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#6 Living Paycheck to Paycheck on $250,000+ | NEW MONEY NEW PROBLEMS PODCAST

#6 Living Paycheck to Paycheck on $250,000+ | NEW MONEY NEW PROBLEMS PODCAST

December 02, 2022
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Whether it's increased expenses, mindless spending or more, high income earners can still find themselves in a money crunch.

Check out this episode for tips on how to pull yourself out of the hole and move towards a healthy financial foundation!


EPISODE RESOURCES

CNBC Paycheck to Paycheck Article

LendingClub Report

Subscription Tracking Service

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Hello.

This is Brenton Harrison of New Money, new Problems, and your host for the New Money New Problems podcast. If you were here in last episode, we talked about in that session why based off of the way people typically earn money, the idea that you would be saving smaller amounts over a consistent period of time doesn't necessarily match up with the reality that most people hit their peak earning years later in their career, and at that point in time, they can catch up for a number of the years they've lost when they were building that profile, getting a few promotions along the way, and thus increasing their salary.

I wanted to talk about that first, because it is not uncommon for me to come across a person who earns a really great salary, but is not in a position to save as much for retirement as they are. Because it's not uncommon to go through the finances of these high income earners and realize that they have little to no money saved that they can access in the here and [00:01:00] now.

If you think I'm speaking out a personal experience that may not reflect the broader realities, you'd be mistaken because there was a recent article that came out from CNBC that talked about a study of high income earners and their savings habit.

The title of this article was " amid High Inflation, 36% of employees earning a hundred thousand dollars or more say they are living paycheck to paycheck.

 Now the study that the article is quoting was by Willis Towers Watson, and as the title implies, they found that 36% of people who earned a hundred thousand dollars or more state that they were living paycheck to paycheck. But it mirrors the results of another study by Lending Club that found that 36% of people earning at least $250,000 a year also state that they were living paycheck to paycheck.

Now, clearly there's a difference between living paycheck to paycheck when you're earning a quarter of a million dollars or more [00:02:00] versus living paycheck to paycheck. When you're earning next to no money, but the overarching point is that your income does not guarantee that you have a cash reserves. And over the course of the next few episodes, we'll talk about how to establish those cash reserves, how to make sure that you know how much is appropriate to have in cash and what to do after you've met those levels.

But we wanna start with at least getting you to equilibrium, which in my opinion is making sure you can call on at least one month's expenses in case of an emergency. There are a number of reasons why this is important. But to put it simply, if you're earning a quarter of a million dollars or more and you can't put your hands on a month worth of cash, you are not in a position to be saving for retirement.

And this isn't just for people in that income tier, no matter what you make, you want the comfort of knowing that at least if something happens to you this month, you have 30 days or so to get yourself together. But before we even get into those lessons, let's talk about how you could find [00:03:00] yourself in this position in the first place as a high income earner.

One of the unique characteristics about the households that they surveyed is that their credit was stellar. Matter of fact, on average the scores of these participants surveyed was 7 58, an excellent score. That might seem odd to you if you're wondering how they're keeping their credit so high while also struggling to meet expenses. But to me it gives you a really obvious Easter egg into what's going on and what helped lead to the struggles they're having.

It is very common for a person to get a credit card when they were in their twenties or early thirties that they struggled to pay off.

They didn't have the money to cover their expenses, and that balance grew, and they reached the point where they just assumed they will always have five or $10,000 worth of credit card debt for the rest of their life. As their income increases, they might reach a point where maybe they still have 5,000 or 10,000 in credit card debt, but they also, in terms of new debt that they [00:04:00] are accumulating, can afford to pay it off in full every single month.

And when you have that ability, it tempts you to put every bill possible on your credit card. And over the course of time, it leads to this type of leakage where instead of you having a grasp on the bills that are actually in your household budget, you don't realize the impact of each individual expense because you're not paying it one on one. You're making one lump sum payment at the end of the month.

It also puts you in a unique position when you have extra money in your account. Because now you could save that money for yourself, or you could decide to chip away a little at that credit card statement that's staring you in the face.

You often go back to that 25 year old self who couldn't and say, now that I can afford to make this payment, I'm gonna make it because I don't want the burden or the stress of seeing that credit card balance increase. So you decide to chip more at the credit card than you do save for [00:05:00] yourself.

Now, it's easy in that process to continue saving for retirement because that money comes out of your check before it reaches your account. You don't have to make that decision, which is why you often see people with very little in savings, high consumer debt, but significant 401ks. They are lacking that foundation.

The next consistent problem I see with high income earners trying to dig their way out of this consumer debt hole, is a lack of knowledge of their subscription payments. Every single year I go through our credit card statements and I mark out the auto pay subscriptions that we've signed up for. And every single year I find something that my wife has signed up for not knowing that I had it or I signed up for not knowing that she had it.

You just don't know until you have an idea of what you're paying for without realizing it.

Because the human brain has an incredible capacity to put out of sight things out of mind, and subscriptions are a big red flag that can get out of control. We'll put in the show notes a number of [00:06:00] resources that will do this for you.

