax deduction for all the money you put into the plan. Second, the immediate gratification of the tax savings generated by the plan provide the structure of a forced savings program causing you to save money on an annual basis. Third, the account will be able to grow much faster because it is in a tax-deferred environment where income taxes wont be reclaiming a portion of your profits every year. Fourth, if set up properly the assets will be safe from creditors and lawsuits. Fifth, when the money is ultimately taken out of the account, the amount of taxes paid will be very small since you will be retired and therefore in a low tax bracket.
Be sure your investments are properly diversified, and dont always try to hit home runs because youll probably strike out. The father of Modern Portfolio Theory, Harry Markowitz, PhD (a fellow San Diegan) received the Nobel Prize in 1990 for teaching the investment community how to use a diversified portfolio to increase investment return while minimizing risk. One of Dr. Markowitz more fascinating discoveries was the Efficient Frontier. Everyone has heard the saying that risk and return are directly related. Dr. Markowitz was able to prove that by using different combinations (diversifying) of classes of investments (stocks, bonds, growth, value, etc.) he was able to increase the return without increasing the level of risk. This new portion of additional investment return earned by the portfolio, without taking on extra risk, is defined as the Efficient Frontier.
The amount of money you can invest every year is determined by how much you earn and how much you spend. Just as there are steps you can take which will increase your production and collections, you can also do things to reduce your spending. Use a monthly budget, analyze and evaluate spending (be frugal), pay off credit card debt, never buy a brand new expensive fancy car, refinance to get lower interest rates on loans, and take serious steps to reduce your biggest expense of all (your income taxes!).
Safeguard against risk. Properly insure (dont over-insure or under-insure) to protect yourself and loved ones against death, disability, lawsuits, medical catastrophe, malpractice, long term care, etc.
The final step of ensuring financial success includes estate planning. Without estate planning, disaster could ruin a lifetime of hard work and otherwise careful planning. Imagine the IRS taking half of your assets, or imagine an ex-spouse receiving the windfall of your $1,000,000 retirement plan because you failed to remove them as the named beneficiary after you got divorced! Financial horror stories happen all the time.
A good financial planner can be invaluable in helping you achieve your financial goals. The average American family spends more time planning a typical family vacation than they spend planning their financial future. Everyone should have a comprehensive, holistic financial game plan, and the sooner, the better. I encourage you to save this article and re-read it once a year. When you ultimately reach your own financial success (whatever your definition is), youll be glad you did. Remember the old adage, If youre failing to plan, youre planning to fail!
Ken Rubin has been helping dentists since 1984. He owns and operates both Ken Rubin & Company, Dental CPAs and Ken Rubin Dental Practice Sales. He is a frequent author, lecturer and the co-founder of the Academy of Dental CPAs (“ADCPA”). He can be reached at (619) 299-6161. Websites are www.CaliforniaDentalCPAs.com andwww.krpracticesales.com.