Struggling on a Six-Figure Income

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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!

Struggling on a Six-Figure Income
Struggling on a Six-Figure Income

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?

( Photo from Flickr by Smiles Are Free )

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33 Responses to Struggling on a Six-Figure Income

  1. I get it. I understand. I mean $100k isn’t that much money when your expenses are high. But do they really need to be that high? A little planning would have taken care of some of their major expenses.

    For example, they knew they had kids. They knew the kids would grow up. I imagine they thought about college for their children years ago. Why didn’t they start putting money away a decade or more ago? I know, I know, they didn’t ‘have the money’ back then. I don’t know how true this is. If you are going to have kids, shouldn’t you make sure you can afford them? Strange way of thinking about it, and one that isn’t popular. I say this because a large number of people can’t afford kids, yet they still have them.

    With some planning, and some lifestyle adjustments, $100k can be a LARGE amount of money. But what do I know – we don’t have kids…

  2. Hi Marshall–Overall I agree with you that $100K CAN be a lot of money. Properly managed it can result in serious money. But kids do create a financial dilemma of sorts. No one ever has enough money to be able to afford kids, and inflation takes a massive chunk out of saving for their future.

    The other problem is cultural influences. We all want “the best” for our kids, which is natural. But today we’ve taken that to perverted extremes. Many kids don’t ever work until they finish college. Newspaper routes and cutting lawns have largely faded into history. The primary emphasis is getting a “good education” which has not only fueled expectations, but it’s also caused a massive inflationary spiral in college costs. Then we want them to grow up in a certain house in a certain neighborhood, and before you know it, you’re technically bankrupt on a very high income.

    I can live in a rented room and eat canned soup and peanut butter and jelly three times a day, but for my kids I do want better. The problem is that giving a better life to your kids can be a noble sounding cloak for giving a better life to yourself. Somewhere in there is a line we cross too frequently and often for the wrong reasons.

    Personally, I think living beneath your means is one of the best gifts you can give your kids. It’s an under-appreciated survival skill that can benefit a kid throught their lives. But because of cultural ifluences, it’s very easy to go the other way.

  3. Hey Kevin,

    I forgot to mention about the keeping up with the Jones. The more you make, the more you spend. Been guilty of it myself – and learned a valuable lesson along the way!

    You raise a very valid point about kids not contributing to their education. It is hard to imagine that kids who are given everything will understand what it is like to actually have to work for something. They probably won’t be too motivated to actually make something of their lives once they leave college. Heck, they might just keep on living at home, avoiding the inevitable – having to fend for themselves.

    I could go on and on and on about this subject. I, obviously, have a very different point of view (and one that I am very proud of) then those that chose to have children. But I do totally get where a parent would want better for their kids. Interesting that you point out that this might just be an excuse to live a bit more extravagantly as I haven’t thought of it this way.

    I also understand how hard it is to raise children the ‘right’ way when, as you mentioned, our culture is often pushing them in another direction. My wife and I often say how lucky we are to not have to deal with these issues, and I feel for those that are truly trying to do the right things for their kids, when outside influences make the job very difficult.

  4. Hi Marshall–Unfortunately that keeping up with the Joneses thing is probably what’s really behind lifestyle expansion, even and especially with kids. People want their kids to have better vs. other kids. That’s expensive. The other complication is the way people try to move into “better neighborhoods” when they have kids. It sounds noble at first glance, but it sets off a whole chain of higher expenses accross the budget. New friends can be very expensive too!

  5. The Middle Income Trap is a belief system that usually results in an unsustainable and unaffordable lifestyle.

    The Cash Flow Hydrant™ Cash Flow management tool that I developed breaks expenses down into three main categories: Past Obligations, Present Control and Future (includes vacations, new cars, college, retirement, etc.).

    What we have learned is that the Obligations are primarily to buy a “Lifestyle” … where as the control expenses almost completely are about “Quality of Life.” Lifestyle choices are based on how each person sees themselves (or wants to see themselves) relative to their peers. Lifestyle choices have mostly to do with “stuff” whereas Quality of Life is determined by a person’s relationships and experiences.

