Stop Lying to Yourself About What You Spend

I don’t care if you decide to lie to me about your personal finances but I am shocked how many people lie to themselves about the very basics that make up their personal finance world.  I understand that not everyone knows their monthly nut, but I was floored the other day by someone so clueless about their own situation.  I am not sure what is worse not knowing some simple answers about your situation or lying to a financial advisor you hired to help you.

As explained in the past, I am back office support for financial planners and part of my responsibilities include discussing a case to determine some basics regarding strategy and materials produced.  It was during one of these meetings I received the following information:

  • Both spouses make $225,000 gross
  • Both spouses fully fund their 401(k)
  • Allegedly spend $14,000/month

As soon as I saw the balance sheet I knew something was wrong.  The investments that they had were a lot more than most people (including yours truly) have but there is no way they were “only” spending $168,000/yr when their income was $450,000 combined.  So I started doing some math with the financial planner:

  • $225,000 x 2 = $450,000/yr Salary
  • Minus $34,000 ($17k X 2) for 401(k) contributions
  • Leaves us with $416,000
  • Assuming a 40% an effective tax rate (purposefully ignoring the effective vs marginal tax rate just to further simplify things) = $166,400 to various government bodies
  • Leaves us with $249,600/yr or $20,800/month spending
  • A difference of almost $7,000 PER MONTH

The client basically shrugged the information off and said maybe he and his wife spend another couple grand! Wow.

30 Responses to Stop Lying to Yourself About What You Spend

  1. Wow! That’s just amazing! This is why your income is only so important. If you spend more than you bring it doesn’t matter what your salary is.

    • Incredible, right? I think that is why I find it so refreshing when I read bloggers that accomplish a TON more on a tenth of the income

  2. That drives me nuts, although at that level I suppose you can have some leeway. But seriously, they’re lucky they haven’t gotten themselves into more trouble. Just making that much money doesn’t mean you can’t run into money (aka spending) problems.

    • The normal course of events that I see is people like this will continue to tread water and live large until retirement creeps in their mind and they’ll scramble to save

  3. Dang. I wish I could be off by $7k and not know it. I know it when I am off by $20. It must be nice to not have to think about your money and where it is going.

    • It is all relative. When I first started this blog I would notice $5! and then as I got more established with debt (and LAX) I stopped noticing as much. I could use a good kick in the ass. Not to the tune of $7k lol

  4. I’ve known also quite a number of friends who don’t admit all their spending expenses. This is due to the fact that they cannot even accept with themselves that they are spending more than what they earn. And this is the very reason why they end up getting into a lot of debts.

  5. That’s the mentality of most people who are making a lot of money. They focus more on making money and shrug off the spending side. That’s why I keep track of every dollar I spend. Why lie to yourself?

    • I think people do it because they think they are doing the right thing. Even this family is saving a TON of money, so they just assume all is good.

  6. this is probably the biggest problem when trying to get out of debt – not knowing how much you spend in the first place! it’s impossible to tell where you’re going if you dont know wtf you’re doing.
    This guy spends more in a month unknowingly than I make!

  7. Sounds like they just pulled a number out of thin air and hoped for the best which is the WRONG way to tackle finances. Although they could honestly think that’s all they spend. Sometimes people just spend, spend, spend and have no clue as to what the price of anything is they just toss it in, charge it… and enjoy life. These are the people who go bankrupt OR blow so much money our heads spin. If I had that much cash you can bet I’d put it to work for me.

    • I believe that these people *really* believed that they were spending less. Actually I have found that most people almost get sick to their stomach when we do these exercises with them.

    • Their combined 401(k) balances I believe were in the 300K range and I think they were in the early 40s. Not too bad! It was their Non-Qual accounts that I was shocked. Only $100K between savings and investments.

  8. WOW! I know sometimes I don’t count every penny in or out, but I can’t ever imagine being that far off – or even that much off “percentage” wise. I guess when you make that much money…?

  9. I continue to shake my head at how many well to do couples like this are out there. Once in a while you see those money makeover articles where Bob and Sally are making about this much but sinking in debt. These people live in a fantasy world sometimes. Do they ever also consider that something might occur where one of them will not be able to work one day or just make a measly 50 k (cough) and have some tough times? God forbid.

    Do some defensive moves people.

    • It almost seems like human nature to put blinders up to that…Not everyone has the personal finance blog included in their morning read lol

  10. You nailed it. I can (kind of) understand why someone would lie to a loan officer about their financial situation. I can also see why someone would lie to a complete stranger. But to lie to a financial adviser doesn’t make a lot of sense to me.

    It’s impossible to know for sure, but I’m curious how many of the lies are on purpose versus the individual being legitimately oblivious to their actual situation.

    • I think the planner who is on the front line would have a better indication of the lies vs. oblivious, but I bet it would depend on where the client came from (referral, or known in real life)

    • I don’t think I’ll ever reach that kind income level…especially since The Wife doesn’t work full time, but if I did, hear me now I would do the right thing! lol

  11. Talk about being in denial, you can be sure that they had some loans elsewhere that were undisclosed if $84’000 a year went unaccounted for!

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