Earning a good income should make building wealth easier. Still, high incomes never guarantee high rates of savings. In addition, some folks manage to grow their assets with fairly modest earnings because they understand how to manage money wisely.
It’s a fact that 14.7 percent of U.S. households (Statista) and 10.9 percent of Pennsylvania households (Visual Capitalist) earn more than $150,000 annually. At the same time, even those families at the top often fail to achieve such financial goals as: saving for college, upgrading homes, and planning for a comfortable and fruitful retirement.
Here at Magellan Financial, we help productive income earners turn their money into wealth. When we work with you, we begin by understanding what matters most to you for both your current lifestyle and dreams for the future. Then we will work together to develop a comprehensive plan to support your goals.
To help you understand how we will help you, continue on to learn about the six common pitfalls that used to derail many of our current clients’ financial plans.
Pitfall 1. Failure to Budget or Track Spending
You have probably read news articles about formerly wealthy celebrities who ended up impoverished despite earning millions of dollars. Naturally, it’s hard to imagine how these people did not plan for a temporary loss of income when they had so much money at their disposal. Typically, high earners struggle because their lifestyle inflates even faster than their compensation.
You can work with us and make use of our many budgeting and tracking tools to keep budgets in check. To get started, you might review the tips on retirement budgeting on our blog. You want to first document the types of fixed expenses that you can already anticipate for such necessary items as housing, food, and transportation. Then you can add in discretionary spending for trips, entertainment, and luxuries. We want you to enjoy the fruits of your labors; however, you will enjoy them even more when you have the security of a good plan to build wealth behind you.
Pitfall 2. Failure to Develop Mid- and Long-Term Investment Plans
People who earn high incomes often believe that large amounts of compensation will protect them from any unplanned financial difficulty. That is, they believe that until the difficulty happens, and then, without a solid investment plan, they are often prone to making impulsive decisions because they panic.
For instance, people who could hold onto the bulk of their portfolios eventually exited the last recession even better off than they were before. Sadly, folks who panicked and sold assets too early only had losses to show for their efforts. People don’t thrive during both good times and bad times by accident but because they can sustain and build their wealth through careful planning and a proven strategy.
Pitfall 3. Keeping Savings Rates Static as Income Grows
During the first few years of work, you may have been challenged to set a fairly small portion of your income aside. Later, when your income grew through salary increases, bonuses, and other compensation, you should consider letting your savings rate increase faster than your spending rate does.
For instance, your employer may not automatically take out some percentage of your bonuses to add to your savings plan, so it may be your responsibility to carve out those extra savings. If you’ve already maxed out tax-advantaged savings for the year, you can always open a brokerage or other financial account to keep accumulating savings. If you commit to boosting your rate of savings along with your income, you’ll be able to leverage compound earnings to build wealth faster. The satisfaction of watching your assets grow will be greater than the temporary pleasure of spending all your extra money on things that won’t last.
Pitfall 4. Lack of Income Protection...
Typical families understand such kinds of income protection as life and health insurance. High earners usually have responsibilities and even vulnerabilities that require them to explore additional protection. After all, people who have a lot of assets will also have a lot to lose.
For instance, a surgeon may have a more critical need for short-term disability and professional liability coverage than a salaried hospital administrator. Similarly, high earning families with a single income may need to think about the amount and kind of life insurance they should buy in a different light than married couples or people with more modest salaries. We help our clients make certain that such products as life, disability, property, and liability insurance match their unique needs.
Pitfall 5. … Or Asset Protection
Hopefully, high incomes lead to accumulating more assets. People who manage to earn and save a lot also need to make sure they keep assets protected. For instance, you might need to protect your wealth with an umbrella policy to broaden liability coverage.
If you set up your business organization properly, you will not only protect your assets — you may have ways to save money on taxes. If you own a small business, this may be one of the most critical steps that you can take to sustain your wealth and protect your family. We can guide you with our tested asset protected strategies as part of our asset and wealth management services.
Pitfall 6. Lack of Tax Optimization Tactics
You should not assume that how much and when you have to pay taxes is completely out of your control. Most high-income earners can reduce taxes by working with a financial advisor and tax advisor to develop strategies to time and lower current and/or future taxes.
Consider these examples:
- Most of our clients know that a Roth IRA can offer them tax benefits, but they don’t know when or how to do a Roth conversion. We can discuss the tax implications of conversions and help handle the paperwork.
- Almost everybody would like a chance to save money on more valuable health insurance. A high-deductible health insurance policy combined with a health savings account, or HSA, will give you the chance to gain an extra deduction, put money aside for out-of-pocket medical expenses, and possibly, roll unused funds into retirement.
- Self-employed people should consider the timing of other tax deductions, including for charitable ones. For instance, donating appreciated stock instead of cash can offer you a greater deduction.
We Help High Earners Develop Solid Financial Plans
Earning a high income gives you an advantage when you want to grow your wealth; however, you cannot waste that advantage by neglecting your budget, failing to increase your savings along with your income, or ignoring the necessity of developing a solid financial plan. In addition, you can protect your assets and income to make sure you keep your nest egg secure. Finally, you should optimize savings in order to minimize both current and future taxes as much as possible. That way, you can enjoy faster growth through the power of compounded earnings.
The more you save and invest, the faster you can get that money to begin earning for you. Contact us here at Magellan Financial to tell us about your financial goals, and we’ll demonstrate how we have helped plenty of high-earning clients in similar situations.
The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates The material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.