If earning a high income made people immune to financial mistakes, then rich folks would never go broke. That’s not the case, however. Plenty of wealthy and successful people have filed for bankruptcy because of financial missteps.
The fact is that high earners make many of the same mistakes everyone else does. Think of it this way: Earning $600,000 a year won’t do you much good if you spend $650,000 a year. But someone earning $75,000 a year can be on sound financial footing if they budget well and make smart investments.
These are some mistakes that are especially prevalent among the wealthy:
1. Gravitating Toward Risky Investments
A characteristic many successful people have in common is confidence in their abilities and intellect — it’s often a big part of why they’re so successful. But that confidence can spill into overconfidence when you start to believe you’re good at everything just because you’re good at commanding a high salary.
One of the biggest mistakes high earners make is believing they’re better investors than they really are. This can lead to risky investments that not only don’t pay off, but can sometimes lead to huge losses and even financial ruin.
2. Not Taking Advantage of Free Financial Tools
Earning a high salary doesn’t necessarily mean you’re an expert at handling money. One mistake many high earners make is that they don’t consult professional financial advisors — or take advantage of free financial tools that show where they stand financially.
A financial services company called Empower offers both. Empower offers free tools that let you check your net worth, plan your savings and retirement and do a checkup on your investments. It also offers professional wealth management and various investment products.
No matter how much you earn, you can benefit from free tools like a portfolio analyzer that lets you assess your overall risk, analyze past performances and model individualized asset allocations. Empower also has a free investment-return calculator that estimates how much money you can earn over time, based on the amount of money you invest and the expected rate of return.
Regardless of your income, consider taking advantage of free tools to help you make the most of your money. It takes just a few minutes to create a free dashboard and see how well you’re tracking toward your goals.
3. Neglecting the Tax Implications of High Earnings
When you earn a lot of money, you also owe a lot of taxes. Many high earners fail to implement strategies that can minimize their taxes, according to a recent blog on the New Trader University website. You can save thousands by taking a proactive approach to tax planning, but a lot of high-income individuals fail to do so.
Building wealth through a high salary doesn’t do much good if a big chunk of it ends up going to the IRS.
“Even the affluent can overlook the tax implications of their financial decisions,” Jake Claver, founder of the wealth management firm Digital Ascension Group, told GOBankingRates in an interview earlier this year. “From selling investments at the wrong time to not leveraging tax-advantaged accounts, these oversights can erode their wealth.”
4. Assuming They Will Always Earn a High Salary
There are plenty of things wrong with this assumption — including the fact that incomes in the United States typically peak for people in their 40s and 50s and then go down from there.
That doesn’t mean you’ll suddenly go from making a high income to a low one. But it does mean that high earners, like everyone else, need to take advantage of their peak earning years by managing their spending wisely and making smart investments. Too many high earners fail to do this.
Another risk is that your salary will suddenly vanish because of a job loss, leaving you with lots of debt and no income. High earners are just as susceptible to layoffs as anyone else. But while rank-and-file workers might spend a lot of time worrying about job security, many high earners have convinced themselves that their jobs are untouchable.
5. Falling Prey to ‘Lifestyle Inflation’
When you have very little financial wiggle room, you’re pretty much forced to make sure every dollar goes to something worthwhile. But as you start earning a higher income, it’s human nature to spend more freely and start ignoring the importance of your budget.
Lifestyle inflation means spending money on items you don’t necessarily need but feel like you have earned because of your high salary, whether it’s an expensive car, vacation home or country club membership. What usually happens is that this spending comes at the expense of savings or investments that let you grow your wealth instead of dilute it.
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