If you think that raking in a high income means life on Easy Street, you might want to think again. It turns out that high earners can live paycheck to paycheck.
According to a recent report by Goldman Sachs, 25% of those making between $100,000 and $200,000 are living paycheck to paycheck and 16% of those raking in $200,001 to $300,000 are living beyond their means. Interestingly, 41% of those earning $300,001 to $500,000 are barely squeaking by. (Yes, you read that correctly.)
So why are those who seem like they should be living comfortably are, in actuality, living hand to mouth? Let’s look at some reasons underneath the hood and what steps to take to turn the situation around.
Lifestyle inflation creeps in
Also known as lifestyle creep, this is the concept that when your income grows, so do your expenses. You might move to a larger home, upgrade your cars, and spend cash on lavish vacations and fine meals. Before you know it, you don’t have as much wiggle room as you’d like to squirrel away funds toward your savings, retirement, and other financial goals.
This might be chalked up to trying to keep up with the Joneses. For example, if you move to a fancy neighborhood, you might want to match their spending habits and lifestyle to feel like an equal in terms of optics and status.
What ends up happening is that you struggle to keep up with bills, and the anxiety and credit card debt starts to ratchet up. Plus, you might experience constant worry about maintaining your lifestyle, and looking unsuccessful among your peers.
They buy things they don’t need
ATVs for the entire family. A massive RV they only use several weeks of the year. Big-screen TVs in every room of the house. Those unopened Amazon boxes are starting to pile up. High earners might keep spending on things they don’t need or end up using.
And while you might get an initial thrill or jolt of happiness when they get that massive rise or leap in income, they will soon return to their baseline level of happiness. This is called the hedonic treadmill, which is when people quickly return to this baseline level of satisfaction or lack thereof, regardless of recent positive or negative life changes. Before you know it, you’ve amassed a bunch of useless stuff and racked up debt.
They carry a heavy debt load
If you’re someone who makes good money and is still broke, you may be shouldering heavy debt. The average debt load in the US hovers at $104,755, per recent Experian data. And these days, a higher share of high earners are falling behind on their mortgage and credit card payments.
When you’re carrying a heavy debt load, that eats into your take-home pay. You’ll have less left over, and may find yourself stretched thin financially, even if you make good money. Carrying a lot of debt can also impact your mental health. Studies show that those who struggle with debt are more likely to experience depression and anxiety.
They have trouble setting boundaries
If you’re the known high earner among their friends and family, you might find yourself feeling the tug of obligation to pick up the dinner tab. Or, you might have a tendency to give in to loaning money to a family member in need. When others rely on you financially, and their well being may depend on it, it could be harder to say “no.”
After all, you’re bringing in good money. However, what might be less visible is that you might be house poor, drowning in debt, and struggling to make ends meet, despite appearances.
If you have trouble being transparent about your financial situation, you’re not alone. According to recent research by Wells Fargo and The Female Quotient, the only topic that’s considered more taboo to talk about than money is one’s past romantic partners.
Steps to get financially on track
As you can see, there’s a lot of reasons why someone might make a good living and still struggle to make ends meet. Here, we’ll walk you through some ways you can turn things around with your money situation:
- Envision your future. This might not sound like practical advice, but spending time figuring out what your hopes and dreams are can help you stay motivated to make changes so you live within your means. Spending time connecting to your goals also helps you stay in alignment with your values and priorities.
- Set a budget. A budget is like guardrails for your money. Without a plan in place on how to manage your money, you’ll easily veer off course – and can feel financially strapped. Start with one of the popular budgeting methods.
Zero-sum budget: Every dollar gets assigned a “task” or put into a category
50/30/20 budget: Where 50% of your spending goes toward needs, 30% toward wants, and the remaining 20% toward savings and debt repayment.
Guilt-free budget: You “pay yourself first,” then spend the rest guilt-free.
- Create a debt repayment plan. If you’re struggling to pay off your debt, start by doing a tally of all your debts, and include outstanding amounts, interest rates, the lender or creditor, and any other relevant information.
From there, create a debt repayment plan. This can include the debt snowball method, which is a strategy where you focus on paying off debts from the smallest to the highest balances. The debt avalanche method is where you pay off your debt by starting with the highest interest rate first, then work your way down.
- Find ways to save. If you’re constantly broke, look for ways you can cut back. Instead of trying to cut back on everything, start with one area, then go from there. For example, try to slash costs on dining out, groceries, or on entertainment.
As you can see, earning a high income doesn’t mean you are financially secure. By taking some steps, you can get out of the vicious cycle of living paycheck to paycheck, and feel more empowered about your finances.
FAQs
What is the $27.40 rule?
This is a personal finance tactic where one can build savings and grow their money by stashing away $27.40 a day. In a year’s time, you’ll have saved $10,000. The easiest route to achieve this is by automating your savings.
What is a good salary at age 40?
According to data from the Federal Reserve, the median annual salary for workers between the ages of 35 to 44 years old is $86,473, which is equivalentt to $41.57 an hour or $1,662.94 a week.
At what age should you have $100,000 saved?
According to Fidelity, by age 30 you should have one time your salary saved for retirement. By age 40, you should have three times your salary. And by age 60, you should have four times your salary stashed away.
These are just guidelines, and how much you need for your nest egg depends on your time frame, lifestyle preferences, and financial situation – such as whether you plan on investing in hobbies or pursue passions, if you decide to age in place, downsize your living space, or move to be closer to loved ones.
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