Welcome to EWA’s FinLyt podcast. EWA is a fee only RIA based at Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you.
And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time. Welcome, everybody. On today’s episode of FinLyt, Jamison and I are talking about something that we deal with our clients pretty much on a daily basis when we’re onboarding new clients.
Now, why do I make a million dollars a year before taxes and also feel broke? And this is not something that’s a one -off. This is a very common theme when we onboard a new client that has adjusted gross income above a million dollars and they just wonder, you know, I make a lot of money.
Why do I not feel like I have any money? So today we’re going to break this down and we’re also going to talk about tips that you can actually implement to make sure your plan is on track, to make sure you have reduced stress and to make sure that you do not feel broke, essentially.
Because if you have a million dollars of income, it’s probably because of hard work, high discipline, high stress job. And so if anything, your financials should be reducing your stress and be working for you by a life design.
So let’s break this down. So we came up with three examples because we work with all three of these physicians, business owners, and then also executives. So James, talk to us just about some common traits that you see in a physician that’s making a million dollars a year.
What has typically happened for them to come into our office and say, I feel broke? Yeah. I think a couple of things to understand is you’re making a million a year. That’s before tax. but just how tax brackets work, anything above like 690 is gonna get hit at 37% plus state and local taxes.
So much more of your income is getting hit at these high tax brackets, which it’s really easy to be like, well, I’m making a million, but my after tax income is much lower than I think it should be. And that’s because majority of it’s getting hit at the high tax rates.
So from a physician’s standpoint specifically, it’s basically, if you’re making over a million a year as a physician, you’re very specialized, you’ve done a ton of training, generally that’s like a specialized surgeon or somebody that is super specialized.
So you’ve gone through residency fellowship, making $50 ,000, $60 ,000 a year, that could be four to 10 years, and then you sign your first contract, probably not making a million your first contracts, maybe the first three or four years you’re making half a million.
And then you see a huge income, basically see two big income jumps, one out of training and then… the next income jump is with that second contract. So it can happen all of a sudden, and then I would say the biggest reason is just lifestyle increase creeps up.
There’s a number of reasons why, but that would be the biggest thing is just as your paycheck jumps, doubles and triples, you immediately wanna go buy the car, buy the house, do all of these things, and it’s really, which we’ll get into, kinda juggling and making sure that we prioritize all of those things.
Yeah, so a couple thoughts on that. Thanks for breaking that down. So a physician has, just like anybody, typically four years of undergrad, four years of medical school, so now we’re at eight years.
And then if we’re talking about a specialized non -surgeon, at least three years of internal medicine, probably another three years of fellowship to specialize, maybe that’s cardiology, gastroenterology, so be it.
And so just adding the math there, that’s 14 years of delayed earnings. I mean, during undergrad and resident, during undergrad and medical school, you’re making literally nothing. And after that, maybe you’re making between 50 to 75 ,000 a year.
And that whole time, you’re surrounded by attendings or your mentors that are making a large amount of money, driving Porsches, in nice cars, and there’s a saying, you become the average of the five people you surround yourself.
So it’s very tough to basically go over a decade seeing this amazing lifestyle, well, you’re also working 80 hour weeks, and not being able to see any of the financial benefit. It’s very tough. So just from a pure mental stability, psychological perspective, there’s a reason why attending, you go from residency or fellowship, immediately go to your first attending job.
And I can’t tell you how many doctors I’ve worked with during fellowship that then they call me and they say, I say, let’s meet before this goes up. And they say, let’s me get my first paycheck. And they literally blow it on, I’m thinking about a couple clients.
They went to like the, what’s the store, the Kate Spade? Yeah, I don’t know. like five grand of purses and we laughed and now after that, you know, she’s on a good financial track. But this happens and there’s just having that realization is really important and having a philosophy down before that happens is also really important as well.
A couple of things to add also if you think about like by the time that you’re through that you’re like 35 years old and if you’re your peers that you’ve gone through your high school college with at 22 they’re making money not anywhere close to as much as the physician is going to make but through that time the people at the same age as you are making money they’re buying things you know they’re if they’re making more than 50 ,000 year they’re buying things that you can’t and that’s also hard psychologically as well as being around all the attendings.
Totally. So let’s break down like numbers. So if you’re making a million dollars a year first that probably the little voice in your head is saying I can afford pretty much anything right but the reality is a million dollars a year a couple of things that are going to happen.
Your paychecks are going to be smaller in the first couple months until you get the social security threshold. 6 .2% of your paycheck is just getting ripped away. And then once you hit that max, which is probably after the first two months, then it jumps up, which is confusing.
And most people don’t understand that. And then it’s like this uneven cash flow. Then if you get a bonus, your employer probably messes up the withholding for the taxes on that. And then you have a big tax surprise in the year.
So just in Pennsylvania, for example, if you’re making $1 million a year, depending if you’re married or single, and what kind of deductions you have, in general, you’re probably going to take home on average about $43 ,000 to $45 ,000 a month.
That’s the first realization. And having a financial plan and looking at what month. Because thinking, I make a million versus a reality is, you’re going to have maybe $550 of money you can actually spend.
