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.
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!
Want to connect with other money-smart women? Join in my Facebook groups:
- Breadwinning Women – A group for female breadwinners, with kids or not.
- Women on FIRE – A group for women looking to achieve financial independence, no matter what their age, life stage, or situation
Be sure to follow my blog for more great posts via e-mail or WordPress, or connect with me on Facebook or Twitter and say hello! You can also check out what I’m buying or baking on Instagram, what I’m pinning on Pinterest, or the latest books I’m reading (or want to read) over on Goodreads.