Advice For Young, High-Income Earners

In this video, Matt addresses young high earners making seven figures, offering advice to avoid lifestyle inflation. He emphasizes the importance of tackling tax issues by maximizing the Mega Backdoor Roth. Matt suggests a reverse budget, separating fixed and variable expenses, with a 30% cap on housing costs. He advocates for a balanced approach to savings and investments, recommending a structured distribution between short-term, midterm, and long-term goals. The video concludes with practical tips on splitting paychecks, automating finances, and using separate bank accounts to minimize decision fatigue, providing actionable insights for effective wealth management.

Video Transcript

This video is for young people that have had tremendous success and are making seven figures early on. Either, you know, usually we see business owners or, you know, young tech executives between cash, bonus, stock, et cetera. So if you’re making over a million dollars per year, you know what are some ways that you can make sure you don’t mess this up? Because we see that lifestyle inflation is huge. And typically when your cash flow is really good, it’s really easy to start paying for everybody, kind of all friends start going on payroll. And also lifestyle inflation can be a real thing. And then if a change in the economy affects you, it can really hit, and any savings that you have could quickly fall back under you. So some of the things we’d recommend.


So, if you are making a million dollars a year, plus you’re going to have a lot of tax issues. So right off the bat, after taxes, we’re probably looking about 46,000 a month being your take home. And that’s assuming that you’ve maxed out a 401k. So the first thing we’d recommend is Max out Omega backdoor Roth if it’s available. If you’re a business owner, you can create this for yourself. If you work at a big company like Humana, ADP, UPMC, HN, a lot of Pittsburgh, Google, Microsoft, they all have this mega backdoor Roth available in 2024. You can put 69,000 in there between a Roth at 23,000. If you’re under 50, whatever match you get, and then the difference, you can put in an after tax component and then convert it to the Roth, that’s 69,000 a year.


So I have that reflected in this take home right here. So right off the bat, I would recommend reverse budget. So essentially have figure out what’s your lifestyle going to depend on, and then make sure that the rest of the money, you never put it in, that you never commingle it in that lifestyle account, and that this goes right into a savingsinvestment account. So, controlling the money temperature, especially if that million dollars is made up of cash bonuses, et cetera. So let’s say hypothetically, it’s just a base salary. We’d want in the lifestyle to have two checking accounts, a fixed account where you attach a mortgage. Speaking of a mortgage, we’d want that to be 30% of take home cap. So let’s just say we’d want your house all in to be under 12,000 a month.


Generally speaking, we want to have a variable account as well. So the fixed account would take care of your fixed bills, mortgage, utilities, everything you know you have to pay. And the variable account is basically anytime you swipe a card. So I would challenge that for any seven figure income earner, really should try to keep lifestyle to about half of that net take home. And you should try to save and invest the other half. And the saving invest is not that you need to save and invest that to stay on track of your goals. It’s just to control your money temperature. Because if you’re making that much money, it’s very few jobs that pay you that much.


And so the danger is if something changes, if your income changes, you want to have the flexibility to keep the same lifestyle even if your income drops. So the other half we’d recommend to break up between a short term bucket, which is typically, we want to categorize it, an emergency fund, maybe an opportunity fund for purchases in the next five years. So the emergency fund would be six months of salary. Opportunity fund would be anything purchased in the next five years. Usually we layer treasuries, currently paying about 5% for those based upon the time frame. And then midterm, if you have kids, it would typically between 529 plans for college brokerage accounts, which we direct index to make sure it’s tax efficient.


And then long term, we’d really want to make sure on top of your mega backdoor Roth, that you have a Roth IRA that you’re filling on a backdoor Roth basis. You have a brokerage account that’s invested in equities for tax efficiency. And to make sure that early financial independence is on track. Usually the paradox of someone making million dollars a year is that a lot of their needs and their wants are tied to their job. A lot of identity is tied to the job. So we find that a lot of people this successful are not going to retire early, despite thinking of that at high stress. So getting yourself in the position to work because you want to, not because you have to as quickly as possible, is really important.


But right off the bat, if you just split your paychecks half and half here, it’s going to put you in the position. You can always use this brokerage money to increase lifestyle if you’re way ahead of track or determining, but it’s really hard to ever pull that back and then back to the lifestyle. The most important thing is keeping that house in check. 30% of take home that could between a primary and a secondary, a vacation home, and then the variable cost as well. We typically recommend to have two separate bank accounts because this alone can remove a lot of decision fatigue.


If you’re categorizing and filling in a bank account that then goes out the door, you can keep a much better control of your money temperature for the variable account would be things like vacations and dining out again every time you swipe your card, purchases, et cetera. And so just automating this, if you’re low on time, can remove a lot of distress, a lot of decision fatigue. So the decisions you do make are the important ones, and you remove the day to day noise that you have as a high income earner.

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