Are high earners really better with money?

You’ve got your paycheck, and you’ve got your wishlist items in your shopping cart – but before you splurge on yourself this 11.11 Singles Day, have you taken some time to assess your finances?

If you’re a high earner, you may be in a demographic of people called the HENRYs – High Earners, Not Rich Yet. This refers to individuals who are presently earning high incomes (between $250,000 to $500,000 annually, averaging $20,000 a month), and have the potential to be wealthy later in life. However, their “rich” status comes largely from their working income, and not from accumulated wealth. According to the 2020 Singapore census, 13.9% of households in Singapore are earning at least S$20,000 a month.

Even if you’re technically not a HENRY if you’re not earning those 6-figures (yet!), you may still consider yourself a high earner, and also make the same mistakes as other high earners. For instance, if most of your earnings are diverted to expenses rather than wealth-building investments, you could be hindering your ability to accumulate wealth in the long run. This is very common if you are supporting your parents in their retirement as well as your children – i.e. you are part of the Sandwich Generation.

What are the common mistakes that high earners make?

1. Lifestyle inflation

Many high earners fall into the trap of increasing their spending as their income goes up. Changes to one’s lifestyle can increase the daily cost of living, such as going from taking public transport to splurging on a car and making monthly car loan payments.

While some lifestyle inflation is good (e.g. spending more on preventative healthcare, healthier food), consider other areas in your life where your expenses can remain the same or not rise too much.

2. No cash flow management

If you are making a high income every month, you may start to take for granted that you can afford every expense that you make on your credit card. Worst-case scenario is, you may inadvertently rack up credit card debt if you’re not aware of your spending habits. Even if you don’t accidentally accumulate debt, not knowing what you are spending on every month may prevent you from taking a good hard look at your finances.

Having and sticking to a budget is the first step to achieving your financial goals, and gives you a clear picture of your expenses from which you can optimise your savings rate.

3. Low savings rate and no goal-setting

Your savings rate is the source of your future financial power. Simply put, the more you save today, the more you will have in the future – which matters a lot especially if you’re no longer working your high-income job.

It helps to have an idea of what you would like to achieve in the future – are you planning to have a wedding, or buy a house? Are you looking to pay off your student loans? What is the minimum amount you’d like to have for your monthly retirement income? Having goals helps to give your savings a direction and can motivate you to keep up with your financial plan.

4. Not enough protection in case of emergencies

It may take only a simple accident or an unexpected layoff to throw your cash flow in the red if you’re not sufficiently prepared to buffer against the financial cost. At the very least, have an emergency fund that can cover 3 to 6 months of expenses in the event that you are no longer able to work. Put aside a small percentage of your income every month to build this up, and do not touch this pool of money except for real emergencies.

It is also important to ensure that you have sufficient insurance coverage to protect yourself and your lifestyle. Consider a basic health insurance plan to cover hospitalisation costs, and a life insurance plan if you are supporting dependents.

5. Not investing properly, or at all

Perhaps you’re a cautious person and don’t want to take on any risk without proper research. Yet, you may be in a profession that takes up a lot of your time, and setting aside time to do research on investing and financial instruments may be the furthest thing from your mind. Or on the other end of the spectrum, you may be taking on too much risk, and investing only in highly speculative portfolios because that’s what you see your peers doing. Regardless – not investing enough, investing too recklessly, or not investing at all may sabotage your future financial health and erode away your spending power.

Maximising your investing strategy as a high earner

As a high earner, you are in a privileged position to make wise financial decisions and achieve your goals. Once you have addressed the basics of your cash flow management (budgeting, managing your expenses), savings rate, and wealth protection (insurance, emergency funds), you can start to look into ways to optimise your investing strategy to maximise your advantage of earning a high income.

1. Reduce your taxable income

Singapore operates on a progressive tax system, which means that higher tax rates apply to higher levels of income. While beneficial to society on a whole, you may feel the pinch as your increased income tax eats away more of your hard-earned money.

There are ways to reduce your taxable income to lower your income tax rate, and that is by contributing to tax-advantaged accounts. In Singapore, you can top up your CPF (Central Provident Fund), up to S$8,000 for yourself and another S$8,000 for your parents’ accounts (up to S$16,000 of tax relief a year for CPF contributions). 

If you would like more flexibility with your retirement savings and portfolio options, you can consider topping up your SRS (Supplementary Retirement Scheme) account where your contributions would be eligible for tax relief (up to S$15,300). Your investment returns are also tax-free before withdrawal, and only 50% of the withdrawals will be taxable at retirement.

However, be mindful not to sacrifice liquidity for tax relief! Maintain some cash in more liquid accounts in case of emergencies.

2. Diversify your investment portfolio beyond retirement accounts

While topping up CPF and SRS works great for tax relief, you might benefit from diversifying your investment portfolio outside of your retirement accounts to give you potentially better returns. Depending on your risk tolerance, you can look into bonds, stocks, ETFs, index funds, and unit trusts. Index funds and ETFs are great options if you are new to investing, or if you don’t like to actively manage your investments.

3. Consult a financial expert

There are many facets to financial planning beyond basic budgeting, such as estate planning, tax planning, investing, insurance – on top of your day job, it’s a lot to look into. As a high earner, not only can you probably afford to hire a professional to manage these matters for you, but you would also benefit greatly from getting expert help. A financial advisor with niche expertise would have experience and knowledge that you don’t, and it would free up your time to do other things that are more meaningful to you.
 

As you work hard to make money, make your money work harder for you.

As a high earner, you are in a more privileged position than many to make choices that would benefit your future financial health. Don’t fall into the trap of being the “working rich,” where you are only rich when you’re working, and would struggle if you’re not.

A comfortable life looks different for everyone at any income level. With your financial resources and more prudent planning, you can find a healthy balance between a comfortable lifestyle now and in the future.