    The middle income trap is a belief system that they can afford more of a lifestyle than is really possible – for a family to strap themselves with too many obligations (usually 75%+ of after tax income). 20-25% of income must go to control expenses (food, clothing and entertainment – relationships and experiences). An equal amount (25%) should go to future relationships and experiences to maintain quality of life past the working years.

    You can see that the math doesn’t work (adds up to much more than 100%) – and it usually works out worse for $100k+ income earners (who have a harder time judging an appropriate lifestyle for their income) than it does for $40k income families.

  6. Hi John–You’re on to something with the Cash Flow Hydrant. I completely agree about lifestyle costing more than people can afford. It’s driven by self-image and the need to maintain it at a certain level. Then the level increases over time. It’s giving ourselves what we think we deserve, and the world (mostly the media) helps us along with that.

    I wrote about the greater importance of quality of life in another post, “10 Ways to be Rich Without Being Wealthy” (first Reated Post beneath the article above). I think this is really what people need to be happy, not the costly standard of living people usually pursue.

  7. I think one of the big problems in our society today is the “I want it now” syndrome. There not happy with looking at a “starter” house. They buy a small mansion even though there is only two of them. New top of the line cars every two or three years. Expensive “toys”, trips,boats, cottages,dining out,great wardrobes,etc. They buy a lifestyle. Then put children in the equation. I think all of us need to be happier with a little less. Slow down and smell the roses.

  8. Hi Ella–All of your points are valid ones. There’s a sense of entitlement that’s never existing before. And there’s no sense of delayed gratification to balance it out either. It may sound simplistic, but I think TV is having a big affect here. The BabyBoomers and everyone who’s come after have been raised with TV. TV is a place where everyone has everything and little is made of how they come into it. We’re mimicking that process, only it doesn’t work painlessly in the real world. Somehow I think financial sanity starts the day you turn off your TV for good.

  9. It’s like the old saying, “The more you make, the more you spend.” Add credit cards and debit cards into the picture, it’s not too long before you overspend and find yourself struggling. At least when you are making five figures, you do not have as much credit available to you, so you are limited as to how much you can spend.
    On the other side of the coin, anyone in the lower five income figures are definitely struggling, as the cost of food, housing, heat and hydro, all neccessities keep going up, but their income is not keeping up the pace. and most of their struggle is not due to frivolous spending.
    I agree with you. Yes, I believe TV and magazines do have a lot to do with creating a picture perfect lifestyle.

  10. I agree on all points Ella. Just an FYI, when you make a comment, you don’t need to add a url address with the comment. If you do, the comment gets caught in the spam filter. A url to your site comes up at the bottom of your comment with the CommentLuv feature. Thanks!

  11. Unless you lost a spouse or a limb, or something equally dramatic, you generally dug your financial hole all by yourself. I have no compassion for a healthy, working family who can’t make ends meet and wonder why, even though they upgrade cars every year and eat out five times a week. Most of my friends say they don’t know how I manage my finances because I don’t work and they do, yet they are worse off than I am. Sure you work hard so you want nice things to play hard. As for the couple who send their kids to college, that is very nice of them but if they are struggling they should at least delay the expense, thanks to student loans who don’t charge interest until the kids graduate for example.

  12. Hi Pauline–I completely agree. The more you make, the more expenses you have. You come to see more income as the magic bullet in your life that makes all things possible.

    When you have less income you’re closer to the ground, so to speak, and you find ways to do what you need to with a lot less money. I’ve always been fascinated with how the immigrant populations manage to do this. They live a middle class life, but do so without middle class incomes. But their the ones you see buying clothing at thrift stores, furniture and appliances at garage sales, and cars on Craigslist.

    I’m trying to follow their lead, and I’m pleased to report that IT WORKS! There’s almost nothing we need that we can’t get for a lot less money. But you first have to change your thinking. Most of us have lived in the suburbs too long, watching far too much TV to fully appreciate this.

  13. I totally agree. Much of the financial problems people have are more related to a twisted definition of “needs” rather than a shortage of income (except when someone suddenly finds themselves out of work or suddenly needs to incur huge, unanticipated medical expenses). The easiest way to fix most financial issues, is to fix their attitude issues and stop feeling entitled to everything they see advertised on TV. Oh, and TV is not a need – it’s a money-sucker and a health-sucker. Give a TV to somebody you hate.

