You've probably seen media reports of successful business owners or celebrities facing financial challenges and wondered how that could happen. It may be surprising that they've gone through bankruptcy or foreclosure, but it turns out that people with high income can be just as susceptible to making financial mistakes as those who earn less, in fact, the stakes are often higher.
We don't share that as a scare tactic, but If you make a good living and can't seem to get ahead of your debts or save for retirement, it's time to take action. Learn how to avoid financial mistakes that create money issues for you and your family.
1. Pinch Then Spend Mentality
"Pinch then Spend" refers to the concept that being frugal or responsible with your spending is something you only need to do when you don't have a high income. This can result in overspending after a long period of self-denial, delaying your long-term financial goals like retirement in favor of achieving short-term wins.
Learning not to spend money when you can't afford it is a Personal Finance 101 concept. However, it's also important to watch your spending even after you achieve financial success.
Spending what you earn is tempting. You've worked hard to get where you're at, so it's understandable you want to enjoy the fruits of your labor, but establishing a budget, setting financial goals, and learning new spending habits will serve you well as you build wealth and anticipate a prosperous retirement. You'd be surprised how many high earners still live paycheck to paycheck because of this mentality or lifestyle creep.
2. Spending More Than You Should
One of the biggest money mistakes to avoid is unnecessarily spending top dollar on products and services when frugal options more than suffice. Apply the same strategies that those with more moderate incomes use when making a large purchase:
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Take a time-out (at least 24 hours) when tempted to make a large purchase. You'd be surprised how even a short delay can help you consider whether you really need to buy something.
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Talk to your spouse about making large purchases. Many couples agree to consult with each other on purchases over a specific dollar amount. Not to police your spending but to feel confident big purchases are necessary.
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Use coupons and take advantage of sales when making purchases. This is huge on purchases like home appliances, furniture, or electronics. If you delay your purchase to an upcoming sale, you can save thousands.
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Reign in convenience spending. This could include anything, from frequently ordering take-out food to eating in restaurants. This sounds so basic, but it can lead to a significant change.
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Watch those monthly subscriptions. Your monthly spending for streaming services and gym memberships may not seem like a big deal, but these expenses add up over time. They also increase your credit card balances, compounding with interest and potentially impacting your creditworthiness. Several apps and web-based services are designed to help you identify and cancel unnecessary recurring memberships.
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Set up a savings account. Immediately move a percentage of your paycheck over. If your employer pays you through direct deposit, ask if you can divide your deposit between two accounts. Sometimes the best way to encourage saving is to automate it.
3. Keeping Up With "The New Thing"
Expanding on that concept even further is "the new thing" race. If you're always eager for the latest product drop, it might be time to reconsider your priorities. Given how lifestyle inflation is glorified, it’s understandable to want to splurge. The trouble is that new products, and new product versions, tend to come at a premium price. . .a price that typically drops in as little as a few months.
If overspending is preventing you from meeting long-term goals, such as building a healthy retirement savings plan or paying off student loans, consider whether this habit applies to you. The premium price is likely better spent elsewhere. Bottom line: Unless your job requires you to remain on the bleeding edge of technology, you can likely get on just fine with the phone you bought 18 months ago.
4. Overusing Credit Cards
Racking up credit card debt often tops the list of money mistakes to avoid, but it impacts high earners in a unique way. Before we dive in on the possible negative impacts, it's important to say that responsible credit card use is a great way to build or maintain your credit score to reap benefits like lower rates or take advantage of a more secure way to make payments online.
That said, there is a trap-like nature to large, open lines of credit and high-income people aren't immune to this form of debt. In fact, it can become more dangerous because high earners tend to believe they can easily make monthly payments not understanding quite how much debt has racked up and how compounded interest weakens each payment.
Because of these factors, credit card debt can spiral out of control for high earners, particularly when credit card companies increase card limits or spike the interest rate. Higher earnings equals higher card limits, allowing you to rack up tens of thousands of dollars quickly which can put an anchor on the progress of your larger financial plan.
It's also important to remember that overusing credit cards can negatively impact your credit score, which compounds the problem by increasing interest rates and/or limiting access to alternative forms of credit like mortgages, car loans, or personal loans from your bank for truly needed items.
As we move toward more digital payment options, credit card perks, and reward schemes, avoiding credit traps can be difficult. A good rule of thumb is if it will be tempting in a negative way for you to have access to a large line of credit, don't open new accounts. Contact your credit card provider to reject proposed line increases, and set a clear plan to pay more than minimum payments to ensure you're not digging yourself into a hole.
