Many people view a six-figure income as financial validation. When you break the $100,000 mark, you’ve officially made it.
But many high earners have bad financial habits that keep them living check to check no matter how many raises they get. Conversely, people with modest incomes can live rich if they understand that healthy spending — not an arbitrary dollar amount on a paycheck — is the true path to wealth.
While $100,000 is as arbitrary an income as any, it’s a good benchmark for those who aspire to financial security. When you get there, you might be able to afford to loosen your belt a little — until then, avoid these purchases at all costs while you’re still earning five figures.
A fancy car that turns heads on the highway is something most people want, no one needs and few can afford. If you’re not a six-figure earner, learn to love daydreaming while spending as little as possible to keep your hooptie running as long as you can.
“Something you should never buy until you make $100,000 a year is an expensive luxury car,” said Phillip Godinez, accredited financial counselor and founder of Reach Your Goals Personal Finance Coaching. “Certain automobile models are so pricey that they can put a serious strain on your finances every single month. When your salary is higher, you are more likely to be able to save a more sizable down payment, decreasing the amount you need to borrow and lowering your monthly payment.”
Baruch Silvermann, CEO of The Smart Investor, has seen people fall into the trap of buying more car than they can afford because their calculations stopped at the MSRP. Vehicles that are more expensive to buy are also more expensive to own.
“Fancy cars cost a lot even after you buy them,” he said. “Fixing them, getting insurance, spending more on gas and losing value through depreciation costs a lot for these fancy cars.”
Not only shouldn’t you splurge on a high-end vehicle with steep upfront and ongoing costs, but modest income earners would be wise to go a few model years back, no matter their vehicle of choice.
“You shouldn’t buy a new car until you make at least $100,000 a year,” said Melanie Musson, a finance and auto insurance expert with USInsuranceAgents.com. “New cars depreciate quickly. When you buy a used car, you’re letting the previous owner absorb the impact of depreciation.”
According to Progressive, most vehicles shed one-fifth of their value in the first year and 15% each additional year through the first four or five years. That means a gently used 1-year-old vehicle that’s nearly as good as new can come with a 20% discount. That’s well worth the compromise until you can afford to experience that new car smell when you hit six figures.
“If you have your finances in order and can take the depreciation hit,” Musson said, “buying a new car can be a luxury that you’ve earned and you’ll enjoy.”
Luxury cars aren’t the only status symbols that allow people to project wealth they don’t have. Designer purses, clothes, jewelry and shoes start losing value at the moment of purchase just like Audis and BMWs. Although they’re smaller-ticket items, they prey on the same poverty-inducing fake-it-until-you-make-it mentality.
“Postponing extravagant spending on depreciating assets can have a significant impact on your long-term financial success,” said Jon Morgan, CEO of Venture Smarter. “Rather than being swayed by the allure of status symbols, prioritize investments that generate passive income or appreciate over time. Diversify your portfolio with stocks, real estate or other income-generating assets to position yourself for lasting financial prosperity.”
Professional Services for Household Tasks
When you rent, the landlord handles basic upkeep. When you own a home, you can pay service providers to handle it for you — but you shouldn’t until you make enough money to justify farming out tasks you can do yourself.
“There is no reason to hire out recurring lawn, snow removal or cleaning services for one’s residence if there is little disposable income,” said Jordan Olmscheid, entrepreneur and creator of The Wealth Letters. “And this is coming from a business owner who owns a cleaning company! Most service businesses charge $75 plus per man-hour. One needs to ask themselves if this rate is an acceptable trade-off for their situation.”
If you don’t have a high income, you might be tempted to cut corners and speed up the wealth-building process by gambling on the high-risk, high-reward investments in which so many rich people dabble.
Remember, the 1% can afford to take the hit when long odds lead to predictably disappointing outcomes. You can’t.
“In the realm of more speculative avenues, like cryptocurrency or penny stocks, the temptation to make a quick buck can be incredibly seductive,” said Tim Schmidt, vice president of business development at Cayman Financial Review. “But let’s be real. Unless you’ve got both a substantial financial safety net and a well-calibrated risk radar, diving headlong into these volatile markets can leave you treading water — or worse.”
As a senior mortgage loan officer at Neighborhood Loans, Tony Abazi has seen many prospective homeowners sink their chances of securing financing because of financial mismanagement — and luxury getaways are among the most common ways that modest earners spend themselves into holes.
“While it’s essential to unwind and relax, extravagant vacations can significantly dent your finances,” Abazi said. “Consider more budget-friendly travel options or save for that dream vacation once you’ve reached your financial goals.”
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