Wealth maximisation is a goal that many high earners share. Whether you are just starting out in your career or approaching retirement, the chances are, you are keen to make the most of your earnings.
To achieve this goal, careful planning is required. Those on higher incomes tend to face a multitude of challenges when it comes to wealth management, including higher tax rates, lower pension allowances, and severe time constraints, so a structured financial plan is crucial. With that in mind, here are some simple wealth maximisation strategies along with some specific tips for high earners.
Why is wealth maximisation important?
Wealth maximisation is important for several reasons.
For a start, it can help you achieve financial independence – the ability to live comfortably without having to work. By maximising your wealth, you may be able to retire early and pursue other non-work activities.
It can also help you build generational wealth. This is wealth that can be passed down to your children and grandchildren. Generational wealth can provide long-term financial security for your loved ones and set your family up for success for generations to come.
Of course, wealth maximisation can help you achieve shorter-term financial goals as well. These could include paying for school fees, paying off your mortgage, buying a holiday home, starting a new business, or travelling the world.
Overall, there are many benefits to maximising one’s wealth.
How to maximise your wealth
The key to wealth maximisation is putting a plan in place early.
People often see financial planning as a task for tomorrow. However, by delaying it, they are putting themselves at a disadvantage.
The sooner they put a wealth maximisation plan in place and start growing their capital, the wealthier they are likely to become due to effective planning tools and the power of compounding.
When developing a financial plan, it can be beneficial to work with a trusted financial planner. They will be able to show you what you need to do to maximise your wealth, and create a plan that is designed to encompass all aspects of your finances (including your businesses).
Steps to wealth maximisation
When creating a wealth maximisation plan, the first step is to consider your long-term and short-term goals. Once you have determined these, you can create a financial strategy designed to help you achieve them.
This strategy should take a holistic view and incorporate cash flow planning, investing, tax minimisation, risk management (e.g. life insurance and income protection), and more in order to better organise your finances.
Securing yourself financially
Before trying to grow your capital by investing it, it’s sensible to secure yourself financially by establishing an ‘emergency fund’. This is a pot of money that is set aside to protect yourself from unforeseen circumstances such as the loss of your job, an illness that prevents you from working, or a large, unexpected cost such as a house repair or hospital bill.
Your emergency fund should be large enough to cover at least three months’ worth of expenses. By putting this amount of money aside, you will be protected from the financial ‘surprises’ that life tends to throw up. High earners often find that cash flow planning, with the help of a financial planner, is very useful at this stage of the financial planning process.
Investing for the future
Once you have put aside some money for emergencies, you can think about investing to build your wealth. Investing is the process of putting money into financial assets such as stocks, bonds, and alternative assets with the aim of generating higher returns than those offered by savings accounts.
The key to successful investing is building a diversified portfolio that provides exposure to many different asset classes and is in line with your risk tolerance. Owning a diverse range of assets can help protect your capital and will give you the best chance of wealth maximisation in the long run.
When constructing their investment portfolios, high earners may wish to consider investments that align with their personal beliefs, such as sustainable or ESG investments. These kinds of investments enable you to build wealth whilst ensuring that your capital is being used by businesses responsibly.
Minimising tax liabilities
At this stage of the process, you will also want to give some thought to investing tax-efficiently. High earners face high tax rates on interest, capital gains and dividend income, so it’s important to shelter your investments from HMRC, and reclaim tax where possible.
In the UK, one of the best ways to invest tax-efficiently is to invest inside a pension. With a pension, all investment income and gains are tax-free, and investors may also receive tax relief on contributions.
For the 2023/2024 tax year, the standard annual pension contribution allowance for tax relief purposes is 100% of your salary or £60,000, whichever is lower. However, if you wish to invest more than this, you may be able to take advantage of pension ‘carry forward’ rules, which allow you to make use of any annual pension allowance that you have not used in the last three years.
High earners may also wish to consider making pension contributions on behalf of their spouses (who will have their own annual allowances). This can be an effective way to contribute more than the standard annual allowance.
Another way to minimise tax liabilities is to invest within a Stocks and Shares ISA. Here, all capital gains and income are tax-free as well. At present, every adult in the UK has an annual allowance of £20,000 meaning that a couple could potentially invest £40,000 per year within two ISAs.
By taking advantage of the various pension and ISA allowances available every year, high earners can put themselves in a great position for wealth maximisation in the long run.
A financial plan is worth its weight in gold
Most high earners understand the importance of wealth maximisation. However, many don’t have the time to devise and maintain a wealth maximisation strategy, or knowledge of how to grow their capital in the most effective way.
Careful, considered financial planning can empower high earners to make informed decisions, and create a tangible difference to their finances throughout the entirety of their lives. Getting ahead today, by proactively planning and implementing small changes, can help to build financial security and cashflow for the later stages of life.
This is where a trusted financial planner can add value. They can take the burden from your hands and help ensure that you are putting your money to work in the best way possible.
At Bowmore, we understand the financial challenges you face as a high earner, and we can assist you in tackling them. Want to find out more about how to maximise your wealth? Get in touch with us today.
- Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.
- The Financial Conduct Authority does not regulate Estate Planning or Inheritance Tax Planning.
- The Financial Conduct Authority does not regulate cash flow Planning.
- Bowmore Financial Planning Ltd is not regulated to provide tax advice.
- The value of your investments can go down as well as up, so you could get back less than you invested.
- The tax treatment of certain products depends on the individual circumstances of each client and may be subject to change in future.
- Past performance is not a guide to future performance.
- A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
- The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.