“Living paycheck to paycheck” commonly describes people who feel financially stuck, the paychecks they earn seem to evaporate after paying bills, leaving no money left over for a rainy day.
Living this way is stressful, like walking on a tightrope without a safety net below. A sudden unexpected health issue can turn into a financial crisis, especially one that keeps you out of work.
With the long hours and high stress of their jobs, HENRYs should not be living paycheck to paycheck. They have the opportunity to use their high incomes to build wealth and achieve their ideal early retirement lives.
Parkinson’s Law On Your Paycheck
In economics there’s an idea called Parkinson’s Law, which observes that work expands to fill the amount of time there is to complete it. So in most cases, people who have a project due in a month at work will likely take the entire month to complete it, even if they really only need a week to complete it.
In personal finance, Parkinson’s Law applies to people living paycheck to paycheck: spending rises to meet their discretionary income. High earners are not immune to this phenomenon as it’s seen at all levels of income.
Percentage Of High Earners Living Paycheck To Paycheck
In a recent PYMNTS and LendingClub survey, over 50% of individuals who earn more than $100,000 a year reported living paycheck to paycheck.
For individuals making $200,000 a year, that figure drops to around 30%. This makes sense intuitively given higher incomes create more opportunity to save, but it’s still a surprisingly high percentage.
Source: PYMNTS; January 2023 survey
3 Observations On High Earners Living Paycheck To Paycheck
I think the 3 major reasons high earners live paycheck to paycheck are:
- Taxes
- High cost of living
- Education Debt
Reason 1: Taxes
Most high earners are professionals with W2 income. Taxes will be their largest ongoing expense.
As Benjamin Franklin once said: “Nothing can be said to be certain, except death and taxes.”
The combination of federal, state, local, and FICA taxes can reduce a multi-six-figure annual income to much less than imagined. While high earners should take every opportunity to reduce taxable income, it’s very limited.
For a household making $300,000 gross income in New York City, more than 40% will go to paying taxes.
Source: SmartAsset.com; New York Paycheck Calculator
Reason 2: High Cost Of Living (HCOL)
While high incomes sound nice on paper, jobs that pay higher salaries are mostly going to be in high cost of living (HCOL) areas.
In San Francisco, an individual making less than $104,400 and a family of 4 making less than $149,100 would be classified as “low income” in 2023
In New York City, an individual making up to $128,570 a year and a family of 4 making up to $183,560 can qualify for affordable housing projects.
On the bright side, the cost of living reflects economic opportunity in the area. This means your income potential is much higher in a HCOL area.
People are rational and make moves that will help them succeed. There is a reason why people choose to move to New York City and pay more than 50% higher cost of living compared to a city like Atlanta. They expect to make a lot more money!
At the same time, they will also naturally find a network of people who share similar interests, professions, and drive to succeed living in a HCOL area.
Source: Forbes; Cost of Living Calculator
Reason 3: Student Loan Debt
Student loan debt is the last major burden on many high earners’ finances. To obtain above-average incomes in high-paying careers, many high earners invest in their education by taking out student loans.
In recent statistics from the Education Data Initiative, the average student loan debt balance in America is over $40,000.
From personal experience, it’s not uncommon for folks who also have professional graduate degrees (lawyers with JDs or doctors with MDs) to have over $300,000 in student loan debt by the time they begin their careers.
Source: EducationData.org
Tips For High Earners To Get Ahead Financially
Suggestion 1: Focus On Sustainable Lifestyle Inflation
Take a hard look at the big three fixed expenses: housing, transportation, and food. These are the areas where changes will have the biggest impact on your overall finances.
it’s very easy for high earners living in HCOL areas to unknowingly inflate their lifestyles over time due to their rising incomes and social environments. As humans, we always adapt and become accustomed to things over time.
What was once a luxury over time becomes a necessity as you adapt to having certain things and living a certain lifestyle. Think hard if you NEED more square footage or if you NEED a car if you live in a major city with good public transportation, especially when you are young or don’t have a family.
