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Podcast: Thoughts For Young High Income Earners

August 9, 2021

Young High Income Earners

In this episode…

Young high income earners have a unique opportunity to build wealth and reach financial independence relatively quickly.  In this podcast we discuss what they can do to make the most of their situation, and the traps to avoid.

Prefer reading?  Find the transcript for this podcast at the bottom of this post.  Keep in mind, it’s computer generated, so it won’t be perfect.


Listen to the show…

(or download the mp3 file here)


Discussion points…

  • The most important thing to consider  (04:29)
  • Making the most of your high income  (09:35)
  • The challenges high income earners may face  (12:13)
  • Dealing with expectations from other people  (16:34)
  • Should high earners invest using complex structures?  (22:29)
  • Self-employed workers chasing tax deductions  (26:57)
  • Deciding how to invest as a high income earner  (30:26)
  • Final thoughts  (41:01)

Resources and stuff mentioned…

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Podcast Transcript
Podcast: Thoughts For Young High Income Earners | Episode 33 | FIRE & Chill

Pat: [00:00:00] Welcome back to the fire and chill podcasts. We are your hosts, pat from lifelong shuffle and dave from strong money Australia. Today’s episode is our advice for people higher up on the income ladder, especially young people because they have the biggest opportunity.

Dave: And this episode was actually prompted by an email from a listener. And they mentioned that this might be a good topic to cover because they’re in this bracket and dealing with this situation themselves. And we agree that this is a pretty good topic because high income earners do tend to have a couple of things that are a little bit different about their situation than the rest of the people in the FI community.

And just to be super clear, like our advice will be just as applicable for high  earners, [00:01:00] as it will be for those earning an average income.

And this podcast does skew a little bit younger, which is why we’ve put the put the emphasis on the young high-income and to see, and they do have the biggest the biggest opportunity available to them because obviously earning a large income at a younger age, puts them in a really good position to build up some wealth and financial independence at a pretty, pretty young age. As our resident high-income fat cat mate, you can tell us the tricks of the trade, and how to make the most of a high income at a young age.

Pat: I’ll do my best. Dave. I’ll do my best, but in the first things first, maybe we should talk about exactly what we mean by high income earner, because that varies quite a lot, depending on who you ask,

Dave: Yes, that’s true. That’s true. We didn’t actually talk about this before the show, but let’s just make it up as we go along.

Pat: that’s the way we do it.

Dave: I’m thinking how about a hundred grand, anything over a hundred grand? Would you consider that high income?

Pat: For a single or a family

Dave: For a single.

Dave: if we look at the average or the median full-time wage, which is a pretty similar it’s about 75,000 or $80,000 per year so I think anything over a hundred, it would, could be considered high. What do you reckon?

Pat: Yeah, I’d say that is pretty good. I was going to say anyone in the highest two tax brackets, which would be 120+,

Dave: Okay. Yeah, yeah,

Pat: 100 is a pretty. We’re pretty close there though. That’s not too different.

Dave: And what would you say is high-income? As far as a couple goes, I’d say somewhere like 150. So where you’ve got you’ve got two adults working full-time who are earning essentially like the average or the median wage. They’d be on about a hundred and 150 grand to combine. Cause that’d be 75 by two people.

Pat: Yeah, I think that’s pretty fair. Especially if like they’re sharing accommodation and sharing other expenses that gives you a similar sort of lifestyle to a single on a hundred K let’s say.

Dave: Yeah, we won’t get too into the weeds. Cause then we can start talking about tax and all the other things. So we might just leave it there as some rough kind of guidelines to go on. So somewhere kind of six figure range would be high. Yeah.

Pat: we’re going to get so many comments from all, everyone on the spectrum. Some people are going to be like, what are you talking about? 100 K you’re rich if you’re over 80 K. And then on the flip side, we’re gonna have people saying, oh, a hundred K is nothing you can’t even make ends meet on a hundred K when you’ve got a family and I’m like, oh fuck, here we go.

Dave: yeah, you can’t keep everyone happy.

Pat: You can’t keep everyone happy. We’re doing our best. See, I think that’s a happy medium measuring points.

Dave: Yeah. Let’s just run with that.  What is the, what’s the first thing that we need to consider if we are a high income earner pat?

Pat: So the first thing we need to consider is just because you earn a lot of money. Doesn’t mean you’re going to automatically start saving a lot of money. Saving isn’t something you do in the future when you finally earn enough to save or it’s not something that’ll just automatically happen. Once you start earning more money, it’s actually a conscious decision.

Dave: Yeah. Cause I think there’s some, there’s something in our mind that leads us to believe that. If we’re making this big income, obviously that means there’s lots more cash coming into our bank account. So surely we’re going to end up getting somewhere financially, but it doesn’t quite work that way.

Pat: It never works that way. Money, inevitably, when someone starts earning more money and inevitably just disappears out to more lifestyle inflation, fancier things, more expenses, more comfortable life, bigger, house name, your drug. It’ll disappear on that. As soon as you start earning more of it.

Dave: We just find more ways to get rid of it.

Dave: Is that, is that why they call it disposable income

Pat: Oh, don’t they just love that term disposable

Dave: And where consumers were not like humans. We’re called consumers, the average consumer,

Pat: The avg consumer with a disposable income of a hundred K that we need to access. You can imagine boardrooms actually speaking like that though,

like, oh, here’s our target demographic. This is how much disposable income we think they have. This is how much of it we think we can get.

