Too many high earners confuse income with wealth.
High incomes make it easy to look and feel wealthy by allowing you to buy a sprawling home, sleek car, and dinners out at your leisure. But the trappings of wealth are not the same as wealth itself.
True wealth is the ability to build a life you enjoy without constantly stressing over your finances. And unless you know how to properly manage your money, that kind of wealth could elude you, no matter what your income is.
Common Mistakes High-Income Earners Make
While many of these money mistakes affect earners at all income levels, these 15 common mistakes made by six-figure earners prevent them from accumulating permanent wealth.
1. Having a Low Savings Rate
Depending on who you ask, Americans save between 3% and 10% of their paychecks, on average. The Federal Reserve shows it hovering between 5% and 8% over the last decade (pandemic skewing aside), while a report from the International Monetary Fund estimated it at 3%.
Either way, it’s not enough.
That’s because wealth comes from your savings rate, or the gap between what you earn and what you spend. A person who earns $50,000 per year and saves $10,000 of it builds wealth faster than the person who earns $1 million per year and spends every penny.
As a high earner, you’re in an easier position to save money. Take advantage of it, because your savings rate is the source of your future financial power. The more you save and invest, the more your investments earn on their own, creating a virtuous cycle of compounding returns.
2. Failing to Stick to a Budget
It’s awfully hard to reach a high savings rate without a budget.
The average person goes into each month with a personal finance plan consisting of good intentions and little else. They spend, they get paid, and they spend some more, and then if they have any money left over at the end of the month, they toss it into savings.
It’s why the median U.S. household only has $4,830 saved, according to USA Today.
To start accelerating your savings, investments, and wealth, create a budget through Personal Capital, Mint.com, or an alternative and stick to it every month. If you have an uneven income, that’s no excuse. Follow these steps to create a budget even on a variable income.
Remember, none of your expenses are written in stone. Most people start their budget based on what they currently spend.
Instead, base your budget on what you want to spend, starting with your target savings rate as the first and most important “expense.” Work backward from there, and find a way to make it work by putting every single expense under the microscope and cutting liberally.
As a final tip, use four weeks’ income as your monthly revenue. You can’t count on any more income than that in any given month, so don’t budget as if you can.
3. Succumbing to Lifestyle Inflation
If I asked you what it would take to reach a 50% savings rate, you would almost certainly laugh and tell me it’s impossible. Strangely, the answer would likely be the same whether you earned $75,000, $150,000, or $300,000.
Unless you’re working your first job out of college, there was probably a time when you lived on half the money you spend now. So yes, you could theoretically achieve a 50% savings rate, but you’ve made a choice not to do so.
The problem is that most of us don’t remember consciously deciding to spend $100,000 per year rather than $50,000.
But one day, you got a raise, and then a few months later, your lease was up and your friend invited you to move into a snazzier apartment with them. The next year, your car died, and you replaced it with a fancier car. And so it went through the years.
The more you earn, the more vulnerable you are to this trend. It’s called lifestyle inflation, and it’s insidious. Any extra money you bring in, you spend in pursuit of an ever-nicer standard of living. But just because you can buy something doesn’t mean you should.
Instead, set a budget with a high savings rate and stick to it every month. When you get a raise, leave your existing budget in place and put the extra money into savings. Then, watch your net worth accelerate even faster.
4. Confusing Your House Payment With Real Estate Investing
If you own a home — and the vast majority of six-figure earners do — you made a decision about what percentage of your income you were willing to spend on housing.
Even if you didn’t know it at the time, it was a decision with far-reaching implications about your future budgeting.
The trouble is far too many homebuyers find themselves on a slippery slope of thinking, “Well, if I can afford this one, why not spend a little more for this other one I like better?”
Then, they justify their overspending by telling themselves it’s not an expense; it’s a real estate investment.
That’s simply not true.
Yes, you need a roof over your head. But you also need to eat, and that doesn’t make food an investment.
Your home — like your car, groceries, and every other bill — is an expense. It’s a line item on your monthly budget. And it reduces the amount of money you can put toward true investments.
