In today’s consumerist society, everyone wants to be wealthy. Anyone you speak to would say yes to being able to live a luxurious lifestyle where they can afford an abundance of materialistic belongings. However, to accumulate the wealth to live lavishly is not an easy feat. Even if you are currently earning a high income, this does not guarantee that you will be wealthy in the future.
Earning a high income will put you in prime position to become wealthy, but without proper financial management you may never become “wealthy”. It is easy to confuse income and wealth since these words have become synonymous in our society. But you’ll need to understand the difference between the two and how they correlate with each other to build your wealth.
Once you read the different definitions of income and wealth you’ll start to understand why our society confuse the two.
Income – the monetary payment received for goods or services, or from other sources, as rents or investments.
Wealth – a great quantity or store of money, valuable possessions, property, or other riches.
The main difference between income and wealth by definition is that income is a stream of incoming money while wealth is a collection of assets which is accumulated over time. Now it might start to be clearer why high income earners may not always be considered wealthy. And why some wealthy individuals come from humble roots and are able to build their wealth from lower income earnings.
Becoming wealthy is more than just about securing a job that pays a high salary. It’s about setting a financial goal, developing a plan to reach that goal and committing to building your wealth. This is why many individuals who earn relatively lower incomes are still able to become quite wealthy.
By being smart with your money and making the most of your opportunities you can gradually work to accumulate wealth. High income earners are placed in a unique position because they have the means available to quickly generate a lot of wealth. But only if they take the right steps.
We all have new year resolutions which we give up on or never follow through. The truth is our will power fluctuates over time. In order to make saving money a habit, the best way is to automate. This will remove the temptation for you to spend the money that you should be saving. It also takes away the time and energy that is needed if you manually calculate and transfer your savings.
If you use Digit, the service will take a small amount of money from your bank account each week and place it into your Digit account. This helps create a mental and physical divide between your regular spending money and your savings. Having this done automatically means you won’t have to worry about it. All you need to know is that each week you will be setting some money aside into a savings account. Then when the time is right, you can pull money out of your Digit account.
Monetise on the other hand, can create financial statements that is then algorithmically processed to generate meaningful insights and product advice. This service can identify your savings potential based on your spending habits, it’s definitely worth checking out!
Spend More On What You Love. Cut Down On What You Don’t Need.
As a high income earner, you can afford luxuries and expenses that may not be as accessible to lower income earners. However, just because you have money to spend doesn’t mean you should spend it. There are many stories of “wealthy” celebrities who have essentially wasted all their money on trying to live a lavish lifestyle.
But we’re not one of those people that keep saying you have to cut down your spending. In fact, we advocate that you spend more on the things you love. You can enjoy your money or treat yourself, but avoid money sinks as much as possible.
By cutting down on non-essential purchases and expenses, you can save more money and build your wealth quicker. Take a moment to think about the expenses that you don’t really need, be specific! We have compiled a list of action points to help you save in this article.
There’s no such thing as earning too much. Even if you are already earning a high income, there is still room for even more income. There are numerous ways of boosting your income. You can start a new side business or learn to invest.
Not only will diversifying your income help to increase your annual income, but it can also act as an additional asset. Having more assets under your name can be an advantage. For example, businesses can apply for specific tax deductions which regular taxpayers might not be eligible for.
Though it may seem excessive, you could always take on a side job to boost your income. Your high income day job will most likely pay you more than enough to live your current lifestyle, but if you have a financial goal in mind, there’s nothing stopping you from seeking additional employment.
Here are some ideas for side businesses that you can do in your own time to boost your income:
There are many ventures that can boost your income, but it’s important to try something that you will enjoy and not just go into something for the sake of earning extra cash. Since this will only be a side job or project, it doesn’t make sense to invest your time and energy into something you won’t enjoy.
Taxes will take a significant chunk of your earnings. As the old cliche goes, the only certainties in life and death and taxes. If you are truly serious about building your wealth then you will need to measure exactly how much tax you will pay each financial year. You can work with a tax accountant who will process all the paperwork on your behalf or if you prefer a DIY approach then you can lodge your own tax returns.
Unfortunately, one of the downsides of earning a high income is the increased tax rates. Which is why you need to be tax-efficient. Learn what types of taxes apply to you and your income streams. If you’d like a quick and easy way to do tax returns online, then head over to Gytbo, it is a wonderful online app that makes your tax return fun and easy to manage.
Being tax-efficient is about learning to leverage each little advantage you are given through the taxation system.
Here are some common money-saving tax strategies you can use:
Taxes can be a complex topic especially once you have multiple streams of income. If you are unsure about your taxes it is best to consult a professional tax accountant who can help you properly lodge and process your taxes.
Contrary to popular belief, high income earners are not always debt free. They are able to pay it off quicker and lenders are more lenient towards them when they ask to borrow money. Accumulating debt is a normal part of life. Having debt does not necessarily mean you are in financial trouble, it just means that you owe the bank some money.
