For high-income executives, the road to financial independence might feel well-paved thanks to high earnings. However, competing financial demands ranging from a mortgage and lifestyle expenses to daycare costs or college savings can derail even the best-laid plans.
The challenge is not just to earn more but to manage, prioritize, and consistently grow your wealth over time. Working smarter, not harder, on priorities like your retirement plan and financial goals can really come down to the consistency.
Work keeps you busy and life goes fast, so it's easy to fall into a trap of postponement. Postponing your investment plan under the guise of thinking, “you'll be fine because you make enough,” is a poor strategy for meeting your financial goals.
Yes, that loose plan may work out, but what if it doesn't? A well thought out financial plan beats good luck every time. Here are just a few of the hurdles that can sneak up and raise havoc on your good intentions as your income grows.
Housing expenses: As your income grows, so does the desire to improve your housing situation. Seeking out benefits like an exclusive neighborhood, a shorter commute, or better school districts can result in larger mortgage payments.
Lifestyle expenses: Executives tend to have lifestyle-related expenses that match their income. More travel, better dining, maybe a nicer car, golf lessons—you get it.
More income can easily translate into establishing and maintaining a certain social status. Does making more really need to equal spending more?
“Keeping up with the Joneses” may not be all that’s great if you consider the Joneses are knee-deep in debt and don’t have a retirement plan—but their new cars are great!
Daycare and childcare costs: For those with younger children, daycare costs can quickly add up. Monthly daycare for infants and toddlers can easily rival an auto or house payment.
The daily safety and well-being of your child is definitely a primary priority and can easily put your investment plans on hold or at least on the back-burner.
Education expenses: From private schooling and college to extracurricular activities like sports and music lessons, the costs of raising children tend to inflate over time.
These are your child's formidable years, and your goal is to help shape them into strong, well-rounded adults. Of course they take priority!
So Why Invest Early and Consistently?
One of the biggest mistakes high-income earners can make is delaying consistent investing due to life’s competing expenses. A better choice is to pay yourself first.
Below are just a few reasons to consider why implementing a plan early and checking in often is a wise choice for your financial future.
Time in the market vs. timing the market: To properly plan for the next several years, investing early and consistently is critical. The power of compounding means that small, consistent investments can grow into substantial wealth over time.
It’s much easier to obtain $2 million at age 65 if you start consistently investing at age 25 than if you start at age 40. Delaying investing, even by a few years, can significantly reduce potential returns.
Inflation and compounding interest: Over time, inflation can erode the purchasing power of cash. By investing regularly, executives can grow their assets at a rate that outpaces inflation.
Your investments will compound over time, and the earlier you start investing, the more time your investments will have to grow.
Outpacing inflation and preparing for the growth of expenses down the road is key to maximizing your money and making it work for you.
Income isn't wealth: A large income does not automatically translate into long-term wealth. Many high-income earners can easily find themselves living paycheck to paycheck, struggling to build wealth.
Life can easily get in the way of a well-crafted investment plan. Consistent investing can ensure that a portion of income is dedicated to long-term growth, building net worth.
Living within your means, setting short and long-term goals for your spending and savings, and having a long-term retirement goal is key.
Diversification: It's common for an executive to have a large portion of their wealth tied up in their company’s stock, particularly if they receive stock options as part of their compensation.
Diversification, as well as consistent investing outside of these concentrated positions, will help spread risk across different asset classes.
Although too much diversification can dilute returns, a properly diversified portfolio will have more consistent returns over time versus holding few, or single, positions.
Hedge your bet: Markets fluctuate—they always have, and it's truly impossible to accurately predict how things will go. Sure, there are indicators and trends we can follow; however, it can be extremely easy to get drawn into waiting for that perfect moment to move in, or out, of the market.
Investing consistently allows for dollar-cost averaging. This strategy reduces risk of making a large investment at the wrong time and ensures participation in both market lows and highs.
Most long-term performance data will reveal a dollar cost averaging strategy out-performs an attempt to time the market.
Building Consistent Investment Habits
Create a budget with purpose: 60-80% of Americans have a budget for their cash flow, but that doesn't mean they live by it. Creating a budget that accounts for both short-term needs and long-term investment goals is crucial.
Paying yourself first, by investing in your 401(k), IRA, or even a non-sheltered account can ensure wealth accumulation over time. Putting that thought last, and you will most likely start to consider postponing your investments as short-term expenses start to jump in line of importance.
