We hear a lot in the news about mortgage stress, with Australia having one of the world's most expensive housing markets. But many people - including doctors themselves - are surprised to find out that even well paid medicos can end up overcommitted and struggling to meet their home repayments.
You've finished your training, time to buy a house?
The number one thing that our clients ask when they finish their training is 'how much can I spend on a house?'. After many years in training, living on a registrar's wage, and often with a young family, it's understandable that many newly qualified doctors put buying a home at the top of their to-do list. It's part of the great Australian dream.
Unfortunately, that dream can turn into a nightmare if you aren't careful. It's very easy to look at some of your colleagues in big houses and be tempted to set a big budget and buy the dream home. But, if you don't do your homework, you could find yourself struggling to make repayments. We see this more often than you might imagine.
Can you really afford that luxury home?
We work with our clients to develop a realistic budget for their home purchase. We start by looking at your income, and determining how stable it is. Will it increase in the future? If so, by how much and how certain of this are you? In the case of doctors going into private practice, we often suggest delaying their house purchase until they have established a pattern with their income, so they can buy with confidence.
Once we have an idea of income, we then need to have a good understanding of your current and future expenditure. For example, will your children go to private school? Do you have any other big expenditure plans? Or do you have current commitments that will cease in the near future?
Using realistic income and expenditure estimates, we then combine these to project current and future cash flow over a number of years. Often we find clients have done a rough one-year cash flow at the current interest rate, but have not thought much beyond this. By financially modelling future years we can clearly see changes in surplus cash. We can then model different purchase scenarios, including looking at the effect of increased interest rates. We also show on a year by year basis the home loan being repaid.
Two stories from our practice help to highlight some of the issues you need to consider with our help.
One husband and wife came to us looking to buy a million dollar home, confident that they could make the repayments on their joint income as doctors. When they looked into it more carefully, though, they realised the kinds of homes they were looking at were more like $1.4 million. When we worked through their life goals, it also became clear that they wanted to start a family and the wife wanted to work part-time after their children were born. Once I showed them the effects of their decreased income in future years, and possible interest rate rises, they realised their budget was well under their estimate.
Another client came to us looking to purchase a $1.2 million home. Had he been in his mid-30s, I would have confirmed that this was a reasonable decision. But, after lengthy training, he was actually in his 40s. I used financial modelling to show him that he would need to work at full capacity to 65 to pay off a mortgage of that size. With this scenario in front of him, he opted for a less expensive property.
Expert advice on finance and more
Sorting out your budget is only the start. Medical Financial Group can also:
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Business skills for doctors a must
If you ask most people what's required to be a good medico, they're likely to say that medical professionals must be highly skilled in their medical specialisation.
It's true that clinical skills must be of the highest standard. But when it comes time to learn the skills required to set up in private practice, business skills are also critical.
Think about it: you've probably spent more than a decade acquiring your clinical skills. It's a strategic investment to spend a little more time acquiring the core business skills that will make you an informed and effective practice owner.
Increase your knowledge, reduce your risk
Yes, you can employ a practice manager for the hands-on, day-to-day operational side of your practice. And yes, you should definitely seek advice from experts on aspects of practice management such as accounting, tax, and business development.
But, as an owner or partner, you need to understand business issues so that you can steer your practice in the direction you want it to go. As an informed practice owner, you'll also be able to ask the right questions of your managers and advisers, and fully understand the answers they give you.
To do this, you need to know about:
Good business systems and processes are the key to continuous improvement and risk management. In this post, I'd like to talk about two critical business systems: cash control and staff backup.
Cash control is critical
Almost every medical practice will have some patients paying their fees in cash. You need a system to handle cash from when it is received to when it is banked, and a mechanism to trace cash payments.
A procedure document should tell your staff what to do when cash is received (provide receipt, mark off in practice software, get authorisation from a second staff member) and include template forms to be completed when holding cash until it is banked.
When things go wrong
Without a formal cash control procedure in place, you are vulnerable to theft. I know of one practice where a staff member was able to pocket cash received and then delete the related patient consultation from the doctor's calendar, removing evidence that it had taken place. This behaviour was detected fairly quickly, but expensive legal fees were necessary to terminate this staff member's employment.
Backup is not just for computers
Staff backup is also critical in managing risk.
Many small practices feel that they can get by with one practice administrator or manager. It's true that overall labour costs are generally lower when you employ only one person even when they do a lot of overtime.
But being dependent on just one practice manager or administrator is dangerous. If that person gets sick, goes on holidays or, worse, decides to leave, all the intellectual property associated with running your practice is missing. And any disruption to the administration of your practice can have significant financial and reputational costs.
Having a second, part-time manager or administrator, even for just one day each week, is well worth the extra cost. It will give your practice some insurance if your primary staff member is unavailable for whatever reason.
