Are you at a crossroads trying to figure out how high earners actually manage their investments? There's a whole lot more than just raking in the cash; it's about planting it smartly!
In this thought-provoking episode, I unravel the wisdom and strategies behind how high earners channel their finances into avenues that accelerate wealth. I will guide you through the principles of the "wealth priority ladder," where every dollar is earmarked for prosperity. You'll find out why some high earners are still caught in the paycheck-to-paycheck snare and how to sidestep that trap by smart management of both your earnings and outgoings.
Ready to revolutionize your approach to financial security and pave the path to true financial freedom? Plunge into the full podcast now!
IN TODAY’S EPISODE, I DISCUSS:
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TAKE THE FINANCIAL FREEDOM QUIZ:
Take this free quiz to see where you are on the path to financial freedom and what your next steps are to move you to a new financial destiny at http://www.YourFinancialFreedomQuiz.com
OTHER RESOURCES:
7-Day Money Plan Workshop: https://www.TheMoneyPlanWorkshop.com
Affluent Entrepreneurs Private Facebook Group https://www.melabraham.com/group/
CONNECT WITH ME:
Website: MelAbraham.com
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Instagram (@melabraham9): M
Are you at a crossroads trying to figure out how high earners actually manage their investments? There's a whole lot more than just raking in the cash; it's about planting it smartly!
In this thought-provoking episode, I unravel the wisdom and strategies behind how high earners channel their finances into avenues that accelerate wealth. I will guide you through the principles of the "wealth priority ladder," where every dollar is earmarked for prosperity. You'll find out why some high earners are still caught in the paycheck-to-paycheck snare and how to sidestep that trap by smart management of both your earnings and outgoings.
Ready to revolutionize your approach to financial security and pave the path to true financial freedom? Plunge into the full podcast now!
IN TODAY’S EPISODE, I DISCUSS:
RECOMMENDED EPISODES FOR YOU
If you liked this episode, you'll love these ones:
RECOMMENDED VIDEOS FOR YOU
If you liked this video, you'll love these ones:
TAKE THE FINANCIAL FREEDOM QUIZ:
Take this free quiz to see where you are on the path to financial freedom and what your next steps are to move you to a new financial destiny at http://www.YourFinancialFreedomQuiz.com
OTHER RESOURCES:
7-Day Money Plan Workshop: https://www.TheMoneyPlanWorkshop.com
Affluent Entrepreneurs Private Facebook Group https://www.melabraham.com/group/
CONNECT WITH ME:
Website: MelAbraham.com
YouTube: MelAbraham.com/tube
Instagram (@melabraham9): M
This is the affluent entrepreneur show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money, and scale your life while creating a deeper impact and living with complete freedom, because that's what it really means to be an athlete entrepreneur. All right, so you're a high income. Earner, or maybe you want to be. So here's the question. What do you do with your money? What do other high income earners do with their money? This is what we're going to focus on in this episode. I'm going to walk you through a framework, and I'm going to walk you through some of the things, the hierarchy and the priorities that are given to their money, their cash as it comes in. Here's what I know. You have the opportunity to pay bills. You have the opportunity to do vacations. You have the opportunity to do a lot of things. But are you truly building wealth? If you want to be on the path to financial freedom, then there are. Certain principles, there are certain priorities, and there are certain processes you want to follow because they're proven, they're time tested, and they work no matter what kind. Of economy we're in. I'm going to talk a bit about. That in this episode, and hopefully you find it of value. I'm going to jump to some slides. I'm going to build the framework. I'm going to walk you through it, and I'm going to go dig a little deeper on one aspect of the. Framework so you know specifically what they're doing to build wealth. All right, now, there is plenty of ways, so we're clear, to build wealth. You can be an entrepreneur, you can be a wage earner, you can be w two, you can be in startups. There's a lot of different ways to do it. I'm going to talk about a path. First and know that there's other things that I may be leaving on the table. We'll get to them in other episodes. All right, so let's just jump to it. What I want to do is really hit on something that we talk about in the affluence blueprint in my upcoming. Book, building your money machine, in the. Things that I do with my clients and my masterminds, my workshops and everything. Called the wealth priority ladder. Think about this money comes into your. World, what do you do with it? Do you know what to do with each dollar that comes in if we. Don'T see, I look at your money. As they're your employees, and the challenge is this. Can you imagine for a moment that you decide to hire 20 new employees. 