While earning a ton of money can make building wealth easier, it’s not the magic solution it’s made out to be. That’s right; earning a high income is only part of the equation. If you want to get rich, you have to put that money to work. This is where a lot of high earners get off track. They think earning six figures or more is the best way to become wealthy, but they don’t take steps to reach their financial potential.
In a lot of ways, high earners can sabotage their finances, too. Instead of using their big incomes to their advantage, they create scenarios where it’s even harder to get ahead.
High earners, beware. At the end of the day, earning a lot of money won’t mean a thing if you don’t use your dollars wisely. To find out which mistakes high earners make most often, I reached out to several financial advisers who work with high net worth individuals regularly. Here’s what they said.
How High Earners Sabotage Their Finances
#1. Not Using A Budget Or Tracking Spending
According to financial planner Ty Hodges of Client Centric Wealth Management in San Antonio, “thinking the basics don’t apply” is a huge mistake many high earners make. Even when you earn a lot, you can spend it all if you’re not careful. That’s why high earners need a budget or “spending plan,” says Hodges.
“Work with your adviser or use one of the many online tools to establish a monthly benchmark for you and your family,” he says. “Then plan the annual trips, gifts, and other discretionary items above your fixed expenses.”
You can have all the fun you want and deserve with no regrets while still knowing every dollar is accounted for, says Hodges. But it all starts with a budget that tracks each dollar you spend.
#2. Failing To Plan For Social Security
According to Charles C. Scott, a financial adviser in Scottsdale, Arizona, high earners tend to ignore Social Security planning, and often to their detriment.
“We’ve seen high earners ignore any kind of Social Security planning and strategizing because they think it’s not going to be enough to make a difference to them,” says Scott.
While the Bipartisan Budget Act of 2015 did take away a couple of the most creative strategies, there is still reason to have a plan incorporating who takes their Social Security benefits and when, he says. Another mistake Scott sees frequently is when high earners set up their businesses to avoid paying into the Social Security system.
“The idea here is not paying FICA taxes will leave you with more take-home pay,” says Scott. “What they rarely do is calculate what you’re giving up by purposefully under-contributing to your own future guaranteed lifetime benefit — a benefit that never runs out and is partially indexed for inflation.”
#3. Not Creating A Long-Term Financial Plan
According to North Dakota Financial Adviser Benjamin Brandt, many high earners believe their big incomes will solve any financial problem they run into. Because of this belief, they fail to come up with any sort of long-term financial plan.
Since letting the chips fall where they may won’t always lead to the outcome you want, this is a mistake. If you want to use your big income to become wealthy, you have to take action.