The Rachel Cruze Show - How to Actually Build Wealth on a High Income

Episode Date: July 1, 2024

💵 Start your free budget today. Download the EveryDollar app! This week, I unpack the reasons some high earners struggle to save, reveal five financial numbers you should keep track of, and provide strategies to transform your income into long-lasting wealth. I also share clever tips for smart money management that will set you up for financial peace. In This Episode: ·     5 Reasons Wealthy People Are Living Paycheck to Paycheck ·     How to Actually Build Wealth on a High Income ·      5 Numbers You Must Track to Build Wealth  Next Steps ·     🎥 Watch my video to learn how to create a budget from scratch. ·      🏡 Go to my video for easy ways to pay off your mortgage early. ·      💰 Navigate your investments with expert guidance from SmartVestor Pro. *Ramsey Solutions is a paid, non-client promoter of SmartVestor Pros. ·      📊 Track your saving progress with the help our Investment Calculator.   Offers From Today's Sponsors ·      🏥 Learn more about Christian Healthcare Ministries.   Listen to More From Ramsey Network 🍸 Smart Money Happy Hour 🎙️ The Ramsey Show   🧠 The Dr. John Delony Show 💸The Ramsey Show Highlights 💰 George Kamel 💼 The Ken Coleman Show 📈 EntreLeadership   Ramsey Solutions Privacy Policy Learn more about your ad choices. Visit megaphone.fm/adchoices

The one thing that I love about money and personal finance is that a little bit of legwork on the front end has power to create such long-term success. Having good money habits and consistency, you'll be making more progress than you ever thought was possible. Hey, you guys, welcome to this episode of the Rachel Crewe Show podcast. I'm so glad that you're here. So in this episode, I'll share how to utilize your income to build wealth. then we'll talk about what numbers you should be tracking to build wealth. But first, let's talk about why wealthy people are still living paycheck to paycheck. Take a listen. So recently, a guy called in on the Ramsey show saying that he was making more than $400,000 a year and still couldn't save an emergency fund. Well, this immediately ruffled some feathers because let's be real, the average

American makes way less than that. And a lot of people were thinking, I mean, I would do anything. to make that much money. I mean, what is his problem? What is going on? Well, the simple answer is lifestyle creep, and this term is thrown around a lot, but what does it actually mean and what does it actually realistically look like in someone's life who is struggling to find margin? So today, I want to unpack five specific reasons that wealthy people are living paycheck to paycheck. Now, he definitely is not alone in this. So let's talk about how someone might get to a place and how you can find your way back out if you are in this place. And like I said, we're not going to camp out here for a super long time, but first, let's just again clarify this concept of lifestyle creep. Because all this

really is, is that as your paycheck grows over time, so do your expenses. And most working Americans experience gradual salary growth along with steady inflation throughout their professional career. And rarely does someone go from making $35,000 a year to $400,000 a year overnight. Now, if this were the case, that margin would be much easier to grasp because they were used to living on, you know, $38,000, $35,000 a year. But what happens is that would slowly, as it goes up, it might be harder, and it is for some people to track and to manage as their lifestyle continues to increase. Now, off the top of my head, here are five reasons why this is. The first reason is really simple, and while it's not the best news, there is reality to this. it is inflation. So things are starting to cost more money over time. And people love to complain

about the cost of gas and groceries and cars and houses because, well, genuinely, let's all be honest, the cost is higher. Now, if you're feeling the pain of inflation, I'm right there with you. But unfortunately, none of us have the power to change the cost of our essentials. And things are going to cost more over the years. So the question is, what are you going to do about it? Now, I have some ideas, and we'll get to those later. But for now, let's talk about reason number two why wealthy people are living paycheck to paycheck. That is debt. Now, this one may seem obvious, or it might not feel like a real problem for someone that's bringing in six figures. But sometimes when people start to earn more money, they start to think that

they can just take on more and more debt. And obviously, debt can affect anyone from any walk of life. But some people never even consider their credit cards or car payments until their income goes up. And suddenly, they're thinking, oh, well, I can hate that. handle it. But unfortunately, the reality is, you guys, debt is debt. It's always going to steal your paycheck and feel like a burden. You're not invincible just because you got to raise. Now, having to throw away your hard-earned money on interest and minimum payments and late fees every month feels overwhelming. It feels defeating at any income level. But why does debt feel like such a good option to people? Well, reason number three is actually the main reason

