Earning a high salary is a good first step toward generating a high net worth. However, the two don’t necessarily go hand in hand.
In fact, a recent study shows that even among those earning $100,000 or more, roughly half are still living paycheck to paycheck. By definition, this means that those workers are not saving much if any money, with a corollary effect that they are not significantly growing their net worth.
To translate a high level of earnings into an increasing net worth, those living paycheck to paycheck have to fundamentally adjust how they are handling their money — or living their lifestyle. Here are some suggestions that have proven successful for many looking to make that jump.
Make a Realistic, Functioning Budget
The only way to ensure that you have some money for your own future is to make sure that you aren’t spending it all in the present. This can be hard to do without a well thought-out road map, in the form of a budget.
While budgeting may seem boring or even remedial, it’s still one of the very best ways to track your income and your spending. Without knowing where your money is going, it’s hard to control your spending and allocate enough to your savings. But when you have all of the information written out in front of you, it becomes easier to reduce the discretionary spending that may be siphoning your cash flow and chart a path toward long-term wealth building.
Pay Yourself First
The idea of putting a portion of your monthly paycheck into your savings and investments before you even pay your bills is as old as the financial system itself.
However, in a country where one-third of Americans said they might have trouble covering a $400 emergency expense with cash — and a whopping 12% of those earning at least $100,000 saying they had no emergency savings at all, according to research from GOBankingRates — it’s clear that not all Americans are following this advice.
Save Until It Hurts — and Then Double It
For many Americans, saving is an inherently painful process. Setting aside money into an account that “just sits there” and doesn’t provide any immediate gratification can seem meaningless — unless you have a good grasp of the big picture.
If you really want to generate a high net worth, you’re going to have to save aggressively. Start by setting aside an amount you’re comfortable with, be it 3% or 10% of your monthly income, and then double it. You’ll definitely feel the sacrifice at first, but you’ll be much better off in the long run. If saving and investing is too comfortable for you, it means you aren’t setting enough aside.
Maximize Your Tax-Advantaged Accounts
Tax-advantaged investment accounts like IRAs and 401(k) plans are a great way to build long-term wealth. Not only will you typically get a tax deduction on your contributions, but your savings will grow tax-deferred until you withdraw them.
With a 401(k) plan, you’ll also likely reap the benefits of employer matching contributions, which effectively translate into free money being deposited into your account every year. Since your 401(k) contributions come out of your paycheck automatically before you even see them, they’re a great way to build wealth with little-to-no effort on your part.
Change Your Living Situation
If you’re able to work remotely, or if your employer has offices across the country, moving to a lower-cost area is a great way to bust out of the paycheck-to-paycheck cycle.
Let’s say you earn $100,000 per year and live in a big urban area where your income just barely covers your costs. If you can keep that salary by working remotely or moving to a new office in a low-cost city, you might find that you can save $500 to $1,000 per month just on your cost of living. Pouring that money into investments that can grow over time is a great way to start building a high net worth.
Of course, this strategy will only work if you can pull the same paycheck working in a new area, so do your research before you make such a move.
Understand That It’s Hard To Get Wealthy on Just a Salary
Earning a high income is a great first step toward generating a high net worth. But until you defer some of that income into investments, it’s hard to significantly build your net worth.
The value of the money you receive as income actually decreases over time due to the effects of inflation. This is why it’s important that you receive regular raises. But even then, your income will likely only keep up with your rising costs. To outgrow the effects of taxes and inflation, you’ll need to put that money to work.
Real estate and the stock market are two common areas of investment that can significantly build wealth over time, but you can narrow down your specific choices with a financial advisor.
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