Many of us look at a six-figure income as an ultimate goal. We think that whoever has such money should be set for life. After all, when you’re struggling to make ends meet with an annual income of $45,000, a six figure income seems like more riches than you know what to do with.
However, as countless stories point out, just being a high earner doesn’t mean that you’re home free. In fact, there are plenty of families with multiple six-figure incomes that end up broke. They fall into some of the same traps as those making minimum wage, just on a larger scale.
So, why are some of those six-figure earners, people we might consider “rich,” living paycheck to paycheck? Here are some of the key reasons why some high earners aren’t guaranteed to actually be very wealthy.
Keeping Up With Appearances
Years ago, when our family was looking for our first home, the lender approved us for a huge mortgage that would allow us to buy our true dream home. It was tempting, of course. But the finances didn’t make sense to us whatsoever. Just because the lender thought we could afford it, didn’t mean we could actually keep up with the bills. We ultimately decided on a very modest home instead, and skipped all the extra expenses a “dream home” can come with.
Having a nice big house means you have to pay more to maintain it. From higher utility bills to perfect landscaping, the list of extra expenses can be long. Plus, there’s the peer pressure from the neighbors. We would be surrounding ourselves with folks who spend extra on cars, furniture, private school for their kids, and memberships to the country club.
When everyone around you is doing it, you end up thinking that you need all these things. After all, they are “normal” in your neighborhood’s social circle. However, it can be a trap that drains all your money away. You are so busy trying to live up to the image of what you “should be” that you don’t actually manage to get your budget on firm financial footing. And then you wonder where all your money went at the end of every month.
Where You Live Matters
Of course, sometimes it isn’t all about spending on things you don’t need. The reality is that sometimes those with six-figure incomes have a higher cost of living simply due to location. Six figure incomes in New York City or San Francisco won’t go nearly as far as in a mid-sized town in the Midwest. The difference is amazing. Even modest housing, transportation, and food costs can take a huge chunk out of a six figure income when you live in a high cost of living area.
In fact, there are some cases where you are better off (financially speaking) making less money and living in a low-cost area. Having a lower salary (or trading in L.A. for a smaller city in Northern California) may not sound attractive at first. But at the end of the day, your disposable income matters more than your gross income. You’ll probably find yourself more financially comfortable.
Poor Money Habits
Finally, there is no substitute for good money habits. Even the wealthy can have poor money habits, leading to poor spending decisions, leading to a lack of overall wealth.
In some cases, a high income earner can be more wasteful with their spending. You can bet that a family of four living on $45,000 a year is looking for every way to save. They are calling their cable and internet company every year to renew their discounts. Or packing their own lunches and making coffee at home. You can be certain they are shopping around, trying to look for the best deal before they buy anything. How many dual six-figure income families will spend the effort to do the same? Very few.
Then there’s the big one — making bad investment decisions. Stocks can be a wonderful way to build wealth. However, it’s essential to look at the long term and not worry too much about the day-to-day fluctuations.
Far too many “rich people” trust their guts. They jump in and out of the markets. It’s an amateur move. In the end, they will spend decades investing with little to show for it. For one, most people mistime their trades. They end up selling low and buying high. For example, you may have heard that Tesla stock is hot right now. That doesn’t mean it’s time to buy — you already missed the boat.
Furthermore, they pay taxes for any gains they see every time they sell. As a result, they squander their one opportunity to become wealthy, even though they were frugal and had lots of opportunity to let their nest egg grow.
The Last Word
I know many people who earned a high income but now live a much more modest life in retirement than their lifetime career earnings would suggest. They could easily be swimming in money if they just use their savings and invested in the S&P 500 through the years.
On the other hand, I know many others who earned a modest salary through their career but literally have millions in their investment accounts. They just kept saving slowly and investing in low cost index funds. They never sold, trusting that the U.S. economy will continue to grow long term. And that equity prices will keep reflecting that reality. In fact, they seldom even check their account balances because they know it’ll tempt them to make a mistake. Over-managing your investments is another rookie mistake. As the late Vanguard founder Jack Bogle once said “Don’t do something. Just stand there!”
Who do you want to be? Who will you become?
Developing a good understanding of money management is far more valuable than earning a high salary. If you have a solid grasp of finances, you can build up financial freedom on almost any income — and have a rich life. A six figure income can help, sure, but it’s not a guarantee of lifetime wealth. You still have to save and invest prudently, over the long term, to become truly wealthy.