Helping High Earners Plan Cashflow

To ensure confidentiality, we will refer to our clients, John and Linda Smith.

 A few months ago, they approached us seeking assistance in establishing a financial plan.

Despite being in their mid-30s, they had not previously sought financial guidance and had managed their finances on their own.

 However, they realized the importance of having a comprehensive financial plan and sought our expertise to help them achieve their goals.

As a part of our onboarding process, we gather relevant information and input it into our financial planning portal.

Here is an overview of John and Linda's current financial situation:

*****

We often come across young high earners who have the majority of their assets in pre-tax 401(k)s due to automatic savings. In this case it is 6% per paycheck with a 3% employer match.

While this is a positive start, we believe there are opportunities to automate savings across all types of accounts and better diversify one's tax situation.

To achieve this, we start by gathering information on their income, expenses, and planned savings.

We then take a comprehensive look at their cash flow to identify potential areas for optimization. Here's a snapshot of what we analyze:
*****

In this scenario, the combined income of John and Linda is $232,000, their expenses are $107,915, taxes are approximately $56,142, and they plan to save $9,720.

Upon review, we noticed their savings rate is around 7.2%, which is below our recommended minimum of 15%.

Additionally, there is an opportunity to invest nearly $60,000 of their cash flow that is currently unsaved, which could greatly improve their long-term financial standing.

To start, we often find that people underestimate their expenses, so instead of planning to save the entire 60K, we typically start with a more conservative estimate of around 40K.

One of the first recommendations we made was for both John and Linda to complete backdoor Roth conversions every year.

Since they make too much for regular Roth IRA contributions and have no traditional IRA money, this strategy allows them to each get $6,500 into Roth IRAs every year.

To further diversify their tax situation, we suggested automatically saving the remaining $27,000 ($40,000 - $6,500 - $6,500) in a taxable joint account.

This is done by setting up automatic savings of $2,250 each month, which ensures that the money is saved and not spent unnecessarily.

After implementing these strategies, their cashflow situation improved significantly, as shown below:
*****

Great job increasing their savings rate to 24.4% and providing a good mix of savings options! It's also important to note that these recommendations will help John and Linda achieve their long-term financial goals and build wealth for their future. Additionally, having a buffer of 20K will provide them with a financial cushion for unexpected expenses or emergencies.

We also have increased the probability of success from 44% to 91%:
*****

At our firm, we believe that each person's financial situation is unique, and therefore, we don't offer one-size-fits-all solutions. We take the time to get to know our clients' goals, expectations, and financial circumstances before developing personalized planning recommendations. This ensures that our clients receive tailored advice that is specific to their individual needs and objectives.