That’s a huge step that a lot of people don’t understand. And then without a financial plan, we see that can go away so quickly. So just thinking about clients that we’ve worked with that have come up to us after they already feel broke.
Typically, they’re in a multimillion -dollar house. So maybe 10 or 15 a month is going away to a mortgage. They have their kids, three kids, in a private school. That’s another 10 a month. So now half of their money is literally gone before we even bought groceries.
And then we talk about lifestyle. Typically, they have two or three really nice cars. That’s another $3 ,000 or $4 ,000 a month. And then typically, their credit cards are fluctuated between 10 to 15 ,000 a month as well.
So before you know it, we’re saying, hey, develop a financial plan. And we only have $4 ,000 or $5 ,000 a month to work with, which isn’t going to work to replicate a lifestyle that they’re currently accustomed to.
So first of all, having a financial plan before this happens is so much easier. And we’re going to talk about 10 actual tips you can take away so this never doesn’t happen to you and the lifestyle creep doesn’t occur.
But to undo that situation, I mean, there’s typically, we have to have some… serious conversations and really evaluate what’s most important because a lot of people get, I would fit, the majority of America is not in a sweet spot of financial plan.
There are people that are just over accumulating wealth and will have 10, 20, $30 million when they retire, but they’ll only be used to spending $100 ,000 a year because they’re out there splitting meals and doing, and then they’re not going to know how to spend that money.
So that’s one paradox where it’s like the best savers are the worst spenders. And then the opposite end of this, there’s people that are spending everything and they’re never going to be financially secure and then working for the wrong reasons because they have to, they don’t need to.
So I would say there’s probably statistically less than 10% of Americans in this income range are in the sweet spot where they have a really healthy balance. They’re living their best, you know, life by design now, but they’re also securing the future.
But it’s not over or under accumulation. And they’re accumulating for reasons because they want flexibility and autonomy, not because they just want to suddenly retire. They just want optionality. And so having that reinforced in the context of a written financial plan is so important.
But what other thoughts do you have on why this happens? And how do we help some clients get out of this? Yeah, I would say the biggest thing is it’s the psychology behind it of lifestyle creep in a lot of time, a lot of years of just deferred compensation.
And then it finally hits. But how we help, the biggest thing is what we call reverse budgeting and the coin or the term, I don’t know if you came up with this, or I know you’ve used this for a long time with the money temperature.
It’s basically like a thermostat of, let me just break this down. So if you’re making 45 a month after taxes, we’ll figure out what are the fixed expenses and savings. And that’s going to be stuff that doesn’t change every month.
So mortgage, car payment, school loans if they’re still there, and then whatever we allocate towards savings for financial dependents, for kids’ education, or whatever that is, that’s on the fixed side.
And let’s say that’s 25 a month. So 25 of your $45 ,000 paychecks, going into that account, it’s automated every month. You’re not even gonna think about it. Now we know expenses and savings are taken care of.
And then the remaining 20 a month would go, in this example, go to the spend account. And basically it’s just monitoring that account each month. That’s the only thing you have to track, the only thing you have to look at, and just making sure that account can be run down to zero, and now you don’t have to regret or think about, can I afford this, can I not?
It’s whatever’s in that account gets spent, and that’s it. So the first thing would just be having a, what we call reverse budgeting, and getting some structure around your cash flow, your expenses, your saving.
And a lot of times what we’ll see is like, you have one bank account or two bank accounts that all the bills are auto -drafting out of. They don’t even know how much those are, and then they’re swiping a credit card.
And so it’s like just total chaos. That’d be the first thing, anything to add? Yeah, no, that’s really good. So I mean, I think the reality is, and this is a good thing. a judgment -free zone in our office because we see this.
Most people really make themselves feel very shameful or guilty around finances. And so then they just continue the habits. And so I think the reality is everyone has a definition of their life by design that’s different.
So our job is to just educate. And there has to be some structure in making sure they’re not making any mistakes. But then it’s up for their decision -making on figuring out what’s most important. Maybe they want to enjoy life more or whether their kids are under the roof.
Statistically, 80% of the time with your kids is spent before their age 18. Then once they’re out of the house, yeah, you’re going to see them. But they start their own family. So you got to enjoy that time when your kids are under your roof.
I think that’s the biggest regret of billionaires is that they didn’t spend the first five years with their kids. And then in today’s society, unless you have a financial plan, and there’s do -it -yourselfers that can do this.
But I think whether you have a financial plan or you do it yourself, the key factor for success is intentionality and tracking. Because if you don’t, society is not. And what you listen to, what you watch, what your friends, it will lead into subconsciously decision making.
And most people are living on this hedonic treadmill where they’re very stressed, they’re very unhappy, the anxiety and depression are all times high after COVID. And they think stuff is going to fix that.
And so then they get a new car, and then three months later, it didn’t fix anything in their life. And so that process continues with a bigger, better house, a bigger, better car, bigger, better tools.
Amazon, you can literally click a button, and stuff arrives at your door the next day. So, and all of that’s great and fine, but how much of that decision making is done with intentionality? And so I think the biggest thing to remove decision fatigue, because, you know, I’m just gonna rewind myself as an example, 10 years ago, I was working with a coach.
