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Business Planning For Healthcare Professionals
Table of Contents Foreword
Lesson #1: Work On Your Practice, Not “In” Your Practice
Chapter 1-1: Be Different. Be Rich. Be Worry-Free
Chapter 1-2: Work Smarter, Not Harder: Don’t Just See More Patients
Chapter 1-3: Making Your Money Work For You
Chapter 1-4: How To Work Less
Chapter 1-5: Getting the Most Out of Your Assets
Chapter 1-6: Using Other People to Make You Money
Lesson #2: Don’t Try to “Fit In” with the Crowd
Chapter 2-1: Understanding the Average American
Chapter 2-2: The Popular Press Hurts Doctors
Chapter 2-3: Smart Doctors Don’t Want to “Fit In”
Lesson #3: Accept Referrals to Specialists
Chapter 3-1: The Value of Financial Specialists
Chapter 3-2: The Specialists Doctors Need
Chapter 3-3: Seven Outdated Procedures to Avoid
Lesson #4: First, Do No Harm
Chapter 4-1: Protecting Your Family From Unexpected Death
Chapter 4-2: Paying Bills Even If You Can’t Handle Work
Chapter 4-3: Handling Long-Term Care Needs Before They Arise
Chapter 4-4: Making Sure You Don’t Run Out of Money in Retirement
Chapter 4-5: Avoiding Healthcare & Insurance Issues
Chapter 4-6: Avoiding Employment Threats
Lesson #5: Turn Your Practice Into a Financial and Wealth-Building Engine
Chapter 5-1: How NOT To Structure Your Practice
Chapter 5-2: S Corporation, C Corporation Or Both?
Chapter 5-3: Using Multiple Entities For Asset Protection
Chapter 5-4: Protecting Your Practice’s Accounts Receivable
Chapter 5-5: Using Qualified & Non-Qualified Plans
Chapter 5-6: The One Contract Your Practice Must Have
Chapter 5-7: Captive Insurance Companies-The Ultimate Practice Tools
Chapter 5-8: Creating Your Practice’s $1 Million Retirement Buyout
Lesson #6: Protect Personal Assets From Lawsuits
Chapter 6-1: The Importance Of Asset Protection
Chapter 6-2: The Sliding Scale of Asset Protection
Chapter 6-3: Asset Protection Myths
Chapter 6-4: The Best Asset Protection IS Not Asset Protection
Chapter 6-5: The Mixed Blessing of Property and Casualty Insurance
Chapter 6-6: Maximizing Exempt Assets
Chapter 6-7: Family Limited Partnerships and Limited Liability
Chapter 6-8: Using Trusts To Shield Wealth
Chapter 6-9: International Planning
Chapter 6-10: Protecting Your Home
Chapter 6-11: Divorce Protection
Lesson #7: Legally Reduce Taxes
Chapter 7-1: Use Retirement Plans
Chapter 7-2: “Borrow” Lower Tax Rates
Chapter 7-3: Let the IRS Subsidize Your Long Term Care Insurance
Chapter 7-4: Use Charitable Planning
Chapter 7-5: Tax-Efficient Educational Planning
Chapter 7-6: Avoiding the Only 70% Tax Trap-Pensions and IRAs
Chapter 7-7: Determine When Your Tax Advisor Is Helping or Hurting You
Lesson #8: Avoid Poor Investment Outcomes
Chapter 8-1: A Nobel Prize Is Not Enough
Chapter 8-2: Taxes, Inflation & Your Investments
Chapter 8-3: Alternative Investment Strategies For Doctors
Chapter 8-4: Life Insurance as an Investment for Doctors
Chapter 8-5: The Best Investment Option for Doctors
Lesson #9: Protect Your Family’s Wealth From Estate Taxes
Chapter 9-1: Wills & Living Trusts
Chapter 9-2: Joint Ownership & Disinheritance Risk
Chapter 9-3: Estate Planning with Life Insurance Policies
Chapter 9-4: FLPs and LLCs as Estate Planning Tools
Chapter 9-5: Avoid the 70% Tax Trap of Pensions and IRAs
Chapter 9-6: Protection From Rising Medical Costs
Chapter 9-7: Charitable Estate Planning
Lesson #10: Take the Prescribed Medicine
Foreword As a Doctor in California, you are faced with some of the greatest challenges of any group of doctors in the country. Sure, California is a great place to live for many reasons. But it is one of the hardest places to get ahead financially—especially as a doctor. Consider the following factors: · California has one of the highest penetrations of managed care—resulting in lower reimbursement rates than those of your colleagues in other parts of the country receive. · Once you are paid, California has one of the highest costs of practice overhead in the country—cutting your profit significantly. · Once you have profits, California has one of the highest state income taxes in the country—with every doctor paying 13% of his or her income to state income taxes. Remember that your colleagues in Florida, Texas, and other states pay 0%. · Even your after-tax costs are extreme—as in the major metropolitan areas (Southern California, Bay Area, etc.), the personal cost of living is among the highest in the nation. · If you are ever sued for any reason, California gives you little protection—as it has one of the worst sets of “exempt assets” (to protect doctors from lawsuits and other creditors) in the nation. · Better not get divorced in California—as a community property state, it is very easy to lose family assets to a divorce. · When you die, it gets no better for your heirs—as probate costs in California are some of the highest in country (between 3% and 8%). If you have interest in getting the most out of your practice without having to work any harder, sleeping better at night knowing that your personal and practice assets are protected, and learning how to assemble the right team of experts to help you reach your long term goals, then this book is ideal for you. The co-authors have hundreds of years in the combined fields of asset protection, tax, estate planning, litigation, financial planning, insurance and investing. They have offices from the Bay Area to San Diego and in a number of areas in between. They are well networked with other professionals in your area and can offer you a level of service you’ve likely only imagined possible. The first step for you is to read this book and learn the important lessons every doctor needs to know. Then you can decide how to proceed. You may contact the authors for a consultation or arrange a seminar in your area to learn firsthand how to improve your situation. Whatever you decide to do next, we hope we can be of assistance.
Thank you for reading our book. We appreciate your dedication to improving your situation.
