Managing Wealth Wisely: Tips for Young High-Income Earners

For young professionals experiencing tremendous success and making high incomes early on, financial management becomes critical. Whether you're a business owner or a young tech executive, it’s essential to avoid the pitfalls of lifestyle inflation and ensure that your wealth continues to grow sustainably. Here are some key strategies to make sure you don’t mess this up.

Understand Your Take-Home Pay

If you're making a high income annually, you'll face significant tax obligations. If your income is around 500k gross then after taxes, you’re probably looking at around 23.5k/mo of take-home pay, assuming you’ve maxed out a 401k. Here are some steps to effectively manage this income:

Maximize Retirement Contributions

Start by maximizing your contributions to retirement accounts. If a Mega Backdoor Roth is available, use it. For business owners, create this opportunity. Employees at companies like Humana, ADP, UPMC, HN, Google, and Microsoft often have access to these plans. In 2024, you can contribute up to $69,000, combining a Roth IRA and other matched components.

Implement a Reverse Budget

Create a reverse budget by determining your essential lifestyle costs and ensuring the rest of your income goes directly into a savings or investment account. This helps control your spending and prevents commingling lifestyle funds with savings.

Separate Fixed and Variable Expenses

Maintain two checking accounts: one for fixed expenses (mortgage, utilities) and one for variable expenses (dining out, vacations). Aim to keep your total mortgage payments under 30% of your take-home pay, which would be about $7,000 a month.

Save and Invest Half of Your Income

Ideally, save and invest half of your net take-home pay. This isn’t just about meeting your financial goals but about controlling your spending habits. If your income changes, you’ll have the flexibility to maintain your lifestyle without financial stress.

Create Short, Mid, and Long-Term Buckets

Divide your savings into three buckets:

• Short-Term: An emergency fund and an opportunity fund for purchases within the next five years. Use treasuries currently paying about 5% for these savings.
• Mid-Term: If you have children, invest in 529 plans for college and brokerage accounts that are direct-indexed for tax efficiency.
• Long-Term: Besides your Mega Backdoor Roth, maintain a Roth IRA through backdoor contributions and invest in equities for tax efficiency. This ensures you’re on track for early financial independence.

Control Your Money Temperature

High-income earners often tie their identity to their jobs and may not retire early. The goal is to work because you want to, not because you have to. By managing your income wisely, you’ll achieve financial independence sooner and can adjust your lifestyle spending as needed.

Automate Your Finances

Automate your finances to reduce decision fatigue. With separate accounts for fixed and variable expenses, you can manage your spending effortlessly and focus on making important financial decisions without being bogged down by daily budgeting.

By following these steps, you’ll ensure that your high income continues to grow and support your lifestyle sustainably. Remember, the key is to manage your wealth proactively to maintain financial stability and achieve your long-term goals.