After years of living frugally in a modest fixer-upper, working long hours to pay off student debt, and paying down their mortgage, intensive care doctor Mark Soth and his wife felt ready to splurge on a dream home.
No matter how much you bring home, there’s never an unlimited supply of cash, and mistakes with big price tags can lead to expensive outcomes.
A decade ago, they bought a 24-acre rural property outside Hamilton, Ont. and built a house and a barn. The family of four later realized they would have been just as happy with something half the size. A smaller abode would come with lower maintenance and tax costs, fewer toilets to clean and a smaller lawn to mow. “It’s a classic doctor mistake, to get a bigger house than what you need,” says Soth, with a chuckle.
On his personal finance blog looniedoctor.ca, Soth called the house and barn “my dirty little 10,000 sq.ft. secret.” The couple also knows when they try to sell, it might be difficult to find a buyer. “The price range and uniqueness will mean that we are selling into a very limited buyer pool,” Soth writes on his blog.
Overspending on a house, or on multiple real estate properties, is just one financial blunder high income earners make. No matter how much you bring home, there’s never an unlimited supply of cash, and mistakes with big price tags can lead to expensive outcomes. Here are some of the other common money errors that high net-worth individuals make, and how to avoid them.
Blair Evans, IG Wealth Management’s director of tax and estate planning, says one of the most common mistakes high earners make is “not starting early enough” with a savings and retirement plan, he says. Their good income gives them a false sense of security, and they assume there’s always enough time to put money away. However, in retirement, those used to a comfortable lifestyle, and with high living costs – a vacation property, travel plans and nice cars – will need a big nest egg, the kind it takes years to build up. While there is no firm rule about when to ramp up retirement savings, “starting as early as possible is better,” says Evans.
Spending too much
Many high-income earners have a desire to “keep up with the Joneses,” or they often reward themselves for their hard work. If you live large, you can’t save. Soth suggests “living like a resident” – even if you’re not a doctor – as long as you can. Live frugally while you pay down debts, build equity in your home and start saving. Over time, make larger spending and lifestyle changes, and get financial advice on how to balance saving and spending. “Make sure to plan appropriately when it comes to an asset purchase, whether it’s a house purchase, a car purchase or anything of that nature,” says Evans.
Not paying attention to tax
Business owners who pay themselves via dividends, or are self employed, should be aware that they can get hit with high taxes, especially after an abrupt rise in income. “You can get a large tax bill at the end of April and if it’s not paid, it could result in interest as well,” says Evans. “The problem could get bigger and bigger.” Get in the habit of paying installments throughout the year and work with a financial professional to better plan ahead for taxes.
Failing to use an RRSP
Using registered savings plans to their full potential can help ease some of the tax burden high income earners face. While this may seem obvious, Evans says many people aren’t using RRSPs or TFSAs to the maximum extent possible. The point is to invest in an RRSP when you’re in a high income bracket – and receive a tax refund, which you can then reinvest – and pull money out at retirement, when you’re on a lower tax bracket.
Invest on their own
Many high net-worth people think that being successful at business means they’ll be good do-it-yourself investors. Soth used to pick his own stocks, but found he was spending a lot of time getting mediocre results. “You may be smart, you may be able to research and control your emotions at your job, but that doesn’t necessarily translate into being successful at investing,” he says. It’s always a good idea to get a professional to manage the family’s money. “High income earners are still going to be involved in decisions, but they can have someone working on their behalf, to minimize the amount of time they spend on investing,” says Evans.
When it comes to dealing with money, everyone makes mistakes. Unfortunately, high-income earners are in the position to make even bigger ones.