  14. Hi David–Don’t get me started on how distructive TV is to your finances! (I’ve written several articles on the topic.) TV is one continuous advertisement, made worse by the fact that most people aren’t even aware of it.

  15. I absolutely get it. I’ve been and am there. The key reasons behind my rut are the monthly costs associated with a divorce, child support, alimony and a house payment (for my ex). These all force me to live several “lifestyle” steps below my income. I always look on the bright side though, I’m getting used to living in a fashion that I will have to be used too when I semi-retire 🙂

  16. Hi Jose–The financial situation caused by the divorce may give you the discipline for later on. Once your children come of age, the payments will stop and if you can redirect the money into investments, you may get to semi-retirement a lot sooner than you think.

  17. Kevin, that’s my plan. At a point very soon there will be a major bump in my “discretionary” funds, which will all go towards retiring debt and retirement funds. I don’t plan on changing my standard of living other than the occasional really nice steak and bottle of wine)!

  18. Good article, Kevin. I have two comments to make. One, $100,000 sounds like a lot but it really isn’t (I did convert it in £) in absolute terms although relatively speaking it is not a shabby income. Problem is that it goes with certain expectations none of which support a really lavish lifestyle (the expectations are mainly about neighbourhoods, houses and education). Second, most people’s day-to-day personal finance leaks like an old bucket – the worst of it is that most people don’t even realise that. I know because we had to change our ways.

  19. Hi Maria–I think there are also certain expectations at that pay level. You think you need to live a certain way, ie, better home, better car, top education for your children, more expensive travel. And the problem is that once you take on those higher amenities in life, you surround yourself with people who are also living at a higher level.

    Very few people start living the frugal life when they reach that income threshold. In fact, it’s quite the opposite. They become prisoners of their pay level, so to speak. We have to remember too that TV is always trying to sell us on the good life and it’s hard not to buy into it.

    Sadly, today $100,000 (about 65,000 pounds) doesn’t necessarily buy the good life anymore.

  20. I have a friend who lived in Chicago, supported one infant and wife, who told me “I made $140,000 last year, and don’t have a dime to show for it”.

    Between 2,500/mth for rent and 2,500/mth for student loans, money went pretty fast. Lived a modest lifestyle: two used cars that cost less than $35k each new (Hyundai and Ford sedans–not leasing new BMWs and Benzes or anything like that), a little dining out but not a ton, bought his younger brother an Xbox, that kind of stuff.

    Taxes hit hard at that level, especially with no deductions for mortgage interest and capped student loan interest deductions.

    What starts out as nearly 12k/mth becomes 7k after taxes and employee share of health insurance premiums, then 2k after rent and student loans.

  21. Hi Jeremy–I get what you’re saying. Your friend is an excellent example of what I’ve heard described as “suburban poverty” – high income offset by equally high living expenses. I would hate to think that I MUST make $140,000/year just to keep my head above water.

    I would question the student loan situation though. If his repayment is $2500/mo, he must have borrowed in the range of $200,000+. Thats a very expensive education to pay for with borrowed money. Is he an MD???

  22. It’s more than 6 years.. I have been working in IT industry with less figure which is now $7200 🙁 I really want make it six figure and I have been trying very hard.. Let’s see now much times it is going to take …

  23. @Kevin: He’s an attorney, private undergrad and private lawschool. Yes, his loans are over 200k, maybe 30 or 40 of it are his wife’s loans.

    He did three years in the Army and had the GI Bill pay some of his tuition, but when you borrow living expenses too while in school…it adds up real fast. They basically let you borrow as much as you want. He came from a working class background, so he basically thought making over 100k was “rich” and therefore it didn’t matter how much he borrowed during school. Tuition was 30k a year for lawschool, plus he borrowed another 15-20 for living expenses. Times that by three years plus undergrad loans and interest and you get to 200k.

    He often says if he did it over again, he would have gone to a state school or stayed in the Army.