In medicine, patients come to physicians when their bodies are unable to heal themselves. Patients who delay seeking medical treatment are missing out on the power of modern medicine and failing to take advantage of an opportunity to dramatically improve their health. Similarly, the financial and legal ailments impacting your medical practice cannot be healed without professional care. Simply working harder and hoping that your practice’s problems will solve themselves is just as foolish as the patient who places hope on his body healing itself. In addition, you may not see any “problems” yourself, but you will not be working at maximum efficiency without consulting an expert. In this Lesson, we will delve further into this concept. We will examine the concept of Leverage in an attempt to help you shift away from -just seeing more patients” as a cure-all for your practice and personal financial challenges.
We will also discuss the demographics of the Average American, the demographics of the American Doctor, and compare the planning challenges and financial goals of both groups. We will also discuss how Doctors who look for information in magazines and websites can be dangerously misled. We will conclude with a discussion of how the information in this book is unique for Doctors and can be used to help Doctors meet their asset protection and wealth accumulation goals.
Be Different. Be Rich. Be Worry-Free. When you were in medical school, residency, and first starting practice, you relied on a number of mentors to “teach” you valuable lessons about medicine. Undoubtedly, this training was invaluable to your development as a physician. Despite the valuable training you received, you were left inadequately prepared to practice medicine as your profession. While you have learned the “medical” part quite well, do you think you were trained how to “practice?” In other words, did your education and residency prepare you to build a “practice” into an optimal business? The successful practice of medicine in the 21st century requires so much more than clinical expertise and good bedside manner. The days of simply seeing patients and waiting for substantial income to be deposited into your bank account are long gone. Successfully practicing medicine now requires expertise in disciplines that were never even mentioned, let alone taught, in medical school, residency or even in a fellowship. How are Doctors supposed to learn how to protect themselves from billing and coding errors, employee lawsuits, health insurance fraud, HIPAA violations, Medicare fraud, and OSHA issues? Where will Doctors find the time to learn and understand asset protection, business structuring, estate planning, insurance management, investments, benefits structuring, and tax planning? How can you do all this while continuing to stay abreast of important clinical developments and still find time to see patients and earn a living? This is what Doctors MUST know how to do if they want to successfully practice medicine in the 21st century. Replicating the actions of the physicians who trained you will not replicate their levels of financial success. The environment has changed dramatically. If you do what most Doctors do and focus only on the clinical issues of medicine, you will expose yourself to unnecessary lawsuits and taxes, and will continue to struggle as reimbursements stagnate or decrease while overhead constantly increases. Do you want to follow this path and be the next helpless victim or do you want to learn how to be different?
The only way to achieve financial success and peace of mind is to break away from the pack—to be different and do things differently than your predecessors. Perhaps this seems counter-intuitive. While those who trained you no doubt provided priceless guidance in many areas of your practice, recognizing that today’s practices demand new perspectives couldn’t be a more valuable lesson. Let’s look at a practical example.
How Medicine Has Changed One of the book’s authors, David Mandell, comes from a family of physicians. David’s brother is a cardiologist. His father is a radiologist close to retirement age, and his grandfather was a general practitioner from the 1930s to the 1970s. The grandfather worked only for cash—except during the Great Depression, when he accepted food from patients who were unable to pay. He made house calls and knew all of his patients by name. Not once did he utter the words “managed care,” “malpractice crisis,” or “HCFA audit.” David’s father, Charlie, spent nearly 30 years in a lucrative radiology practice. He saw reimbursements increase for many years and enjoyed an over-funded pension. He took advantage of numerous tax laws (since legislated away) during his career that swelled his after-tax income beyond what he had ever expected to earn when he began his career in the 1960s. The idea of “going bare” (having no medical malpractice insurance) never occurred to him. Premiums were always reasonable and personal liability was never a major concern. As you well know, the “business of medicine” has changed dramatically through these three generations. The young cardiologist—David’s brother Ken—began his career dealing with a medical malpractice crisis (in his state, many Doctors chose to go without medical malpractice coverage because of its outrageous costs), increased time demands for administration and paperwork, shrinking reimbursements, and increasing regulatory concerns. He thinks about terms like “practice buy-in,” “malpractice premiums,” and “debt repayment.” He wonders if he’ll ever reap the financial rewards his father did in medicine or if the landscape has just changed too much for him to ever be able to enjoy the fruits of his labor.
Where do you fit within these generations? Perhaps you are between the radiologist and the cardiologist and are in the prime of your career or you are in its second half. If so, the issues on your mind are likely retirement (not only when, but if), asset protection, tax reduction, and even partner buy-out. It is a lot to consider, by any measure.
Treat Your Practice Like A Business Throughout this book, we will use the term “business of medicine.” This is not by accident; rather, it is quite intentional. To use this book as the professionals that helped put it together intended, you must make a paradigmatic shift in your medical career. You must come to view your practice as a business!
While we mean no disrespect—medicine is truly a virtuous calling, and your primary motivation to become a physician was likely an altruistic one—the hard reality is that there are myriad business issues that affect your practice and personal finances every day of your career. Unfortunately, the vast majority of physicians are completely unprepared for these issues so they suffer from lower incomes, personal legal liability, shorter and less comfortable retirements, acrimonious practice splits, severe financial stress, bankruptcy and sometimes a premature exit from the practice of medicine.
