Michael on November 6th, 2007
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Many people, particularly young folks, think their paycheck to paycheck worries will go away once they make more money.

You: Dude, when I make what my boss makes, I promise you I won’t be living paycheck to paycheck.

I hope you’re right. But if that’s your only strategy for taking financial control, be careful.

You: Why?

Because there’s a good chance your boss is thinking the same thing.

You: What?

Seriously, your boss might be thinking the same thing. In other words, that he won’t have to live paycheck to paycheck any longer once he makes as much as his boss.

You: Hard to believe. My boss makes over $100,000!

Look at it this way. Depending on the study, between one-half and two-thirds of Americans live paycheck-to-paycheck.

You: Yeah, but–again–most Americans are not making what my boss makes and what I could be making in a few years.

Actually, 19% (that’s nearly one in five!) of those making $100,000+ lives paycheck to paycheck.

You: For real?

Unfortunately. And we should both feel confident when these 6-figure income people were making far less, they never thought they would still be living paycheck to paycheck on the substantially higher incomes they subsequently achieved.

You: How the heck does that happen? Is this because they’re floozy?

Not exclusively. I’m sure some are. I just read that despite Britney Spears’ monthly income of $737,000, she somehow has no investments. None. Nada. No savings. Nothing for the future. Each month: $737K comes in and $737K goes out.

You: Okay, but that is Britney Spears you’re talking about, not Alan Greenspan.

Excellent juxtaposition. Might be a web comparison first (Greenspan and Spears in the same sentence). Fair enough. Still, I once had a client who lived paycheck to paycheck on over $400K a year.

You: Rookie athlete?

Not quite. A 50-something tax partner.

You: An accountant?

Yup.

You: Wow. So what causes an accountant to live paycheck to paycheck on $400K?

That’s not a simple question, but it’s partly because people raise their expectations as they make more money. Their peer groups change. They need more stuff, so they spend more. Their tax rates go up. They have bigger houses so their mortgages and property taxes increase. And so on.

You: So how can I avoid that path (provided I can get the raises over time I strive for)?

Now that is an easy question. Just spend less than you make. Said another way, if you spend more than you make, you’ll always be in trouble.

You: No matter how much I make.

Right. At the youngest possible age, it’s important to realize that the cure for living paycheck to paycheck is not a higher income. Instead, it’s about becoming fiscally responsible. Take ownership of your financial responsibility while you’re young.

For example, if you can live on 95% of your current income (rather than the full 100%) you’ll be saving 5% of your income and you’ll see your net worth grow. Then, if you get a 4% raise, keep 3% for yourself, and send the other 1% to your future self (through saving).

When you live this way from the outset, it only gets easier over time. Soon you’ll find you’re living way Beyond Paycheck to Paycheck. On way less than $737,000 per month.

You: Take that, Britney.

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4 Comments to “The well-paid poor”

  1. dong says:

    Nice post. I think it’s easy to think only if I was there, and then there you are. Even when you have your financial house in order it’s hard not to think if only I had a little more.

  2. Michael says:

    You’re absolutely right. It takes a conscious effort to go against the grain of today’s society and knowingly choose to live beneath your means. But if you can pull it off, it really pays.

  3. AJ says:

    Interesting points. I’m interested in the transition period between living beyond your means to living beneath your means. I think this is the proverbial crunch where in order to make this shift, they are essentially turning their cash flow in the opposite direction…right? So, I think there are two shifts here. The first is pulling back on spending initially to be equal to your income….essentially eliminating the “burn”. The second is moving from where the inflows and outflows are the same to where the inflows are 5% higher than the outflows. So, assuming the first shift was 5% and the second shift is 5%, it’s a net change if 10% “loss” at some point during the turnaround that you will never recapture…..right? It’s no different than when someone went the other direction and gained something (maybe a new wardrobe…etc.) that they didn’t have the money for at the time but put on a Ccard. At the time they gained and didn’t pay…now they have the opposite shift to deal with. Is it this shift that makes the change more of a battle…essentially giving up something for nothing in return?

  4. Michael says:

    Yes, there’s definitely a shift from spending more than you make to spending less. It’s a change in monetary habits to be sure, but also a fundamental change in mindset. So I’m with you all the way until the end. Is choosing to save “giving up something for nothing in return?” Almost. Rather, you’re choosing to forgo something today in exchange for something (likely quite larger) in the future.

    When you think of it that way, the change in mindset becomes much easier to accept. Those who are already saving will be happy to verify that for you. After all, you also get peace of mind along the journey.

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