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10 “Truths” of Financial Planning for Highly Compensated Professionals
We have worked in the tax and financial planning industry for just over nineteen years. Most of those years have been spent working with High Income Professionals, just like you. Serving hundreds of clients and performing thousands of plans, there are certain "truths" that are self evident in financial and tax planning for these individuals...
   
1. One Size Does Not Fit All. The old “cookie cutter approach” of financial planning does not work for Highly Compensated Professionals. Because of your high income; you have special needs. Your tax planning must be more precise and complex to preserve more of what you make and what you own. Your financial strategies need to consider liability protection since your rapidly growing net worth makes you a more likely target of a lawsuit. Your specialized professional abilities increase the likelihood that a “job downsizing” will result in a greater period of time without income between jobs. Therefore, your liquid reserves need to be more robust than most families. This is just a small list of the unique differences your financial planning requires. Subscribing to Money Magazine or Motley Fool’s financial recommendations is not a realistic option for you anymore. Their message is intended for the “masses.” Financial planning, for you, needs to be more specific to your unique income and asset accumulation status.
   
2. It’s Not What You Make – It’s What You Keep. The top 5% of Income Earners in America pay 55% of all taxes! Many professionals have referred to the tax code levied against this group as “confiscatory” (i.e. to confiscate from you). You, as a Highly Compensated Professional, fall into this lucky group. Most likely, income taxes are a significant, if not the most prominent line item in your budget. This is such an important area in your financial life that you must give careful consideration to putting it at the forefront of your financial planning concerns. Each of the four other areas of your financial systems (investments, legal, debt & insurance) should be supporting your tax planning strategies.
   
3. Accountability! In the 23 years that I have been in this industry, I have met some very decent Financial Advisors. I have also met some that were “less than impressive.” I maintain to this day that if your Financial Advisor adds nothing more to your relationship than to hold you accountable to your own financial development, they are worth everything you pay to them! Let’s face facts: left to our own devices many of us would spend way beyond what we should and save way less than is financially prudent. If the financial professional you use measures your net worth each year and compares it to your financial past, that is a great start!
   
4. Know Where You Have Been. When you go to see a doctor, you may notice that they are always recording your vital information into your medical file. They are charting this important information to make sure that your health is moving in a positive direction (…or at least not in a negative direction). And, these vital signs are crucial to giving them a snapshot of how your health is progressing. Similarly, a good Financial Advisor should be charting your financial progress. A positive trend in your financially vital areas is an important sign as to how your overall financial health is doing.
   
5. Know the Difference between Needs and Wants. A client of ours, who is a psychologist, once said, “a strong mind is like a team of horses: it can accomplish some really significant things if used in the right manner – it can also cause some really serious damage if not kept under control!” A Highly Compensated Professional is in a very similar situation. You can accomplish some really significant financial goals if proper focus and strategies are put in place. You can, however, also cause some significant damage without discipline and control. Make sure you are always evaluating “needs” vs. “wants” in your financial affairs. Reliable transportation is a need – owning the newest S class from Mercedes is definitely a want. Now, I am not saying that you cannot indulge yourself from time to time. Goodness knows that I will treat myself to something nice on occasion. Let’s just make sure you have your financial needs taken care of first.
   
6. Pay Yourself First. Paying yourself first, is the other side of the equation from knowing “needs” & “wants”; which is spending. Highly Compensated Professionals should be able to systematically save one out of every five dollars they earn. If you are not doing this, or are not able to do this, go back to the “needs” vs. “wants” evaluation. You may find significantly more “wants” in your spending than you might care to admit. The “Paying Yourself First” plan should be put on autopilot whenever possible. Automatic deposits into both retirement and non-retirement accounts are a sound strategy for accumulating net worth methodically and predictably.
   
7. Debt is Not A “Four Letter Word.” One of the most common misconceptions about debt is that it is always bad. Debt, like any financial instrument, can be a very powerful tool in accumulating net worth in an efficient and effective manner. In particular, debt used to acquire property that is likely to appreciate (ex. homes, real estate, or stock) can be a very effective way of leveraging your net worth growth, keeping strong liquidity and keeping taxes at a manageable level. This is a more aggressive financial philosophy, however. Make sure you are getting professional guidance if you are employing this financial strategy! You need to understand the pros and cons of such maneuvers.
   
8. Time Is of the Essence. If we were to calculate your hourly earnings as a Highly Compensated Professional, the amount would be very impressive. Said another way, each hour that you spend on what you do best (…your profession) can yield more significant reward than trying to save money in other areas where you are not a specialist. Sure, there are legal planning software programs that you can buy to prepare the legal documents your family needs. These programs likely cost less than $100. However, by the time you add up the hours that it will take to prepare them and the potential cost to your family if you screwed them up, the “real” cost of preparing these documents yourself could be ten times that of paying a qualified attorney to prepare them right the first time. There are similar hidden costs in tax return preparation, investing, debt management & risk management. Become a believer in your professional career! Spend your time making more money: hire professionals to handle the rest.
   
9. Your Advisor Needs to Specialize In Your Situation. Whether you are on the employer side of the table or the employee side of the table, your status as a Highly Compensated Professional will present you with some financial strategies that most Americans will not encounter. Employee Stock Purchase Programs, Incentive Stock Option Plans, Deferred Comp arrangements, and “Golden Handcuff” programs are just a few of the financial strategies that you will have to navigate that most people will not have to face. Your financial professional needs to be able to guide you through the advantages and disadvantages of these types of programs and help you determine if they fit into your overall plan. Hiring a “general practitioner” (i.e. one who is not exposed to these financial tools on a regular basis) as your Financial Advisor could cost you a great deal when making these types of decisions. The tax implications of these programs, alone, could make thousands of dollars of difference. Make sure to check the background of your financial professional to make sure they encounter these specific strategies for their clients on a day-to-day basis. (Link to Biographies) Find out more about our team.
   
10. Your Planning Must Be “Holistic”. Your net worth, as a Highly Compensated Professional, is likely growing very rapidly. As a matter of fact, many financial marketing organizations refer to the group that you belong to as “the aspiring affluent” – tomorrow’s affluent individuals. Because of your accelerating net worth growth, it is important that all areas of your financial planning are working together to provide for more significant increases and less significant decreases in your financial future. Your planning must be solid in all five areas of financial planning: investments, insurance, debt, legal planning and taxes. If one area is weak, it can hamper or destroy the other four areas. As an example, having weak debt management can impact your ability to invest. Weak debt management can also affect the amount of tax that you pay and your ability to pay it. Believe it or not, certain debt is forgiven at your death, while other types are left to be paid by your estate.

Financial planning, for you, needs to “holistically” address your financial situation. Make sure you are evaluating the strengths and weaknesses of each area in your financial plan. For Highly Compensated Professionals, the entire plan “is only as strong as the weakest link.” If you are not currently evaluating, monitoring and managing all five areas, or if your current financial professionals are not evaluating, monitoring and managing all five areas, consider getting some help from a financial professional that will.

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