It is no surprise that 99% of physicians do not properly handle the financial and business issues that affect their careers. Why? Because Doctors have had absolutely no training in these matters. The typical physician may receive over 10 years of clinical training by the time medical school, residency, and fellowship are completed. This is over 3,500 days. How many days of training have you received on topics such as asset protection, compensation arrangements, taxation, investing, and retirement planning? How many days on malpractice insurance options, partner buy-outs, or disability protection? What about employee training, contracts, and practice management? With this complete lack of non-medical training, it is a wonder that any medical practice survives. Imagine how more economically efficient and less stressful the business of medicine could be if you had been properly trained in all of the above fields. How much better protected would your wealth be from lawsuits? How much more income would you bring home? How much smoother would your practice run? Imagine. While we cannot attempt to change how the American medical establishment trains its physicians (although we have often been asked to speak to medical schools and residency pro-grams), we can make the following urgent recommendation:
Make today the first day of your self-imposed training program by dedicating time to become educated about the non-medical issues that affect your business and personal financial situation. As the subheading of this section states, you must treat your practice like a business, learning the operational and financial issues that are crucial to its success. Otherwise, you will never reach your financial goals. By devoting just a fraction of your time on these practice issues—perhaps one day per quarter or one afternoon per month—you will be working ON your practice. For as long as you toil only as the medical worker, you will suffer from the stress and reduced rewards that come to people who handle matters “half-way.” Only when you step back and act like the CEO of your practice—and of your career—can you hope to achieve the financial and lifestyle goals that you certainly deserve and that the business of medicine can still afford you.
Envision Your Ideal Career In Medicine When you chose to be a physician, you made a decision to rely on your medical practice to provide you with the things you value in life: control over your time, financial security, reduced stress, a good life for your family, among other things. Think back to before your medical practice, residency, and medical school to your college days. What was your vision of life as a successful physician? What was your vision when you were toiling in medical school or during all-night calls during residency or fellowship? Did you envision your eventual career as a pay-off for all the years of hard work, training and sacrifice? Now, after considering what the ideal vision of your career looked like to you during different stages of your education and career, take a moment to examine your present practice and personal financial situation. How close are you to your ideal vision? Is there room for improvement? Is it as stress-free, lucrative, and secure as your ideal vision? If not, is it worth devoting a small fraction of your time to working toward this ideal? The answer to these questions for the majority of physicians with whom we speak is obvious. In the generation of David’s radiologist father, the medical business environment was so easy that physicians could almost totally ignore the business and financial issues described above and achieve their life goals rather easily. Even if Doctors made financial mistakes every day, it did not matter. Doctors simply rode the wave of the financial profitability with minimal regulation. It was truly the “golden age” of medicine for U.S. physicians. Today’s physicians, however, operate in a dramatically different environment. Like David’s cardiologist brother, you do not have the luxury to make such financial mistakes. It is still possible to enjoy your own “golden age” of benefits, but to do so you must be as effective and efficient as possible. You must be both a skilled physician and an attentive businessperson or you will suffer the consequences of today’s more challenging medical business environment.
Avoid the trap of inertia. Be confident enough to envision your ideal situation and use this book and the advisors who contributed to it to help you achieve your goals. You have worked hard in medicine to get to where you are today. Now, work on (the business of) medicine to take you where you want to go.
Be Practical, Not Political Many physicians reading this book may get riled up enough to march on Washington and Sacramento and demand malpractice caps, tort reform, lower tax rates, and greater reimbursements. This emotionally charged effort may or may not have any impact on lawmakers’ decisions. Whether any legislative changes will have a significant impact on your specific financial situation is uncertain. Though this is not our area or expertise, we do know that changing laws takes time and you need to change your financial situation today.
We are financial and legal advisors to physicians, not policymakers or politicians. In this book, we will not discuss how the laws regarding non-economic damages in malpractice cases should be limited. We will neither opine on the fiscal policies of the malpractice insurers nor comment on Medicare reform. We will not discuss tax policy or medical education. These elements, and any proposed changes to them, are beyond your control as an individual Doctor. While rallying with your fellow physicians as a political group may be effective over the long-term, we will let other voices (like those of your local medical associations) take up that cry.
Our focus here is to show you—in a real, practical way—what you as an individual can do to move your practice and medical career from point A (financially inefficient, high liability exposure, chaotic financial plan) to point B (efficient, asset-protected and organized for maximum financial success). This is the goal of this book, our e-newsletter and our website (www.forcaliforniadoctors.com).
The Diagnosis Like any worthwhile endeavor, education is just the beginning of a process. For you, this means reading this book and digesting the general ideas before determining which of these strategies will make sense for your practice and personal situation. Reading this book is only the beginning—education without action is fruitless. Like a patient who let the pills you prescribed sit in the medicine cabinet, a failure to implement the protocols outlined in this book will result in no improvement in your situation. For your planning, the next step after reading this book will be to discuss your situation with one of the authors to put the knowledge you have gained into action for you. This way, you can ensure that your practice and your life will be as close to your “ideal vision” as possible and that you can enjoy your own “golden age of medicine.”
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Work Smarter, Not Harder: Don’t Just “See More Patients”
In the last chapter, you read how the business of medicine has changed. The implication for you is that you can’t keep repeating the same actions time and again and expect to see the results you may have received just a few years ago. But even many of the Doctors who come to this realization still think that the solution is to “see more patients.” In this chapter, we will briefly cover the flaws of this strategy and explain the ways in which Doctors can apply the concept of Leverage to address all of their financial and legal challenges.
“See More Patients”—A Tragic Flaw Confronted with any legal, tax, or financial setback, many Doctors follow the business strategy of “seeing more patients.” If the practice suffers because of a successful lawsuit, a sudden un-foreseen expense, or an unproductive associate, Doctors try to “make up for it” by seeing more patients in hopes of billing more. The same tactic is followed by many Doctors who are behind in their retirement planning, who feel like they are paying too much in taxes, or who are getting divorced. Any financial setback seems to yield the same resulting behavior. Many physicians approach their entire career with the business strategy of working as long and as hard as possible for as long as they can physically endure it. Does this remind you of any of your peers? Do you see someone like this when you look into the mirror?
Certainly, there are many flaws to such a business strategy. Let’s examine a few of these flaws so you can understand why other strategies are better:
1. This strategy has diminishing financial returns
Even if you work harder and see more patients, each patient you see will potentially net you fewer dollars. As your marginal expenses for each additional hour of work may be the same and your taxes may increase if you hit new marginal tax levels, your “take home” may actually become less per-dollar as you work harder. Even if this is not the case, the next two limits certainly apply.
2. This strategy has financial limits
Even if you worked as hard as you possibly could and you could make more on each additional dollar earned, you only have 24 hours per day. Regardless of your special-ty or sleep requirements, you cannot work 18 or 20 hours per day over an extended period of time. Thus, you are capped in the total income that you can generate by “just seeing more patients.” Chapter 1-4 develops this concept further.
