The Curse of a High Income
The Curse of a High Income
February 20, 2020 By Machinist
The Income Curse
Regardless of income level, the vast majority of people spend very nearly everything they earn, if not more. Most people know that living paycheck-to-paycheck is a problem. What they may not realize is that the higher their income, the bigger this problem actually is. Common sense tells us that more income is always better, but that’s not always true. If you have a high income and are spending it all, then you might be in serious trouble with limited options.
Consider the following scenario and think about who is financially more secure? Who is wealthier?
Introducing Bob and Bill
Bob earns a salary of $50k per year. He owns his 10-year-old Toyota Camry outright, makes the mortgage payment on his comfortable home, and is still able to save $5k each year in his 401(k) account.
Bill earns $250k per year and leases a new Land Rover every two years. He lives in a very nice house with a pool and a beautifully landscaped yard. Bill is also saving $5k per year toward retirement.
Bob and Bill both consider themselves responsible personal financiers. Neither one has any credit card debt and both are careful to keep some money saved for unexpected expenses. In fact, Bob has $10k in the bank, and Bill has $20k.
So, who is doing better financially? Obviously, Bill’s and Bob’s kids know who is richer. It’s not even close. They all prefer to play over at Bill’s house. Bob’s kids complain about having to mow the lawn, and whine about why they can’t have somebody take care of it like Bill does.
Everyone knows Bill is richer than Bob, but everyone is wrong, as they are about to find out.
What Lies Beneath
By all outward appearances, Bill is absolutely prospering, keeping his expenses in check, and even securing his future, but the car, the pool, the house and the fancy life are obscuring a ticking financial time bomb which explodes with surprising devastation as recession hits causing both Bob and Bill to lose their jobs.
Bob is disappointed to lose his income, but he figures that if he cuts the cable and his cell phone and all restaurant meals, he can cover his mortgage, utilities, and groceries for four months. While he’s looking for a new job, he takes on some odd jobs around town. In this way he is able to make his savings last for 6 months.
Bill is also bummed about losing his job, but within days he has started to panic. He realizes that his $20k savings will last little more than a month at his current burn rate. Even after cancelling his kids camps and sports and the bouncy house for Billy’s birthday party, he’ll be flat broke within two months.
Luckily the gardener lets bill out of his contract without a penalty, but now Bill has to figure out how to maintain his yard all by himself. Things don’t go as well with the Land Rover dealership.
They let him return the car, because that’s easier than sending out the repo man next month, but they also charge Bill $10k for early lease termination. Bill decides to just let that go to collections for now, because he has a bigger problem. He kind of needs a car to look for a job, but he also needs to hold onto as much of his cash as he can. Maybe Bob will let him borrow the Camry.
So, who was really wealthier? Who was financially more secure?
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