It’s easy to think of budgeting as a tool only for those who are scraping by financially. But in truth, a properly crafted spending plan can be helpful no matter your level of income or wealth, says Aimee Bauman, CFP®, Senior Wealth Planner for Wells Fargo Private Bank.
“A spending plan is a tool to help you reach your financial goals, whether it’s giving to charity, leaving a legacy for your family, or simply making sure your assets last through retirement,” she says. Without a plan in place, households have a natural tendency to spend all available cash — and then some. A solid spending plan can help you divert unallocated funds to the goals you value most to help you maximize your impact before that money is spent on something else.
The wealth management pyramid
Smart wealth management looks like a pyramid with four layers, Bauman explains. The foundation — the largest section — is the cash flow you need to support your immediate family. The next layer is your assets — investments such as real estate and stocks — that hopefully will appreciate over time and help you build wealth. Estate is the third layer and represents the wealth you want to pass on to your family. The top layer is the portion of your wealth you hope to share through philanthropy.
These five steps will help you build a spending plan to support your pyramid and create a long-term strategy to meet your financial goals:
1. Establish your cash flow needs. Determine your typical monthly spending by making a list of your fixed expenses — housing, health care, utilities, gas, insurance, etc. — plus how much you typically spend on discretionary expenses such as travel, entertainment, and gifts. Be sure to figure in additional, easily accessible cash to cover unexpected expenses and periodic large purchases like home improvement projects or a new car.
2. Do a cash flow analysis. Ask your relationship team to run an analysis looking at your list of expenses compared to your current and future sources of income. “The big question is, can your accumulated wealth support your desired spending level for your lifetime?” Bauman says. Your team will consider anticipated investment returns, inflation, taxes, and myriad other factors to determine if you need to make changes to maintain your lifestyle over the long term.
3. Set your goals. Talk to your relationship team about your priorities, including your retirement, legacy, and charitable goals, which play a role in determining whether your spending is sustainable. If you want to retire early, for example, you may need to boost your retirement contributions. If wealth transfer is a top priority, your spending plan may include annual monetary gifts to family members. “Building a spending plan may even help you discover you have the bandwidth to increase your family gifting and philanthropic giving,” Bauman says. “You may be able to make a bigger impact than you thought.”
4. Maintain your spending plan. A spending plan works only if you stick to it, so you need a way to monitor your spending. Wells Fargo online banking tools such as My Money Map can provide the help you need. “The important thing is to pay attention to what you’re spending,” Bauman says.
5. Review your plan once a year. Many circumstances can affect your plan: a life change like retirement or a marriage, large unexpected expenses, tax reform, or a drop in the market. “Check in with your advisors at least once a year,” Bauman says. “They can take a look at where your net worth is and where it’s heading and make sure your plan still aligns with your goals and objectives.”