3. This strategy will take a great personal toll on you
Extreme stress, physical ailments, divorce, decreased life expectancy—these are all common symptoms for Doctors who choose “seeing more patients” as their business mantra. Are these extreme personal costs worth it? We think not—especially given #4 below.
4. There is a “better way”
If working as hard as you could was the only alternative available to allow you to meet your financial goals, that would be one thing. However, the truth is that there is a much better concept upon which you can build your practice and personal finances. This concept will be explained below.
The Concept of Leverage Let’s consider the following all-too-common scenario. You work a very long day and generate $10,000 of billings. The insurance companies pay your practice $3,000 for your hard work. Your practice overhead is about 50%, so $1,500 of that income is gross profit. However, the $1,500 isn’t yours. Of the $1,500 you actually receive, the Federal, state, and local tax authorities will take 40% to 45%, leaving you with only $800 to $900. In other words, less than 10% of the work you do in a given day actually results in money you keep. This means that you have to do $3,000,000 worth of work in order to generate less than $300,000 of money for you to enjoy. Unless you want to continue to work ten times as hard as necessary, you have to learn to work smarter. This is the key to this entire book. We call it Leverage. If you refer to the Merriam-Webster Dictionary and look up the word “Leverage,” you will be presented with three definitions: 1. the action of a lever or the mechanical advantage gained by it 2. POWER, EFFECTIVENESS 3. the use of credit to enhance one’s speculative capacity We will offer very simplified interpretations of the three definitions of Leverage stated above. The first definition states that Leverage increases the amount of force exerted. To exemplify this concept, think of Leverage as the act of wedging a stick between two heavy rocks that you could not move with just your hands. In order to efficiently move the rocks, you need to push down on the stick that you wedged between the rocks. In doing so, the rock can be moved. Leverage—the wedging of a stick—allows you to move a rock you would otherwise not be able to move. The second definition of Leverage simply states that the act of Leverage allows people to be more efficient, effective, and powerful. This can be interpreted to mean that Leverage allows people to get more done in less time. It can also be interpreted to mean that Leverage allows people to get a job done with less effort. In either case, Leverage enables people to be more effective. The third definition of Leverage applies to credit and loans. In this definition, Leverage allows people to buy things they don’t have the money to buy in an effort for them to increase their financial capacity. To illustrate this definition, think of a home loan—the $500,000 home that is purchased by a family with only $100,000 of their own money to use as a down payment. Leverage is the ability to enjoy the use of or participate in the upside potential of an investment you otherwise could not afford.
Quite simply, Leverage is a method by which you can do more with less. Less effort. Less money. Less time. If you are looking for a shortcut to financial success, Leverage is the closest thing to it.
The Importance Of Leverage Successful physicians know that Leverage is an important tool to increase their wealth. Without Leverage, people would have to do everything themselves, including running their own business, earning money, handling financial affairs, paying for everything with only their own money, micromanaging everything at work and at home, and still finding time to eat and sleep. If you feel like this is an accurate description of your life, then you are not using Leverage. Leverage makes your life easier. Leverage frees you to do the things that are most important, most profitable, or most enjoyable to you. Leverage is what allows you to achieve greater levels of financial success. No matter what your financial goals, mastering the art of Leverage and incorporating it into your planning will help you reach these goals faster. As we mentioned earlier, Leverage is how physicians can increase the power and effectiveness of their financial planning. You can do the same. Leverage Limitations
A little Leverage is good. A lot of Leverage is better. Who wouldn’t want to get more done with less effort or get more done with less money? Those who understand Leverage have tried to maximize its potential and use for thousands of years.
Work Smarter, Not Harder It may seem like the amount of Leverage one can attain is endless, but there are restrictions on how much Leverage you can achieve. This restriction can be referred to as Capacity. Con-sider the following: · You can only exert so much force · You only have 24 hours in a day · You only have so much money · You can only borrow so much money · You can only manage so many people The principal goal of Leverage is to maximize efficiency. Efficiency is achieved when Leverage is increased to a point when you have maximized your capacity without going over. When you exceed capacity, problems occur. This causes you to have to address the method of Leverage all over again and possibly repeat certain steps. It is obviously an inefficient process when you have to duplicate any effort. This is why you should be careful not to exceed your capacity and create other, often bigger problems. Examples of problems caused by increasing Leverage beyond your capacity include seeing so many patients that you are: 1.) making billing and coding errors (Medicare fraud); 2.) working too fast and making mistakes (medical malpractice cases); 3.) hiring the wrong employees (employee lawsuits); and others.
You could theoretically increase capacity by working harder, but that is only acceptable if that is the most valuable and profitable use of your time and energy. Leverage is about working smarter, not harder. For this reason, increasing effort is not a viable method of increasing Leverage. The rest of this section will explain ways to increase Leverage and capacity so you can get even more out of your reduced effort. Getting better results from less effort isn’t just the subtitle of the book; it is the only way to achieve greater levels of wealth.
The Diagnosis Leverage makes life easier. Leverage allows you to get more done with less effort or with less money. Once successful investors achieve a measure of Leverage, they use their extra time and money to find better methods of Leverage. This is a never-ending quest to become more efficient and effective in everything they do, so that they can build and maintain their wealth and protect their assets. The next four chapters will specifically discuss how Leverage applies to financial transactions, effort, employees, and advisors. Lesson #3—Accept Referrals to Specialists—is perhaps the most valuable way to increase the capacity of your Leverage. As such, For California Doc-tors is filled with practical strategies that can only be enjoyed if you have a team of advisors to help you achieve greater Leverage.
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Making Your Money Work For You
Now that you understand the basics of Leverage and its importance in allowing you to get things done more efficiently and effectively, this chapter will apply those concepts to financial and legal planning. Subsequent chapters will demonstrate how physicians can apply these lessons to Leverage assets and people to maximize and maintain wealth.