Dave: And that’s the thing. Yeah. Income is their opportunity, which is like a rip off of a Jeff  Bezos quote, which is your margin is my opportunity. That’s how that’s, how companies would see us and our paychecks.

Pat: Yep. Yep.

Dave: Interesting. But yeah, the point here is that you’re essentially playing by the same rules as everyone else. There’s nothing like that’s kind of magically happened just because you’re on a higher income. So first thing is first, saving is the most important thing you can do. High income, low income doesn’t matter because without saving there’s no level of income that’s coming into your bank.

That’s going to save you if you’re not saving any of it. It just doesn’t work. There’s plenty of high income people. That, you know, pat and that I know, and that everyone who’s listening to this probably knows who I know better off than a middle income earner or a low income earner, because they’re just using every one of those dollars for a more expensive lifestyle.

And so they’re not actually making any financial progress as such.

Pat: Yep. That’s true. And. It’s a little trap. It’s the little crap that’s always there. It’s called lifestyle inflation for a reason, because as soon as you inflate your lifestyle, as soon as you get used to the more comfortable shoes, the more expensive groceries, whatever it is, you can’t even imagine your life not spending that money.

Like it would just be too painful. It’d be like cutting yourself, like, oh, okay.

Dave: It’s funny, isn’t it like, it’s very peculiar as a, for a thing to happen because and the thing is that you’re not actually happier than you were before.

Pat: No,

Dave: And if you go back down, it might be a little bit painful at first because you’re adjusting, but then six months later, you’ll be just as happy as before.

It’s so strange, the human mind.

Pat: it’s very strange. And you actually notice people falling into this trap when you’re speaking to them online or they’re making comments. They think that you’re living like a poor person, because it’s like a little lower standard than what they’re used to. They just can’t imagine a life without RM Williams, boots, polo shirts, and BMWs.

I’m being a bit facetious there, but just painting the picture. It’s it’s impossible to live a life without some of those little luxuries, those little extras for people who have gotten used to them and in their mind, anyone who. Has the ability to buy those things, but chooses not to is living a, like a pauper,

Dave: Yeah, essentially, missing out.

Dave: We just pointed out that saving is the key, regardless of your income and especially a high income and it can make the most of it. But pat, did you notice that we point out the most boring thing first? I think as podcast hosts, we’re actually supposed to hook people in by saying something exciting at the start to keep them listening.

But we, our default kind of option is to tell you like the most boring, the boring truth upfront.

Pat: The boring truth upfront. Yeah. That’s all right. You’re absolutely correct. It’s like, oh, is that the secret you need to save and just invest regularly? Oh what else? What more is there to say? There’s nothing more to say, oh, well, let’s end it there.

Dave: But maybe that’s like a little qualifier for our listeners. If they choose to keep listening after that, then they’re going to learn some more. But if they’re, if they choose to switch off right now, cause that’s not the message they want to hear, then they’re going to miss out right.

Pat: Yeah. Not fancy enough. It’s not complex enough. You need to like route all your investments through trusts and investment bonds and get like companies to buy it back. And then depreciate this. And after you’ve paid an accountant, $3,000 in a financial advisor, $4,000, and you’ve run all of your money through.

Complex incomprehensible like financial structure of companies and trusts and investment bonds and holding companies. And it comes back to you. That’s the way to make money as a rich

Dave: Through luck, this game of Cayman, islands, snakes, and ladders.

Pat: complex web of making money. And then Dave and Pat’s version save and invest.

Dave: But as a high income earner, obviously the main opportunity here is to make the absolute most you can, of the high income that you have while you have it. Because if you are on a high income, you should be considering yourself, like pretty lucky because. You’re already living in one of the highest income countries in the world being Australia.

And then you’re also at the top of that ladder, essentially being on a high income, even one of the highest countries income countries in the world. So that’s a pretty damn good position to be in.

Pat: In one of the richest times in history.

Dave: yeah,

Pat: if not the most richest time in history. Yeah.

Dave: That’s quite an extremely good position to be in. So it’s worth pointing that out. I suppose it’s also worth remembering that while you might be on a high-income now there’s no, there’s nothing guaranteed about that income lasting forever, for whatever reason. Whatever industry you’re in the industry could change, your job could get replaced in the next 10 years. This might not be nice to think about, but it’s definitely possible you could get injured or decide that you really don’t like that line of work anymore.

There’s lots of stuff that could happen that would. I guess put it, put a bit of an early end to that high-income gravy train that you might be on right now. So that’s with thinking about

Pat: Yeah, really uncomfortable thoughts, but high incomes might not last forever. And you probably want to be in a position where you’ve set yourself up financially, if they don’t, or even. You were to be able  to earn a high-income forever. Maybe your priorities change like you have, you want to become a sole carer for one of your child because they, something happens to them and money gives you that option.

Dave: Absolutely. That’s it just when you touched on before, like there’s a ton of stories here in Perth, you’ve probably heard them over east, even of people. Making hundreds of thousands of dollars, like during the mining boom years, and then essentially ending up broke some people even living in their car because they just spent all of it.

And they even used their high-income to get loans, to buy houses and jet skis and Utes and whatever. And there, they actually, when the mining boom ended, a lot of people lost their jobs and it ended pretty badly for quite a few people. They really ended up worse off than if they had never got that high income job in the first place, because they accumulated all of these extra possessions to look after and extra debts to service.

And while it seems strange that you could end up in a worst position for having that high income, that’s definitely the case for some people

Pat: Yep. Yep. They didn’t know how to manage that money and they ended up much worse. Okay.

