Addressing Financial Gravity In Practice
Bringing simplicity to the financial complexities of a Doctor by Garrett B. Gunderson Gravity is no respecter of persons. It doesn’t matter how nice of a guy or gal you are, if you jump off a cliff, there are harsh consequences simply due to the principle of gravity. As a Financial Advocate to professionals that have become business owners (especially doctors), I constantly encounter people that are not efficiently dealing with the financial gravity that comes with being a business owner. Just like gravity, it doesn’t matter if you are a good person, have the right intentions, or are working hard, if you do not deal certain financial aspects, you will lose money. When you raise your hand and opt in to becoming a business owner there are certain rules that apply just as sure as gravity exists. These are more complicated rules of finance and business that if not understood and addressed cost millions of dollars over ones lifetime. At the same time, these are some of the greatest advantages to entrepreneurs when these items are properly understood and addressed. Some of the things that take a higher degree of knowledge and attention include tax strategy, acquiring loans and negotiating the best interest rates, acquiring proper insurance coverages (the types only bought or used by a business owner), employee benefits, and many others. Most of the time rather than being more efficient or effective in these areas, the doctor merely tries to work their way beyond this by adding more space, hiring more people, selling more procedures, working more hours, etc etc. Rather than address the gravity, docs use hard work to temporarily help or even increasing marketing or reducing expenses or eliminating staff and asking some to just do more by working them harder, but this is a limiting view that leads to frustration and eventually can be very destructive. There is a better, although little known way to address this issue and keep more of your money without wearing yourself out by working harder. First, it is critical to realize that financial planners are not the right professionals to address this situation. Unfortunately, most people who call themselves “financial planners” are actually just salespeople. Because they get paid from commissions on selective products, they have little or no incentive to give you an accurate, comprehensive, and efficient financial plan that accounts for every variable. Hence, their recommendations are skewed and incomplete at best and their objective is not one of efficiency and effectiveness, it is mostly about saving, sacrificing, delaying and deferring through the purchase of retirement plans and products. My firm works on a personal level with more than 500 doctors. With thorough research we have proven that 93% of them take home far less money than they should—regardless of if they have financial planners. Even if your financial planner is trustworthy and knowledgeable, most likely he or she is just one part of what should be a more complete financial team and strategy. Use the following guidelines to determine whether or not you are addressing the financial gravity that weighs on you as a business owner. Once again, it doesn’t matter if you are a nice person or not, the numbers just don’t care. It matters if you have an awareness and address the “gravity” of the situation to keep more of your hard earned money. Do you analyze the expense structures and uncover hidden financial fees and commissions in all your existing financial products. Fees on your retirement plans 12b-1 Fees Expense Ratios Administration Fees Advisor Management Fees Do you have any investments that are not outperforming the cost of some or all of your loans? Consider paying off the guaranteed cost vs. earning the non-guaranteed interest. For money that stays invested, do you have strategies for limiting your exposure to market risk while also giving you as much upside potential as possible? Do you analyze your accounting strategy and every aspect of your taxes to ensure you’re keeping as much of your money as possible? Have you considered cost segregation if you own your building? Do you separate out your activities from a salary vs. dividend perspective? Do you have the type of corporation that best fits minimizing your taxes? Do you talk with a tax strategist throughout the year versus just during tax season? Does he teach you to defer your taxes until later when your tax burden will be higher, or do your tax strategies limit or eliminate your taxes when you withdraw on the back end? Do you have a current strategy to provide you with practical exit strategies on all your investments, or will you be subject to unexpected penalties, fees, and taxes? Do you know of ways to prepare your business now if you were to sell it in the future to: Limit taxes Maximize your multiple (how many times earnings you sell for) Have you reviewed all your insurance coverages to check for duplicate coverage and ensure the most efficient structure and best possible premiums while transferring as much risk as possible? Do you have a Business Owner Policy for liability protection? Do you have an umbrella policy to protect from liability anytime you are not acting as a doctor? Does your umbrella policy include uninsured/underinsured coverage? Have you looked into Health Savings Accounts? Have you increased your deductibles to lower your premiums? Have you increased your elimination periods to lower your premiums on your disability policies? Do you know how to present yourself to a bank in order to ensure you’re getting the best terms and rates, maximize deductibility and to provide the best debt payoff strategy? Do you have a credit score above 780? Have you renegotiated your loans in the last year? Mortgage Credit Cards Business Lines of Credit These are just a few of the areas where we find docs leaking money. In the areas of credit score, debt structure, and cash flow optimization (increasing cash flow from efficiency, not reduction or
Is it truly one of the inevitable things in life?
