Gearfuse Technology, Science, Culture & More
Hitting six figures is a major milestone. After years of grinding, you’ve finally broken into the income bracket that so many people want. But before you start upgrading every part of your lifestyle, pause and take a strategic approach. Earning six figures is an opportunity – one that can either set you up for long-term financial success or trap you in a cycle of lifestyle inflation and financial stress.
What you do next will determine whether you build wealth or just maintain an expensive lifestyle.
Here are six smart moves to make as soon as your income reaches six figures.
1. Optimize Your Tax Situation
With a six-figure salary comes a bigger tax bill. If you don’t have a strategy in place, you could be handing over more of your hard-earned money than necessary. Now is the time to get serious about tax optimization.
Top financial planners suggest maximizing tax-advantaged accounts like your 401(k), IRA, and HSA (if available). These accounts not only help you save for retirement and medical expenses, but also reduce your taxable income. If you’re self-employed or have a side business, take advantage of tax deductions for business expenses, home office costs, and retirement contributions through a SEP IRA or Solo 401(k).
A financial planner with high-income knowledge can help you navigate the tax landscape. They can identify deductions, tax credits, and legal strategies to reduce what you owe, so you keep more of your money working for you.
2. Increase Your Retirement Contributions
If you’re making six figures and still contributing the bare minimum to your retirement accounts, you’re leaving money on the table. Higher income means you have more room to invest, and the earlier you increase contributions, the more time your money has to grow.
If your employer offers a 401(k) match, make sure you’re maxing it out – it’s essentially free money. From there, work toward hitting the full contribution limit ($23,000 for a 401(k) in 2024, plus an extra $7,500 if you’re 50 or older).
Don’t stop at just employer-sponsored plans. Open a Roth IRA if your income qualifies, or look into a backdoor Roth IRA if you’re over the income limit. If you’re self-employed, consider a SEP IRA or Solo 401(k) to take advantage of even higher contribution limits.
3. Diversify Your Investments to Build Long-Term Wealth
A six-figure salary puts you in a position to move beyond basic savings and start truly building wealth. But if your money is just sitting in a savings account or a single investment type, you’re losing opportunities.
Now is the time to diversify. If you’re primarily investing in a workplace 401(k), consider adding taxable brokerage accounts to your strategy. This allows you to invest beyond retirement and gives you more flexibility for future financial goals.
Look into real estate, ETFs, dividend stocks, and alternative investments to spread out risk and increase potential returns. If you have a business, you might consider reinvesting in growth or diversifying income streams through passive investments.
4. Upgrade Your Financial Protections (Insurance & Estate Planning)
With a higher income, you have more to protect. That means you can’t afford to overlook insurance and estate planning.
First, review your insurance policies. Do you have adequate health, life, and disability insurance? If you’re the primary earner or have dependents, a solid life insurance policy (term life is often the best option) ensures your loved ones are financially protected. Long-term disability insurance is also a must – your income is your biggest asset, and losing it due to injury or illness could derail your financial plans.
5. Set Clear Financial Goals for the Future
Making six figures feels great, but if you don’t have a plan, your money will disappear just as fast as it comes in. The key to long-term success is setting intentional financial goals.
Think about what’s next and any goals you may have, like:
- Paying off debt
- Buying a home
- Starting a business
- Creating passive investment income
Whatever your priorities are, define them clearly and create a plan to reach them. A financial planner can help you set realistic, achievable targets that align with your income and lifestyle.
6. Be Mindful of Lifestyle Inflation
When your income jumps, it’s tempting to start upgrading everything – nicer car, bigger house, more vacations, luxury purchases. While there’s nothing wrong with enjoying your success, lifestyle inflation is one of the biggest threats to long-term financial stability.
The trick is balance. Instead of spending every extra dollar, allocate a portion to savings and investments first. Then, decide how much you want to increase your lifestyle. Maybe you upgrade your living situation, but not beyond what you can comfortably afford. Maybe you take more vacations but stay within a budget that allows you to continue building wealth.
Adding it All Up
Earning six figures is an incredible accomplishment, but what you do next matters more than the income itself. If you want to build real, lasting wealth, you need a plan. The more time and effort you put into proactive planning, the healthier your finances will be in the decades to come.