Dave: So I think the point here is that you can use that kind of gravy train that you might be on right now to your advantage and build wealth and investments. Even faster than someone on a low income earner or low income can.

But having said that there are some things that, uh, unique to higher income earners they might be facing. the job might require or might come with an extra workload or extra stress associated with it. They might be taking on more responsibility or working longer hours. So that’s something to think about because you want to make sure that you’re not sacrificing, too much of your health and too much of your.

Time for more money, because that can come back to get you, come back to bite you a little bit later. You can get away with it for a while. If you are putting yourself in this highly stressed situation. But that can definitely come back to get you a bit lighter if you’re doing it to the detriment of the rest of your life and your health, perhaps

Pat: Yeah. Yeah. I think actually we were talking about this before the podcast started. I used to work in an organization where Over time was just a given for some employees. Like they would work every weekend, they’d work 40 hours overtime per month, and then they’d work the other two weekends per month as penalty rates shifts.

And so they’d essentially be working. I haven’t done the math in a while, but 24 days a month or 26, whatever it is and they’d built their entire lives around this base of income. Like they got an home loans for this amount, maybe car loans, their families were, had become used to this income. Maybe they’d sent their children to higher cost schools, so they could not stop working all of that over time, even if they wanted to after five or 10 years to the point where trying to remove that over time, but actually became quite an issue for the organization.

And they would get, maybe get unions involved, but despite what it was for the organization plus these people they’d work themselves into this position where they could no longer stop working these extreme hours because they needed  the money.

Dave: So it’s essentially if we think about a treadmill, they’ve just turned that dial up from seven to 10 on the treadmill. So it’s gone faster

Pat: It’s going faster and faster. And it was so unhealthy. You could see it. Like people were tired, it was terrible. But even more so maybe not so much for people who work like blue collar jobs, where they get overtime pay to them. But even if you’re a salary employee, sometimes the glob just comes with a lot of extra stress, extra workload, extra responsibility, much longer hours.

That’s a tough one. It definitely can’t last forever. I see counterparts and colleagues of mine that are maybe slightly older than me. And they’re definitely on that treadmill with myself as well, but at least I have an exit plan in the not too distant future.

Dave: Yeah, good point. So this loops back to the last point where that, that high-income opportunity might be there for a long time, but you might eventually get sick of the stress and the responsibility. And you might want to drop down a bit, maybe if it’s a part-time work or maybe just to a lower level again, because you want to take a more relaxed role in that, in the work that you’re doing.

Do you see people doing that pat or not?

Pat: I very rarely see it, but as people can’t afford to lose the income or maybe they just psychologically tie their sense of self-worth to that income. So they don’t want to reduce the.

Dave: And the job title.

Pat: and the job title. So that’s a problem as well, a different completely different problem. Lots of problem as well. Yeah. This one clicks with me a lot because yeah, I think I’m right in the middle of that position right now, high workload, high responsibility, long hours. And can’t wait to go. Part-time.

Dave: Yeah, I bet, man.

Pat: Already talked to my employer about it.

Dave: And they’re on board.

Pat: they’re on board. Have a two year plan, we’ll say, but I might bring it. I might bring it forward. I don’t know.

Dave: Uh, I have to definitely do an update with anything in that area changes, or I have to do an episode of it.

Pat: Yeah, definitely.

Dave: But if you’ve been listening to us for a while, you’ll know that pat and I are not about just trying to make the most money that you possibly can. We’re really about trying to balance the act of making money and making financial progress with living a healthy and enjoyable life now.

Pat: Yeah, absolutely. Money’s worthless. If you don’t have your health and happiness, as they say. So make enough money to enjoy yourself, live a good healthy life and reach some of your goals, but don’t kill yourself doing it, which as a digression, kind of why Dave and I, aren’t the biggest fan of side hustles, unless you really enjoy what you’re doing because you don’t want your entire life to become about making money.

Dave: Yeah. And just, you touched on this before, but we’ll expand a bit on it. Now, pat, sometimes high-income earners kind of face some different kinds of problems because they’ve got expect, they might have expectations from their peers about how they’re supposed to. They might be supposed to live a certain way or have a certain lifestyle because of their income either from peers or parents or society.

Pat: Yep. just remember Nothing bad is going to happen. If you start spending a little less, if you don’t quite meet the Joneses in their front yard, so to speak.

Dave: it’s definitely something that people struggle with, I think, because they want to fit in and they want to be liked. Right. Naturally drawn to doing what other people are doing and what seems like the accepted thing to do in their role. Maybe they’re a doctor, maybe they’re whatever, and so there’s a certain kind of expectation from other people that comes with that and say they don’t want to be, they don’t want to feel like an outsider. Like they’re a bit weird because they’re doing different things to what everyone else in that list. Are there appears at the kind of work community group is doing.

Pat: So there’s a great book called the subtle art of not giving a F.  People in this position should read it because at the end of the day, you’ve got this one life. And if you want to run this treadmill, trying to impress other people, instead of focusing on your own goals and your own plans and aspirations, right. That’s not the way to do it. Who gives a shit what other people think.

Dave: You’ve really got to, you’ve really got to focus on what you’re doing and rather If he can ignore what other people are doing, what other people might be expecting of you because you don’t really need other people’s approval. At the end of the day, those people are just essentially copying each other.