Good debt is debt that increases your net worth or helps generate value. Bad debt, on the other hand is debt that does not increase value or is money that is used to purchase goods/services that don’t have lasting value. Debt is a double-edged sword, good debt will help you build wealth while bad debt will destroy your wealth.
Let’s examine examples of good debt vs bad debt.
Examples of bad debt:
Examples of good debt:
However, if you are risk averse, the best possible solution may be to completely avoid debt. This is not always feasible, so creating a financial plan which allows you to quickly pay off debts will help you accumulate more wealth.
Investing is a topic that merits its own article, but we will cover the basics of investing and hopefully you will have a strong foundation to build upon for further knowledge.
Investing is the act of committing money or capital to an endeavour with the expectation of obtaining an additional income or profit.
By investing into various markets, we are using our existing money to generate more income in the future. Investing is a great method of building wealth as a high income earner because you have the necessary capital to pursue significant investment options.
There are many things you can invest in. The traditional investments include stocks, bonds, and property. But, you can also invest in new apps, upcoming businesses/companies, pretty much anything you can think of. While there is no shortage of investment options, it’s about making good investments and avoiding bad investments.
You need to weigh up the risk and reward of each investment to determine if you are willing to commit your money. No investment is 100% safe despite what people say. Some investments have a “fail-safe” which prevents you from losing your entire investment while others may not operate like this.
Learning to invest is a valuable financial tool you can take with you for the rest of your life. Once you become a good investor you can make your money work for you and generate a substantial amount of income without needing to work.
Here’s an interesting infographic illustrating the relationship between your investment timeline and investment risk:
Safe Investments vs Risky Investments
As stated above, there are no investments which are 100% safe, but there are some “safe” options which are regarded to be low-risk. These include things such as government bonds, renting out your property/properties and blue-chip stocks. The biggest downside to investing in safer options are lower returns.
On the other hand, we have risky investments which are able to swing either up or down extremely quickly. If you make a series of unwise investments you can potentially lose a large amount of capital and have nothing to show for it.
When you are trying to figure out how risky an investment is, here are some considerations that you may take into account:
An area that many high income earners overlook is the need for insurance. If you don’t insure your assets then you could potentially lose them. If one of your properties burns down and it’s not insured, then there is no way of getting it back.
Don’t neglect to insure your assets. Even your income is insurable through Disability/Illness/Injury Income Insurance. Should an accident or situation happen that renders you unable to work for a period of time, you can cover the loss of income through insurance.
Insurance is used to protect your assets and helps you stay on track when things don’t go according to plan, in case you lose some of your assets due to reasons out of your control, you can recover all or part of the losses. This means that you won’t have to start over from nothing to try and build your wealth again if something goes wrong along the way.
However, insurance is very specific so you must check the exact terms of your insurance policy. There are countless stories of innocent individuals who think their damages/losses are covered by insurance, but their claims get rejected because it does not meet the specific requirements of the insurance policy.
The unexpected can happen in life. Don’t put your assets at risk. Insure them and make sure they are properly covered.
The key to building your wealth is to follow a financial plan. Without structure to your financial strategy then you won’t know if you are on track to hit your goals or not. Also, developing a financial plan helps you identify the most effective method of reaching your target.
A financial plan is a blueprint to your monetary goals. By compiling your current financial status, your current level of income, available assets and other factors you can construct the most effective plan of action to reach your goals.
You must be disciplined when it comes to executing your financial plan or you will continually fall short of your expected wealth projections.
When creating a financial plan you want to set both short-term and long-term goals. This helps you stay motivated and it becomes easier to track your progress. Setting up a financial plan initially takes a lot of time and effort, but once you get into a savings rhythm it becomes second nature.
If you’d like to see how we can help you come up with your own tailored strategic financial plan, feel free to give us a shout!
Putting It Altogether
It’s important to understand the difference between income and wealth and how each relate to one another but are not the same. Securing a high income job does not necessarily mean that you will become wealthy. Overspending, bad debt and poor financial management means that even a high income earner may not be able to accumulate a large amount of wealth.
Building wealth is about setting goals, creating a plan of action to reach these goals and then staying disciplined when executing your plan. Becoming wealthy is a gradual process, even if you were to win the lottery tomorrow, you would still need to have a plan in mind that will help you turn that money into more wealth.
High income earners have many advantages over lower income earners when it comes to building wealth. But there are also some unique pitfalls such as high taxes which you need to watch out for.
There is no guaranteed strategy that will work for everyone. Each person builds and accumulates wealth differently. You should seek the opinions of a professional financial adviser if you need clarification or guidance. Also, if you prefer to not worry about building your own wealth then you could give control of your portfolio to a financial adviser who will do it all for you.
Building wealth is an exercise in patience, discipline and strategy. Rome wasn’t built in a day and you won’t become wealthy overnight. It is a long and arduous project that needs constant attention.
We all have this image in our heads where a wealthy person is able to never work again but can still afford luxuries. This goal is attainable, but it will require hard work and determination. High income earners definitely have an advantage and they should learn how to use it to reach their financial dreams and goals.
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