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The Illusion Of Affluence
Too much consumption stunts wealth creation .
By Aaron Cirksena
FOR THOSE HOPING TO BECOME wealthy , a job with a high salary would seem to be a big step in the right direction . However , high income alone doesn ’ t guarantee a high net worth , and a growing number of high earners say they don ’ t see themselves as wealthy . Advisors call this group HENRYs : “ High Earners , Not Rich Yet .”
Despite their large discretionary income , those in this cohort live a lifestyle in which saving and investing are not a priority . The money comes in and goes out , leaving their total net worth unaffected .
Stats from the Center for Retirement Research at Boston College reveal the problem : High earners , those making $ 150,000 , to $ 283,000 , are the least likely of all the income brackets to prioritize retirement planning — though retirement investing is a key component of building net worth . The center ’ s statistics reveal that 32 % of high earners are not engaged with retirement planning in a significant way .
A high income without a comparable high net worth creates an illusion of affluence in young earners , so that the financial stability they should be feeling remains out of reach . Those who don ’ t understand and address the disconnect relinquish their potential to build their net worth and secure a financially secure future .
What Fuels The Affluence Illusion ?
One of the problems is a high-consumption lifestyle . Consider the 50 / 30 / 20 rule — when 50 % of income is set aside for living expenses , 30 % for discretionary income and 20 % for savings . This rule empowers anyone to build net worth by limiting consumption and contributing to savings . But when living expenses
push past 50 %, something has to give . Usually , that something is savings , and thus a more expensive lifestyle derails the process of building net worth .
A report by PYMNTS . com shows high earners struggle with the 50 / 30 / 20 rule , and that more than one-third of people earning more than $ 200,000 a year live paycheck to paycheck . Among those making $ 100,000 or more per year , the figure rises to 40 %.
The site Financial Samurai , using data from a study on U . S . wealth distribution by economists Emmanuel Saez and Gabriel Zucman , suggests that the savings among today ’ s high earners are closer to 10 % than 20 %. Whereas the top 1 % of earners save 38 %, the remainder of the top 10 % report saving only 12 %. With the bottom 90 %, the average percentage of income saved is only 4 %.
Net Worth Suffers When Priorities Are Misplaced
Increasing your net worth requires setting priorities to value tomorrow ’ s needs over today ’ s wants , meaning savings and investing need to be as important ( preferably far more important ) as a newer car or another vacation .
You can tell by the way a client handles a pay increase how they
42 | FINANCIAL ADVISOR MAGAZINE | JUNE 2024 WWW . FA-MAG . COM