Two Ways to Protect Your Growing Income

There is no doubt that these are challenging times financially, and inflation is not your friend when it comes to protecting your income, even as that income increases. Under these conditions, even if you are making progress in gaining promotions and raises or increasing sales for your business, sometimes it feels like you are running faster just to stay in the same place. It will take some extra discipline to protect your income even as you earn more, but it can be done.

Two proven ways of establishing financial security and protecting your income when you rely on income are: truly living within your means, and making sure your money is stored in efficient wealth-building accounts that provide income. Let's elaborate a bit.

Live Within Your Means, Don’t Commit It to Service Debt

Practically everyone has heard the phrase “live within your means,” but many people conceptualize it as only making sure that less money is going out than is coming in a given period, such as a month. While that is certainly a good thing to do, adhering to that short-sighted goal is not going to do much to protect your income. 

Living within your means should signify taking a long-range look at all your financial goals. Further, “living” should not just mean getting by right now, but living out your life as you want to live it.

For example, if you adjust the basic concept of “spend less than you earn” and spread it across twelve months instead of one month, you realize that there are going to be certain expenses that impact your calculus. In the twelve-month view, you realize that you should account for periodic expenditures that don’t fit neatly into a monthly budget – like having to buy new tires for the car, going on a vacation, buying Christmas gifts, replacing the old dishwasher, or unplanned medical expenses. Your income must cover all of these expenditures without accessing credit or raiding your savings.

But even an annual budget can be short-sighted when it comes to establishing financial security and living the life you want. A good plan will look further into the future and will include things like saving for college tuition for your children, your retirement, eventually replacing your vehicles, or remodeling your outdated kitchen. Maybe your ambitions are even bigger: owning a second home, buying a boat or RV, taking a grand tour of the Orient, or buying your mom a house. These may sound a bit “pie-in-the-sky” when you are just starting out, but there is no reason these goals should be unachievable: if other people can achieve them, so can you.

In addition, your vision should take into account that your life may not go as smoothly as you hope. You may lose your job, your spouse may get seriously ill, or some other misfortunate may befall you. Looking at a long-term life plan means managing your income so that you are prepared, as much as possible, no matter what may come your way.

To do this, you need to have self-discipline. Just because you want a boat does not mean you should make that “dream come true” if it means committing your future income by going into debt to purchase it. Protecting your growing income means just that: protecting it, not spending it.
It is surely a challenge to plan your long-term financial life but if you are concerned about protecting your income, you can start by appreciating how the financial decisions you make now affect your long-term financial well-being. Understand the value of your income in light of all the aspects of your life that have a financial aspect and impact. 

When you are starting out, you may have to allocate a lot of your income to things like paying off student loans or your car. But even if your plan starts with climbing your way out of a hole, allocate your income toward making sure that, once you are out of the hole, you continue climbing toward the peaks you want to achieve. Your plans may change over time, but take steps to put yourself in a position that allows you to achieve your future goals, whatever they may be.

Fund Wealth Building Accounts That Provide an Income

Another way to protect your growing income is to make your income work for you with a passive wealth-building account that provides income either now or in the future. Unlike your job, in which you have to put in work, effort, and time in order to bring in income, a passive income vehicle is an investment that provides financial returns without you having to work. 

Some options, like your home, help you to build wealth as they increase in value. Your home – as well as assets like artwork, or collectibles – do not provide income to you unless you liquidate them. If you do not need additional income now, these can be wise places to park your money if their value, either in terms of money or benefits, has the potential to appreciate significantly. Some investments may also have tax advantages either now or in the future, such as 401(k) retirement accounts, Roth IRAs, and Health Savings Accounts.

Other types of accounts, however, can provide you with a continuing income stream either now or in the future such as stocks or bonds. The simplest example is a bank savings account, which pays you interest on the money you have deposited. However, bank interest rates are far too low to provide much of an income.

Another great option is cash-value life insurance. This could be a great option given the safety of the funds in the policy, access to the funds, and the value of the cash increases through interest and usually dividends. Cash value life insurance also offers tax advantaged benefits as well as other benefits. 

In evaluating a passive income stream, you should concern yourself not only with the rate of return but also with other factors. Look at every aspect of the investment, including the degree of risk, the amount of active management it may require, liquidity, and the tax ramifications. 

For example, investment in a rental property can provide you with an income stream. Once you purchase the building, whether a house or office space, you are able to collect income in the form of rents, while still gaining the benefit of having the house as an asset. However, owning rental property requires effort on your part: you have to find and keep good tenants, keep the property in good repair, pay for property and liability insurance and property taxes, or at least pay an agency a fee to manage the property for you.

Annuities are another example of a passive income investment. One of the advantages of an annuity is that, like a bank account, once you purchase the annuity, no work is required on your part to receive the income. The returns are significantly higher than the rates paid by banks – as high or even higher than the stock market. While you cannot sell or liquidate your annuity, one unique benefit is that it can guarantee you a specific level of income for the remainder of your life, no matter how long you live.
If you are interested in finding different ways to protect your growing income, Mountain Financial can help. We assist clients with financial planning so that they can build their wealth over the long term. For insights and recommendations on how to meet your financial goals, contact Mountain Financial today.