Do you have a great job with a generous salary or have started a business that has taken off but still find you’re living paycheck to paycheck?
You’re not alone. Many HENRYs (high earners, not rich yet) early in their careers find it difficult to juggle their increased finances and expenses.
Whether you’re at a booming tech company, just started your medical practice or recently passed the bar exam, don’t make these same five mistakes that thousands of young, high earners make each year.
1. Running up Credit Card Debt to “Keep up With the Joneses”
Having the newest car and best wardrobe is fantastic, until you apply for a mortgage and find out your credit score is less-than ideal. How much you run up on your credit cards makes up 30% of your total FICO credit score.1 If you’ve got a low score, you will likely pay higher interest rates or have trouble getting a business or home loan.
If you are using your credit card, try to use less than 30% of your total credit limit to keep your score in check, and don’t forget to pay off that balance each month. Keeping luxury purchases to a minimum will reduce stress and allow you to maintain your lifestyle, even through retirement.
2. Not Saving for Retirement
The last thing anyone wants is to see their paycheck shrink just to be put into an account they can’t touch for years to come. Although it isn’t the most exciting way to spend your new income, saving for retirement is more important now than ever. General guidelines say to save between 10-15% of your income, starting in your 20s.2
Putting off saving for even five years as a HENRY could mean a difference of tens of thousands of dollars to your retirement account. Even those with student loan debt should think twice before neglecting their retirement account to pay extra on a student loan.
In 2016, between law, medical and dental programs, at least 69% of students graduated with student loans.3 However, student loan interest rates can be lower than expected returns on an investment account. For example, the interest rate on direct unsubsidized loans for graduate or professional borrowers for 2018-2019 was 6.60%.4 Although investment performance can never be guaranteed or promised, it is generally projected that a retirement account invested in globally diversified stocks can return around 7% on an average, annual basis.5
That means you could miss out on nearly 0.5% of a return each year by choosing to pay extra on a student loan instead of saving for retirement. This may not sound like much, but compounded over may years, it can add up.
3. Forgetting Estate Planning Documents
One of the biggest mistakes a high earner can make is forgetting to have estate planning documents. Not only does estate planning allow for designating who will receive your assets, it can also help you avoid hefty estate taxes and protect your personal assets (e.g., real estate, business, etc.). Getting a financial power of attorney, buy-sell agreements and a succession plan in place can ease your nerves, protect your successors and keep your wallet happy.
4. Having Inadequate Insurance
HENRYs need to ensure they have adequate insurance to protect themselves and their businesses. Lawsuits are not uncommon in high-profile positions, such as a doctor, dentist or lawyer. In fact, one in three physicians has dealt with one at some point in their career.6
Keep malpractice or professional liability insurance top of mind as you enter your career. With a high income, it is also important to look into life and disability insurance. At least one in four Americans will experience some sort of disability during their career.7 Having insurance in place and understanding what is available for long-term care can bridge that gap in income that someone with a disability could experience.
5. Not Negotiating
Successful millennials are likely to have several job offers. The company may be a great place to work, but that does not mean you need to immediately accept. There is a reason they picked you to work for them, and negotiating things like salary and benefits is not uncommon. Even young business owners can use negotiating to their advantage.
For example, if your practice is looking at different medical equipment companies, don’t be too quick to pick the first vendor that shows interest in you. Keeping your business costs down will not only cut costs but also keep your customers happy as your services remain competitive. Remember, the best vendor is not necessarily the cheapest. Up-front costs may be high, but time saved from staffing or repairs could ultimately be a deciding factor.
The best thing about these five techniques is that they can be started now, even if you were not yet applying them. By making these small adjustments early, you could be greatly impacting your future.
Want to get started with your planning? Contact us.