Anyway, they don’t really know what they’re doing. So if you’re doing something else, you’re probably on the right track because most people end up making no progress. And they’re just wondering in a pack. Essentially, but if you’re doing something different, you might look like an outsider, but you’re probably on the right track.

Pat: there’s definitely a whole lot of people out there that aren’t very intentional with their lives or what they’re doing. Like you said, they’re just going along with the flow without really directing their financial life in one way or other. So you don’t need to worry too much about that sort of peer pressure, especially if you’ve got a plan and you’ve got some intentionality that will make you feel a lot better and a lot more in control of your life, right?

Dave: Yeah. And so making decisions based on what you feel is right for you that’s gonna go a long way because that’s going to help you avoid some of that lifestyle inflation that pat was talking about earlier. Thinking that you’re supposed to buy certain things or have a certain car or whatever it is.

Cause that’s really what destroys high-income earners at the end of the day and leaves them no better off than someone on a low or middle income earner. They’re, they’re essentially just on a, on the same kind of treadmill might just have a fancy gold buttons on it or something like that, but they’re still, it’s the same thing.

Pat: same thing. It’s just a higher quality treadmill. It’s just a nicer treadmill. It’s easier on your knees and all that sort of stuff. Uh, so what does this actually look like in practice? We need to keep lifestyle inflation under control, because really that is what destroys high income earners potential to save a lot of money, leaves them no better off than people who earn less money and, um, and who are also on the treadmill. So you can obviously afford to spend more than people who don’t earn as much as you do.

So you can definitely enjoy that. Still save a lot of money while employing some of your high income, but just don’t go crazy with it.

Dave: Yeah, this is a good point because high-income earners do have a much greater capacity to spend more and to have splurges here and there. And that’s not even going to move the needle. It’s not even going to matter. They can still say 50, 60, whatever percent of their income, if they get the basics right.

Not going out for that $1.2 million mortgage, the two financed cars, whatever, because if they get all that stuff, right, they can spend a bit extra here and there compared to people on the lower income and still make huge financial progress. So that’s good to remember. I think because they don’t in their mind, they can feel a little bit more relaxed because they don’t have to optimize to the extent that someone on less money would have.

Pat: Yeah, correct. And that can really create a lot of freedom to your every day. Because living in psychology, as long as you don’t do anything drastically stupid, you’ll probably be more than all right. Like you can afford to just go about your day, buy the groceries you want eat out occasionally with friends and do all that sort of stuff.

As long as you don’t go buying, $200,000 Teslas or something on a yearly basis, you’ll probably be fine.

Dave: And is this something that you notice pat, that as your income has risen, the amount that you’re able to spend on just without even really thinking about it? Just on little extras here. Have you noticed that the amount that you’ve been able to do that has gone up without affecting how much you’re actually able to save, like in terms of your savings rate and financial progress?

Pat: Yeah, a hundred percent.

Dave: Okay.

Pat: I’ve been able to save more every year, year on year while also spending more every year, year on year. And my savings rate is very healthy, even though I’m spending more than I did. My savings rate has gone up, even though I’ve spent more than I did last year and previous years. I definitely do not try and optimize all the small expenses like I used to when I was on a lower income.

And now I just like to just go with the flow. I’ve got the major things, correct. I’ve done the hard yards, so to speak with the early on saving and getting myself set up. And now that snowball is working in the background and I’m really quite relaxed about any sort of small everyday purchases I don’t even think about.

Dave: Those fat cat cigars that don’t even register. Do they pat?

Pat: It’s all about the vaping now, mate, the mahogany desk, the real camel leather chair. The whiskey smoking a cigar while I tell my minions how to make me money

Dave: Uh, I knew it. I knew it.  No wonder you’re not in a rush to leave work. Mate you’ve got it too good see.

Pat: too. Good. It’s just too easy.

Let’s keep going here. And let’s maybe talk about some of the traps that high-income people can fall into or. Yeah, let’s just leave it at that.

Dave: You did mention it before in passing. So one of the, one of the things that high-income earners are encouraged to do or told to do is to start using expensive structures and elaborate. Setups to invest with. It might be trusts and companies and whatever, or to search for kind of lucrative tax efficient in air quotes investments because of their high-income position.

But usually, usually the tax effective investments are quite rubbish.

Pat: as we went through last week.

Dave: Uh, yeah. Yeah. There’s usually a lot more to it than meets the eye. And so the main thing you’ll probably maybe be encouraged to do is to invest using trusts and companies and all the rest of it. And that can make sense in some cases for some people, but for most people, we’d probably suggest that it is better to keep it simple that you probably don’t need to worry about stuff like that.

And to just choose Simple investments like you are going to choose in the first place rather than to search for super tax efficient secret havens to hide your money and say that it’s not going to eat you too much in terms of tax. What do you think that.

Pat: I agree with you, Dave. Something to keep in mind as a high income earner is yes, you can save money by using more complex investment structures. Keep in mind that investment structure has to remain in place long after you’ve stopped being in the top tax bracket. And long after you’ve stopped needing to pay that high amount of tax.

So you can’t very easily unwind a trust and company without incurring a huge CGT bill, because you essentially have to sell out all the investments that unwind it. So it’s not as straightforward as it would. I’m not saying that you won’t make money doing it that way. You almost certainly will, but the risk reward, maybe not risk the gain that you get from it and what you end up needing to spend on it.

And the additional complexity that you need. Uh, I don’t know if it’s that straightforward unless you’re on an excessively high income, not. Dave, and I define high income at the start of this episode as above a hundred K I think to start using those complex tax structures, you probably need to be in the extreme, extreme high income range to really be worth the extra complexity, to deal with that stuff and make enough money saving tax.

