Financial Planning & Budgeting Strategy for High-Income Professionals

Budgeting isn’t a task most people look forward to. The idea of creating one is stressful enough, let alone sticking to one (especially if you’ve had trouble doing so in the past). But even if financial planning and budgeting can be tricky, they’re well worth the effort. After all, they’re key to achieving your personal financial goals — particularly for high-income earners who want to make sure that their hard-earned money is working for them.  

And the good news is, creating and sticking to a budget doesn’t have to be as painful as you might expect. Below, we’ll go over some of the best financial planning and budgeting tips for high-income individuals — read on to learn which financial goals you may want to aim for, how to develop a budget that supports them, where you can cut expenses, and more. 

Identify Your Personal Financial Goals 

You can’t create a solid budget without first figuring out what you’re budgeting for. Before anything else, make sure that you’re clear on what your financial goals are. Here are a few goals that high-income professionals may want to consider: 

Shorter-Term Goals 

• Buying a home or vacation home 
• Buying a car, or other large purchases 
• Saving for your child’s college education 
• Paying off debt 

To save for a house, first you have to know the value of the type of property you’re interested in buying, say a $1.5M house. Then, you need to calculate about 20% for down payment ($300k) and possibly another $50k-$100k for closing cost and renovations/new furniture. That means you have to save $400k. When do you want to buy a house? In three years? You can put a portion of your paycheck into this fund every two weeks. You can add your entire bonus to this bucket as well. And if you have company restricted stock units, you may want to sell as they vest to fund this goal. Your time horizon is short (three years). You should invest in a conservative to conservatively moderate strategy depending on your risk appetite. 

If you have children, another goal might be to set aside money in a 529 plan, also known as a college savings account. You can use an online calculator to help you determine how much you need to save monthly, quarterly, or annually. You may only want to fund it 50%-75% since your child may obtain a scholarship. Assume a modest return like 5%-6% and invest in an age-based portfolio where the investments get more conservative as the child grows up. 

Another major financial planning and budgeting goal for high-income earners should be to pay off their debt. Debt is not necessarily a bad thing in itself — often, things like student loans and mortgages are investments that help high-income earners get to where they are in life. If you have debt that has a relatively high interest rate (7%+), you’ll want to target paying that off first. Chip away at it slowly by paying a few hundred dollars more than your required payment amount each month.  

Long-Term Goals: Retire…Maybe Even Early  

A much longer-term goal that many high-income earners have is to retire early. There are three variables to building your nest egg: (1) savings, (2) spending, (3) and how you invest your savings.  

One of the most basic rules of financial planning is that the more money you set aside for retirement, and the sooner you do it, the better. That’s because, thanks to the power of compounding, any money invested now will grow exponentially when it comes time for you to retire. When it comes to planning for retirement, a good rule of thumb is to save at least 10% to 15% of your income each year. However, the exact amount you need to save will depend on a range of factors, such as your current income, expected retirement age, and desired retirement lifestyle.  

To get a better idea of how much you should save, consider using a retirement calculator, which can help you estimate your retirement expenses and income. By using a retirement calculator and working with a financial advisor, you can develop a solid retirement savings plan that ensures you’ll have enough money to enjoy the retirement lifestyle you want. Remember, the sooner you start saving, the more time you have for your investments to grow thanks to the power of compounding. 

By the time you’ve worked your way up to being a high-income earner, you should be able to hit the annual limits for standard 401(k) contributions fairly easily. As a bonus, these contributions even help reduce your taxable income. 

Have you heard of the Mega Roth 401(k)? Mega Roth 401(k) is a unique feature that some retirement plans offer, which allows you to make after-tax contributions and then convert to Roth 401(k). This enables you to contribute significantly more money to your account. This strategy allows you to enjoy tax-free growth and withdrawals in retirement. Imagine you have been saving $20,000 per year over the last ten years to a Mega Roth 401(k) with 6% return. You would have over $263,000 of tax-free assets today that you will continue to add to, and the assets will continue to grow.  

Imagine Lisa is 51 years old, and she works for Meta. She has maximized her employee contributions and catch-up ($22,500 + $6,500), and her employer contributed $11,250; therefore, she can contribute $25,750 as her employee after-tax contribution because she has to be within the $66,000 total max contribution limit.

However, not all employers offer Mega Roth 401(k) plans, and eligibility and contribution limits can vary based on plan rules and participant’s age.

The backdoor Roth IRA strategy is another excellent tax strategy for retirement option to consider if you want to maximize your retirement savings. This concept is the same as above. It involves making after-tax contributions to a non-deductible IRA, which is then converted to a Roth IRA. The benefits are similar; it allows you to enjoy tax-free growth and withdrawals in retirement. 

Other ways of saving for high-income earners are deferred compensation and cash balance plans if your employer has these options.  

Read More: 5 Essential High-Net-Worth Retirement Strategies 

Create a Budget & Learn How to Stick to It

Once you’ve identified your financial goals, the next step  is getting a sense of what you’re currently spending — and how that may need to change. 