20 new employees, and you bring them. In and you hire them and it's. Their first day of work, and you bring them into the conference room and you welcome and say, thanks for being here. Hey, as you noticed, I didn't give any of you a job description. I didn't give any of you any goals. I didn't give any of you any guidance. I didn't give any of you any metrics. But here's what I want us to accomplish. I want us to double our business in the next two years. Now, how successful do you think you're going to be? No job descriptions, no goals, no metrics, no guidance. Yet here's what most people do. They do that with their money. Money gets paid. They don't know what they're doing with it. It goes and they go. I don't know what happened. The money just went. It's because you didn't give it a job description, you didn't give it goals, you didn't even give metrics and you. Didn'T give it guidance. Well, the wealth priority ladder solves that. You'll see that the wealthy will do. Certain things, and there are certain accounts that I'll talk about that is deeper than the wealth priority ladder as we go through this. But I want to start with this as a foundation, that you need to have a priority of what your money is doing to make sure that it's moving you to a place that really starts to drive the value. Okay. And I'm going to just build up some of the model here. So let's just jump to the model real quickly. And so the first thing that I. Think everyone needs to do, even high. Earners, is to understand that we need. To have what I call a comfort fund. It really is something where we get. A chance to know that if something. Happens, we're not in trouble. I saw an interesting statistic, it's an. Interestingly sad statistic that over 70% of people that make less than$50,000 live, check to check, 67% or 69% if I remember correctly, that make between 50 and 100,000 live check to check. And over 47%, almost half that make over $100,000 live check to check. That's a travesty. How is it that when we have. People in the six figures, that half. Of them are still living check to. Check. And we need to solve that. Now, some of it is expense structure. And if you're at lower incomes, I get it. But what ends up happening with many of these folks, especially at the higher. Levels, is that if they're living check. To check, it's because they allowed their. Life to expand as their income expanded. And they didn't do things to give them the cushion for any kind of negative thing, any kind of downturn, any kind of occurrence, any kind of thing. And it's important. I was just having a conversation with. A friend who went through a situation. Where he ended up burned out and he needed to take a break. But if he didn't set himself up financially to financially sustain himself during that break time, he couldn't have taken the break. He would have had to push through the burnout and just keep going, which. Is not easy to do and it's. Probably detrimental to your health. So he had the ability to do it because of this. And he follows something like the wealth priority ladder. So we want to be in a situation where you have, what I say is this comfort fund. Now, the comfort fund isn't your emergency fund. This is a situation where you aren't going to have to break the glass and go into debt because something happens. And if you have an emergency fund, the comfort fund becomes obsolete. But at the very beginning, when you're. First starting out, I want you to. Have $1,500 or one month's expenses. I want you to know that you have the comfort of knowing that if the transmission goes out or the AC. Goes out or something, that you're not. Going into debt, that you have that money put aside in a high yield cash account to take care of things. That's the first piece of this. The second piece of this is to. Realize that we need to eliminate consumer. Or what I call destructive debt. Destructive debt to me is any debt. That doesn't increase your cash flows or increase your net worth. It's for consumables, it's for lifestyle. So we're going to get rid of. That at the outfront because it is a parasite to your prosperity. It is a parasite to your wealth and your financial future. So if you need to get rid of it, we can talk about debt payment plans. If you need to get rid of. It, I have a tool that is free. You can get it. You can just go to melabraham.com nodet. You'll get the debt breakthrough calculator. You can put your debt in there. You could schedule it out. It'll tell you what to pay, when to pay, all that stuff. And there's a short training on how to use it. It's a free tool. Go get it. Let's get you out of debt. Now, that's the second piece. But this second piece isn't done in isolation. There are some people that will tell. You, get yourself completely out of debt first. And I get it because indirectly, if. You'Re at a 20% interest rate, every dollar you pay is saving you 20%. Here's why I say that we ought to be looking at it differently a. Little bit, is that your debt management. Muscle is different than your wealth creation muscle. There are two different muscle groups. Having a wealth creation mindset is different than, hey, I got to dig out. Of a hole, but there is no. Reason we can't dig out of the hole. Maybe a little slower while we're building the mountain. At the same time. These two pieces. Or three pieces, if you will, are. Kind of done in concert with each other. So what ends up happening is that. You'Ve got the consumer