High Income Does Not Guarantee Financial Security

By Logan Jones

Many assume a higher income will solve their financial problems. Real-world patterns tell a different story. The Millionaire Next Door found that high-income earners, including lawyers, business executives and doctors, can be “under-accumulators of wealth,” prioritizing today’s lifestyle over long-term financial security. Thirty years after its publication, little has changed. High-income earners continue to risk their financial security by maintaining unsustainable lifestyles.

In grade school, I believed my friends with the largest houses, newest cars, coolest shoes and most exotic vacations had the wealthiest parents in town. As we grew older, I learned that some of their parents struggled to make ends meet, relying heavily on debt to fund their lifestyles. Oftentimes, high-income earners fall into this lifestyle pattern.

Look the part to play the part

High-income earners often worry about social status and appearance at the cost of financial security-the ability to cover living expenses, emergencies, and long-term goals without taking on debt. As humans, we naturally compare ourselves with others, particularly peers and public figures, and anchor our definitions of success and happiness to their lifestyles. We attempt to match or surpass them by seeking status symbols such as nicer homes, luxury cars and extravagant vacations.

Social media has amplified our tendency to compare ourselves with others and has fostered the urge to follow the crowd, known as herd mentality. Doing so can create poor spending habits and an inability to make ends meet, especially during an emergency. The struggle to maintain this costly standard of living threatens your financial security.

Wealth destruction

Humans have a psychological tendency to increase spending alongside income growth, known as lifestyle creep. High-income earners often “fall into the trap of too much convenience spending,” a trend that can be difficult to stop once it begins.

Moreover, several studies have found that high earners still live paycheck to paycheck. A recent BHG Financial study found that people with incomes over $300k still struggle with credit card debt.

Personal debt instruments – such as credit cards, personal loans and payment programs – enable spending habits well beyond income. Living beyond your means, especially when using debt, erodes financial security and can silently hinder financial independence.

Deferred gratification

The foundation of financial security is savings, yet saving is repeatedly pushed to the financial back burner. High-income earners all too often lack adequate emergency savings, curtail retirement savings and suspend saving for future expenses.

Consequently, lifestyles focused on instant gratification allocate dollars toward today’s enjoyment at the expense of future financial outcomes – a tendency known as present bias. Delaying gratification helps prepare your finances for unexpected crises, unforeseen expenses and the retirement you deserve.

Below are a few steps you can take this year toward greater financial security.

• Live below your means: Maintain a budget and periodically review your spending habits. Avoiding personal debt while living below your income puts you on the path toward financial security.


• Set it and forget it: Set up automated transfers each month to your investment and savings accounts. This creates a consistent yet effortless savings habit. Schwab’s Patrick Means describes this process as a monthly subscription to paying yourself and your financial goals first.


• Plan ahead: Unforeseen events can be detrimental to your financial security, and maintaining an emergency fund is a crucial defense. The amount you need in your emergency fund should be based on various factors, including:
• Access to short-term coverage options, such as sick pay and paid time off
• Access to disability insurance and the extent of coverage
• Established taxable investment accounts that may be earmarked for other purposes, such as vacations, education or retirement
• Number of household income earners
• Savings rate compared with spending rate
• Flexibility in your budget’s fixed costs and discretionary purchases
• Obligations for children and other dependents
• Save for future you: Prioritize your emergency fund before moving on to maximizing workplace retirement account contributions, taking advantage of available tax-deferred or tax-sheltered accounts, and putting additional money into a taxable account. Future you will be grateful.


• Find a support team: Your Northern Capital Management financial adviser and a qualified CPA can help you build a plan for financial security and success.

Questions?

Northern Capital Management advisers are certified financial planners with extensive experience working with medical professionals. You may reach us using our WSMA member contact form.

The WSMA is a client of Northern Capital Management and receives compensation for promoting our services. As a result of the compensation arrangement there is an inherent conflict of interest. Disclosure.

Logan Jones is a certified financial planner with Northern Capital Management.