Yahoo Finance 6 Things You Must Do When You Start Making 7 Figures
If you started making a seven-figure salary — first, you should celebrate, as this is no small feat. You’re part of a very small group of Americans earning a salary of more than $1 million. Indeed, according to Greenlight, a meager 0.3% of Americans fall in that category.
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“If you’ve boosted your earnings to a million dollars per year, congratulations! Take a moment to treat yourself to a nice meal with your loved ones, and then put a couple of these steps into practice,” said Scott Lieberman, founder of Touchdown Money.
As many experts noted, once one falls into this higher-earning bracket, there are many financial factors to consider — as well as pitfalls to avoid.
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Reconsider Your Tax Planning
This entails taking advantage of any tax planning strategies that are available to you — which is not only looking for ways to reduce your tax liability, but ways to plan tax efficiently over the long term, said Jason Dall’Acqua, CFP, founder and financial advisor at Crest Wealth Advisors.
He added that potential strategies include: pre-tax retirement contributions, Health Savings Accounts, mega-backdoor Roth contributions through you 401(k), utilizing deferred compensation plans, charitable giving, investing tax efficiently in a brokerage account and incorporating whole life policies or annuities into your plan for tax deferral.
Paul Gabrail, founder and host of Everything Money, also underscored the importance of researching tax implications.
“While it shouldn’t be something to worry about, understanding tax implications at seven-figure income levels is worth noting,” said Gabrail. “And if you can live somewhere with great tax benefits without a hit to income … why not?”
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Review Your Estate Plan
As Jake Skelhorn, CFP, co-founder of Spark Wealth Advisors, noted, making seven-figures usually does not happen overnight.
“So if you’ve been earning close to that for some time but just recently crossed into $1 million-per-year territory, you’ve probably accumulated a significant level of investments, properties, business,” he said.
In turn, he recommended sitting down with an estate attorney and reviewing your estate documents, such as a will, power of attorney, beneficiary designations and trusts.
“This will ensure that if the unthinkable happens, your family or other beneficiaries will inherit your belongings without going through probate, and ideally with as little estate taxes as possible, if any,” he said.
Consider Assembling a Support Team
Erika Kullberg, attorney, personal finance expert and founder of Erika.com, deemed this a “smart step” to take once you’ve hit the seven-figure earning mark.
“Managing a large income isn’t easy, and you don’t have to pressure yourself to handle it alone,” she said.
Hiring a financial advisor, tax planner, etc. can help you optimize your wealth management strategies and cover whatever areas of financial management that you feel less confident in handling, she added.
“It’s also extremely helpful to have a financial professional whom you trust in your corner whenever a big — or even little — money issue comes up,” she said.
Avoid Lifestyle Creep
It can be tempting to inflate your lifestyle by buying a lavish home and cars and picking up expensive hobbies and habits, noted Skelhorn.
While there’s nothing wrong with this if you have a financial plan that factors in this spending, it can be detrimental if spending goes unchecked and spirals out of control — not to mention if it doesn’t actually bring you true happiness, he added.
“We’ve all heard the stories of lottery winners and sports stars that go broke — don’t let that be you!” he said.
Boost Your Savings
Don’t assume you’ll earn seven figures every year, cautioned R.J. Weiss, CFP, CEO of The Ways to Wealth.
“Save as if your income could drop significantly,” said Weiss. “Build a substantial emergency fund and invest wisely to ensure long-term financial security.”
Carla Adams, founder and financial advisor at Ametrine Wealth, echoed the sentiment, saying that you should make sure that you are still saving a least 10%-15% of your income.
As your earnings get higher, it’s easy to fall into the trap of inflating your lifestyle. Yet, the more you increase your lifestyle spending, the more you are going to need to save for retirement to keep up with this lifestyle you got accustomed to, she said.
“It’s easy to fall into the trap of telling yourself this money is going to keep coming, but you really never know,” she added. “Continue to live below your means, save and invest.”
Some experts go even further. For instance, Dana Anspach, founder and CEO at Sensible Money, said that to have a reasonable chance of maintaining your lifestyle into retirement, you’ll likely need to target a 30% savings rate, or at least $300,000 a year, that you add to retirement and brokerage accounts.
Reassess Your Portfolio
Kullberg recommended diversifying your investments, as once you start earning a significant amount annually, it’s crucial to spread your investments across various asset classes.
“This can help mitigate your overall risk and ensure you’re not reliant on one source of income,” she said. “Diversification can eventually lead to stable income returns and protection against economic volatility.”
Lieberman also argued that now is the time to re-analyze your portfolio and perhaps consider another investment strategy.
“Are you being aggressive enough with your money? Can you afford to pursue a riskier strategy? Asking yourself some honest questions can help you plot your strategy,” he added.
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