Investing for High Income Earners
October 18, 2012
Some time ago I wrote about investing on a budget. Now I’m going to write about the opposite end of the spectrum: Investing for High Income Earners.
Although I am admittedly more familiar with the first scenario, here are some of the considerations for high income investors. As always, meet with the appropriate expert prior to making any important financial decisions.
When I wrote about investing on a budget, I indicated that broker-free investing with a large “do it yourself” type brokerage house such as Vanguard may be ideal. When you have more money to invest, however, you may wish to pursue a more sophisticated investment strategy.
One major consideration is whether you would be better off leaving a professional broker or financial planner handle your investments for you rather than attempting to do it yourself. If you want to be an active investor, it would take a lot of time and expertise to learn the necessary skills to make your personal investing be worth your while. Perhaps you would be better off earning money doing what you do best (i.e. your day job, assuming it does not involve investing), and instead diverting some of that money into a professional’s services.
Note: If the Great Recession has taught us anything, it’s that you ultimately are responsible for your own financial decisions. In other words, even if you have a trusted broker, it’s important to make sure you and your finances are adequately protected.
When you’re investing on a budget, I tend to believe that individual stocks are a poor choice because there’s simply not enough money to properly diversify. The trading fees also start to add up if you’re not trading a large amount of shares. If you’re a high income investor, however, then perhaps you can pick some individual stocks to go after as part of your overall financial plan.
When you’re a high income investor, you might be precluded from receiving certain tax breaks or phased out of others (debt on student loans comes to mind). At the same time, you’ll be paying higher taxes, so your incentive to reduce taxes is perhaps even higher than the average citizen. Perhaps you may wish to consider purchasing real property whose interest likely is tax deductible. This might even include an investment property, if applicable.
Alternatively, perhaps you should start a business and contribute to an employee’s retirement as a way of reducing your own tax exposure. (Again, check with your accountant or another financial planning or tax professional to make sure this would apply for you.) A solo 401(k) if you’re a business owner may also make sense.
In some instances, you can also potentially write off gambling losses, alimony payments (hopefully not applicable, and note that child support is generally tax-neutral), and interest payments on investments purchased “on the margin.” Finally, consider investing in “tax-managed” or tax-beneficial funds such as certain classes of bonds.
How High Income Earners Can Earn More Than Low Income Earners
Aside from the obvious investments such as expensive art and real estate that the average person would likely be precluded from investing in, I have also read that there are actually classes or types of investments that individuals below a certain income level may not even be legally allowed to invest in (“for their own safety”), that high income earners would conversely be able to make. For instance, I remember reading in the book “Rich Dad, Poor Dad” that the SEC barred investors below a certain income threshold (called non “accredited” or “non-sophisticated” investors), from investing in certain types/classes of more “risky” investments.
Although there are different considerations when you’re investing as a high income earner, the basics still apply as well. You still need to diversify, pay yourself first, properly allocate risk, and determine that you’re saving enough each month to achieve your investment and retirement goals.
What other advice would you have for investors with high incomes? Leave a comment!
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