How to Translate High Income into Wealth

By Stuart Sutphin, CFP®

Congratulations! Your hard work has paid off, and your income is at, or above, where you dreamed it could be. Yet this payoff does not always correlate with the growth of financial wealth. And why is that? Could it be that you did not increase your savings as much as your income, or do you have a ton of debt in your life, or perhaps as your means grew, so did your lifestyle’s costs?

Know What You’re Spending

The first step to translating your high income into wealth is knowing where your money is going. It is easy to become reliant on mental accounting—and dangerous. Every time you swipe, insert, or tap your credit card, or sign up for automatic electronic payments, you remove the opportunity to see the actual cash go from your possession to someone else. As a result, it is easy to lose track of how much you are spending and how much spending is reasonable for your budget.

An easy way to track your expenses is to sign up for a free online service like Mint or some other budget-tracking software. Online budget-tracking software is great in the modern world for a few reasons. First and foremost, unlike older generations of people, you don’t have to reconcile your checkbook with bank statements, nor do you have to go to the ATM to pump out wads of cash for the week’s expenses. As a result, you have lost out on the organic opportunity to review where your money is going.

Nowadays, it’s all digital. Having an online budgeting tool that tracks your expenses in real time reduces the amount of effort you have to put forth while also showing you exactly where your money is going month to month. After a few months, you will begin to understand your spending patterns and where you spend more than is financially healthy (specialty beverages and going out with friends are common stress points in a budget).

Simply being aware of your expenses will subconsciously train your brain to recognize when you are about to make an unnecessary purchase—which can lead to thousands of dollars saved a year.

Invest for the Long Term

Great, you are tracking your expenses, you have started managing your expenses as part of a budget, and you have extra money! Now what? It is time to invest in something that will earn you money over the long run. Our firm believes that consistent and systematic investing over a longer period will aid you in your journey to a happy financial life.

An important note here: Focusing on getting the “most return for my money” can be a dangerous way to approach investing. If all of your focus is on getting the absolute highest return every year, you may feel encouraged to invest in places that offer poor-quality investments or are potentially speculative.

Sure, you may have a 20% return one year. But, if the next year that same investment is down 20%, you are actually lower than where you started, even though the percentage return might make you think you broke even. For example, if you invest $100 and earn 20%, you now have $120 (we are not including expenses or taxes for simplicity). Next year, you lose 20% on that $120, and you are left with $96. Therefore, the key is to invest with purpose.

Investing with purpose begins with defining what your future life vision looks like to you. This is an important step because it allows you to think about what it will realistically cost to live out the life that brings you the most value. It may cost more than you think, and sometimes it may even cost less.

Regardless, you don’t walk through a busy intersection in a city wearing a blindfold (at least, I hope you don’t!), so why take that approach with investing? By taking the time to identify what we value and what we want in our future, we can get a clearer image of the investment returns we need to get there.

Build Habits to Reach Your Goals

Ironically, setting financial goals—or goals in general—can be extremely motivating while we’re making them, and then extremely demotivating once we start thinking about how long it will take to achieve them. That’s why once your goals are set, don’t focus on them anymore. Instead, focus on how much success you are having in building habits to reach those goals.

As Thomas Sterner said in the book The Practicing Mind: Bringing Discipline and Focus Into Your Life, when you use a goal as a rudder and then engage in the process of reaching that goal, you are successful at your goal of reaching that goal at every moment. You take the observer’s mind where you simply observe whether your behaviors and habits are moving you closer to or further from your goal. Then you make any adjustments as necessary to realign yourself.

This way, emotion is removed from the process, and regardless of what you are doing, you are engaged in a successful process of growing and learning what is necessary to reach your goals.

Your Unique Journey

Each individual’s journey through life is unique. And for high earners who realize their net worth has not grown with their income, the solution may be as simple as taking a step back and looking at what you are doing.

Heightened awareness of financial habits, investing with purpose based on goals, and building habits to reach those goals make up a great founding recipe to get you on track with where you want to be. It is important to still balance your future savings with your current lifestyle. Savings and investing do not automatically mean you cannot travel or enjoy life in the present. Rather, take a moment to think about what is important to you and how to balance your current lifestyle with your future planning.

Schedule a complimentary consultation with a fiduciary financial advisor to discuss your personal situation.