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If you feel like you're earning a good income, but you can't seem to get ahead financially, then this video is for you. We're going to go through 10 tips to help high earners get the most out of their money.
So let's define the problem first. If you feel like you can't get ahead financially, I'm assuming things feel tight. Either that means that you don't have much room in your budget, or you feel like your net worth is not growing as much as it should with a high income.
Either way, something's not working. So that's what I'm going to address with these tips. How can we create some breathing room and start building assets that will grow into the future? Let's jump into it.
The first tip is to create a spending plan. A spending plan is really simple. It's a written down plan for how you're going to spend and save your money.
Start with your take and pay, then subtract your fixed expenses, things like a mortgage payment, car payments, utility, cell phone bill, etc. Then allocate what's left to more discretionary spending and saving. Discretionary spending is going to be things like entertainment, eating out, clothing.
The key to an effective spending plan is to include non-monthly expenses. These are things that don't happen every month, but definitely do happen. Things like home maintenance, car repairs, and gifts around the holidays.
If you spend all of your monthly take home pay on the month to month stuff, then there's not going to be any money left over for these non-monthly but very real expenses.
And while we're on the topic of spending, the second tip is to focus on the big expenses. There's too much attention paid to small things like getting a daily cup of coffee from your local coffee shop. If you make a high income, a daily coffee is not going to break the budget.
The things that can hurt you are the big things like housing and cars. These are the expenses that eat up the majority of your take home pay. So these are the ones that you need to be extra diligent about.
A mortgage lender is going to have no problem telling you that you can afford a mortgage payment well over half of your take home pay. But you don't ask your barber if you need a haircut and you shouldn't ask the person earning a commission on your loan amount how much house you can afford.
I'd aim for a total payment of less than 25% of your take home pay. I realize in some areas that's not going to be possible, but if you go far over that, things are going to feel tight.
For cars, don't base affordability on the car payment. An old trick of car dealers is to sell you a new car with a lower monthly payment than what you're currently paying, but they do that by giving you a longer loan. So you're still paying the full price of the car regardless of what your monthly payment is.
The next tip, eliminate high interest debt. Credit cards are an obvious culprit here with interest rates over 20%, but really I'd say anything over a 6 to 7% interest rate is high interest.
By paying off this debt, you're no longer paying that interest rate, which means you're effectively earning a return on your money equivalent to whatever the interest rate is. In the case of high interest debt, the rate is usually more than you can hope to earn in the market.
Now to get rid of this debt, I would attack the highest interest rate first, then work your way down. So make the minimum payments on all debt except the one with the highest rate. Put all of your extra monthly income towards that one until it's gone, then move on to the next highest rate until you've eliminated all of that high interest debt.
Tip number four, automate your saving. Money sitting in your checking account is more likely to be spent, so we need to get it out of there if it's not something that we need.
Once you have your spending plan in place from tip number one, you'll know how much you have allocated towards saving each month. Rather than moving that money manually, make it automated so that a portion of your income is immediately transferred to your savings or investment accounts each time you get paid.
This has a couple of benefits. First, automating your saving takes willpower out of the equation and makes saving something that just happens. Second, it harnesses the power of compound interest. The sooner you save, the more time that money has to grow. So get it out of your checking account as soon as it's available.
Speaking of saving, tip number five is to increase your savings rate as your income rises. A savings rate is the percentage of your pre-tax income that you're saving every month. So if you were saving $20,000 per year on a pre-tax income of $200,000, your savings rate would be 10%.
The savings rate to target depends on your goals and how much you have saved now, but a general rule of thumb to aim for is at least 15%.
Now, this tip is about increasing the savings rate over time, and the easiest time to do that is when your income goes up. So let's say that you get a pay raise and instead of $200,000 per year, now you're making $220,000 per year. You had a 10% savings rate at the old income, so you need to save more than 10% of the pay increase so that the overall savings rate goes up. Let's say that you save half of that $20,000 pay increase, which is $10,000. Now, you're saving $30,000 per year on an income of $220,000, so your savings rate increased from 10% to 13.6%.
The key is to get that money saved before it gets absorbed into your living expenses.
The next tip is to utilize tax-deferred investment accounts. You have a high income, which means a lot of that income is probably going to the government in the form of taxes.
There are federal income taxes, state income taxes, so security taxes, Medicare taxes, and a lot of major cities also have an income tax. Taxes on taxes on taxes. Wouldn’t you rather pay yourself than pay the government? That's what tax-deferred accounts are for.
These are accounts like 401ks and HSAs, and your contributions to these accounts are excluded from your taxable income for the year. So by increasing your contributions to these tax-deferred accounts, you're not only getting more money saved, but you're also paying less in taxes.
All right, tip number seven, use taxable brokerage accounts. A taxable account is just a regular old investment account, and you can open one of these up pretty much anywhere (Vanguard, Fidelity, Robinhood, Schwab). And you can invest in pretty much anything like stocks, bonds, mutual funds, and ETFs.
While you don't get a tax deduction for your contribution to this account, it does have some advantages.
Number one is flexibility. Unlike your 401k, you can get money out of these accounts whenever you want without penalties. So you could think of it more like a savings account in that way.
It's different than a savings account though, in that you don't just earn a simple interest rate. Instead, you're investing that money, which means you have the potential to earn higher returns than what your savings account is going to pay. But also you could lose money. So it's important to take a diversified approach and go in knowing the risks.
Money that you need within a couple of years is probably better kept in a savings account. However, money that you're saving for longer than that is where a taxable brokerage account can come in handy and allow you to build more savings over time.
Tip number eight, avoid unnecessary risks. In a world full of complex investment products and strategies, it's easy to feel like you need to jump on every hot new trend. But the truth is, keeping things simple usually gives you the best results.
To have a high income, usually it means you've taken some sort of risk to get to this point and it's paid off. So there's a natural instinct to carry that mindset into your investing. And sometimes it does pay off, but more often than not, you will lose a lot of money or you'll just find yourself treading water.
Study after study has shown that if you just keep things simple, meaning diversify and keep your costs down and don't jump in and out of your investments, then you're probably going to do better than the average investor. And for most people, that's going to be enough to build wealth over time.
It's okay to have some riskier investments, what I would call speculative investments, but you just don't want to bet your future on them.
Tip number nine, keep your mimetic desire in check. Mimetic desire is a concept popularized by French philosopher René Girard. And it basically says that our desires, the things that we want, come from the desires of other people.
Girard says, "Man is the creature who does not know what to desire, and he turns to others in order to make up his mind. We desire what others desire because we imitate their desires."
How does this apply to what we're talking about? Well, high-income earners typically socialize with other high-income earners. And so those groups tend to desire similar things. And in a social circle of high-income earners, those things tend to be nice cars, big houses, and designer clothes.
Now, what's the solution? I think you just need to be aware of this and try to keep those desires in check.
All right, the last tip. Tip number 10, make sure you're getting tax deductions for your charitable contributions.
We've already talked about how taxes can eat up a lot of your income, so we want to minimize taxes as much as possible. Well, if you're making donations to charity, you're probably not getting any tax benefit from it.
I have a video explaining why that's the case and what you can do about it. So watch that video next.
As always, the information in this video is for a general audience and not for anyone in particular. It's important to consult with a financial professional before making any changes to your financial plan. If you are interested in learning more about what it looks like to work with a fiduciary financial advisor, schedule a free consultation with us.
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