How America’s “Rich” Are Wasting Their Financial Potential
By Eliseo "Jojo" Prisno, CRPC, MS
Chartered Retirement Planning Counselor
PE CAPITAL INVESTMENTS
Holly Johnson, a financial planning contributor for personalcapital.com wrote this article a few months back on the current status of most American earners. It’s quite compelling how statistically affluent most Americans earners are in global standards yet they still struggle to get by, worst most are living paycheck to paycheck.
Here are excerpts from Ms. Johnson’s article:
“Are American Earners Really affluent?
Have you ever wondered if you are truly “rich”? Not just by American standards, but in a global sense?
If you’re curious, look no further than the Global Rich List. With the help of a calculator that uses World Bank data and global wealth statistics you can use the site to compare your wealth to that of folks across the globe.
Go ahead and play around with some numbers if you want, but I’ll give you a spoiler. According to Global Rich List, bringing in just $75,000 per year in the United States places you among the top 0.11% of earners in the world. And the coveted six-figure income? That puts you among the top 0.08% of earners on the entire planet.
I could go on, but you get the picture. Even the median household income in the U.S. ($51,939 in 2013) falls in the top 0.28%. So, how is it that so many American high income earners are broke?
Why High-Earners are Living Paycheck to Paycheck
A recent survey shed light on this curious issue. The study surveyed only households who made $75,000 or more, and found that one-third of high earners live paycheck to paycheck. Meanwhile, 44% of respondents said lifestyle purchases are holding them back from saving more.
And it gets worse. Among those who claimed that lifestyle purchases were the source of their money woes, 68% pointed to dining out as their biggest issue. Among high-earning Millennials, that figure jumped 70%.
In other words, a large percentage of high earners are literally eating away at their financial potential. Instead of socking money away in 529s and Roth IRAs, they’re choosing to feast on baby back ribs and guzzle expensive cocktails.
Unfortunately, those delicious dinners cost more than most folks realize. As the study revealed, only 53% of respondents aged 35 to 44 feel they are saving enough for retirement. Among respondents aged 45 to 54 that figure drops to 37%.
Other Reasons High Earners Can’t Get Ahead
Of course, it’s important to note that a six-figure salary doesn’t go as far as it used to – especially in certain parts of the country. Take San Francisco, for example, where the median home value was $750,900 in 2012. Or New York City, where the median home value was $501,500 that same year. A $75,000 annual income seems like peanuts when the roof over your head costs upwards of $3,000 per month.
Other factors add to the financial hurdles Americans go through. For one, when accounting for inflation, median household incomes in the United States have shrunk over recent decades. Meanwhile, the cost of commodities and household necessities has risen significantly.
Got kids? Ask any parent how expensive it has become. According to the U.S. Department of Agriculture, the price tag for raising one child from birth to age 18 has surged to $245,000. Try having two kids in full-time daycare for a few years and see how much you can save. When you consider all of the factors working against you, it’s no wonder that so many Americans just say, “screw it,” and head to their favorite restaurant for a basket of chicken fingers.
High Earners: Quit Squandering Your Potential
If you look only at the factors working against you, it’s easy to give up. But that would be a mistake. No matter what, remember that you have control.
You may not be able to dictate the cost of healthcare, daycare, or college tuition, but you are 100% in charge of how you spend your extra funds. Be honest with yourself – are you reaching your potential?
If you know for a fact that you aren’t, there is still time to turn things around. Changes you make today can mean the difference between having money for emergencies or living paycheck to paycheck, retiring early or never retiring at all, having peace of mind or struggling to make ends meet. What you do today matters, even if you’re late to the game.
Are you a high earner ready to make a change? Here’s how:
• Track your spending – One of the most efficient ways to see how much you’re wasting on lifestyle purchases is to track your spending. Personal Capital’s Cash Flow tool, for example, groups all of your purchases into categories and presents them in easy-to-interpret pie charts and graphs.
• Find ways to save – Once you begin tracking your purchases and discover your problem areas, you have nowhere to hide. Find ways to save on your most common splurges. Cut dining out down to once per week, for example.
• Create a budget – Tracking your spending can be an eye-opening experience, but it’s also a great first step towards creating a monthly budget. Once you figure out your ideal spending for the month, put it down on paper. As the month progresses, track your spending to stay on track.
It might take a while to stick to new spending limits, but you’ll eventually learn to live within self-imposed limits.
• Maximize tax-advantaged retirement accounts – One of the easiest ways to grow your nest egg, and lower your tax bill, is to maximize tax-advantaged retirement accounts. The IRS raised 401(k) contribution limits up to $18,000 per year, and anyone with earned income can also open a traditional IRA. Raise your retirement contributions at work or set up automatic contributions on payday so you can “set it and forget it.”
• Hire a financial advisor – If you feel overwhelmed, it may be worth it to hire a personal financial advisor. P/E Capital, for example, also offers advisory services where conflict-free advise can help you lay out your short-term and long-term goals, and make a plan to reach them.
The most important thing is to think long-term. Don’t just get through this week, month, or year. Think about how well off you’ll be in five, 10, or 20 years if nothing changes. It may be harder and harder to save, but it’s not impossible. And if you’re a high-earner living in America, you’re probably luckier and more privileged than you realize. In fact, many would argue you’re one of the luckiest people in the world. Don’t squander it. Instead of wasting your resources on temporary pleasures like dining out, learn to put your family’s financial security first. The sweet taste of financial independence will be worth it.”
There it is folks, be financially savvy and always seek guidance from financial professionals.
ABOUT THE WRITER: Eliseo Jojo Prisno is a Chartered Retirement Planning Counselor (CRPC).He founded P/E Capital Investments in 2010, a State Registered Investment Advisory Firm (CRD# 172695) and is currently the firm’s Managing Director and Senior Investment Advisor. Mr. Prisno also manages a Fund of Funds investment program with Ameritas and runs an All-Equity Growth and Income customized portfolios in separate accounts via E*Trade Securities. If you have questions email j.prisno@PEcapitalinvestments.com or call 1-888-929-2825. Visit our website www.PEcapitalinvestments.com