Magnificent 7 Investments For High Income Parents

I don’t know about you but when I was working and going to school with the anticipation of earning a high income someday, I thought the really good investments would come out of the woodwork once I had that high income.

I had heard about these amazing opportunities that high earners received but there was a minimum investment usually in the five figure range or more.

There was a water park idea that one of my friends was investing in. He said it couldn’t miss but the minimum investment was $50,000. 

Another friend was investing in this brand new battery company that could make batteries more efficient and cost-effective than ever before. Of course, the minimum was $200,000. 

I was still in school at the time and so I felt like I was missing out.

Then when I finally reached a high income thankfully I concentrated on paying off debt. That took a few years and in the meantime, I was reading about what really gave us the highest probability of producing wealth.

It turns out all those “sure things” that were capable of producing 10,000% gains aren’t the best investments. In fact, they are major longshots that rarely pay off. The likelihood of being able to retire on the profits from those longshot investments was basically zero. 

I would liken those to investing in lottery tickets or in the number 25 on the roulette wheel. They are more of an opportunity to separate you from your money and less of an opportunity to make money.

The brokers of this investment would tell you they are the best thing ever and an amazing opportunity. What they meant was it was the best thing ever if I gave them my money and my money would be an amazing opportunity for them to pursue their dream without any risk on their part. 

This caused me to sit down and think about my priorities with my money. I wanted to think about my values and how I could invest my money to enhance those values. My priorities as a high income earner and a parent have to be in the forefront. I wanted a pathway to retirement but also to have happy and productive kids and a fulfilling family life. After much thought and contemplation, I came up with these investments. 

These are my magnificent seven investments for high-income parents. 

1. Yourself

A recent article challenged the idea we are our greatest asset. He turned the idea on its head and said we could also be our biggest liability. That has some truth but the bottom line is we can’t accomplish anything or produce anything apart from ourselves. The other important factor we need to consider is we are our loved one’s asset. We might not be their biggest most important asset but I know my family would be worse off without me. Not only out of a duty to myself but out of a duty to my family I should invest in myself. That means caring about what I put into my body regarding food and drink. It means I should guard what I expose myself to in the media and for entertainment. My body is part of me and I should care for that with exercise and good health choices. 

Exercise of the mind is also part of investing in myself. Pushing myself to step outside of what is easy to me or what makes me comfortable will lead to growth and build me up as a more productive investment for both myself and my family.

2. Low Cost Stock ETFs or Mutual Funds

This is the gold standard as far as I’m concerned with my money. My money is a tool that allows me to invest in the other aspects of my life that are important. There is no other passive investment that has the ability to grow in the same way buying a total market mutual fund or ETF can.

Investment in a total stock market ETF like VTI has returned 8.3% over the past fifteen years.

The S&P 500 has returned 9.7% with dividends reinvested from 1928 to March of 2017. This is my gold standard when it comes to investing. Any other investment needs to have other advantages before diverting my attention from a Total Stock Market ETF or mutual fund. 

The other aspect we need to remember is our time value. As high earners, we average more per hour than most workers. If we take the time to research and do the due diligence for an investment, it better pay an adequate hourly wage to compensate us for our time spent on top of at least equaling the total stock market return.

3.  Real Estate

My second favorite investment is real estate. This can either be passive or active. Likely the more active you are with real estate investing, the more total market independent it is. You also have a greater opportunity to improve your return on investment. Also, the more active you become, the more it behaves like a second job. That is fine, but if you are pursuing real estate as a second job, you better really best investments high income parentsenjoy it.

The better returns likely reside in a local real estate market. There is a greater chance of one market not mirroring the entire housing market if you are investing in one property. Of course with investing in one property you are taking on more risk. Both can be lucrative but the local market single property will be more work and carry more exposed to risk. 

In order of real estate ranking, I would prefer REITs (public) and my favorite is the low cost REIT index ETF by Vanguard VNQ with an expense ratio of 0.12%.  

The underlying philosophy of real estate investing is truly beautiful. When we buy real estate we are effectively buying commodities. The commodities consist of lumber, glass, petroleum products, land, etc. Then people rent those commodities from us. That doesn’t happen in any other circumstance. I’ve never heard of anyone wanting to rent some gold coins, pork bellies or orange juice.

The catch is those commodities have to be managed. That either costs you a significant part of your profit in the form of a property manager or costs you time and stress depending on the quality of your tenant and the age of the property. Remember the gold standard is the 8.3% return of low-cost stock index funds so factor that in when investing in real estate.

4.  Bonds

Bonds are one of those investments that nobody brags about. They’re probably a step below a CD as far as glamorous investments. At least you can brag to a friend that you found a killer CD rate to park some cash at some obscure bank. 

I just buy a bond index fund in my tax deferred account and let it do its job.

Others will advocate buying the actual bond because you will avoid expenses and get the exact product that you want. This depends on the type of bond you are purchasing. You can buy treasury bonds through Treasury Direct and other types of bonds like municipal and corporate bonds through brokerages.

Unless you have a lot of time on your hands, it is hard to beat the returns and ease of buying a bond fund. If you bought Vanguard’s admiral share Total Bond Market fund VBTLX or the ETF BND, this gives you diversification across 8646 different bonds. The average age to maturity is 8.3 years and the expense ratio is a measly 0.05%. You would be hard pressed to put together a diversified group of bonds for less than that.