And this was kind of like a life coach, super, super helpful, but it’s basically like, let’s get into, you know, what do you want your life to look like, do a vision, exercise, a life wheel, and all these things.
And it started out to like a morning routine. And I was having trouble getting up. And so I would hit snooze like three or four times, and before you know it, scrambling at that time, prior broker -dealer, we had to be in at 7 .30 a .m.
for meetings I thought were not a good use of time. So it was just kind of like a bad attitude to get out of bed, but then I would miss working out, I’d miss journaling, I’d miss reading, I’d miss meditating, and doing all these things.
And so what that coach told me is that, let’s set up an exercise to remove the decision fatigue. So at that point, there was curings, didn’t exist, at least I couldn’t afford one. And so I had a coffee pot, and so I would program my coffee pot for 5 .35 a .m.
And the night before, she said, you have to leave the coffee pot off the coffee maker. So unless you get out of bed and get down to the kitchen and put the coffee pot on the coffee maker at 5 .35 a .m., that machine’s gonna start, it’s gonna spill and ruin your counter.
And so next morning, 5 .30 a .m., instead of hitting snooze all the way to like 6 .15 a .m., I had to get out of bed. I didn’t have a decision other than, because I don’t want, you know. My counter to be ruined, there’d be a huge mess.
So the decision, instead of having a thousand decisions, is do I work out, do I do this, do it? It was one decision, it was program that coffee pot. So that’s really what reverse budgeting and a financial plan can do.
And so I would say in order, if you wanna have a quick recipe for success, it’s reverse budget. So you can automate everything from a fixed perspective, and then also from a savings perspective for college and retirement.
The second thing would be, from a savings perspective, really get clear on what you’re saving for and automate it. And then the only decision, so this comes down to three things, reverse budgeting, automate savings as part of the reverse budgeting.
And the third thing is, just spend everything else guilt -free. Because then instead of wondering if you have money or justification of I have all this money and all being intermixed and spread out, you know what you have left.
It’s in a separate account, and you can live your best life within the confines of that. coffee pot that you just set up. So now one decision has just eliminated thousands of decisions. Yeah. And I think that’s super important because a lot of people we see will get, they’ll track every dollar they’ve spent on an Excel sheet.
And that creates so much more stress because you’re looking at it every single day. Should I buy this? Should I not buy this? And it’s like, well, we could calibrate this once or twice a year and say, OK, what’s the spending?
Here’s the, any added expenses is, you know, our money and our variable count too high, too low, and just two decisions, one or two decisions per year and totally agree with everything you said. Yeah, no question.
So let’s move on to some examples of executives and business owners. So which one do you want to tackle next? Let’s do business owners because we, yeah. OK, so what do so business owners that make in a million dollars a year?
Typically, if like a family owned business, small business, why do they feel broke? Because you think a business owner is very savvy financially strategy. You know, they’re managing probably multiple employees, etc.
So what are some things that creep up that make a business owner making a million dollars a year also feel broke? Well, I think there’s, yeah, a couple of things. I think there’s always a paradox of like, do you reinvest money back into the business to make it grow?
Do you hire a new employee? Do you buy a software or do you like take it out for yourself? So that never goes away. And so that would be one thing. And then the other thing just industries very so much.
I mean, a business could be gone tomorrow and literally any business could just go away. So that is just fluctuating. The other thing is taxes. A lot of business owners, they’re so caught up day to day on what they’re doing in the business.
And it’s, I mean, just total chaos most of the time. Business, to me, a lot of it is just like problem solving. Every day there’s a new problem to do. And so you’re dealing with all that stuff. And if you don’t have the internal systems and processes within the business to like automate a lot of that, you’ll be doing all that stuff.
So you’ll have no. idea what a lot of business owners we talk to, they don’t even know what their profits are, like they just never look at their finance, they just know I have enough money to pay my bills.
So when you do that you forget a lot. If you don’t know how much is actually going to be like taxable income, there could be stuff that flows through your personal tax returns. So taxes always creep up that you’re not anticipating if you’re not proactive about it.
There could be unexpected tax bills. So I think there’s a number of things, but business owners can be the most variable because there’s like all these things that pop up in the business every single day.
Yeah, so let’s talk about like just a normal industry. So like let’s think small business owner, say a team of 20, $10 million of revenue, which most people say oh that’s so much money, probably like a 10% margin, right?
So the business owner, let’s say they’re paying themselves 100 ,000 a year, and there’s a 10% profit, that’s a million dollars a year. So first of all, taxes. Like right off the bat, if you’re making $1 million a year, you’re probably gonna set aside $100 per quarter in estimated taxes.
Because if that’s profit and that’s not running through payroll and you’re saving some bike of taxes through an S corporation, that million -dollar profit, like $400 of that has to go to taxes because you being this whole business owner, that tax liability all flows through you as a 100% owner of that S corp.
That’s $100 a year. And if you don’t mentally set that aside or actually make those payments, most people will have blown through that million of profit and then they’re $400 ,000 a month tax. That’s just a crazy example.
But so make sure that you understand in detail your accounting system. And that’s not something that you can fully, you delegate it, but you need to understand on a high level from a cash flow perspective, know what’s yours and what’s the government’s when payroll tax are being automated for you.
