News
Wealth management tips for high earners
Do you earn more than six figures or more?
For high earners, focusing solely on budget may not be the most effective strategy. As income levels increase, the principles of personal finance evolve.
High-income earners often find that their time and energy are better invested in broader financial strategies rather than getting bogged down in the minutiae of budgeting everyday expenses.
Instead, many high-income workers could benefit from shifting to strategic investing, wealth management, and financial automation to create greater financial freedom.
What defines a high earner
A high-income person is generally considered a person who earns in the 95th percentile or higher for their age group. According to Statistics Canada, this is what the top 95th percentile earns by age in 2021, after taxes:
-
From 20 to 24 years old: $50,000 or more -
From 25 to 29 years old: $76,000 or more -
From 30 to 34 years old: $94,000 or more -
From 35 to 39 years old: $108,000 or more -
From 40 to 44 years old: $118,000 or more -
Ages 45 – 49: $126,000 or more -
From 50 to 54 years old: $128,000 or more
If you fall into this category, you are statistically considered a high-income earner.
Redefining financial priorities
If you fall into a lower income bracket or are simply struggling to keep up with monthly expenses, you may find more benefits in budgeting and controlling your expenses.
Once you’ve identified areas where you’re overspending, you can start cutting back and reallocating funds to pay off debt or start building up your savings.
For high earners, however, I recommend a slightly different strategy. While budgeting shouldn’t be completely neglected, people with higher incomes in Canada can benefit most from strategic investment strategies designed to grow their wealth over time.
Beyond the basic budget
While the basic budget provides a framework for managing daily expenses, higher earners should elevate their financial strategies and focus on maximizing the return on their resources.
This involves engaging in active asset management, as opposed to simply sticking to the budget. It means creating systems that manage large-scale investments, estate planning and tax strategies that can have a significant impact on global wealth accumulation.
Time versus money
Once you reach a higher income bracket, time often becomes more valuable than money.
Traditional budgeting can be time-consuming and only make a marginal difference compared to the difference you would see if you invested the same amount of energy into finding new outlets to invest in.
By using financial tools and services that streamline or automate your money management, you will have time to pursue bigger and better opportunities.
Strategic investment
High earners have access to a wide range of investment opportunities that can generate significant returns over time. Here are some of the most popular investment strategies to consider:
-
Real estate: Invest in commercial properties, land or even real estate investment funds (REITs) -
Stock market: Build a diversified portfolio of dividend-paying stocks or invest in exchange-traded funds (ETFs) that generate consistent profits over time -
Private equity: Invest directly in private companies for higher potential returns -
Guaranteed Investment Certificate: Buy a GIC from banks that offer a guaranteed return on your investment over a certain period of time
Each of these investment avenues offers unique advantages and levels of risk. One of the smartest investing strategies is to spread risk by balancing high-risk/high-reward investments with lower-risk/lower-reward investments, depending on your risk tolerance.
Wealth Management Strategies
Even the smartest investors often employ qualified financial advisors to get a second opinion or streamline their wealth management. These professionals provide personalized advice tailored to individual financial situations and goals.
In some cases, it is often advisable to hire experts in different areas (i.e. real estate investing and stock market investing).
One of the most valuable services financial advisors can provide is periodic portfolio audits. They can scour your portfolio and make adjustments to minimize your risk exposure while maximizing your long-term profits.
If you go this route, try looking for fee-for-service planners as they only charge a one-time fee for their services.
Tax optimization
Canada has a progressive tax system, which means the more income a person earns, the higher percentage of tax they will pay. People with lower incomes are taxed at a lower rate compared to people with higher incomes. You can see a full breakdown of Canada’s income tax brackets on the page CRA website.
While those earning higher incomes are taxed at a higher rate, they are also given opportunities to reduce their tax obligations by investing in their retirement, their communities and taking advantage of legal tax exemptions.
Tax optimization involves several strategies:
-
Deferral techniques: Utilize retirement accounts and other tax-deferral options to reduce taxable income -
Income division: Distribute income among family members in lower tax brackets to reduce overall tax burden -
Investment in tax-efficient vehicles: Choose investments that offer tax advantages, such as RRSP retirement accounts, or claim deductions on business or real estate investments
Planning your wealth
Finally, a characteristic of the rich is that they know how to optimize their estate planning so that their wealth remains in the family. The best way to do this is to work with a qualified estate planner to create and eventually execute your will.
For many, though, the first step is to increase their income so they can get to the point where they can start investing comfortably.
Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of Canadian readers daily on his website. Incredible wealth website.
Do you have any questions, tips or story ideas about personal finance? Please send us an email at dotcom@bellmedia.ca.