5 Steps To Take Once You Start Earning A Lot Of Money

Photo by Mikhail Nilov

I was listening to a speaker recently who said his teenage son asked “Is $60,000 a year a lot of money?” to which the speaker replied, “It is until you make it.” Ain’t that the truth! But what if you find yourself making “a lot of money?” Maybe you’ve cracked the six-figure mark, upleveled to a HENRY, or found yourself in the seven-figure club.

If you have recently become a high earner, or see it happening soon, it’s important to know how to manage your money.

You want to avoid the “Mo’ Money, Mo Problems” paradox and that starts with planning. When we make more money we tend to spend it, expect it, and wonder what happened to it. Before that new income gets absorbed into your budget to cover your new “adjusted” cost of daily living, be mindful of your money. A few strategic steps put you in control of your budget, your choices, and YOUR MONEY.

Where do you begin? Start by equipping yourself with the financial knowledge to craft a solid plan. Here are four tips to help you take control of your money so that you can enjoy what you’re earning while still growing and protecting your assets.

Lock It Away

Start with savings. Wherever you are in your financial journey, an emergency fund is the first step to put in place. This rainy day fund is a safety net against uncertainty and life’s little emergencies that pop up when you least expect them. 

Dave Ramsey defines it this way: “An emergency fund is money you set aside for life’s unexpected expenses, like car repairs, hospital visits, and even job loss. This money gives you the power to hand over cash to cover the big and small surprises that come your way.”

Start with your first $1,000 set aside, but don’t stop there. Three to six months of living expenses is the goal for a fully funded emergency fund, and more is better in the face of rising inflation and layoffs.

One of the most sensible things you can do is to “lock away” a portion of your money in a high-yield savings account. There are always savings accounts out there that allow you to earn a lot of interest on your money, sometimes up to 8% or more, but with the proviso that you are not able to access that cash easily, if at all. This is wise, because you will earn money on your money, and you won’t be able to fritter it away.

Pay Down Debt with High-Interest Rates First

Should I pay off my debt or invest my extra cash? They are both worthy goals. But one debt worthy of payoff priority is high-interest debt. While the term “high” can be subjective, a good rule to follow is to prioritize paying down debts with interest rates over 6%-8%. This means things like car loans and credit cards. For example, a credit card with a 17% annual interest rate should be prioritized over maximizing your 401(k) contributions.

And while there’s no right answer for everyone on how to juggle debt repayment taking time to look at your financial big picture, identifying high-interest debt, and making a – I’m going to use that p-word again – plan can empower you. Attack your debts from smallest to largest so you get those little “wins” along the way!

Contribute to a Retirement Account and Invest

With anything left over, you could and should invest. Set up automatic payroll contributions to a 401(k), and if you are self-employed, there’s a similar range of retirement accounts available to you.

A Traditional or Roth IRA should be part of your plan. A Traditional IRA is tax-deferred, meaning you pay taxes on withdrawals, but a Roth IRA provides tax-free withdrawals because post-tax monies are used. Consult a professional who can walk you through the best fit for you.

Smart investing is an essential part of wealth building. With a savvy approach to investment, you are going to find that you’re much more likely to grow your money. The nature of investing, however, is that there is always risk involved, so you should bear that in mind and make sure that you are only investing what you can afford to lose – and that you are doing so carefully and safely.

Give To Charity

Giving to charity gives back to you as well. You feel good about yourself, it benefits the community, and there are even tax benefits for charitable giving. If you believe in a cause, being able to support it with your money is a win-win.

There are many ways to find and support charities and causes that align with your values and goals. There are many charity organizations to donate to, so you will need to do your research to ensure that you are happy with the one you are donating to.

How much should you donate to charity? That depends. If you’re still paying down high-interest credit card debt, that will be your priority.  The percentage given to charity might be a bit less for a while and that’s okay. Do your homework, have a plan, and stay the course.

Treat Yourself

If you’ve been working hard for a long time without much of a break, now could be a good time to treat yourself to something special. Perhaps it’s time to go on a holiday or buy something that you’ve had your eye on. Whatever it is, this is a great way to feel good about yourself and to see some real material benefits from earning all that money. If you find yourself staring down an impulse buy, try using Glen James’ 1% rule: If you want to spend on something — a non-necessity — that costs or exceeds 1% of your annual gross income, you must wait one day before buying. Doing or buying things that bring you joy should also be part of the budget. A well-planned splurge can be a good investment.

Bottom Line

Getting into the high earners club is just the first step. In my research there are five important money activities in your life:

  1. Earning
  2. Saving
  3. Investing
  4. Spending
  5. Giving

All are briefly discussed above. Once you start making more, you’ll want to rethink your financial habits and find ways to protect and grow your finances. With some planning, you can build wealth, have fun, and leave a legacy. As Dave Ramsey says “If you don’t tell your money what to do, you’re going to wonder where it all went.” You’re going to be the boss of every dollar!

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