Secondly is guess who’s responsibility is if the market changes. Like if you’re on a $10 million revenue and the market changes and you wanna keep all your employees and suddenly you’re at $8 million of revenue, most likely that doesn’t mean you’re an $800 ,000 profit, that 10% margin is probably slid down to like a two or 3% margin because you still have your employees, you still have your tech costs, you still have your rent or your building cost.
None of that stuff goes away. Those profits really show up at scale. And if the business or the economy changes, who’s responsible to keep the business afloat? It’s you. So it’s a paradox like you mentioned, Jamison, because the best businesses, the best returns will be reinvesting in the business, which will eliminate tax liability, which will keep the business going.
But if you put all your eggs in that basket and you have one year of fluctuation, you know, like in COVID, a lot of businesses got wiped out. So I believe it’s your responsibility, even though it may not be the best investment, you need to have a good financial, personal financial plan in place as a business owner because your best asset is your business.
So everything you do should be a support system to save your business. or keep things going because one or two bad years doesn’t mean you have a bad business. It just means the economy and factors changed.
So those are the reasons I think starting to realize and not saying, oh, I’m going to just eventually sell my business. If you want to get a good sale in your business, you have the responsibility to make sure the business is healthy and striving from a financial culture and many things that go into that.
So I always heard as a business owner, you have really three duties. So you have to do what’s in the best interest of your clients or customers at all times You have to do the best interest of your team members at all times.
And you should make every decision that’s also in the best interest of the company. So nowhere that I say as a business owner, anything’s in the best interest of you, that’s where I think a lot of business owners get caught up.
But what’s in the best interest of your team members is if you, the owner, are mentally stable and sane, having a good financial plan will drastically help that. Also, without the company. is making sure the person that’s literally financially back in the company is able to do so again.
So be selfish and get a financial plan in place. And then also for your team members, because they’re relying on you for a paycheck. And the only reason they’re going to get a paycheck is if your business is surviving.
So great examples from the business owner, but it’s even more difficult as a business owner from a casual perspective. It’s not only the money temperature can affect as a physician. It’s probably you’re going to make a million consistently if you’re over that.
If you’re a neurosurgeon as a business owner, you could make 1 million one year, 200 ,000 the next year, 2 million the next year, 300 ,000. So just all over the place and the money temperature could really change really quickly.
A lot of conversation, I guess one way to help fix this with business centers is we’ll say, let’s figure out, what do you need to live your life and save enough? And maybe that’s 100 ,000 a year. Let’s make sure that’s coming in no matter what, that this is secure.
Anything above that, then we have the conversation around, do you save it, do you reinvest it? And that way, that generally alleviates a lot of stress because then it’s like, okay, at least I know my basic expenses and lifestyle is covered.
And obviously if lifestyle’s super high, then that fluctuates back to how much you need to take from the business, et cetera. But that’s, I think, a great example. So what are the third one, let’s talk about executives.
So typically at Fortune 100 Company, we see in Pittsburgh, probably making between one to two million a year. Let’s say for the sake of this podcast, let’s call it a million a year. So how does that compensation work and what problems typically arise?
So yeah, now this is an interesting one because they may have a base salary of like 300 ,000, even less, and then there could be some cash bonuses and then generally a lot of the compensation is through stock, restricted stock units or stock options.
And so a couple of things happen. Number one, the base salary is coming in and that’s like not, if it’s 300, you’re 14 or 15 ,000 a month after taxes. So you’re used to living on that smaller number, but psychologically, like, well, my gross income’s a million, that something’s not adding up.
So you say, okay, I’m relying now on the stock, the cash bonuses. So what happens then, the cash bonuses could vary. So same thing as like the business owner, if that industry’s fluctuating, the executives are the first people to generally make less money.
And so that could fluctuate. The third component is the stock. The stock generally is if they’re restricted stock, restricted stock units, those are getting hit at high tax rates. There’s a ton of taxes.
A lot of times, those withholdings are going to be all messed up because they may be withholding for that $300 ,000 base salary when gross income’s a million with all of this. So now you have a tax liability.
So I guess as we’re talking through this, it is a similar example of the business owner situation just on a, I guess, a different situation. The other thing too with executives, I think it’s super high stress, like extremely high stress.
You could be told, hey, tomorrow you got to get on a jet and go over to Asia. Okay? Like I have to do that. You may be in a hotel room 200 days of the year. And so that causes, kind of like you said, when you do have the time to spend money, you want to enjoy it and actually spend money, do the things like that, do things that make you happy.
So if there’s no structure or organization and a lot of the same things can happen where you have no idea how much you should be spending. There’s all these things that vary. And it’s very easy to make a lot of million dollars a year and not feel like you have any of it.
So anything to add on that? Yeah. No, Fortune 500 companies are smart. If you’re an executive, they can’t really afford to lose you. So they basically, typically 30 to 50% of your compensation in these restricted stock.
And the way these works is if you’re making a 300 ,000 dollar base, a 300 ,000 dollar cash bonus, you’ve pretty much eaten up all the small, mid, even now, anything on the stock, like James said before, anything above 690 is going to get at 37.
So that stock, the way it works is you don’t get tax on it when it when it goes to you because it typically invests three years later because the company has a golden handcuff and they don’t want you to leave.