Why although paying taxes is inevitable, overpaying them doesn’t have to be. How would you feel if you found out you were overpaying your taxes? Most people want to pay as little in taxes as possible, but many times have no idea of whether they are overpaying or not. Without going into huge amounts of detail (and boring your socks off) there are a few simple things to know about taxes that can make a big difference. First, there is no better way to keep more of your own money than to make more. Often people pass up income because they might have to pay more in taxes – that’s just crazy. If you got to pay 25 cents to earn a dollar, how often would you do it? Never pass up a chance to make more money in congruence with your purpose. If you own a business, do you have the proper entity structure to maximize your tax advantages? Not all entity structures are created equal so if you have a partnership, sole proprietorship, or even the wrong type of corporation for your business, you may be missing out. Learn about how to take your income as well. Salary may be taxed differently than dividends. In my research with 117 people in my program, 107 were overpaying their taxes. More alarming is that 2/3rds felt they had it all handled and their accountant was doing a great job. If you want to find out if you are overpaying or not, take a quick look at our Financial Health Assessment at www.freedomfasttrack.com/cfw and answer a few questions. If you answer no or uncertain, then check out the Curriculum for Wealth series when I go into depth and leave nothing locked away as “secret” as I dig in with the CPA in our network to give you the insights necessary to find money that is being overpaid. So, you can check with your tax professional on the best way to employ these ideas for your specific situation, or join us on the Curriculum for Wealth as we go through the checklist of most important areas to save tax.
Why Professionals Get Screwed on Taxes
How to Reduce Your Tax Burden & Boost Your Productivity by Garrett B. Gunderson with Brett Sellers, CPAAs a Financial Advocate to chiropractors, dentists and other professionals, I once performed a survey of my doctor clients. Out of 117 doctors, 107 of them were overpaying on their taxes—and many of them by tens of thousands per year. This can be easily avoided, and reducing your taxes is the lowest-hanging fruit for increasing your cash flow and productivity. Here are the most important things every business owner should know about taxes: Don’t Let the Tax Tail Wag the Dog of Productivity Would you rather pay $1 million or $10 million in income tax? Most people say $1 million. My answer is always $10 million, because it would mean I made much more money than if I owed $1 million. Taxes should definitely be taken into consideration with any financial plan, but some businesses actually don’t want to produce more because they’re afraid of paying too much in taxes. They base financial decisions primarily on tax ramifications. In other words, they let the tax tail wag the dog of productivity. Bottom line: Your first and best defense against taxes is always to earn another dollar, rather than limiting productivity and settling for a lower income in the name of saving on taxes. Be Proactive, Not Reactive By Using a Tax Preparer, Rather than a Tax Strategist Most small businesses have a CPA that simply prepares their taxes at the end of each year. This makes them reactive rather than proactive. Instead of anticipating and strategically solving potential tax problems, such tax preparers scramble to limit your tax liability just once throughout the year. And to accomplish this, they usually tell you to dump as much money as possible into a qualified plan, or recommend other things that you otherwise wouldn’t do except to save on taxes, which creates even more problems down the road. In contrast, a tax strategist makes tax season a non-issue by keeping you organized, creating and tracking financial benchmarks throughout the year, and limiting your tax burden. Plan for the Future, Don’t Defer to the Future Typical scenario: At year’s end you bring your taxes to your CPA, and one of her primary and automatic recommendations is to put money in a qualified retirement plan. This is lazy accounting at best. Are taxes going up or down in the future? Do you plan on being more or less successful in the future? So why would it be a good strategy to save on taxes today in a way that creates a bigger tax burden tomorrow? Of course, traditional retirement planners will tell you that when you retire you can live on 70 percent or less of your pre-retirement income, and that living on this