Dave: I suppose you’ve also got to remember that just because you set up a trust or whatever it might be. The rules on trusts can change over time. They’re not set in stone and you might remember the proposal to change the tax outcome for trust. A few years ago in the, it was proposed at the election.

So there’s nothing to say that those kinds of rules and regulations can’t move against you. If you do have these kinds of structures set up.

Pat: And setting up these structures then basically ties you to needing. An accountant and a lawyer for the rest of your life.

Dave: Uh, you, I think you mentioned it before pat, but so let’s say you’re investing for financial independence. You’re trying to build wealth and maybe retire a bit earlier. So let’s say that takes 15 years after 15 years, you might have saved a bunch of tax in that time, but after 15 years, your tax rate is going to be pretty low because like, we’ve mentioned before you’re living off your investments at that point and the amount of tax you have to pay on your investments up being pretty low, like very low.

Pat: Yeah, and then you’re stuck with this structure or this may be trust or company for the next 50 years and you’re paying money to administer it and keep it going and doing additional tax returns. And I don’t want this to get too much about investment structures and their pros and cons, but it’s. Often making a monetary, like a theoretical monetary gain by using the structure.

Isn’t enough. You have to be willing to take on the complexity for a very long time. If that’s the route you want to go

Dave: Yeah, it’s not such a straightforward go-to option. I don’t think.

Pat: Yeah. And I feel this is part of the tax fetish that we talk about often Dave is people hate paying tax. They hate it with a passion. Like it’s a visceral response. They want to get rid of it. No matter what, they’ll pay like an accountant $4,000 to save themselves $2,000 in tax

Dave: Cause mate, if even the accountant’s fees are tax deductible, so you can’t lose.

Dave: Wait let’s get into that now. Let’s get into tax deductions. Right?

Pat: Oh, perfect. That was the best segue.

Dave: All right. Sometimes high income earners, let’s say you might be a self-employed high income earner. So you might have quite a few ways, ways to reduce your tax, which com well, let’s actually let’s use this example. So we got a listener send through an email and here it is. I’m a 32 year old carpenter.

Your podcast is helping me get my shit together. Finally. Thanks for making it easy to understand financial independence. We get told to buy expensive Utes and tools to get less hammered at tax time, but do the tax benefits make up for it? Ah, good question ey pat.

Pat: Good question. Really happy that we’re helping you get your shit together. No, they don’t. So you will get the tax benefit on a $10,000 a year at a $20,000 or $30,000 a year or a $40,000 a year. You don’t need to buy an expensive to get the tax benefits. Keep in mind that this is like spending $2 to save $1.

You’re still spending more money, no matter what, like the more expensive thing you buy overall, you’re going to be spending more

Dave: Yeah. I think people miss that part. So sometimes I’ve actually seen that people actually think they get the money back.

Pat: Oh

Dave: Have you have heard of that before? That’s all right. I get it back at tax time. Well, it doesn’t work like that. It reduces the, reduces your income for tax purposes. So let’s say you spend a thousand dollars on a tool, so you can, instead of your income being 70,000, now your taxable income is 69,000.

So the ATO will say your income is 69,000. Here’s how much tax you, and maybe you paid tax on 70,000. So you’ve paid slightly, too much tax. So you’ll get the amount. Tax back that you paid on that $1,000, you don’t actually get the $1,000 back

Pat: No. Exactly. So it does save you tax, but overall you’ve spent more money than you otherwise would

Dave: you have less than before.

Pat: Yeah. Overall, the net outcome is you have less money to save and invest them before, even if you save some tax. this is the same advice as we would be telling anyone else. Buy the tools and the vehicles, you need to do your job.

Don’t overspend on them by what you need to do your job competently and then claim the tax deduction on those. But don’t go out specifically buying the most expensive crap that you can see because you think it will make you money back at tax

Dave: yeah, because yeah, you’re still in a worst position because people might think hi, Higher expense means more tax deductions. So less tax means more money in my pocket, but definitely not. That’s definitely not the case,

I think part of this is people they want to believe that’s true.

Don’t you think that part of it’s that they really want to believe that’s the case, that they can go out and blast off and end up in a better position for avoiding the taxes so that cause like, cause I kind of want to buy the stuff anyway. They want to buy a new Ute and new tools.

Pat: Yeah. And then, so buying the new year to use new tools is keeper to your hip pocket than it otherwise could have been. So you’re there at the store and you’re like this is a ticket price of 300, but I’m going to get back, whatever 33% or if you’re in the top tax bracket, 47%, it’s basically half price.

Dave: Everything’s on sale. When you’re self employed.

Pat: Everything’s on sale when you’re self employed.

Dave: But that’s a hundred percent off if you don’t buy it in the first place.

Pat: That’s right, right. You still have to spend the money to get it. So not telling you not to buy the shit you need to do your job. Just don’t go out with the specific intention of buying the most expensive crap because you think it’ll save you time.

Dave: Yep. Good summary.

All right. Say, do we have any investment advice for. How high income earners might go about investing. Should they, what do you reckon, pat, should that go on? Bless them negatively geared properties, or is that what you would recommend?

Pat: man, can you even get a negatively geared property anymore?

Dave: Oh yeah. With the amount of expenses that are associated with property, that you can still get them. Trust me on that.

Pat: Okay. Okay. Fair enough. Oh, that’s right. People like do these depreciation schedules on new properties and then that helps you negatively gear it.