They want you to realize if you leave company A for company B, you’re leaving millions of dollars on the table because the stock’s not vested. So typically they give it to you every year, but it vests every three years.
So at any point, after an executive has been in their position for over three years, you have three years worth of RSUs, restricted stock units that are just not vested. And so when they do invest, that’s when they’re taxed at ordinary income rates.
So if you have a million dollars of stock vested, typically they’ll withhold some low number, like 24% of it, 240 ,000 tax, but you’re going to owe $370 ,000 of tax. So right away, okay, most people don’t realize that’s $130 ,000 of cash.
I’m going to owe the government at the end of the year that I didn’t plan for just because there’s an HR withholding mistake. So a good financial plan obviously can forecast this in advance and lay it all out there.
So, the reality is that having a good financial plan and realizing how my compensation works, when am I going to be able to use the money, see the money, how the tax is going to work, then can allow you to take control from that voice in your head, which is basically going to say, I make a million dollars a year, I can afford this car, this house, send my kids to college and all these things.
When the reality is maybe you can, but if you rely on the fact that you make a million dollars a year, it’s going to drastically fail you without having a financial plan that actually supports the reality of how your cash flow works and the reality of how taxes work and the reality of what is actually yours.
Let’s talk about, and those are great overviews of physicians, business owners, executives. Let’s talk about some of the tips we had. So, the first one would be stress test on the house purchase. It’s important to have some basic rules.
We’ll use house and car, for example. We did a blog on this and have some video content. But making sure that you don’t get a house poor, there’s two stress tests we like to use. The first one would be making sure housing costs are less than 30% of your take -home income.
So for example, we use the beginning. If take -home pay is $45 ,000 a month, 30% of that would be $15 ,000. Taxes, insurance, whatever cost would go into the house. Keep it under that 30%. The third of that would be, so technically it would be $13 ,500 a month.
But yeah, the reality is that’s about a $2 million of house max depending on where you live with, because principal, interest, taxes, and insurance, so 30% of 45 would be $13 ,500. You need to fit your principal, interest, taxes, insurance, and even factor maintenance under those costs.
So really under today’s interest rate environments, at max that’s probably a $1 .8 to $2 million house. Anything above that, you’re wondering why you feel house poor, that’s why. But that also fits within stress number two, and we always recommend you look at both stress tests with the house.
What’s stress test number two? Don’t borrow more than two times gross income. So this is where interest rates can have a huge factor in. And two times gross income is what? Two million, right? And I just said 1 .8 to 2 million.
So those are really important to look at. Make sure your house purchase fits under both of those stress tests, because those taking into consideration, changing market conditions, et cetera. And then also we have plenty of advice on, you should not be purchasing a house because of investment.
It’s not maintenance, insurance, taxes, we’ll eat up. Make sure that it’s a lifestyle decision, so it’s not a justification process of spending a lot, thinking it’s investment, and what’s not, because if you need to sell that thing, two million dollar house is gonna cost you like $120 ,000 minimum in a commission to a real estate agent just to unwind it.
And so if the market drops and you’re paying the commission, you could be a couple hundred grand behind. Time solves usually all these problems. So as long as you’re in a job, you like the job likes you, you have a minimum timeframe of seven years and you follow those true stress tests on the houses, 30% of take home pay and also the 2X rule, typically you’re going to be good.
That’s a great one. So one other thing to add, test for, so basically housing car, the two things that is very easy to go pour on. Yeah. So what’s the stress test for the car? Under 10% and that would include car payment, maintenance, gas, insurance, all of that, keep it under 10% and then whole another conversation about buying versus leasing.
But regardless of which one you choose, keeping under 10% will keep you. So at 45 ,000 a month of take home, make your car payments under 4500 a month. So if you have a Porsche, a Lamborghini, a Mercedes and those are each two grand a month, you’re wet, you’re well over.
4500 a month, I’m just thinking about my Lincoln lease a couple years ago. It wasn’t that too far ago. It was 300 bucks a month. I negotiated the heck out of it. But obviously, I couldn’t get that now.
Car price has increased. But OK, so we’re going to get this is 10 tips, by the way. So 10 tips of if you follow this, there is a high high probability that you will not if you make $1 million a year.
If you follow these tips, you will not feel broke. And you’ll have significant reduction in stress. So number one was around the house car. Number two is just around savings. So just as a general rule of thumb, between all savings for short -term goals, the next five years, mid -term goals, which should be like a college or maybe a vacation house, college for kids, undergrad, post -grad, and then also for financial independence.
We hate using the word retirement, because most people make $1 million a year. They have a lot of identity and meaning in what they do. So we just want to have a financial plan that’s a support system.
So as soon as possible, they can do it because they want to, not because they have to, and get off that treadmill of having to work and being in a situation they don’t like, and the adonic treadmill of keeping up with the material possessions, and just getting time back, and being able to trade time for money for time, or time for money.
I mean, everyone’s doing that every day. So just as a general rule of thumb, what percentage should a million -dollar income earner be saving for short, mid, and long -term goals? I would say generally 25% of gross income will get you there.