A general rule of thumb for bond investing percentage in your asset allocation is 100-Age. Some say 110-Age. Bonds generally have a smoother path and less volatility compared to stocks. These are what you buy to help you stomach the losses in the market and diversify your investments. Generally, it is expected that bonds will return less than stocks but for the period 1981-2012 bonds slightly outperformed stocks. 

best investments high income parents

As you can see on the graph, adding bonds to your portfolio can preserve your returns by decreasing volitility and making it more likely for an investor to stick to his investment plan.  Diversification is the closest thing you can get to a free lunch with investing. 

Some people can tolerate a complete stock portfolio and theoretically, they should do better than someone that invests in both stocks and bonds. The standard deviation and drawdown of your portfolio should be much smoother including bonds.  It’s a personal decision how much value that adds for you.  

5. Children’s Education

You may ask why I think this is an investment. Spending money on your child’s education will be a net loss. I would argue that it isn’t in the long run if done correctly. We already see the advantages of graduating on time in Pursue graduation in four years like your hair is on fire. Your college student is likely to earn significantly more than their high school educated counterpart. Advanced degrees earn even more. If you look at the average cost of a college education, a public university is around $9,650 a year and a private institution is $33,480.  If we take a good value of $50,000 for a four-year college education, that graduate is expected to average around $1 million dollars more in earnings than the high school graduate over a career. That is a 20X return on investment. 

best investments high income parents

The added benefit of independent, high achieving children that don’t depend on you into adulthood is a bonus.

I’m not saying that we need to finance our kids’ entire education. In fact, I think that is more of a detriment. The real investing I’m speaking about is that we take a vested interest in our kids’ educations both mentally and financially. This should not only occur in college but throughout their childhoods and into their young adult lives.

6. Side Business

This is aimed more at the high earners that have worked their way up the corporate ladder or have built their own business to the point of success. They have changed to the management side of their careers and do less of the tasks they loved initially.

The beauty of a side business is you can do something you really love and incorporate ways to make some additional income. You might not need the additional income, but those earnings could also help you attain some financial goals that weren’t as easily accomplished before.

It is also a nice way to incorporate business education for your family and expand your talents along the way.

Most high income earners are pretty driven people. They like a challenge. By the time you’ve become adept enough to warrant a high wage in your career field, some of the challenge and mental exercise that was required to get there is gone.

Expanding your mental capacity and effort into another financial endeavor could not only reap additional income but also challenge your mind and character.

It’s a great way to incorporate your family as well. Bringing your older children into the business and letting them help can bring unity to the family and provide another type of learning that isn’t readily available educational system today.

For example, my wife didn’t grow up in a high income situation but as a family of seven, they ran a lawn care business. Each kid eventually was responsible for several lawns once they reached high school age. This extra income funded savings and travel opportunities they wouldn’t otherwise have had. It also taught them how to handle self-employment income and the responsibility of tending to a business. 

7. Family Time

Last but not least, we need to invest in our families. Not only monetarily, but emotionally, physically and spiritually. This is definitely a quality over quantity investment. Just taking the time to be around each other and see what opportunities form can lead to substantial gains. Without investing some time in each other, no amount of money will lead to fulfillment and enjoyment in your home. 

One of the best parts of financial gain is sharing that with the ones you love. Encouraging your kids to invest their time with you and you leading the way by investing your time with them will give you gains beyond finances. 

 

Go Invest!

I’ve concentrated on these investments throughout the last sixteen years. Grouping them into a targeted set of high priority investments allows me to concentrate my efforts and not get distracted by all the noise that is out there. 

If we can master all the components of these investments, we will be miles ahead of those individuals that are looking for the next get rich quick scheme in the decades to come. 

What do you concentrate on when you are looking for investments? What is your favorite type of way to invest? Do you have others that have brought you better returns? 

Start tracking your expenses, deposits, and investments with Personal Capital. It’s a great way to keep track of all your accounts in one easy platform. I use it to track my investment returns and overall net worth. Just click the link to the right and start your account today. The best part is it’s all free. There is nothing else on the market today that is as powerful and easy to use. 

Tom
Tom is a doctor and father of five with a passion for parenting and finance. When he isn't skateboarding, riding BMX, or jumping on the trampoline with his kids, he is reading and writing about personal finance. He helps high income parents educate and mentor their kids to become financially, emotionally, and intellectually self sufficient.

6 Responses to “Magnificent 7 Investments For High Income Parents

  • Hello,
    I totally agree with you that we should invest in ourselves. Without doing it there is a huge chance to become left behind one day and found yourself a real burden.
    I don’t agree with Mr. Retire by 40 on this topic, and still think that I am my biggest asset and liability at the same.

    • I think Joe at Retire by 40 made some good points. We can definitely derail our goals if we are not focused but i like to focus on the positive. We will work the rest of our lives in some capacity. We might as well learn the things we need to know to do what we want. Thanks for stopping by.

      Tom @ HIP

  • I think you hit the nail on the head. These are the 7 things my husband and I also love to invest in. 🙂

  • Good post, but I’m not clear on the following:

    “As you can see on the graph, adding bonds to your portfolio can enhance your return without adding risk.”

    I do not see that happen anywhere on the graph. At ALL points along the efficient frontier, adding bonds reduces the return.

    • Good point. You’re definitely right that adding bonds should decrease return compared to stocks only.
      I should have been more clear and referred to bonds decreasing the volatility in a portfolio, usually making it easier for an investor to stay the course with his game plan and that enhances returns as apposed to selling at the exact wrong time. I’ll edit to make it more clear. Thanks for asking about the clarification.

      Tom @ HIP

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