Almost anyone will tell you that building wealth is a long-term game. Apart from winning the lottery or stumbling into a massive inheritance; there’s no overnight method for building a seven-figure net worth.
There are plenty of proven techniques you can use, however, during your peak earning years to maximize the money you earn. Developing a personal strategy based on these principles will set you up for major gains over the coming few decades.
Four Tips for Scaling Your Net Worth
Are you familiar with the acronym HENRY? It stands for high earner, not rich yet. In other words, it’s a term used to describe people who earn a significant amount of money (six figures or more) but have yet to build substantial net worth.
Sometimes HENRYs are the byproduct of irresponsible personal finance and money management. Others find their way into this category as a result of being weighed down by business debt, student loans, childcare, taxes, and basic living expenses.
Either way, it’s time to escape the rat race! Here are four essential tips you can use to scale your net worth during your peak earning years.
The first investment you make is in yourself. If you don’t understand personal finance, investing, and wealth building – at least from a top-down perspective – you have almost no chance of becoming successful in your effort to expand your net worth.
Anybody can make money. Wealthy people know how to manage the income they’re accumulating. They regard money not as a signal that they’re performing as they should, but as a resource for crafting the lifestyle they desire.
When you seek to educate yourself, try to learn from as many different sources as possible. One of the beauties of the Internet is that you can spend hours gathering opinions from various blogs, YouTube channels, membership sites, white papers, news sites, and figures on social media.
Avoid getting too cozy with any one person or resource. Instead, spread out your energy across multiple areas and take the average of what you learn.
Diversify Your Portfolio
One of the keys to wealth building (and risk reduction) is diversification. Putting 100 percent of your net worth in a single asset or asset class is a crucial mistake. You need to spread it out across a variety of investments, so as to reduce the likelihood of any single negative event potentially wiping you out.
Proper diversification in the current marketplace depends on your net worth, cash flow, and goals. However, you’ll likely want to consider options varied as cash, stocks, bonds, CDs, mutual funds, tax-advantaged retirement accounts, cryptocurrency, real estate, insurance, and annuities.
Take Real Estate Seriously
Study a cross-section of wealthy people across the globe, and chances are you’ll find the majority have a significant portion of their net worth allocated to real estate. This is not a coincidence; it’s because real estate works.
Worried about the time commitment required to manage your real-estate investments? It’s as simple as
hiring a property management service to oversee all the day-to-day responsibilities. This preserves your time (and emotional health), while giving your portfolio exposure into real estate.
Avoid Lifestyle Inflation
Lifestyle inflation or lifestyle “creep” is one of the biggest obstacles to wealth building for high income earners. As the name implies, this is when your lifestyle creeps up alongside your income to the point where you’re not actually increasing cash flow or investments.
To better understand what lifestyle inflation is and why it’s important to avoid this snare, let’s discuss an example. In this illustration, here’s what your income and expenses look like:
Year 1 Income: $50,000 Year 1 Expenses: $40,000
Year 2 Income: $60,000 Year 2 Expenses: $50,000
Year 3 Income: $100,000 Year 3 Expenses: $90,000
Year 4 Income: $200,000 Year 4 Expenses: $195,000
On paper, this kind of income growth looks amazing. You’ve essentially quadrupled your earnings in a four-year span. The problem is that your expenses rose too. In fact, while your lifestyle may be pretty awesome, you actually have less investing power and liquidity in year four than you did in year one.
There’s nothing wrong with enjoying some of your hard-earned money and rewarding yourself for generating more. But your investments should scale with your income.
As a general rule, at least 25 to 50 percent of every pay increase should go directly into cash savings or investments. If you did that in the example above, your $200,000 income would produce somewhere around $75,000 in annual investing power.
You’d still get to enjoy a luxurious life based on $125,000. Not bad!
Now’s The Time to Hit it Hard
There are times to coast and times to grind. Your peak earning years are the grind time. This is when you push the pedal down and get to work.
Even if it involves only three to five years of intense investing on the front end, your commitment to building wealth will be rewarded in the years that follow (when it becomes time to coast).
From financial education and portfolio diversification to real estate investing and everything in between, we hope this article serves as an encouraging resource to get you moving in the right direction!