Why High Earners Also Need Help Managing Money
It’s easy to assume that just because you earn a lot of money, you don’t need help managing your finances.
As we’ll see in this article, this is far from the truth. In fact, many high earners are people who desperately need help managing their money. Here are a few reasons why:
- The more money you earn, the more complex your tax payments become
- The more you earn, the less time you (usually) have to do your research and educate yourself on your financial options
- The more you earn, the more you think you can spend (also called lifestyle inflation)
- The more you earn, the more likely you are to be targeted by scammers, overpriced financial advisors and snake-oil salesmen.
Having a high income does not mean having a high net worth.
If you earn $200k per year but you are still paying off your $500k medical debt, then your net worth is negative and you are in fact less wealthy than your friend who is making $50k per year and has $100k in her retirement accounts.
If you are a high earner, you also need help managing your money. Let’s dive into some more specifics. 👇
Understanding complicated taxes
As we mentioned above, the more you earn, the more complicated your taxes get.
Even if you earn all your money from a W-2 job, you still need to manage all your retirement and tax-optimized accounts including your 401(k), Roth IRA and 529, to name a few. If you’re also investing in mutual funds, rental properties and have a spouse in a different tax bracket, things get tricky very quickly. At first, you may not think too much of it — but once you’re hit with the tax bill and additional fees you’ll likely feel a bit of sting. Understanding how the tax system works will help you make sure you’re not overpaying in taxes and can pass on as much wealth as possible to the next generation.
A simple example of the above is comparing between a Roth IRA and a Traditional IRA. Many high earners believe that investing in a Traditional IRA is better since they think they are more likely to fall into a lower tax bracket after retirement. But as the White Coat Investor says, in most cases, your wealth will actually be higher once you retire, and it may actually be wiser to use a Roth IRA hedge against future tax rates (who knows what the tax rates will be in 20 years?!). Doing your research and understanding how taxes work can save you (and your children) thousands of dollars in the long run.
Learning about investing
Many high earners start investing in the stock market later than their peers.
That’s because if you spent 7+ years in school before entering the job market, it’s likely investing and money management was at the back of your mind. However, starting late means you have fewer years for compound interest to work its magic. For this reason, high earners who start late should actually contribute more than the average person when it comes to investing. Yes, 20% of your salary is a lot more than 20% of someone else’s regular salary, but if they started many years before you it’ll take a lot longer for you to catch up.
The other investment you’ll hear a lot about is your house. But is your house really an investment? The only time you’ll be making money off your house is if you sell it at a profit, or if you rent it out. In the meantime, it’s an expense. Many high earners believe that because they earn a high income, they can afford a large house. But if your mortgage costs two-thirds of your income, is it really an investment worth considering?
Learning about the importance of investing early could be the difference between a comfortable and tight-budget retirement.
Managing lifestyle spending
A high income does not automatically mean a high net worth.
Why? This is often because high earners are also in large amounts of debt. It’s also because many fall into the trap of the infamous lifestyle inflation: “I earn more so I should be able to spend more”.
There are a few reasons this happens:
- Pressure from society: “You’re a high earning lawyer now; you should be able to buy a nicer car”
- Relying on a higher future income: “I will earn even more money in the future, so I should be able to take on as much debt as I like and pay it off later”
- The “I deserve” this mentality: “I work long and hard hours; I deserve a nice car and a nice house”
Lifestyle inflation encourages high earners to have large obligations. Next thing you know, you’re spending one-third of your income on a house and another third on your car — does that make you wealthy?
The Federal Reserve estimates that Americans save 8.1% of their income. That is too low for any income level; no matter what your salary is, saving, budgeting and having an emergency fund should be an essential part of your financial management. Once again, someone who earns $60k per year and saves $10k is increasing their wealth at a higher rate than someone who earns $250k and spends every dollar.
Understanding what lifestyle inflation is and how to manage it means you won’t fall into the trap of being a “poor” high-income professional.
Prioritizing financial education
The last but the most important reason high earners need help with money management is the lack of financial education available specifically for them. There is already a huge lack of financial education for people of all income levels — but the resources that are there rarely cater to high-income professionals.
This may not seem like a big deal to others, but unfortunately, a lack of education usually means that doctors, lawyers and engineers are targets for scammers and snake-oil salesmen. This leads to situations where well-meaning doctors are paying over 1% in mutual-fund fees, getting a low return on their investment and buying dodgy insurance products that are designed to steal their money.
A lack of education also leads to high earners getting into a huge amount of debt. With college tuition prices ballooning and students earning an income later on in life, many high earners leave school with over $500k in debt. Even if your first job earns you $200k per year, a $500k student loan debt repayment program can take decades to pay off. Many young students require education on how to fund college tuition and how to take advantage of forgiveness programs.
Everyone needs help managing their money, and that’s including high earners. Complex tax calculations, high student loan debt and predatory “financial advisors” put high earners in just as much risk. We believe there is a large gap in financial services for high earners; many are quick to think that the high earners don’t need help, but here at Unifimoney we know that this is not the case. That’s why we are building a bank account to help you spend, save, and invest effortlessly.
Are you a high-income professional who wants a genuinely better bank account? Join the Unifimoney waitlist today!