5. Failing to Plan for Retirement
When you're in your twenties, the twilight of your career seems a long time away. The same is often true when you're in your thirties and even forties, particularly if you're busy with work and raising a family. As a result, you may slip into one major money mistake to avoid: Failing to save enough for retirement.
Retirement Income Sources
Eventually, you'll reach retirement age, but you might need to retire earlier than anticipated due to health issues or changes at your workplace. Developing a solid retirement plan is critical to comfortably enjoying your old age.
There are multiple sources of retirement income, including:
- Social Security
- Individual Retirement Accounts (IRAs): Traditional and Roth
- 401(K) accounts
- Pensions
- Employee Stock Purchase Plans (ESPPs)
Employer Contributions
Have you ever considered withdrawing a few thousand dollars in cash from the bank and dumping the bills in a trash can? Probably not. After all, reasonable people don't throw money away! Yet many people do this when they don't take advantage of employer-matched 401(K) plan contributions.
Employer matching is a percentage of your income, which can be considerable for high earners. Let's say you make $200,000 annually and elect to contribute 5% of your salary to your 401(K), which your employer matches. That's $20,000 going into your retirement fund each year, plus $10,000 of that free money from your employer!
If you aren't making those contributions, you're walking away from money that could have been used to ensure a comfortable retirement.
6. No Clear Investment Plan
Putting your investment plan on autopilot means you'll miss opportunities to increase wealth. If you aren't actively involved in planning and monitoring your investments, it may be time to work with someone who can do these things for you.
Tax Liabilities
A lack of guidance could mean your tax liabilities are higher than they should be. This can deprive you and your family of income that could be used to provide for retirement or an inheritance for your children. A well-funded checking account, along with the guidance of a financial planner, can help you develop a wealth management plan that may also provide tax benefits.
Diversified Investments
7. Missing Health Care Tax Breaks
Many high earners fail to fully take advantage of programs that help cover health care expenses not always covered by insurance. In addition, they can also provide significant tax advantages.
Flexible Spending Accounts (FSA)
You can contribute a percentage of each paycheck to a flexible spending account. These funds can be used to cover medical and dental expenses as well as healthcare-related purchases, such as over-the-counter medications, equipment (e.g., crutches), and supplies (e.g., bandages). Your contributions to an FSA are "pre-tax dollars," which can reduce your overall tax liability. Money in your FSA must be spent by the end of the year, or the unused will be lost.
Health Savings Accounts (HSA)
A health savings account allows you to contribute to a special savings account that earns interest. You can then use the funds to pay for medical expenses. HSA accounts have "triple" tax benefits; your contributions are pre-tax dollars, reducing tax liability. Interest earned on your savings is not taxed, and withdrawals used to pay for medical expenses are also non-taxable. Unlike an FSA, your contributions to an HSA can be rolled over each year.
8. Not Establishing an Estate Plan
Most people don't like thinking about end-of-life matters. Like retirement, death is inevitable, so you'll want to ensure your loved ones are cared for after you die. The best way to do this is by having a solid estate plan.
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Will. A will outlines how your estate should be distributed upon death. It should be reviewed and updated at least every few years and during life changes, like marriage, divorce, and the birth or adoption of children and grandchildren. Of all the money mistakes to avoid, not having a will, or having an outdated will, is in the top three. You don't want to force your family into a long and expensive probate process at a difficult time.
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Beneficiaries. Regularly review and update the beneficiaries on your life insurance, investment, and retirement accounts. Remember, your will doesn't govern these accounts and policies. You must update each policy and account separately to reflect your wishes.
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Living Trusts. A trust helps ensure the quick transfer of assets between your estate and beneficiaries. Trusts also keep your assets out of probate, reducing your heirs' tax liability.
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Durable Power of Attorney (DPOA). Appoint someone as a power of attorney who can make decisions on your behalf if you become incapacitated.
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Lists. Include an updated list of assets, debts, and financial accounts, along with online passwords to access these accounts.
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Instructions. Provide instructions regarding your digital presence and managing your social media accounts. You'll also want to arrange to transfer digital assets, such as movies, games, and books, to your heirs.
How's Your Current Financial Situation?
Even high earners are susceptible to common financial mistakes and must identify money mistakes to avoid them. Once you know these missteps, you can correct your financial behavior before bad habits significantly impact your overall financial health.
One of the biggest financial mistakes you can make is failing to seek help and advice. This is particularly true if you have concerns about your spending or don't feel your retirement fund is growing as it should. Plancorp advisors can provide guidance with financial planning, including debt repayment, savings, investments, and establishing goals for retirement.
