What You Keep

As the owner of a financial planning practice, part of the routine of running a business is to keep up with the bookkeeping to ensure the bills are paid and the accounting is accurate and up-to-date.  These can be tedious tasks so I occasionally turn on local sports talk radio to help as a diversion.  Recently, I heard an interesting statistic when someone mentioned “around 80% of former NFL players are bankrupt” and I was stunned.  I wasn’t surprised that the number was higher than average, what was shocking was how high and made me question the validity.  So I did a little digging and found that in fact it’s true.  According to a story in Sports Illustrated from a few years ago (“How (and Why) Athletes Go Broke”, Pablo Torre – March 23, 2009) by the time an NFL player has been retired for two years, 78% have already declared bankruptcy or “are under financial stress….”  For NBA players, about 60% of former players “are broke” within five years of retirement.

We all know these guys make an absurd amount money but how absurd?  According to Forbes, the average salary of an NBA player in 2012 was $5.15 million.  For the NFL, it was $1.9 million and for Major League baseball it was $3.2 million.  Just to clarify and emphasize – that’s per year.  Without getting into the debate over whether or not they should be paid this much, this sad scenario provides a clear example of the old axiom, “it’s not what you make, it’s what you keep” – and it validated just how important it is that I help my clients manage their cash flow.

Knowing this, I thought it would be important to convey some concepts and practices that help with this process.  Given the importance of this topic, I dedicate at least one meeting in the first year of an engagement with clients to thoroughly discuss this underappreciated aspect of our financial lives.  It’s part of the valuable holistic approach I take that sadly gets overlooked in most other financial planning engagements.

Before we delve into some details, I wish to emphasize that this blog applies to almost ALL families at almost ALL levels of income.  You might make $200,000, $300,000, $500,000 or even $1,000,000 per year and that’s great.  But don’t think you’re not immune from this trap.  As those athletes demonstrate, you can ALWAYS spend more- no matter how much you make.  Said differently, if you are mentally pre-disposed to spending what’s in your bank account or the available credit on your credit card, there will always be something to spend money on from vacations to cars to hare-brained investments to extravagant gifts, etc.  The point here is that unless you are living at or near the poverty line, your income level is not as important as you think. What’s more important?  How much you spend relative to your income.

So how can we manage this?  A few tips and/or practices to consider:

Track It:  As noted several of my blogs (including http://knwm-llc.com/the-number/) I believe having a solid understanding of your annual expenditures is a critical cornerstone to a family’s financial plan and is a key portion of my planning engagements with families. To do that, one must track at least one month of spending (and multiply by 12) or even better, a full year of tracking spending. This is important because by tracking and knowing how much you are spending, you can now start to make informed decisions on a multitude of critical financial factors.  Personally, I’ll admit to being a geek on this topic.  I use Quicken® software (made by Intuit) almost daily.  This links all of our household’s banking, investment and credit card accounts and gives me an up-to-the-day categorization of where our money is going.  Even geekier, I recently discovered (to the chagrin of my wife) that Quicken also has a free smartphone app that links with my computer so that we can update our transactions in real time.  (Side note: the worst part for her is this mobile app also has text / email alerts to notify of purchases, budget levels, etc.  My poor wife.)  In working with clients, I would be happy to sit down with them to demonstrate how this could work for them.

Automate It:  Using the concept of “you rarely miss money you never see” I believe designing a system of purpose-driven savings and/or investment accounts goes a long way toward transforming your income into savings on “auto-pilot”.  Of course, this is not rocket science but it’s effective.  I help clients setup accounts that are automatically funded by the bi-weekly paycheck (or bonus, commission, investment income) so that what gets deposited into the checking account is for bill-paying only.  The other accounts (retirement, college, savings, etc.) have already been “fed” by the magic of direct deposit.

Back Into It:  OK you high-rollers- this one’s for you. Even if you think you make too much money to have to track your expenses for a year, which I agree is arduous, I think there’s another way: we can “back into it”.  By that I mean, we go through an exercise where we start with the finish line.  We talk about when you want to retire, how much of the kids’ education you want to fund, etc.  Next take a snapshot of “where you are” (i.e. your net worth) and “back into” how much you need to be saving ever year in order to get that finish line.  Forget about you’re income, however impressive it may be. In stark terms, what’s more important is how much you need to save regardless of your income.  Does your savings plan align with your goals?  If you’re really serious about these goals, you have three choices:  earn more, spend less or both.

To wrap up- the difference between what you earn and what you spend is your ticket to retirement, college funding, your vacation home, etc.  Just as there are millionaire spendthrift athletes who squandered their earnings, the opposite is also true.  There are plenty of folks who in their lifetimes, have earned the median household income (about $51,000 in 2012) who have diligently spent less than they earned and are now the proverbial “Millionaire Next Door”.  Again, it’s not what you make, but what you keep.  Keeping spending it check, legally minimizing your tax burden, keeping investment costs low and setting up the “machine” to automate savings are the best way I know how to help people grow and keep their net worth.


  1. Hello. Great article. I was wondering which software edition of Quicken you recommend. Is there much difference between the Starter edition and Deluxe? Thanks.


  2. I read all of your no-nonsense articles. Plainly written and full of useful information. Thank you for sharing.


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