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Higher Income, New Bracket: Adjusting your Financial Goals Accordingly

When most of us see a change in our incomes it is a slight increase or decrease. While we fear a sudden layoff or a huge reduction in our sales month over month, the more likely change that we see in income is a slight alteration here and there. A bump in the road you may call it. Or you may see a slight increase in income for whatever reason. Even if your yearly salary remains the same a bonus that aligns with inflation is common for many of us. 

We consider these small changes in income and can then make similar changes to our financial planning that are commensurate with these small changes in income. If the change is small enough or short-lived enough, we may not even need to make any changes to our financial planning. For many of us, a household budget performed on a month-to-month basis would be the only way to truly tell that a small change in income (up or down) has occurred. Otherwise, we may just pass right on by without even noticing the change. 

However, what we are going to talk about in today’s blog post from the Law Office of Bryan Fagan is how to financially plan your life and your estate when you experience a significant increase in your income. This can happen to you for any number of reasons, but the key is to be prepared for when you do see your yearly income increase by leaps and bounds. Using the same financial plan that you always have simply because you are used to it or because you don’t know any better is not good enough. Rather, you should evolve with your changing circumstances so that you can better serve those around you.

Changes in income can bring about other changes, as well

Many clients at the Law Office of Bryan Fagan have shared a common challenge in their estate planning journey: as their income grows, so does their lifestyle. If you’ve noticed a similar trend with your pay increases over the past few years, you’re not alone. Think about it—does your lifestyle now resemble what it was right after college or early in your career? While maintaining your initial lifestyle might be ideal for financial stability, it’s not the most common outcome.

You’ve likely encountered what we call “lifestyle creep”—a gradual increase in spending as your income rises. There’s nothing inherently wrong with evolving tastes. For instance, maybe you’ve gone from fast food treats to dining at upscale restaurants or upgraded from a decade-old domestic car to a newer foreign model. As our incomes increase, so often do our lifestyle choices.

When reevaluating your financial goals, remember that higher earnings don’t always justify increased spending. Sure, you can now afford luxuries like gourmet meals, high-end consumer goods, or even a home upgrade. But remember, it’s easier to increase your lifestyle than your income. Without caution, you might find yourself needing to cut back to align your spending with your earnings.

Establishing a budget is crucial for everyone. Most of us skip the detailed budgeting that helps prevent lifestyle creep. Consider managing your finances by percentages—it’s a sound strategy to gauge your income, spending habits, and potential over-expenditure. Here’s how you can manage your money: spend it, save it, or invest it. Let’s start with spending.

If you spend 10% of your monthly income on lifestyle needs, resist the urge to increase this percentage just because you earn more. Keeping to the 10% allows for enjoyable upgrades without falling into lifestyle creep. In ten years, you might not recall a specific luxury meal or upgraded vacation, but you will remember significant life moments, like fulfilling your granddaughter’s dream of owning a pony.

Creating a household budget doesn’t need to be complex. Use simple tools like your phone’s notes app or a legal pad. Start by noting your total monthly income and subtracting your expenses. This basic formula places you in a better financial position than many. Simply knowing your income versus your outgo offers a solid foundation for effective monthly budgeting.

Financial planning begins with understanding where your money goes each month. A budget doesn’t restrict your spending; it clarifies it, helping you identify and address any spending issues. Do you really need numerous streaming subscriptions? Are you saving enough for retirement? These are the types of questions a well-structured budget can help you answer.

A budget also empowers your spending decisions, aiding in estate planning. Knowing your financial limits justifies expenditures on your home, hobbies, or other luxuries following a salary increase. While the first few months of budgeting can be challenging, by the third month, you’ll likely find a rhythm that makes the process smoother.

Implementing a month-to-month budget simply requires the willingness to scrutinize your financial life more closely. Life may get more complex with new jobs or responsibilities, but a budget keeps your financial priorities clear, focusing on what truly matters from a dollars-and-cents perspective.

