How to Create a Personal Budget for High-Net-Worth Households
Key Points
Budgeting provides organization and insight for high-net-worth individuals to align finances with their goals.
Calculating net worth, setting savings targets, tracking spending, and making a cash flow plan are key steps in the process.
An independent financial advisor can optimize high-net-worth budgeting through customized strategies and guidance.
For high-net-worth individuals and families, budgeting is an important exercise that provides insight and control over your finances. While you may assume that having substantial assets and investments makes strict budgeting unnecessary, going through the process of creating a personal budget can optimize your financial picture.
Tracking income, expenses, savings, and cash flow on a regular basis allows you to pinpoint areas for improvement, ensure proper wealth management, and align your money with your short and long-term goals.
Whether you have a million in assets or 10 million, a carefully constructed budget helps coordinate all aspects of your finances, so you can preserve and build wealth in line with your priorities. If you’re looking to make the most of your financial resources, consider the following guidelines.
How to Calculate Your Net Worth
The foundation of creating any personal budget is understanding your current financial position, or your net worth.
Calculating net worth involves tallying your assets and subtracting your liabilities. This provides a clear snapshot of where you stand financially as of a certain date.
To determine your net worth:
List all assets: cash, investments, real estate, business interests, personal property, retirement accounts, and any other holdings that have monetary value. Be as detailed as possible.
List of all debts owed: mortgages, credit cards, loans, or any other outstanding liabilities.
Subtract your total liabilities from your total assets. The remainder is your net worth.
Compare your net worth today to past calculations. Is it increasing, decreasing, or staying the same? Why?
Regularly updating your net worth over time allows you to track progress and quickly identify any problem areas that need attention. While your assets may be substantial, overlooking liabilities can significantly impact your overall financial health. Calculating net worth provides clarity on where you stand today and helps inform wise financial decisions moving forward.
How to Set Savings Goals
Speaking of moving forward, once you have a clear understanding of your net worth, the next step is to establish targeted savings goals.
Savings are a vital component of any budget, providing funds for both short and long-term needs. Think about your medium and long-term goals. What are you working towards? What future costs may arise?
For high-net-worth individuals, potential savings goals may include:
Retirement - Even if you have substantial assets now, these will need to continue growing to maintain your lifestyle in retirement. Model your projected retirement expenses and set savings targets for retirement accounts accordingly.
Education - If you have children or grandchildren you intend to support through college, you’ll need to project future education costs at chosen institutions and save systematically each year in dedicated education accounts.
Major Purchases - Whether a new home, boat, or other large expenditure, identify the target amount and timeline and tailor your savings to meet that goal.
Emergency Fund - Having an emergency cash reserve of 3-6 months of expenses protects against the unexpected.
Charitable Causes - Philanthropic endeavors often involve major multi-year commitments. Plan your charitable giving and set aside funds so you can honor pledges.
Carefully projecting your savings needs for both short and long-term purposes allows you to purposefully direct surplus income to meet those goals. An independent financial advisor can provide guidance to model future costs for personal and charitable priorities and build an integrated plan.
How to Track Your Spending
Once you’ve defined your savings goals, the next step is monitoring where your money is actually going right now.
Tracking your spending reveals expenses you may be overlooking and helps you identify areas to cut back on discretionary spending.
For high-net-worth individuals, useful spending tracking methods include:
Credit card and checking account statements to categorize expenses for necessities, leisure, housing, travel, etc.
Budgeting apps or software to automatically capture and organize spending data. Mint, You Need a Budget (YNAB), and Personal Capital offer user-friendly options.
Consolidate your spending reports from investment advisors if you have a substantial number of accounts to give you a comprehensive view.
Monitoring expenses consistently each month keeps you aware of cash outflows you may be taking for granted. If you’re finding yourself buried in paperwork and spreadsheets, it might be time to bring in some expert advice from an independent financial advisor like Capstone.
How to Make a Cash Flow Plan
Now you understand your net worth, you’ve set savings goals, and you’re tracking your spending, consolidating everything into a cash flow plan is next. A cash flow plan maps your income to expenses, factoring in taxes, periodic costs, and upcoming large outlays.
Key elements of a cash flow plan for high-net-worth individuals include:
List all recurring income sources and amounts, such as investment income, business revenue, rental income, etc. Identify any regular or potential income fluctuations throughout the year.
Add up predictable living expenses based on spending patterns. Account for items such as quarterly tax payments and annual insurance premiums.
Note any major one-time cash outflows - such as a home renovation or car purchase.
Compare income to expenses month-by-month to see where there may be deficits or surpluses. Identify potential cash flow issues early.
An annual cash flow plan adapted as needed allows you to coordinate the timing of income and expenses. This helps ensure you have cash available as needed for priorities while also directing any excess to your established savings goals.
When to Hire a Professional
While diligently tracking your finances gives you valuable insight into where you stand financially, there are limits to a DIY approach when you’re a high-net-worth individual.
An independent financial advisor can help you navigate the intricacies of wealth management and avoid missteps, providing objective guidance based on your unique circumstances and goals.
They can:
Give an in-depth analysis of your assets, liabilities, cash flow, and investments to optimize your financial picture holistically.
Advise on minimizing taxes when gifting to heirs or charitable causes.
Show you how to best utilize accounts like donor-advised funds and trusts as part of your budget.
Optimize use of retirements accounts (e.g. IRAs, 401ks, etc) for tax-efficiency
Keep you updated on changes in tax laws and strategies to reduce your tax burden.
Connect you to accountants, attorneys, and other specialists who could support you.
Your Capstone Advisor can create a strategic wealth management plan tailored to you. We take a personalized approach to preserving and expanding your assets in a tax-efficient manner. Our integrated financial planning and tax preparation services are aimed at helping you gain a competitive edge and make the most of your monetary gifts.
With our guidance, you can have confidence your finances align with your priorities, and that your personal budget makes sense for you and your loved ones.
Disclosures:
This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.