behind reason number two, and that is increased expectations. So this can be really subtle, but it's really, really, you guys. So for example, let's say you move into a slightly bigger house, nothing crazy, but you're not moving into, you know, some crazy mansion, like a bunch of celebrities, right? But you've leveled up a little bit, and maybe you went from your first house to a slightly bigger house because you've had a couple of kids. Now maybe you bought the smallest house in a high-end neighborhood, or maybe it's not house-related. Let's say your kids started a new school and their friends' parents make a little bit more than you, and you're starting to, you know, be friends with them and you're kind of seeing what they're doing, like whatever it is,

when you're surrounded by a new aesthetic, you know, in a standard of living, it's easy to feel like you have to level up every part of your life. That may not be conscious, but subconsciously, that's what you're seeing. But trust me, it does not have to be that way. When Winston and I got our house in 2008, our first house, after we were married, now, granted, at the bottom of the real estate market, so we got a bigger house than what we were expecting to get because prices were so low. But you guys, when we bought it, like, we didn't have the furniture. Like, we moved some of our furniture from college, like, into it. But we didn't have a ton. We had enough to get a living room set and a bedroom set and, you know, a kitchen table. But we really took our time.

So I just want to encourage you that don't feel like you have to go all in on something. You actually can really ease yourself in and you need to manage, though, your expectations when it comes to that. So again, don't take one step forward just to take two steps back. Take it slow and make progress over time. All right, the fourth reason wealthy people are living paycheck to paycheck is a little more technical, and that is the lack of adequate insurance. If your salary and standard of living have slowly creeped up, don't forget to properly insure the things that you own.

So housing, car, health, it's crucial that you're fully covered in all of these areas in case of an emergency. If your homeowner's insurance is still at the base level for what you signed up a few years ago, consider increasing your coverage. Although it may feel unlikely, the last thing you want, is for a big, unexpected emergency to wipe out your insurance coverage and your emergency fund savings. So make sure you are covered. And finally, the fifth reason wealthy people feel like their living paycheck to paycheck is that they don't follow a monthly budgets.

Even high-income earners need structure and need a plan. And remember, a budget doesn't keep you from spending money. It actually gives you permission to spend money. And it takes all of the guesswork out when it comes to your bills and your expenses. And if, you know, can I pay this? Is that okay? When's the next paycheck coming? Like, all of that is cleared up, you guys, you have a plan.

So it's never about the specific salary number that you're bringing in. It is about your behavior and possibly needing to adjust that to see progress when it comes to your money. It is a total game changer. So, listen, it's human nature to look at other people's circumstances and wish you had what they had. But one thing that I've been reminded of recently is that even high-income earners struggle to build wealth. So just because, again, a lot of money is coming into your checking account every month doesn't mean that it's going toward things that will set you up for long-term success. So stewarding or managing your money wisely boils down to good habits and consistent behavior.

I mean, I see six-figure earners who struggle to make their next payday, and I see lower-income earners reach a million-dollar net worth over the long term when they hit retirement. So let's talk about how to actually build wealth on. on a high income. And stick around to hear me share my number one tip when it comes to building wealth on a higher income. First, let's talk about the common roadblock that many higher income earners face. This is something I see a lot in the medical field or with people who work in law or even with a graduate degree. And this is student loan debts. Yes. Now, I get it. It can feel unavoidable if you're interested in pursuing a certain career path. But in general,

you guys, this general attitude of like, well, I'll just take out a loan and it's fine. And once I score high paying job out there and I make a lot of money, then I'll pay all the debt off quickly, it'll be fine. There won't be a problem. But the problem is life happens. And maybe you get married or you have kids quicker than you expected to. Or maybe you end up needing to buy a house or a car during your years of schooling. I mean, I have talked to people, you guys constantly that this is the problem. I talked to a chiropractor the other day on the Ramsey show. And she was wanting to stay home with the kids. And she was like, well, I'm about to have my second baby and I want to stay home. And she's still owed over $200,000 in student loan debt. And you're like, oh, my gosh,

I don't know what to tell you. Like, this is so difficult. So again, this life happens and people don't consider that. And so what happens is, again, expenses can go up and then it delays this idea of paying off debt. So for a lot of people, it ends up leading to more debt over their lifetime. You know, you add a mortgage, a car loan, you know, credit card balance of maybe a wedding or a honeymoon. or maybe just life. And then before you know it, your $250,000 salary is getting eaten up by payments every single month, which is why I highly recommend making debt pay off your first priority no matter what career you're in or salary that you have.

