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How the 1% Manage Their Money

Do more with what you’ve earned.

Financial advisors for successful professionals, executives, and business owners.

There’s a sea change happening in national wealth trends, and if you’re reading this, you’re probably in the thick of it without even realizing it. Due to generational wealth trickling downward and a new economic regime that rewards youthful innovation, millennials are set to 5x their collective wealth by 2030. If you’re between 27 and 42 today (born between 1981 and 1996), you may be on the cusp of joining the current 618,000-strong class of millennial millionaires – but do you know how to manage that money? 

The downside to newfound millennial wealth is that, unlike “old money” and the mega-rich, you don’t have the benefit of a full-blown family office managing your financial affairs or complex legal structures and esoteric alternative assets that maximize investment returns while keeping costs (like taxes) as close to zero as possible.

But you can learn from them, emulate the 1%, and tailor their approach to your finances to kickstart your generational wealth goals. 

Widening the Gap

The simplest and most basic way to retain your newfound wealth and secure your future goals – early retirement, work-optional status, whatever – is to identify, build, and maintain a gap between your expenses and income. We want to widen the divide by keeping expenses low while increasing income. That’s a no-brainer, right? Unfortunately, this type of framework usually comes bundled with negative connotations of thriftiness, austere budgeting, and otherwise being unable to enjoy the fruits of your labor today.

But that doesn’t have to be the case. 

The hardest part of effective budgeting is walking the line between accuracy and obsessiveness. You want to capture all of your spending categories but risk two common pitfalls:

  1. Relying too much on a ballpark figure when estimating costs and savings. This approach often leads to underestimating expenses while overestimating savings rates. 
  2. You over-analyze each spending category down to the dollar, allocating precise spending amounts to each and causing undue stress when the numbers don’t align. Worse yet, this approach usually leads to revenge spending that blows any progress you make. 

But there’s a middle ground that weaves between the two extremes. It simultaneously encompasses most spending and income categories while remaining broad and flexible enough to adapt to reality and scale with your growing wealth. At the same time, it serves as a visual indicator to help widen your income/spending gap to maximize your earnings and create long-term wealth. 

We’ve created an easy tool built upon these principles to help you emulate the 1%’s money management techniques. It’s linked here, but we still need to cover some essential basics: money management KPIs.


Measuring Success

It’s a well-worn saying (to the point of overuse, really), but you can’t manage what you don’t measure is also a plain fact that’s particularly evident when trying to maintain and grow your wealth. If you don’t know where cash is going or how much comes in, you can’t manage the income/expense gap to build savings. 

But measurement goes beyond just income and expenses. Granular categorization helps drive your progress toward specific goals while offering insight into spending and opportunities to optimize. Bottom line – just as you likely use KPIs to track and measure progress at work, our tool’s foundation is built on measuring, tracking, and managing six key indicators. 

Remember, though, that any parameters mentioned are just that – rough guidelines that serve as a framework to plan against, not hard and fast proportion rules. This is how our tool weaves between misestimating categories and falling into the downward cycle that typifies extreme analysis.

Watch:

Savings Rate: 20%  – 25% of Income

Since our goal is to widen our savings gap, the first step is to set a savings target. 20% should be the floor, but ideally, you should trend closer to saving 25% of your income. And remember that savings isn’t just stashing cash under a mattress or even going above and beyond your emergency savings allocation in a high-yield savings account (although that’s an option). 

Savings is allocating money to your future self by helping it grow rather than describing how you do so. Savings allocations can go toward 401(k)s, self-directed IRAs, taxable brokerage accounts, and more. In fact, this is the secret to maximizing savings: by calculating income as an after-tax total but considering pre-tax savings allocations to eligible retirement accounts, you can boost the total percentage of income allocated to savings to easily hit, if not surpass, a 25% target. 

Financial planning that matches your ambition.

Financial advisors for successful professionals, executives, and business owners.

Burn Rate: (Usually) Between 30% – 50% of Income

Your burn rate is, broadly speaking, all expenses aside from debt payments (that includes your mortgage). While you should personally dive into your burn rate to delineate between discretionary and mandatory categories (our tool helps with this), your burn rate includes:

  • Utilities
  • Housing upkeep
  • Food and groceries
  • Medical and wellness, including insurance
  • Fun categories like shopping and dining out
  • Car notes and related expenses

When you use our tool, you might find it challenging to accurately estimate your monthly burn rate across variable categories like groceries and discretionary spending. A good trick is to dig out last year’s credit card statements and see how much you spent historically across the different categories. While not a perfect answer, doing so helps accurately estimate future spending while helping avoid the trap of rigorously setting dollar targets without flexibility. 

Debt and Housing: The 28/36 Rule

When managing debt and housing, we like to stick to the 28/36 Rule. In a nutshell, the 28/36 Rule sets two requirements: 

Housing expenses (mortgage principal, interest, taxes, and insurance), excluding upkeep, which you measured in our Burn Rate category, shouldn’t exceed 28% of your monthly income. So, if you live in San Diego with an average mortgage payment of around $6,000, you should earn at least $21,500 monthly or around a quarter-million annually. If not, you risk becoming house-poor – a condition where, on paper, you’re wealthy based on home value. But, in reality, most of your income goes toward housing. 

Your total debt, including medical debt, student loans, and consumer debt like credit cards, shouldn’t exceed 36% of your income. There’s some nuance here, depending on debt type, terms, and more, and our article on the 28/36 Rule helps break it down further – but maintaining a rougly-36% debt-to-income ratio remains an ideal standard that’s still achievable with some focus.  

Vacation Rate: Flexible, but within a 5% Range

Budgeting and saving is a drag if your loftiest goal is retirement and you have 10+ years to go. That’s why, in addition to planned discretionary spending, deliberately planning for vacations and building that into your budget improves your overall financial plan in two ways:

  1. You build intermediate, short-term savings goals, demonstrating your budget’s effectiveness and inspiring you to keep pushing. 
  2. You get to blow off some steam and exercise some (relatively) reckless spending that, if untapped, could compound until you go on a revenge spending spree.

Allocate for your vacation separately from savings or your burn rate, and you’ll probably want to have a distinct account for the vacation fund separate from, for example, emergency savings. Try to cap your vacation allocation to 5% of your income, max. 

Tax Rate: Variable (The Lower, the Better!)

The taxman’s allocation is the hardest to pinpoint since so many variables affect your personal tax rate. A good rule of thumb is 21% if you want a planning guideline, but working with a comprehensive tax planner can help determine a more accurate number (and probably bring the rate down, to boot!).


Keys to Success

Now that we have our measurements, we’re ready to manage our wealth and widen the savings gap between our income and expenses. You can build your own financial future using our free tool. It’s simple to use, but we also have a video tutorial to run you through the process that offers some additional insight across all of the categories we’ve covered here.  

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