At Pro Hockey Advisors, we often see high-earning clients struggle with effective money management. Contrary to popular belief, budgeting for high income earners is just as crucial as it is for those with more modest salaries.
In this post, we’ll explore strategies tailored to the unique financial challenges faced by high earners. We’ll cover practical tips to help you maximize your wealth and align your spending with your long-term goals.
Why High Earners Need Budgets
The Lifestyle Inflation Trap
High income earners face unique financial challenges that often go unnoticed. As income grows, so does the temptation to increase spending. Expenditures rose by 9.1 percent in 2021, after declining by 2.7 percent in 2020-only the third time average annual expenditures had fallen in the recorded history. This unchecked spending can erode wealth faster than it accumulates.
Tax Implications and Complex Finances
High earners often encounter more complex tax situations. The progressive tax system means that as income increases, so does the tax rate. Without proper planning, a significant portion of earnings can go to taxes. Additionally, high-income individuals may have multiple income streams, investments, and financial obligations that require careful management.
The Myth of Financial Security
A common misconception exists that high income automatically translates to financial security. However, a survey by CareerBuilder found that more than three-quarters of workers (78 percent) are living paycheck-to-paycheck to make ends meet. This fact underscores the importance of budgeting regardless of income level.
Preparing for Financial Volatility
High incomes can fluctuate, especially in industries like professional sports. The average NHL career lasts just 5 years (according to the NHL Players’ Association). This short career span emphasizes the need for careful budgeting and long-term financial planning.
Maximizing Wealth-Building Opportunities
With higher income comes greater potential for wealth building. A well-structured budget can help identify opportunities for strategic investments and savings. For instance, maxing out retirement accounts (like 401(k)s and IRAs) can lead to significant tax savings and long-term wealth accumulation.
Budgeting for high earners isn’t about restriction-it’s about optimization. It’s a tool to ensure that your money works as hard as you do, aligning your spending with your long-term goals and values. Whether you’re a professional athlete or a high-powered executive, a solid budget forms the foundation of lasting financial success. In the next section, we’ll explore effective budgeting strategies tailored specifically for high income earners.
How High Earners Can Budget Effectively
Adapting the 50/30/20 Rule for High Incomes
High income earners need a different approach to budgeting. We recommend a 50/30/20 split instead of the traditional 50/30/20 rule. This means 50% for needs, 30% for wants, and 20% for savings and investments.
This savings rate builds wealth over time. For example, an annual income of $500,000 allows you to save $100,000 per year. Over a typical 5-year NHL career, that’s $500,000 saved (not accounting for investment growth).
Implementing Zero-Based Budgeting
Zero-based budgeting is a powerful tool for high earners. This method offers several advantages, including focused operations, lower costs, budget flexibility, and strategic execution.
List all your income sources for the month. Then, assign each dollar to a category until you reach zero. This approach prevents money from slipping through the cracks and ensures that your entire income works towards your financial goals.
Aligning Spending with Personal Values
Value-based spending is essential for high earners. It’s not about deprivation, but about intentional spending on things that truly matter to you.
Identify your core values and long-term goals. Then, evaluate your current spending patterns. Are they aligned with these values and goals? If not, it’s time to make adjustments.
For example, if family is a top priority, you might allocate more funds to quality time activities or future education savings. If career development is important, you might invest in additional training or networking opportunities.
Tracking Expenses Meticulously
High earners often overlook small expenses, which can add up quickly. Use budgeting apps or spreadsheets to track every expense, no matter how small. This practice provides a clear picture of your spending habits and helps identify areas for improvement.
Regular Budget Reviews
Set aside time each month (or quarter) to review your budget. This allows you to adjust for changes in income, expenses, or financial goals. It also helps you stay accountable and motivated to stick to your financial plan.
The goal isn’t to restrict spending, but to optimize it. By aligning your budget with your values, you’ll find greater satisfaction in your financial decisions and be more likely to adhere to your budget long-term. Now, let’s explore how to maximize savings and investments to further accelerate your financial growth.
How to Maximize Your Wealth
Maximize Retirement Account Contributions
High income earners have a unique opportunity to build substantial wealth over time. One of the most effective ways to build wealth is to maximize contributions to tax-advantaged retirement accounts. Another little-known strategy allows high earners to use after-tax contributions to a 401(k) to fund a Roth IRA. It’s called a mega backdoor Roth.
For 2024, the contribution limit for 401(k) plans is $23,000, with an additional $7,500 catch-up contribution for those 50 and older. Self-employed individuals or those with additional income should consider a SEP IRA, which allows contributions up to 25% of compensation or $69,000 (whichever is less).
The power of compound interest cannot be overstated. A 25-year-old NHL player who maxes out their 401(k) for just five years and then never contributes again could have over $1 million by age 65 (assuming a 7% annual return). This illustrates why early and aggressive saving is important, especially given the typically short careers in professional sports.
Diversify with Additional Investment Vehicles
While retirement accounts are essential, high earners should explore additional investment options to diversify their portfolio and potentially increase returns. A diversification strategy is designed to help your investment portfolio generate more consistent returns over time and protect against market risks. Consider a mix of:
- Index funds: These offer broad market exposure with low fees.
- Real estate: Whether through direct property ownership or REITs, real estate can provide steady income and appreciation.
- Private equity: For accredited investors, private equity can offer higher potential returns. However, it’s important to understand the risks and illiquidity associated with these investments.
- Municipal bonds: These can be particularly attractive for high earners in high-tax states, offering tax-free income at the federal and potentially state level.
Balance Liquidity and Long-Term Growth
While long-term investments are important, maintaining adequate liquidity is equally vital. We recommend keeping 3-6 months of living expenses in a high-yield savings account. As of November 2023, some online banks offer APYs of over 4% on savings accounts.
For funds you won’t need for 3-5 years, consider laddered CDs or short-term bond funds. These can offer higher yields than savings accounts while still providing relatively quick access to funds if needed.
Regular Portfolio Review and Rebalancing
The key to successful wealth building is consistency and discipline. Regularly review and rebalance your portfolio to ensure it aligns with your goals and risk tolerance. As your income grows, resist the urge to increase spending proportionally. Instead, funnel that extra income into investments to accelerate your wealth accumulation.
Seek Professional Guidance
Creating personalized investment strategies that balance current lifestyle needs with long-term financial security can be complex. Professional financial advisors (such as Pro Hockey Advisors for those in the hockey industry) can help create tailored strategies to make your money work as hard as you do, setting you up for financial success long after your playing career ends.
Final Thoughts
Budgeting for high income earners optimizes financial resources to achieve long-term success. Effective strategies include the adapted 50/30/20 rule, zero-based budgeting, and value-based spending. These approaches align money with goals and values, while maximizing retirement contributions and diversifying investments build lasting wealth.
Regular budget reviews and adjustments keep financial plans on track as income, goals, and circumstances change. This proactive approach helps navigate unique challenges of high incomes, including complex tax situations and lifestyle inflation temptations. Professional hockey players and others in the sports industry face short career spans and volatile incomes, making sound financial planning essential.
Pro Hockey Advisors offers expert guidance on career management, contract negotiations, and financial planning for athletes. A well-structured budget serves as a roadmap to financial success, whether at career peak or planning for life after sports. Implementing these strategies today takes the first step towards a secure and prosperous financial future.
