As a CERTIFIED FINANCIAL PLANNER™ working with high income earners across the country, I tend to see the same financial deficiencies. High income earners typically have unique situations, in that they worked hard and the income followed, but it came much faster than anticipated. With nose to the grindstone, one day they realized that they are doing pretty good for themselves – in fact, pretty great!
As you might recognize in your situation, just because you “made it”, doesn’t mean the work just disappeared. The opposite happened. With work consuming the vast portion of your time, you never had the chance to put a financial plan together for how and where to allocate the additional income. And though the income is impressive, it all gets lumped together and really “feel like” you are doing well enough. There are reasons for that.
In an effort to help you achieve more out of your income, I want to provide you a list of financial planning mistakes that I have discovered many high income earners make.
1. Falling Victim to Lifestyle Inflation
This is the easiest trap to fall into. We all have many wants and when income increases, we tell ourselves that it’s okay to purchase those wants. The issue becomes that our wants increase as fast or faster than the income coming in. All of the sudden you realize that your spending is increasing at the speed of our income and you are back to feeling broke.
As Investopedia describes it, “Lifestyle inflation tends to become greater every time an individual gets a raise and can make it difficult to get out of debt, save for retirement, or meet other big-picture financial goals”. But, how can we overcome this natural tendency? The next mistake is also the answer.
2. Not Setting Up and Sticking to a Spending Plan
In my financial planning practice serving high income earning professionals, you will never hear me say the word budget. There are two reasons for this, you have out-earned that term and also because it can be a psychological deterrent. A spending plan is a better term that gives you a blueprint for a more intentional spending pattern.
How does this work? I have written about it in detail here, but it starts with monitoring your current expenses. Once you have tracked your expenses, you are going to label them as discretionary (fixed and necessary bills) or non-discretionary expenses (variable and entertaining bills).
Then take your after-tax/after-retirement plan net income and divide it into 3 buckets: Non-Discretionary, Discretionary and savings/debt repayment. Here are the allocations to make; 50% goes to non-discretionary, 30% to non-discretionary, and 20% towards debt repayment or to savings. It’s easiest to do this by having 3 different bank accounts for each bucket.
By setting up this kind of spending plan, it makes your cash flow significantly easier to follow and allows it to be flexible with your income because it works off of percentage allocations. If you want further clarification of a spending plan unique to your situation, feel free to contact me.
3. Poor Tax Planning
As a high income earner, you get phased out of a lot of tax benefits within the IRS code. But, that doesn’t mean you just don’t get any tax breaks. There are many ways to reduce your overall income tax situation with some creative tax planning.
Often, my high income earning professional clients don’t have straight forward tax returns like a typical W-2 employee would. Instead, those clients have rental properties, business entities, and several retirement and investment accounts. With a complex tax situation, comes a complex tax return. If you are in this situation, you have a potentially increased chance of missing some important tax deductions. You may also have an increased chance of making mistakes on your tax return.
Make sure you hire an expert and knowledgeable accountant to work alongside a CERTIFIED FINANCIAL PLANNER™ in an effort to provide a team that is working towards reducing taxes and pursuing your financial goals.
By avoiding these three mistakes, you are giving yourself a foundation to ready yourself for future increases in income, without sacrificing adjustments to your lifestyle. Without having a proper financial plan, your increased income may not come with as much freedom as you anticipated and might find yourself continuing to wonder when you’ll ever get to enjoy your successes.
I’m here to help guide to a more intentional and fulfilling life by setting up a financial foundation to take back control of your financial situation.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.