When you earn a high salary, it’s all too easy to think that you’re set in terms of building long-term wealth. After all, if you’re in the upper echelons in terms of earning income, surely you must be ahead of the game compared with the rest of Americans when it comes to net worth, right?
Wrong. Regardless of income, the path to long-term wealth is through investments, not salary. Plenty of mid-level earners end up with seven-digit bank accounts by the time they retire, while many Americans earning $150,000 or more are still living paycheck to paycheck.
How do the middle earners get so far ahead? By developing a solid financial plan that’s heavy on investments. Here’s how you can do it as well.
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Why Salary Is Not Enough
If you’re looking to build wealth, a higher salary can certainly make the path easier. But it’s not a slam dunk. In fact, there are lots of reasons why salary is at a handicap when it comes to increasing net worth:
- Inflation: Cash begins losing value the day it arrives into your pocket. Over time, the effects of inflation are insidious, eroding the purchasing power of cash. If you have $100,000 in cash and just leave it there, it might only be “worth” $90,000 a few years down the road, in terms of what you can actually buy. While accumulating cash may technically increase your net worth, in terms of your quality of life, you’re actually moving backward.
- Active income: To earn a salary, you actually have to work for it. In other words, you are trading time for money. As there are only so many hours you can work in a day, your salary necessarily has an upper ceiling. Investments are passive income, meaning they earn money on their own, without taking a moment of your time. As famed billionaire Warren Buffett once said, “If you don’t find a way to make money while you sleep, you will work until you die.”
- Taxation: Your salary is taxed at ordinary income rates, which are much higher than the capital gains rates that you’ll pay on your investments. For 2025, the top federal marginal rate is 37%. On top of that, states like California have top tax brackets of as much as 13.3%, putting the combined rate over 50% for top earners. But most high earners only pay a 20% tax rate on their long-term capital gains. Many workers actually pay a long-term capital gains rate of 0%, according to the IRS. This includes singles with taxable incomes of up to $47,025 and joint filers with taxable incomes as high as $94,050.
- Rising expenses: It’s human nature for people to increase their spending as their income rises, a phenomenon known as “lifestyle creep.” But if you’re always living paycheck to paycheck, even earning $200,000 or more won’t help you build long-term wealth.
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Steps To Build Long-Term Wealth
So, if investments are the key to long-term wealth — not salary — how can you integrate them into your financial plan?
First, you’ll have to define your investment objectives and risk tolerance. If you’re looking to build long-term wealth, your investment objective is likely “growth.” Depending on your ability to handle risk, you’re likely looking at a sizable allocation to stocks, whether in the form of mutual funds, exchange-traded funds (ETFs) or individual equities. But as each investor is different, you’ll have to make these determinations yourself, or perhaps in conjunction with a financial advisor.
Next, you’ll have to prioritize your investments. This means you should set up automatic transfers directly from your paycheck or bank account into your investment account. That money should transfer before you even have the temptation to use it for your bills or discretionary expenses. Some advisors refer to this strategy as “paying yourself first,” as you’ll be setting that money aside for your future self before you have the chance to spend it.
Perhaps the most important part of a successful wealth-building program is to consistently invest over time. Through the market’s ups and downs, it’s important to continually funnel money into your investments, understanding that the magic of compound interest only kicks in over a long period of time. Investing $275 per month at an 8% return over 35 years could generate a $1 million nest egg, but according to Dave Ramsey, more than $500,000 of that growth comes in the last seven years alone. This emphasizes the value of long-term investing.
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This article originally appeared on GOBankingRates.com: 4 Reasons You Need Investments, Not Just a High Salary