They will go through your bank statements and your credit card statements, and they will identify your subscription payments to make sure that you have an idea on what you're paying for unknowingly.

And that brings me to my last point, and this is something that I suffer from as well. As a matter of fact, every single thing we're talking about is something that at some point in time I've had to deal with in my own finances. And that is recognizing the fact that the more money you make, the less value you place on a single dollar.

When I started in this industry, it took me six months of studying, getting my licenses, training, and meeting with clients before I ever got my first paycheck. And that first paycheck was under $200. For six months of intensive work. Now, at that point in time when I got that $200 check, if I went to the grocery store and decided to spend a hundred dollars, you better believe before I went to check out, I would've evaluated every single thing in that cart [00:07:00] to make sure I really needed it before I went home.

But the more money I make, the less value a hundred dollars has to me. As a matter of fact, if I'm being transparent, I would say that if I'm looking at something online and it's less than a hundred dollars, I don't even think about whether I shouldn't buy it. because really less than a hundred dollars isn't something at this point in my life that is a big concern.

What is a problem, however, is when I'm shaking off those purchases that are less than a hundred dollars and making them without thinking 5, 6, 7, maybe eight, nine or 10 times a month. Now we're reaching the point where that becomes a significant expense that I haven't picked up on all because the value of a dollar has reduced as my income has increased.

All of this is natural. It's not about blaming ourselves, it's about pulling ourselves out of this scenario. So after the break, we're gonna talk about some immediate things you can do to get to the [00:08:00] first level of foundational savings, which in my opinion is one month's expenses.

Before the break, we talked about common reasons why high income earners can find themselves in a scenario where they're living paycheck to paycheck or simply don't have the emergency fund they would like in a pinch.

But now it's time to talk solutions. And the first solution is understanding that no matter what you see online, no matter what you believe is " common sense financial advice". When you're in the type of hole where you're earning significant money and living paycheck to paycheck, you have to flip all that on its head and do what's right for you.

 Now, this may not be the right thing for everybody. But in my opinion, if you have less than a month's expenses saved, one of the first things that you need to consider doing is stopping your retirement contributions.

One of the first things people say when I recommend this is, yeah, but if I do that, I'm giving up my company match and that's leaving free money on the table. You are correct, but again, [00:09:00] the utility of money that you can't touch till you're 59 and a half pales in comparison to the utility of money you can touch now when you're living paycheck to paycheck.

I can assure you that taking three to six to nine months off from retirement contributions in exchange for establishing an emergency fund will be something that for the future of your finances, will pay long-term dividends.

The next step is for any debt that you have, whether it be a credit card, a car, a student loan, for which you've been making extra payments, you need to stop until you've established this base savings. Many of us have a debt that annoys us more than others or stresses us out more than others. It may be a car for you, it may be a credit card for me, and the temptation is to take that stressful debt and pay more towards it.

Even if you feel you're living paycheck to paycheck, it makes you feel better when doing so.

But until you've done a full accounting of your [00:10:00] finances, you don't know if that stressful debt is the place where those extra payments have their highest and best use. And right now we're trying to get to the point where we can simply have some breathing room.

So all extra payments need to stop while we divert this extra money on a monthly basis to our saving.

Next, evaluate your subscriptions. Either do it yourself or use some of the resources we'll put in the show notes to identify all of your automated subscriptions and actually go through the process of deciding whether you need it, want it, or it's a duplicate.

And lastly, until you've reached one month in savings, eliminate or reduce one of your consistent lifestyle expenses. Here's an example. My wife and I have a favorite pizza place around the corner from our house. And every single Friday night I take my son, I go pick up a pizza. And then on the way back home we get a donut and ice cream at his favorite donut.[00:11:00]

It is a staple part of our week. It's something I do out of habit. I don't even really think about it. But that pizza is from a gourmet pizza parlor. That donut is from a gourmet donut shop, one of my favorite in Nashville, five daughters bakery. If I get a pint of ice cream, that pint of ice cream is from a gourmet ice cream shop.

Jeni's, my favorite ice cream shop. At the end of the night, I have spent almost $50 without thinking about it. If it's a month where there's five Fridays in that month, that's $250 that I have spent all just out of habit and without evaluating that purchase.

Now, it may not be $250 for you, but I can guarantee that there's some expense that may be $10 a week, $15 a week, and it doesn't mean you have to stop it, but even if you cut it in half, you could take some of those savings and divert it to your emergency fund.

Now, all of these things are just a few tips, and I'll [00:12:00] actually put a link to some other articles we've done in the past about other ways to increase your savings. But these are those emergency steps you can take to get to one month's expenses in your savings account. But to make sure that the juice is worth the squeeze,

you can't just stop these things. You have to keep a tab of how much you're saving. And once you've tabulated that final amount, whether it's $50, a hundred dollars, $200, $300 or more, that needs to be diverted to your savings account through an automated transfer. We're not here trying to make ourselves more disciplined than we can possibly become in a couple months time. We're literally trying to make things as easy as possible on our way to establishing a foundation.

But the process isn't completed until you've tabulated what you saved and set up the transfer so that money can be repurposed to savings until you've met one month's expense.