Avoid These Missteps and Get on the Path Toward Building True Wealth
Having a high income can certainly make you feel wealthy. Maybe you’re enjoying a sprawling home, a fancy car, and the latest technological gadgets. However, what too many high earners fail to realize is that true wealth is much more than just a big paycheck that comfortably funds your current lifestyle. If you’d like to leverage your high income to establish long-lasting wealth and financial security, avoid the five common mistakes below.
Mistake #1: A Ho-Hum Savings Rate
The Federal Reserve tracks the personal savings rates of Americans, and its data suggests an average rate spanning 5% to 10% of household pay annually over the last decade (with a year or two of skewed data due to the pandemic). If you find yourself falling within this average personal savings rate and you’re a high earner, you’re not saving enough.
Think about it – wealth is created by the gap between what you earn and what you spend. Someone earning a salary of $50,000 and carefully saving $10,000 each year will build wealth much more quickly than someone earning seven figures and spending every penny. Your personal savings rate matters, and high earners should take advantage of their position and save as much as possible. The more you save and invest, the more you can benefit from the magic of compounding, too.
Mistake #2: Failing to Automate
You’ve heard the old saying: “If you want something done right, you’ve got to do it yourself.” However, this isn’t true when it comes to remaining consistent with your good financial behaviors (like saving, as discussed above). Don’t rely on your self-discipline (or your memory) when it comes to things like moving money from your checking account to your savings each month. Instead, automate the process so you can be sure it happens every time. Most employers will allow you to split your direct deposit so that a portion of your paycheck goes directly into savings, so that’s one option. You can also utilize an app like Acorns or Chime to move money into savings on a set schedule.
As a high earner, you might also consider automating your investments so that you have money going towards things like equities, bonds, or real estate like clockwork each month. This method of investing is called dollar-cost averaging, and it’s also a helpful method for reducing risk in your investment portfolio.
Mistake #3: Believing You Can Time the Market
Many an investor has fallen into the trap of thinking they can outwit the markets, high earners included. In fact, high earners are often very intelligent people who may be smarter than average, and they may believe this gives them a better chance to beat the market by timing it.
The truth is that even seasoned investment professionals can’t time the markets – and trying can end up costing you more in the end. Consider this example:
Jeff is a high earner who is keeping his eye on a stock market that is riding a high at the moment. He plans to wait until there’s a crash and then buy the dip. However, while he’s sitting on the sidelines, the market rises another 20% before a 15% correction. Even if Jeff very cleverly times his purchase at the statistical bottom of the correction, he will still end up paying more than he would have before the 20% increase.
If you find yourself trying to time an investment perfectly, remember that no one can know what the market will do in the short term. However, history shows us that the stock market and the real estate markets have always risen over the long term. So, forget perfect timing and simply start investing now – the sooner the better.
Mistake #4: Having No Tax Planning Strategy
High earners who are reaping both large paychecks and potential passive income from investments often have complicated tax returns. The U.S. tax code is a beast and sometimes there are arcane loopholes that you can miss if you do your own taxes.
Do all high earners need professional tax preparation? No, they don’t. However, if you’re leveraging your high salary to build long-term wealth, you probably should. Income from mutual funds, private equity funds, rental properties, and the like mean more convoluted tax returns. You don’t want to risk missing out on deductions or accidentally claiming more deductions than is permitted. Without the assistance of a financial professional, you might even be leaving money on the table by failing to use savvy strategies like tax-loss harvesting.
Mistake #5: Eschewing the Help of a Financial Advisor
On the topic of financial professionals, it’s not only tax preparation that may require high earners to seek assistance. Utilizing the services of a financial advisor means that you can better protect your existing assets, plan for how to grow your wealth, plan for a secure retirement, and make an estate plan that protects your loved ones when you’re gone.
Even if you know quite a bit about personal finance, it takes time and expertise to wisely manage all aspects of your finances. Embrace the fact that you don’t have to do it all on your own and find a financial advisor who understands your needs as a high earner hoping to build true wealth.
Avoid the Common Mistakes High Earners Make
Achieving a high salary is a valuable first step toward building long-term, lasting wealth. However, there’s more to it than that and it’s especially important to avoid common missteps that can jeopardize your financial future.
If you’d like to discuss retirement planning or a related topic, schedule a 15-minute phone call with one of our advisors!
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