Why High Income Doesn’t Mean Wealthy

Yes, I know people who feel pinched on their six figure incomes. Your income matters less to wealth building than the gap between your income and expenses. I’ve had conversations with people who “just can’t” put aside the six percent they would need to get the full match in their 401k. Those that talk about how they can’t possibly save for their kids to go to college, and then go head to their SUV and drive home to their McMansion.

As someone who has gone from a low income to a much higher one, this has always seemed somewhat ridiculous to me. But I can pretty clearly see how it happens. High income doesn’t mean wealthy because you can outspend any income amount. You’ll also quickly adapt to whatever your new, inflated lifestyle is, and be left wanting ever more. Let’s explore more.

Six Figure Struggles Around The Internet

And I’m sure, even if you don’t know these folks personally, you’ve read these articles before-people making $100k, 200k, or even $500k per year talking about how they just can’t save *any* money. There was an entire Reddit thread about it. There’s this article on why people earning six figures barely have anything saved (spoiler alert-they blame our spends culture, money shame, and student loans).

Did you know half of people earning between $100-$150k have less than $1,000 saved? And take a look at this budget breakdown of a couple earning $500k per year who “still feels average”.  Don’t forget that 25% of six figure earners feel that they’re struggling-and here’s a story of someone earning $450-$600k per year lives paycheck to paycheck.

So what’s the one thing that causes people making such high incomes to live paycheck to paycheck – and feel like they just can’t save?

Living Beyond Their Means

“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” Charles Dickens

To adjust for inflation-20 pounds in 1850, when David Copperfield was written, would be 2,400 pounds today-about $3,300.

Most of the tales of woe I see from high income folks who can’t seem to live within their incomes, or who feel broke, involve all kinds of expenses folks who live at lower incomes can’t even dream of. Elaborate, brand-new SUV’s. Multiple vacations every year. Private school tuition.  Essentially they’re six figure earners living a higher-six figure – or even seven figure – lifestyle.

And yet it somehow isn’t their fault that they can’t save for their kids education, retirement, or pay off their home.

I know folks like this. People who earn between $100-$150k per year, but live like their bosses who earn quite a bit more than they do. You can outspend any income. Why do you think 70% of people who come across a windfall-like winning the lottery-go broke in just a few years?

These aren’t people living at low incomes who have encountered an emergency that is causing them issues. They’re not middle class (whatever that might mean?) with some unexpected expenses they’re struggling to cope with. No, these are folks who have let lifestyle inflation occur in direct proportion to increases in their income. They’re unaware that it’s income inflation coupled with a steady lifestyle-or even lifestyle deflation-that leads to a stable financial life.

How Does It Happen?

These kinds of folks have no idea how their spending got up to where it is now, but the facts are typically usually pretty straightforward. It can be one or a combination of the following:

  • They bought a more expensive home than they had before. Not only did they pay for commission upon the sale of their old home, and purchase of the new one, they also paid to move. They may have forgotten that more expensive home comes with a boatload of increased expenses – from more costly maintenance, to higher property taxes, and of course homeowners insurance.
  • A move up in income or in house may have introduced them to “the Jones’s” – and the need to keep up with them. Neighbor Bob got a new deck with a new BBQ grill, and your old, slightly rusting grill on the grass pales in comparison. Your co-worker Suzy talks all about the name brand clothes she got for her kids for back-to-school – and it was “only” $750 for two kids! Lets not forget the fact that you now have to furnish that more expensive home, and you certainly don’t want people laughing at your Ikea furniture from your first post-college apartment. And of course there’s keeping up socially with their neighbors and co-workers, through private lessons for the kids, golf club memberships, fancy vacations, and even second homes.
  • Then of course there’s the fact that they “must” do things “for the children”. I’ve always been amazed how people justify all sorts of costs because they can have only the best for little Johnny and Betty. This is where expensive childcare, expensive homes in good school districts, private schools, and private colleges come into play. Heck, I know people that live in some of the best school districts in the US that still send their kids to private school.

Using Your Kids As An Excuse – Data Driven vs. Emotional Decision Making

As the mother of three, I’ve always found it odd when people use their kids as an excuse for everything from justifying a brand-new $50k vehicle to spending $300k on education.

Now there are certainly bad vehicles, child care situations, school districts, and colleges. And like every parent, I would love my kids to have the best. But once you get above “bad” and into “good” territory, you need to look closely at the facts around trying to pay your way into “great”. You just might be paying for a brand name, or fancy fluff, that aren’t really adding value for your children.

