You might assume someone earning $100,000 a year could never be living paycheck to paycheck. But it can happen to anyone.
In fact, by one measure, some 40% of Americans who make that much do. That doesn’t mean they’re close to starving, of course — just that they are as reliant as anybody else on regular cash flow to pay the bills.
Following are some common but not necessarily obvious ways that high-earners can end up living paycheck to paycheck, even if they’ve been making tons of money for a long time.
1. Lifestyle inflation
When you get a raise, what do you do with it? The serious savers pretend it never happened and send the extra money straight into a retirement account before they can ever miss it.
Many of us, though, see it as easing existing financial stresses and giving us a bit of breathing room. Ideally, raises at least keep pace with inflation.
But some people instead inflate their lifestyle: More money means more to spend. You work hard and deserve nice things, right? This type of thinking means your cost of living goes up alongside your paycheck.
The problem with lifestyle inflation is that if your pay ever decreases, you will immediately be living beyond your means. That is obviously unsustainable and can lead to financial ruin, or at least frustrating sacrifices.
2. Being deep in debt
As Money Talks News founder Stacy Johnson points out in “The 10 Golden Rules of Becoming a Millionaire,” you can either look rich or be rich — but you probably won’t live long enough to accomplish both.
Some people choose to lease luxury cars or borrow to buy a yacht. Others take on a jumbo mortgage so they can have an enormous home. Still others took on significant debt in college to get that high-paying job, and are diligently working to repay student loans.
Whatever the case, huge debt payments can easily eat up huge paychecks.
3. Bad luck — and poor planning
Some things we have no control over. Your company could go under, or you could get laid off.
People who don’t have a solid emergency fund built up and aren’t maintaining current, relevant job skills may find themselves forced to take lower-paying work to scrape by for a while. Their paychecks in such a scenario might not stretch as far as they’re used to.
4. Lack of adequate insurance
Some insurance isn’t worth spending money on, but you don’t want to skimp on the important things. If you’re not prepared to pay for catastrophic risks to your health and property and worse comes to worst, you may end up financially struggling to get back to the way things were.
A car accident or a house fire is an enormous financial burden best left to your insurer. Unless high-earners specifically set aside money to self-insure, they may need all of their income just to replace what they lost.
5. Poor impulse control
People who make a lot of money aren’t necessarily any less likely than lower-earners to enjoy retail therapy from time to time — or all the time, since some people flush with cash may be used to just buying everything they see and want without waiting or budgeting for it.
The difference is that they can afford more, in theory, than the rest of us. So they may be more likely to get their dopamine — the happy brain chemical we get from anticipating something good — from buying more fancy and expensive things.