Why True Wealth Preservation Requires Necessary Risks

People who don’t have a lot of money often think their problems would all be solved by getting more. But in fact, more money often comes with more financial challenges, and therefore more stress. High earners face plenty of unique economic dilemmas, including losing their money if they don’t manage it strategically.

It’s not enough to just throw your money in a savings account and forget about it. It might sound counter-intuitive, but you need to take some level of risk in order to maintain and grow your wealth.

Older adults have spent more time accumulating wealth and the lifestyle that goes with it. So they’re the most susceptible to having their net worth deteriorate, and dealing with the resulting negative impact. If you, a parent or grandparent are in that situation, don’t ignore it. Many of these upcoming strategies may require help from family and beneficiaries.

Why Wealth Degrades Over Time

Because of inflation, money loses value over time. While you could buy a brand-new car for around $1,500 in 1950, and gas cost less than 30 cents a gallon, you wouldn’t get very far by budgeting those amounts today. Then again, the average family only made about $3,000 a year. So relatively speaking, both prices and income have increased many times since then but normally stay in line with each other.

However, let’s say you had put $1,000 in a safe back then, planning to take it out when you retired. Well, it might have been a fortune when it went in. But not so much on its way out.

Now, imagine that instead of just locking it away for safekeeping, you put it in a savings account earning 5% interest. After 50 years of compounding, your $1,000 would be worth over $12,000. So if you’re making good money and don’t want to effectively lose it, you need to put it somewhere that earns interest. 

Unique Financial Challenges of High Earners

Making money is not the same as managing money, and it’s possible to be good at the former and bad at the latter. This isn’t something that’s traditionally been taught in school, so many people don’t know what to do with their money after earning it.

Everybody should learn financial literacy. But high earners face different monetary challenges than people in other income brackets.

Short term

High earners have several unique financial challenges in the short term.

• Higher tax bracket: Making more money can push you into a higher tax bracket, where you owe a bigger percentage of earnings to the government. You might even go from a 24% tax bracket to 32% just by making an additional few thousand dollars a year.
• Lack of management: Earning more money than before is great, but you need to manage it properly to keep its value.
• Limited assets: If you don’t start investing your money in assets — like savings accounts, investment accounts, retirement accounts or real estate — it won’t be working for you.
• No budget: Budgeting is important for everyone, and if you don’t keep track of how much you have coming in and going out, you could easily overspend.

Long term

Taking care of short-term challenges is just the start. High earners face even more financial concerns in the long term.

• No tax strategy: While being in a higher tax bracket isn’t something you can control, how much you actually pay is … to a degree. Putting your taxable income in a retirement account, real estate or side business could give you legitimate tax breaks or deductions.
• Limited planning: Your long-term plan or strategy should include knowing where you want to be financially in 5 years, 10 years, or 30 years. Getting there may require paying down debt, building assets, and analyzing every purchase.
• Lack of attention: If you invest your wealth but don’t know exactly where it’s going or how it’s performing, you could lose your money without even realizing it.
• No leverage: Knowing where your money goes doesn’t mean you have to manage it yourself. Spend your time earning the money, and let somebody else take care of mundane tasks like investing it in the stock market.

Strategic Investments

When you invest your money, you’re buying an asset and hoping it increases in value. Of course, some investments will lose money instead of making it, because their value goes down instead of up. Analyzing the markets can help you make educated guesses about the direction an asset will take, but it’s not foolproof.

Typically the riskier the asset, the more you stand to lose … or gain. So a lot of people choose to diversify their portfolios by investing in a variety of different assets with different risk levels. This type of strategy can maximize your return on investment (ROI) across the board.

• Stocks are shares in companies, and their value can rise or plummet due to things that business does, or with the overall stock market as a whole. The basic concept is to “buy low, sell high,” which means purchasing stocks when they’re lower in price and selling after they gain value.
• Bonds are basically short-term loans you give a corporation or government entity in return for interest payments. Unlike stocks, you don’t own a share of that company, and they tend to be less volatile.
• Mutual funds are collections of assets like stocks, bonds and other securities. They earn a net capital gain or net capital loss based on the combined performance of the included assets.
• Exchange-traded funds (ETFs) are similar to mutual funds, but they often have lower minimum investment requirements and give real-time pricing feedback instead of just a daily value.
• Cryptocurrency is a digital asset that can be extremely volatile, and fortunes have been made or lost overnight. More than just buying low, the advice here is often to “buy the dip,” which means purchasing after a sharp decline when you expect it to recover later. Analyzing the crypto markets, including the price of bitcoin, is similar to analyzing the stock market — but perhaps even less predictable.
• Real estate investing is more than just purchasing a house to live in. It often includes buying properties that you intend to rent out or flip for a higher price.
• Business investing often refers to funding start-ups as an angel investor or venture capitalist. But you could also start your own business or buy a franchise, and then hire other people to manage and run it.

