If a higher salary is supposed to solve money problems, why do many high-income people live paycheck to paycheck?
New research suggests that once income increases enough, financial stress also increases.
A recent Goldman Sachs survey found that 41% of households earning between $300,000 and $500,000 say they live paycheck to paycheck, a higher share than among many Americans who earn much less (1).
Compare that to the 36% of households earning between $50,000 and $100,000 who reported the same financial strain. And, surprisingly, the group that had the best financial results was not the richest, but rather households earning between $200,000 and $300,000, where only 16% said they lived paycheck to paycheck.
The findings highlight that many high-income people are falling into a trap that financial planners call “lifestyle change.”
“Lifestyle crowding out,” also known as lifestyle inflation, occurs when spending increases along with income.
According to AdvisorFinder, there are a few different psychological reasons why a “lifestyle change” occurs. People can quickly get used to nicer things and what once seemed like a luxury, like daily coffee or frequent takeout, starts to feel normal. Higher salaries can also lead to new social circles, where more expensive cars, vacations, and dining out become the norm (2).
There is also the temptation to reward yourself after a raise or bonus, or the tendency to treat extra money as “separate” cash that is easier to waste. Over time, these upgrades can reduce the financial benefits of earning more.
Upgrades like switching from public to private education, joining exclusive lifestyle memberships, purchasing larger homes or luxury vehicles, and expanding your travel and entertainment budgets can quickly become fixed expenses that are hard to reduce.
Even the smallest changes add up. High-end groceries, premium subscriptions, frequent dining out, or first-class flights may seem manageable at first, but together they can increase a household’s monthly “burn rate.”
Personal finance creator Erin Moriarity, who runs the YouTube channel Erin Talks Money, told MarketWatch that this mentality is common once income increases (3). People start thinking, “Why shouldn’t I?” But once luxuries become routine, they stop seeming optional.
“All of a sudden, your burn (rate) is getting higher and higher,” Moriarity told MarketWatch.
Interestingly, the survey suggests that households earning between $200,000 and $300,000 may occupy a financial sweet spot.
They earn well above the median household income, which the U.S. Census Bureau estimates is about $83,700, but they may not feel the same pressure to spend on status-driven expenses, like joining a country club or buying a bigger house (4).
Meanwhile, very high-income earners often face additional financial goals, such as saving for retirement and paying for their children’s college.
These pressures can make even the largest salaries seem stretched.
It can be frustrating for low-income Americans to hear six-figure income households say they are struggling. Currently, 57% of households earning less than $50,000 live paycheck to paycheck, which is the highest rate according to the Goldman Sachs survey (1).
But financial planners say the lesson is not that high-income people are worse off financially, but that spending habits, not just income, determine financial stability.
Read more: 5 Essential Money Moves You Should Make Once You’ve Saved $50,000
Read more: Young millionaires are abandoning stocks. Why older Americans should take note
The good news is that lifestyle change can be prevented. Financial planners recommend putting systems in place before raises and bonuses start inflating your lifestyle.
1. Automate your savings
When your income increases, automatically send part of the increase to retirement accounts or investments before you see it.
2. Establish “lifestyle boundaries” after increases
Instead of upgrading everything, choose one or two significant improvements and keep the rest of your spending stable.
3. Review your expenses regularly
Set a monthly date to review subscriptions, memberships, and small recurring expenses that can often add up. Regular reviews can help you discover what is no longer necessary. A tip from Due.com is to use an unsubscribe tool to help remove what you no longer use (5).
4. Try luxuries before you commit
Are you thinking of making a big splurge? Moriarity suggests trying it temporarily, like renting a luxury car for a week before buying it, to see if it really improves your life.
5. Define your financial priorities
High-income earners also often juggle goals such as retirement, college savings, housing, and lifestyle improvements. Writing down priorities can help you formalize your priorities and long-term plans. The Consumer Financial Protection Bureau has a variety of online toolkits to help with budgeting or goal setting.
More money does not automatically equal financial freedom. Without intentional planning, earning a higher salary can simply lead to spending more money and having financial stress at a higher level. The key is to make sure your lifestyle doesn’t grow faster than your wealth.
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Goldman Sachs (1); Advisor Finder (2); Market surveillance (3); US Census Bureau (4); Due.com (5)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