This could vary because there’s- So 250 a year, so 25% of a million. So you should be saving 20 a month. And so typically out of that 45 a month, we’ve already factored out your max, not your 401k with a match, that’s probably 2 ,000 or 3 ,000 a month.
And then maybe an HSA. So I would say typically, most of our million -dollar income clients, after we’ve gotten the financial plan and calibrated this, they’re saving automatically when you add everything up together about 20 ,000 a month.
I do wanna say that that’s- Those are good general rule of thumbs, but it’s so specific to, like we had talked about earlier, you may want to, like we have clients that they’re saving enough for long -term financial independence, which may not be 25%, maybe less.
And they may say, well, we’ll help with college, but we don’t need to pay for eight years at a private school. So we want to spend more now on vacations, on things. So it can fluctuate, and that’s why you should have a plan specific to your goals and your values.
The crazy thing though is, here’s the reality. The more, the less you save, it becomes a paradox, because then you need to replicate a higher income, a higher lifestyle. It’s actually having that balance of saying, okay, make 45 a month, I’m going to spend 25 between my fixed expenses, and I’m going to, you know, I’m going to save 20 a month, fixed and variable spent, I’m going to save 20 a month.
That’s a good balance. But if you say, no, I don’t want to do that, I’m going to spend 30 a month. Now you have to replicate a higher lifestyle. So just as a quick aside, like, yeah, your kids will be out of the house when you retire.
Yes, your house will be paid off. But when you retire, like you’re going to have more time and you’re going to have a completely shift in your identity, figuring out what do I want to do? Who am I outside of work?
You know, 10, basically half my day was at work. Now half my day is, I don’t know. And typically when you fill up activities that are meaningful in time and adventures and travel and hobbies, you’re going to spend more money on other categories than you were when you’re working.
So, you know, the typical rule of thumb we’ve seen like 60% of income or 80% of income, those are very individual based. I would just say, you know, look at if you’re a million dollar income, we’re going to make it 45 ,000 a month and you’re saving 20 a month.
You’ll be okay. You’ll be okay. But like you’re going to need to replicate probably out of that 25, at least 20 of that 25, because yes, kids and mortgage will be out. So maybe you could say, oh, we could spend 15 a month.
That’s just not realistic for, you know, hundreds of clients we’ve helped retire. You’re going to need to replicate at least 20 a month in that example of after tax income, adjust that for inflation, you know, 20 years from now will be like 40 ,000 a month.
So it’s very surprising that you do need to have the healthy balance of saving and saving is the best thing you can do to control your money temperature as well. Yeah, so I couldn’t agree more. All right.
So that brings us to number three. So James, and tell us about the rule, general rules of thumb for bonus compensation. How much is it going to tax and then out of what’s left, how much do we recommend could be spent for fun and how much should be saved?
So high income are making money a year or over a million will round up and say 50 percent is going to get a taxes after federal, state, local, depending on how the income is real quick Pennsylvania break it down.
37 federal, 3% 3 .07% state, Medicare taxes. And then also, you know, you’re in a surcharge of the Medicare tax plus local taxes and the only thing that. that’s not a factor there is social security tax.
So generally it is gonna be doing some quick math like 44 to 45%. So we’re gonna round up to 50% because there’s some states with higher state taxes. Okay, so you get a, I’ll just use an example. You get a $300 ,000 gross bonus and you’re saying 150.
Out the door. Out the door in taxes. Probably only a hundred of that got actually taken away from taxes. Another 50 of what you have to go to taxes. So now you have 150 left sitting in your bank account.
What do you do with that? Half can be saved, half can be spent generally. And when you spend it, it’s important that that doesn’t increase ongoing lifestyle. Maybe that’s a one time project on your house.
Maybe that’s a big vacation. Maybe that’s a big experience. Maybe that’s saving to put on a down payment to a lifestyle vacation house. But there’s also a money temperature that can creep up with bonuses and wanna make sure it’s avoided.
So that’s tip number three. Tip number four is, and this is an important one, we’re not therapists, a lot of what we do feels like therapy though, which is. great because we have really meaningful deep conversation with our clients, but tell us about the values exercise and how that could be an impactful way for meaningful change not only in financial behaviors but also in general state of happiness and just being present in day -to -day.
Yeah, this is probably one of the most in my opinion impactful things that we can do with clients. A lot of times you’re just not having these conversations. The values exercise we call it is we will, it’s funny, one of the clients that I talked to said that was when you made me look at a bunch of words and pick what was like important.
I was like yeah basically that’s what it is. So we have a deck of cards of these values make maybe health or family or faith or whatever it is and they have to narrow it down. There’s a process that we go through to get down to what is the five most important and so we use that as a guardrail for decision -making processes because a lot of people’s financial plans do not support their lifestyle and they’re saving for no reason and there’s no intentionality behind it or they’re spending and not saving enough.
Maybe early financial independence is important and they’re spending everything or on the vice versa like they don’t care about saving they’ll work forever and they’re you know not anyway can get totally out of balance but the values exercise super helpful because then that helps.
I’ll use an example if health is, health is one of my values personally. So for me I have no problem spending money on things that will help my health. So going to a trainer or making sure I eat healthy things for my mental health and that I don’t even have to think about it.