Financial Leverage: The Foundation Of Wealth For thousands of years, every great construction project required the use of levers to complete the building process. This was true for moving the large stones to build the pyramids of Egypt and lifting the stones for Stonehenge. Levers were used to build all of the great castles, churches, synagogues, and mosques around the world. Financial projects are very similar to construction projects. They both can seem overwhelming at the beginning—a collection of complex tasks that must be executed with skill and precision. The success of both types of projects begins with significant and detailed planning. After the plans are drawn, they must be implemented accordingly. One person could never accomplish the implementation of such plans. Instead, the plan requires a team of people working together to accomplish the same goal—for us, that goal is building and maintaining wealth. Without exception, every high income earner and wealthy family has relied on financial Leverage in one way or another.
Once you grasp the concept of Leverage and the financial applications of Leverage, it becomes impossible to imagine how affluence could possibly be built without it.
Type Of Financial Leverage
Physicians can use different types of financial Leverage to create and build wealth. These include:
Leverage of Effort Leverage of effort is a way to get more out of your financial plans and investments. Since the goal of Leverage is to get more done with less effort, all forms of Leverage require that you Leverage your individual effort by including the efforts of others.
Leverage of AssetsLeverage of assets is one way to increase your financial status and get more out of what you currently possess.
If you had an unlimited amount of money or land, you wouldn’t need to accumulate any more wealth; however, this is not the case for most people. Since we all have limited resources, we want to get the most wealth/asset accumulation and financial protection out of what we have with the least amount of effort and the lowest amount of risk.
Leverage of PeopleSavvy business owners know that they only have the capacity to do so much and that the Leverage of people is one way to get more than 24 hours out of a day. By leveraging other people’s efforts, you can increase the number of tasks you can accomplish in a day. By leveraging people with special skills and expertise you don’t possess, you can get things done in much less time than it would take you to do these same tasks—if you could accomplish them at all.
Generally speaking, physicians utilize Leverage to some degree, but they are not thorough in their application. They try to Leverage effort by working hard—we know that. Doctors also may try to Leverage assets in their practice through medical equipment for which they can bill and they may try to Leverage people through technologists, nurses, and physician’s assistants, who can generate income to the practice. Still, few physicians apply this concept broadly enough in their practices to result in any real wealth building. Even fewer Doctors effectively Leverage people or assets with respect to their personal finances.
The Diagnosis Within each of the three categories of Leverage discussed above—Leverage of effort, Leverage of assets, and Leverage of people—there are a number of different applications. In the follow-ing chapters, we will review each of these categories, discuss how they can be used to generate wealth and explain which of these types of Leverage are more appropriate for creating wealth and which types of Leverage will best help maintain higher levels of wealth.
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How To Work Less There is no doubt that hard work is a key to success. However, this character trait is not one we can teach. Some people become harder workers as they mature, but seldom does a zebra change its stripes. There are generally hard workers and not-so-hard workers. The goal of this section on Leverage is to help you get the most out of any level of effort. Whether you fancy yourself hard working or laid-back, Leverage can help you get more out of your desired amount of effort. In this chapter, we will discuss the capacity problems of Leverage, how education can increase your ability to Leverage your effort and then suggest ways physicians can overcome the barriers of capacity. You Can Leverage Hard Work…But Effort Is A Capacity Problem The basic and inherent problem with effort is that you only have two hands and two feet, and there are only 24 hours in a day. If we consider the case of two landscapers (Lazy Larry and Manic Mike) with very different work ethics, we can illustrate these physical constraints we all have. Let’s assume that Lazy Larry and Manic Mike earn $50 per house per week. If Lazy Larry works five days per week and landscapes 8 houses per day, he will earn $2,000 per week before paying overhead, staff, equipment, taxes, etc. Manic Mike can work seven days per week and landscape 10 houses per day. This would give him precious little time off for family or personal time, but he would earn $3,500 per week before all of his expenses.
Both of these landscapers might consider themselves successful (depending on their goals and values). But if hard working Manic Mike wants to make more money, there aren’t enough hours in the day or days in the week unless he does something that earns him more money per house or he finds a way to Leverage something other than his own effort. The next application of Leverage could help Mike do just that.
Leveraging Education The idea of leveraging education to create wealth is no secret. In fact, it has become part of the American Dream. For over a century, immigrants have come to America and have taken advantage of the educational system. They have pushed their children to do well in school in hopes that they would get a good job and enjoy a higher standard of living. They have also pushed their children to find careers that pay them more money than a career like Manic Mike chose. Leveraging education is a key element of building and protecting wealth. To prove this point, consider the following salaries of highly educated professions. When considering the earning potential of these professions, keep in mind that the median U.S. household income for the year 2007 was $48,201, which means that half of all United States households earned less than $48,201 per year. (US Census Bureau’s 8/27/07 Current Population Survey (CPS)). According to a USA Today article on 1/18/06, the first year salary plus signing bonus for an MBA (2 years of graduate school) was $106,000.
According to MD Salaries (www.mdsalaries.blogspot.com), the first year salary of a neurosurgeon ranged between $350,000 and $417,000 in each of these cities: Houston, New York, Miami, Los Angeles and Seattle. Neurosurgery requires the completion of four years of medical school, a one-year internship, and a rigorous 5- to 7-year residency. Thus, there is no doubt that leveraging education can help you earn more money per year and increase your wealth faster than if you had a job with a lower level of education. Physicians use this type of Leverage quite well.
Education And Effort Are Not Enough Would you be surprised to hear that the neurosurgeon mentioned above and Manic Mike have the same problem? While we are not saying that Mike is performing brain surgery, we are suggesting that they both have the same fundamental problem—albeit at a different level of income. Mike doesn’t have enough hours in the day or days in the week to increase his business. Similarly, a neurosurgeon’s income is limited by the number of surgeries he can perform as well as constrained by the number of hours in a day and days in a week. Even if you assume that there is an endless supply of patients who need brain surgery, and there is an endless supply of lawns to be mowed, the surgeon is limited just like Mike. In other words, a landscaper earning $50 per house has the same capacity problem as a neurosurgeon earning $500 per hour because: 1. They are limited in the amount of money they can earn until they figure out how to Leverage what they do 2. They only make money when they are actually working This is a lesson that savvy business owners and investors figured out long ago. As a result, the most successful business owners: · Always focus on the Leverage of any business. · Never consider increasing effort as a legitimate, long term means to increasing income. · Never enter into a business that requires them to constantly “work” to make money.
