8 Ways People Become Poor While Earning a High-End Salary
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The average annual salary in the United States is $56,220 across all occupations. So, when we think of a high-end salary, it’s significantly above that. In fact, many people consider a high-end salary to be anything in excess of six figures — that is, the $100,000 range or higher.
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But even high-earners aren’t always in a good position financially. According to a LendingClub report, nearly half of people earning $100,000 a year still struggle to make ends meet. Rather than building wealth, a lot of these individuals are actually living paycheck to paycheck.
This might seem strange when you consider the numbers on their own, but the truth is that it’s very possible to become poor even when living on a higher salary. Poor money management, excessive spending, limited savings or investments, and a lack of financial preparedness can all keep even the highest earners strapped for cash.
If you’re wondering just how it is that people with a high-end salary become poor, here are some of the most common ways.
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Overreliance on Credit Cards
Diana Howard, financial analyst at CouponBirds, suggested that an overreliance on credit cards is one of the main money habits that keeps high earners poor.
“Even [when] making a lot of money (like over $100,000), high earners may still end up losing it all and facing the same money management pitfalls as average earners. In some cases, it can even become easier,” she said.
“People with high incomes rely heavily on credit cards,” continued Howard. “A Quicken survey reveals that 46% of individuals with higher income depend more on their credit cards, compared to the middle-income groups (40%) and lower-income groups (39%). It’s pretty normal to have credit card debt, but once the balance is broken, rich people can sink deeper in the mud.”
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Succumbing to Lifestyle Creep
Lifestyle creep is what happens when you start spending more money as your income increase. Sometimes, this increase in spending is disproportionate to earnings — and not in a good way.
“Lifestyle creep is real. That’s when you start adding more expensive features to your lifestyle over time. Before you know it, you’re overspending,” said Todd Stearn, founder and CEO of The Money Manual. “For example, many of us started with one streaming service but then we added another and another and before long, it’s a serious monthly expense. The same can happen with fancy restaurant dinners, nights out, travel, and more. Then, once you get accustomed to this lifestyle it can feel challenging to go back to living simpler.”
Not Making Tax-Efficient Money Moves
High earners still have to pay taxes, but many people in a higher tax bracket don’t pay as much attention to this as they should. This is especially prevalent when it comes to how they invest their money. This is a mistake that can keep high earners poor or with limited wealth-building potential.
“Being in a high tax bracket should cause [high earners who aren’t rich yet] to think harder about the ‘tax location’ of their investments and to take advantage of account types that offer tax shelters,” said Kelly Milligan, managing partner at Quorum Private Wealth. “Some investments that are highly tax-inefficient (e.g., taxable bonds and private credit funds) should ideally be located in tax-sheltered accounts such as IRAs, Roth IRAs, or 401ks.”
Highly tax-efficient investments, Milligan added, should be placed in taxable accounts. These types of investments include municipal bonds and certain real estate funds. Some high earners also skip out on important tax advice, but this can hurt them financially or keep them broke.
“Getting proper tax advice and knowing how to structure corporations and understanding write-offs is one thing that especially high earners need to have a good grasp of, or at least have good consultants to work with,” said Sebastian Jania, owner of Ontario Property Buyers. “Doing this alone will save someone lots of money in taxes.”
Trying To Keep Up With the Joneses
Keeping up with the Joneses is all about trying to show others that you’re on equal footing in terms of wealth or status, even if you don’t actually have the means to back it up. This can result in expensive purchases, taking on debt to fund a certain lifestyle, and limited assets or funds.
“As one increases their salary, it’s not uncommon to try to compete with those around them to have the nicest cars, houses, watches, and more,” said Jania. “The truth is, however, recklessly fighting for these things ultimately puts one in a spot where they are worse off financially than if they hadn’t made those purchases.”
Lack of Financial Discipline
Another common mistake that people with a high-end salary make entails being less disciplined or downright reckless with their money.
High earners often “get rid of the habits that got them to their level of wealth and their high salary,” said Jania. “For many people, this was discipline over time that resulted in these results. In many cases, this discipline came in the form of keeping savings high and keeping spending low, along with delaying gratification. Many people stop these habits and unfortunately create chaos in their lives.”
Having a financial plan can help prevent overspending or other poor money habits, and keep high-earners — as well as most anyone else — from becoming poor.
Skipping the Emergency Fund
Saving for emergency expenses like medical bills or a layoff at work is vital to building financial stability. This is just as true for high earners as it is for those with an average or lower salary.
“Life is unpredictable, unexpected events like medical emergencies or job losses can quickly drain savings and push people into debt,” said Howard.
“I advise all clients to build up an emergency fund of between 3 and 6 months of expenses,” added Milligan. “If you have liquid investments or access to reliable, low-cost credit, then you might get away with even lower reserve levels.”
Not Using Corporate Benefits Properly
Oftentimes, having a high-end salary comes with certain corporate benefits. But high-earners don’t always take advantage of these benefits — or they ignore them altogether. This could significantly impact their ability to successfully plan for retirement, which could leave them in a financially difficult situation in the future.
“I encourage every client to understand and take full advantage of their employer-offered benefits. Many companies offer 401(k) plans,” said Milligan. High earners “maxing out their 401(k) contribution defers taxes at the highest bracket into their retirement years when they are likely in a much lower bracket. In the meantime, their untaxed contribution compounds without any tax drag whatsoever, and a portion of that contribution is often matched by their employer.”
Another corporate benefit that should be considered, according to Milligan, is a non-qualified deferred compensation plans (NQDCs). These plans let people “defer up to 100% of their income, such as salary, bonus, or vesting stock units, giving them unparalleled opportunities for tax minimization.”
Not Planning Ahead
Having a sound financial plan is key to building and maintaining wealth. But a lot of people, including high earners, don’t look at the bigger picture or think about their future selves.
“A big mistake many high earners make is assuming the good times will roll on forever. It’s helpful to have a savings cushion in case you lose your job to a recession or if your riskier investments don’t pay off,” said Stearn. “We’ve all heard to the sad stories of professional athletes who started with nothing then got rich but lost it all due to extravagant spending. This can happen to any of us on a smaller scale. Take care of your future self before splurging.”
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This article originally appeared on GOBankingRates.com: 8 Ways People Become Poor While Earning a High-End Salary
