7 Ways People Become Poor While Earning an Above-Average Salary
Written by
Cynthia Measom
Edited by
Rebekah Evans
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Earning an above-average salary might seem like the ticket to financial security, but many people still find themselves struggling with money. Unfortunately, it often comes down to common mistakes — lifestyle creep, poor investment choices or neglecting to save for the future — that turn a healthy income into not enough to get by.
Understand the traps others fall into, so you can protect your own financial well-being and avoid ending up in the same sinking boat.
Failing To Budget
Robert Johnson, Ph.D., chartered financial analyst (CFA), chartered alternative investment analyst (CAIA) and finance professor of Heider College of Business at Creighton University, said that the primary reason people become poor while earning an above-average salary is that they fail to budget.
“Even high-earning individuals have finite resources,” Johnson said. “One must create a budget and prioritize how to spend those finite resources.”
But what about spending on things that aren’t necessities? Johnson explained that what one person might see as wasteful, another may see it as perfectly rational.
“For instance, many pundits — most notably Suze Orman — claim that individuals should eliminate their daily latte purchase,” he said.
“But, for some people the daily coffee purchase provides them with a lot of utility. For others, it can simply be a habit that can be eliminated. Individuals are unique and what brings one individual pleasure is different than what provides pleasure to another. The key to budgeting is to recognize that and to take that into account.
“People will remain poor if they don’t budget for savings and then invest those savings. If one truly wants to make savings a priority, it cannot be a residual — what is left over,” Johnson said. “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.”
Lifestyle Inflation
Dalton Tigner, partner with Tigner insurance and Associates, explained that lifestyle inflation is one way that people become poor while earning an above-average salary. “As income rises, spending habits frequently rise faster,” he said. “Luxury vehicles, frequent upscale dining and lavish vacations can quickly dwarf income.”
Tigner added that the way to avoid lifestyle inflation — aka: lifestyle creep — is to live below your means.
Failure To Plan and Invest
According to Dennis Shirshikov, head of growth at Summer and professor of economics at City University of New York, a lack of financial planning and investing is another significant issue.
“High earners might assume that their income alone is enough to secure their future, neglecting to save or invest appropriately,” he explained. “Without proper retirement planning, emergency savings or investments that generate passive income, they are vulnerable to financial crises when unexpected events occur, such as a job loss or medical emergency.”
Falling Victim To the ‘Success Guilt’ Spending Trap
Kris Mullins, chief marketing officer at CapitalMax and Grant Cardone business coach, said, “Many high earners feel the need to spend generously on family and friends or they may overspend on charitable donations to compensate for their success. While well-intentioned, this can lead to significant financial leakage if not managed carefully.”
Mullins’ solution to this issue is to create a “giving budget” that allows for generosity without compromising long-term financial goals. “This can help you manage the emotional pressure to spend without derailing your financial health,” he explained.
Overconfidence in Income Security
Mullins explained that high earners can become too confident in their ability to maintain or grow their income, which can lead to risky financial decisions. “This can include not diversifying income streams or failing to invest in their own skills and education to remain competitive in the job market,” he said.
Mullins added that even if you have a high salary, you should diversify by creating multiple income streams, such as a side business or smart passive income investments. “This reduces dependency on a single source and adds financial security,” he said.
Failure To Adjust Financial Plans Post-Success
“Achieving financial success often requires a different strategy to maintain it,” Mullins said. “High earners sometimes fail to revisit their financial plans as their circumstances change, leading to inefficiencies and missed opportunities for wealth preservation.”
Mullins pointed out that as your financial situation evolves, so should your financial plan. “Regularly review your goals, investments and spending habits with a financial advisor to ensure they align with your current life stage and future aspirations,” he suggested.
Allowing Luxuries To Become Necessities
Mullins also pointed out that desires tend to expand with wealth and what someone once considered a luxury can become a perceived necessity. “Recognizing this psychological tendency can help in making more mindful spending and investment decisions that align with true long-term happiness,” he said.
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