“You don’t really do this stuff—do you?” The question came from a major network anchor after the camera stopped rolling. The topic was budgeting.
He certainly isn’t obtuse, and he wasn’t being patronizing or condescending. It was a legitimate question that accurately reflects the underlying perception held by most people in any demographic–that budgeting is for those just scraping by and young people just getting started. A tedious chore reserved for those lacking the means to do otherwise. A humble state from which most of us hope to graduate.
But this is a misconception. In truth, the budgeting process can help people at every stage of life and every income level articulate and align their deeply held values with their financial priorities, which is the first step on the path to integrating money and life. However, there is more to be gained from the discipline of budgeting (at least in terms of raw dollars) for those of means. Better said, there is less to be lost by families who earn especially high incomes.
If you’re blessed to be addressing this welcome dilemma—or hope to be at some point in the future—please consider the following.
Most households have a tendency to consume cash flow that is not otherwise and deliberately diverted. The key to budgeting for families with high incomes, then, is to purposefully divert excess or unallocated funds to achieve the goals they value most. After that, by all means spend the remaining cash sloshing around in your checking account. But I bet it will be less than you think after addressing some common financial priorities many aren’t in a position to fully realize:
1) Maxing out 401(k)s (or equivalent retirement plans) will cost $36,000 to $48,000 per year for a household with two eligible employees.
2) Maxing out Roth IRAs, or perhaps non-deductible IRAs for a “back-door Roth” strategy if you’re over the income threshold (but be careful, because this strategy is much more complex than it appears at first glance), will cost $11,000 to $13,000 per year for a two-adult household.
3) Assuming a minimum of three months’ earnings in emergency reserves has already been met, and with an expected average annual attrition rate of 25%, a household with $250,000 in income would need to save $15,625 per year to maintain its reserves.
4) If you want to keep your kids on track to repeat your professional successes, a college education is probably a must. An in-state public university will very likely require estimated savings of $350 per month—or $4,200 per year, per kiddo, from the date of birth—to ensure you’re totally funded at high school commencement. An Ivy League education is more likely to run you closer to $12,600 in annual savings per year.
5) What really separates people of plenty from the merely financially stable is having “maybe money.” That’s money set aside to fund goals which may not have fully materialized yet. So once you’ve checked off all of your saving “I shoulds,” why not fund some “I cans”? Boats, second homes, exotic vacations and spontaneous extravagance require funding. How much will depend greatly on the amount of excess income, but let’s say $20,000 per year.
The deliberate diversions listed above will cost a household an estimated $100,000 each year, give or take. Plans for accelerated debt payoffs and early retirement—common items on wish lists for the affluent—could easily double or triple these estimates.
But make no mistake. The rich don’t get a pass when it comes to budgeting. Even they have a lot to gain from this simple discipline.
This commentary originally appeared June 23 on Forbes.com
Copyright © 2015, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any links contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.
A few weeks ago, I got home late after a long trip. I’d been traveling a lot recently and didn’t sleep well that night. The next morning, I woke up and felt like I’d been hit by a truck.
Emotionally, I was at a really low point.
When I came downstairs that morning, I asked my wife, “How are you?” She said she hadn’t slept well. Her tone was matter-of-fact, but given my thoughts and emotions, I made a huge mental leap. I took her answer way more personally than I should have.
What did I do wrong? Did I keep her up late? Did I snore too loudly? Why was she blaming me? As I went down this mental rabbit hole, I started to get mad. It wasn’t my fault she hadn’t slept well.
To be clear, my wife didn’t mention my name or even hint that I’d done anything. All she said was, “I didn’t sleep well.” But because I was tired, I reacted to what I thought she meant. I mentally curled into a fetal position and then went on the offensive. You can imagine how the rest of the conversation went.
I’ve made this mistake many times before, and you might have, too. When we’re in a bad place mentally or emotionally, we engage in what some people call basement thinking. Every little comment feels like a personal attack. We can only see the obstacles in front of us, and not the potential solutions in between. We also default to shaming and blaming the people around us for how we’re acting.
