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Secrets of the Wealthy: Spending & Planning

What the Wealthy Know

The wealthy have a certain set of knowledge and skills that sets them apart from the rest of us. They know how to make their money work for them, how to invest wisely, and how to create multiple streams of income.

They understand the importance of budgeting and saving for the future. And they know that it takes more than just hard work to become wealthy – it also requires smart decisions, planning, and discipline. In this post, we’ll explore what the wealthy know that most people don’t and how you can use this knowledge to build your own wealth.

The wealthy know that success is not just about having money, but also about having the right mindset and knowledge about money. They understand that it takes more than luck to become wealthy; it requires hard work, dedication, and the ability to make smart decisions. By learning what the wealthy know, you can take control of your financial future and achieve financial independence.

You Are In Control Of Your Spending

As we discussed in my last blog post, the wealthy know that you can’t burn your money. This doesn’t mean you can’t have a robust quality of life, but it does mean you must learn to make your money work for you rather than just living a consumptive lifestyle.

Self-control does not mean you have to “live like a resident” but there are principles of living this way that are helpful for building your wealth. The most important of these principles is delayed gratification with your lifestyle choices.

Delayed Gratification

Delay gratification is an important concept in lifestyle design. It is the ability to resist the temptation of an immediate reward in order to receive a greater reward later on. This concept has been studied extensively and has been found to be essential for success in life.

Delaying gratification can help us achieve our goals more effectively by allowing us to focus on long-term rewards instead of short-term pleasures. It can also help us develop better self-control, which is essential for leading a successful and fulfilling life. It’s all about learning the power of contentment and satisfaction in life. It has been said about contentment:

Discontentment makes rich people poor while contentment makes poor people rich.    ~Unknown

By learning how to delay gratification, we develop the mindfulness skill of being satisfied with our present state, rather than always yearning for something better. This mindset helps make sure that we are making decisions that will benefit us in the long run, rather than following the momentary urges of the present.

You Need A Plan

To accomplish your long-range goals, you must both create those goals and then be intentional with how your money flows through your home to help you reach those goals. My Dare to Dream guide can help you with this.

You need a financial plan for this to happen. Some call this a budget, others call it a spending plan. Call it what you want, but in the end, it involves controlling how your dollars are used to help you reach your goals in life.

The beauty of a plan is that it keeps you in control of your money but simultaneously helps you make sure your earned dollars are just no frivolously spent, nor mindlessly consumed. You alone get to determine how it is saved, spent, and given. It is your plan.

Here is a suggested template for starters, if you are new to this idea.

50-30-20 Plan

The 50-30-20 spending plan is a great way for wealthy individuals to manage their finances. It encourages people to allocate their money in a way that allows them to save, invest, and enjoy life. The plan suggests that 50% of your income should go towards essential expenses such as rent or mortgage payments, 30% should be allocated towards discretionary expenses such as entertainment and dining out, and the remaining 20% should be saved or invested. This plan is especially beneficial for wealthy individuals who want to ensure that they are making the most of their money.

Automate your Cash Flow

I highly suggest you automate your cash flow and hard wire it to move into your 50-30-20 accounts automatically. Most banks have digital account management tools that make this easy to set up.

It is a great way to ensure that you are paying yourself first. This means that you will be able to save money and invest it in the future. By automating your cash flow, you can make sure that a certain amount of money is set aside each month for savings and investments. This will help you build up a financial cushion for yourself and ensure that you have enough money to cover unexpected expenses. Automating your cash flow also helps reduce the stress of managing finances as it takes away the need to manually transfer funds from one account to another.

I find Mint to be a great tool for tracking your spending, subscriptions, and overall personal finances, including your automated spending.

I also like Acorns as a comprehensive banking, saving, and investing app that helps with this automation process, including its really cool “round up” savings feature. It is basically a more robust replacement for my old “loose change jar” that was on my dresser.

Timing

The best time to create an annual spending plan budget is at the beginning of the year. Behaviorally the new year provides each of us the opportunity to put off old patterns and embrace new habits and patterns that better support our well-being. The forced holiday pause at the end of the year provides a natural space to reflect and consider what you want your preferred future to look like.

Taxes

It also turns out that the calendar year parallels the tax year. Taxes are one of your largest budget categories by percentage, due to your large income. Many of you take a fatalistic view of taxes believing you have no real power to reduce your tax burden, and thus all you do is complain about them.

But the tax portion of your spending plan or budget represents an opportunity to retain more of your earnings for the ultimate purpose of growing your net worth, as opposed to more consumptive living. You have the power to reduce your taxes every year just by knowing the tax rules and then organizing your finances around them to optimally flow through this fixed expense.

Although taxes are an unavoidable part of life, the wealthy know how to use the system to their advantage. They understand the importance of tax planning and how it can help them save money and increase their wealth. They are well-versed in the various tax laws, deductions, and credits available to them and use them to their advantage. They also use strategies such as charitable giving, investing in retirement accounts, and taking advantage of tax-free investments to reduce their taxes.

By understanding what the wealthy know about taxes, you too can make sure that you’re taking full advantage of all available tax benefits.

I am a fan of paying my fair share to live in this great country, However, I am also unashamed to do my part to legally avoid taxes within the framework of the tax code.

Importantly, reducing your tax burden is not the same thing as tax evasion.

The truth is that proactive tax planning can help you retain more of your earnings and will propel you to be more prosperous in addition to reaching financial independence faster.

I am not a socialist, but It has been said:

“We are all equal, but some pay higher tax rates than others.”

The spirit of this expression is that every US citizen has an equal value and responsibility to fill the treasury with dollars, but the amount is proportional to your income level.