Increase your knowledge, reduce your risk
Every one of my clients has felt more secure and confident once they acquired a better understanding of the business aspects of their practice. Watch our free practice management videos to kickstart your own business training.
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In this post I want to talk about a topic that's vital for all of us: personal insurance. In particular, I'm going to look at trends in insurance claims on super funds, how they're affecting those funds and, possibly, your premiums.
Insurance claims are on the rise.
In Australia, insurance claims for illness, injury and disability are on the rise due to a number of long-term trends.
Secondly, our population is ageing. This means more policy holders are reaching an age where they are likely to be claiming on their insurance policies or are leaving the pool of policy holders and taking their premium payments with them. The problem is compounded by the fact that there are also fewer young people available to enter the pool of policy holders.
Thirdly, over the last few years, insurers have broadened their definitions in a bid to win more clients, increasing the number of "defined events" that can be claimed for. Whilst this appears good for policy holders, ultimately it can lead to an unsustainable cost structure that has the potential to increase policy premiums and damage the insurance industry over the long term.
Lastly, lawyers are becoming more active in helping people make insurance claims against super funds, as a recent Sydney Morning Herald article points out. The disappointing aspect of this is many of society's more vulnerable are paying a significant portion of their claim to lawyers. Whereas, if you have a financial advisor, they will generally deal with the claim as part of the service they provide.
Insurance through super may not be so super.
Superannuation firms are obliged by law to provide insurance cover to members, and I believe the trends described will place increasing pressure on these funds. Over recent years, many premium rates have increased significantly but these often go unnoticed as the total dollar cost of the increase is often unclear. Plus premiums are collected through the super fund which is less transparent than the premium leaving your bank account.
As premiums rise, increasing numbers of educated, fit and healthy people are likely to leave insurance schemes run by super funds as they find better value insurance elsewhere. The result is a concentration of higher-risk members and ongoing premium increases as the claims experience worsens.
What does this mean for you?
You need to understand what personal insurance you have and whether a super fund is the most cost-effective way to get that insurance.
I think there's a myth that if you want to pay your insurance premiums from your super contributions, then you must have your insurance with that fund but that's not necessarily the case. It is possible to fund your insurance through your super but have your insurance provided by a different party. Also don't assume that if you have insurance cover through your super fund it will be cheap. Insurance through your super fund can often be quite expensive. You also need to review your insurance policies regularly and check any changes or premium increases.
It's always worth taking advice about your personal insurance from an independent adviser. At Medical Financial Group, we understand price is important but believe it remains only part of the value equation. We recommend the right protection strategy taking into account all of your circumstances. We review this each year to ensure that, if the worst happens, there are no surprises. This involves reviewing a client's changing needs as well as their super, insurance and estate planning arrangements to make sure they work together to deliver the required outcome.
Please feel free to contact me with any questions you may have via:
Phone: (07) 3363 5800 or
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Establishing a medical practice involves many opportunities but also many challenges. Understanding how to start a medical practice the right way can save you much heartache (and money) down the track.
As a chartered accountant advising small businesses for the past 20 years, I've gained some insights into human nature and how emotion tends to influence people's decisions when starting businesses of all kinds.
Many of my clients have approached their new business with rose-coloured glasses. They don't want to think that bad things could happen. For example, when starting out, they don't want to think about problems that could arise with business partners, employees or service providers.
They also tend to think a lot about their cash flow, and are often very concerned to control expenditure in establishing their business. This is both sensible and understandable, as fit-outs, equipment and computers can eat up a lot of money if spending isn't well managed. But it's also important not to scrimp on other important, less obvious elements that I believe every good business needs.
My advice to medicos setting up in private practice is dream of (and prepare for) the best, but also to plan for the worst. Start on a firm foundation by mitigating your risk exposure.
Four essentials to put in place when starting your practice
Four of the most important things to put in place when setting up in private practice are:
1. Legal agreements - Professionally prepared legal agreements will protect you when employees and partners leave, whether that is their decision or yours. These agreements should cover expectations for all parties and the how exiting the practice is to be undertaken. Without these, potential complications could be significant and costly. Don't rely on agreements prepared on the back of a napkin. You need legally binding documents prepared and reviewed by a qualified legal representative. Otherwise, agreements can be easily overturned. These agreements will protect you and your business at its outset and into the future.
2. Software programs - A good practice management software program isn't cheap but it's a vital investment. Your software program will maintain patient records, billings and receipting. Many offer extra features that can make a major difference to your practice. For example, the Genie program (which costs $10,000-15,000) will also transfer patient billings to various health funds for payment with receipts from those funds automated. These programs can save you and your staff time and help you manage debtors. You don't want to have to recover bills three years down the track.
