7 Ways High Earners Sabotage Their Finances

While earning a ton of money can make building wealth easier, it’s not the magic solution it’s made out to be.

That’s right; earning a high income is only part of the equation. If you want to get rich, you have to put that money to work.

This is where a lot of high earners get off track. They think earning six figures or more is the best way to become wealthy, but they don’t take steps to reach their financial potential.

In a lot of ways, high earners can sabotage their finances, too. Instead of using their big incomes to their advantage, they create scenarios where it’s even harder to get ahead.

High earners, beware. At the end of the day, earning a lot of money won’t mean a thing if you don’t use your dollars wisely. To find out which mistakes high earners make most often, I reached out to several financial advisers who work with high net worth individuals regularly. Here’s what they said.

1. Not Using a Budget or Tracking Spending

According to financial planner Ty Hodges of Client Centric Wealth Management in San Antonio, “thinking the basics don’t apply” is a huge mistake many high earners make.

Even when you earn a lot, you can spend it all if you’re not careful. That’s why high earners need a budget or “spending plan,” says Hodges.

“Work with your adviser or use one of the many online tools to establish a monthly benchmark for you and your family,” he says. “Then plan the annual trips, gifts, and other discretionary items above your fixed expenses.”

You can have all the fun you want and deserve with no regrets while still knowing every dollar is accounted for, says Hodges. But it all starts with a budget that tracks each dollar you spend.

2. Failing to Plan for Social Security

According to Charles C. Scott, a financial adviser in Scottsdale, Arizona, high earners tend to ignore Social Security planning, and often to their detriment.

“We’ve seen high earners ignore any kind of Social Security planning and strategizing because they think it’s not going to be enough to make a difference to them,” says Scott.

While the Bipartisan Budget Act of 2015 did take away a couple of the most creative strategies, there is still reason to have a plan incorporating who takes their Social Security benefits and when, he says.

Another mistake Scott sees frequently is when high earners set up their businesses to avoid paying into the Social Security system.

“The idea here is not paying FICA taxes will leave you with more take-home pay,” says Scott. “What they rarely do is calculate what you’re giving up by purposefully under-contributing to your own future guaranteed lifetime benefit — a benefit that never runs out and is partially indexed for inflation.”

3. Not Creating a Long-Term Financial Plan

According to North Dakota Financial Adviser Benjamin Brandt, many high earners believe their big incomes will solve any financial problem they run into. Because of this belief, they fail to come up with any sort of long-term financial plan.

Since letting the chips fall where they may won’t always lead to the outcome you want, this is a mistake. If you want to use your big income to become wealthy, you have to take action.

“If high earners want to keep a large income in retirement, they need to accumulate a large retirement nest egg to sustain their spending levels,” says Brandt. “This won’t happen by accident, however. You need a written financial plan and a financial adviser to keep you accountable.”

4. Assuming Their Big Incomes Will Last Forever

Earning a lot of money can give you a false sense of security. And if you earn enough, you might even feel invincible – at least in a financial sense.

San Diego Financial Planner Taylor Schulte says this kind of thinking can be dangerous, mainly because it sets high earners up for huge failure down the line. Remember, “things can change quickly,” says Schulte. And if a huge recession hits (think 2008-09), your income could plummet overnight.

To combat this, Schulte says he encourages high earners to have the same fully-funded emergency fund as everyone else – a full 3-6 months of living expenses stashed away.

“Work with your bank or financial professional to establish an automatic savings program to ensure you never spend money before you earn it ever again,” he says.

5. Failing to Come Up With a Tax Strategy

While many people assume taxes are largely out of their control, most families could save money by coming up with a long-term strategy to minimize them. And since high earners pay higher taxes, the savings can add up even more.

“It is important to work with a tax adviser, a financial adviser, or both to figure out ways to minimize this outflow either through investment accounts or deductions,” says financial adviser Tony Liddle of Prosper Wealth Management.

6. Not Boosting Savings Rate as Incomes Grow

If you’re a high earner, you’re probably maxing out your employer-sponsored retirement plan already. While that’s certainly a good thing, you should consider saving even more as you earn more. Once you max out your tax-deferred retirement accounts, don’t be afraid to set up a brokerage account or other savings vehicle so you can easily stash away more money over time.

“As human beings, we tend to spend at the pace our income increases while not making many changes to our savings habits,” says Kansas City Financial Planner Clint Haynes. “Get in the habit of saving the exact same percentage (15-20%) of your income regardless of whether you’re making $100,000 or $1,000,000.”

By boosting your savings rate as your income grows, you’ll grow even wealthier over time.

7. Wasting Too Much Money on Flashy Toys

When you have a lot of discretionary income, it’s easy to fall into the habit of buying flashy toys. Boats. Jet skis. Four-wheelers. All of these expenses, and costs for upkeep can add up quickly.

Still, cars tend to be the biggest drag on high earner’s budgets. Why? Because it’s far too easy to finance a vehicle for five, six, or even seven years.

“I have seen way too many big earners spending almost $3,000 per month on car payments,” says financial planner Joseph Carbone of Focus Planning Group. Since most cars are worth 20–30% less when you drive off the lot, Carbone says cars are one of the worst ways to spend your hard-earned cash.

To avoid the inevitable budget drain that comes with financing expensive cars, Carbone suggests trying to cut your car bill in half.

“Save the difference for an emergency fund, retirement, or college education,” says Carbone. “You would be amazed by the effects of one simple change.”

It’s also good to keep in mind that overextending yourself with credit cards or things like auto loans can have an adverse impact on your credit scores, even if you earn a lot of money. It’s especially true if you start making late payments or worse, default. You can keep track of how your spending is affecting your credit scores by getting your two free credit scores, updated every 14 days, at Credit.com.

Final Thoughts

Earning a huge income can be an enormous financial blessing, but only if you make smart financial decisions along the way. If you spend all of your money, fail to plan for the future, or assume your wealth will last forever, you could be in for a rude awakening.

To make your money last, you have to make it count. High earners may earn more than most people, but they’re just like everyone else. The only difference is, they have farther to fall.

Image: gradyreese