The High Income Curse: Great Wealth Is Not A Guarantee

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When it comes to building long-term wealth, most people think that earning more is key to going from well-paid to well-off.  But the thing is, earning more money isn’t always the answer. If it were, then 78 percent of NFL players wouldn’t face bankruptcy or serious financial issues at some point in their lives. And yes, you read that right. More than three quarters of professional football players end up with very little once the thick of their careers is over.

Of course, it’s easy to balk at all of the excess surrounding professional athletes and wonder how on Earth they let that happen. It’s easy to ask yourself, “how could they spend that much money?” It’s easy to look down on them for squandering their extremely good fortune and think it could never happen to you.

Unfortunately, it’s much more common than you might think. Look around you and you’ll probably see people you know doing the exact same thing, although usually on a much smaller scale. The only difference is, it takes a slightly longer time for the average person to blow up.

The High Income Curse

I happen to know more than a few people who are also spending lavishly to the very edge of their ample means. For example, a married couple I know pulls in 200K in the low-cost Midwest, yet burns through it relentlessly and even leans heavily on credit for things like groceries and gas. {Related: A Potentially Easier Way To Get Rich: Move To The Midwest}

The problem?

A huge house with a correspondingly ginormous mortgage sucks their bank accounts dry, while their bus-like SUVs consume almost everything that’s left. The kids participate in every sport and activity you’ve ever heard of, and even a few you haven’t. Mom and dad keep themselves busy with random activities that never, ever involve staying home or anything free. Meanwhile, no one is saving anything meaningful for retirement or college, and the credit card bill inches up each month, although no one really knows why.

But that’s where the high income curse shows its face.

It tells them that, because they earn plenty of money, “everything will be fine.” A high income convinces them that their next raise, their next promotion, is all it will take to get ahead. The problem is, that raise- that bump in income-will mean nothing once it finds its way in their wallets. Why? Because they have no idea how to manage their money, and they look to the outside for answers instead of looking within.

Turning a Curse Into A Blessing

Fortunately, a high income used wisely can be much more of a blessing than a curse. In fact, even those with lower incomes can end up far ahead if they can save a high percentage of their income. My parents are the perfect example of a couple who has done just that – my father worked as an insurance agent, my mother a school assistant. Even though they earned little while I was growing up, they paid off their house while I was in high school and saved religiously during my entire childhood. My parents are proof that, if you are dedicated, you can make your financial dreams come true no matter how much you make.

And that’s part of the reason the high income curse is so incredibly sad. Think about it. Someone earning six figures or more in most parts of the United States has such an edge when it comes to building long-term wealth. That’s because a high income means far more opportunities to save and get ahead.

But, as we all know, saving zero percent of your income (or worse, going into debt) will do nothing to build your net worth. And when you look at people like my parents, it becomes increasingly apparent that wealth and net worth outcomes have a lot less to do with how much someone earns over their lifetime, and more to do with how much someone can save.

How much should you have saved by age

But take a look at this chart to see what a big difference that six-figure income can make. As you can see, the family earning 60K will do just fine if they invest and invest regularly and max out their tax-advantaged retirement accounts. But the family making 200K? They’re practically rolling in the dough by the time they retire. Or even better, they retired long before the age of 65 and are busy traveling the world or pursuing their passions and hobbies.

How To Break The High Income Curse

Earning six figures or more is no longer the guarantee of riches that it once was, but that doesn’t mean that it isn’t the ticket to financial independence either.  {Related: Why a Six-Figure Salary No Longer Means You’re Rich} The key is maximizing your income and making it work for you, and the alternative is simply spending it on everything you’ve ever wanted and looking back some day and wondering, “what happened?”

On the other hand, if you’re suffering from the high income curse, I have good news. The fact is, there are plenty of ways to ensure your high income doesn’t go to waste, although some of them might make you feel uncomfortable. But you have to suck it up if you want to get ahead sometimes. After all, the option behind door #2 is not all that great, is it?