Private schools will often tout their greater than average college entrant rates and test scores, but I have yet to see the study that shows said improvement and controls for parental income and home environment. And the studies I have seen are from private school associations.

There are multiple studies that the cost of a college matters less to success than personal aptitude. In fact, plenty of successful people didn’t go to college at all-or went to a not very good one. Elite schools don’t cause better outcomes than more ordinary schools. Paying full price for your kids to go to a private college may be like buying them a $200 pair of shoes with a cool name on them. They do just as good a job as an option for 1/4 the price.

When it comes to childcare, it’s not the cost or the fancy offerings (like teaching babies French or something), but the warmth, responsiveness, and language use of the caregiver that makes a difference to kids.  It’s also about the ratio of kids to caregivers. More expensive care doesn’t necessarily equal warmer caregivers. Many centers I’ve seen try to sell parents on the “extras” they offer, but don’t focus on the core of what’s actually best for kids.

As with anything, you need to do your research. Sometimes cost equals quality, but other times, not so much. Gather the data around what leads to the best outcomes for kids, and research your options accordingly. You’ll often find that it’s not the most expensive option that makes the most sense.

The Power of Debt Freedom and Lifestyle Deflation

I find it strange when people who make more than I do complain about money. Our family is totally debt free except for the mortgage, which I hope to be rid of by the time I’m 40.  This means that we don’t have car payments, credit card bills, or student loans to cover each month. It reduces our fixed costs (costs that don’t change), leaving more money for other goals.

I also haven’t inflated my lifestyle in some time. We don’t have a boat, or a camping trailer. There’s no second home. This house we live in was purchased 12 years ago when I was 25, and we have no desire to trade up. We don’t own SUV’s, we have cars – and mine is nearing 10 years old. My husbands car is now about five or six years old. Since we’ve owned both these cars, we added a fifth member to the family, and didn’t use that as a reason to trade up to a bigger vehicle.

Does this mean we’ll never inflate our lifestyle? Likely not. But we do it thoughtfully, since we have no desire to take on any debt. I also have big financial goals and dreams, which I hope to be able to fund even more once that mortgage is gone.

You Can Outspend Any Amount Of Money

You can make $100k, $200k, $500k, or millions a year and still go broke. For proof, check out these 15 celebrities that made fortunes and went bankrupt. Any amount of income can be outspent, and there will always be someone that can comfortably lead a much fancier lifestyle than you can.

If it’s not a fancier house in a great neighborhood, it’s an even fancier house in an even better neighborhood. There’s always a more expensive couch, vehicle, school, or clothes you could pick up. You can go from flying coach, to first class, to private jets in the blink of an eye.

Hedonistic Adaptation

Hedonistic adaptation is the psychological phenomenon where you quickly adapt to major life changes and return back to your baseline level of happiness.

If you inflate your lifestyle, it might make you happy for a period of time, but you’ll quickly revert to just considering that item part of ordinary everyday life. You won’t appreciate it as much as you used to, and then you’ll want to seek out the next burst of happiness by getting something else.

This is why you want to be cautious about getting ever-fancier stuff – because you’ll quickly adjust and just want more. Instead, carefully consider each purchase just as much as you did when you earned less money. If you find yourself starting to take something for granted – like the pleasure of a dinner out, or new clothes – decrease the number of times you indulge. That will actually make you happier, because you’ll enjoy it more than you would otherwise.

In fact, that article I linked above says that the key to happiness is slow or halt the adaptation process. There are two key ways to do that:

  • Ensure there’s variety in your life, so you don’t adapt and take things for granted. For example – instead of totally refurnishing and updating your new home all at once, take it slowly so you don’t just take your things for granted
  • Practice deliberate appreciation.  Sit for a while and think about what you already have, and how much you appreciate it. Every once in a while I make it a point to think about how much I love having a two car garage, and a basement, when my original condo had neither. And I take time to appreciate the nice view off my back porch – even though it hasn’t changed in 12 years, it’s still beautiful

I Want To Hear From You!

Do you know people who outspend a high income – or have blown a windfall? What are your tips for countering lifestyle inflation and hedonistic adaptation? Let me know in the comments!

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23 thoughts on “Why High Income Doesn’t Mean Wealthy”

  1. I love this post, Liz. Here’s what I tell people who are high earners but don’t have anything saved: there is another way, and it is full of so much freedom! My husband got to turn down a job that paid more money but would have taken us clear across the country. Great company, great title, bad location. No thanks. We didn’t feel compelled to take it because we’re fine with what we have. We’re debt free except for our mortgage, and when we sell our house we’ll be 100% debt free. It’s amazing how much money you can free up when you don’t have all those payments.

