Becoming a six-figure earner is often touted as a critical financial milestone, but if you don’t know how to manage your money well, earning more won’t solve much.
Rather than spending your full paycheck all the time and putting yourself at serious financial risk if faced with a job loss or unexpected expenses, there are things you can do to take advantage of your high income and set yourself up for long-term success.
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In particular, here are three milestones that indicate you’re managing your money well on a $100,000-plus income, according to a recent video from Humphrey Yang, a former financial advisor and current entrepreneur.
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Avoiding Lifestyle Inflation
Lifestyle inflation often explains why high-income earners still often live paycheck to paycheck. As your income goes up, you might increase your expenses accordingly. “When most people get paid more, they will spend it,” Yang said.
In fact, there’s hardly a difference between the proportion of households earning $51,000 to $75,000 and those earning more than $100,000 in terms of living paycheck to paycheck, according to a Bank of America Institute study.
While Yang noted that it’s okay to spend more to some extent, getting a raise doesn’t automatically mean you need a bigger house or car. Instead, if you live below your means, you can more easily grow wealth while gaining financial peace of mind, he said.
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Knowing Your Financial Independence Number
If you want to retire early, you need to know how much you need to save to get there. Yang recommended a resource from Networthify to calculate this number. With the tool, you can put in variables, like your income and savings rate, to determine when you can retire.
For example, Yang showed a calculation where someone who has $250,000 in a portfolio so far, while earning $100,000 per year and saving $20,000 per year (based on a 20% savings rate), could retire in a little less than 20 years.
That’s not to say you have to be on track to retire early if you’re earning $100,000 or more, but you should generally be able to have a solid retirement plan at that income, especially if you’re living below your means and have the flexibility to invest a substantial portion of each paycheck, such as in a 401(k) or IRA.
Increasing Your Overall Investment Gains
Lastly, as you grow your wealth, you might be in a better position to take on more risk with a small percentage of your portfolio, Yang explained. Assuming you can afford the potential losses, you can potentially enjoy larger gains.
For example, Yang pointed out that he takes this risk with around 5% of his portfolio, and he has benefited from investing in certain stocks he has a high conviction in, while others might benefit from areas like real estate investments.
According to SoFi, some high-risk investments include commodity stocks, cryptocurrency and leveraged exchange-traded funds.
If this works out for you, you might be able to achieve your financial independence number or other goals faster, but again, be mindful of how much you can afford to lose and don’t overhaul your entire investment plan to chase potential gains.
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This article originally appeared on GOBankingRates.com: Making $100K per Year? How To Know If You’re Managing Money Well, According to Humphrey Yang
