How much should high-income earners spend?
Most professionals don’t have the safety nets that your parents or grandparents may have had and although you are or may be considered high-income earners by society, you may feel far from wealthy. The path to getting there starts with your cash flow and budgeting. Think of budgeting as the main ingredient needed to make your favorite flavorful cake.
We don’t like to use the word budget as it can be constricting to how someone wants to live their life. So we’ll call it a spending plan.
How to create a spending plan?
Identify the amount of money you have coming in. It's easy to misjudge this but don't forget to take out taxes, 401(k) contributions, and any other deductions. What you ultimately take home, or your net income, is the number you should use when creating a budget.
List your fixed expenses such as your rent or mortgage, utilities, student loans, car payments, subscriptions and childcare. These are the monthly bills which you'll find difficult to cut back on. But, knowing this number is helpful.
List your variable expenses which change month to month, such as groceries, entertainment, take-out and Amazon purchases. This is an area you might find opportunities to cut back on. You can track your spending using tools like Mint, YNAB, Tiller or even a spreadsheet to itemize and categorize your expenditures.
What's your savings rate? Your monthly spending should at least be less than the money you take home. What’s leftover is one of the major predictors of financial independence.
Set your SMART financial goals. You may say you want to pay down your student debt aggressively, without considering how this could impact other areas of your life which ultimately make you happy. For example, if you work in states far away from your family wouldn't you like to know that you have the savings to be able to make a couple of trips back home during the year? (If you do plan on visiting during Thanksgiving/Christmas remember that plane tickets are even more expensive).
What is a SMART goal? Specific, Measureable, Actionable, Realistic, Timely
SMART goals are easy to quantify. When you set a goal, it should be something you can track and quantify. We cannot do it all, but we must prioritize and focus our time.
Make a plan and periodically review and make adjustments. The spending plan should reflect what makes you happy and your lifestyle. For example, if you spend more on entertainment and eating out in your spouse’s birthday month, you can tweak other areas. Or, if you want to forgo the $30 per month gym membership for buying a $63 per month Peloton bike you can share with friend or family, the convenience may be worth it to you.
Little by little
Don’t drive for three hours, just to realize you could’ve reached your destination in one if you’d only noticed the small puncture in your tyres slowly seeping air. Save yourself time and reach your goals quicker by building a solid foundation.
Adviso Wealth is dedicated to working with people just like you. We want to give you the clarity and confidence you need to achieve your personal and financial goals.
To learn more, visit advisowealth.com or email firstname.lastname@example.org