How Do You Have Financial Struggles with a Six-Figure Income?

To most working families, a six-figure income seems like the antidote to all of their financial struggles. After all, $100,000+ incomes are still not the typical numbers that most people earn these days even when there seems to be more and more of those high-salaried people around us.

It can be difficult to understand, but even families with six-figure incomes can have financial struggles. Here's why that happens and what to do.

I guess the truth about that is a little bit hidden. After all, we never really know exactly what our neighbors’ and friends’ W-2’s look like and the chances are it doesn’t come up in a conversation with them. Even if it did, would they ever tell you the absolute honest truth? It has always been my experience that the answer is a resounding “no”.

But even when the numbers are revealed or if they are exaggerated, some people who are earning $100,000 a year—or even way more than that—are still struggling with their finances. While you may not want to throw those higher-than-you earners any kind of pity party, it does make me wonder why in 2019 can’t a middle class family get by comfortably with that kind of income? Does it make you wonder too? So, how can a family struggle on a salary of $100,000?

The #1 Reason Why People Can’t Manage Their Money

Earning money and lots of it doesn’t necessarily come with superior financial management skills. In fact, one can argue that lots of people with lots less income are much better at managing their money and do pretty well…and also manage to stay out of major debt too. While we tend to think that those mid-range and low-income earners as always the ones in a financial bind, high-earners find it’s shockingly easy to fall into one particularly damaging debt trap—and that is living beyond one’s means.

My experience while working for major banks in financial planning back in the early 2000’s taught me something that was true then (and even truer now) and that is that as incomes rise, most people adjust their standard of living upwards!

In theory that may not seem like a bad thing, especially if you also “adjust up” your retirement plan contributions, savings account balances, emergency funds, and pay down debts like student loans too. But, that doesn’t happen automatically as most of us tend to spend more and save less when they are right in the middle of an earnings bonanza. There are some reasons why this happens.

Two Things Higher Earners Don’t Think About That Can Really Hurt Them

First of all, when you start to earn more money, a lot more money, you have to ask yourself exactly why it’s happening and can you totally count on it to continue that way for an extended period of time? If you are someone like baseball star Bryce Harper and just signed a 13-year $330 million dollar contract, then you probably can spend some of it on something really gaudy, opulent, or ridiculous if you want to. But for most everyone else there are few written guarantees about income and you can’t assume that you are always going to earning more and more. Try to remember the old saying, “When you ASSUME you make an ASS out of U and ME”! Making that kind of assumption doesn’t insure it will always happen just the way you want it to happen.

Secondly, the challenge higher incomes bring with it in many cases is that the higher your income goes, the more variable it actually becomes. This is because much of it can be based on things like bonuses, options, and commissions. When income goes back down, whether on a permanent or temporary basis, most of these earners have very little free cash to fall back on.

Often, the higher your income bracket, the more pressure there is to have a higher kind of lifestyle—whether that pressure is from your neighbors, your family, or just from within yourself. On top of that, most high-paying careers come with a hefty price and that’s typically in the form of an expensive college education.

No reminder is necessary here, but if you are a 20-something in college today you will probably graduate with big debts in the form of student loans. Typically, that will take a big chunk out of any of your future earnings for an extended period of time, possibly more than a decade. Add graduate school to the mix (an MBA from a top 20 business school costs well over $150,000), and even with a $100,000 job, you’re still looking at years of loan payments with little room leftover for savings.

It May Sound Simple But It’s Actually Very Complicated

If I made the statement to you that “if you don’t earn a lot of money you will have financial problems and if you make a lot of money you won’t”, you would probably say that sounded pretty logical. But in my real life experiences, I encountered many clients who were high earners but were not smart savers. The reasons for that are that higher incomes can change one’s perspective of “wants” and “needs” and that can cause huge problems for people.

Having written extensively before about knowing your wants and weighing them against your needs, I witnessed that higher incomes can often remove your careful thought processes and give you a much more distorted view about what those differences are.

Here’s an Example of a Real Life Distorted Financial View

Back in 2002, I met the “X” family though my job at a large bank and the X’s had a breadwinner pulling in more than $100,000 a year as a product manager at a pharmaceutical company. Keep in mind that that $100,000 was almost 20 years ago so it would translate into $140,000 today! Firmly established in the “upper middle class”, when I met this family, they were just realizing they were really going broke!