Dave: Nevermind, nevermind that depreciation’s like a future cost,

Pat: Yeah. That’s right. Yeah. I dunno. I think people think that it isn’t people think they’re getting more back than they are.

Dave: because it’s, like we said before in the last point, like that’s what people want to believe. They really want to believe that it’s like a free kick, like it’s. It’s free money, but you’re, you’re usually buying a new property if that’s the case. And when you buy a new property, you’re paying a premium because most of the values in the property, which is actually depreciating, not the land component, which is actually the valuable component.

Pat: yeah. You notice that lot sizes are getting smaller and smaller with new properties. There’s a reason for that. The developer makes money on the more land they can sell. Not necessarily, the most expensive properties they can build on land, but

Dave: Man, let’s not turn this into a property show. Come on.

Pat: no, let’s not. Okay. So Sue, there may be a more attractive option as a high-income earner because you do get the tax deduction or you don’t pay as much attacks on money.

This really won’t help you to build wealth to live off while you’re young, until you reach a preservation age.

Dave: So there’s a real trade-off there. You might be in your twenties. And on a high tax rate and you’re thinking, oh my God, super is supers like a tax Haven, which it really is. It’s very tax friendly environment to be investing in, but if you’re young and trying to build financial independence, it really doesn’t line up too well with what you’re trying to achieve.

Pat and I have said this before, I’d rather have a million dollars outside super and be 30 years old. No money outside super and 5 million inside Super. Cause it’s not really helping me live the life I want to live right now. Like yeah, it’s just, it doesn’t line up too well with what we’re trying to do here.

Pat: And the thing is, once you’re in a high income, you’re already getting quite a lot of money in super if you’re a payday employee. Some people will try and balance how much they’re putting in super and how much outside of super, so that they can with a buffer spend down there outside of super money.

And then when they reach preservation age, have that super money unlocked. So they try to game it perfectly with a bit of a buffer. I just find if you’re on a high income, you’re already getting enough in super that’s going to happen without you contributing very much more at

Dave: Yeah. Yeah. And especially when you consider that. Even if you’re, well, you don’t have a choice, but to leave it, but that’s super is going to grow. It’s going to compound every decade and when you can eventually get it, it’s going to be much higher than you think it is.

Pat: Yeah, Exactly.

Dave: I think people underestimate that.

Pat: For sure I’ve done some basic calculations, like some modeling on my super and without contributing a single extra dollar in real terms with a pretty conservative growth rate, I’ll already have 700 K in there by the time I reach preservation age. So it’s like in today’s

Dave: and that’s basically enough for a 30 grand income stream or something like that. So that’s very, very healthy.

Pat: Yeah exactly. Do I need to, I could save tax by putting more in there at the moment. And let’s say I was a bit older. Maybe I was 50 years old. That would definitely be something that I would do if I was on a very high income, I’d just throw it into because then it’s only 10 years away. Like the risk profile is so much different and.

You’ve probably already got enough outside of super to make you those 10 years. Whereas when you’re like me young thirties, I need to make my outside of super stockpile last me for maybe 30 years, let’s say so I essentially need a full fat fi like investment portfolio outside. Yeah. Super to last 30 years, I can’t game it.

You know what I mean? Because the 4% rule already takes into account a 30 year timeframe. there’s nothing there for me to gain. Anyway, I need the fourth, I need the full fat amount to make me to preservation age and then whatever comes in super is just about,

Dave: Yeah, we did speak a little bit more. Well, a lot more about super in our episode that we did just about super and an early retirement, which was episode number 14. I think it was.

Pat: Yeah, that sounds right.

Dave: So for, that’s not typically the best option, pat, it pretty much comes back to paying down your mortgage if you’ve got one or investing in a normal portfolio.

Pat: Yep.

Dave: we we did actually discuss that kind of trade-off as well. And that was episode number 26. And so both of those options. Are pretty good.

Like getting rid of your mortgage obviously is handy because it reduces your expenses often by quite a bit. But then investment also has it’s it’s pros as well. So it depends what is going to suit your situation and what you prefer.

Or we did go into a bit of detail in that episode.

Pat: So other options you could consider. Maybe some debt recycling. If you want to invest that way, if you’ve got a primary place of residence you can maybe pay off some of your mortgage and then get a split loan or, some other way to get the money out, to then spend it on investments and make that interest tax deductible, which is a very efficient way to invest.

Dave: Yep.

Pat: Did you ever actually do debt recycling?

Dave: I have done some of it. Yeah. But we paid, we took the money back out to use as a deposit for a property.

Pat: Oh, right.

Dave: Even better.

Pat: Even better.

Dave: So I, I did an article about debt recycling , which I’ll put in the show notes. If you want it to read a bit a bit about it, there’s quite a bit to it. So we could possibly do an episode about that in the future. I’m not sure how audio friendly it is to walk through scenarios on that. It might not be the best for audio, but we’ll think about it.

Pat: Yeah. Some very number, heavy topics are very hard to do in a podcast format.

Dave: Other than that, we’d just say, invest in, your normal low-cost long-term investments like index funds and just pay the tax. You’re gonna, you’re gonna end up with much more. You’ve got the accessibility of the investments by having them in your own name and outside sources. Yeah, you might have to pay a bit more tax, but it’s going to make a much bigger difference to your freedom and your ability to live a better kind of lifestyle with more freedom, much sooner than waiting until later.

