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