Sure, one day in 15 years from now you might sell it for a gain. But you can’t take real estate appreciation for granted. Home values are not an elevator that only goes up.
So don’t twist financial logic to suit your desire for a nicer home.
5. Maintaining Bad Debt
Make no mistake: There is a difference between good debt and bad debt.
Good debt makes you richer. Bad debt makes you poorer. It’s that simple.
For example, imagine that in your neighborhood, you can rent a home for $1,500 per month or buy a comparable home with a monthly mortgage payment of $1,200 per month.
Granted, as a homeowner, you’d be responsible for maintenance and repairs in addition to that monthly mortgage payment. But part of that monthly payment goes toward paying down your principal balance, and the odds are in your favor that the home will appreciate in value to boot. That mortgage would qualify as good debt.
An even better example is a mortgage on a rental property that earns you $250 per month in cash flow. Yes, you have debt, but that debt enabled you to buy an asset that generates income for you each month. You’re richer for having used debt to acquire a cash flow-positive asset.
Bad debt sucks your financial resources, costing you money each month rather than earning you money. That credit card balance you ran up over the holidays, for example, is bad debt.
Get rid of bad debt quickly as possible. Try the debt snowball or debt avalanche techniques to get out of debt fast, and avoid bad debt like the plague moving forward.
6. Not Keeping a Sufficient Emergency Fund
We all need an emergency fund, just not necessarily the same amount as everyone else.
A person with extremely stable income, employment, and expenses might be just fine with only one month’s expenses in their emergency fund. Their next-door neighbor, who’s self-employed as a real estate flipper, might need six months’ worth of expenses or more in their emergency fund, given how infrequently they earn a paycheck.
Notice that emergency funds are measured by “months of expenses,” not dollars. A $2,000 emergency fund means something very different to someone who spends $2,000 per month than it does to someone who spends $10,000 per month.
Lastly, keep in mind your emergency fund doesn’t have to consist of cash only. I like to think of my emergency fund as a series of tiers.
The first tier is cash in my savings account at CIT Bank, the second tier is money invested in short-term government bonds, the third next tier is my paid-in-full credit card, and finally, I can always sell off some relatively stable stocks from my brokerage account in a pinch.
You should keep a certain amount in cash, ideally in a high-yield savings account or money market account. But to leave tens of thousands of dollars languishing in savings represents a serious opportunity cost.
Start thinking about your emergency fund like the defenses of a medieval castle, with a series of escalating fallback options if the barbarians come banging at the gate.
7. Failing to Automate Good Financial Behaviors
If you want something done right, don’t do it yourself — automate it. You’re only human, after all, and self-discipline always slips sooner or later.
Alternatively, most employers let you split your direct deposit into two bank accounts, so you can put money into savings before it ever hits your checking account.
Automating good behaviors doesn’t end with savings, though. Follow these steps to simplify and automate your finances, such as automating bill payments and canceling rarely used subscriptions.
You should also automate your investments. Every month like clockwork, at least part of your savings should go into investments like equities, bonds, or real estate.
Nowadays, robo-advisors like M1 Finance can choose appropriate investments and invest the money for you at little or no cost. They can even rebalance your portfolio regularly and optimize your taxes through harvesting losses at the end of the year. See our full guide to robo-advisors to learn more.
8. Trying to Time the Market
Everyone thinks they’re smarter than the masses — and, therefore, the market. That goes doubly for high earners, who often think they can beat the market by timing it.
They tell themselves fairy tales like “The market is high right now; I’ll wait until it crashes and then I’ll buy the dip.” Then they sit back with a smug smile and congratulate themselves on how clever they are.
Meanwhile, the market rises another 20% before a 15% correction hits. Even if that oh-so-clever investor times their purchase perfectly at the exact bottom of the correction, they still end up paying more than they would have initially.
The simple fact is that no one knows what the market will do in the short term. But in the long term, the stock market and real estate market have always risen. So play a safer game and simply dollar cost average your investments by buying the same amount every single month.
It’s humbling to accept that you’re not smarter than the market. But it’s also freeing.
