Avoid These Common Financial Mistakes Made by Private Practice Therapists
Navigating the financial landscape as a private practice therapist can be challenging. While each individual’s financial journey is unique, there are common pitfalls that many practitioners fall into. In this article, we’ll explore five of these common financial mistakes and provide actionable steps to avoid them.
For someone like me, who works as a fee-only financial advisor, I have the luxury of evaluating numerous financial situations. In doing so, I get to see the pitfalls that many private practitioners fall into. Some of these are unique to the therapy space, while others are common across those who consider themselves self-employed.
Private Practice Financial Pitfalls To Avoid
Mistake #1: Treating Your Business Account Like an Expense Account
One prevalent misconception among self-employed therapists is the idea that they can simply “write off” expenses without fully understanding the implications. However, overspending on your business account can lead to financial troubles. Remember, writing off expenses reduces your taxable income, but it doesn’t provide a full refund. If you are short on cash despite healthy revenues, consider reevaluating your expenses.
Solution: Differentiate between necessary business expenses and personal spending. Maintain a clear separation between your business and personal finances to ensure a more accurate financial picture.
Mistake #2: Neglecting Long-Term Savings
Many private practice owners resist planning for retirement, assuming they’ll work indefinitely. However, failing to save for the long term can lead to unwanted financial constraints later in life. Proper retirement planning not only offers financial security but also reduces tax exposure and provides peace of mind during revenue fluctuations.
Solution: Prioritize retirement planning by contributing to retirement accounts like a 401(k). Building a retirement portfolio can empower you to take calculated risks in your practice while safeguarding your financial future.
Mistake #3: Underestimating Financial Risk
Self-employment comes with inherent risks, making it crucial to mitigate financial uncertainties. Relying solely on high-risk investments or not diversifying your financial portfolio can amplify the risks associated with your profession.
Solution: Address risk by diversifying your investments, opting for low-fee, broad-based index funds. Focus on leveraging your therapeutic skills while reducing risk in other areas of your financial life.
Mistake #4: Lack of a Succession Plan
Many therapists believe their practice will cease when they step away. However, adopting a succession plan can ensure continuity and financial stability, benefiting both you and your potential successor.
Solution: Identify a suitable partner to mentor and gradually transition your practice. Establish a clear agreement that facilitates a smooth transition and ensures the business’s sustainability.
Mistake #5: Ignoring Financial Responsibility
Allowing financial concerns to take a back seat can hinder your ability to provide effective care to clients. Both avoiding financial matters and pursuing excessive wealth without purpose can negatively impact your practice.
Solution: Cultivate a balanced approach to finances. Embrace financial responsibility and understand how it influences your ability to serve clients effectively.
Avoiding these five common financial mistakes can significantly enhance your private practice journey. By recognizing these pitfalls and implementing proactive strategies, you can create a solid foundation for financial success, ultimately benefiting both your practice and your clients. Remember, seeking professional financial advice can further guide you toward making informed decisions and securing your financial well-being.
Ryan Derousseau is a fee-only CERTIFIED FINANCIAL PLANNER™ at United Financial Planning Group. He specializes in working with therapists, both solo and group practitioners, enabling them to thrive financially while they focus on their clients. You can find more of his thoughts on financial planning at ThinkingCapFinancial.com.