At its core, budgeting is about money coming in and money going out. Anyone who earns and spends money has a budget. (Similarly, anyone who eats food has a diet.) 

 

While we tend to have restrictive notions about budgeting and dieting, neither is inherently tied to restriction. In fact, optimization tends to be a more successful strategy than deprivation in both cases.

 

Let’s walk through a few ways budgeting applies to wealthy families, and why being strategic about your budget can help you optimize your income and assets.

 

Create clarity

 

Budgeting can be a helpful tool for solving money problems. For many Americans, those money problems are obvious—it’s about making sure there’s enough income to cover needs and wants with some left over to save for the future.

 

What gets lost in that framework, however, is that budgeting can also help you uncover potential issues before they turn into problems. 

 

For instance, many wealthy families wind up with fragmented finances. If you’re earning income from a job, investments, and a trust, it can be difficult to keep track of where your money comes from and when you’ll be paid. Similarly, if you always have enough money to cover your expenses, it’s easy to lose touch with how much you’re actually spending in a given month or year.

 

This detachment isn’t necessarily bad, but it can make it harder for you to spot potential problems or potential opportunities. A basic budget—one that focuses on cash in and cash out—can offer clarity and awareness. 

 

Improve liquidity

 

Having enough money is only part of the equation—you want to be able to access your money when you need it.

 

Budgeting can help you act strategically about how you use your accounts, particularly if you’re planning for a big purchase. For example, we never want our clients to sell assets they’d prefer to hold on to just to generate liquidity. If a client needs an influx of cash during an income gap, we might be able to adjust payment schedules or arrange a securities-backed line of credit for a short-term cash infusion.

 

In short, clarity around how your money flows into and out of your accounts is the first step to optimizing your finances.

Start cutting (opportunity) costs

 

While the average family might focus on cutting costs overall, the bigger concern for wealthy families tends to be opportunity cost. For every investment you make, you’re losing the opportunity to make other investments or purchases.

 

Knowing where your dollars are going means you can ask: Is that the best place for them?

 

That’s a big but important question. To answer it, pull up all of your family’s expenses for the last quarter. Then ask yourself:

 

  • Are these expenses aligned with our family values? (If you haven’t discussed family values yet, try this exercise.)
  • Are we supporting the causes we care about in a meaningful way?
  • Are we planning for the future or focusing entirely on life right now?

 

Some quarters, your answers might be more satisfying than others. The goal isn’t to be perfect; it’s to be aware. If you have a quarter where your money is going solely towards your present-day wants and needs, it gives you a chance to reset the following quarter.

 

Next, pull up all of your income statements for the same quarter. It’s important to look beyond how much you made; look at how much you got to keep. 

 

You want to make sure you’re using the right accounts and investments to minimize your tax burden. After all, paying more tax than you need to means you’re missing out on an opportunity to do something else with those funds.

 

This second exercise is best done with a wealth advisor and/or tax professional.

 

Create generational wealth

 

When you analyze your spending and income at a high level, you aren’t just looking for opportunity cost, you’re creating an opportunity. Those conversations are a great way to introduce your kids to important financial concepts.

 

We’ve all read stories of families who lose everything when children or grandchildren begin taking wealth for granted. The best way to avoid that is to make sure the next generation understands where their funds are coming from and where they’re going. Putting these conversations in context, by discussing family values and showing how your spending and saving maps back to guiding principles, can help your kids stay grounded.

 

What budgeting looks like for wealthy families

 

Ready to get a better sense of your budget so you can start optimizing it? Not surprisingly, the complexity of your finances often means spreadsheets are just the first step; often you’ll need to go many levels deeper to truly optimize. A financial advisor can take a more nuanced approach by focusing on cash flow and looking beyond the assets in your portfolio.

 

If you’re ready to get started, reach out to our office to set up a consultation.