7 Biggest Mistakes Families Make When Their Household Incomes Hit $200K
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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While wages have not kept up with the steep rate of inflation, making salaries that look big on paper stretch less far in reality, $200,000 is still a lot of money in many parts of the country.
When you start making that much income, it’s easy to forget what it was like to live on less and to spend more without thinking about it.
Here are seven mistakes families make when their household income hits $200,000 and what you can do about it if you’re in this enviable income bracket.
They Succumb To Lifestyle Creep
The most common mistake people make is what’s known as “lifestyle creep,” letting your spending increase commensurate with your new salary, according to Robert R. Johnson, PhD, CFA, a professor of finance at Heider College of Business, Creighton University and CEO and founder of Economic Index Associates.
“For instance, people move into a bigger apartment or buy a more expensive car or home to reward themselves for receiving the raise. What happens is they are unable to improve their financial condition because they spend everything they make.”
Instead, Johnson recommended investing any money from a raise and continuing to lead the same lifestyle you led before.
He gives an example of what this investment could look like. Say you received a $5,000 annual raise early in your career. If you invest that $5,000 annually into an investment account growing at a 10% annual rate, you will have accumulated over $822,000 in 30 years. (On average, however, most investments in the stock market tend to net around 8%).
They Buy Unnecessarily Expensive Items
In line with lifestyle creep is purchasing unnecessarily expensive or name-brand items just because you can, according to Kathy Gilchrist, an accountant and CEO of CFOKathy.com.
“It’s very easy to waste a lot of money on things like expensive clothing brands that won’t actually improve life. Many people with disposable income don’t realize how much they’re wasting if they aren’t paying attention to the total they’re spending,” she said.
This can also extend to expensive loans on new cars. “It’s common for a car loan to have a term of five or six years, and the good household income you have now may not be as high in the future,” Gilchrist said. The monthly payment on an expensive car can quickly eat up a big chunk of your income.
They Become House-Poor
Another mistake of the higher-earning, Johnson shared, is spending too much of their income on a house and effectively “crowding out” other investment opportunities, a concept known as being “house-poor.”
While investing in real estate strategically can be a good investment strategy when done properly, just buying a big home is no guarantee of solid appreciation.
Johnson warned, “[Don’t] succumb to the advice of mortgage bankers who will tell you based on your income how much house you can afford. Procure the house that you need, not the most expensive house you ‘can afford.'”
They Fail To Budget
It’s easy once you’re earning more disposable income to spend it without thinking twice about where it’s going, however, Johnson warned against this.
“Budgeting is critical. Specifically, one should not simply budget and track expenses, but one should budget for savings,” he said.
Instead of letting your savings be “residual,” just what is left after you’ve spent down your other expenses, he urged, “It should be a line item on your budget. You don’t successfully build wealth by simply taking what you have left after all your expenses. We accomplish what we prioritize. Prioritize savings and invest those savings.”
They Forget To Automate Savings
Another common pitfall of making a lot of money is neglecting to automate savings and investments, according to JJ Maxwell, CEO of Double Finance. With a higher income, it’s crucial to set up automatic transfers to savings accounts, retirement funds and investment portfolios. Otherwise, it’s too easy to spend that extra money without even realizing it.
“Think of it like setting up a sprinkler system for your lawn — you set it and forget it, and your lawn stays healthy without any extra effort,” he said.
They Don’t Maximize Retirement Contributions
Additionally, high-earning families often fail to maximize their retirement contributions, Maxwell said.
“With higher income comes the opportunity to contribute more to tax-advantaged retirement accounts like 401(k)s and IRAs.”
These accounts offer significant tax benefits and help build a secure financial future. He said missing out on this money is like not taking advantage of a government stimulus check.
“Why wouldn’t you take advantage of that?”
They Aren’t Smart About Their Money
Lastly, remember that anyone, at any income level can run out of money if they’re not careful. Gilchrist pointed out a story she’d heard about a man who used to have a million dollars but was now going through bankruptcy and needed to be on food stamps. “The man was devastated, but loss of income can happen to anyone,” she said.
Instead, be smart if your income increases, keep your costs of living the same or not much higher, and save or invest the difference.
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