Of course, even the most routine conversations can be filled with emotional land mines when we’re in the mental basement. But just imagine the outcome if we try to talk about something as emotionally charged as money. In those low moments, before we even realize what’s happening, the simple act of opening something like the credit card bill can lead to World War III.
Our money conversations don’t have to trigger these emotional fights. We can have meaningful and thoughtful discussions about our financial goals and what we want to do with our money. But those conversations won’t happen by accident. We need to make sure that all parties are in a good place emotionally. Talking about money when we’re in the basement all but guarantees a fight.
In these low moments, we feel constricted, like we can’t breathe. We take things personally. We use words that feel like daggers to the other person. Nothing good comes from conversations when we’re in a bad place.
So if we sense that a money conversation is headed south, we need to stop it — immediately. Respect the signs. If either person appears to be reacting personally, trust your instincts and call a halt to the conversation. Instead of throwing a verbal dagger and blowing up the conversation, tell them, “I can’t do this today. But I know it’s important. Let’s talk about it tomorrow.” A small break or a good night’s sleep can make all the difference and restore our energy. The higher our energy, the higher our thinking and the better the potential outcome.
When we start or return to these conversations with the right energy, we tend to end up focusing on the possibilities, not the obstacles. Instead of negative emotion overwhelming the discussion, we find ourselves moving away from “my way” or “your way” to the idea of a third, better way. But that can’t happen if we let basement thinking sabotage the conversation.
It might help to set up a routine for these conversations. Maybe pick a specific day and time. Maybe even pick a designated place outside the home, like a park or a coffee shop. Whatever the routine, our goal is to have regular, thoughtful conversations at moments of high energy. A routine can help us prepare for these conversations and avoid emotional minefields when we’re in the basement.
Talking about money can be hard. But these conversations will only be more difficult if we let basement thinking get in the way. Learn the signs and appreciate that sometimes stopping a conversation before it turns into a fight could be the best money decision you ever make.
This commentary originally appeared June 8 on NYTimes.com
Copyright © 2015, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any links contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.
Where am I now? Where do I want to go from here?
At the start of each year, many of us make it a habit to ask ourselves the two above questions. The answers help us map out a strategy, make resolutions and set goals. This annual exercise offers us the opportunity to take stock of our current situation and see the areas in which we want to improve. Maybe it's to save a little more money each week, carve out more family time every day, make a big career move, or spend more time on your favorite jogging/hiking/biking trail. Big and small things, alike.
One problem with these two questions: We don't ask them enough. Now that we have inched past the halfway point of 2015, it could be a good time to ask them again: Where am I now? Where do I want to go from here? This midyear checkup allows you to reassess where you want to spend two of your most precious but limited resources: time and energy. Asking these questions lets you to examine if the goals you identified in January are still where your focus should be. It allows you to review what has changed in your life and whether those changes have brought about new challenges or, better yet, opportunities.
Simply, asking these questions allows you to account for what you didn't know then. And that's often the key to successfully carrying out a plan -- accounting for, and adapting to changing circumstances.
Carl Richards, director of investor education for the BAM ALLIANCE, wrote in his Behavior Gap newsletter: "Think back 10 or 20 years. Did you have any idea you'd be doing what you're doing now? Living where you're living? Earning what you're earning? Or that you'd be contemplating chucking it all and pursuing some kind of radical change?
When we put it this way, planning seems pointless, even silly ... Don't get me wrong. We do need to plan. But we're far better off setting specific but flexible goals that reflect our personal values and our best guesses about the future. Then we can do our best to reach those goals, revising our guesses and making course corrections when things change.
While it's a bad idea to get attached to a particular notion about how things will play out, it is crucial to commit to the process. When you do that, you'll feel different; you'll be way more relaxed, at least around financial issues. Once you let go of the idea that the future must take a certain shape lest we flunk the plan that you spend so much time on, you'll feel more engaged in something that belongs to you."