Are you overspending? As a high-earning professional, your answer could very well be “yes.” Everyone knows that saving money is essential to achieving financial stability and a prosperous future, yet many high-income professionals tend to overspend. The higher one’s income, the easier it is to spend and not overdraw one’s checking account or run up credit card debt. The higher one’s income, the more that must be saved to maintain a high-income standard of living in retirement when the paycheck stops. No doubt, striking the right balance between spending and saving for your retirement can be a challenge—but it’s not impossible. It is important to be sure that you are spending money on things that are important to you and reflect your priorities and values. The first step is to get a handle on how much you’re spending, then make adjustments. Here’s how:
Calculate how much you spend. Take a moment to review your W-2, and deduct your taxes from your gross income. The net amount serves as the foundation for your budgeting and spending decisions.
Review your W-2 and year-end payroll stub for expenses. While you still have your W-2 in hand, determine the expenses that are being deducted from your paycheck—for example, your 401(k), health insurance or commuter benefit program. For couples, a simple spreadsheet can combine incomes and taxes and calculate after-tax spendable money. Lastly, you may find that looking at your income and expenses as a monthly average is easier to understand than a larger annual number.
Review your bank and credit card statements. In this step, you will continue to determine your expenses. Take a look at your bank and credit card statements, and write down the remainder of your expenses—mortgage or rent, utilities, car payments and school loans, for example. How much do you spend dining out? Attending concerts or other performances? On your travels? Some credit card companies provide an annual summary statement that itemizes expenses and totals by categories such as travel, entertainment or clothing. Or consider using a software program like Quicken or a website like Mint.com to categorize your expenses. Your bank website may have similar tools to use.
Prioritize your expenses. Now that you have tracked your expenses, categorize them into three groups: fixed costs, financial goals and discretionary spending. Fixed costs comprise your expenses that do not change from month to month. They include essential expenditures such as your mortgage and fixed recurring expenses like your cellphone, subscriptions and club membership dues. Your financial goals, meanwhile, include your short-term and long-term objectives, like saving for retirement. Finally, your discretionary spending is made up of nonessential expenses such as vacation getaways and dining out. Ask yourself if you are spending too much on things that are not important to you.
Adjust your expenses. Fine-tune your expenditures so that your fixed costs are no more than 50% of your original expenses, your discretionary spending is 30% and your financial goals are 20%. High-income people also need to save more than the legal limits for IRAs and 401(k)s. Do not assume that if you are maxing out your retirement plan contribution, then that is as much as you should do.
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If your spending in any category is too high, brainstorm for solutions. For example, if you want to reduce your fixed expenses, you might consider moving to a smaller, less expensive house. If you need to curtail your discretionary spending, you might stop eating out as much and instead cook your own meals and bring them to work. Other practical solutions could include postponing the purchase of a big-ticket item at least overnight so you can think about it. Again, consider priorities. If eating out is important to you, be willing to spend less money on clothes, a car payment or other living expenses.
Ben Franklin said, “A penny saved is a penny earned.” Your financial stability in the future is largely dependent on the spending decisions you make in the present. By knowing your current expenses and paying attention to them on an ongoing basis, adjusting them as necessary, you can take control of your spending and feel more confident about your retirement.