3. Procedures manual - A good procedures manual is also an important tool. This should detail doctors' expectations: what they need and expect to happen to ensure an efficiently run practice (i.e. when they need stock reordering, billings to be delivered, receipting completed). Your procedures manual is a living document that should develop as the business grows. The main thing is to ensure that all the tasks that are essential to the business are covered. It can also be useful to help manage staff as it sets out the performance required of them.
4. Staffing arrangements - You should always keep in mind the need for a backup plan. The worst thing you can do is have one full-time person in a practice whom you depend on completely to keep things running. If that main person gets sick or leaves unexpectedly, you need to have someone else who knows how to help maintain the business. One simple strategy is to make sure your reception role is covered by at least two people. And, as your business grows, a practice manager will be essential. Make sure you recruit somebody with the right skill set for any role. After all, there's no point having someone who has only reception skills if you also want them to cover bookkeeping duties.
The best strategy for starting a medical practice the right way is to spend some of your cash flow at the outset to cover these four essential items. It's a worthwhile investment to put in place safeguards that will protect what you will spend years building.
Remember: dream of the best - plan for the worst.
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You've probably heard it said that good financial planning is based purely on facts and figures, and has nothing to do with emotion, right?
Well, no, actually! In this post I'm going to turn that idea on its head, along with some other standard 'truths' you might have heard.
In my opinion, money on its own is not the secret to happiness. I've learned this over almost 30 years in the financial services industry, advising people on their financial futures.
My clients often arrive in my office for the first time thinking that my role is to help them accumulate more cash reserves, or buy a business, or own a larger home or more expensive car.I can help you to do all, or any, of those things. But, in fact, my main job is to help you achieve greater emotional satisfaction in your life. Money is just a facilitator for that.
Let me explain.
At Medical Financial Group, we spend time getting to know you and what you want out of life, so that the financial decisions you make will help you to achieve your life goals. The first time we meet with you, we explore your values, goals, and vision for your future. If you have a life partner, we encourage you to bring them along so you can both express your thoughts about your future with each other.
We start by talking to you about what's important to you right now, then in the short term and longer term. We work through a systematic questioning process designed to reveal your own personal definition of "success". We then record your thoughts on an 'advice map' that's unique to you.
What's important to you? Maybe it's the best education you can afford for your children. Maybe it's having a successful practice but also having quality time with your family. Maybe it's a good home, or regular holidays, or being able to contribute to the community through research or some charitable work. Or maybe it's a combination of all of these.
Working out what you want is the starting point for everything. For many clients, this first session is a revelation. Often they haven't really reflected on their life goals since they stepped into university at 17 or 18. They've been so busy studying, training and starting a practice that they haven't had a chance to stop and think about the bigger picture.
With our help, you get an opportunity to take a breath and spend time thinking about what will really make you feel fulfilled. You may be surprised; my clients often realise that there's a gap between their financial behaviour and what they'd actually like to achieve. And husbands and wives are often surprised by what their partner has to say. It's a great opportunity to develop a shared vision for the future that incorporates both partners' priorities.
To enhance your financial future over the long term, it's vital to work out what you want and to put plans in place to help you achieve it.
Once we all understand what you'd like to achieve in life, we can work together to help make those goals a reality.
And the sooner you do it the better. One of the major findings of our recent white paper on financial independence for medical professionals was that many medicos wished they'd sought expert financial advice earlier in their careers, before they made major financial decisions and, in some cases, mistakes.
Planning early in your career can have a major impact on your financial success and happiness.
And here's where I turn another truism on its head. We've all heard the expression that 'hindsight is a wonderful thing'. Well, I believe that foresight is better. With help from a qualified financial adviser, you can avoid pitfalls and be confident that your hard work is actually moving you closer to where you'd like to be.
We can accurately model different scenarios before you make major purchases so that you can see their implications. For example, if you buy that luxury car you've always dreamed of, what will you have to give up? If you go into private practice, how many hours will you need to work to achieve financial viability? With our help, you can go into things with your eyes open and enjoy what you spend. Sometimes you may make different decisions as a result.
The best part of what I do is helping my clients work out what they want and how to get there.
Good financial advice isn't a couple of meetings and a few emails. It's about taking the time to get to know your client and having a conversation with them over many years. It's about establishing a relationship, asking the right questions, and providing options based on a sound understanding of the financial world and a sound understanding of your client's goals and values.
Here's my final reflection for this post. Some people say you can't put an old head on young shoulders and to an extent this is true. I think, however, if you're smart enough to seek advice you can reap the benefits of more insightful decisions while you're still young enough for them to make a real difference. And that can help to put you on the path to achieving the things that you really want.
Good financial planning - it's an emotional thing.
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