For these reasons, we prefer to focus our articles, seminars, books, and personal consulting recommendations on strategies that help Leverage assets and Leverage people.
The Diagnosis All teenagers have parents, teachers and coaches who tell them to work harder. We prefer to tell you—and show you—how to work smarter without having to work harder (or having to clean your room or take out the trash). The Lesson applies to anyone—no matter how hard working or lazy you may be. If you want to work less and build more, you can do it. Applications of this “smarter working” lifestyle will be the focus of the next two chapters.
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Getting the Most Out of Your Assets You have undoubtedly heard the phrase, “It takes money to make money.” No truer words have ever been spoken. It always takes some investment to generate a return. This chapter will explain how successful investors Leverage assets to create and sustain a high level of wealth. A partial list of assets that can be Leveraged includes: 1. Your own money 2. Other people’s money (sometimes shortened to simply “OPM”)
3. Intellectual property
Leveraging Your Own Money Leveraging your own money is the oldest and most basic form of Leverage. It has been documented all the way back to the ancient times of kings and emperors. These wealthy empires had enough money to fund expeditions to discover new lands and acquire even more wealth. A visit to any of the museums of Rome or other ancient cities will bear witness to this Leverage. Hundreds of years later, you can witness similar Leverage right here in America. Successful investors make their capital work for them in various ways. To illustrate this point, let’s take a look at one of the nation’s most flamboyant and public billionaires—Donald Trump. If you visit Trump’s website, you will see that he has a significant portfolio of real estate which includes properties in New York, New Jersey, Honolulu, Los Angeles, Chicago, Florida, Las Vegas, the Dominican Republic, Seoul, Toronto, Panama, Mexico, and Connecticut. Additionally, he has future plans to develop properties in Soho, Atlanta, New Orleans, and Dubai.
Trump was able to expand his real estate portfolio because he Leveraged his assets. His earnings from real estate generated income for him to support his expansion into golf clubs in six cities, four casino resorts, various television programs and pageants, a university, merchandise, a travel company, restaurants, skating rinks, and other projects. Once Trump started making money from his new ventures, he was able to Leverage those assets into more projects. The profit from those additional projects gave him the capacity to start even more businesses.
You don’t have to be a billionaire with a ridiculous haircut to use Leverage. If you have money, you can purchase land or real estate and lease it to others who can’t afford to buy the property outright. If you have money you don’t need to spend to support your lifestyle, you can invest in long term investments that have higher expected returns than shorter-term investments. These may be investments that otherwise are unavailable to investors who require a short-term return to pay bills. Lastly, when you have money, you can use it as collateral to borrow money and use other’s people money to make money, too. This is what Trump and other sophisticated business owners do all the time to maximize wealth. This is the next application of Leverage.
Leveraging Other People’s Money Generally, using other people’s money is considered to be the “classic” definition of Leverage. Recall from the first chapter in this section that this is the third definition of Leverage in the Miriam-Webster dictionary list. Using other people’s money as Leverage certainly relates to credit, but we will broaden its definition to include all types of Leverage involving OPM. The most common type of OPM is debt. Many wealthy people throughout history have achieved their wealth by borrowing at lower rates and reinvesting the loan proceeds at higher levels of investment return. Donald Trump’s empire was built in a similar fashion—typical of most real estate investors. They put down a small percentage of the total costs to build properties and used OPM to fund the remainder of the costs. By borrowing money from the bank at rates that may be as low as 6% to 8%, and developing properties that may have an overall return of 15% per year, the Leverage gives the investor an amazing return on actual dollars invested. Consider the following: Investor Amount Invested Rate Amount Earned Total $10,000,000 15% $1,150,000 Bank $8,000,000 8% $640,000 Trump $2,000,000 25% $510,000 Based on this these numbers, Trump can actually get a 25% return on his investment by using OPM Leverage to fund a project he anticipates will yield a 15% total return. This is a classic example of how Leverage works with real estate.
In other situations, like starting a business or making another speculative investment, people were able to take higher levels of risk because they didn’t need the money to pay for living expenses. This allowed them to take chances and realize higher investment returns than less risky investments offered.
The other way to Leverage OPM is called equity—that is, taking someone else’s money and giving them a piece of a business or investment in return. In this situation, the investor takes more risk, but also gets a higher expected return than the bank would get with debt. Though this kind of deal ultimately costs the investor a higher piece of their total return, it doesn’t have monthly or annual payment requirements (like a loan does). This gives the wealthy more short-term freedom with regard to cash flow since no interest or principal payments are due each month. In fact, even if there is a profit, the wealthy may be able to effectively borrow the investor’s share simply by not distributing it and reinvesting in the next project.
Equity is best suited for deals that are more speculative and cannot guarantee regular short-term income. Even well established, publicly traded companies (like AT&T, Disney, Oracle, etc.) do this on occasion. Many wealthy Americans have learned a lesson from these companies and have offered equity positions to investors to help fund the growth of their family wealth while offering participation in the upside.
Leveraging Intellectual Property Since World War II, the most significant wealth accumulation has resulted from leveraging intellectual property. This intellectual property could be an idea, like McDonald’s fast food assembly line concept, or a patent on a technology millions of people use, like Microsoft Windows. Other forms of intellectual property include copyrights like the Star Wars films or Harry Potter books. In each of these cases, an individual or a small group of partners comes up with an idea, proves it can work, legally protects the idea, and then attempts to Leverage it in ways where they can make money as a result of other people’s efforts. Let’s consider three examples. Bill Gates and Microsoft created the Windows operating system. He (meaning his firm, Microsoft) didn’t create a desktop computer or laptop to run his operating system. He just created a system that other people would run on their computers. Every computer that is built that runs Windows results in a license fee to Microsoft. Gates didn’t have to drive the increase in the sale of computers. Rather, he found a way to profit from the efforts of all the other companies who were building and selling computers, and from the efforts of all of the software manufacturers who were designing products to make the use of a computer a more enjoyable—not to mention necessary—part of life.