Because the best way to do this, you guys, the most effective way to get out of debt is what we teach is the debt snowball method. And this is where you pay off your smallest debt first. So list out all of your payments, all of your debts, and pay off the smallest debt first. really does build momentum and you're going to be cutting expenses, you're going to get side hustles, you're going to do whatever you can to pay this debt off quickly, do whatever it takes. And you'll be amazed at how much further along your paycheck goes when debt is not around and it's not stealing your income. I mean, you actually have your income and you're like, wow, this actually feels like

a substantial income because if you're a high earner, it is. So get debt out of your life. Which brings me to number two, stick to boring old school investing strategy. a.k.a. proven investment strategies. So here's the deal. Anytime you start making more money, so whether you've changed jobs, you've got a promotion. I mean, it can feel limitless. It's like, oh my gosh, this is amazing. And it's a great thing. But you have to be careful not to spend it all on some get rich quick advice because you're going to see something and people are going to be like, oh my gosh, just do this and do that. And it's so easy. So listen, just stick to the basics, you guys. Don't do crypto. Don't go and invest in NFTs. No investment.

investing in collectibles or overpriced artwork or designer shoes or handbags, like none of that, okay? Go to tried and true investing strategies. And one of the best things you can do is once you're out of debt and you have an emergency fund is invest 15% of your income into retirement. And you put it into tax advantage retirement account. So this is things like a 401k match, a Roth IRA. If your work offers a Roth 401k, do that. And so again, it's boring. It's not as exciting and fun and flashy, but over time, you guys, this is how people build wealth. And if you want to make sure that you, again, are going to have money for decades down the road in retirement, the boring route is usually the right route. But don't take that first step of investing and just call it a day. It can be a little

bit more nuanced than that. So the third thing that you need to make sure that you do when you're building wealth with a high income is to stretch your investments. So invest to a point where you feel maybe a little bit of pain. So if all you ever do is invest 15% of your income, no matter what, you may not reach your full wealth building potential. So be sure to try to level up those percentages again once. You've paid off the house. Kids college funds are funded, all of this. Then go and revisit your investing. And maybe you've maxed out those traditional retirement accounts and you look into maybe getting paid for real estate or doing other things. That's fine at that point. But again, making sure that you don't go something that doesn't have a long-term.

record. So usually investing in the market in real estate are two great bets, but use your money to do both of those things. Now, the fourth thing that I recommend doing if you want to build wealth with a higher income is to live below your means. So raise your hand if you ever heard this phrase for my parent or a teacher or a coach back in the day, just because you can doesn't mean you should. And that applies to adults today. Just because you can go get a credit card doesn't mean you should. Just because you can buy a bigger house and the bank will give you more money, doesn't mean you should. Just because you can go shopping for new shoes every single week doesn't mean you should. Wealthy people stay wealthy because there is a part of them that always remains a little frugal.

They're always questioning those purchases. So instead of blowing every penny, maybe they, you know, buy a more modest house. They pay for a reliable car in cash. They save up for their annual summer vacations or skiing or whatever they do and they cash flow that trip. So I would say, live with a little bit of wiggle rooms that you can have some excess margin to think about things long term. But again, living below your mains and not spending everything is so crucial. All right, tip number five for high earners building wealth is to continue to follow a monthly budget. So just because you're a high earner doesn't give you an excuse not to

budget. For so many people, like, well, I just make too much money. I don't want to feel like I'm like, you know, nickel and diming every little thing and all of this. Listen, you make too much money to not have a plan, okay? So making sure that you have a plan and track your expenses. Winston and I, we are on Baby Step 7, and we do this, you guys. We track our expenses every single month. Honestly, we do it almost every single day in the every dollar budgeting app. So if you've not checked out this app, make sure to do this because when it comes to budgeting,

the best thing that has happened for us is it has caused us to be intentional. And it causes us some red flags of like, oh, we always spent more this month here. even if we're living within our means, it's still a reality check of, okay, did we need this? Are we managing our money wisely in this? I mean, it really is accountable when you're looking at numbers on something like the Every Dollar app. It's so great. And, again, it's a great place to go if you are needing to pay off dead.