percentage will lower your tax bracket. First of all, no one knows exactly what future tax brackets will be. And with the current economic and deficit environment do you think that tax rates are going to stay at these historic lows? Historical marginal tax rates for the lowest and highest income earners in the United States. Source: U.S. Bureau of the Public Debt Second, is this really how you want to spend your retirement years: living cheaply, afraid to spend the money you’ve earned for fear of triggering tax consequences? Do you really want to have a lower standard of living when you retire? In contrast to qualified plans, there are other products and strategies that provide much better exit strategies upon retirement while still offering tax benefits during the growth phase. This doesn’t necessarily mean you shouldn’t ever contribute to a qualified retirement plan. But such a decision needs to be part of a holistic, long-term financial plan that supports your purpose and passion, not a reactive and misguided accounting strategy based solely on numbers today. Increase Your Deductions With Confidence Entrepreneurs frequently ask CPAs for a clearly-defined, bullet-point list that spells out legitimate deductions explicitly. But Section 162 of the IRS tax code simply states that you can deduct all “ordinary and necessary” business expenses. For most business owners, this means they can and should be deducting far more expenses than they currently are. Deduct anything and everything connected with your business, while making sure you can build the case to support the connection. Incorporate to Reduce Your Rate I’m shocked by how many people operate as sole proprietors, which is the worst arrangement possible for taxes. Incorporating limits your liability and protects your personal assets, increases your deductible expenses, gives you greater tax flexibility, and helps you build a sellable business. A competent attorney that coordinates the strategy with your CPA can help you choose and properly structure the right entity. Withdraw Business Income Strategically As an owner of a business, you wear at least two hats (you may also be the landlord). You understand that you should be compensated as wages for the practice of dentistry for example, but how you withdraw business profits can have a significant impact on your taxes. Withdrawals can come in the form of additional salary or dividends. Depending on your corporate structure, the withdrawal of dividends can greatly reduce your overall tax because certain distributions of corporate profits are not subject to employment or self-employment taxes. Again, consult with a competent and strategic CPA to get further details for your unique situation. Use Cost Segregation to Benefit from Depreciation If you own your building, “cost segregation” can make a drastic difference in deductions due to depreciation. This effective but under-utilized accounting technique shortens the depreciation period of your assets for taxation purposes, and results in reduced tax liability and increased cash flow. The most effective way of segregating costs and supporting these accelerated depreciation deductions is to engage an engineering firm to perform a cost segregation study. Get Deductions by Investing in Your Business Section 179 of the IRS tax code allows you to deduct the full purchase price of qualifying equipment and/or software
The Safest & Quickest Way to Become Debt-Free
by Garrett B. Gunderson with Dale Clarke The Counter-intuitive Formula Your Financial Adviser Doesn’t Know Hint: It’s not about your loan interest rates, nor is it just about socking away more money by cutting back or even just about saving money on interest. As a financial advocate to professionals, I deal with this issue frequently with the business owners we work with. You want to get out of debt so you can reduce your risk, increase your cash flow, and have greater peace of mind, right? Unfortunately, in a zealous effort to get out of debt, too many people make critical mistakes that increase their risk and make the process much slower than it has to be. It’s not just a matter of prioritizing which loans should be paid off first. It’s also a matter of minimizing your risk throughout the process. Here’s the fastest, safest, and most sustainable way to do it: 1. Build Savings First. It doesn’t make any sense to start paying extra on loans until you have at least three months of income, and ideally six months, in a liquid savings account. If you have no cash reserves, what happens when you pay down your loans but then experience an unexpected cash flow crunch? You simply increase your loan balances