Dave Ramsey's advice doesn't apply to everyone. Things change as your income and net worth go up.
Just look at any billionaire or even Multi-millionaire. They have debt. They're certainly not doing this because they're stupid.
Here's how you should handle your personal finances as you approach the highest tax brackets.
Budget for taxes
There’s nothing more painful than getting upside down on your taxes. I seen this first hand when I counseled one of my entrepreneur friends. Over a year ,his income increased radically, so did his lifestyle. At year end he realized he owed 30 something percent on 7 figures, that he didn’t have. Oops.
As your income increases, so does your taxes. There’s no magic way around it. Yes, there are some ways to lower your tax burden but nothing is going to radically lower it.
A quick word for all those with the mentality that ‘rich people pay no taxes’ or that there is some ‘major tax avoidance strategy’: BULLSHIT. High earners have to pay their share. Yes, for EXTREMELY rich folks, or companies (usually companies), with income earned overseas there are some big tax loopholes. For all your friends or snake-oil salesman that claim they have a legal loophole to avoid it… well the keyword is legal. It might sound good in their pitch, but in an audit you’re fucked.
Now back to the point. As a high earner, chances are your income won’t entirely be coming in the form of a W2. You’ll likely have business or rent income. Your taxes aren’t going away so plan on paying them asap. Estimate your taxes from every cash disbursement you take. Give yourself the haircut.
Save… But not excessively
Nope, I don’t believe in stashing away all your money and living on 40k a year like some personal finance blogs. Admittedly I’ve been a cheap ass and I like it that way. I like having a boatload of investments, but I certainly think “if I croak tomorrow, I’d regret not having a nice car”.
After taxes save, 20%, and then blow the rest (if you want).
Forget about prices. Buy assets that hold value.
Wealthy people look to 'the long run'. While some might make a car purchase (for example), based on what they can afford or like, holding wealth means holding value.
Let's say you're considering a car that is 60k and will be worth 40k in 2 years and another that is 80k and will be worth 60k in 2 years. In both cases the expense is the same, but someone that can afford it will enjoy the luxury of a nice car.
Keep your ‘Safety Net Fund’ fully invested.
A safety net fund is one thing when you’re living modestly on a tight budget.
It’s a different thing when you’re earning a bunch of money and eating 21 meals a week out, paying for weekly maid service, and have multiple sources of income as most high earners do.
That’s why I embrace the idea of keeping the safety net fund full invested.
Betterment previously suggested keeping your safety net in a fund of 40% stock / 60% bonds based on statistics. Recently (July 2019), they revised it to 15%.
As a high earner, I’d tilt towards the higher end of allocation. Maybe even keeping it consistent with long term goals. It’s a factor you’ll need to decide on your own buy keep two things in mind.
#1) High earners typically have multiple sources of income, so losing it entirely is less likely then someone with a single job.
#2) If things get tight you you can cut some fluff back to normal. ie. no 21 meals a week out and no weekly maid service.
Always put everything on a credit card.
We can’t have a post on ‘personal finance’ without talking about credit cards.
Here’s why credit cards are typically a bad idea for those on a tight budget … when money is tight, putting things on a credit card may may not force budget adaption. Once you’ve got some wiggle room, credit card rewards can get you a return on your expenditures (or a discount depending on how you look at it).
And you’ll be able to qualify for the best reward credit cards .
Personally I LOATHE travel reward credit cards and rotating categories. I can’t imagine having to be limited to only specific airlines or hotels when I travel and then having to book through their platform. I don’t want to carry a handful of cards and remember which one to use at each retailer.
At places where consumer financing is offered; ask for a cash discount.
Ever notice those places that offer their own in-house financing like ’12 months no interest, no payments’. Sounds like a great way to get some FREE MONEY! Nope. No such thing.
Businesses that offer consumer financing pay a ‘dealer fee’, on each deal. Basically when the dealer uses that finance method they have to pay percentage to the financier. The juicier the offers are, the higher those finance fees are. Business just mark up their prices to account for the fee.
I know this because I own a small business and have entertained offering consumer financing (I do not offer it, just researched it).
So when you see a business offering consumer financing (furniture stores always), make a cash offer. As a rule of thumb I’d start at 20% off. Chances are they aren’t eating quite 20% but they’ll come back and tell you what they can’t do. If it’s ‘no cash discount’, ask to speak with a manager about that and remind them that their financing programs aren’t free.
Use leverage only when there is a clear ROI.
Leverage! Leverage!! Leverage!!! We’re excited noooow. When your net worth is low (below 200k according to Mark Cuban) and/or you have no business interests, the best thing you can do is carry no debt.
Here’s the thing; as your income and net worth increase beyond a point of living modestly, you don’t have to worry about making poor decisions. As I indicated above when you are stretching your budget, rational decision are harder to make. None of us are immune to it.
For example, as a high earner you could leverage your house at 4%, take a tax deduction for the interest, thereby reducing your effective interest rate, and put the funds into the market where long term average returns are above 7%.
Pulling this off requires investing the funds entirely, and sticking to it for 20+ years. It is easy to say, but at a low income where the budget is stretched it easy to bend the rules for things you want. Also the amount of deductions you’ll be able to take on a smaller mortgage probably won’t get you beyond on the standard deduction threshold.
And then there is margin.
At Interactive Brokers you can barrow cash on margin against your portfolio for very low rates. Like 0.55% - 2.57% depending on the type of account and portfolio size you have.
This comes in handy when you need a good bit of cash that you don't have, because you keep it all in the market, but want to avoid realizing capital gains which may be taxed near 40%.
Personally I use margin to essentially fund my cost of goods in a business I own, where we incur costs, but usually do not receive payment for them for 60 days. Using this method my interest rate is effectively 0.1333% annually compared to the cost of traditional account receivable factoring which would be about 8% of the 60 days (or 48% annually).
Buy insurance with high coverage limits.
I'm shocked by how many wealthy people I know that are simply underinsured... I'm talking bare bones auto insurance policy while they drive a luxury car.
Unless you’re absolutely blowing ALL Your money, you’ll build your net worth quick. This makes you a litigation target.
You need to make sure you are properly insured. If a potential litigant find you only have 100k of auto insurance, but your net worth is in the millions, they wont settle and will pursue for much more.
It's much easier to sleep at night knowing that you have Make sure you are adequately insured!
Don’t be stupid. That’s it.