If you're needing sinking funds, I mean, the app has it all, which is so great. But I still, again, want to be organized in all of it. So whether you're a high income earner or not, make sure to do this. All right, my number one tip. for building wealth successfully when you are bringing in a higher income is to work with a professional. So having a financial mentor or a professional investment advisor is crucial when it comes to managing your money. So again, having somebody that does this professionally, I think is really important, especially

when it comes to your investing, to sit down with them. And they, again, they live in this world. They are looking at everything from taxes and estate stuff. I mean, they're looking at the whole picture, and it's just really wise to sit down with somebody. And then I do like the idea if you have somebody in your life who has been successful and you love the way that they manage their life and manage their money, you know, they could be a good resource just to ask questions. If you're new to some of this and you're trying to figure out how to do it and you have someone in your life you trust, go talk to them as well. Get connected with a

smart investor pro who is an investment professional who can actually sit down and help you when it comes to the technical side. And again, I think it's really, really crucial. So make sure to check that out. So the one thing that I love about money and personal finance is that a little bit of legwork on the front end has power to create such long-term success. Now, learning the basics and having good money habits and consistency, all of that is so crucial. And before you know it, you'll be making more progress than you ever thought was possible. And it might sound cheesy, but it's true. And this is just one of the many reasons why I love my job, because I'm always blown away by how people are able to transform their finances once they have access to the proven tools they need to actually let their

money work for them. But there are a few tricks of the trade that you can't just put on autopilot. So that's what we're going to talk about today. So there are five numbers, percentages, rates, whatever you want to call them, that are really important to keep your eye on. I'll explain what these are and how you can leverage them to build wealth when you track them consistently. All right, the first number that you need to track in order to build wealth should also be your first step on your financial journey, and that is debt. So before you start tracking Zillow or CarMax or the stock market, your number one priority should be looking at how much debt that you have and how to eliminate it completely as quickly as possible. So keeping in mind,

the word tracking there is something that is active, it is moving, and your amount of debt is going to change over the course of time for better or for worse. But as you start paying, it down, obviously that's for the better. And so again, it's this idea that you're saying, hey, I'm going to know the amount of money I have that I owe to people my debt, and I'm going to have a plan to start paying that off. But the longer you put that off, the longer it's going to take you to pay off debts because of interest that you're continuing to pay, even some late fees, if you're late paying those bills. So to get started with this, I recommend doing something how the debt snowball. This is a method that we've talked about for so long, and this helps you build

momentum when it comes to paying off your debt. And this is where you're going to list out all of your debts, smallest the largest, regardless of the interest rate, pay minimum payments on everything, and attack that smallest debt first. Which brings me to the number two number that you should be tracking when you're building wealth, and that is savings. So when it comes to an emergency fund, this is crucial. I always tell people to get a $1,000 emergency fund first and foremost. And then once you're out of debt, you can bump that up to three to six months of expenses. Now, once that's all done, you have no debt, you have a fully funded emergency fund, then you're going to be looking at your life and you're going to want to know those numbers to say, hey, do I need to be saving up to

replace a car? Do I need to be saving up for maybe a vacation we want to take? Am I saving up for things like retirement and accounts that are out there that I won't see for maybe a few more decades? Whatever it is, you want to be able to actively track your progress over time to know what is in your savings, because this is a really crucial number because that emergency fund is there to catch you when life happens, but also things like sinking funds is going to help you live a lifestyle that you want, but doing it the right way. All right, the third number you should be tracking is something that applies to almost everyone on earth. And that is your income. Your income is your largest wealth building tool. It is the thing that is going to help you

build wealth over time. Because when your income comes in and you don't have half of it because it's going out to debt payments, it's hard to use the remaining income, not just for your life, but in order to invest and do things to help you build wealth. So when you have your entire paycheck working for you, that is so crucial. That's why paying off debt is really important. But it is important to know how much money you have coming in, knowing that number, and where it's all going. So a monthly budget does this, you guys. It is so crucial. It is a plan to help you when it comes to your spending. If you need to put money aside for savings, like we talked about earlier, all of it. But none of this is possible without that income. Your income is really crucial.

