Earning capacity and money management skills don't always go hand-in-hand. If you're a high earner with high levels of debt, you aren't alone, but there are key steps you should be taking to get on the path to financial independence. Once you understand your comprehensive financial picture, the difference between high income and having true wealth, and your options for getting out of debt, you'll be on the path to financial security.
Many people associate a high salary with financial security. The truth isn't that simple. Many of the highest earners enter their working years with high amounts of debt and as you might expect, if you begin your career in debt, it will take you longer to get to the point you're able to build wealth. In addition, if you spend more than you earn, your debt will continue to grow and attach and anchor to your financial trajectory.
People who have high incomes often have high debt levels due to the following factors:
While your career success provides you with an enviable income, it also increases your risk of getting into high levels of debt. Being aware of this risk is critical to avoiding short-term financial strain as well as enabling you to start building wealth for the future early.
Income is the money you're regularly bringing in (likely from a job). Your wealth is the value of your assets minus your debt load. Avoiding and paying off debt are essential steps in building wealth, especially early on. Fortunately, high income offers a significant level of flexibility when it comes to managing your finances.
The first step in getting out of debt is understanding your financial obligations. These include living expenses along with any debts. Everyone's situation is different, but here are some typical expenses to consider:
Review your bank and credit card statements to learn how you spend your money. You might be surprised at the number of obligations you have and what they cost you each month. You don't have to start from scratch, though. Many banks and credit companies now offer easy-to-use solutions through an app or their website to help you bucket and track your expenses with minimal upfront effort. You'll be surprised how much some of the small things add up and how seeing your expenses in the aggregate can encourage better spending habits.
Now that you know your obligations, create a budget that you can stick to. This last bit, "that you can stick to," is essential. It's easy to have noble intentions when creating a debt reduction plan but following that plan is a greater challenge. A solid budget helps you pay debts, keep up with your expenses and enjoy a reasonable standard of living while providing a financial cushion that allows you to handle unexpected expenses. It can be a trap to set too strict a budget that you abandon quickly.
Once you've set your budget, commit to using surplus funds to pay your debt. There are several approaches to doing this, and two of the most popular are the debt snowball and the debt avalanche:
Another option is to reduce the interest rates of your unsecured debts by consolidating what you owe at a lower interest rate. This form of debt relief isn't always available to everyone and depends on your credit history. However, if you've been able to maintain a good credit score and can secure favorable credit or loan terms, your options include the following:
However, remember that a debt management plan involving taking out a loan (or opening another credit card account) can be risky. You might create an even deeper debt if you don't change your spending habits. This can further impact your credit score and damage your financial health. Be prepared to stick to your plan.
Your budget should include regular contributions to a savings account. While savings accounts don't provide the financial returns that some financial products do, they provide easy access to funds when needed, with no or minimal financial penalties for having a low balance.
Having a standard bank account also reduces the chances that you'll go back into debt when faced with a financial emergency, as you'll have the funds to cover these unexpected expenses. Sometimes, a relationship with a bank may also increase your loan eligibility at favorable terms. Once your savings reach a certain level, it may be time to transfer some funds to an investment account.
If your financial situation is mixed: You have a high income and high debt, but the debt is currently manageable, working with a financial advisor might be a wise strategy. Your financial advisor can provide a realistic assessment of your financial circumstances and a plan for eliminating debt, reducing tax liabilities, and maximizing investment options. They'll also help answer specifics on the order and amount in which you should be paying off debt, contributing to savings, and starting investments. It can be hard to know what to do to align with your long-term plans.
Nobody wants to struggle with debt, but everyone can agree your worst option is to ignore it. If you are earning enough to get your debt under control and haven't been able to do so, consider the tips above to help manage on your own or look into professional support. If you're looking for some high-level recommendations, check out our free financial analysis. It can point you toward areas within your financial plan, including debt minimization, to focus your efforts on.