Convert High Income to Wealth with Just a “Touch” More Planning

4th Sep 2014

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Turn HISE people into HNW clients

One of the missions of every financial advisor is to help clients convert income to wealth. Research confirms that as many as 50% of high-income people spend most of what they earn, so steady guidance from an FA can make all the difference in raising the percentage of income saved each year.

For us, having so many high-income people spend most of their hard-earned money is troubling, because one of the great values of earning a $200,000+ income over a number of years is the ability to set up a wonderful retirement, by dedicating just a portion of that annual discretionary income to wealth-building.  Although most people don’t start thinking seriously about saving for retirement until their mid-40’s, if you talk to them about income-to-wealth conversion strategies, you may just bring forward by a few critical years that inflection point where “retirement concerns” suddenly pop onto their personal financial radar.

One of the attractions of high incomes is the relief of budgetary stress. All the basic bills are paid. Your clients can afford luxuries that make life more comfortable. They can take great vacations.

One of the pitfalls of high income is social stress. Keeping up with their preferred social crowd can start a “luxury arms race” that can severely impact a family budget.

In our view, then, the ability to build “net worth” can sometimes come down to building “self-worth!” Can you gauge a client or prospect’s mindset on how they manage their social position?

  • How well do you resist the need to acquire the latest expensive accessory?
  • If a friend acquires a fancy new item (car, watch, phone), do you feel the need to match that with a new toy of your own?
  • Do you plan vacations to impress others, or to give your family and yourself the restful break you need?
  • Do you buy expensive cars or lease them?
  • Did you buy a very nice house in a great neighborhood because that serves as a strong reflection of who you are?
  • Do you own more pairs of shoes than there are days to wear them, and a handbag to match each pair?

We prefer a mindset of “reasonable luxury” or “practical luxury.”

  • Earning a high income does give you the ability to afford nice experiences and things.
  • It does not demand, however, that you buy the most expensive version of these things, or more of them than you need.
  • You can “keep up with the Joneses” in some ways, and ignore their excesses in others.
  • You can step one level down in either neighborhood or size of house (or both) without denting your own self-worth.
  • You lease the expensive car, and turn it over every two years to satisfy your need for a great set of wheels.
  • You wear the clothes you buy for a while before refreshing your wardrobe, and ration your visits to shoe stores.

We don’t recommend enforced frugality, but selected frugality! A little less spontaneity in a high-earner’s purchasing patterns can reap great rewards in developing their ability to keep right on buying luxuries for decades to come!

How do you work with clients to embed more income-to-wealth habits? Do you discuss their lifestyles with them? Do you find them open to ideas that inject a bit more financial discipline into their behavior? How has that worked?

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