Another example is George Lucas. Lucas created the Star Wars concept. He made a few movies that became classics. But the interest in the characters and story line didn’t end with the movies. It expanded to action figures, lunch boxes, video games, and countless other items that were based on his concept. Lucas could have tried the “do it yourself” technique, but that would have only yielded a fraction of the financial profit the Leveraged approach did. Instead, he licensed his intellectual property to other people. Their efforts made Lucas hundreds of millions, if not billions, of dollars.
The last example is the McDonald’s restaurant. One successful restaurant might have generated $100,000—$250,000 of annual profit. An international chain of restaurants whose focus is on fast, consistent food has served 3 billion customers and is worth billions of dollars. One of the authors of this book has actually had a private tour of one of the three facilities that process and package all of McDonald’s food worldwide. It is truly an operation designed to create consistency and maximize Leverage.
In less extreme cases, every city has a restaurant, dry cleaner, or other business that isn’t particularly profitable on an individual basis. However, the owner may be able to take the unique approach, branding, experience, or know-how and open additional locations to achieve a higher level of financial success.
The Diagnosis All three categories of leveraging of assets—leveraging your own money, leveraging other people’s money, leveraging intellectual property—can be very valuable. Certainly, many people have achieved significant levels of wealth by doing so. The important lesson is that you need to get the most out of your assets if you want to achieve a higher level of wealth and get the most out of your practice. Now that you know how sophisticated investors Leverage assets, you are ready to learn the most powerful Leverage technique—leveraging people!
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Using Other People to Make You Money While leveraging assets and capital are fundamental wealth-building techniques, these techniques cannot succeed without also leveraging people. At the end of the day, every deal, investment or transaction needs people to manage or oversee it. No matter how rich you are, you still only have 168 hours per week. To our knowledge, no one has figured out how to be in two or more places at one time. As a result, the single most powerful type of Leverage is the Leverage of people. By properly leveraging people, you can have multiple levers working at once. This is where greater wealth is created. This chapter is going to explain why—and how—to get the most out of leveraging people. More specifically, we will focus on: 1. Leveraging employees 2. Leveraging advisors Leveraging Employees
The most common method of leveraging people is by hiring employees. Those with financial means can afford to hire other people to do jobs for them. The employer has successfully Leveraged people if the collective group of employees helps the owner earn more money than the amount it costs the employer in salaries and benefits.
Simple Leverage: Pay Less Than Productivity The more employees you have, the more potential Leverage opportunities you have. Sometimes you hire staff to support these employees. That is an investment that you hope increases the productivity of the other employees by more than the cost of the administrative help.
To Leverage your employees successfully and yield a profit, a simple rule is to pay people less than the value they provide your firm. Law firms have followed this lesson for years. For example, law firms may bill out attorneys to their clients at $200 per hour and require the attorneys to bill out 2,000 hours per year. Though the firm collects $400,000 for the services of the particular attorney, they may only spend $300,000 for that particular attorney’s salary, benefits, and allocated overhead. The firm earns $100,000 per attorney. If they can afford to hire 10, 20 or 100 less-experienced attorneys and can find enough work to keep them busy, the senior partners of the firm can earn a very nice living-10 to 25 times that of Average Americans and 5 to 10 times that of a less experienced attorney. In doing so, law firms are leveraging their employees’ productivity. They are training less expensive attorneys to do the work. This, in turn, enables the senior partners to focus on very profitable activities like landing contacts and building relationships for the firm.
Benefits To Leveraging Employees In many circumstances, it may not be as easy to quantify the financial return on a Leveraged person as it was in the law firm example above. Often, there may be equally important qualitative benefits in addition to the quantitative ones. For example, consider these benefits: 1. By leveraging someone else, you are able to spend your time performing tasks that create greater profits. This is a quantifiable benefit. Using the example above, by having associates do the work, the law firm partners can also do what they are best at bringing in new business. This is likely a “highest and best use” of their time. What is your “highest and best use?” You already have someone to sign in patients, take vitals, file charts, do the scheduling, and other valuable tasks. Is it possible to pay someone to do any more of the less profitable tasks you currently perform? If so, you can take advantage of Leverage! 2. By leveraging an employee, you are able to spend your time doing things you WANT to do. This is a qualitative benefit. If you could have employees perform more of your work, perhaps you could spend time doing something you prefer to do, such as playing golf or spending time with your family. This is not being lazy—it is using Leverage, not for increased profits, but for a better life. What is more important that that? 3. By leveraging experts, you are able to spend time on your own areas of expertise and save money. As we will see in Lesson #3, leveraging advisors who have more expertise than you have in certain areas is fundamental to long-term success. While it is possible you could learn to become a CPA, money manager, or an attorney, learning these jobs would not be time well spent. This would take you away from things that are a good use of your time. Leveraging people who have expertise is very economical. You can pay them less to help you in certain areas than what it would cost you (in time, money, and aggravation) to learn these fields yourself and then try and do the work yourself. Bill Gates didn’t learn how to build computers and George Lucas didn’t learn how to make action figures, yet they both benefited from someone else’s expertise in those areas.
Now that you see how important it is to Leverage employees, let’s learn the importance of leveraging advisors.