again or even worse, miss payments and hurt your credit score, therefore getting charged more for future loans and you can miss opportunities to lower your interest rates. So before you even get started with paying down debt, build your cash reserves first. This puts you in a much safer and more sustainable situation. Don’t worry if you are wondering where that money might come from, details to follow, read on. 2. Raise Your Insurance Deductibles. Once you have cash reserves you can raise your insurance deductibles and extend elimination periods, which decreases your premiums, an extra benefit of having money in savings. This increased cash flow can then be used to strategically pay down debt. I recommend using your home, auto, and liability insurance to primarily cover catastrophic losses. With higher deductibles (again, assuming you have cash reserves to cover small losses) you’re less likely to make claims, which prevents increased premiums. The larger principle here is that when you approach debt elimination the right way it affects almost every other aspect of your finances. This is a more comprehensive approach that takes every factor into consideration, rather than looking at your debt in a vacuum. 3. Restructure Your Non-Deductible Debt by Rolling Short-Term, High-Interest Loans into Long-Term Tax Deductible, Low-Interest Loans. Again, the goal is to minimize your interest payments and maximize your cash flow. Then you can attack your remaining debt strategically, using your increased cash flow to eliminate one loan at a time. Another benefit of this strategy is that it improves your debt-to-income ratio, which then improves your credit score, which can then be used to negotiate lower interest rates and will result in increased cash flow. Having a better credit score also gives you more negotiating leverage. You can look into a streamline refinance on your existing mortgage. You can call your credit card companies, for example, and tell them you’re considering canceling and switching. They may be inclined to make their interest and terms more favorable for you, especially if you have a higher credit score. Assuming you have enough home equity and after improving your credit, refinance your mortgage and roll as much of your non-deductible loans (credit cards, auto loans, etc.) into it as possible. The tax deduction will also increase your cash flow. CAUTION: Do NOT do any of this if you’re undisciplined and your spending is out of control. If you’re just going to charge your credit cards back up again, you’ll just sink deeper into debt. 4. The Secret Sauce: Cash Flow Index. Here’s where the rubber hits the road. After minimizing your payments and maximizing your cash flow, you’re now prepared to focus on one loan at a time, thus creating the “snowball effect” until you’re completely debt-free. Most financial advisers and pundits will tell you to pay off your loans with the highest interest rates first. My advice is to ignore the interest rate and use my proprietary Cash Flow Index to determine which debt to pay off first. To determine your Cash Flow Index, take all your various loan balances and divide each of them by their respective payments. Whichever one has the lowest number is the one you should pay off first. For example: Home Loan Balance: $228,000 Interest Rate: 7% Monthly Payment: $1,665 Cash Flow Index: 137 ($228,000 ÷ $1,665) Auto Loan Balance: $16,500 Interest Rate: 8% Monthly Payment: $450 Cash Flow Index: 37 Credit Card Balance: $13,000 Interest Rate: 12% Monthly Payment: $260 Cash Flow Index: 50 Student Loan: $107,000 Interest Rate: 3.9% Monthly Payment: $650 Cash Flow Index: 165 In this example, it seems to make sense to pay of the credit card first because it has the highest interest rate. But the Cash Flow Index reveals that the auto loan should be paid off first. The trick is to pay off debt that gives you the greatest cash flow with the least investment. A high Cash Flow Index means your loan balance is high relative to the payment, while a low Cash Flow Index means your balance is low but with a high payment. Knock out those high payments first and you free up cash to work on other debts. In this case, by paying off the auto loan first, you free up more monthly cash, which can then be applied toward the credit card balance. Paying off the auto loan first means you can pay off both faster than if you started with the credit card. 5. Address the Risk Factor. Again, this strategy isn’t just about paying off debt faster and saving money on interest—it’s also about reducing your risk. Banks and other financial institutions tell you to pay off debts that lessen their risk