I’ll spend the money on that whereas if I didn’t care about health and I’m going you know spending money on those things it’s like why are you doing that. So I think the biggest thing just creates some intentionality in your spending and making sure that you can make those choices based on what is most valuable to you.
No question. For listeners out there that aren’t our clients and want to do this. themselves, Google 50 top values. Anything family, friends, meaningful activities, work, security, wealth, those are all just examples, spirituality, whatever it is.
Narrow it down, print them out, look at them, narrow it down to five. Then rank yourself on a scale of one to 10, how present is this in my life on a scale of one to 10 right now? And then ask yourself, how can I make it?
How can I get it two at nine, at least, in the next year or two? And then that becomes a framework for decision making. So I’ll just give you an example. A client recently, they want to buy a vacation house because family is so important for them.
And they don’t necessarily, it’s not as important for them to fully fund graduate school. They want to do undergrad. So going through the financial plan, having those top five values and saying, will this decision help us move the needle towards getting to a nine on those values or will it take away?
In that case, It helped four of the five and it took one of them down because wealth was one. And that’s not a way to grow wealth is my invocation house typically because they’re not going to Airbnb it.
They’re not going to rent it out. Just going to be for them. They’re going to use it, you know, one week out of the month. So, um, that allowed us to have a very meaningful, not just look at numbers and the spreadsheet and look at here’s the impact.
Is it helped us have a very meaningful discussion and educational process saying, here’s how this decision affects your financial plan. And here’s if you don’t do this, how this affects your financial plan, cause maybe you’re over a community wealth and you’re going to have lots of regret in life.
So it’s not a, um, a black or white process for decision making. It just become, it makes decision making actually your decision making versus influences in your life who typically, you know, a lot of decisions I see people make really aren’t their decisions and that values exercise.
If I were to summarize it in like a sentence, it makes sure every financial choice you have is actually your decision and not someone else’s agenda for your life. Very powerful. Couldn’t agree more. I could, we could, this could be a two hour episode on part on value.
So let’s move on to the next one. So the fifth one is just simple. It’s, you know, having a financial plan is so important. I think a good financial plan is not just a formula of save X amount and these accounts and be tax efficient.
It’s really living in that top 10% of the population and making sure you’re not someone that just accumulating for the reason of accumulating and making sure you’re not someone who is not saving enough to then, you know, essentially be on someone else’s agenda the rest of your life because you don’t have any choices.
You have to work. So it’s a being in that top 10% and in understanding there’s competitions between college and retirement and vacationing and lifestyle today. And it’s not just about, did I get the best returns?
I did I save in the right places? It’s about making choices that you will never be able to change in your life. You only have one shot at this. And so calibrating that is a continual process. So a lot of people ask, why do you pay your financial advisor 1% it is not I think most of what we do is table stakes.
Investment management, I believe we’re in the top 1%, tax advice, estate planning, the list goes on. But if I were to say what’s the value proposition, it’s saying I would look at someone and say, it’s when our value proposition, have you worked with us your whole life?
I want you to look at 90 and look and say, I have no financial regrets. And that does not happen by just putting something on autopilot. We recommend savings on autopilot. That happens through a continual calibration process of making sure that you’re not living based on what your money does or doesn’t do.
It’s making sure your money is designed to help you live your life by design. Yeah, and I think that’s, like you said at table stakes, like with artificial intelligence, I mean, a robot’s gonna be able to do investment management and do some of that basic stuff.
But that’s like, so anyway, advisors, that that’s their value prop, it’s gonna be gone in my opinion, it’s my personal opinion. But it’s like having those really hard conversations to make sure that, okay, that stuff’s…
the box is checked, but is it intentionally being used for your lifestyle and what you want until exactly what you said? Make sure they have no financial regret. A good financial advisor will eliminate, not completely eliminate, but eliminate as much stress as possible through your life and then make sure later in life looking back that you have as little regret as possible.
That’s what a good financial advisor and a good financial plan can do for you. Yeah, couldn’t agree more. All right, what’s next? So next one is just tracking. So you know, your best life is not in a spreadsheet.
Your best life is outside of the spreadsheet. So there is unhealthy tracking where, you know, we’re obsessing over what dollars went out, where it went, and then, you know, spouses arguing, you spent too much on Amazon or you spent too much on that trip.
It just can, so reversing that and realizing that the healthy tracking is typically done in a once a month, once you’re on a reverse budget, once your savings are automated, it’s tracking your net worth.
It’s making sure that you’re spending on very enjoyable exercise or viewing your, your values exercise. So there is a million things to track, but if we track the right, you know, four or five things, we can eliminate the decision fatigue to have to track the other thousand.
I personally, I have a budget every once a year. It’s automated. It’s that coffee pot. I can’t change it. And so, you know, what I track is what I’m saving, what my net worth is, controllable factors because once I spend money on most purchases that are sometimes stupid, I can’t get that back.
So, So, takeaways, net worth and savings are the two big ones I would say are the most important anything to add. And make sure you have goals for, you know, experiences and all your financial plan. I would track your progress towards, you know, college, towards your, you know, maybe tracking even time with your, with your kids would be a good thing to track, not tracking, you know, what you’re spending on a lot of days.
