How to Turn a High Income Into Wealth

Financial Freedom
Yannik Cudjoe-Virgil

If you’re a high income earner, you may be in a position to take control of your financial future easier than you think. In fact, most high income earners have the potential to exponentially create and preserve their wealth compared to the average American today. But how can you do it? In this article, I will share a few practical tips on leveraging that high income to build generational wealth.

Educate Yourself

If you want to grow your wealth, you have to educate yourself about investing. Making smart investments comes with having a keen understanding about the investment vehicles you choose. Having this knowledge will help you avoid bad actors, poor investment advice, and self-serving sales pitches. You don’t want to be taken advantage of by unscrupulous financial advisors, etc. If you do choose to work with an advisor, make sure they are highly experienced, have strong references, and will act as a fiduciary of your investment capital.

Create a Written Financial Plan

Rather than operating with some vague idea of what you want to accomplish financially, you should prepare a clear and concise written financial plan that includes investments, insurance, budgeting, tax planning, estate planning and most importantly, asset protection. It’s imperative that you remain disciplined enough to stick with it. Writing down a complete financial plan tends to increase our level of focus and commitment, and makes it easier to track progress over time. Your plan should be practical and relevant to your current financial status. A well-written financial plan will also help you focus on the long-term perspective, and avoid knee-jerk reactions to market ups and downs.

Save 50% or More of Your Earnings

Saving and investing go hand-in-hand. A major pitfall of high-income earners is spending too much of their income as it increases. It’s hard to cut back on your lifestyle after you’ve started living it up. It’s much easier to avoid increasing your expenses early on in your career when you first begin to see income increases. The excess spending will erode your ability to generate wealth in a short time. Money spent on your lifestyle is money that will not earn interest and can not be used to acquire income producing assets. Try using the “50/30/20” strategy; spend 50% of your income on necessities, save 30% for investments and use 20% for “lifestyle” wants. If you learn to live below your means and save as much as you can, you'll build up your investment capital and wealth much quicker.

Keep a Balanced Portfolio

Diversification is one of the core principles of successful investing. Once you determine a portfolio asset allocation that works for you based on your risk profile and age, you need to find assets that align with your investment goals. Even if you choose to invest more money in one type of asset in the short term, and something else thereafter, your portfolio should remain balanced in the long run. If you’re young, you may have the flexibility to endure the high risk and volatility of the stock market. When you’re older, you may favor more conservative and predictable investments like real estate.

Take Advantage of Tax Breaks  

Unfortunately, high income earners pay higher taxes. Maxing out your tax-deferred retirement accounts, taking advantage of the Qualified Business Income Deduction (Section 199A), and investing in assets like real estate which allow you to write off depreciation, are a few ways you can soften the impact of taxation on your investment earnings. To build wealth, it is imperative that you find ways to legally reduce your tax liability.  High-income earners can capitalize on their head start towards this goal by learning, planning, saving, and diversifying.

Creating wealth means taking a holistic approach and evaluating your whole financial picture. Take control of your financial future.

Photo by jannoon028