Pat: And I let’s just look at this as well with  say an international shares index fund. The dividends you get on that are like two and a half percent. So even in the top tax bracket where you’re paying say 50% for simplicity sake in tax, you’d lose half of that to tax One and a bit percent.

Yeah it’s pretty shit, but it’s not the end of the world when you’re making seven, 8%.

And then you’ll stop paying that 1%. Once you get into a lower tax bracket. Anyway, for 10 years, you’re copying this tax. It is tax drag, which I,

Dave: When do you break it down? People think, Aw, investments. Lose so much the tax, whatever, but not really. When you really break it down, you turn a seven or 8% return into six or 7%.

Pat: Yeah, Exactly. Exactly.

Dave: reasonable.

Pat: That is reasonable. And again, it’s only while you’re in those top tax brackets, once you retire the next 30, 40 years, you might be in a much lower tax bracket. So you’re not, and you’re not paying that much tax. And if your investments go so well that you end up back in a high tax bracket, stop complaining.

Dave: you’re you’re in a very good position to be in at that point. And then you can always add money to super because of the low tax environment and you’ll be much closer to receiving it.

Pat: Yeah, exactly. Exactly.

Dave: where again, we’re having to remind people that, we’re not having to, but we’re choosing to remind people that tax is not really a big problem or such a hurdle that people think it is.

Pat: So another thing that people might decide to do today, or they might. Consider is preferentially investing in a lower income spouse’s name while they’re accumulating wealth. And this is not a bad idea at all. Especially if you, your spouse or partner plans to be in a low income for quite a while, but I’d just say, keep in mind that.

As you start to approach the aid you want to throw up down and hours and go in a low-income yourself. Or the higher income person wants to go into a lower income tax bracket. You would from a tax perspective, be best off. If you try and even out the amount you have invested in each partners.

Dave: As, yeah. As you can imagine, it gets quite tricky because one spouse might be a lower income earner now, but then you, so if you build up all the portfolio or most of the portfolio in your partner’s name, then when you get to. early retirement, all of the investments are in one person’s name, which is not tax efficient when you’re going to live off the portfolio.

So it gets a bit tricky if you want to try and optimize it too much. So there’s no real perfect solution.

Pat: I’d say the best idea would be to start investing in the lower income person’s name. And then maybe when you’ve hit 50% of your target start investing in the higher income person.

Dave: Yeah.

Pat: But that’s just a rule of thumb. I haven’t done any like proper math around that, on your personal tax rate and investment income and all that, but it’s just conceptually the way to think about it is start in the lower income person’s name and then try and plan it.

So by the time you hit retirement, you’ve closed the gap. So to speak between how much you have in each person’s account.

Dave: probably have to be less than 50% because then that account’s going to keep growing while you add to the second account

Pat: I’m not aiming. Yeah. I’m not aiming for a full 50 50, by the time you reach it, because you can always keep moving the needle after you’ve retired as well.

Dave: and reshuffling and whatever.

Pat: Selling in low tax brackets and shuffling around and all that sort of business. Yeah.

Dave: playing games again.

Pat: Playing games again, but that one, I feel is simple enough to implement that. There’s not a lot of downside to it. And so it’s probably an okay. Yeah, it’s an okay strategy, which doesn’t have a huge number of downsides.

Dave: Yeah. It’s definitely worthwhile doing, it’s something that we’ve done personally, so yeah, it’s definitely worthwhile, but it just realize that you’re not going to get it. Perfect. So just keep that in mind,

Dave: you might save a little bit.

Pat: Especially because things change and you might’ve thought that they’d been a low-income forever, but then they might end up making a whole lot of money. And so it’s like, oh, well we did our best, but things have turned out different.

Dave: Yeah. All right. Let’s do a little summary,.

Pat: Yeah, definitely. So saving is actually the key to building wealth and becoming financially independent. What this means is to make the most of your high income, you need to save a big chunk of it. You should be grateful for this opportunity that a lot of people don’t have.

Dave: and remember, you can still save a big chunk of it while living a pretty good life, because you have the opportunity to spend a bit more than other people do and keep that savings rate higher. So that’s pretty cool. But then you also want to keep lifestyle inflation kind of under control. Don’t let it get out of hand. So that’s just something to keep an eye on.

Pat: Can definitely very easily get out of hand. you can also not chase tax deductions just because it feels like you pay a lot of tax. Keep your finances pretty simple as appreciate your good fortune to earn a strong enough. You can optimize here and there, but generally there are trade-offs to that optimization and yeah, tax deductions mean you’re spending more

Dave: Yeah. And finally measure your life and your choices by your own judgment, not other people’s. So they’re likely just playing the, what we’ll call the unwinnable consumerism game, where they’re trying to compete with each other. It’s like a status game. So they’re just really playing a different game than you.

You’re on a different path than them. So don’t really worry too much about what they’re doing or what they might be saying and focus on your own goals.

Pat: right.

Dave: Anything else?

Pat: No, I think we covered it.

Dave: That’s it. All right. Thanks for tuning in today. So hope you got something out of this episode and we just want to thank you again for your support of the show. not long ago, we pass like a quarter of a million downloads for just a little bit over a year of podcasting. So pat and I are really, really happy about that and really humbled and pleased that people are enjoying the show.


14 Replies to “Podcast: Thoughts For Young High Income Earners”

  1. You touch on this in the article but I think the biggest trap is you forget why you are even working, i.e. that is to live and enjoy life not just to retire early. My partner and I have fallen into this trap. We earn almost $300k together but both work in roles we don’t enjoy. We find ourselves spending less nowadays because we haven’t maintained relationships and attend much less social engagements. No point having a fancy house or car when you don’t have any friends to impress!

