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Why High Income Earners Can Still Benefit from a Budget

Posted by Michael J. O'Connor | CWS®, Vice President Investments
January 23, 2018

High Income Earners Budget.pngA high-income earner can benefit from a having a budget much like a professional athlete can benefit from having a personal trainer – even though the extra help and attention may not be completely necessary, it can serve to make a good situation even better. Much better.

Consider that, simply put, two goals of closely maintaining a budget are to:

  • Minimize waste
  • Maximize efficiency

Isn’t that what everyone wants when it comes to your hard-earned dollars?

Let’s start with minimizing waste. One of the first steps in creating a budget is to itemize each and every monthly expense you incur. Mortgage payments, insurance, cable and internet, phones, memberships, subscriptions, utilities, food, entertainment, and so on. When was the last time you sat down and closely scrutinized all of these expenses? Doing so could very well reveal fat that needs trimming.

Once you’ve identified these weekly and monthly expenses, a great experiment to do is track it closely for, say, three months. From month to month, what changed? Where did the frivolous spending come-in, and what can be done to avoid it in the future or eliminate it altogether? Even for those with very high incomes, going through these exercises can be an eye-opening and rewarding experience. And it can also free-up dollars you can put to work more efficiently, such as for saving more or donating to a charitable cause.

That leads us to maximizing efficiency. J.P. Morgan created this simple but crucial graphic that encompasses where our money goes – towards needs, wants, and legacy-building.

Structuring-a_portfolio_to_match_investor_goals_in retirement2.png

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When you think about it, every dollar we earn essentially goes into one of these three categories. The better we manage and budget our money, the more it can funnel up to our wants and legacy/estate planning goals. Shifting a few hundred dollars a month from some unused service or membership into a college savings fund for a grandchild can equate to tens of thousands of dollars over a long stretch of time – and can make a big difference in someone’s life.

Another reason why budgeting makes good sense: there will likely come a time when income falls but expenses grow. Indeed, since older Americans tend to spend more on healthcare and in other areas with relatively high rates of inflation, costs can move higher over time. Budgeting today can mean having extra dollars stashed for the future.

Spending_and_Inflation.png

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Health care is one of the key areas where this matters the most. Research by J.P. Morgan has shown that the current estimated median health care costs for a 65-year old are about $5,140. But when that person turns 85, the cost is expected to have risen to $18,110. This research suggests that it may prudent to assume an annual health care inflation rate of 6.5%, which is quite high relative to the costs of other goods and services.

rising annual healthcare costs 2017.png

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But at the end of the day, legacy-building may be the biggest beneficiary of high-income earners taking the time to maintain a budget. Every last dollar that can make its way into the estate plan can mean building a bigger, more meaningful legacy for generations to come.

Overwhelmed about the Time and Process of Creating a Budget? WrapManager Can Help

Creating and maintaining a budget is no easy task. But WrapManager can help. Our Wealth Managers can work with you to break down, analyze, and organize your monthly expenses and can work with you as you explore ways to redirect money and/or cut costs. If creating a budget means freeing up a few hundred or even thousands of dollars a month, WrapManager can also help you find ways to put that money to work. Call us today at 1-800-541-7774 to get started or send an email to wealth@wrapmanager.com.   

 

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