Despite being in the top 1% of income earners, most executives don’t feel like they are building their own wealth. This is due in part to the lifestyle changes that come with the salary. There is also often a reliance on a company share plan to build personal wealth, rather than implementing a formal wealth building strategy. High earners need to shift that mindset and see bonuses and shares as the cream on top.
Higher income does not automatically translate to higher wealth creation
Directors and Executives of companies are appointed to increase returns for the shareholders of the company they work for. They are well paid 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 assistance, the wealth could be a lot bigger, arrive a lot sooner and have an improved experience along the way.
Let’s take the example of an executive who earns $350k a year, an $80k bonus and $50k of shares as part of a long term incentive plan. This person has a partner who, since children came into the scene 7 years ago, has not worked and two children, both at school.
Assuming no share price movement they will have $50k of shares which they are likely not allowed to sell within the first few years as company policy – written or not.
The salary looks good on paper, so how is the money actually spent?
Time poor = higher spending for conveniences and enjoyment
With limited available time, we tend to spend more money to ensure we enjoy that time. We may eat out more often and may book more expensive restaurants, order the more expensive wagyu steak, wine and desserts are a must! “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, a bottle of wine or two for the cellar, and the smattering of coffees and breakfasts along the way. It adds up quick.
Being time poor also tends to result in ‘buying back time’. This includes all the jobs we outsource; cleaning the house, cleaning the cars, gardening, the personal training sessions, clearing the gutters, the window cleaners for the second story, the pool guy. You are far less likely to tackle a home DIY job yourself when you are limited with time.
Luxury becomes the norm – fast
Holidaying becomes business class and 5-star hotels, but here’s where the there is some good fortune involved. Due to all the business travel there are generally points programs with airlines and hotel groups that bring the travel and accommodation component down. But the money spent on entertainment and shopping more than makes up for the good fortune with points programs. A $20k holiday a year and a few $5k local holidays or getaways during the year are commonplace.
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.
Lifestyle creep
As salaries increase, so does spending. The $10 coffee and croissant on the way into the office becomes a $30 breakfast meeting with eggs benedict and a side of avocado. You 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 you inflate your lifestyle it’s almost impossible to go back.
Location, 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 big house that you can entertain at. 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 $30k per child per annum depending on the school.
So, is the higher income translating to building wealth?
In this example we have just spent the whole of this executive’s after tax income excluding their bonus prior to the basic living expenses. We have not yet paid for the food, household running costs, car running costs, health bills and any other of the fixed expenditure that comes with a family.
Mentally this example executive is in the top 1% 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’re working 62 hours a week. Add the time you’re thinking about work and that doesn’t leave a lot of time left. Then you need to prioritise the family, your physical health, mental health, the household chores – its little wonder that prioritising building your wealth doesn’t rank number one on the list. It probably doesn’t even rank in the top ten.
If you want to get fit, you hire a professional trainer. If you want to build wealth, hire a financial planner
A lack of professional guidance is a scenario we see all the time. People that have been through executive roles for twenty years and have come out the other side burnt out and barely financially better off than many of the people that worked for them during that time. We have implemented plans with high income earning executives in the past that see them still enjoy the luxurious lifestyle, but grow enviable wealth which with visibility of the tangible benefit from their effort, allow them to continue to focus for longer. It removes a major stress from their life, the financial stability of their family.
Taking away the burden of growing their family wealth is making their life better and allowing them to focus on their job and spend more quality time with their family. Forrest Private Wealth was founded on the vision of making lives better. We achieve this by implementing proven strategies to build wealth, achieve financial freedom and get peace of mind.