All of the outrage over excessive executive pay in general, and the Stephen Hester £1m bonus in particular, has raised some interesting questions about how the wealthy spend their money.
£1m a year sounds like a lot of money. In fact, it is a lot of money.
I suspect that many of us would be happy to receive that level of remuneration for our work, even if that meant additional responsibilities and pressures to justify the wage.
In our experience as Financial Planners, there is no typical way in which large salaries like this are spent.
Expenditure will differ depending on chosen lifestyles; many higher earners are surprisingly frugal when it comes to their money.
The traditional image of an expensive car, massive property and expensive foreign holidays is usually a long way from the reality of how higher earners spend their income.
Of course a large part of a big salary like this will go on income tax and National Insurance contributions. In the 2011/12 tax year, someone earning £1m a year of salary will pay £478,000 of income tax and £23,381 of National Insurance contributions, leaving them with net earnings of £498,619.
This is before the additional of taxable benefits in kind, with things like a company car or private medical insurance quickly increasing the total tax bill each year.
Tax can also be saved through the payment of pension contributions or investments in tax efficient investment schemes, although this also reduces the available net income.
With what is left over, the net income is often spent on property and running the household. Money is also often spent on private education, with much of the Financial Planning work we do used to determine whether a private education is affordable.
Any feeling of wealth tends to be relative to not what you earn but what you get to keep.
Someone on a salary of £1m may feel no more or less wealthy than someone earning £100,000 or £25,000 a year, if their net income disappears each month on committed expenditure.
Working towards a defined set of goals which are documented within a regularly reviewed Financial Plan is essential regardless of earnings level.
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