Yeah. And I heard this make like, instead of $3 decisions, make like $300 ,000 decisions and what that means is like the $3 coffee is like not changing your life if you buy that or not, but the $300 ,000 decision is saving $1 ,000 a month.
compounded over many years. Yeah, and I would encourage, if you make a million dollars a year, you should be spending $10 on every copy. Because guess what? By doing that, someone else is doing all the work, and you add up what your time is worth compared to that.
And you’re saving probably a couple hundred dollars every copy you buy. And so same thing for vacations. Maybe it’s flying first class and making it enjoyable. Think about what your time’s worth. And when you go through these exercises and prioritize and eliminate all the unnecessary, stupid stuff, and focus on what you really want, it’s incredible to see what you can do.
And a lot of stuff, like nitpicky stuff, we would encourage you to dine out. We would encourage you to spend $10 on every copy every day. Because that’s gonna save your time, and that’s a very valuable, non -renewable resource which you need to be focusing on.
So tracking’s so important. So the decision making, if you’re making a big purchase that you have any pressure, make sure you sleep on it overnight. And then just make sure you review how your value system is aligned after the decision is made, whether that’s a house, a car, et cetera.
For our eighth tip, we’ve already mentioned several times, it’s around automating everything that’s possible. So that’ll be everything from reverse budgeting, to dollar cost averaging in the market, to having a philosophy in place with how you’re going to spend and save your bonus.
So the ninth thing is just about understanding. So in general, we recommend don’t do anything that you don’t understand. So Jameson talked to us about how we’ve seen some clients balance sheets that actually are working against them.
All these different investments are pitched, but then it just takes up their time and confuses. So many layers to unpack here. I think that a lot of financial advisors will create more stress, because they don’t clearly understand.
They may not clearly understand it. That way, then they can’t articulate it to a client to get the client to understand. So a client doesn’t trust them, but they’re just stressed out. It creates more stress.
The client’s busy. They’re like, OK, do it. But then the client’s thinking, is this the best thing I should be doing? So there’s no trust factor, because the advisor’s not an expert. That’s the first thing.
And then the second is sometimes they will. It’s easy to do things. We’ll say private equity is a great example with a lot of high net worth people we work with. It turns into, oh, my best friend says I should do this.
And it’s like, OK, why? And so if you really just dig deep, your friend doesn’t understand it. You don’t understand it. So one, let’s make sure we clearly understand what’s going on. And a lot of times when we break that down, and here’s how this actually works, it becomes a very easy decision.
So if you don’t have an understanding of it, you’re going to be more stressed. You don’t have to be an expert of it. You don’t need to know the ins and outs of your portfolio. But having a trusted relationship that you know they at least understand it will eliminate a ton of stress.
Yeah. And if you’re a gamble or listen, a lot of clients that make this, they feel like they should, they like the adrenaline maybe. So just have some rules in place. So generally recommend, out of your balance sheet, have less than 10% of your balance sheet and stuff that you don’t understand.
such as Bitcoin, such as private equity investments. And then also the second rule of thumb is you should not have more than 10% of your income or your net worth or balance sheet in a concentrated stock, which is typically also the company that your whole financial well -being is based upon, because it’s also the company that’s paying you, giving you all these restricted stocks.
If you follow those rules of thumbs, if you understand the majority of your balance sheet, and you just understand that you’re gonna limit your balance sheet to less than 10% of the stuff you don’t understand, we realize that’s gonna happen, but just making sure you have this simplicity and making sure that balance sheet is working for you, not against you time -wise is super important.
I use this personally, but you won’t put your money anywhere with something you don’t understand. So think of your physician and you understand medicine, but you’re getting solicited real estate. You don’t understand the real estate market.
Maybe if you have the time to spend in real estate and understand it, okay, go do it. But a lot of times that will just eliminate so much decision fatigue on being solicited for stuff that generally should not be investing in.
So couldn’t agree more. No question. All right, so the 10th thing is just around how to implement this. This doesn’t all have to be done on one. I actually just read it from a really good book. I think in human history, people that juggle, I can juggle actually in my prime four balls, four whatever.
And it took a lot of work. But apparently, history, I think that the record is 13 balls. No one has gone above 14. I think that’s such a good analogy in life and in a financial plan. You can only do so much.
And so making sure that the balls you are juggling, if you’re juggling 20, you’re not going to do anything really well. So max 14, delegate relentlessly to people you trust. But you still have to understand stuff.
But just be really careful how you’re spending your time and how you juggle what balls you have in there. And that’s the same thing with back to the beginning of the discussion, a lot of high -income earners think they can do everything.
It’s like, you may be able to buy the vacation house, pay for private undergrad, pay for eight years of college. You may be able to do all of those things. It’s like, let’s just prioritize what we’re going to do now versus later.
Same thing with juggling. Whatever the number is, you can’t go above 14. You can’t do 14 big financial goals at one time. Let’s just intentionality what’s most important and then create a process to do it.
Absolutely. So James, thanks so much for joining the Finlet podcast. Again, Finlet, the lit was spelled with a Y is a catalyst. So financial literacy for all listeners. And we hope that the advice and takeaways here are catalyst for you to make meaningful change to get your financial plan up and running.
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