You get to stop watching the market like a hawk, laying awake at night worrying about it, and just automate your investments. Once they’re automated, you can stop thinking about them constantly and simply check in on them occasionally.
Still not convinced? Read our complete, mathematical explanation of why you shouldn’t time the market.
9. Failing to Diversify
Over the centuries, stocks as a whole have performed quite well as a long-term investment. But that doesn’t mean you should put your life savings on the stock tip you got along with a secret handshake.
But diversifying your equities portfolio is only the beginning.
Today’s stock markets are truly global, and when one region sneezes, the rest of the world’s markets catch a cold. That means high earners who are serious about diversification should expand their portfolios beyond stocks.
Traditionally, that meant seeking safety in the bond market, although bond yields have been so low for so long it’s hard for anyone to get excited about them. Instead, look to real estate investments, fine art through Masterworks, or Farmland through Acretrader to round out your portfolio.
As mentioned above, that doesn’t mean your home or even your second home. It could mean buying an investment property, but bear in mind that direct real estate investing requires both knowledge and labor on your part.
To minimize both, consider buying a turnkey property through a platform like Roofstock. For your trouble, you’ll be rewarded with predictable returns and a range of real estate tax benefits.
If you’re not interested in investing the required time in knowledge and labor, consider indirect real estate investments instead. That could mean buying a real estate investment trust (REIT), although REITs tend to move more synchronously with the stock market than real estate values themselves since REITs trade on public equities markets.
Alternatively, you could invest in private REITs through real estate crowdfunding platforms like Fundrise or Streitwise. Other options include private notes, real estate syndications, or private equity funds.
10. Failing to Get Expert Help
High earners think they’re good at everything. But while you may have many skills, that doesn’t mean you’re a tax planning, investing, estate planning, or asset protection expert.
As a high earner, you’re in a better position than most to afford expert help. And since you likely have more complex finances than the average earner, you need that help more than most.
Financial experts can help you properly prepare your taxes, protect your assets, plan your retirement, and create clear estate plans to make life easier on your family after you pass. As your assets grow larger and more diverse, these all take more time and expertise to manage.
Accept that niche financial experts know more than you do and can help you save money in both the short and long term. Once you embrace that you don’t have to do everything yourself, you can reclaim your free time by delegating work to others.
Start with this list of different financial advisors to help you optimize your taxes, investments, and estate planning.
Pro tip: If you need help finding a financial advisor in your area, start with SmartAsset. They have a tool that will ask you a few questions and then provide you with a list of vetted financial advisors you can choose from.
11. Poor Tax Planning
Your higher income, combined with diverse assets that are all generating passive income, means more complicated tax returns and arcane loopholes that are easy to miss if you attempt to do your own taxes.
It’s easy to do your own taxes when you only earn income from a W-2 paycheck. It’s less easy when you earn income from a business you own, rental properties, mutual funds, private REITs, flipping houses, and private equity funds. You could be missing out on tax deductions or claiming more deductions than allowed.
In many cases, you could be technically filling out your tax return properly but unknowingly waving red flags to the IRS for an audit trigger. Or you could be leaving money on the table by failing to capitalize on year-end tax strategies like harvesting losses.
The larger your income and assets grow, the more attention you need to pay to tax planning. Get expert help from competent accountants and tax strategists who specialize in working with high earners.
It’s an investment that can pay for itself immediately in the form of lower tax bills and lower odds of an audit.
12. Taking Retirement Tax Breaks Today
Many six-figure earners aim to minimize their tax pain right now. After all, they’re paying higher tax rates and want to trim the income at their highest bracket.
But as a higher earner, there’s no reason to believe you’ll be poorer 20 years from now than you are today. Often it makes more sense for high earners to opt for tax-free growth and withdrawals in retirement using a Roth IRA or Roth 401(k) than maxing out today’s tax breaks.
That proves especially true for young high earners whose contributions could have 30 or 40 years to compound.
Think carefully about contributing to a Roth versus a traditional IRA, as your wealth plan likely involves many years of compounding followed by greater wealth in retirement than you have now.