    I also think it’s important for people who make $200+K per year to realize that they are NOT middle class. http://www.businessinsider.com/upper-income-us-state-2017-9 They are upper class. In some ways, that may seen counterintuitive for people who spend so much, but I think it should be a slap in the face. You’re not middle class, you’re upper class. And you’re broke. So what’s wrong?

    People get trapped by what they “should” be doing, and like you said, by what they feel like they should be giving their kids. It’s so easy to get wrapped up in what other people are doing. I think we need to teach people to take a step back and think about what’s important to their family before making all these stupid decisions that keep them locked up in debt, like buying bigger and nicer houses and nicer cars. Because if people will let go of the need to look a certain socio-economic way, they can begin to save for the things that really matter.

    1. chiefmomofficer

      So true! I know people who get caught up working all the time so they can buy more stuff for their kids. When their kids would rather have less stuff/smaller home/less fancy vacations but more time with their parents

  2. Preach!

    Those that talk about how they can’t possibly save for their kids to go to college, and then go head to their SUV and drive home to their McMansion.

    I live in the DC area and I would correct your above sentence by adding “$45,000” before SUV. That’s probably the average here. If they don’t have the SUV they HAVE TO have a $45k BMW or Mercedes Sedan. Or Audi. It’s cookie-cutter mandatory where I live.

    I did a post last month showing that I live in the richest area of the country, the DC area. The five richest counties in America are all DC suburbs. And yet folks here are still in debt. Enough said.

    1. chiefmomofficer

      Right-it’s interesting to me that some people just don’t see the connection between those two things

  3. Good points, Liz. A couple months ago I even dared to write a rant post against this type of whiny overspenders. That commercial is awesome 🙂 I consider myself frugal and mindful, however, we all have our failures. Have to admit that this “get the best for your kids” attitude tempts me every now and then. I wanted a big garden for them to have place to run and play. They do like it but sometimes I feel that I am paying the price for it with my free time, spent on garden maintenance. Fortunately so far it is a burden I can bear and I write this on the account of recreation. When we were looking for a car I wanted a bigger one to have all that free space for all the stuff. My wife vetoed the plan and now we have a small, but efficient car for half the price (yeah, Honey you were right). No idea about schools yet, will report back in a couple of years 🙂

  4. Great post Liz. I know lots of doctor friends who live paycheck to paycheck because they got in the habit of rewarding themselves with items they cannot afford. I really want an apple watch that will run without the phone being nearby. I don’t currently own a smartwatch. I am making myself anticipate it. I am going to buy it for a retirement gift for myself. Not a gold watch but a functional one. I step count. I think this type of thinking is what many mean by mindful spending.

  5. Mostly I find people are confused on what wealth means. They hear a salary or career (doctor/lawyer) and assume wealth. The same happens when someone owns a fancy car or a big house. Many others assume they make lots of money…. Which is not the point. The real question is whether someone is financially stable: do they have some savings to handle an emergency and are they able to regularly set aside money for their retirement. Preferably sooner but at the very least have enough for traditional retirement age.

  6. Liz,

    I think you hit the nail on the head. Income does NOT equal wealth. The mistake I see most people who are earning a high income and who should have plenty to save are:

    (1) They buy the biggest house the bank says they can afford.
    (2) They then trade up every opportunity they get.
    (3) They buy fancy cars.
    (4) They replace those fancy cars every 3-5 years.

    Yes, there is more, but these will kill your ability to build wealth. I’m not the most frugal person, but I think more high income earners need to become familiar with what I like to call relative frugality.

    Nice post!


    1. chiefmomofficer

      Love the term relative frugality! It’s true that you don’t need to live on ramen to live below your means

  7. Jane Has Debt

    I have to say in a way I disagree with this post. I make a high income, support 2 and fit an ALICE profile (Google “ALICE income by state”) because I live in HCOL area. At one time creating a bigger lifestyle was me w/every raise. Now I have things mostly under control and am paying for all my past mistakes at the tune of $1500/m. As the CUT article states, “And the state of student loans is insane”.
    Granted I could consider moving or trying to go car-less. But there are things like growning up in the area, community, stability, health, long-term employment and other factors to consider. Especially when kids are involved. We live very modestly, where extras can’t really be included. It’s not always about Hedonistic Adaptation.

