Andres Garcia-Amaya is CEO and Founder of Zoe Financial, whose mission is empowering people to make better financial decisions.
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High earners are plentiful in the United States. In fact, 29% of households earn over $100,000 or more per year. As a high-earner, budgeting is particularly important. Yet more often than not, the focus of a budget tends to be on strategies for spending less. Instead, the purpose of a household budget for high earners is to ensure you’re aligning your spending with your values and long-term goals. These five steps for creating a household budget can help you dig deeper into ways your lifestyle might be negatively affecting your future goals and whether your money decisions match your values.
Step 1: Evaluate Your Income
While it may sound crazy, it’s quite common for people not to know exactly how much income is coming their way monthly. Gathering all of your income will provide an idea of how much money is coming in and will give you a clearer awareness of your wealth. When identifying your monthly income, remember that your budget should be based on your after-tax net income, meaning the amount of money coming in after deductions. To calculate this, you need to subtract your deductions: taxes, Social Security and health insurance.
Step 2: Create A List Of Monthly Expenses And Evaluate Lifestyle Creep
Once you have calculated your after-tax income, the next step is to create a list of your monthly expenses based on that same paperwork. The best way to identify your monthly expenses is to list and total up all your expenses. Start by prioritizing your expenses by fixed essential expenses (such as mortgage/rent and property taxes) and variable essential expenses (groceries, gas, utilities), followed by nonessential expenses (eating out, entertainment, hobbies). What’s the mix between necessities (your electric bill) versus “wants” (upgrading to a Tesla X)? For some, a high income can lead to “lifestyle creep.” As you earn more, your expenses “creep up,” which can ultimately end up deterring you from achieving big-picture financial goals that are aligned with your values.
Step 3: Analyze Whether Your Spending Matches Your Values
We all have inherently unique ways of thinking about money based on our upbringing and life paths, yet too many people end up mimicking the way others handle their finances. The first step to evaluating whether you’re inadvertently spending your money in a way that doesn’t match your goals is to figure out what exactly you value. When your values aren’t aligned with your financial habits, you won’t feel as though you’re actually able to achieve your goals — even if you’re earning well.
Begin by evaluating what matters to you in your relationships, career, health and spirituality. Write your values for each category down as you recognize them, listing them from most important to least. This will enable you to evaluate whether your life is currently in line with your values. For example, when I was 31 and working on Wall Street, I was working every weekend and traveling on average to three cities per week! One of my most important values was being with my family, yet my time wasn’t aligned with what I valued most. The moment I re-calibrated my time with my values and switched to a role where I could spend more time at home, my life immediately improved.
Similarly, your values must match your spending habits to achieve your financial goals. Are your values reflected in the way you spend? Compare your monthly expenses with your big-picture financial objectives. For example, if you value your kid’s education but are spending a larger chunk of your income on that upgraded SUV than on their 529 plan, this is a great opportunity to readjust your spending habits to match your values. Remember that your variable and nonessential expenses are the first places you can adjust spending if you need to.
Step 4: Use A Budget To Transform Your Values Into Achievable Goals
Create a plan for achieving your short-, medium- and long-term financial goals, and clearly list your values and how they align with those goals. Next, create your budget based on your income, fixed expenses and variable/non-essential expenses. Review these expenses to ensure they match up and contribute to you achieving your value-aligned financial objectives. Fixed expenses can be predicted fairly accurately, and by looking at your previous spending habits, you can predict your variables. Tracking your budget on a worksheet that lists the steps for achieving your financial goals will help you stay on track.
Step 5: Adjust Your Value-Based Budget As Needed
In time, your income and expenses will shift, just as your goals might change. You will need to ensure your values are still aligned with how your lifestyle and financial habits change. Some aspects of what you valued when growing your family will shift once you are focused on enjoying your golden years, while others may remain the same throughout your life. By looking at the value-based budget you created, you can have a better picture of how each piece of your financial puzzle fits in.
Aligning Your Values With Your Financial Lifestyle
Making a value-based household budget takes time. Having a trusted financial advisor by your side can help guide you and set goals. Even if you don’t work with one, having clarity on how your values, financial goals and lifestyle align before you start making a budget will help. As you stick to your budget, your financial goals will become easier to achieve.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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