debt that we're working on. But at the same time, I want to make sure that you have a peace of mind fund. This is the true emergency fund. And in this peace of mind fund. I want to be nine to 18 months. Call it twelve months. Three to six months isn't enough. Especially if you're an entrepreneur, especially if you're up in age, especially if you're the sole breadwinner to the family, especially if you have a unique kind of job that isn't easy to replace. And so it's really important to do that. So at this stage, what you're doing. Is taking whatever extra cash you have. To get out of debt and build the peace of mind fund. Now, at some point, you will be out of debt. At some point, you'll have a peace of mind fund. You might be out of debt before the peace of mind fund is fully funded. You might have the peace of mind fund before the debt is fully paid off. As soon as one of these categories is done, this is when you move to the next stage, and that next. Stage is where you start to work towards your freedom. This is where I want to focus. This is where we're going to turn. Around and look at what do we do next. Now, there's a couple of stages beyond this, but I want to focus on this right now, because what we try to do is get our clients in a situation where they are putting away 20% to 25% of their income in. Different investments to build their wealth. And that's what we're going to really. Dig into is say, what do they do? How do they allocate their money for wealth creation and everything, especially if you're a high earner and you have cash flow to do that with and everything. Let's just jump to this and we'll dig little deeper into some of the elements that go into this for doing that. So we're going to just focus on. This freedom line item. And the very first thing that you're. Going to see that they do is. That they're going to take into consideration. The 401 match from their employer. Here's the thing. If you have an employer that has. A, they're willing to match it for you. You're effectively turning around and creating something. That is going to create free income. If they're going to give you a. Dollar for something that you put a. Dollar in, that's 100% return. In my book. Okay. In my book, that's 100% return. And too often we leave that on. The table and we shouldn't. The high earners know that because you'll see that these first two categories are going after the free income and the free money that is available to them, and that's the employer match. So the first thing they do is they'll put money towards the employer match, and they'll make sure that they get. 100% of the employer's money in that. The second thing that you'll see happen here is that once they get the, they'll also take advantage of what we call the ESPP, it's employee stock purchase plan. Now, not everyone has access to this. Certain companies will have a stock purchase plan. Typically it's publicly traded companies. For instance, my wife works for a company where she gets a chance to. Buy the company stock. And because she can buy the company stock and she's an employee there, she. Can buy the stock at a discount. So the discount could be anywhere from ten to 15%, typically. And so what she's going to do is that if the stock price is$100 and she has a 15% discount. She can get the stock for $85 a share immediately. She's in the black. She's making money. Now, some of these you cannot sell right away, so they're restricted. But if you are in an employee. Stock purchase plan that is fully liquid, you can buy at a discount and. You can immediately sell and make income. And what we would tell people to do in some cases, depending on the. Volume, is that you can sell and. Then move it into a more diversified portfolio. So not all your wealth is sitting in the company that you're actually working for, because now, all of a sudden, if the company has problem, you get laid off and the stock price goes down, you get double hammered. But the high earners that work for companies that have these types of programs, they will take into consideration and take advantage of it, because both the ESPP. With a discount is free money, ten. To 15% discount, plus the employee match. So employer match. So those two things are probably the first things that they'll focus on, just to make sure that they get access. To the free money. The third thing that they will then. Look at is to look at a Roth IRA. Now, if they're high earners, they may. Not qualify for this. Because right now, in the year that we're filming this, if you're single and your adjusted gross income is over 161,000, you can't use a Roth IRA. Now, Roth IRAs are powerful, because what. They are is that when you put. Money in, you don't get a tax deduction for it. But when you put money in and. It'S invested and it grows, when you. Take the money out, it's 100% tax free. So it is truly a tax free account. You pay the tax up front, and that's it. That's why they limit it and say. They limit what you can put in. And they limit it if you have high income. So in a Roth right now, you can only put in $7,000 if you're under 50. If you're 50 or over, you can push it another. So you can't put a lot in there. And if your income is over 161,000 as a single and 240,000 as a. Married filing joint, currently you're not eligible for