Accountants and financial advisors are often viewed as number crunchers and penny pinchers. This is because spending money is fun and having to control or slow down your spending is not. This series of articles will address how to spend your money on big ticket purchases such as cars, houses, cottages, investment properties, pools, boats, planes and art, so you can have your fun and minimize the damage to your bank account.
Separate big-ticket purchases into those that result in ongoing big expenses (cottages, planes, boats) and those that have few ongoing expenses (art). View those that have ongoing big expenses like a printer, which is easy to buy, but requires expensive toner. The ongoing expenses should be taken into account not just the initial purchase price. For example, a cottage may cost $1,000,000; however, the annual upkeep may cost $50,000. For the few times you will be using it each year, would you be better off renting it and using the cash you saved to pay down personal debt such as your home mortgage?
Dentists we encounter typically fall into two categories. Category one is those with little/no debt. Dentists in this category can afford to spend liberally. Category two is comprised of those who have significant debt and are able to secure more debt because of their income. The latter group of dentists should look to reduce their debt, although they are able to obtain more debt. Dentists in category two should avoid buying items even though they can afford the initial purchase since they may not be able to afford the ongoing expenses.
The question dentists often ask is can I afford to buy a cottage, car, boat or pool? Most of the time, the answer is yes. The question dentists should be asking in addition to the question of affordability is: Should I buy it, or would the money be better spent somewhere else?
Enhancing and preserving financial health is similar to enhancing and preserving one’s personal health. Can I afford to eat ice cream and french fries? In many cases, the answer is yes. Should I consume ice cream and french fries? In many cases, the answer is no.
Art is enjoyed by many and has little ongoing cost, except insurance. In addition, from a tax perspective, one can deduct an annual write-off of 20% (except first year of purchase) on Canadian art with a minimum cost of $200 if is purchased for business use. If you sell/remove the artwork for personal use, there will be taxes payable based on the appreciated value and the write-offs claimed in all prior years.
A pool often detracts/reduces the value of one’s home. Before installing a pool ask: “Will I enjoy this pool so much more compared to going to a community pool to warrant this expenditure plus the ongoing maintenance cost?”
A car’s primary purpose is to get you from point A to point B in a safe and reliable manner. Both a $40,000 car and $100,000 will accomplish this, but one at a significantly lower price. Many dentists will lease a car because they don’t have to pay $100,000 upfront, instead it’s only $1300 a month for 3 years which is easily affordable. The decision to buy the car now becomes a question of whether you can afford it instead of whether you should buy it to begin with. Imagine leasing a $100,000 car every three years for the next 30 years, you would end up paying $468,000 ($1300 per month X 30 years). Consider that you could buy five $50,000 cars which is a new car every 6 years and still have over $200,000 left over to use elsewhere.
A client who owns a Lamborghini lamented, “The worst purchase I have made is buying this car. Yes, I can afford it, but the money would be better spent elsewhere, and I should have just rented it for the few times I use it and instead used the money to buy my own dental building”.
Maintaining financial health can best be understood this way: Garbage is on the floor. There are two choices. Option 1: Bend down, pick it up and dispose of it, while I am physically able to do so. Option 2: Kick the garbage down the street. Eventually, I will have to dispose of the garbage, except in some cases, we are forced to do so when we are least able. We suggest dentists make sacrifices early in one’s career, so that when they are older, they can enjoy the fruits of their labour.
This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP and Eugene Chu, CPA, CA of DCY Professional Corporation Chartered Professional Accountants who are tax specialists* and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca / louise@dcy.ca / eugene@dcy.ca . Visit our website at www.dcy.ca. This article is intended to present tax saving and planning ideas, and is not intended to replace professional advice.