It was 2002 and they had a purchased a brand new “McMansion” here in central NJ just three years earlier. They were now welcoming their first child into the family. The father (age 34), was taking home close to $6,000 a month (after taxes), and yet they were still overdrawing their bank accounts regularly. They had debt collectors constantly calling them at work and at home. Each month, his almost $3,000 mortgage bill brought another wave of terror and yet their loan servicer told them they earned too much to qualify for any kind of loan modification. He felt poorer now that he did when he made one third of his current salary as he scraped by to finish up college. This little family felt that their income should be OK but was in a panic mode all of the time.

What We Did to Try to Fix Their Financial Struggles

Grudgingly, they agreed to sit down with me and try together to figure it all out. I broke out my calculator and even before factoring in their mortgage, the couple owed nearly $200,000, of which $160,000 was split between student debt, a home equity loan, a 401(k) loan, plus another $25,000 on three credit cards. Once I put everything on paper, they seemed paralyzed. Their reaction said to me that they couldn’t even imagine getting out from under this huge rock! But, when the shock wore off after a few minutes I told them that the real work before us was just about to begin. Here’s what the plan we devised entailed.

Getting That $200k Debt Under Control

There are just two ways to improve anyone’s financial situation. You can try to earn more or try to spend less…or you can do them both together which works better, faster, and longer!

Mrs. X, who cared for their son during the week agreed to get a part time job waitressing on the weekends, a job that would potentially earn her about $150 a week. So often child care becomes a big issue and prevents a parent from working at a high paying job or even any job at all! Fortunately, Mr. X could manage childcare on his own over the weekend freeing Mrs. X to earn some extra money.

They also began using a spreadsheet and began budgeting (something that they had never ever done before). Eventually they transferred that info onto a computer app and kept real-time track of all their expenditures and income. Lesson number one: you need a budget and you have to use it to gain knowledge and control over your finances!

They also made a commitment to quitting dinners out and for the near term vacations had to be cancelled as well. Mrs. X needed a new car, but this time it would have to be a used one and would be paid for in cash and not by a loan or credit card. We then went through a laundry list of their expenses and started cutting back and eliminating all the things that were definitely not needs and were only wants. Mobile phones were exchanged for bare bones models, bank accounts were consolidated, and a savings account was established for them along with an emergency fund account and a 529 college savings fund for their son too. All of these helped them keep better track and control of their money.

The Biggest Problem in Their Life

Their biggest financial mistake was also their hardest to rectify. It was their house and huge mortgage payment. Central New Jersey is one of the most notoriously expensive housing markets in the state and they had purchased their home for $620,000 at the near-peak of a housing bubble. With an interest-only loan, the almost $3,000 he shelled out each month didn’t even cover any property taxes or home insurance. It was way more than they could really afford and frankly not even close to a need for their family housing! They told me that they had tried to do a loan modification but our bank kept telling them that they made too much money to qualify!

Now, with a new plan in mind, I tried to help them refinance their interest-only loan into one with better terms and that would now build long term equity. But after some frank discussion, we ultimately decided that the best longer term plan was an agreement to sell and downsize their 6,000 square foot home into a much more affordable and practical residence. That move, completed within 6 months would ultimately save them $1,500 a month on their housing payments!

These changes weren’t easy but they put the X family well on their way to resolving their debt and personal financial crises.

Your Financial Advisor Wants to Help You, So Just Ask

One of the best parts of advising people about their finances and working in the industry for me was helping people get out of dark financial holes. The case of the X family was an extreme one, but not as far off the averages that it at first may seem. The key takeaways from their story and the ones that I talk about most frequently relate to owning a budget and understanding your wants vs. needs. Until you get those correct in your head you will always be skating on thin financial ice and you just may wind up cold, wet, and out of luck!

Do you have and use a budget each month to monitor you expenses and income? Are you under control? Do you know the differences are between wants and needs and are you making smart decisions that prevent you from spiraling into a financial disaster? What lessons have you learned in dealing with debt today?

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