And I can give you one piece of advice when it comes to tracking your income because it's all about balance. And most of us have had a desire to make more money or maybe you're like, oh my gosh, I want to do bigger and better things. And listen, that desire is not a bad thing. And I think it's great to be motivated and to work hard and to earn money and provide for yourself, to be giving and being generous. But make sure all of that is going alongside this idea of contentment as well. because I hear a lot of young professionals say that everyone should be job hopping every year because if you move jobs, then you actually have a better chance of making more money and all of this. I get the drive behind this and studies have shown that moving around different companies

increases your salary by a larger percentage than just staying with one employer forever. But I don't necessarily think that that's the right mindset to have all the time. Because, again, in life, there are pros and cons to everything. And if you're really happy with your current job, then stay. I think it's rare to find a place that you love when it comes to work and it aligns with your values, your skill sets, your career aspirations. But with that being said, pay attention to your raise history. And if you haven't had one in a while, talk to your leader about that, even do some market research

and know, hey, what are some comparable roles even in my city? And make sure that you're earning enough money to be pushing your financial goals forward. Also, that you're getting paid market value, I think, is really important. But again, you want to be doing all of this. Those things are so good and so great, but sometimes we could just like, we want to claw from more and more and more. And again, sometimes that motivation isn't necessarily bad, but make sure that you do have a level of peace and contentment, too.

So I think familiarizing yourself with numbers is going to really help you know appropriately, hey, with my income, am I where I should be? And I think that's a really crucial question to ask yourself. All right, the fourth number that you should be tracking in order to build wealth is something that's related to your income and works in tandem with. Like I mentioned earlier, I said I would circle back on this, but that is investing. So we touched on this a little bit, but again, once your emergency fund is funded of three to six months of expenses, investing is a really crucial number to know.

And that is 15% of your income should be going towards building wealth. And these are going to be things like a Roth IRA or a 401k at work, but these things long term are going to be making money while you sleep. I mean, it's amazing. Compound interest is a really beautiful thing. But your work doesn't end once you just start investing. Make sure that you increase those percentages over time once you've paid off your house and everything. So, for example, again, let's just say you had no mortgage.

Your kids' college was taken care of. Everything is good. Then you want to be increasing your giving and you're investing. And I think at that point, it's a really crucial part of your life because it's going to probably be later on when you're a little bit older. So you're going to be able to throw some more money because retirement is coming sooner than you think and you want to be prepared for it. So again, that 15% is a really crucial number to know, and it will increase over time.

But also, I think it's fun to look at your progress when it comes to investing. So if you're interested in that, make sure to check out our Ramsey investment calculator. It's really easy to use, and it can be really motivating to know where you're headed when it comes to retirement. So plug some of those numbers in. Have some fun with it. All right, the fifth number that you need to track is actually three numbers in one, and it all has to do with your mortgage.

So you want to pay attention to this percentage, 25%. Your housing costs like your rents, mortgage, insurance, HOA fees should all be about 25% of your take-home pay. So this percentage is really crucial because we want to be able to free up your other 75% of your income to work for you. So whether that's investing or saving or giving, whatever it is, so that your house isn't taking up so much of your income. Next, I have another percentage for you to track, and that is interest rates. So interest rates are in the sixes and sevens right now as we're filming this. they could drop soon. I mean, who knows? We don't know. So be watching those numbers because if you're buying a house recently, yeah, your interest rate is higher than it was a few years ago, but maybe you can

refinance down to a lower rate when rates start to drop. So mortgage rates are constantly changing, so again, keep your eye out on that. And then the final number that you want to track is principle versus interest when it comes to your monthly mortgage payment. So the quicker you can pay money towards the principle of what you owe, the actual amount of money that you borrowed from the bank to buy your home, the better off you're going to be. So making a couple of extra mortgage payments every single year can actually shorten your timeline drastically and can save you thousands of dollars. But what you want to do when you pay that is to make sure to tell the mortgage company, put this extra payment towards the principal. And again, it's really, really key here because

when you're paying down that principle, it's going to cause you to get out of that mortgage so much faster. And the idea of paying off your house, I know it can sound so much. weird and it sounds so crazy, but people are doing it, you guys. So it's actually really impressive. So run some of those numbers and look at it. There's a lot of them to keep track of when you're building wealth, but it's crucial, you guys. So stay on top of that. All right, if you love this show, make sure to leave a review so we can hear your feedback. It helps us out so much. And while you're at it, go ahead and subscribe to the podcast and share it with your friends and your family because word of mouth and spreading this content is so, so important, you guys.

we want everyone to be in control of their money. So thanks so much for listening, and remember to take control of your money and create a life you love.