  24. Hi Jeremy–He might cover the debt being a lawyer, but even that isn’t as lucrative a field as it once was.

    I’ve written about this elsewhere, but the middle class needs to take a long hard look at college as an option if attending will leave a young person deep in debt for decades. Even with a six figure income, $200k is a LOT of money to pay back on an after tax paycheck.

  25. I struggle to survive on my 6 figure income, not because I’m a spender (I am the opposite, in fact), but because as soon as you get to this point, you’re plunged into this monstrously confiscatory TAX BRACKET.

    My state and Federal income taxes and social security are so unbelievably high, leaving me with less to pay bills with than when I was only earning 50 k per year!

    Thanks, IRS.

  26. Hi Eric – I can see that. They put you into this conundrum, where if you don’t have high tax deductions, you pay high taxes. But if you have high deductions – retirement, property taxes, home mortgage interest – you’re essentially forced into a high cost lifestyle. Ether way your cash flow is restricted. Current earned income tax levels, including FICA, are now just about back to the levels they were before the Reagan tax cuts launched Post World War II Economic Boom #2. And no one can figure out why the middle class is shrinking, or why the economy is no better than lackluster even in good years. Duh!!!!!!!!!!!!!

  27. I do watch TV but for some reason have never been prey to the ads. I don’t give a hoot about status, so I guess that is why the ads don’t prey on me. I watch TV solely for entertainment and for education. I watch mostly PBS.
    I don’t have kids, so that is one expense I do not have. However, I hear women in my office bragging about ‘spoiling’ their kids and grandchildren and women whose main ‘hobby’ seems to be shopping at the mall.
    I hate shopping malls and go only if absolutely necessary. I am a bargain hound.
    In my household we have used cars, mostly used clothes and furniture,etc.. I ‘upgraded’ to a smart phone and digital TV only when I was forced to by network changes. I only have a pay as you go phone and no cable TV.
    Housing costs are out of sight for many people. In my area, they keep building luxury condos and townhomes and McMansions but almost no rental apartments or working and lower middle class housing developments. Several of those ‘luxury’ developments have gone bankrupt yet they keep on building them anyway. Many buildings that were once rental apartments have been condo-ized and priced well out of sight of the former renters. Once in a blue moon someone builds ‘affordable’ housing but it is usually aimed at welfare recipients not working people. Many years ago, before the last housing bubble broke, I was sounding the alarm about the cost of housing, which was far outpacing inflation, and how it eventually would wreak havoc on the economy and leave many people homeless and unemployed. The cost of housing birthed those shaky ARM loans because people on the lower, working class end of the economy could no longer save for housing due to stagnant wages, rising medical and educational costs and lack of affordable ‘starter’ home stock.

  28. Hi Mary – I agree with all that you’ve written. I agree on the shopping side, particularly with women. Unfortunately, the retailers play into the propensity to shop. If you notice, most of the floor space in large retail stores is dedicated to women’s goods, like clothing, jewelry and leather goods. My son worked briefly for one of the large retailers, and they made it clear that women are their primary customers. But I think both men and women, as well as children, have been carefully conditioned into being perpetual consumers. I believe that a lot of shopping is recreational in nature. It’s even become something of a socially acceptable addiction.

    But getting to your point on housing, you’ve made so many valid points. As far back as the 1970s, the government decided that stimulating real estate is one of the main tools to juice the economy. As a result, we’ve experienced a series of bubbles, that have gotten progressively worse when they pop. The current one will be worse than the last, not the least of which because we never fully recovered from the last bubble. Everywhere you go, high end housing is going up, and people are getting priced out. I don’t know how that’s of a benefit to society. Armies of displaced people aren’t good for any country, and we’re building that group steadily. Homeownership rates have declined from 69+% in 2006, to less than 64% now (similar to the decline in the labor participation rate) – and we’re supposed to be in a recovery. That translates to several million fewer households owning compared to 10 years ago. So something is already playing out. That explains a lot of the support for Donald Trump, though I don’t see how he can change it, even if he is elected.

