For individuals with higher incomes, traditional methods of budgeting may seem futile. Instead, consider adopting a goal-based spending plan to keep you on track.

Yes, it’s true. Some folks spend way too much at Starbucks every year. But for many affluent Americans, they can afford to and it’s a lifestyle expense. As wealth builds, lifestyles tend to follow. And while the Starbucks habit isn’t an issue, the 2016 Audi and the vacation home with ocean views might be hampering your ability to save. It is very easy to slip into ever-higher spending on luxuries to the point that it becomes stressful.

Budgeting for high income households

For individuals with higher incomes, the standard granular approach to budgeting likely seems futile; in fact, it probably is. Instead, define your goals and how you’re currently tracking to achieve them based on what you’re doing now. If you don’t like what you see, consider adopting a new approach to systematically saving and investing to maximize your wealth.

Personal finance can get quite complex when looking deep into specific situations. But at a high level, everyone’s personal financial situation really boils down to three things: income, saving, and spending. Yet there are numerous misconceptions around these three areas that often hurt investors:

  1. As I make more money, I save more too. While it is possible and typically advisable to increase your savings rate to commensurate with your income, few people actually do. For many, as compensation increases, so does new spending; and it increases much faster than savings.
  2. I’m already saving enough to meet my goals. Especially for families with young children who wish to provide for a college education, parents are shocked to learn they may have to save upwards of $1,000 a month per child. Even for families with a comfortable income, this can be a significant expense.
  3. I know what I spend my money on and can use that to make accurate projections about my spending in retirement. A lot of popular guidance is based on spending less in retirement, perhaps 70% of pre-retirement income. The reality is that many affluent couples don’t want to change their lifestyle; in fact, some even increase their spending (at least initially). For well-to-do investors, even putting away the maximum annual amount to a qualified retirement plan like a 401(k) likely won’t be enough on its own to provide adequate income replacement in retirement without a reduction in spending.

So what’s the solution? Although there’s no one-size-fits-all approach, these big-picture strategies can help affluent investors maximize their income through smart saving and investing strategies.

Pay yourself first

As your income increases, so should the amount you’re saving for retirement and other goals. Ideally, increases in income would go directly towards saving and investments instead of increasing discretionary lifestyle expenses. If that doesn’t seem realistic, you can take smaller steps and still benefit. This is especially important when it comes to saving for retirement.

For example, Nora is 40 years old and regularly contributes 10% of income to her employer-sponsored retirement plan. She receives a 5% raise this year. Nora increases her monthly retirement contribution to 11%, which, based on her income and age, is just below the $18,000 maximum annual addition limit for 2016. Nora also decides to divert 3% of her income to a brokerage account and uses the remaining 1% of her salary increase to increase her travel budget.

In this example, Nora would spend only minutes modifying the automatic transfers she already has in place. Her cash flow would be set and she wouldn’t have to continually evaluate the best uses of her excess cash or worry that she’s overspending. Based on the planning she’s already done, she knows how much discretionary spending money is available and won’t need to feel guilty for spending it on whatever makes her happy.

Another way to boost retirement savings in addition to an employer-sponsored plan is to open an IRA. The contribution may not be deductible depending on your income and other factors, but it allows those with earned income under 50 to contribute another $5,500 (in 2016) towards retirement.

Treat all income the same

In addition to automatically saving a part of your monthly income, consider applying the same approach to sporadic or one-time income as well. It isn’t always easy to determine the best use of irregular income. Whether it’s an inheritance, equity-based compensation, or a bonus, it’s helpful to think about the funds as just another paycheck; a portion towards retirement, savings, goals, and then spending.

This becomes especially important when a large part of your annual income is based on commissions, bonuses, or stock options. Skipping contributions to retirement and other goals can really derail your progress. Depending on how the sporadic income is received, funding your goals may require a bit more discipline. For example, when you receive proceeds from liquidating a portion of equity-based compensation, you won’t have the option to defer a portion as a pre-tax contribution to your retirement plan. Instead, consider diversifying in a brokerage account.

Track your goals

Review your savings periodically to make sure you are on track to meet your goals. Goal-based investing may be a valuable method of saving or investing money for a specific purpose. Goal-based investing does not focus solely on comparing portfolio performance to a broad-based market index. Rather, the focus is on developing a plan around achieving the objectives of each goal, without taking on any unnecessary risk to do so.

Having a plan in place is essential to achieve your goals. Saving for college is a big priority for many families. Yet, without adequate planning, this goal may not be attainable. For a plan to succeed, investors need to be realistic when setting expectations and committed to saving.

The longer you have to save for and fund your goals, the better your chances for success.

Automating your contributions for saving and adjusting as your income increases is a great strategy to ensure success. It is so hard for us all to take money out of our pocket and stash it away, which is why establishing a plan to set-it-and-forget-it is so important. Pay yourself first, and then use the discretionary spending pot to buy yourself something nice.

Knowing you have prioritized fully funding your goals provides you the peace of mind to let you use any surplus funds for quality-of-life discretionary spending without worrying about over-spending.

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