The 7 biggest financial mistakes high income earners make

We work with a lot of high-income earners at Bounce Financial. Whilst a high income can really help you achieve your financial goals, there are some additional pitfalls you need to watch out for.

In this blog post, I’ll outline the 7 most common ones we see.

#1: Assuming you can easily replace your job

When you’re just starting out in your career, it’s easy to move from job to job without too many concerns. But as you get more senior, replacing your job becomes a lot harder.

If you are made redundant or want to leave a job early in your career, it’s common you can have something lined up in the next couple of weeks. But for more senior people who are looking for the RIGHT job, a job hunt can take months.

At this point in your career, you don’t want to just accept any job that is offered to you. You want to take the time to interview, meet with your network and find the right fit.

In addition, for executives, your job is not guaranteed like it was when you were younger. CEOs on average last less than 5 years before being moved on.

What this means is that you need a good emergency buffer sitting around to give you flexibility. This shouldn’t be invested but should be liquid and ready to access at all times.

Too often I see executives with too much money tied up in inflexible investments and small emergency buffers (or even worse credit cards). I would usually suggest at least 12 months of expenses for higher income earners outside of your investments to ensure you have quick access to cash when needed.

This can be in a high interest bank account or on an offset account, but you need to be able to access it without worrying about market timing.

#2 Getting caught up in lifestyle inflation too quickly

I often meet big income earners who aren’t very wealthy. When it comes to wealth, it doesn’t matter how much you earn, but how much you keep.

Whilst some lifestyle inflation is desired when you earn good money, doing it too quickly can disadvantage you significantly.

Once your income increases, the goal is to minimise your lifestyle inflation. This will allow you to save and invest this money.

Once your investments are earning money, then you can bring up your lifestyle spending without too many concerns knowing you can always fall back on your investments when you stop earning.

But if the first thing you do is upgrade your house, car and put the kids in an expensive school, you’ll find yourself quickly wearing golden handcuffs.

#3 Not considering non-concessional superannuation contributions

Once you start earning good money, tax becomes a big part of your finances.

With the top tax rate set at 47%, investing and earning money can be a slow grind when the tax man wants his half.

Most high-income earners I know are maxing out their concessional contributions to super. This is usually happening automatically based on the fact that the normal 11% of their salary is a lot.

But what most high-income earners are missing out on are ‘non-concessional contributions’.

These are contributions where you don’t receive an immediate tax benefit, but once in the fund and invested, all earnings are taxed at 15% (and 0% when you retire).

The benefit of non-concessional contributions is you can put a LOT more into super than your concessional contributions. As these investments earn money, they are only taxed at 15% instead of investments in your own name being taxed at 47%.

Especially as you approach retirement age, these contributions can make a big difference to how much money you end up with.

#4 Investing in their own name instead of through their partner/family trust/investment bond etc.

A common mistake I see when it comes to investing, is people investing in the name of the person who is most interested. In many instances, this is the higher income earner and can cost you a lot in tax.

When you’re a high-income earner and have the capacity to contribute a lot to your investment, it’s worth setting up the right structure from the start.

For smaller amounts, this may be simply investing in your partner’s name. For larger amounts, this could be investing through a family trust, a company or an investment bond.

#5 Investing in high-risk investments before setting up the lower-risk investments

Higher income earners tend to get access to investment opportunities which come up in their world. This might be a commercial development opportunity, or an angel investment in a start up.

Whilst these might be good investment opportunities, it’s important to remember that these sorts of investments come with a lot of risks.

I would usually suggest getting your financial house in order before leaning heavily into these higher risk investments. This means setting up the lower-risk, more likely investments and getting yourself into a position that you can succeed before taking on more risk.

By all means, allocate a smaller part of your portfolio to these higher risk investments, but avoid putting yourself in a position where you may lose everything.

#6 Not getting the right insurances (life, TPD, income protection etc)

Most people will have a base level of insurances in their super fund. The amount is usually the same regardless of whether you earn $60k per year or $600k per year.

If you’re a higher income earner, it’s likely your insurance is SUBSTANTIALLY less than what you would need if something were to go wrong.

Particularly whilst you’re building your wealth and have things like mortgages and young kids, you really can’t afford not to get this right.

#7 Not hiring the right team

In most cases, the mistakes I see above are because people didn’t put in place the right team early on.

Whilst it can be tempting to try and DIY your finances instead of reaching out to a financial adviser, the cost of getting it wrong becomes greater the more money you earn.

Not only do I suggest having a good financial adviser, I also suggest getting a great accountant and lawyer.

In our role as financial advisers for our clients, we will usually come up with a plan for your finances and outline what team you need to assist. We can then introduce you to a great accountant or lawyer or work with one you’ve found to give them all the information they need to succeed.

If you’re a high income earner and want to know you’re getting it right from the start, then please drop us an enquiry on our website. We work with clients all over Australia and would love to hear from you.