Track Your Expenses

To start, you’ll want to review your actual expenses, ideally over the last one to two years at a minimum. When we at Team Hewins kick off a partnership with a new client, we encourage them to send over an itemized budget. This includes a list of expenses in categories like: 

• Living expenses (groceries, rent/mortgage, medical expenses, etc.) 
• Entertainment (eating out, clothing, vacations, etc.) 
• Savings (contributions to savings accounts, retirement accounts, brokerage accounts, etc.)   

To make it easier to track your spending, consider these tips: 

• Download a budget app: There’s no shortage of great, easy-to-use options available. 
• Leverage your bank or credit cards—they frequently provide statements that categorize your expenses, saving you the time of doing that. 
• Limit the accounts/credit cards you use: To make sure no expenses fall through the cracks, limit your spending to just one or two credit cards and/or accounts. Try not to go overboard with third-party platforms like Apple Pay, Venmo, or PayPal — but if you do leverage those options, make sure they’re tied to your main accounts and cards for easy tracking 
• Hire a bookkeeper: Bookkeepers are surprisingly affordable — in many cases, it only costs a few hundred dollars for them to create a detailed breakdown of your annual spending, granting you a detailed look into your finances with little effort on your part 
• If nothing else, look at bottom-line numbers: If you’re spending is particularly complex or you get overwhelmed by detailed line-item spending, you can always just look at your overall cashflow — if you brought in about $200,000 after taxes and had $80,000 left over, you know you spent a total of $120,000 

Once you’ve got an idea of what you’re spending, it’s time for the heart of the financial planning and budgeting process: analyzing whether your current spending is in line with your financial objectives, and if it’s not, creating a new budget

Refine Your Spending Habits

To stay within the confines of your new budget, you’ll likely need to adjust your spending. Here are a few ideas for doing so: 

Take the Marie Kondo Approach to Spending 

In her hit book, The Life-Changing Magic of Tidying Up, Marie Kondo advises people to throw out any possessions that don’t spark joy — a philosophy that can be applied to personal finance as well: buy what sparks joy. The great thing about this method is that it’s not overly-restrictive and shouldn’t make you feel like you’re constantly pinching pennies. 

 Odds are, your spending will reveal a number of purchases that don’t add much value to your life, either because you don’t actually make much use of them — like a cable package when you mostly use streaming services or a wine club membership — or they just aren’t as convenient, meaningful, or fun as you thought they’d be. You’ll want to cut back on costs like that, or  eliminate them altogether. If any of them are recurring, there are even apps that help you cancel subscriptions and memberships. 

How Do You Know You’re on Track? Utilize Financial-Modeling Software Tools 

It’s one thing to know that you need to cut down on your spending — but it’s another thing entirely to see how your future finances will be impacted if it doesn’t change. When working with clients, we often use financial-modeling software to show them what their financial future will look like according to their current earnings, spending, and savings combined with factors like growth rate and inflation over time.  

Based on that, we can actually show them things like how long their money will last them into retirement and whether or not they’ll be able to reach their financial goals. We can also show the impact of their spending over time — what would happen if someone spends $10,000 less or $10,000 more per year? When you’re able to see the concrete impact in front of you, it’s much easier to stay motivated and stick to the financial planning and budgeting limits you’ve set for yourself. 

Read More: 3 Benefits of Having a Financial Advisor 

Remember — Expenses Can Take Time to Come Down 

When trying to shave down your expenses, there’s often some low-hanging fruit you can go after right away, like the under-used subscriptions and memberships that we mentioned earlier. But building up to real savings usually takes time or big lifestyle changes, so don’t be discouraged if you don’t get there right away. Just make the progress that you can and track it over time to make sure it’s trending in the right direction.

Ready to Take Control of Your Finances? Empower Yourself Today

Financial planning and budgeting are all about thinking ahead — the sooner you act, the more likely you are to achieve the kind of financial freedom you’re looking for. If you take the time to identify your financial goals, create a reasonable budget, and live within your means, your goals should be well within your reach. 

And if you ever need help staying or getting back on track, you can always turn to a financial advisor like the ones at Team Hewins. Whether you need help coming up with your personal financial goals, drafting a budget, or strengthening your investment portfolio, we’ve got you covered. And as fee-only advisors, you can be sure that we’ll always have your best interest in mind. 

Reach out today to schedule your free consultation! 

Team Hewins, LLC(“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. Certain information provided herein is based on third-party sources, which information, although believed to be accurate, has not been independently verified by Team Hewins. Team Hewins assumes no liability for errors and omissions in the information contained herein. Certain information contained herein constitutes forward-looking statements. Team Hewins does not guarantee the achievement of long-term goals in the portfolio review process. Past performance is no guarantee of future results, and a diversified portfolio does not guarantee a positive outcome. Nothing contained herein may be relied upon as a guarantee, promise, assurance, or a representation as to the future.