Many of our high-income clients hoped they would make lots of money when they were young, but they never comprehended how much they would really actually make. They really didn’t know how much they would spend, either! Life gets expensive when you add up the house, the kids, the cars, the vacations, and all the rest of the trappings of a high-income lifestyle.
Unfortunately, high income doesn’t naturally translate to high net worth. In fact, many successful retirees still mourn the lifestyle they could have had post career if they had saved more when they had the opportunity. If you want to be financially independent at some point, you need to maximize the savings potential of your high income as soon as possible and as much as possible.
First, try to avoid as many of the “trappings” as you can. Don’t overbuy your home, cars, boats, and other personal consumables that require a long-term commitment of spending. This is the easiest thing to not start, because once you do, it’s hard to give up. Further, as soon as you can, start monitoring spending and savings habits. A software tool such as Mint.com can be a big help.
Second, automate all the savings you can and maximize company benefits. Most people have many benefits through work that can help them build a nest egg as well as protect them in emergencies. Make sure you are benefiting from these, as well as getting the maximum benefit from your 401k – especially look into Roth features that may be allowed in your 401k.
Third, look at other savings vehicles you can automate, like 529 plans for your kid’s educations. The higher your income, the less likely saving in a 401k plan alone will be enough to maintain your lifestyle. Further, the older you are as you contribute or if you plan to retire before 59 ½, the more saving outside your 401k plan may make sense for you. But most brokerage accounts can easily be set up for regular monthly contributions that happen as automatically as the 401k plan would. The higher percentage of your income you can save, the faster you will reach independence.
Fourth, insure risks where you can. Life, long term care, and disability insurance for yourself are no-brainers and should be addressed. But have you thought about your parents? If you are like many, your parents may not be as well off as you are. If you can’t afford long-term care insurance on them, have you thought about funding a life insurance policy on them that you own and control that could pay you back in case you end up paying for some of their care? Depending on their age and health status, it may be something to consider.
Fifth, don’t ignore your biggest asset – your career. Plan your career like you would any other asset. Build a network that includes mentors, competitors and mentees. Keep up your skills and consider building your brand by making a mark in professional groups. This will help you continue to earn well into your peak earning years as well as provide you with unexpected opportunities.
If you are like our clients, you know many of these tips, if not all of them. However, the difference between those doing it on their own and those with a “coach” who provides assistance, thoughtful guidance on specifics and accountability are night and day. Our thorough planning process helps our high-income clients address these issues again and again each year, ensuring progress each year. Your results will depend on your behaviors and choices, but having the guide makes all the difference in the world when there are so many things vying for your attention.