When in doubt, don’t be afraid to split the difference. You can invest in both simultaneously, as the contribution limit applies to both Roth and traditional retirement accounts collectively.
Pro tip: If you’re investing in a retirement plan such as a 401(k), IRA, 403(b), or another eligible account, you’ll want to sign up for a free Blooom account. Once you connect your accounts, they’ll provide you with a free analysis that looks to make sure you’re properly diversified and have the right asset allocation based on your risk tolerance. They’ll also look to make sure you’re not paying too much in fees.
13. Not Creating (and Updating) an Estate Plan
Everyone needs an estate plan. The greater your wealth, the greater your need for thorough estate planning.
Higher earners amass more complex assets, creating an ever more tangled financial web for their children and other heirs to unravel. The last thing you want to leave behind is a legal mess for your grieving family to clean up. So you not only need to create an estate plan through a company like Trust & Will, but you also need to update it regularly.
That means every time you add a major asset, plus a quick review once per year. Bought a new vacation rental property? Add it to your will or living trust. Got a new job with a new 401(k)? Update your will or living trust.
Nor is being young, single, or childless is no excuse. You have assets and liabilities, and you need someone to sort them out for you if you meet an untimely end.
Start with this basic estate planning checklist, and remember that as your finances grow more complex, you’ll need to continually update your estate plan to grow with them.
14. Falling Into Career Complacency
You might have the perfect job, whether it’s a job you love or something cushy you plan to ride into the sunset of retirement.
But you can’t count on it being there forever. In a worrying trend, older workers are increasingly being pushed out of their jobs. They often have trouble finding replacement work, and when they do, it usually doesn’t pay as well as their original job.
That creates a real risk for older workers who under-saved for retirement in their youth. They funneled all their money into buying a home, getting the new car they wanted, and paying for their kids’ college tuition.
Retirement seemed far away, a problem for another day.
Until it wasn’t.
If you’re a younger worker, don’t put off retirement investing until later, because there may not be a later — at least not at the same salary you’re earning now.
If you’re an older worker, take steps to protect your current job by continually improving both your skills and your network. And, of course, invest as much of your income into retirement as you can.
You can’t take your current job or salary for granted. The floor could drop out from under you at any time.
15. Failing to Create and Follow a Lifelong Financial Plan
Your financial needs change over the course of your lifetime. That means you need to keep one eye on the long-term at all times.
As outlined above, that means saving and investing for retirement even in the early years of your career.
Ignore the power of compounding at your own peril. It takes only $160 per month invested at 10% over 40 years to reach a million-dollar nest egg. But if you only have 20 years, it takes $1,315 per month invested at the same return to become a millionaire.
The long view also means mapping out your other financial goals as well. In your 20s or 30s, that could include buying your first home or paying off your student loans. Later, it could mean helping your kids with their college tuition or saving for future health care needs through a health savings account.
Map these needs out and plan accordingly, but always keep investing for retirement as you aim for these short-term goals.
All good story arcs should come to a satisfying conclusion, and your career is no exception. Plan out your career exit strategy, and remember that your current high-octane job doesn’t have to be your last.
One way to retain both income and engagement in retirement is to work a fun or meaningful job on your own terms. That could mean turning a hobby into a small business, working part-time, doing freelance work, or consulting.
You get to set the terms, and you might just wonder why you didn’t switch career gears sooner.
Far too many six-figure earners find themselves bound by golden handcuffs. They don’t love their job, but they do love their salary, and they worry they won’t match it if they pursue their passions.
While that can be true, just as often, high earners let fear hold them back from their dreams. Instead, ask yourself the hard questions of lifestyle design:
What does my perfect life look like?
Where would I live if I could live anywhere?
What would I do for work?
How many hours would I work each week, and how many would I spend with my family, friends, and passions?
More than any one tactical or strategic mistake, I see six-figure earners letting life carry them on its current rather than plotting their own course. Break the golden handcuffs and forge your own path.
As a high earner, you’re in a better position than most to choose your own adventure. Don’t waste it.