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  • Debt problems at $400,000 a year? Really?

    by:
    Laurie Campbell

    Here’s the big mistake among many who are gainfully employed but who face debt problems. “If only I had more money, all my financial worries would disappear,” they tell themselves, thinking about money as some sort of magic bullet rather than as a dynamic tool that needs mastering and maintenance. Truth is, for many with this mindset, more income solves nothing since the root cause of the financial difficulty isn’t about the amount of dollars being earned, it’s about how those dollars are being allocated and spent.

     

    Growing numbers of affluent families in Canada and the U.S. are having trouble making ends meet.

    It would follow that if big salaries solved all debt problems, then all the high-income earners amongst us would lead financially worry free lives. But this is not the case. The Wall Street Journal reports that for some years now, growing numbers of affluent families in Canada and the U.S. are having trouble making ends meet. More and more, these families are living paycheque to paycheque as they face having to dramatically alter their lifestyles or even seek aid for debt problems through credit counselling and debt consolidation programs.
     

    Take the example of a couple who can’t make ends meet despite a $400,000-a-year household income.

    A lot of average wage earners cannot fathom how families with hefty six-figure incomes get behind the eight ball financially. But it’s not that hard to understand. WSJ illustrates the how of it through the example of an unnamed Chicago couple who can’t make ends meet despite a $400,000-a-year household income. WSJ said of the couple that, “they live comfortably, travel frequently and pay the mortgage on a home worth more than $1 million. They send their two teenagers to public school and put away about $12,000 a year for retirement and $10,000 for college tuition. But when it comes to income and expenditures, they are basically broke.
     
    “The (family’s) annual take-home income is $273,000 after setting aside money for retirement and college and after paying U.S. and Illinois income taxes … They spend $87,000 a year on their mortgage, $24,000 on property taxes, $25,000 on home maintenance and $15,000 on utilities, cellphones and other household bills … Groceries for the family of four cost $575 a week, or $30,000 a year.
     

    My analysis is simple: money is relative. Or to revive an old cliché, the more one makes the more one spends.

    “The family buys a new car every four years, which amounts to $15,000 a year on average, and spends $9,000 annually on car insurance. Their discretionary purchases also include $21,000 a year on dining out and other entertainment, $12,000 in membership dues at a local club, and $26,000 on two family trips and one weekend getaway for the parents. Add in $10,000 for equipment, fees and other expenses related to sports their children play, $4,000 for gifts and holiday spending, and $5,000 for school fundraisers and other charitable giving,” WSJ reported.
     
    With all spending tallied, the couple is $10,000 in the red every year.  
     

    I have to say that I don’t hold a lot of sympathy for the Chicago couple’s $10,000 annual shortfall.

    My analysis of the situation is simple: money is relative. Or to revive an old cliché, the more one makes the more one is apt to spend. I have to say that I don’t hold a lot of sympathy for the Chicago couple’s $10,000 annual shortfall. Given the way they allocate funds for everything from travel and entertainment, to dining out and club fees – not to mention groceries at $2,500 a month – there is no good reason why they couldn’t shore up funds quite painlessly to get back on track.
     
    Where affluent couples of this sort are deserving of sympathy is when life and economic circumstances suddenly change in unfavourable ways. Here we’re talking things like a job loss or a sudden hike in interest rates. Then there’s the specter of a housing market crash. In Canada right now, all scenarios stand as real possibilities affluent families ought to take into consideration given current recessionary trends and warnings from economic forecasters.
     

    It’s all about getting a grip, starting with the simple question: Can you afford your lifestyle?

    For high wage earners – and in fact for wage earners at all levels – I offer a simple checklist for living within one’s means.
     
    It’s all about getting a grip on spending and saving, starting with the question: Can you afford your lifestyle? If not, check your mindset. Do you have a YOLO (you only live once) mentality? Is FOMO (fear of missing out) affecting your spending? If so, get your (expletive deleted) together, both financially and psychologically (credit counselling is always an option when debt problems seem to be just too much to handle).
     

    Above all, high, medium, and low wage earners alike should be setting monthly budgets and sticking to them.

    Some further considerations: Do you carry a balance on your credit card month by month? If so, you’re probably spending more than you can afford. Maybe set aside the plastic and get back in touch with the real world – start paying in cash. While you’re at it, take a long, hard look at what you’re doing to save money. Ideally, 10 to 15 per cent of one’s total income should go towards savings. My absolute minimum recommend is five per cent.
     
    Above all, high, medium, and low wage earners alike should be setting monthly budgets and sticking to them. And when I say setting a budget I mean putting the thing in writing, reviewing it regularly, and revising it as need be. It should include short to long-term goals that give you incentive to save; it should be premised on a sound understanding of your spending habits (tracking all spending right down to the little day-to-day items); and of course it should include a full list of mixed and variable expenses calculated against net income. For help with budgeting, visit our page on budget creation
    Just remember, overspending can break anyone, no matter how big the paycheque.    

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