Mastering the Financial Dimension of Your Psychotherapy Practice

The Definitive Resource for Private Practice

Peter H. Cole, Daisy Reese

• Publisher: Routledge
• Year: 2017
• eBook ISBN: 9781317432838
• Topic: Psychology
• Subtopic: Clinical Psychology
• Index: Psychology

Written by two therapists with extensive business experience, Mastering the Financial Dimension of Your Psychotherapy Practice addresses the clinical and financial challenges of establishing and maintaining a successful private practice. This book contains updated content on investing strategies, changes in the insurance marketplace, and trends in the marketing of a psychotherapy practice. The first of five sections explores the life cycle of the modern therapy practice, offering best business and investing practices for each phase. In the second and third sections, the authors consider the emotional dimension in the development of a private practice. The fourth section offers a basic course in financial planning, including an investigation into five common financial mistakes therapists make and various solutions to each situation. The fifth section is designed to offer a road map of actions to take in establishing a financial plan. Concluding the book is an inspirational discussion of how the therapist in private practice can create a career with meaning, fulfillment, personal satisfaction, and solid financial rewards.

Section IV

A Therapist’s Money Guide

Chapter 18

Filling in the Financial Knowledge Gap

We would like to begin this chapter with a case study. Although Dr. Friedlander is a composite of numerous clients, we hope that taking a look at her struggles and successes will put financial planning for private practitioners into a human perspective. Like many therapists we have worked with, Dr. Friedlander has not paid the same quality of serious attention and study to the financial dimension of her practice that she has to the other aspects of her professional life. As a result, her level of financial knowledge is underdeveloped and she feels intimidated by the whole financial arena.

A Brilliant Clinician With Underdeveloped Financial Skills

Dr. Rachel Friedlander is a 48-year-old clinical psychologist practicing in Bethesda, Maryland. She is divorced and lives with her 16-year-old daughter, Sarah. Dr. Friedlander has worked diligently to build a highly successful psychotherapy practice. She attended Georgetown University for her undergraduate degree and went on to the University of Michigan where she took her PhD followed by postdoctoral training at the Baltimore-Washington Institute for Psychoanalysis. She is a talented and successful clinician. She has won a respected place in her professional community, with many of her referrals coming from fellow therapists. She nets well over $100,000 per year and lives comfortably. Most of her income has gone toward providing for herself and her daughter. Her ex-husband pays child support in the amount of $1,000 per month, but she will not receive income from his federal government pension at retirement. She maintains a SEP IRA that she has funded sporadically. She is anticipating approximately $200,000 in inheritance if her parents do not eat up their own assets in retirement. She has accumulated a little less than $100,000 in her SEP.

Dr. Friedlander’s retirement savings are far below where they will ultimately need to be to fund a comfortable retirement. Moreover, at age 48, she has less time than she once had to make up the difference between where she is and where she will need to be. As Dr. Friedlander moves closer to retirement she is becoming increasingly concerned about what the future holds. She would like to be able to retire in her mid-sixties but is not at all sure that is a realistic possibility. To make her vision of a financially secure retirement a reality, she will have to develop some new skills and begin to view her practice from a more business-like perspective. She will need to reorient herself to the reality that fully funding her retirement is a vitally important life goal. Dr. Friedlander’s dilemma is similar to that of many therapists in private practice—she is a highly skilled and successful clinician, but her financial planning and business skills are significantly less developed than her other professional skills. It is for Dr. Friedlander and her peers that this book is intended.

Our goal is to fill in the knowledge gap that many therapists have about the business and financial planning aspects of private practice. While all professional therapists have extensive clinical education and training, few have training of any kind in running the business and financial end of their private practice. With little or no financial training, private practitioners frequently take a “seat of the pants” approach to financial planning, picking up bits and pieces of information along the way from various sources such as money magazines and financial shows on radio or TV. However, just as you didn’t learn to practice psychotherapy by reading self-help books, learning to deal effectively with your finances requires more than putting together bits and pieces of (often conflicting) information.

In America, a “Seat of the Pants Approach” Just Won’t Do

A lack of serious attention to the financial dimension might be adaptive if we were Swedish therapists living in a democratic-socialist society rather than Americans living in the individualistic social reality of modern American capitalism. In Sweden, we would have healthcare provided by the state and cradle-to-grave social services—childcare, housing, and college tuition would all be highly subsidized. In America, however, we are expected to fend for ourselves. In particular, private practitioners and entrepreneurs have chosen a high degree of freedom coupled with a high degree of responsibility for our own financial security.

It’s true, of course, that at retirement age you will be eligible for Social Security. However, if you do the calculations and take a look at the amount you will actually receive, you will quickly realize that Social Security is merely a supplement to a personal retirement plan—not a substitute. For a detailed explanation of Social Security benefits, see “Social Security and the Private Practitioner” in Chapter 28.

Foundations of Putting Your Financial House in Order

We must put our own financial house in order from the bottom to the top, for if we do not do this for ourselves, who else will? From the perspective of your practice, putting your finances in order begins with effective and accurate bookkeeping. We can think of this as the bookkeeping level of your financially savvy private practice. Getting the bookkeeping level properly organized is foundational to higher-order thinking and action in the financial dimension of your practice. Therefore, it is vital that you get your bookkeeping in good shape.

