The other day I came across this wild stat that 36% of America’s high-income earners (so anyone earning > $250k) is living paycheck to paycheck. I thought, nah, this can’t possibly be true. I did some googling and it didn’t take me very long to find a long string of articles on the exact same topic. Why high-earners simply can’t hack their finances.
These folks are earning a quarter of a million bucks each year – how can they possibly be living paycheck-to-paycheck?! It’s bizarre at first but when you dig a little deeper you realise it all comes from one thing: lifestyle creep. Okay, and maybe a 2nd – a lack of financial literacy.
Since this stuff isn’t actually taught in schools as though it were some kind of dirty taboo, we rely on our parents to teach it to us. And if they don’t (or can’t – as is most often the case) then we pass this down to the next gen like some ugly gene.
It’s hard to break the cycle. And even harder to quit bad habits. Especially when they become second-nature. But if you don’t do the work, it’ll be harder down the line. Trust me, having to live from paycheck to paycheck is infinitely harder than facing your money problems. We all have a relationship with money. You’ve just gotta make sure yours is a healthy one. Read here
The funny thing is, high-earners aren’t stupid! These aren’t the kids who flunked college. They’re top of their game. They’re the valedictorians (thank heavens the UK has none of those) of their field. During my gap year, one of my flatmates was valedictorian. She killed herself all the way through high school so she could scoop that top spot. I hope it was worth it!
But here’s the dirty truth: higher salaries won’t magically transform your (bad) spending habits. They’ll just make your habits more expensive. If you have trouble managing $10k you’ll have trouble with $100k. And definitely with a quarter of a mil! If you can’t get your spending under control, your problems, not your stocks, will 10X.
Don’t break this cardinal rule
When we earn more we spend more. So someone on a $250k salary seems to be better off than a guy on a $50k salary but if the first one spends $200k they’re no better off than the ‘poor’ guy! If you don’t find a way to keep your spending under wraps even as your income rises, you’ll trap yourself into a perpetuating cycle of more, more, more. You won’t be able to build a nest egg for yourself that will hopefully last for retirement and you won’t have the peace of mind that comes about from having your $$$ working for ya.
Don’t spend more when you earn more. Please don’t. It’s so tempting. But lifestyle inflation is the silent taxer. You’ll be robbing from your future self. Of course a lil’ upgrade here and there is well-needed (and very much deserved!) but don’t go overboard like a mortgage up to your eyeballs or a car loan that sucks your account dry. If you spend $500 a month on car payments for the next 10 years, you’d have spent $60k. If you invested $500 into the S&P 500 over that same period (assuming 7% annual return), you’d be left with $86,542! There’s a big fat opportunity cost to every spending decision.
But when you’re in the spur of your moment, swiping your Amex left right and centre, you aren’t thinking about your 40 year old self who’s gonna have to deal with your mistakes. It’s so much easier to live a little smaller in your 20s than in your 40s. When my parents were saving for a house they had no car, tv, barely ate out, travelled minimally. And guess what? They made it onto the property ladder. Sometimes you’ve gotta make some sacrifices so that you can live comfortably later on. There’s a balance to be had. But living paycheck-to-paycheck on a massive salary, something’s gone wrong.
And all this living for the here and now is magnified by our desire to impress others. Since we care what others think of us, more like what they think about our account (which no one goes round showing, obvs) so we flaunt our “wealth”.
We dress designer, dine michelin and travel like we’re millionaires, all to keep up with this perceived image of our wealth. So we walk around looking rich but being very poor. That’s backwards. I’d rather wear my $200 Apple watch, have no Rolex, but an investment account that looks like one! Treat yourself (and others) but don’t go overboard. It just isn’t worth it. The joy will fade. Read here why you should live like you’re fake poor now to get to live real rich later on!
I used to be forever shopping online (10X than I do now!) and not only was it draining my bank but it was cluttering my room (and mind). I ended up with so much stuff that used to be money which used to be time. Clothes are just clothes. I was chatting about this to my friend and finance guru about this who said she curbs this by ‘going shopping in my wardrobe’. I love it. It’s all about a mindset shift. She said we’re envious of others who seem to dress perfectly but they’d “ooh” and “aah” at our wardrobe. We want what we don’t have. And we think they have it better than us.
Just because you can, doesn’t mean you should!
Don’t spend what you don’t have. While credit cards are really useful things (read here how to boost your credit score in 6 steps) they’re also scary. I opened my first credit account a few months ago; it took under 60secs for it to be approved and I was offered a crazy amount of credit. Given the fact that I’m a) in my early 20s b) have zero credit history, this is mad on their part.
But they saw someone who’s in finance and thought ooh, goodie! Another one! Nuh-uh. Not gonna happen. You fall into their trap when you treat that “credit” (aka a loan!) as free money. Don’t do that and you’ll find you no longer need to chase your tail! You’re not a month behind. Paying off last month’s fun today. And you can fund your future.
Keep it private
No one needs to know how much you’re earning or how big your net worth is. As my dad always says ‘the less they know, the better!’. Your private life is meant to be kept private. Don’t waste your precious time, money and energy trying to impress people who frankly don’t care. Everyone’s too busy being wrapped up in their own lives to worry what yours is looking like.
Where you start is not where you’ll end up. If you’re a high-earner and are struggling with your spending, start today. Pushing it off till tomorrow will only make the problem worse. Your past habits don’t define you. Don’t let them.
The key to moving away from that is by not spending tomorrow’s today. By living below your means when you can very well live above ‘em. Just because you can doesn’t mean you should! Try going a lil’ frugal for a while and see what it does, not only for your bank account (duh) but for your overall wellbeing too.
Go after your future. Just make sure your past doesn’t hold you back.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment