Most people would think that if you earn more than $100,000 a year in the US, you should not have any money worries. But Jana Kasperkevic writes about people who earn much more than that who still live from paycheck to paycheck.
Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth, has a client in the Washington, DC area who makes $450,000 to $600,000 a year but lives paycheck to paycheck. He spends a lot of it on keeping peace with his ex-wife.
Close to half a million a year sounds like a lot, but he has to pay $8,000 per month to his ex-wife and both of their kids are in private high school. Four years of private high school cost $150,000.
In 2014, a Brookings Institute paper found that about one-third of US households live hand to mouth. That’s about 38 million households. About two-thirds of these American households living from paycheck to paycheck are not actually poor but instead middle class or richer. They might have liquid assets or own a home that they are paying off. There is just one catch: they are spending everything they are earning even if it’s $100,000 or more a year.
Where does all that money go? It turns out that most of the money goes towards things such as sending children to private schools and trying to keep up with one’s perceived peers in terms of where one lives, what cars one drives, what kinds of vacations one takes, and how frequently one eats out.
When she first opened Ballou Plum Wealth Advisors in California, Lynn Ballou was advising a well-off couple who ate out three times a day, every day.
“They worked incredibly long hours but also, neither knew how to cook. Not even how to make toast!” Ballou said. “So I treated them to two thing: a basic cooking class for couples on the run and a cook book with Quick Recipes for two. They started saving so much by changing their habits, they were able to start fully funding their retirement plans and then soon after, started a family.”
Many “rich” people have problems accepting that they aren’t really that wealthy and the money will not last forever.
I must admit that I am often surprised by the every day expenses that people take as normal but which for me are extravagances. I know people who every morning will stop off to buy a cup of coffee from a coffee shop (or even buy breakfast) on the way to work. To me that sounds not only extravagant, but even more time-consuming and requiring more effort than making a cup of coffee at home. I just do not understand it.
The one thing that may be unavoidable is schooling costs. Our children went to public schools. We wanted to avoid private schools for ideological reasons, because we wanted our children to not be just among the privileged. When we were looking for a home to live in, we chose a community that had reasonably good public schools. But not everyone may have that luxury of choice. But I am not sure to what extent people choose private schools because the public alternative is really awful where they live and they cannot move or whether they do so because it is what people of their socio-economic class are expected to do.