When you think of the term, “high-income earner,” you may think of someone who makes a six-figure salary and has no financial struggles. Making six figures may influence individuals to automatically assume that you are saving more for retirement, saving more money in general, and doing well financially, but is that really the case?
According to polling company, YouGov, just 9% out of 2,000 surveyed Americans reported earning more than $100,000 per year. Considering several economic factors such as the rise in cost of living and debts (i.e. credit card and student loans), $100,000 may not go as far as it once did forcing individuals of every generation to feel some sort of financial stress.
Let’s take millennials for instance. Despite the longest bull run in U.S. history (before the worldwide pandemic), job growth and good timing, more than half of millennials feel behind in their financial situation.
Below, we’ll take a look at some of the reasons why high-income earners are struggling to save, and some solutions that can help them save more and get on track towards reaching their financial goals.
Reasons Why You’re Not Saving Enough
- Cost of Living. It is without question that keeping up with living costs has gotten more difficult over the years, in particular, densely populated metropolitan areas such as New York, San Francisco and other cities around the U.S. According to a report by Statista Research Department in 2019, a homeowner in New York City would need approximately $148,000 to live “comfortably.” For a homeowner in San Jose, they would need an income of almost $198,000 to live comfortably.Of course, the cost of living is not as expensive in many parts of the U.S., but this does show how one’s living location can dictate and limit a high-income earner’s saving ability.
- Lifestyle Habits. While everyone’s lifestyle choices are different, living without a planned out budget or spending application can hinder an individual’s financial well-being. Say for example an individual who makes $105,000 per year ends up spending somewhere around 75-80% of their income on essentials like rent, utilities, transportation, and also on non essentials like dining out and vacations. Just based on those assumptions, it would be difficult to properly plan, as unexpected expenses may arise such as health care and other emergencies.Lifestyle choices are definitely a personal choice, but it should be encouraged to track all of your expenses with a free tool like Personal Capital so you can have improved transparency on your finances.
- Debts. Ever since the Coronavirus pandemic, there have been several reports showcasing how credit card debt has gone down. While this is certainly a step in the right direction, many high-income earners, and earners of all income levels, continue to struggle with growing debt. “Keeping up with the Joneses” is a real issue as we see high-income earners burn their cash, and pile expenses such lavish vacations and luxury items on their credit cards. The idea of keeping up with the “Joneses” is a problematic mentality as that can lead to a path of mounting high interest debt.Along with credit card debt, many high-income earners of younger generations like millennials are likely struggling with paying down student loans they had to take out to fund the hefty cost of higher education. According to Student Loan Hero’s 2020 report, approximately 69% of 2019 graduates held an average amount of over $29,000 in both private and federal debt. With education costs continuing to rise, it is important for younger generations to look more aggressively for ways to reduce the cost through scholarships, grants, and if possible, family assistance.
Ways You Can Save More
It doesn’t necessarily matter how much you earn because if you are making $100,000 a year, but are spending $101,0000 a year, you will eventually have a negative net worth. Working with a financial advisor like Personal Capital can help you minimize financial disasters and maximize financial well-being.
The following are some things high-income earners can do to help their financial well-being and be on an improved path towards retirement:
- Volatile times exist. It’s easy to think your income will rise over the course of years of your career. Unfortunately, bad things may happen, and many people are facing struggles from the worldwide pandemic. The sooner you acknowledge that there will likely be tough times over your working career and that it will not be entirely a smooth ride, you’ll be able to better manage your lifestyle and spending habits.
- Keep a progressive savings rate. Do you know how much of your after-tax income you are actually saving? Whether it is building up your savings, emergency fund, or retirement accounts, make a goal on how much you would like to save and how. If you are currently saving 20% of your income, think of ways to increase that rate to 25% or more. You may be due for a bonus or pay raise, but instead of thinking about what to spend that money on, consider treating your future self by investing that extra income in your 401k, IRA or investment brokerage account.
- Focus more intently on building net worth vs. growing income. Focusing on both net worth and income is important. But building real long-term wealth comes more from focusing on net worth. Income is just one source of wealth creation. Once you stress net worth, you can start focusing on developing multiple income streams, estate planning, tax planning, savings, insurance and a whole host of other things that could help prevent you from ever having to declare bankruptcy while earning six figures. It’s what you keep that’s most important.
- Automatically save your money away. You have probably heard of the tip to set up automatic deposits or transfers so you don’t see your money and think about spending it. This can certainly be a tactic to help you save more and spend less. You can park your income and emergency fund in a high-yield, liquid cash account that has no fees or minimum requirements, or potentially a CD if you know you will not need that cash over a set number of years.
Saving money takes discipline. The more you make, the more discipline you need because there will be many more temptations. Pay yourself first, focus on growing your net worth, and keep on investing.