This American ethos is baked into our tax code through a graduated-marginal tax rate that escalates as your income grows. In some regards, it does allow every citizen of this great country to proportionally contribute to paying for the infrastructure that supports our incredible quality of life.

What I naively didn’t understand for years was that those with an equal income level don’t always pay an equal amount of taxes. That is because not everyone knows about the secret tax loopholes and tricks known to the rich that are buried in the 70,000 pages of the US Tax code.

What The Wealthy Know

The wealthy often know about lesser-known tax strategies like:

• Defer Income When You Can.

• All Income Is Not Taxed Equally.

• Claiming Depreciation Is A Powerful Tax Tool.

• Tax Powers Are Afforded Businesses such as Deductible Expenses.

• Hiring Your Kids within your Business.

• Rolling Forward Business Losses.

• Earning Income From Your Investments Is More Tax Advantaged Than Earning It From Your Job.

• Moving to a Lower Tax State.

• Opening an HSA.

• Forming a Donor Advised Fund

• Having (Life) Insurance That Allows For Tax-Advantaged Uses.

So, the truth is that a married physician who makes $400,000 a year does not necessarily pay the same amount in federal taxes as their same peer does in a parallel universe. I live in Indiana and this is what the default tax starting point looks like for a doctor here who earns $400,000. Your effective tax rate at the combined federal and state level is 23.6%.

When you look at your peers in the physician lounge, grand rounds, or medical group meeting you need to know that not all are paying the same amount as you are in taxes. Some have figured out the tax strategies of the wealthy, and others are just passively finding out the retrospective tax news when they file their taxes annually. By then it’s too late as the proverbial “cow is out of the barn” by then.

The proactive ones plan by looking at their finances and deploy strategies (often with the help of their tax-accounting-financial professional) that help reduce their effective tax rate. The most important and valuable tax strategy they deploy is to own a business, with a micro-professional corporation being the best choice.

The passive doctors just keep trudging along helplessly accepting that they are going to annually pay $94,477 in taxes to live in Indiana and the USA.

With the new tax laws that annually evolve, it is more important than ever for high-income earners like you to have a good understanding of your finances. For instance, the federal government has signaled they are going to increase both taxes and audits for those with earnings over $400,000 annually in order to increase the flow of dollars into the treasury. You my friend are a target.

A Spending Plan

Beyond taxes, each of you needs to know how much you spend and save each month in order to make sure that you do not overspend your earnings. You can easily figure this out by doing a 3-month look-back process through your bank account/debit card/credit card(s). This will provide a pretty good outline of your fixed and non-fixed expenses. It’s a good starting point.

At this point, I realize that some of you cringe at the thought of having a budget, and therefore might prefer using the term “spending plan”. After all, with your predictable high income, it’s really all about how you choose to spend your money.

My pro-tip for you here is to “pay yourself first” and do it in an automated fashion. Automation will help you reach your personal and professional financial goals more efficiently.

This is in contrast to the “left-overs” approach that more haphazardly accumulates funds to match your goals.

A general breakdown of a budget versus a spending plan is noted below and you can read more about it here.

So in order to avoid the psychological pain, let’s move away from the notion of budgeting with all of its restrictive notions and instead re-label it as a spending plan that prioritizes what is most important to you, such as

• Charitable giving

• Monthly obligations (mortgage, insurance premiums, utilities, groceries, etc.)

• Retirement account

• Emergency fund

• Growing your net worth

• Long-term spending goals (vacation, car down payment, home improvement, etc.)

As you begin to gather your personal financial data and begin thinking about the above categories, let’s revisit the 50-30-20 plan.

The 30% Rule For High-Income Earners

As you do begin to organize your spending, as I previously mentioned, I am a fan of the 50-30-20 spending plan. In this plan after your taxes and benefits are paid, your paycheck is divided into 50% for needs, 30% for wants, and 20% for savings.

In my opinion, this needs tweaked a little as a doctor. That is because your large income should allow you to easily have a robust lifestyle based on 70% of your paycheck.

Your large income truly allows for a more prudent push of 30% of your paycheck into savings and debt elimination and 20% goes towards wants.

The wealthy understand this and adjust their finances to make sure more of their money works for them rather than is consumed.

Go To WAR

What the wealthy know is that they must track and grow their Wealth Accumulation Rate (WAR). This involves the two critical elements of ruthlessly eliminating debt and disciplined growth of your assets(savings).

To calculate your WAR: Add your annual savings rate (hopefully at least 20%, but preferably 30%) and the amount of money you are putting towards debt (hopefully at least 10%) until you are debt free.

Wealth Accumulation Rate (WAR) =% Gross Income paying down debt** + % Gross Income savings rate

Wealth accumulation is an important factor in achieving financial security and stability. It is the process of building up assets over time to achieve long-term financial goals. The rate at which wealth accumulates depends on a variety of factors, such as the amount of money saved, investment returns, debt elimination, and inflation.

By going to WAR with your personal finances, understanding the needed mindset, and taking steps to hardwire your decisions, you can increase your wealth accumulation rate and reach your financial goals faster.

A 50-30-20 Guide

I invite you to start the spending process now by following this no-cost 50-30-20 spending (budget)guide from Personal Capital. I like their free tools and resources in particular because they also calculate your net worth which is the single number you need to keep your eyes focused on while you live this great physician life.

The White Coat Investor has some nice physician-specific considerations for your spending plan here.

YNAB (you need a budget) has put it all together in an app and desktop format for you. Sign up and let YNAB direct you through their simple process.

Lastly, if you are a DIY type, use Ally’s budget-free template spreadsheet, and add your own categories.

As you use these resources just remember to flip-flop the 20% and 30% allocations for each standardized category (save more), automate things, and snap—you will be following the secret path of the wealthy.

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