Having high income and being wealthy aren’t necessarily one and the same unless you take the necessary steps to build lasting wealth.
Having a high income doesn’t automatically make someone a financial success. Though, high income can certainly indicate a higher wealth potential simply because you have greater financial resources at your disposal.
However, income alone is rarely the best indicator for whether someone is truly wealthy or not. Anyone who lives in a high cost of living metropolis like my fellow Silicon Valley residents can attest to this truth. High income is relative to where you live, and so what you do with your financial resources can matter a great deal more than how much money you make.
Building wealth starts with setting clear financial priorities for your money. Here are six ways to organize your income so that you maximize your likelihood that you can reach your long-term financial goals.
1. Build a Cushion of Cash and Protect
In today’s day and age where credit is easily accessible, it can seem like having extra cash reserves on hand is unnecessary. After all, if you find yourself in a pinch, you can just put in on the credit card, right? Wrong. Depending on a high-interest loan for “rainy day” expenses, no matter how much income you make, puts you at high risk of ending up in a crippling debt situation. Instead, build up a cushion of cash you can easily access to cover unexpected, but possible setbacks like car repairs or the temporary loss of employment.
Similarly, make sure you have adequate insurance coverage: health, car, homeowner’s/rent, umbrella, term life, and disability. Any amount you pay in monthly premiums is pennies compared to what it could cost you if you don’t have coverage when something happens. Don’t treat insurance as optional if you are serious about building wealth.
2. Invest Early and Often
Don’t delay in getting your money invested for retirement. Time is your greatest friend and foe when it comes to investing. Start early, and you can take full advantage of compounding interest. Start late, and you limit your growth potential exponentially.
How you invest is just as important as investing in the first place. Keep in mind that nothing impacts your ability to build wealth more than not starting in the first place except maybe investing in high-cost, high-fee investments that eat away at your returns. So, choose investments and an investment manager wisely. At a minimum, I say work with a fee-only fiduciary financial advisor that can offer financial guidance and investment portfolio management with minimal conflicts of interest.
3. Get Tax-Efficient
No one wants to pay more in taxes than necessary. Therefore, make sure that you aren’t paying Uncle Sam more than his fair share of your income. With 2018 being the first year for the Tax Cuts and Jobs Act, many unknowns about how the new tax reform impacts you directly may not become clear until after tax filing this coming April. That being said, there are certain changes to the tax rules that you can be aware of and prepare for right now to minimize your tax exposure.
[Related content: Tax Changes to Know About Before Year End]
Don’t dismiss the significance of a comprehensive tax strategy when it comes to your wealth potential. When you earn a high income especially, it’s important that you aren’t leaving yourself open to higher taxation. You also want to diversify your investments in a way that tax your future retirement income differently so that you don’t wind up in a high tax situation on fixed income. Preparation now can head off a lot of unfavorable tax consequences later.
4. Get Rid of Debt
The appearance of wealth is not the same as being wealthy. Even if you earn $300k a year in income, if you can’t pay off your credit card balances every month, something is off. Nothing will slow your progress toward reaching financial goals and building wealth like debt: credit card debt, student loans, mortgage loans, and any other type of financing out there.
And I get it. It is very easy to find yourself overleveraged. I’ve been there, and now I am out of that vicious cycle of borrowing against my future. And I can tell you that you can’t reach your full financial potential when you are beholden to creditors. So, it’s time. It’s time to stop accepting debt as normal and make a plan to pay it off. Fortunately for you, if you are someone with higher income, a few lifestyle changes may allow you to tackle debt much faster than someone of lesser means.
5. Prioritize Your Spending
After you address items 1 through 4, where is the rest of your money going? Do you have other financial goals like saving toward your children’s education, taking yearly vacations, being generous around the holidays, or renovating your home? Make sure your money is going toward funding important priorities before frivolous ones. You alone determine which goals get funded and which ones don’t. Therefore, if important things are being left on the backburner, reassess why that is and how you can pull them into the forefront of your financial operations.
6. Eliminate Unfulfilling Spending or Waste
Finally, cut out the wasteful spending – the spending you don’t need or even enjoy. Do you have a subscription to something you don’t even use? Cut it! Membership fees to that gym you thought you would use four times a week and go never? Cancel it! Little fees here and there can add up quickly, and if you can’t remember why you have certain charges, it’s time to eliminate them.
In the same way, try to focus your discretionary spending on experiences and things that bring you the most joy. The intrinsic value of your wealth and the way it can enhance your quality of life is not something to take lightly. Therefore, don’t be afraid to spend in areas that just feel good. Something tells me it’ll feel even better to spend your money in thoughtful ways when you have all your finances prioritized in a way that puts you and your family’s future and well-being first.
You are in control of your financial reality. When you feel like your money controls you instead, it is a good indicator that it’s necessary to focus in on your finances and course-correct. The good news is that once you prioritize your money and create a plan for how you are going to deploy your resources, you can breathe easier knowing your financial life is organized and on track to allow you to live the life you want.