JUNO INVESTING ©

Why high-earners are running out of money

JUNO INVESTING ©
Why high-earners are running out of money

 

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Website story by Brenda Ward

An alarming number of people earning $100,000-plus are spending more than they earn or living from pay-cheque to pay-cheque, says JUNO investing magazine editor Brenda Ward.

As part of her role as the editor of a magazine focused on making investing simple, Brenda Ward talks to financial experts around the country, and says she’s hearing remarkably similar stories about people you’d think were rich, who can’t make ends meet.

Among the experts are Auckland psychology major and accountant Lynda Moore, of Money Mentalist, who says she frequently finds couples spending all they earn, especially business owners.

And Wellington financial adviser John Killick of Foxplan told Ward he’s spoken to couples where both partners are earning more than $100,000 but who are finding there is no money left at the end of the month.

The Sovereign Wellbeing Index reported in late 2015 that 7.7% of Kiwis earning more than $100,000 were finding it ‘difficult’ to live on their present income and 1.5% of them were finding it ‘very difficult’.

The trend is of concern to financial experts and their comments are mirroring Nielsen research in the United States, says Ward. The latest US figures show that one out of every four families making US$150,000 or more each year falls into this cycle.

In the US, they’re calling it ‘lifestyle creep’. Moore calls it ‘the Hedonic Treadmill’: “Basically, the more we earn, the more we spend.”

Moore says people think their happiness will increase with more earnings, and it may for a time, but it then levels off. “Spending the extra money doesn’t add to our happiness.”

She says people today are becoming disconnected from their spending and failing to put money aside. Business owners are particularly prone to this phenomenon.

“With Xero, some business owners have the perception they don’t have to talk to their accountants any more,” she says. So, the self-employed do their own paperwork in the cloud and no longer have their accountant’s advice on saving for tax.

“Take the example of business owners, who love life, and have a couple of children. The business is growing, revenue has more than doubled, more money is coming into the bank account, so they think, we must be doing everything right. So, they spend everything.”

Then they face a ‘double-whammy’, she says. They had a great year but they didn’t pay enough tax on that income – and then they also get hit with a big provisional tax bill they weren’t expecting.

Moore says much of the extra money high-earners are spending is going on “bits and pieces” – tropical holidays, the occasional weekend away, taking the kids and their friends to the movies, Netflix and Sky subscriptions.

“You’ve got to look at the choices you’re making around lifestyle things,” she says. “If you’re eating takeaways, is it because you don’t have time, or you can’t be bothered?”

How to get a handle on spending

1.  Moore says to start by looking at the automatic payments that come out of your bank account for some extra funds. Did you trial Netflix and never cancel the subscription? Do you have a gym membership you never use?

2.  Then look at the choices you’re making. If you’re buying takeaways, is it because you’re busy, or is it that you just can’t be bothered cooking?

3.  If you’re a details person, do the numbers and work out where your money is going. If you’re not, divide the money up into ‘buckets’, where one bucket equals one bank account. If you use all the money in your ‘spending’ bucket, then you have to accept there’s nothing left. This can be an incredibly powerful tool for changing your perception of spending, says Moore.

4.  If your ends really aren’t meeting, then how are you going to create extra money? Can you do overtime, work two jobs, build your business?