If you are a high-income earner you may be wondering whether you are making the most of your financial situation and whether your money is working as hard as you are. Wealth building is an approach that enables you to maintain your current lifestyle whilst ensuring you are effectively setting yourself up for the future. If you would like to know the top five financial tips for high-income earners, continue reading.
Make time to take action
It is likely that you feel as though you do not have the time to take action with your finances and therefore it always seems to be a task that gets pushed to the bottom of the list. The first piece of advice is that it is crucial to make time for your finances. Failure to do this is likely to result in your finances being pushed to the bottom of your list for another year or five, which is time you can never get back.
Studies have also found that expert financial advice can boost an investor’s return by 3.75 per cent (Russell Investments), and thus taking immediate action is vital if you wish to get on top of your financial situation and ensure your income is being used to effectively maintain and grow your wealth. If you are not sure where to begin, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser to determine if we can guide you on your financial journey. To read more about our transparent fee structure, as well as the private wealth package available, you can click here.
Cash flow management
You may think you know what you are spending, however, it is likely that your current perceptions of your spending may not reflect your reality. The best way to ensure you have a clear and accurate understanding of your cash inflows and outflows is to construct a budget. You can use how often you get paid as the timeframe for your budget i.e., on a weekly, fortnightly, or monthly. Your budget should include the income you are earning such as your salary, investment property income and dividends. You should also account for your expenses such as rent, mortgage repayments, bills as well as household, travel and medical expenses. Despite earning good money, it is also crucial that you save a portion of your earnings so that you can continue to maintain your lifestyle in the years to come, and a budget can help to highlight how much money is being spent and what is left to be saved.
Wealth management and preservation
Now that you have a better understanding of your income streams and expenses it is important to structure your wealth in a way that not only maintains it but continues to build its value into the future. The first stage of this is to identify your goals and objectives over the short, medium and long term. This will enable you to implement a plan which allows you to achieve each of your goals without diminishing your wealth.
Short term goals could include paying off debt or loans whereas medium term goals may include saving for a house deposit or overseas travel. Your long-term goals are likely to be those regarding your retirement and possibly preserving your wealth for future generations. It is vital your goals are specific, measurable, actionable, realistic and timebound so that you can take the right steps to work towards achieving them.
A common mistake among high-income earners is failing to ensure their assets are diversified. Many high-income earners may be more inclined to invest in property, however failing to hold a range of investment assets increases your risk of loss and may not be giving you the best return on your investment.
Diversification refers to investing in a wide variety of asset classes such as domestic and foreign companies over a range of sectors in both defensive and growth assets. Doing this can also reduce the impact of short-term market volatility as different investments react in different ways and therefore, it is important to not put all your eggs in one basket.
Earning six figures is often synonymous with a high-tax rate and therefore high-income earners must ensure their assets are structured in a tax effective way to help prevent a significant amount of your earnings being swallowed up by tax.
A beneficial option for high-income earners to reduce their taxable income is through making contributions to their super. This could be through a salary sacrifice which refers to ‘sacrificing’ a portion of your pre-tax earnings into your super account which reduces your gross taxable income.
Concessional contributions are also taxed at a reduced rate of 15% within your super fund up to the cap of $27,500 and therefore is another tool to help reduce the taxable income of high-income earners. To read more about what super contributions are available to you, click here.
In conjunction with this, it is important high-income earners are aware of the Division 293 tax which is an additional tax for individuals who have a combined taxable income that exceeds $250,000. The 293 tax is charged at 15% of an individual’s taxable income, and therefore reduces the tax concessions for these contributions if your income exceeds the threshold.
This tax is payable on top of the standard 15% contributions tax, however, does not apply to non-concessional contributions which are made in excess of the cap of $27,500. What this means is that if you earn more than $250,000 per year, the total tax payable on your concessional contributions before the cap is 30%. To read more about this tax, click here.
Another tax minimisation strategy involves setting up a trust fund. This has the potential to reduce the taxable income of high-income earners as any tax incurred from the assets held within a trust fund is passed onto the beneficiaries who receive the income and thus, is not borne by the original owner of the asset. To read more about how a trust fund could benefit you, click here.
If you would like to take action with your finances and are seeking advice on how to manage and maximise your wealth in a tax-effective environment, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.