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.