According to a 2020 report by Bank of America, debt is and continues to be an issue in America, particularly among millennials. The study shows that some 76% of millennials say they are “unable to achieve their personal and financial goals because of their debt.” That’s a staggering number right? And this surely includes salaries in the six-figure range. Why is it that so many still find it difficult to stay afloat on relatively high salaries? And, more importantly, how does one manage their money when their salary is over 100K?
"Earning a six-figure salary is an exciting milestone you should be proud of, but it’s important to not let yourself get carried away and overspend," says Dana Marineau, vice president and financial advocate at Credit Karma. In the current social media-driven climate that pushes instant-gratification, living above one’s means and abusing credit cards is becoming increasingly common. Marineau adds that there's no one-size-fits-all financial formula, but the key here is simply to have a plan. "Deciding how and when to spend and save your money is deeply personal, and it’s subjective," she says. "You should set a realistic budget based on your life, your goals and your income."
To help you better manage your money for 2021 and beyond, ahead, two finance experts break down their top money management tips for success. From staying on-budget, to planning on the future, to avoiding common spending mistakes, following this advice will help you divvy your funds in a way that works best for you.
Stick To A Budget
Whether you're borderline broke or a multi-millionaire — or anything in between — experts agree that sticking to a budget is key to getting or staying out of debt. This is especially true when your cashflow suddenly increases. "The first mistake people make [when getting a big raise] is casting aside their monthly budget," explains Marineau. "Adjust your budget based on your updated salary, and expand to allow for more savings opportunities."
Not sure how to start your budget? Marineau says you can keep it simple. "The 50/30/20 rule budget can be a great tool for people who don’t have the patience for tracking their spending in detailed categories," she says. "You spend 50 percent of your after-tax pay on needs, 30 percent on wants, and 20 percent on savings or paying off debts. With only three major categories to track, you don’t have to dig into the nitty-gritty as much as you would with a normal budget."
If you find yourself with money to spare, Marineau mentions that paying off debts, building your savings, increasing your 401K contribution, and seeking new investment opportunities are all smart avenues to channel your extra cash. "Don’t go overboard and throw caution to the wind just because you see an increase in your salary," she warns. "Being thoughtful now can allow for a healthier financial future down the road."
"Saving, both for retirement, as well as other goals you might have, is crucial," adds Jill Gonzalez, an analyst for WalletHub. She advises building these categories right into your budget. "The best strategy here is moving the money to savings each time you get a paycheck, before you start spending anything. You should distinguish between short-term and long-term saving goals, and have separate accounts for each."
To put it into context, Gonzalez says, "Ideally, you should start by saving about a quarter of your gross income, and increase with age; with a $100K salary, you should [start by] saving about $2,000 a month."
Start Planning For The Future
Speaking of financial forethought, Marineau says it's smart to map out future expenses so you can start saving for them. "Planning can often seem like something you need to tackle month-to-month, but think long-term; if you know there’s an important financial milestone coming in the next year or two, make sure to plan for that too," she says. Are you thinking of buying a house? Planning a wedding? Taking a bucket list vacation? Now is the time to start squirreling some money away. "The sooner you set expectations with yourself, the easier it will be to save and spend accordingly."
And don't forget to prepare for the unplanned. "No matter how much you plan, you never know what curveball will throw your finances into chaos," Marineau points out. "Building an emergency fund that has three to six months’ worth of living expenses could help protect you from taking on debt or dealing with consequences."
Consider Your Cost Of Living
Of course, it's important to remember that the advantages of a six-figure salary are relative depending on where you live. "The cost of living in each city determines how far your salary can take you and the living standard you'll be able to afford," Gonzalez points out. "If getting a higher-paying job also implies moving to a new city, you should definitely do your research in terms what the costs would be for things like food, housing, utilities, transportation, healthcare, and taxes."
She continues, "Typically, housing and fixed costs (such as transportation or installments) shouldn't take up more than 30 to 35 percent of your income. If you're renting, housing costs include rent and utilities. If you own your home, they should include your mortgage and property taxes. Variable costs should make up another 30 percent of your income. These include groceries, entertainment or clothing."
Avoid These Common Mistakes
The temptation to splurge, says Gonzalez, is one that many big earners succumb to. "The most common mistake people make when they start earning a six-figure salary is overspending, especially if it's a jump from what they were making before," she says. "It can make you fall into the trap of buying expensive things you don't really need, like buying a home you might not be able to afford in the long run." As opposed to buying everything your heart desires, "earning a six-figure salary should make it easier for you to save," she says.
Always remember this simple rule of thumb: If you spend more than you make, you'll go broke — no matter your income. "The key is to avoid spending beyond your means," concludes Marineau.
Yes, You Can Reward Yourself
All that said, you can (and should) definitely enjoy your success. In fact, choosing to reward yourself for achieving financial goals is a smart way to prioritize your fiscal responsibilities while still allowing for some fun. "One method for staying on budget is creating an incentive system," says Gonzalez. "The way this works is by establishing milestones and rewarding yourself whenever you achieve them."
Marineau agrees. "Find ways to reward yourself when you hit a few key milestones," she says. "Did you pay off any debt? Treat yourself to a fun meal or activity. Did you stay on budget three months in a row? Buy yourself something nice ... that is still within budget!"
After all, it's all about balance, right?
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