Strategic Savings

Savings and deposits are usually less risky than investments — and also often provide a lower return. Many are FDIC insured, so you’re pretty much guaranteed not to lose your funds (up to $250,000 per person, per account type, per bank).

Getting the best of both worlds requires having investments combined with savings that earn interest. So stashing your cash under your mattress isn’t part of this plan.

• Savings accounts are available from any bank, but they’re not all created equal. Traditional savings accounts typically offer extremely low rates these days, but high-yield savings accounts are designed to pay you more in interest.
• Certificates of deposit (CDs) are like savings accounts where you earn a high-interest return by agreeing to leave your money untouched for a set term while the CD matures.
• Jumbo CDs require a higher minimum deposit than standard CDs, and bump-up CDs let you increase your rate once during the term.

Common Mistakes

High earners often make mistakes when attempting to preserve their wealth. Sometimes it’s because they’re not used to having money and don’t know what to do with it. Sometimes it’s just missing the mark while trying to be strategic, or not being fully educated on a method they’re trying to use.

Here are some common mistakes to avoid:

• Tackling investments without help or advice can lead to disaster. There are experts who analyze the stock market, real estate market, or crypto market all day, every day. Use a financial advisor or professional investor to do the heavy lifting or decision-making for you.
• Falling for schemes that seem too good to be true has been the Achilles heel for many novice investors. Ask for impartial advice or do in-depth research before putting your money into any opportunity you’re presented with.
• Keeping money at home might seem like a good idea at first, but if it’s not earning interest, it’s losing value.
• Avoiding risks might also seem like a good idea, but low-risk investments and savings usually come with lower ROIs. Getting out of your comfort zone and investing some (not all) of your funds in a riskier stock or asset could pay off. Just don’t invest more than you can afford to lose, because that just might happen.
• Filing taxes without understanding how to maximize your return could result in paying more than you need to. A tax professional can walk you through all your options for deductions and tax breaks.
• Not contributing enough to your retirement fund means less money when you need it most. Commit the maximum for employer matching, and then as much additional money as you can — which can also reduce your taxable income. 
  
• Using credit cards that don’t earn rewards is like throwing money away. Compare credit card options and choose one that works the best for you, including high cash back rewards or points in the categories you shop in most.
• Carrying a balance on your credit card will usually wipe out the benefits of rewards through interest charges. So pay off your balance every month, before the due date, to best leverage your money.

Different Strategies for Inheritance

The death of a loved one can impact you financially, and your death will affect your heirs. So while it’s not pleasant to think about, inheritance management and estate planning are important aspects of wealth preservation.

Inheriting money

When you come into extra money from an inheritance, it’s natural to be unsure of how to deal with it. It’s also normal to have your decision-making ability clouded by emotions.

Here are some strategies you could follow:

• Take time to grieve before doing anything with any of the money or assets you’ve inherited.
• Talk to an accountant about how to best manage or grow your new wealth and minimize the tax burden you might face.
• Make a plan detailing how you will spend, invest or save the inheritance, and don’t let your emotions cause you to deviate from the plan.
• Pay off debts so you can stop paying excess interest on your outstanding credit card balances or loans.

Planning your estate

On the flip side, part of managing your own wealth includes making sure it’s properly distributed after your death.

Here are some estate-planning strategies to consider:

• Leave your money to your heirs with no restrictions on when they can access it or how they can use it. Just keep in mind that some people are inclined to live off an inheritance instead of making their own income, which could lead to financial issues down the road. And there’s a chance they could blow it all impulsively or lose some in a divorce.
• Distribute the funds over time, in stages, so it’s not all at risk immediately. You can use a trust to administer this, and the allotments can be based on your heirs reaching a certain age or achieving a specific goal.
• Combine approaches by giving a lump sum upfront, and keeping the rest in a trust for the life of the heir. This removes some of the risk to the whole amount while still giving them money to use right away.

Following the tips and strategies included here will allow you to preserve your wealth, and even grow it over time. And remember that you don’t have to go it alone. There are plenty of financial professionals who can help you with almost any aspect of your earning, saving and investment journey.