Many High-Earners Are Living Paycheck to Paycheck - How to Break the Cycle
A common misconception is that if only we earned more money, we would have a comfortable lifestyle, financial security, and the ability to afford all the luxuries we could possibly imagine. We would be happy and healthy and certainly not be living paycheck to paycheck.
According to the paycheck-to-paycheck report from September 2022, approximately 45% of Americans earning over $100,000 say they live paycheck to paycheck. While approximately 47% of those making between $150,000 and $200,000 and 28% of those earning over $200,000 also report living paycheck to paycheck.
It would seem that getting ahead financially is not simply a numbers game…. “earn more money and everything will be okay.”
If you find yourself in the cycle of living paycheck to paycheck, regardless of how much money you earn per year, please don’t feel embarrassed. There are numerous factors at play, some inside your control and some outside. I want to dive into why high-income earners find themselves in this cycle and most importantly…. how to break out!
Why Are High-Income Earners Living Paycheck to Paycheck?
First, let’s start by defining what exactly is considered “high-income” in America. For a family of three in the United States, an income of less than $52,200 is considered low income, a middle income is considered $52,200-$156,600 and an upper income is more than $156,000.
Living paycheck-to-paycheck typically means that you use up all of your income on basic expenses each pay period and have little to no money left over for emergencies or unexpected costs. You may also find yourself continually relying on credit cards to make ends meet.
There are several reasons why high-income earners maybe find themselves in the paycheck-to-paycheck cycle, here are five:
Substantial debt
High cost of living
Lifestyle inflation
Lack of financial literacy
Unexpected life events
1. Substantial Debt
Student loan debt is a substantial burden on many Americans, particularly high-income earners who owe approximately 65% of our nation’s outstanding student loan debt. Elite schools or multiple degrees could contribute to high student loan balances that can eat up large portions of high salaries.
2. High Cost of Living
In December 2022, the inflation rate was at its highest since the early 1980s. Everyone has been feeling the pain of rising costs, regardless of income, since inflation has affected our basic goods and services.
Oftentimes, high-paying jobs are located in major metropolitan areas where the cost of living is highest. Proportionality, income to living expenses typically rise together, making the paycheck-to-paycheck cycle hard to break free of.
3. Lifestyle Inflation
This pesky problem of lifestyle creep can keep high-income earners in a perpetual state of debt and struggle to make ends meet. The more your income rises, the more tempting it is to upgrade your lifestyle to match. This can include purchasing a larger, more expensive home, a fancier vehicle, extravagant “toys”, and lavish vacations.
These things may increase our happiness temporarily, but they all bring financial obligations that can saddle high-income earners with hefty mortgages, car payments, and credit card debt.
4. Lack of Financial Literacy
The basic principles of personal finance often are not taught or taught sufficiently enough in schools. The lack of financial education and literacy can lead people to make poor financial decisions and lack a long-term financial plan.
According to the National Financial Capability Study, during the pandemic, people with a higher level of financial literacy spent less than their income, built emergency funds at higher levels, and opened retirement accounts at higher rates.
5. Unexpected Life Events
Life’s curveballs have a way of derailing our financial success and often catch up completely off-guard. Medical bills, sudden disabilities, layoffs, divorces, home repairs, long-term care needs, adult children moving back home, etc. can all cause financial strain.
It’s especially difficult to recover from these events when we don’t have proper planning and savings in place, regardless of our income level.
How to Stop Living Paycheck to Paycheck
Living paycheck to paycheck is not reserved for those who have a low or medium income. This cycle can happen to anyone due to debt, a high cost of living, a lack of financial literacy, and unexpected life events.
Fortunately, regardless of your income level, there are steps you can take to break the cycle of living paycheck to paycheck:
Create a budget.
Decrease your expenses.
Save and invest
1. Create a budget. A budget is your financial roadmap. It tells every penny of your income where to go and provides you cold hard data when you come across emotional dilemmas, such as impulse buying and lifestyle creep.
A financial life without a budget is like driving a car in an unfamiliar place without a map,
you’ll certainly get somewhere but it’s probably not where you want to go.
2. Decrease your expenses: With a firm, realistic budget in place, it’s easier to find areas where you can reduce your expenses. This applies to your day-to-day discretionary spending but it can also apply to major aspects of your budget, such as your mortgage and car payments.
Be cognizant of how decisions such as which house you purchase, the car you drive, or even which university your child attends affect your ability to break the paycheck-to-paycheck cycle. Promotions and additional income can only go so far if you’re continually upgrading your lifestyle and increasing your expenses.
3. Save and invest. A crucial part of breaking the paycheck-to-paycheck cycle is putting your money to work. A portion of every paycheck should go to both your short and long-term goals through saving and investing.
High-yield savings accounts - which are paying approximately 3% in interest right now - are the perfect place to hold liquid savings for short-term goals. Brokerage accounts and individual retirement accounts are perfect for long-term investments such as retirement.
Saving and investing will help you build wealth and provide you with long-term financial security.
Break the Paycheck to Paycheck Cycle with Financial Fitness Coaching
Another method of breaking the paycheck-to-paycheck cycle is eliciting help from a financial coach! At Financial Fitness Coaching, we love helping individuals and businesses master their finances so they can experience financial freedom. We believe achieving your financial goals isn’t about how much money you make, but rather how you keep it.
To see how we can help you and your significant other email us at info@financialfitnesscoaching or simply schedule a free 20-minute Discovery Call our calendar.