it. But if you are eligible for it, they will max it out. They'll put the full amount in there. To make that happen. Then they'll look at the next tranche. The next step. The next step is that they'll come back to the. They'll max it out. The current contribution limits for the. So 23,000 if you're under 50. If you're 50 or over, you can. Put an additional $7,500 in, and so. You can put$30,500 in to a 401k. Here's an interesting dynamic. Some 401 ks these days actually have a Roth element to it. So you could put your money into a Roth element and get the same type of Roth treatment, and you completely avoid the income limitations that don't allow. You to use a Roth IRA. So this is the next piece that. Most high earners will go to, is. They'Ll put it into a 401 and they'll max out. Their next piece that you'll see them. Do is they will go into an HSA account. Now, I did a whole separate video on hsas, but understand what these, this is called a health savings account. Again, it doesn't apply to everyone, because. In order to have an HSA account, a health savings account, you must have. A qualified, high deductible health plan. And if you have a qualified, high. Deductible health plan, then you can put money into an HSA account. They are wonderful, powerful accounts if they work for you. But if you have a lot of medical costs and stuff like that, you may not do it. Like, I don't have one because of. All the medical costs and the constant check ins and checkups and everything post cancer and all that stuff. So we don't use an HSA, but here's how they work and why they're so powerful. You can put, currently, as a single. Individual, you can put$4,150 away, take. A tax deduction for it. If you're married, you can put$8,300 away, take a tax deduction for it. And you can have that money invested. And the beautiful thing is that if. You have the cash flow, that investment. Will grow completely tax free. And when you take the money out. Of the HSA account to pay qualified medical expenses, it's completely tax free. So you got a deduction, and you. Got to pay your medical expenses tax free. Now, the way to do this and. The way we try to work with our clients to do this and the. Way we recommend it is to not draw out of the HSA, because what. We want you to do is take. The tax deduction and fund it if you qualify. So you take the tax deduction, we. Fund it, we invest it, and we let it grow. You have medical expenses. You pay those out of pocket. Okay? And then you put those receipts, you scan them, you put them in a folder, a digital folder or whatever, and there is no time limit on those receipts. So now you have this HSA that. Maybe you're funding for ten years, and. It'S grown to now 200,000. If it never changed and you funded $8,300 over ten years, that's$83,000. But because it's invested, the$83,000 has probably turned into call it 160,000. 200,000. Okay, so say you have 200,000 in. HSA a decade from now, but you only invested 80. Now you need some money and you. Need it for the kitchen remodel, or you need it for something else. You pull out some of those old receipts and say, I need$5,000. I get $5,000 of old medical receipts, medical expense receipts from the folder, no matter how old they are. And I reimburse myself the $5,000, and. I can reimburse myself for that $5,000 completely tax free. But I allowed it to grow, and now I still have this account. And at age 65, you can start. To look at it as if it was an IRA. You don't want to take it out for non qualified expenses before age 65 because there's a hefty, hefty penalty of 20% on that. So they will look at an HSA if they have the eligibility, by having a high deductible plan, they'll max it out and put that money in there to make that happen. It leads to this next piece. Now, these next two pieces are really interesting. One is the possibility of a backdoor Roth. It sounds like it's illegal because you're. Saying it's a backdoor Roth. No, it's fully 100% legal. They tried to close this loophole, but. Most of the people that are trying to close it, use it. So the thing is that if you don't have the ability to make a direct Roth contribution because of income limitations, there are no limitations on a Roth conversion. And so the way that this works, if you're eligible, and there's some nuances. Here, is that you would make a. Nondeductible regular IRA contribution. You can do that up to 7000 or 8000, depending on if you're 50. And above currently, you would make this. Non deductible IRA contribution. So you didn't take a tax deduction for it. You would leave it in cash because you don't want any earnings on it right away. You're going to wait a couple of days, and then you're going to convert it to a Roth. So you would do a Roth conversion. On the amount, then you can invest it. And so it's a backdoor Roth. Now, there are some limitations here. Now, one, when you put money in a Roth, it needs to sit there for five years. So you can't get at the money. For a minimum of five years. Two, if you have other iras, there's this nuanced rule that I'm not going to get into here called the prorata. Rule, which can trigger a tax. So if you're thinking of doing a backdoor Roth, and you have other IRA. Accounts that are out there, then you. Want to talk to an advisor that can look at it with you to help make that