By Bradley Woolridge, Director at Burns Acutt
One of the most common questions I get asked is, “Why is financial planning relevant?”. To paraphrase the wise business magnate and investor Warren Buffet: don’t save what is left over after spending, but rather spend what is left after saving.
Tax planning looks to the future in much the same way.
Having a solid plan in place, outlining which taxes you are going to pay, approximately how much, for what reason, and when you plan to pay them, will prepare you to deal with those inevitable annual letters from your accountant, and enable you to make all ancillary financial decisions with the confidence that your tax is under control. Or, if you prefer, simply outsource the whole job to a taxation and accounting services firm.
Whatever you decide, once you’ve committed to making tax planning a habit, it will empower you to make a variety of other important financial decisions.
PLANNING FOR PROPERTY
For instance, a plan will give you an accurate idea of what your personal budget is so that you can be confident about the size of property you can afford. Many professionals tend to mistakenly overestimate the value of their personal investment budgets as they fail to base it on their after tax earnings.
What happens too often is that the typical medical professional will turn to his pre-tax earnings, even including VAT in some cases, from which to work out what his income is. This is a big no-no and create a major cash flow issue if financial decisions are based on this.
Furthermore, certain key expenses are often incorrectly dismissed as “personal expenditure”, and many medical practitioners we find, forget to include their partner’s income and costs when investment decisions are made.
They tend to be far too busy with their patients to meet with whoever is responsible for their practice’s debtors and creditors management, which means they don’t maximise their tax payable or their future investment prospects. They seem to focus solely on a retirement annuity (RA) plan and the earning of interest to secure their financial future and maximise tax return potential.
So why don’t medical professionals invest in property more? One of the main reasons appears to be an apprehension towards debt, which isn’t necessarily a bad attitude to have – however, major drawbacks to purchasing a property cash, is that without added interest, not much qualifies as tax-deductible, and the rental soon becomes onerous on your tax payable, unless of course you are dealing with your primary residence.
From our perspective within the professional services accounting field, we’ve identified the following three questions as the most common concerns among our medical professional clients:
• In order to live comfortably, what size bond and property value should I be considering?
• Is an RA adequate for my retirement?
• Is paying cash for a property not better than paying interest on a property investment?
When you start to compound all these questions, and take into account all the financial and tax considerations they require, then you can start to get an idea of how, over the span of a 30-40 year career, two similar-earning individuals could end up with vastly different net asset estates. And the difference lies largely in having a tax plan with future wealth creation in mind.
The individual with a narrow worker mentality – where the focus is on working, earning and trying to make good decisions – can expect an income that will probably be ineffective to a minimum of a few percent per annum.
However when compounded over the span of their career – Say 25 – 35 years, will likely result in a net wealth of a quite a few million rand less than their tax-planning counterpart.
This can almost entirely be attributed to the time invested in understanding their financials holistically and utilising those few percent differential to amass substantially more wealth than their counterparts.
As practising chartered accountants, my team and I see evidence of this divide daily, yet the sheer magnitude of the divide between those that do financial and tax planning and those who don’t, never ceases to amaze me.
We are helping clients every day to achieve financial independence sooner in their lives, so that they can choose to retire earlier or simply work for the pleasure of service.
We help ensure they have stable futures, that their children are taken care of through generational wealth creation, and that they enjoy less stress overall.
Our vision is to continue guiding medical professionals towards excellence in their financial planning, so that they can continue to achieve even greater financial efficiency and return year after year.