High Income = Higher Wealth Creation? #TheCEOEdition
Does high income always translate into higher wealth creation? Let’s learn together!
Research shows that the top 5% of high-income earners often express feelings of discontentment with their current level of wealth creation. There is, however, a strong desire to do something about it. The absence of a formal wealth-building strategy and heavy reliance on a company share plan to accumulate personal wealth can be partially responsible for causing this feeling.
A positive lateral shift in the mindset is needed to treat bonuses and company shares as the cherry on top and a robust financial plan as a strategic priority to accomplish one’s personal lifestyle, financial big-rocks, and retirement goals.
Realistically speaking, it’s never too late to start working on a bullet-proof game plan to fully materialising your dreams #YouOnlyLiveOnce.
At PrimeAdvisory, our Senior Advisors can help you with a complete professional suite of services, such as Cash Flow Management, Savings Plan, Asset Protection, Superannuation, Tax Optimisation, Home Loan Repayments, Debt Management and Reduction, Insurance, Investments, and Retirement Planning.
Lets look at the bigger picture!
Directors and Executives of companies are appointed to increase returns for the shareholders of the company they work for. They are well remunerated and rarely work less than the 40 hours a week they are obligated to work. In fact, a Harvard study tracking CEOs found that most work 62 hours on average a week.
In discharging their duties they selflessly put the company before themselves and their own finances and work on the assumption that “the more I earn, the wealthier my family will be”. This can be the case in the long run, but with strategic assistance, the wealth could be a lot bigger, arrive a lot sooner and have a transformative experience along the way.
Let’s take the example of an executive, Mrs. X, who earns $250k a year and a $50k bonus as part of her long-term incentive plan. Mrs. X has a partner who has not gone back to work in the last five years since they had kids together, and both their children are at school.
The Salary looks great on paper, so how is the money actually spent?
Time poor = high rate of spending
With limited available time, we tend to spend more money to ensure we enjoy the most of it. We may eat out more often and may book more fancy restaurants that offers the finest steak along with an exotic bottle of red. “Of course we do that, because all the people we socialise with do that too.” The entertainment often runs at $1k a week which equates to a family meal out, a few nicer lunches during the week, a nice meal out once a week, and the innumerable coffees and breakfasts along the way. It adds up real quick.
Being time poor also equates the number of jobs we outsource; cleaning the house, cleaning the cars, gardening, the personal training sessions, the pool guy. We know it’s true.
Luxury becomes the way of life
Holidaying becomes syonymous with business class tickets and luxurious high-end resorts. A $20k holiday a year and a few $5k local getaways during the year are an ordinary affair. When travelling for work is done in style, your personal travel tends to elevate to that level too. And once it goes up, it rarely goes back.
When we work hard, so the attitude towards spending is often ‘you deserve it’. Most people let their spending and lifestyle be defined by their income and once the lifestyle is inflated, it’s almost impossible to go back.
What’s your location
When it comes to the family home, the more you earn, the more debt you can afford. It is hard to resist the temptation to be in the ‘right’ location, with a nice big house with all the amentities and peripherals. Setting aside $5k a month for mortgage repayments is commonplace. A nice car in the garage is also a must, with generally one car leased at $1k per month. With the location, comes schooling. Having the kids at private school can cost $20k per child per annum depending on the school.
So, to answer the question earlier, does high income translate into building wealth?
In this example we have just spent the whole of Mrs. X’s annual salary excluding her bonus prior to the basic living expenses. We have not yet paid for the household running costs, food, car running costs, health bills and any other of the fixed expenditure that comes with a family.
Mrs. X is in the top 5% of income earners in Australia. But with a geared-up lifestyle, there is only small, if any, increases in ‘wealth’ each year – usually only super payments, the long-term incentive plan when received and any principal component of the monthly mortgage when not redrawn to pay school fees.
Building wealth isn’t easy. Especially when your focus is your work and you are working 62 hours a week. Add the time you are thinking about work and that doesn’t leave you with a lot of ‘free’ time. Then you need to prioritise the family, your physical health, mental health, other household chores – it is astounding to note that prioritising wealth building doesn’t rank number one on this list. It probably doesn’t even rank in the top ten.
At PrimeAdvisory, we are passionate about understanding where you are on your journey, being clear on your goals, partnering with you to create the right strategy and keeping you on track with regular catchups along the way.
We understand we might be only helping you in a small capacity at the moment, be it via helping you file your annual ITRs or overseeing your Self-Managed Super Fund (SMSF). However, it is always our intention, and even more so our mission in 2021 to be invested in understanding your overall strategic goals for life and implementing proactive strategies today so we can help you materialise all your dreams in 5 or 10 years from now, i.e., own a home; be debt-free, make the most of your tax benefits, structure a geared property, start an investment portfolio, consider a family trust and manage employee shares, etc.
With Prime 2.0, we hope to take our relationship to another level, make it seem less transactional, more transformational. Contact your senior advisor today. Let’s make this journey exciting and memorable for you.