  8. We have six figure household income and I’m still pinching pennies, like making Seamus’s broken leash last for another month before buying a new one, and generally living modestly.

    Our mortgage and childcare feel like anchors! We have no other debt than the mortgage but because we picked the ok school district within a reasonable distance from work, we pay a premium. Less of a premium than the great school district, but still a premium. It was a conscious choice, I’d rather pay more money and have our commutes be less than an hour both ways. I remember how draining it was to factor in 2 hours of commuting into every work day and with my health, that’s just not an option.

    The daycare expenses will at least stop in a shorter period of time, when JB goes off to kindergarten but I know some people who will continue to opt to pay for the pricey daycare’s kindergarten program and I am curious why they’re doing it.

    We don’t outspend our income, we save at least 30-35% but it still doesn’t feel like enough when we can’t pay off the mortgage by the time I hit 40 when I may be unable to work any more so we’ll see. We are good with anything like windfalls, though, I save it all! Even when it’s side income, I bank all of that cash to make progress toward paying down the mortgage.

    1. chiefmomofficer

      Commuting time is definitely a consideration in where to live. I have a 45 minute commute right now and that’s plenty for me. Two hours-shudder

  9. My mother and my grandparents combined had a yearly income of about 30k Euros, when my mum retired it was about 20k Euros. When my grandparents died, my mother inherited all of their belongings, since she was the only child. When my mother died, my 2 sisters and I got 90k each! They’re my frugal models. They rarely ate out, grew their own food, darned their clothes, didn’t go on vacations and managed to save money although their income was below poverty line.

  10. Great post. I find that so much of the FIRE content online ignores the psychology of financial freedom and just focuses on the nuts and bolts of investing. For me, one of the most important steps (way more important than worrying about the choice between active and passive investing, for example, or the SWR) is silencing that inner voice that constantly compares us to our peers.

    There’s the issue of consumption (“keeping up with the Joneses) that you highlight so well in your post, and also that fear of other people’s derision that prevents many of us (myself definitely included) from talking openly about financial matters and where we’re up to in our journeys. How much freer we’d be if we could just get over it!

    I posted a pie chart of my investments online the other day as part of a wider blog post. I just KNOW that some people I know (who know where my house is) are sitting at home this very minute with a calculator, trying to back out my total net worth from the property percentage in that pie chart. They’re probably thinking “oooh, is that all?” (that’s the little voice at the back of my head talking again!). It’s a small step towards transparency though, and once people know how things stand, I’ll never again need to concern myself with what they might think if they did know. The next stage of financial freedom, here I come! 😎

    1. chiefmomofficer

      What a great step you’ve taken! I’m firmly of the belief that we should focus on where we are now and improving, rather than beating ourselves up for not being “enough”. I hope being more open about your net worth helps you with that! 😃

  11. Don’t forget high cost of living areas. We have six figure income but still struggle living in socal. My compact car has 183k miles, my wife’s minivan was bought used 5 yrs ago. We have an old 32″ tv, appliances that are 10+ yrs old, a 100yr old house less than 1200sf for our family of five. We don’t have cable TV, we don’t drink or smoke or gamble, we don’t have fancy clothes or jewelry.

    For the longest time we couldn’t figure out how people survived in this state until we realized that most people live beyond their means in debt or they get help from their parents or both. Neither my wife nor I came from families with money, so we have never had help with finances since we moved out at 18. It’s been 15 years since graduating college and I’m finally 1 year away from finishing student loan payments. Student loans are a real burden dragging down people’s finances and it affects people more that don’t come from Rich families.

    My new job will be an increase of about $25k so we’re looking forward to finally attacking some of our financial goals like saving for kids college, saving for parental care expenses, and maybe just maybe putting an addition so the kids don’t have to share rooms by the time they’re in high school.

    BTW leveraging for the most house you can afford makes a lot of sense especially if you expect your income to increase.

  12. Tibor Cseszneki

    In the USA it is possible to build your own house, buy your own land, while making $16/hour in a part time job. Pay as you go, no loans. All it takes is 3 years and determination. If more people would choose it would narrow the income disparity between rich and poor. I just wish more people would try it so America would be owned by American people and not by banks.

    Money and time is an incredible combination of power, if used wisely. As you pointed out in the article the shear amount of money isn’t always the answer. It easily flows in and out like water. The secret sauce is how you spend it.

  13. The most important thing in this article is the last thing you mentioned – Being Grateful. It’s what truly keeps one from taking anything from granted and will help one curb their spending desires.

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