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Common mistakes high income earners make

By Pauline Muindi | July 5th 2020

While a high income makes it easier to live a wealthy lifestyle, it doesn’t automatically translate into being truly wealthy. The income can buy you a sprawling home, sleek cars, and glamorous leisure activities. But these trappings of wealth aren’t wealth itself.

Without making a conscious effort to adopt good wealth-creating habits, one can find themselves still struggling with debt and expensive bills even when they have a high income.

No matter how much money you’re making, you don’t have an unlimited supply of cash. Spending like you aren’t aware of this fact can mean financial disaster, especially if you lose your main source of income or aren’t able to work anymore.

Here are some of the top money mistakes high earners make and how to avoid them:

Not having a budget

If you have recently started earning a six-figure salary, the extra money might make you feel like you don’t have to worry about budgeting anymore.

Without a budget, you’re more likely to overspend instead of increasing your savings rate.

As a six-figure earner, you might assume that your good fortune will last indefinitely, hence spend too much of your hard-earned money. But anything can happen tomorrow.

A pandemic can see you laid off from your job, you might get into an accident, get ill and so on. By having a budget to keep your spending in check, you will have more money saved and invested to weather financial storms.

Most wealthy people create their wealth by saving as much as 50 per cent or more of their earnings, which they then channel into various investments. Savings rate is the gap between what you earn and what you spend.

A person who earns Sh100,000 per month and saves 50 per cent of it will build wealth faster that one who earns Sh1 million and spends every penny.

With a higher income, you should have an easier time saving. Take full advantage of this fact to build your future financial power. The more of your earnings you can save and invest, the more you’ll be able to make from those investments, creating a virtuous cycle of compounding returns.

Succumbing to lifestyle inflation

When your income doubles or triples, it makes sense that you’d want to adjust your lifestyle accordingly. This often means moving into a bigger house in a better neighbourhood, upgrading your car, and taking your children to more expensive schools. These changes come with smaller but expensive lifestyle changes such eating out at fancy restaurants, buying designer clothes, owning expensive gadgets and going on expensive vacations.

This trend, known as lifestyle inflation, can insidiously keep you surviving from hand to mouth even when you’re earning a six-figure salary. But just because you got a pay raise doesn’t mean you should change your lifestyle.

A smart move would be to channel the extra money into your savings and investments, until your investments can earn you the lifestyle you desire. Instead of making drastic changes in lifestyle, you can gradually change your lifestyle without compromising your financial future.

Not minimising on taxes

If you earn most of your income from your own business, you are likely to get hit with more taxes as your business grows. If you aren’t smart about taxes, you can end up paying steep penalties that set you back financially.

By properly planning your taxes, you can considerably minimise your tax liabilities. We’re not talking about using illegal tax evasion tactics. Bear in mind that tax evasion in Kenya can have you paying double the amount of tax you were evading or even land you in jail.

You can minimise the amount of money you pay to the government in taxes in various legal ways. For example, the Income Tax Act provides a 150 per cent investment deduction if an investor sets up a manufacturing plant outside three major cities: Nairobi, Mombasa, and Kisumu.

You can also use tax-advantaged accounts and other financial products that help shield part of your income from tax. It is best to work with a tax professional or a financial advisor, who have a better understanding of the tax system.

Investing by yourself

The best way to grow your wealth is through investing. This way, you get your money to work for you and multiply. You can invest your money in appreciating assets such as real estate, government bonds or the stock market.

Investing by yourself is alright in the beginning stages, when you don’t have enough funds to hire advisors. If you choose to do your own investing, you must also be willing to put in the time to research on how to optimise your portfolio. However, most high-income earners are too busy with their job or business to have time for the kind of research required.

When you aren’t doing investing correctly, you can lose potential long-term gains by paying high fees and improper risk allocation. If you can afford to, it is a great idea to consult a professional. A good investment advisor will help you optimize your portfolio to meet your long term financial goals.


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