The path to financial independence

Having a higher-than-average income is no guarantee of financial independence in retirement. Dentists achieve this only through smart and strategic wealth accumulation. Adhering to three important road markers helps. Financial expert Davor Horvat* explains how it can work.

Every young dentist should hope for a high income or even expect not to have to work anymore before retirement. To be financially free enough to be able to determine when you want to leave the program. These might include owning your own practice, home, rented property and saved assets, according to the idea. A deceptive idea, because possessions are not synonymous with freedom. In fact, often the opposite is true. There is more to it.

How does the oral surgeon or the practicing doctor manage to build up assets properly in order to become more and more independent with increasing age? To be free of loans, tax burdens, and ongoing expenses. This requires a strategy, which doesn't even have to be a complicated endeavor. There are simply a few important rules to follow. Brands on the road to true financial independence.

1. Waymark – The consistent pursuit of goals

The financial success of most practices confirms that most dentists and dental hygienists are very planned in their professional practice. The profit the practice generates after a few years usually provides them with a six-figure annual income early on. But what about the private financial goals? The high income usually makes them turn a big wheel quickly financially. But that doesn't necessarily have to do with wealth accumulation.

First of all, it's helpful to set goals in writing – starting with the question of what the current financial situation is and what it should look like at a certain point in the future. In addition counts completely elementarily whether then also all loans will be repaid for example for the practice or the home and how high the freely available liquidity is to be, with which the work-free retirement can be financed in which extent – under inclusion of the annual inflation rate.

"If you don't know the harbor you want to sail into, no wind is right for you." This quote from the Roman philosopher Seneca is as valid today as it was nearly 2.000 years. But in order to achieve the goal of financial independence, it is imperative to be consistent in your pursuit of the set goal.

2. Waymark – The account-based strategy

The second important component on the path to financial independence is the planned approach, the strategy. It includes a summary of all private income and expenses, as well as a summary of all assets and liabilities. However, this must not only be considered for one year, but over your entire planning period, with all additions and disposals. The tax advisor(s) should have these numbers available, at least the data from the practice and on real estate ownership.

A financial advisor or consultant uses this to determine the savings potential for wealth accumulation. Based on this, the consultant and doctor create an intelligent account system. This is a system consisting of several accounts that compares financial needs and resources for each area of life. Therefore the advisor should be particularly well versed in the target group of "physicians.

Each account pursues a different goal. For example, there is an account for fixed expenses, a savings account for vacations, an account for tax provisions and a savings account for your financial freedom. Such an account system ensures, among other things, that the doctor or physician can avoid any cash flow or tax traps.

3. Waymark – The disciplined implementation

Becoming financially independent requires a lot of discipline to build wealth. And patience. Nobody should expect quick success, which would be only a question of luck, of the moment. Investments in shares pay off in the long term, no one should be made nervous by interim price drops. On the contrary, price drops are opportunities for re-buying (re-balancing). Real estate values also increase slowly and should not be the primary reason for purchasing real estate.

Spreading the investment capital across different types of investments is always good and right to begin with. Because this is what risk diversification means. However, it is crucial for investment success not to be blinded by expensive product packaging, which usually comes with high commissions. The market has long offered very good low-cost investment products, such as broadly diversified exchange-traded funds (ETFs), which usually perform better without expensive fund management than with it.

So smart investing means investing in a saddle-full selection of classic asset classes without expensive product wrappers and distribution costs. And: A smart investment strategy focuses on the three main asset classes of equities (ETFs), bonds and real estate. Because these asset classes pay dividends, interest and rental income to build up quite solid assets for later financial independence.

*Davor Horvat is a board member of Honorarfinanz AG, one of only 17 institutions licensed in Germany to provide fee-based investment advice according to WpIG, the highest classification of financial advisors in Germany. Recently, his book "Financial prophylaxis – financial strategy for dentists" was published.

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