    1. Thanks for sharing. It’s always important to keep reassessing what your top priorities really are so you can adjust course if need be, whether your goal is to retire early or not. The act of self-questioning has been one of the most helpful things I’ve found personally. It also helps stop yourself going too far down a path that is likely to lead to unhappiness.

  2. Hi Guys,
    Great podcast.
    I thought something that wasn’t mentioned but would apply to a lot of high income young people is investing whilst also saving for your primary place of residency. I have optimized my take home pay for this. I have a share portfolio and no investment properties. So, sitting at an income of 130k, it’s extremely tax efficient for me to salary sacrifice 1k per month into the FHSSS. This means i pay 15% on 12k instead of 37%. Furthermore, ATO guarantees a 4% growth rate. This is an amazing way to get your house deposit growing like an investment whilst using your take home pay to build a portfolio. (obviously there are conditions to the FHSS).
    I just wanted to mention this I assume the majority of people <30yr, like myself, probably want to invest and also build a 20% deposit at the same time.

    For anyone interested in how i manage the above. Every month i do the following simple plan:
    1k into FHSS (through salary sacrifice)
    1k into Cash savings account (ING at 1.35%)
    2k into ETFs (VAS and VGS)
    1.5k Living and bills
    0.75K into splurge
    0.75k into travel/holiday account


    1. Thanks Chuck. Your approach is interesting. I haven’t dug deep into this scheme, but after a quick look, there is a fair bit to learn/navigate to save a couple grand per year in tax, given its relatively limited capacity.

      It also appears that there is no 4% guaranteed return. This is simply the amount that is calculated as the default return (the ‘deeming rate’, currently about 3%) when deciding how much you’re allowed to take out. In reality, your money may earn negative returns given its exposed to markets inside super and you’re simply taking cash from your existing super balance instead. That’s not necessarily a bad thing, just something to be aware of.

      1. You’re correct. The 4% was roughly when i first researched shortfall interest charge (SIC). The main benefits I personally see:
        1. It’s a house deposit on autopilot and no temptation to spend it (because you can’t).
        2. It drops me out of the 37% tax bracket. Meaning total taxes I pay are $2,790 less per year!
        3. Reduces HECs repayment so sacrificing 1k but take home pay is only $478 less. (obviously means HECs takes slightly longer).
        4. Fits my personal timeline.

        I’m sure you are far more competent than me, but i’ll email you a calculation spreadsheet anyway.

        Thanks for the reply!

  3. Another good listen fellas. Even if it is “boring” reminders to save and invest!! ???? one thing that surprised me was Pat saying he ‘spends more year on year yet continues to increase his saving rate’. How does this work in practice? Do the earnings and dividends reinvested form part of the overall income and then reinvested (essentially becoming savings)?

    1. Hey Matt, haha thanks! I think Pat meant that his savings increases even as he spends more every year. But because his income is growing at a faster rate than his spending, he’s in a better position every year.

      Say you earn $100k and spend $50k, savings rate 50%. The next year you earn $115k and spend $55k, savings rate 52%.

      You’ve inflated your lifestyle but your income has grown more so you’re still better off. Pat has managed this due to getting promotions/higher responsibilities at his workplace. Hope that makes sense.

  4. Gday Dave, thanks for the great podcast discussion.

    I think that high income earners need to think a lot more about the tax brackets they are entering as their investment income increases while still working. As someone approaching the top tax bracket I’ve been deliberating a lot about this especially as I’m expecting another good 10 years+ working before reaching FI.

    What would be your suggested order of investment to minimise the tax burden while maintaining flexibility for FIRE? I was thinking along these lines:
    1. Salary sacrifice to super to reach the $27k cap. At 45% marginal tax rate v 15% this is a no brainer
    2. Debt recycle on PPOR to purchase VDHG or don’t debt recycle and purchase AFI using DSSP, never selling and living off dividend stream thereafter

    1. Thanks! That sounds pretty sensible.

      1. Depends entirely what age you want/expect to retire. It’s fine to tuck a little bit of cash in here, but it won’t really help you create freedom any sooner (if you’re youngish), so I don’t really see it as a no-brainer. Our pod on super and early retirement goes into more detail – here in case you missed it.

      2. Debt recycling is definitely tax efficient if you are happy with a bit of extra complexity. Be sure to check out my article about it to see if it suits you. Or buying AFIC using their DSSP plan is a good option in my mind for investing in Aussie shares. Both good options.

      High tax is annoying, but it’s just the cost of earning a huge income 🙂 Apart from this, there aren’t many ways to game it that are actually a good idea. Just be careful. Too much thinking about wanting to optimise tax can lead to pretty shitty decision making.

      1. Thanks David, you’re right it’s easy to overanalyse or over-optimise things.

        Paying off the PPOR was the obvious option previously and worked out OK in the end, but upgrading to the ‘forever’ home in the next 6 months at these low IRs has me reassessing what to do once a good emergency fund has been built in the offset.

        Super access might be 30 years away but the extra $ per year to hit the cap would not be noticed too much at our current 50+% savings rate. Pretty sure I’ll go down the road of debt recycling given it will help limit some of the high tax rate impacts…

        It seems generally if you are a high income earner you should be favouring a growth portfolio v dividends, as you can decide to sell when FI and in a lower tax bracket

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