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.