I’m a Financial Planning Expert: Wealthy Clients Waste Money on 4 Things
Earning a lot of money might make you think you can spend without thinking much about it. However, it’s easy to inflate your lifestyle to the point where your expenses start to overwhelm you.
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Forty percent of affluent millennials, for example, have taken on more debt than they would like, just to fund a more extravagant lifestyle, according to a Wells Fargo study.
Even if you have a lot saved and invested, it’s important to be mindful of your spending to make sure you’re getting what you want out of your money. Rather than wasting it on superfluous purchases, maybe you’d feel more satisfied increasing your donations or retiring early, for instance.
With that in mind, consider the following areas that wealthy Americans often waste money on, according to Katy Song, chief financial planner at Domain Money.
Club Memberships
Country clubs, luxury health clubs and related organizations often charge high memberships that aren’t always worthwhile, especially if you’re barely visiting.
Song has seen clients waste money on “club memberships that they do not use for years but don’t want to cancel in case they ever decide to go again. We are talking about $2,000 to $10,000 a year. Over a decade, this is wasted money that could have been used elsewhere or invested. It also nags on them mentally each year when they see how much they have spent on something they never use.”
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Luxury Cars
Vehicles are another area that’s ripe for overspending, when it’s often easy to find lower-priced options that provide similar if not better performance in areas like safety, comfort and environmental impact.
In many cases, wealthy clients buy expensive cars, thinking their families need them, Song said.
“I hear this all the time to justify top-of-the-line car purchases of Volvos and Mercedes, etc.,” she said. “We are talking about car purchases over $90,000.
“The justification tends to be that it is a safer car and their family needs to be safe. If you read car reviews and trust the experts, this is not always true. Cars are depreciating assets, and if safety and sound finances are your goal, overspending on an SUV is not helping.”
Private School
Sending your kids to private school can be even more expensive than some colleges, yet that’s not always the best use of your money. Depending on your perspective, you might find that your children gain more valuable life experience by attending a more diverse public school, for instance.
“I know this is controversial and I will get backlash, but some people feel like if they can afford it, they should go ahead and send their children to private school,” Song said. “For kindergarten through high school, this price tag is around $500,000 per child. This is a big financial commitment. Thus, private school ends up being a self-selecting group of wealthy people and their children.”
Shopping
Spending money on fun purchases such as clothes might seem like a harmless reward when you’re wealthy, but this can be an area for overspending. Instead, you might find you get more value by being more conscientious with your purchases.
“Unfortunately, when you have a lot of money and buy things whenever you want to, they start to have less meaning,” Song said. “I have clients that will spend over $30,000 per year on clothes and, when we review that number, they have no idea what they bought.
“I don’t ever judge their spending, but I want them to feel like their habits align with their values. This exercise can be a wakeup call. No one wants to feel guilty or that they wasted money. So setting a realistic budget helps them keep spending under control and alleviate any guilt.”
Getting Expenses Under Control
If you find yourself spending too much money, even when wealthy, consider what’s driving those purchases. In many cases, trying to keep up with the Joneses prompts spending on things you don’t truly value.
“You can probably notice a trend with the four top things wealthy clients waste money on. They mostly relate to status,” Song said. “If this makes my clients happy and they truly can afford it, I am 100% supportive. But, if they cannot afford it and are stressed about money, my job is to help them realize whether they value finding more balance and peace in their lives or want to keep down the path of spending money where it may not matter.”
Also, make sure you’re focusing on expenses that actually move the needle, rather than getting stuck on small purchases.
“Don’t waste your time on the little stuff,” Song said. “There is no point canceling a $1.99 app when you are spending $500 per month on a club you never use. Make the tough calls. My clients typically feel very empowered and positive after this exercise.”
Lastly, it’s important to know your limits. You might think you don’t need to budget once you reach a certain income, but that’s not always true.
“Figure out what you can actually afford to spend,” Song said. “I have clients that spend $6,000 per month and clients that spend $60,000. Those on the upper end are equally as stressed as those on the lower end. You need to have a target so that you have something to shoot for.”
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