Leveraging Advisors Leveraging advisors is one application of Leverage that the wealthy believe is integral to their success, yet many Doctors ignore or undervalue it. Look at any wealthy person’s inner circle and you will almost always see key business and financial advisors who are involved in most of their decisions. The advisors’ charge is to help develop a plan, analyze how every step fits (or doesn’t fit) into their plan, and help them avoid numerous pitfalls that could arise from straying from the course. Simply put, most successful business owners recognize that it makes more sense to hire advisors to help them handle their planning than it does to try to do it themselves. Doing it them-selves is not only a bad idea because the client undoubtedly does not have the experience and expertise in all the areas needed in planning, but it also violates the principles of Leverage. By “doing it themselves,” Doctors would be spending their time sub-optimally, instead of in the desired highest and best use of their time. In other words, does it pay for a neurosurgeon to spend three hours of his time researching a disability policy when a disability expert could do it in one hour? Also, consider that those three hours could have been spent seeing patients and making more money than the disability expert will be paid. And do you think the Doctor would enjoy this research more than he would enjoy playing golf or relaxing on the beach? Probably not. Finally, what is the likelihood that the Doctor will make the right analysis and decision on the policy? Is he an expert? Has he looked at hundreds or thousands of policies in the past? Why would you think he would do any better job performing this task than would the disability expert in performing a neurological exam? Despite the obvious pitfalls of fighting the principles of Leverage, some Doctors make the mistake of foregoing advisors and attempting to “do it themselves.” They are stuck in the mindset of saving a penny and losing a dollar. This leads us to a very important statement that may seem crazy at first: Doctors must realize that time is worth more than money.
Instead of looking for ways to save money by doing things themselves, Doctors must look for highly qualified people to handle as many tasks as possible so they can focus on the best possible use of their valuable time. Since the right advisory team has expertise that physicians don’t have, the right advisors can do the job in much less time than the physician or the wrong advisors could. Since a job done poorly will need to be repeated, doing it right the first time, even at a higher hourly rate, can actually save money in the long run. Additionally, when a Doctor can pay someone to do what they do best, this gives the physician more time to do what he does best—which undoubtedly is what will make the most money (seeing patients, running a practice, investing in real estate, etc.).
Complexity Demands Leveraging Advisors We have found that, the greater the wealth of the individual or family, the more important the role of the advisor team. As the client’s wealth increases, the more complex the comprehensive financial situation becomes. As the situation grows more complex, the client’s need to Leverage the advisors’ expertise and experience to save time and maximize total benefit increases exponentially.
To illustrate how complexity grows exponentially, let’s consider the following two situations. The first chart below shows the relationship between two people. The second chart shows the six different relationships that exist when you have four people in a group.
Situation 1: Relationship Between Two People
In the chart above, you can see that John and Paul have one relationship. There is only one relationship when you have two people. This seems relatively easy to manage as you have two people and only one relationship. Let us see what happens to the complexity of the interactions when we have four people in a group. This is illustrated in the next chart.
Situation 2: Relationship Between Four People In the chart above, you will see John, Paul, George and Ringo. There are two additional people than we saw in the first chart. Doubling the number of people in the group actually increased the unique interactions by 500% from 1 interaction to 6 interactions (John and Paul, John and Ringo, John and George, Paul and Ringo, Paul and George, George and Ringo). Though it only takes one good relationship for two people to work together, it takes six good relationships for a group of four people to work well together. If one of the six relationships is strained, the entire group may have to be disbanded.
This same analogy can be applied to the elements of your financial plan. All elements of your plan, and all advisors in your plan, must work well together. That means that it is at least 500% more work to manage four businesses or elements of a comprehensive financial plan than it is to manage two businesses or elements of financial plan. If you have eight businesses or elements of a plan, then you have 56 different interactions to monitor. You can see how the complexity of the situation increases quickly!
To see how this general theory of complexity can be practically applied to planning for physicians, we need to understand what the physician’s concerns are. Below is a partial list of common financial planning concerns among physicians: · Managing growth of the assets · Managing lawsuit risks from employees, patients, and competitors · Protecting assets from eventual lawsuits · Managing the investment risk while attempting to grow assets · Managing tax liabilities to maximize after-tax growth · Managing business succession and estate planning concerns · Protecting family members against a premature death or disability · Protecting family’s inheritance against lawsuits, taxes, and divorce
Surprisingly, physicians worry about all of the aforementioned items while continuing to do everything they did to help them reach their current level of success. If you think this is impossible, you are correct. It is impossible to do all of these things as a “one man show.” Leveraging advisors is essential—it is a fundamental precursor of long-term success.
The Diagnosis This section explained why Leverage is such an important key to working less and building more. You learned how successful people—whether they are physicians with “medical businesses” or other business owners or investors—Leverage their own assets, other people’s money and people. You learned that the biggest limitation to Leverage is one’s capacity. This can be limited time or limited money. In either case, the best way to increase your capacity is to build a team of experts to help you efficiently maximize Leverage and increase your capacity for Lever-age. This is the focus of Lesson #3—Accept Referrals to Specialists, which could also be titled Building the Right Team of Advisors.
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LESSON 2 – Don’t Try to “Fit In” With the Crowd
When it comes to financial and legal planning, the idea that everyone is created equally couldn’t be further from the truth. As a Doctor, you are very different. You went to college, then medical school, then residency, then possibly a fellowship. You have much more education and training than the Average American. Though a society needs people to play various roles, you deal with issues of life and death. As a result of your educational and functional differences, you are in a different situation and have very different concerns. You have a more complicated and demanding profession. You earn more money. You pay more taxes. You have more liability. As a result, you need different advice. Better advice. More appropriate advice.
Before you can understand what advice is right for you, you need to know what advice is wrong for you. To know why most advice is wrong for Doctors, you need to understand the quantifiable and qualitative differences between physicians and Average Americans. Then, you need to understand how the popular media works and how that information can be very detrimental to a Doctor’s planning. These are the issues that are discussed in this Lesson. Once you understand and embrace your differences, you will be ready to take advantage of the practical lessons offered in For California Doctors.
Understanding The Average American Before you can understand the unique challenge facing Doctors and what the more successful ones do to achieve and maintain their wealth, you must first understand the demographics of the Average American. This is crucial because, in order to learn how to act differently in your wealth planning decision-making, you have to compare your financial circumstances to the circumstances of the “norm.” It is only through these comparisons that you can truly appreciate the different wealth challenges you have and how you can effectively deal with these challenges. In this chapter, we will examine the Average American in terms of income level, federal income taxes paid, source of income, retirement needs, asset protection concerns and estate planning challenges.
Important Note: Throughout this book, we will refer to the term “Average Americans.” We recognize that, to some, this term may at first seem demeaning or condescending, or imply some sort of value judgment. We do not intend it that way. It