Getting a six-figure paycheck may make it easier to accumulate wealth, but it’s not a magic solution to your financial problems. High income is only one part of the equation. If you want to be financially secure, you need your money to work for you.
A high salary can help hide financial mistakes as you can still cover your bills. However, if you want to build wealth rather than lead a bloated lifestyle, you need to focus on unlocking your full financial potential.
Most of the mistakes that six-figure earnings make are easy to fix. Here’s how to take advantage of this high income and increase your net worth.
7 mistakes with six-figure money
Mistake # 1: not using the budget
Just because you have a lot of money coming in every month doesn’t mean you shouldn’t keep track of where it goes. This makes it easy to squander your salary without making any financial progress.
Budgeting doesn’t have to be difficult. Think of it as your spending plan. Make a list of all your monthly expenses and use it to budget. Are your spending in each category in line with your values? Can you cut or cut costs?
Certain expenses, such as eating out or groceries, can get out of hand if left unchecked. Reduce those areas by cooking more at home and shopping wisely. You can still have fun without regrets as long as you know you are sticking to your budget.
Check your accounts for subscriptions you are not using and cancel them. Look at your other expenses and think about how you can cut them without sacrificing small sacrifices. You may wonder how spending can increase if left unchecked.
Make sure of track your expenses so you know where your money is going every month. Just because you can pay your bills every month doesn’t mean it justifies your expenses. Every dollar you invest instead of spending gives you a better financial future.
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Mistake # 2: There is no long-term financial plan.
Having a long-term plan is an important part of setting yourself up for financial success. A six-figure income won’t matter much if you lose your job or don’t save enough to retire.
If you want to continue living a lifestyle that provides your high income, you need to fulfill your retirement plan. Most people do not save for the retirement savings recommended for their age. Having a financial plan will give you peace of mind as you know the financial steps you need to take to ensure your success. It will also help you align your finances with your long-term goals and values.
It also means that you know how to invest your future dollars in order to maximize your profits. Be sure to involve your spouse in all future financial plans so that you are always on the same page. Find out what is important to both of you, such as paying for your children’s schooling, saving for retirement, buying other property, and aligning your spending with your goals.
Mistake # 3: failure to minimize taxes
As a high-income person, you probably pay a decent amount of taxes. While you might think there is no way to minimize the amount of your income that you give to Uncle Sam, this is not the case.
There are ways to minimize your tax burden by using tax-free bills and other financial products that can help you protect some of your income from taxes. These account types have rules regarding income and how much you can deposit.
Talk to a financial advisor or tax advisor about how you can pay less taxes this year. If you have your own business, it is important to enlist the help of an accountant or tax consultant. They can help you find deductions and loans that you might not have known about when paying your own taxes.
Mistake # 4: spending too much
One mistake that many people are to blame at times – six figures or not – is spend too much… This is especially true for six-figure income recipients, as they believe their luck will last indefinitely.
Anything can happen tomorrow – job loss, illness, accident, and so on. Controlling spending can help you weather a potential storm in several ways. It’s okay to spend some of your money, but make sure you create a safety net for your family.
Lifestyle inflation is a problem in many ways. Not only are you spending more than your salary, but you are also getting used to a certain lifestyle. When you’re used to getting the best out of everything, it becomes more difficult to settle for less.
It’s easy to finance a fancy wheelset, boat, or even a second home. These expenses take away more and more of your income each month, leaving you with less money to build long-term wealth.
Instead of investing in depreciating assets like a car, try investing your money in increasing the value of assets. This includes real estate such as renting out or investing in the stock market.
After retirement, if you haven’t invested enough to cover your expenses, you will need to cut your expenses. This can come as a shock if you’re used to fine dining and five-star hotels.
Use some of your high income to enjoy some of the luxuries in life, but accept them as they are – nice to have, but not necessary.
Mistake # 5: Investing on your own
Self-investing is a great idea if you are willing to take the time to research investments and learn how to optimize your portfolio. However, most six-figure income workers are focused on making more money from their jobs, rather than optimizing their investments.
Getting high income is great, but if you don’t invest your money the right way, it could cost you. High commissions and inappropriate risk allocation can eat into your portfolio, limiting your long-term profits.
If you don’t have the time (or don’t want to) research how to optimize your investments, talk to a professional or check out an online investment platform. They can help you optimize your portfolio investments in line with your future goals and ensure diversification.
There are also certain retirement strategies that can help you maximize your Social Security benefits. While you may think that you will have enough money to retire without it, you can leave money on the table.
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Mistake # 6: Not Enough Savings
Even if you save a lot for your golden years, funding your employer-sponsored retirement accounts can help you do more to protect yourself financially. Most people spend at the rate of their income growth without changing their savings habits.
Get in the habit of saving the same amount of your income no matter how much you earn. A good number is 20-25 percent (more if you can). This means that you always have a safety net or a backup fund in case you need money to cover unexpected expenses.
Over time, as your savings balance grows, you can invest some in stocks or index funds to continue building your wealth.
Mistake # 7: not updating real estate plans
Most high-income people already have estate planning in areas such as probate and life insurance. However, many use a set-and-forget approach when they have these documents.
It is important to update your property plan every couple of years to reflect any changes in your life. For example, if you are divorced, update your will and life insurance policies to reflect the change. The same happens if you add a new member to your family.
Many people forget to update their will when their children grow up and move out of home. Make sure you update your estate plan to remove all references to guardians as your children become independent and provide for themselves.
If you haven’t created a digital real estate plan yet, speak with a real estate planning attorney today. Protecting your digital assets like online accounts, retirement plans, and more is an important part of maintaining your wealth.
The essence
High income can be a blessing if you make the right financial decisions. If you end up spending all of your hard earned money, you will find yourself in dire financial straits.
Make a plan to protect yourself and your family in case something happens, such as losing your job. Create a plan for financial freedom and keep your money in mind by investing wisely and making the most of your tax breaks.
This will ensure your future success and provide you with financial preparation.
This article originally appeared on The Money Mix and has been republished with permission.