There’s a difference between making a lot of money and being worth a lot of money. There are plenty of people in the former category who never make the transition into the latter. But with a few smart tweaks to how you manage your money, you can.
4 Ways to Do More With Your Robust Income
A high income doesn’t always equate to a large net worth. According to a Nielson study, 25 percent of households making $150,000 a year or more are actually living paycheck to paycheck. For perspective, half of people making less than $50,000 per year need their next paycheck to survive. That’s a small margin for such a significant difference in income.
The fact that 25 percent of high income earners – including doctors, lawyers, business owners, and professional athletes – are basically broke is a shock to most people. But it speaks to the importance of understanding the soft side of money. In other words, building wealth isn’t just about making money. It’s about using the money you make to create an intentional lifestyle that breeds wealth.
Want to avoid becoming part of this statistic and finally do more with your robust income? We have a few simple strategies for you:
- Be Strategic With Debt
Debt can be a very good thing for high income earners, particularly when it’s used in such a way that it increases your income potential. The key is to be smart about what you finance and where you source these funds.
Let’s say, for example, that you’re a doctor. Doctor loans can be used as a cost-effective and accessible option for buying a house when a traditional lender may not be able to write such a large loan. This would be a smart use of financing.
By contrast, racking up a bunch of credit card debt to pay for a two-week vacation in the Bahamas would be a bad use of debt. (There’s nothing wrong with a vacation, but paying for one with money you don’t have is a recipe for disaster.)
- Find (and Stop) the Bleeding
We all have areas where we’re bleeding money. The key is to identify them as quickly as possible so that you can stop the bleeding and begin the healing process. Common areas of financial bleeding include:
- Paying excessive or unnecessary fees
- Paying excessive or unnecessary interest
- Impulsive online shopping
- Redundant purchases
- Unnecessary energy consumption
- Luxury and “aspirational” purchases
- Expensive cars
- Frequent dining out
Any one of these issues won’t sink your finances, but when you add multiple factors together, it becomes easy to waste thousands of dollars a month.
- Avoid Lifestyle Inflation
The beauty of building a career is that your income grows over time. And the longer you’re in your line of work, the beefier the salary gets. But if you want to translate that growing income into a growing net worth, you have to be mindful of lifestyle inflation.
“Lifestyle inflation gets us all. We start making more money and, in turn, we begin spending the majority of that extra dough. We count our bonuses as a part of our salary. We fund expensive vacations and huge purchases through all that ‘extra’ money that we make,” entrepreneur Steve Adcock writes. “As our incomes increase, so do our lifestyles.”
Those who build high net worths are typically able to modulate their lifestyle inflation. Yes, their expenses increase as their income grows, but it’s not proportional. Just 10 to 25 percent of every “raise” goes to lifestyle expenses. The rest gets saved or invested.
- Automate Your Savings
The more you can keep your hands off your money, the better your chances are of saving and investing. Whenever possible, automate your savings and investment contributions with monthly withdrawals. This makes it less likely that you’ll skip a month and miss out on the opportunity to grow your net worth.
Do You Have a Plan?
Very few people build a sizable net worth on income alone. Unless you win the lottery or have a massive inheritance handed to you, you’re not going to get rich on a paycheck. Your paycheck gives you ammunition, but the rest is hard work, discipline, and intentionality.
Now’s the time to develop a plan for your money. This plan may change over time, but having the basic framework in place will increase your chances of getting where you want to go.