There is yet another of those struggling-on-a-six-figure-income stories (YahooFinance: First Person: How to Earn $100,000 and Still Feel Poor..By Laura Cone) that came out on the web, but this one was at least a little bit more tolerable than such accounts usually are. The writer provided some hard numbers that gave some credibility to the claim making it, I think, a decent point to debate.
An income of $100,000 per year puts a household in the top 17.6% of highest earning households nationwide, which is to say that earning that much money isn’t average, and it isn’t middle class. It’s somewhere in the upper tier. Not rich necessarily, but most definitely in the financially blessed region.
It’s hard to be sympathetic when you see such statistics, yet part of me understands this woman’s “dilemma”. Most of me, however, feels other factors are at play.
Struggling on a six-figure income: Why I “get it”—sort of!
If you’re getting by on substantially less income, it’s hard to appreciate that anyone might be struggling on a six figure income. But there are factors that lend some credibility to the claim.
The cost of the middle class lifestyle is higher than we think. This is a topic I like to discuss and that I don’t think gets nearly enough coverage. The cost of everything we need these days is much higher than it’s ever been and growing steadily. Healthcare/health insurance, education, insurance, repairs and utilities are just such examples. We need all of them and they take up a larger percentage of income all the time. Property values are another factor. In many metropolitan regions, $100,000 per year is practically the minimum you need to earn in order to afford the most minimal middle class home.
Declining equity. A lot of households, especially those in the six-figure income category are reeling from declining equity in both their homes and investment portfolios. Both can wipe out any sense of well being that a high income provides. With house prices falling below mortgage balances, many families may feel trapped in their homes. And even though the Dow is back in near record territory, many people who lost serious money on the way down have been understandably hesitant to get back in the game for the ride back up. Declining equity can make you feel poorer than your income might indicate.
Inflation. This is the “X factor” in the suburban financial deck; no matter how much it cost to maintain a certain lifestyle in the past, it will always cost more in the future. What that means is that it’s almost impossible to fix an income level at which a person crosses over into prosperity. Many people believe that the consumer price index (CPI) is consistently understated—and I agree. Does anyone really think inflation has been running at 1-2% per year for the past ten years or more? When you look at healthcare, education, utilities and property taxes such a low inflation number is beyond ridiculous. The middle class inflation dilemma is salaries and pay increases are based on the CPI, but the cost of living is based on real inflation and it’s anyone’s guess what that number really is.
Certain expenses weigh more heavily at certain times. Here’s where I get really sympathetic toward those who struggle on six-figure incomes. This couple looks to have their finances in check—their house payment is only about 15% of their income, they have no debt apart from their house and one car loan, and they save about 10% of their income for retirement. But this family has two kids in college, and that means high education costs. It’s costing them $15,000 to keep them in community college—that’s the collegiate budget program! Meanwhile they’re spending $1,000 a month for food; anyone with teenage or young adult children will get this.
The point is there are times in life when costs are unusually high. This couple has two kids in college, which means high outlays for education. The elderly or those with chronic illnesses have outsized health expenses. While it may be possible for a single person, empty nesters, or those in perfect health to live on a shoe string, at certain times in life this isn’t possible.
Struggling on a six-figure income: Why I don’t get it—not even a little
I have greater understanding of all of the above for those making below the $100K mark because above that level means you have more options. That those options aren’t more carefully considered and implemented is where the problem really is.
Lifestyle inflation is a big culprit here. As human beings, we’re communal, and that means we often take our behavioral norms from the people around us. What that means is that as income rises, so do costs. More specifically, wants have a way of morphing into needs. It’s what we’ll do if we don’t consciously resist the trend. It’s the path of least resistance. No—I don’t believe most people are aware when they’re doing this. But they need to be.
The most fundamental way to achieve prosperity is to live beneath your means and save and invest the difference. That mindset if often the first casualty of a higher income. Perhaps it’s that a sense of invincibility grows as income rises; all problems are believed to be solved through more income. But if income isn’t converted to true wealth (savings and investments) then it will disappear into consumption. This is critical at higher income levels. This is the main problem for high income households who don’t feel prosperous.
I’ve written that earning more income is more important than frugality but I think that dynamic should reverse as income rises. At a certain income level, after all, it’s not what you earn but what you keep. If you aren’t keeping more of what you earn at higher income levels then you’re failing at something fundamental.
What are your thoughts? Are you sympathetic to high income households who struggle? Or do you think they’re suffering by their own financial mistakes?