Lifestyle inflation is a one-way street. Most people can’t go from living in a high-rise apartment or big single-family house to living in a walk-up with roommates or townhouse unless they are forced to. It’s easy to inflate your lifestyle, but painful to go back down.
If you are in your early to mid-20s, there is no reason to spend a lot of money upgrading your lifestyle, the return on investment is not there. The easiest time to live like a broke college student is… when you were recently one! For the first 3-5 years of your adult life after graduation (if you went to college), live as cheaply as possible because it’s socially acceptable and will set you up financially in the long run. When you’re young, no one cares if you live with roommates, eat at casual restaurants, and drink boxed wine… take advantage of this one time.
Sustainable lifestyle inflation is a sign of financial progress, but it is important to start low and be intentional with upgrades to your life over time as you become more financially successful. Always appreciating what you currently have and really thinking about your actual needs will help this mindset.
For me, the ideal percentage of fixed expenses is 30% of after-tax income. If you can continuously decrease your fixed expenses as a percentage of your after-tax income, you will naturally feel less financial stress.
Suggestion 2: Play Offense – Increase Your Relative Value
While it’s important to be intentional with your lifestyle, it’s difficult to make fast financial progress if you don’t focus on becoming more valuable and growing your income.
The more value you provide, the more income you will make, which will allow you to save and invest more. It’s pretty straightforward.
If you are taking a risk to live in an expensive city with more opportunities and higher incomes, it’s important to put in maximum effort and hustle. Grow your network, develop transferable and marketable skills, secure promotions in your career, and work on additional income streams.
Your earning potential is unlimited! Anyone can make more money if they try, but they must be willing to work longer and provide more value than their competition.
Playing offense (along with defense) has helped me keep fixed expenses at 20% of after-tax income and hit my optimal saving rate. It took long hours and high stress, but I’ve never regretted front-loading the effort to build my path towards financial freedom.
Suggestion 3: Local Geoarbitrage
Although the rise of working from home has increased the number of digital nomads moving to different states or even outside the country, for most people, it’s too disruptive to leave friends, family, and professional networks behind.
My favorite strategy is to use local geoarbitrage: finding cost-saving moves within your own city.
Just by moving a couple of miles outside the city center, you will be surprised by the amount of money you can save. Also, if you move to a less busy part of the city, there are other benefits such as less traffic, cleaner streets, more parks, and cheaper goods and services.
With the rise of rideshare apps and other transportation methods, it’s never been cheaper and more convenient to commute around town.
Don’t let your pride get in the way of not living in the most popular neighborhoods if you want to get ahead financially. Look for opportunities to save money by geoarbitraging within your own city.
Suggestion 4: Stay On Top Of Your Finances
In business, what gets measured gets managed. This is also absolutely true in personal finance. I guarantee that most people living paycheck to paycheck don’t stay on top of their finances.
You cannot turn a blind eye to your finances, nor can you have poor financial literacy if you expect to improve your financial situation. You do not want to drift years into the future and wonder where all your money went despite working hard and making a good income.
In the old days, you would have to use an Excel spreadsheet to keep track of your finances. Nowadays, life is much easier with all the free financial tools out there to track your finances like a hawk and self-manage investment portfolios without having to pay excessive fees to financial advisors.
There is a plethora of free financial education (like The Rich Henry!) on the internet. Improve your financial literacy and take control of your financial future.
Lastly, combat your natural tendency to procrastinate and automate your finances. The most successful businesses can run efficiently because they have processes and systems in place to run automatically. Treat your own life as a business and put in place a system that removes decision-making and automatically pays yourself first.
Make Parkinson’s Law work for your benefit: treat investments as expenses and your spending will decrease to match the amount of money left over in your bank account.
Give it a try and you’ll find that you will adapt to paying yourself first and living on the rest.