Step #1

Track your spending and make drastic cuts- Let’s face it – a high income means nothing if you simply spend it all on creature comforts and luxuries. In fact, you might as well be flipping burgers at In-n-Out if you’re not using your income to increase your net worth. It’s time to stop the madness! The first step to reining things in is simply tracking your spending and seeing where all your cash is going. Then look for ways to cut your expenses drastically. And yes, it should hurt.

{Related: A Better Way to Track Your Spending Each Month}

Those private karate lessons for Junior, that $800 Audi payment, and that weekly mani-pedi are costing you more than a few hundred bucks a week; they’re costing you the hope of retiring one day. See just how little you can live on and the money will magically pile up right before your eyes.

Step #2

Pay off debt- Unsecured debt is the mortal enemy of financial independence and long-term wealth. In order to maximize your high income and put your money to work for you, you have to plug the holes in your sinking financial ship. And that means that any outstanding debts that aren’t helping you build wealth need to politely exit stage left.

Once you’ve begun tracking your spending and making drastic budget cuts, you should have extra cash coming out your ears. While you focus on your long-term wealth-building plans, use that cash to pay off credit card debt, personal loans, car loans, and lastly, any student loans you have.

Step #3

Focus on net worth, not income- As we already covered, your high income means nothing if you don’t save and invest it. So instead of focusing on earning more, set your sights on building your net worth instead. Making a point to max out your tax-advantaged retirement accounts is a good place to start. And good news, the 401K contribution limit for 2015 has been bumped up to a cool $18,000.

But don’t stop there. Look for other ways to build your net worth, such as paying down debt, building a solid investment portfolio, or even investing in rental real estate. And yes, Personal Capital can help you track your net worth with their amazing online platform that lets you track multiple investments and holdings in one place.

{Related: Why Real Estate Should Be Part of Your Investment Strategy}

Take Action Now

High-earners who manage to lose it all prove that a high income is hardly the key to long-term wealth. In fact, they prove that a high income gives you nothing more than an advantage compared to everyone else, and shows us just how easy it is to squander vast riches if you don’t manage your money wisely.

A high income, harnessed properly, can lead to a world filled with options – it can lead to early retirement and financial independence. It can help your dreams come true. Or it can simply help you build a world of smoke and mirrors- one where things aren’t always what they seem, and money is used to project a status that means nothing outside of the confines of your own mind.

The latter option will likely haunt you for the rest of your life, and can even stand in the way of living the life you’ve dreamed.

But the former will not only help you get rich; it will set you free.
Utilize Personal Capital’s Free App To Manage Your Money Today

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Holly Johnson

Holly Johnson is a financial expert and award-winning writer whose obsession with frugality, budgeting, and travel plays a central role in her work. In addition to serving as Contributing Editor for The Simple Dollar, Holly writes for inspiring publications such as U.S. News and World Report Travel, Personal Capital, Lending Tree, and Frugal Travel Guy. Holly also owns two websites of her own - Club Thrifty and Travel Blue Book. You can follow her on Twitter or Pinterest @ClubThrifty.

3 comments

  1. Anonymous

    some negative selection is necessary.

    Reply
  2. Shawn Murphy

    Pay attention to these steps especially step one track your spending erratic spending could lead to financial woes…. I love these steps although basic very effective if followed.

    Reply
  3. ralph

    Here what you really want to do – become a state employee in NY, California , Illinois etc. OK Lets looks at the average small town firemen or cop . YOu start work at 20 you retire by 40. If you live to 90 you get paid for 70 years out of which you work 20 ! If you get say 70 K per year you will collect 3.5 million !!! Thats right 3.5 million dollars is the retirement plan of every cop and fireman – ok and before you start complaining about it being dangerous – they are not even listed in the top ten most dangerous jobs !!! COming up next ….those poor teachers – retire at 55 live until 90 – thats about 2.4 million for all of those poor teachers . OR you could just be a poor downtrodden toll taker in NY – one guy retired at age 50 taking home 128K for the rest of his life – so as a toll taker his retirement is worth about 4.3 million – I know I know he put in at least one year after high school to make this type of money – the good news is – the chimp they replaced him with works for bananas

    Reply

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