Have you gone into your dentist’s office or your family doctor’s office lately? Have you noticed that they have a clerical staff taking care of things like insurance billing, scheduling, ordering supplies, and working the computers? Most therapists do not have that kind of clerical support. Therapists typically rely on themselves, or sometimes a spouse, to deal with the administrative side of their practice. Between seeing clients, paperwork, consultation, and conferences, there is a temptation to procrastinate about bookkeeping chores. Yet this clerical/bookkeeping level of practice management is a vital prerequisite to addressing the broader issues of financial life planning. The clerical/bookkeeping level addresses the nuts and bolts of generating income, while the financial planning level deals with allocating that income into a financial, legal, and tax structure that supports the therapist’s long-term needs and goals. Both levels must be addressed and mastered for the financial dimension of a private practice to work successfully.

Bookkeeping Resources

One support for mastering this level is to use practice management software as well as bookkeeping software. Please see Chapter 17 for our discussion of practice management software, and Addendum II on QuickBooks to help you get started with accounting. One of the nice things about using a bookkeeping software package like QuickBooks is that it helps you organize your books into appropriate categories. If you are computer phobic or merely computer allergic, you can go to a “one-write” system that was very effective and popular before the PC age. Although providing the nuts and bolts of one-write accounting is beyond the scope of this book, you can find all the one-write resources you need at Safeguard (www.safeguard.com), the venerable producer of non-computerized bookkeeping forms. Once you get organized in your bookkeeping, either by hand or by computer, the more conceptual issues around business and retirement planning will be far easier to deal with.

Treating Your Practice as a Business

Sound bookkeeping will allow you to think like a businessperson about your practice. You will know how much money you generate and from what sources. You will understand your expenses better and you will begin to see the big picture of income and outflow in your practice. This is important, because being self-employed is expensive, and you need to be in charge of your cash flow so that you can afford the many expenses involved.

With the Freedom of Private Practice Goes a Responsibility to Yourself

Most private practitioners we know cherish their freedom. We therapists love working for ourselves and doing work that we find deeply meaningful. However, a price we pay for our private practice freedom is that we frequently work outside the formal benefits structure of employment. All those things that an employer would provide for us we must provide for ourselves. We must act both as both employer and employee when we are in private practice. What does this mean in practical terms? It means that our financial self-care must be proactive when we are in private practice. Proactive financial self-care refers to being a good employer to yourself. In the next chapter we will look at five of the most common financial planning mistakes that therapists make. You will notice that one thing all of these mistakes have in common is a failure to treat the practice as a business: to meet the responsibilities of the employer role.

Chapter 19

Five Common Financial Mistakes of Private Practitioners

This chapter covers five common financial mistakes that therapists in private practice make. Notice that they all derive from failing to think about the financial dimension as a good employer would. A good employer would provide a sound retirement package from the business’ revenue stream—she would not spend all the business’ revenues on salary. She would be prudent in the investment policies of the retirement plan, and would make sure to obtain adequate insurance along with setting up a business structure that minimizes taxation. These considerations would simply be fundamental to doing business in a professional way. Let’s look at how we therapists often neglect such fundamentals and look at how such mistakes can be addressed.

Five Financial Mistakes of Private Practitioners

1. 1) Treating all your income as money you can freely spend
2. 2) Underfunding your retirement plan
3. 3) Inappropriately allocating assets in your retirement plan
4. 4) Failing to obtain adequate insurance
5. 5) Creating excessive tax liability.

Let’s take these mistakes one by one and consider appropriate solutions for each.

Mistake #1: Treating All Your Income as Money You Can Freely Spend

Solution

Put Yourself on a Salary

If you begin thinking of your practice as a business, the danger of this mistake becomes clear. Obviously, no business owner could afford to spend all her income on salaries. Overhead expenses, salaries, and benefits must all come out of the revenue coming into the business. Anything left over after all expenses are paid is profit for the business. In the same way, the private practitioner needs to cover all her expenses out of the revenue generated.

Your biggest expense is your salary. A good rule of thumb is that your salary should be about 60% of your target revenue. A percentage of that salary (depending on your tax bracket) will need to be set aside for taxes. About 15% percent of your target revenue should be earmarked for overhead expenses such as rent, continuing education, consultation, furnishings, liability insurance, and so on. That leaves about 25% of your target revenue for funding your benefits package, which includes health insurance, disability insurance, and your retirement plan. Under most circumstances, your benefits and retirement costs as well as your overhead costs will reduce your tax liability.

Mary Smith’s Private Practice (All Numbers Are Approximations)

Because your revenues minus your expenses equal your profits (revenues − expenses = profits), there are two basic ways to increase your profits:

1. 1) You can increase your revenues. Consider the possibilities of raising your fees, seeing more patients, adding groups to your practice, taking on consulting clients, bringing in passive income from rental property, and so on.
2. 2) You can reduce your expenses. This can be accomplished in myriad ways. Obvious ideas are to shop for a cheaper liability policy (I recently saved several hundred dollars per year by switching carriers), reduce your rent (perhaps by sharing your office), reduce your continuing education expenses, and so on.

Table 19.1 Example of...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• List of Figures
• List of Tables
• Foreword
• Acknowledgments
• Introduction Why a Financial Planning Book for Therapists?
• Section I: The Life Cycle of a Psychotherapy Practice
• Section II: Psychological and Therapeutic Considerations
• Section III: Current Practice Considerations
• Section IV: A Therapist’s Money Guide
• Section V: Your Money Pages
• Addenda
• Index