Menu
Planning
Date: February 23, 2021

Why a Budget and Emergency Fund are Important for High Net Worth Individuals

It’s easy to look and feel wealthy when you have a lot of money rolling through the door each month, but that’s not the same as actually being wealthy.

Many high-income earners mistake income for wealth. But as financial advisors in Gilbert, AZ, home to many retired athletes, professionals and successful business owners, the Watts Gwilliam team can tell you with certainty: Cash flow ≠ net worth.

You can have a large cash flow and still have a negative net worth if you hold a lot of debt and live outside your means.

On the flip side, you can have a high net worth and still get into financial trouble if you have your money tied up in illiquid investments like real estate, retirement accounts or businesses.

To build and maintain true wealth, it’s important to have certain safeguards in place – two of which are a budget and an emergency fund.

Here’s why.

 

Have a conversation with a financial advisor who understands the issues that come with a high net worth. Contact Watts Gwilliam and Company to see how we can help.

 

Spending Can Get Out of Control When You Don’t Keep a Budget

The more you earn, the more vulnerable you are to lifestyle inflation. You get a raise, you replace your car with a fancier one. You get another raise, you move into a snazzier house on the trendy side of town. Your job is more professional, so you upgrade your wardrobe.

Before you know it, you’re saving less than you were before you had a comfortable income. How does that happen?

It can be difficult to save money when you don’t know where it’s all going each month. A budget gives you a crystal-clear view of your income and expenses, so you can make sure you’re setting enough aside to reach your financial goals.

A More Expensive Lifestyle Leads to More Expensive Emergencies 

A lavish lifestyle also leaves more room for lavish emergencies – both good and bad.

For instance, your roof may start to leak (a bad emergency). Instead of the $900 you may pay to fix the roof on an average home, it can cost $2,000 for a sprawling estate. Luxury vehicles also tend to cost more to repair than, say, a Toyota Prius with the same issue.

But emergencies can also be good. For instance, you could inherit a dream home that takes you to France suddenly and unexpectedly, or you may have the opportunity to buy a stake in an up-and-coming company.

An emergency fund gives you the means to roll with the unexpected – both good and bad – without wrecking your wealth. An emergency fund can prevent you from having to take on excessive debt to get by in times of chaos.

Taxes Can Take a Huge Bite Out of Your Income

 It’s pretty easy to file your taxes if you’re a regular W2 employee with simple assets like a 401(k) and investment account. Hop on an online tax-preparation website, answer a few questions, and you’re good to go.

But when you’re a high-income earner with complex assets like real estate, dividend income, and maybe your own business, it’s a little more difficult to get just right. (If you’re a professional athlete or entertainer who earns money in different states, and sometimes in different countries, your tax situation can be even more complicated.)

Sure, you may be able to do your own taxes and avoid triggering an audit, but unless you’re a CPA or tax expert, there’s a good chance you’ll miss out on tax deductions and loopholes that could save you a lot of money. And not just on April 15, but in your long-term financial and retirement plans.

Working with a financial advisor and tax professional gives high net worth individuals especially the peace of mind that they can capitalize on every tax strategy available to them. It may cost more than a DIY approach initially, but the money you save in the long-run can make a big difference in your bottom line.

Your Money Won’t Last Forever 

There will come a day when the paychecks stop. It could be by choice (you retire early or start your own business). But it could also happen by force (you get laid-off, develop an illness or need to take care of an ailing spouse). Early retirements are common in financial planning for athletes and small business owners.

When that happens, will you have enough saved up to make a smooth transition into whatever comes next? Or will you be frantically stressing about how to get by?

The stakes are higher when you’re a high-income earner, because you likely have more expenses and more financial responsibilities to boot.

This is why an emergency fund is essential. An emergency fund gives you a steady cashflow to fall back on when the money stops.

How to Get Started

It’s easy to put off budgeting when the money is flowing in, but now is the time to make sure you’re maximizing your resources and setting yourself up for a secure financial future.

Talk with a financial advisor about your budget and what an appropriate emergency fund looks like for you. A general rule of thumb is to save three to six months’ worth of expenses in your emergency fund, but how much you need depends on your financial situation.

If you have an extremely stable income and few expenses, you may be just fine with a two- or three-month emergency fund. But if you’re self-employed or are in a career with irregular income (such as real estate, sales or professional sports), you may need a minimum six-month fund (or more) for when money is tight.

Work with your financial advisor to determine how many months of expenses you should have on hand to confidently handle any emergency that comes your way (whether that’s an unexpected layoff, medical bill or home repair).

Once you’ve found your target number, start saving and follow a plan! Emergency funds should be kept in a high-yield savings account that won’t charge a monthly fee for growing your wealth.

Take Control of Your Finances Today

Everyone should have a budget and an emergency fund – yes, even those with a high net worth or high income. If you need help putting together a financial plan that puts you in the driver’s seat of your money, the team at Watts Gwilliam and Company can help.

Watts Gwilliam and Company is a fee-only, fiduciary financial advisory firm with a team of financial advisors in Gilbert, Arizona that serves investors nationwide. Our firm was established to provide a conflict-free environment that’s dedicated to our clients’ success. We provide innovative investment and financial planning strategies so you can build wealth, generate income and secure your future. Schedule a no-obligation conversation with our team and take the first step to true financial freedom.

Watts Gwilliam retirement eBook

 

David Watts
Author:

David Watts

Dave is one of the firm’s founders. He helps business owners, professional athletes, and other high-net worth clients develop and implement financial plans and strategies. He also specializes in helping those with single-stock positions to diversify and manage their financial lives. Other areas of specialty are wealth transfer plans for concentrated stockholders and business owners; tax minimization strategies for those with employee stock options; cash flow management; and risk management planning.