happen. But a backdoor Roth is a possible. Way to avoid not being able to. Do a Roth because of the income limits. And that leads me to. This next. Piece, which is the mega backdoor. Okay, this is different. It is, again, something that doesn't apply to everyone. And what a mega backdoor Roth is. Is this, is that you're in a. 401 plan at your employer. Now, this 401K plan has to allow. It has to be set up this way. So not all plans are set up this way. Most new plans have this provision anyways, but the plan needs to allow for what we call after tax contributions. You can make a contribution to a. 401 that is out of your salary, that is pretax. In other words, you don't pay tax. On it, and you pay taxes when. You pull it out. You can make it, in a sense, that is a Roth contribution. So you don't take it as a deduction now, and you don't have to pay tax when you get it out. And then you can do this thing called an after tax contribution. Now, in order for you to do this, and the reason that people will do this is that you have. Remember I said the 401K has a maximum of 30,500 currently if you're over 50, or 23,000 if you're under 50 in doing that. So you've maxed out that you got the employee match. But the way the provisions and the rules are that you can actually put up to almost 70,069,$67,000 into a 401K plan if they allow for it. So you could do that as an after tax contribution. Here's the thing. It has to be a provision in. The plan that allows it, and you would make an after tax contribution to the 401K plan. Then the plan would have to either allow an in plan conversion or an in service distribution. I know I'm throwing terms out there. If you're going to do one of these strategies, then it is important that you work with someone that understands how to orchestrate it. So if you get an in service distribution, you're basically rolling it from the plan into a Roth. You're creating a Roth conversion by doing that. Now, the thing that you need to be careful about is you don't want. To do this too early and too. Much in advance, because there's a maximum amount that you can put into a. Includes the amount from your salary, after. Tax distributions and the employer match. And if you put too much in the after tax contributions, the employer match gets squeezed out and you lose the free money. So you want to make sure you max, this is why we do this. You max the employer match first, and. Then you max out your salary contribution. Then you see what you can do. For the after tax mega backdoor Roth. The reason this is powerful is because. You can get past the income limits. If it allows for it. It can get past the income limits. For the Roth IRA, and you can fully fund and get high funding into. A retirement account that becomes completely tax. Free down the road. It's a huge thing that if your 401K plan has the provision for after tax contributions and in service distributions or in service conversions, then you should be. Able to do that, and it allows. You to put a lot more money. Away into a tax advantaged plan. So that's this step and then the final step. What they'll do at this stage is. Now they'll look at and say, all right, then I'm going to put it. In my regular brokerage account, because they're. Going to take advantage of, if you look at what's happened, they took advantage of the free money first, the tax advantage money second, maximizing the tax advantage third. And then they're looking at the regular brokerage account. This is your Schwab, your TD Ameritrade, which I guess is Schwab now, Fidelity Vanguard, your regular brokerage account, you got money left over. You're going to put it in. This is basically the game that the. High earners are playing, and it's going. To allow you to start to go into and say, where do I want to allocate my money? We start with a wealth priority ladder. We go through those first three stages. There's three more stages after that. But in that third stage, we then break it down into these categories and say, which one of these apply to me? Which one can I maximize? And do it in that sequence, because it will maximize your ability to build wealth. It will maximize the free money. It will maximize the, take advantage of the different tax rules that apply to you. Now, in there, you would have to decide what the investments are, which is a whole separate discussion. But this is how the high earners use their money to build wealth. I hope you found this of value. I hope that you'll get on this. Journey of financial freedom because I truly. Believe that financial freedom is your birthright. We just have to go to claim it. And I'm here to guide you. That's what this show is about. That's what this channel is about. That's what my book's about. All right. And in the process, if you have questions, if you have comments, do me a favor, reach out to me, let. Me know because you don't have to do this isolated or siloed. I'll be on the journey with you and so will a community of like. Minded people just like you. All right, till I see you in another episode, see you on another show. Always strive, live a life. Thank you for listening to the affluent entrepreneur show with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the affluent entrepreneur Facebook group now by going to forward slash group and. I'll see you there.