Got an (un)expected windfall? Here's how to protect your wealth
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Unexpected or not, it can be tempting to start spending more when you earn more. But before you do, take pause. “You have to ask yourself if you want to be drinking expensive wine now or buying a vineyard later on,” said Jonathan Drubner, certified financial planner and wealth advisor at Intersect Capital.
Let’s say you’re quarterback Patrick Mahomes, who in 2020 signed a $450 million 10-year contract extension with the Kansas City Chiefs. He signed the lucrative deal, but won’t see all that money upfront — so he can’t start spending like he has it.
No matter how you earned your wealth, it’s important to manage it so it lasts as long as you do.
When your salary increases, start by getting a true sense of what money is coming in and going out each month, said Drubner.
Creating a budget is a sure fire way to see what your cash flow is after taxes, expenses and the cost of “being you,” Drubner added.
After you’ve determined monthly spending habits, decide what percentage of your income to live on, save and invest. There are several popular budgeting strategies to consider, like the 50/30/20 method, where 50% of your budget goes to needs, 30% to wants and 20% to savings.
A good rule of thumb is if your income goes up, your savings does, too. In Mahome’s case, Carlos Dias Jr., founder and president of Dias Wealth, LCC, recommends saving as much as he can now, which is something anyone should consider. This extends past what’s in the bank and into retirement contributions and emergency funds, as you want to make sure your money supports you after the paychecks stop coming in.
Drubner recommends looking at what your net worth would be in three to five years if you save 20% now, in accordance with the 50/30/20 model. Then, you can compare it to what your net worth would be if you saved 40%. Seeing the difference in numbers can help you make the right savings contribution choice for your lifestyle.
High-earners have the potential to invest more, but that doesn’t mean it’s wise to increase investment risks. Dias Jr. recommends investing in things that interest you and have proven high returns, like real estate or franchises. This guide explains the easy way to measure the growth of your investments.
Having the right investment strategy now will give you more time to plan for goals and expenses — having kids, pursuing life passions and crossing items off your bucket list, said Dias Jr.
Budgeting, saving and investing are all ways to prepare your finances for the future. From there, you’ll want to consider other financial protection measures, like doing estate planning and getting life insurance. Throughout this process, you’ll also name beneficiaries so your loved ones don’t end up in court fighting over your assets after you’re gone, said Dias Jr.
There are also other expenses to keep in mind (and budget for) — health care, home care and maybe even wealth taxes. (You can find out what the wealth tax is here.)
Having your financial picture well framed will allow you to be a high performance worker, regardless of your career trajectory or athletic ability, he added.
Check out our guide to setting long-term financial goals.
Updated July 7, 2020: This article is updated with the terms of Mahomes’ contract.
Image: Nastia Kobzarenko
This article is intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
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