Even at a young age, putting money aside before all other things, if available, can pay high dividends down the road.
Resist lifestyle creep: It's not how much you make—but how much you save—that matters. The biggest threat to a long-term wealth plan is lifestyle creep, where higher earnings lead to higher spending rather than more investing.
Avoid the temptation to increase spending with every raise and every bonus. Instead, consider directing those increases into investment accounts or setting them aside toward future savings goals.
Plan for children’s education early: For college savings, consider 529 plans for your children. There are strategies available that allow you to transfer funds from on child to another, and even a qualifying family member.
And as long as 529 funds are used correctly, they avoid taxation. A good wealth management team can help you navigate a 529 strategy.
And although scholarships can offset, or even eliminate, college expenses, that may be difficult to anticipate when you are just starting a 529 for a young child.
For college expenses, high-income earners typically will not qualify for federal grants. Instead, the only options would be for student loans, intrafamily loans, or self-funding through savings/529s, etc.
Work with a wealth manager: Teaming up with a good wealth manager is key to building a comprehensive plan that balances life's competing expenses and priorities.
A wealth management team can help create an investment strategy for short-term and long-term goals, and help you gain a deeper level of confidence around your investment and retirement goals, as well as current expenses.
They can also offer advice on complex compensation structures, such as stock options or deferred compensation plans.
Automate your opportunity: Make it easy on yourself. To be consistent, utilize technology and have income automatically pulled from your paycheck into your investments, 401(k), etc.
This helps to eliminate the mental considerations of what to do, and instead ensures that you are consistently investing without the need for a decision. You don’t see that money hit your bank account—ever. It’s hard to use it frivolously when you never see.
Maximize tax-advantaged accounts: As a high-earner, you should take full advantage of tax-deferred or tax-advantaged accounts like 401(k)s, IRAs, Roth IRAs, and Health Savings Accounts (HSAs).
There are several strategies out there that can help maximize your tax-deferred, and even tax-free growth. It's not only about how much you can save over time, but also how much you get to keep when you are ready to use it!
Be prepared with an emergency fund: High-earning executives can often face larger expenses such as exotic vacations, home renovations, or even large tuition payments. These larger, possibly unplanned, expenses can derail and investment plan.
Try to anticipate these interruptions in advance, but when that's not possible, consider setting aside funds that are just for infrequent expenses, and included this in broader financial strategy.
Setting aside an emergency fund or a sinking fun for these large expenses will help manage your cash flow and keep from interrupting the consistent investment contribution.
The Psychological Benefits of Regular Investing
For a high-income executive, the pressure of balancing a career, family and financial obligations can feel overwhelming. As time quickly marches on, it is important to establish regular investing habits that will help to provide psychological benefits:
A feeling of peace: There's a great sense of peace you get when you know your money is consistently working for you. And when you know you have a plan in place that will help fulfil your long-term financial goals, you just don't worry about your retirement or children’s education as much.
Reduced stress during market volatility: Set-It-and-Forget-It is not an investment strategy. Paired with help from a reputable wealth manager, consistent investing habits help to offset the anxious feelings about stock market fluctuations, because that's a long-game strategy.
Consistent investing, dollar-cost averaging, and diversification over time helps to comfortably navigate thru volatility of the financial markets.
Find the Discipline
Whether it’s a workout regimen or long-term investing, consistent discipline will always produce successful results (and hiring the right coach will help get results even faster and more efficiently.)
Our current society demands instant gratification, yet deep-down we know having patience and knowledge will pay off better for our long-game.
The hard part is being consistent, but the strength is also being consistent. Sure, you may be a busy executive, however properly prioritizing your savings patterns early allows you the confidence that you are managing your cash flow properly and can avoid falling into the "overspending trap."
In 1928, Walter Slezak said:
“We end up spending money we don’t have, to buy things we don’t need, to impress people we don’t like.”
That statement still applies today. The recipe for your wealthy future is easy: prioritize, strategize, create goals, and rely on a good wealth manager to coach you along the way.
Ready to get a seasoned wealth manager on your side as your co-pilot? The first step is a gut-check on how your plan is working for you. Our 2-minute analysis will give you instant results in four key areas of your plan, curate helpful resources just for you, and suggest potential next steps for finding a professional.
