I have been practicing financial planning and tax planning for 3 decades. Today, there is a disease spreading like a flu outbreak at your local elementary school. I call the disease the “$100K and broke”. These people are college educated, with full-time jobs at companies that provide excellent benefits, Most are not contributing anything at all to their retirement and savings. How are they living from paycheck to paycheck and getting behind financially while making so much money?
I was reminded of this Aesop’s fable this week at Toastmasters. Kimberly Hardman presented a speech about The Grasshopper and the Ants. As I listened, I could not but think of the $100K and broke today as they live paycheck to paycheck.
A 2015 Nielsen study, for instance, found 25% of American families making $150,000 or more a year live paycheck to paycheck. One in three households earning between $50,000 and $100,000 find themselves in the same predicament. With household debt ballooning and the cost of living skyrocketing in some parts of the country, a higher income doesn’t always translate into financial security.
Has it been a while since you read Aesop’s Fable of The Grasshopper and the Ants? Then allow me to summarize. The Grasshopper spends the summer “hopping about, chirping and singing to its heart’s content” while the Ants worked to prepare themselves for the coming winter.
In the end, winter comes, and the Grasshopper was dying of hunger and cold while the Ants were using their stored food for survival.
Problem 1 – In working with these clients, the first thing I find is that this college degree $100,000 earners have a sense of entitlement. I worked hard, I made it and I can spend it. Unfortunately, most of them are spending everything they make and more. They think the annual bonus is just part of their annual compensation. Adding to this is if you ask them where they spend their money, they cannot tell you.
Problem 2 – Like the Grasshopper, they do not understand the simple aspect of paying yourself first. I encourage our clients to learn to live off the base salary. We instill a simple spending plan the occurs in this order.
Save 10% of your gross pay
Save 5% of your gross pay into your retirement account and increase it 1% a year until you maximize the annual amount.
No debt other than for an investment that will grow or increase your income.
No Credit Card debt
Pay your bills monthly
Save for other goals – college education, a vacation etc.
Whatever is left over is yours to spend.
Too many of these $100,000 earners treat the bonus as a part of their base pay and are always believing that there is another $100,000 job around the corner. They are lulled into self-belief that there will always be another job. Winter is coming, and they are not prepared.
Problem 3 – The $100K+ earners self-belief is great, but it is also their Achilles heel. They believe that if they can make $100K, $200K, $300K or more that they can be the master of their own finances. The flaw in this thinking is there is a specific skill set needed to master and put together a financial plan that encompasses a balance sheet, an income statement, income tax, savings, investment management and more. The bigger hurdle for these people is that they need self-discipline yet do not know how to ask for help as they continue to live from paycheck to paycheck.
Problem 4 – Without being able to see and identify the needs of tomorrow they are unable to look at the entire financial picture. Many six-figure income families buy too much home, to pricey of an automobile or don’t consider the total financial ramifications of their financial choices. The stress and strain that it puts on the family are immense. Without a safety net, many of these families are one missed paycheck from personal financial disaster.
Until individuals and families begin to make a sound financial plan, they run the risk of financial failure. It is time to get back to the basics and focus on building your future.
Questions that you should be able to answer yes to:
Do you have an adequate cash reserve?
Do you have little or no debt?
Are you paying yourself first?
Or are you just living from paycheck to paycheck?
Make your best money move today and build a plan that turns your $100K+ income into a $1,000,000+ net worth.
Wondering about how to set up your own plan for success?
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Michael Tannery CPA, CDFA® AIF®
Registered Principal
Tannery & Company
Tax – Accounting – Wealth Management
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