Yes, You Can Go Broke on $400,000 Per Year

family ski trip 2

Even a $400,000 income isn’t enough if you can’t keep spending in line

Sad, but true.

A new Wall Street Journal expose shows how easily people making $400,000 or more can end up broke when their spending gets a little too large.

“Some high earners end up leading a lifestyle they can barely afford, saving little or nothing for retirement and living paycheck to paycheck. In extreme cases, they even fail to make ends meet, particularly if they lose their jobs or face unexpected expenses,” writes Veronica Dagher for the Wall Street Journal.

It’s hard to believe, but we see it more often than we would like in affluent communities like Boca Raton.

Let’s take a look (below) at how the typical high-earning couple can easily get themselves into financial quicksand. Northern Trust Wealth Management, which works with high net-worth investors, illustrated the lifestyle and spending habits of a typical couple in Chicago making $400,000 a year for the Journal article.

Note that this sample couple ends up $10,000 in the hole at the end of the year. They have $273,000 to spend after taxes, but actually fork out $283,000.  That can only be financed by debilitating credit card or other debt. They’ve only saved $12,000 toward their retirement, a paltry 3% of income (well below the 10-15% we recommend). A big percentage of income goes toward the $1 million+ residence, one reason we caution clients not to sink too much money into their homes. Their kids are in public school, so bills would be significantly higher if they were in the private schools many affluent families favor. And the $10,000 per year they are setting aside for college may go far enough in low-cost states like Florida, but won’t cut the mustard in most other states or if the kids covet a private college education.

The moral of the story: It’s not what you make. It’s what you spend. To truly build wealth, you need to spend wisely and invest for future growth, not blow all your income on current consumption.

journal example

Calculations: Northern Trust Wealth Management for the Wall Street Journal.

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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One Response to Yes, You Can Go Broke on $400,000 Per Year

  1. Bill Haider July 2, 2015 at 1:57 am #

    These numbers for expenses seem very liberal to me:

    1. $9,250 per month (87000 Mortgage + 24000 Property Taxes) for PITI on the property? Are we assuming nothing was put down and a multi-million dollar home?

    2. Home maintenance at over 2K a month (25,000)? Are you renovating your home every month? Or are you maintaining a vineyard? 2K a month for home maintenance? Really? I grew up in a 1 million dollar home and trust me, my parents weren’t paying anything close to that.

    3. Groceries @ 30,000 year or 2,500 a month? Actually this might not be as outrageous as some of the other estimates, but I still think it’s a little high as my family doesn’t skimp on food, we buy USDA Prime meats and still manage to keep it below this number per month / year.

    4. $750 dollars per month on Auto Insurance? I guess this family either has members with horrible driving records, or they must all be driving exotic cars, I’ll tell you right now that I drive a BMW sports car and my wife a Range Rover and we pay less then $150 dollars per month. I can’t imagine what this family is driving.

    5. $26,000 dollars a year on vacation? What is this the Brady bunch and are they going to Hawaii multiple times a year? That seems high to me, we are able to go to all-inclusive resorts and or cruises every year for much cheaper than that.

    6. Club Dues? I have an income in the $400,000 range and have several colleagues, family members, and friends that do too. Not a single one of them belong to any clubs, maybe it’s not as popular with the younger generation (we are all in our 30’s) these days? Either way it seems like a lavish expense to me.

    7. 10,000 dollars a year on sports activities? My son is too young for sports just yet, however I played Football, Basketball, and Soccer growing up and I don’t recall any of it coming near 10,000 dollars a year? I guess we’re estimating that our kids are going to be golf pro’s and therefore well have to drop money each time we play on the course?

    Honestly, I have no trouble saving thousands of dollars per month, actually I am averaging over $10,000 per month in just savings in the Washington DC metro area – which isn’t exactly cheap. If people are having trouble saving money with this income it’s because they are financially illiterate and consuming way too much.

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