  29. Chances are 50-50 that we are headed for a recession in 2017, so if you are lucky enough to have a six figure income now, I would save enough to cover several months of possible unemployment next year. Somehow I am going to have to do that while sending one child to Community College, the cost of which is going up because local, state, and federal governments contribute less and less to these public institutions and us private taxpayers have to pick up the slack. BTW our household income is less than 90K a year in Philadelphia, which is a poor city with a high cost of living (higher than national average). We don’t feel poor, though. Netflix, free public park visits with our two dogs, access to a corporate pass (no charge to me) to all of the local museums and zoo, and lots of other low cost activities in our neighborhood with friends and relatives where we don’t have to worry about dressing up or expensive food and beverage make life just fine.

  30. Hi IB – I’d say the odds of a recession by 2017 are closer to 100%. We have one at least every 7-10 years, which means we’re due anyway. But the storm clouds seem to be gathering.

    I see what you’re saying about living in a city. We moved from suburban Atlanta to Manchester, NH. It’s a small city (110,000 people), but it offers many of the amenities of large cities. There’s a lot of street life here, interesting and inexpensive restaurants, free concerts and public facilities. And if you live downtown, it’s even possible to live without having a car. Best of all, it’s not pretentious the way living in suburbia is. You don’t feel the need to compete, and it’s easier to just be yourself. It’s an unconventional move, but it’s really a breath of fresh air. It’s amazing how much fun and interesting people can be when you don’t have the competition factor getting in between. I’m not sure that a lot of suburbanites even realize how much competition dominates there lives. It’s only when you step out of it that you realize how intense it really is.

  31. Kevin, I have been devouring your site since I have read just about half the blog entries right off the bat. I responded to quite a few and I am beginning to feel like I am being very disagreeable. I just want to point out here a couple of factors that are not being considered. A lot of the spending mentioned can be controlled but unfortunately a major cost affecting many us the spiraling cost of housing. If you live in any sizable city it is very hard to find decent housing at a low cost and although I don’t have a study to quote offhand there are many out there that point to rising costs.

    Another big factor is childcare. So many people move further away these days and don’t have family to help out which used to be a lot more common. If you have 2 children under 5 you are probably paying the same or more than a mortgage payment monthly.

    Even school becomes problematic because you have to find a good neighborhood if you want to send them to public school and again that is costly. I was able to make it on a low income but I only had one child and I was blessed to have a Grandma in the picture to help out and we made do with a tiny apartment in a good school district (along with great sacrifices in just about every other area of spending).

    People do have the option to cut other expenses where they can to make it work but housing, child care and schooling are major issues that may need to be addressed beyond personal budgeting. I know Ivanka Trump has been addressing family issues and I don’t know if her policies are the right ones but at least perhaps the attention she brings to the issue will help it gain some traction.

  32. Don’t worry about being disagreeable on this site Linda. I learn from readers, at least when they’re constructive (the attack dogs on the other hand, add nothing to the discussion). I fully agree, it’ all more complex than it seems on the surface. The deeper I dig into most issues the more I find that to be true. Even many of the widely accepted, politically correct, mainstream approved narratives are usually largely wrong. For example, while they often emphasize the victim angle of the afflicted, the usually ignore the lack of personal responsibility that attends nearly every problem we have.

    In the case of this couple, I again see both playing out. On the one hand, as you say, the basic cost of living is out in orbit. But on the other this couple has made certain lifestyle choices that have led them to a bad place. Both factors are legitimate.

    But getting back to your point about the cost of living, you’re 100% correct. I try to point that out in other articles on this site. The cost of living is rising out of all proportion to wages. The fact is the middle class (whatever that is anymore) can no longer afford the TV middle class lifestyle. The problem is that middle class people are being incredibly slow to embrace that reality. For example, if you make under $100k per year, you may not be able to afford the nice home in the “good neighborhood”, the college education for your children, the late model cars, or the exotic vacations. But I see people taking vacations who can barely afford to pay their rent.

    Housing is ridiculous, and healthcare is even worse. Both are rising much faster than the published rate of inflation, which I think is totally bogus. Catherine Austin Fitts has described it as the “tapeworm economy” – a rising cost and regulation spiral slowly killing us from the inside, and largely below view. Most people feel the pressure, but don’t fully realize what’s happening, especially since mainstream sources ignore it, dismiss it, or cover it up.

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