Look at your investments after a big increase in your income

If you contribute to a Roth IRA, then your increase in income may have knocked you out of the income bracket where a Roth can be directly funded. There are income limits both for individuals and spouses when it comes to Roth IRAs. If you earn more than that income limit, then you would not be able to contribute to a Roth. Doing so would cause you some income tax headaches down the road. So, does that mean that you can no longer contribute to an IRA on a “pay the taxes now and not later” basis?

Thankfully, no. You can still choose to pay taxes now in an IRA by contributing to what is known informally as a “backdoor Roth” conversion. You would need to open a traditional IRA, contribute whatever you choose to invest (maximum amounts vary based on your age), and once that IRA is funded you would convert that IRA into a Roth. The attorneys at the Law Office of Bryan Fagan are not investment professionals so you should consult with one if you have a question about anything you read today. This is not to be taken as investment advice, either. Rather, we want to help you understand what options are available if you are interested in any tax-advantaged investment accounts. 

The overall point is that if you are investing in the same manner that you were before your big increase in income then you are potentially making a major mistake. On the one hand, you could be sacrificing dollars by not taking advantage of different investment opportunities based on your higher income. On the other hand, you may be putting yourself in a position where you will be running afoul of the IRS by not updating your investment planning. 

When do you think you will retire?

Many of us have 401Ks through our employers, featuring mutual fund options like the retirement year targeted account. For example, you might choose a “2050” plan if you’re a millennial. It allows us to pick investments based on when we think we’ll retire, whether that’s 2030, 2050, or 2065.

With a recent boost in your income, it’s a great time to update your financial planning. Perhaps, you can now retire earlier than initially planned. Your retirement account’s website should offer a calculator to adjust your expected retirement year. This tool shows how much and how long you need to invest to retire comfortably.

Retirement planning often seems more intuitive than analytical. You might feel ready to retire, but the numbers should guide your decision. Instead of relying on feelings, review your retirement savings and see how they measure up. You might be closer to your goals than you think.

Even if you’re far from your retirement targets, you still have opportunities to adjust. Consider changing the funds you’re invested in, especially if certain stocks or mutual funds have underperformed. Consulting a financial planner, someone with a teacher’s heart and trustworthy advice, can be crucial in managing such assets.

Investing in retirement isn’t just about how much to invest but getting started in the first place. Learning about different investment methods is the first step. Then, it’s about taking action—invest your money and let compound interest work its magic.

How much to invest in retirement savings is up to you. If your income has increased significantly, consider boosting your retirement contributions. For many, investing up to 15% of their take-home pay is a solid target.

If investing 15% seems daunting due to high expenses, examine your budget. Look for areas to cut back, like unnecessary streaming services. Making these adjustments can free up more funds for investment, enhancing your financial planning and future security.

How to find the motivation to start thinking critically about adjusting your financial goals

You’ve just experienced a significant boost in your income. This surge might make you feel as though your financial planning is complete, at least for now. You plan to use this extra income wisely, benefiting your family in the process. Yet, it’s also a perfect time to rethink how you can invest this increased income strategically.

Lacking motivation can keep you stuck in your current financial routines. Often, family is the key motivator in your life, especially when it comes to financial planning. Consider a scenario where your spouse lacks income or retirement savings. In such cases, making informed decisions in financial planning becomes even more crucial. Use this as a catalyst to sharpen your focus. Instead of succumbing to worry about these issues, push yourself to better manage the assets you’ve worked hard to accumulate.

As you ponder your future, start by exploring various ways to plan for your estate’s long-term security. The Law Office of Bryan Fagan’s estate planning attorneys are ready to assist. They can guide you through options for retirement savings, investments, and budgeting. Their goal is to help you save and build substantial wealth and estate value.

Thank you for visiting the Law Office of Bryan Fagan’s blog. We consistently post unique and original content on a variety of legal topics. Join us as we explore scenarios and circumstances that might be relevant to your life, offering guidance every step of the way.

Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan

If you have any questions about the material contained in today’s blog post place you know as a day to contact the Law Office of Bryan Fagan. Our licensed estate planning attorneys offer free-of-charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas estate planning as well as how your family’s circumstances may be affected by the filing of a probate case.

https://www.bryanfagan.com/blog/2019/january/budgeting-finances-and-children-and-their-effect

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