You Can Never Earn More Than You Can Spend

1/3 of high earners don't understand basic money management

What would you do if you had a million dollars?

No, really. In all honesty, knowing yourself as you do, if that much money fell into your lap all of a sudden, what would you do with it? Think about it for a sec. Think about what you’d spend it on, then look up what those things cost. (And don’t forget to account for the taxman taking his share!) When you actually run the numbers, it runs out surprisingly quickly, doesn’t it?

OK, I’ll confess. I just played a dirty trick on you. I said, “think about what you’d spend it on,” mentally nudging you into thinking that if you got a million dollars, the thing to do would be to spend it! And then you thought about it, and most likely didn’t end up concluding that you’d make it a conscious priority to save (or invest) any significant amount of that, did you? (If you honestly did, please let me know in the comments.)

You’re not alone

I recently ran across a rather shocking statistic: according to a poll from about a year ago, approximately 1/3 of Americans making over $250,000 per year say they’re “living paycheck-to-paycheck.” While there’s plenty of room to quibble over the precise definition of “living paycheck-to-paycheck” and if it really truly applies to people making that much, I’m inclined to believe it. It’s probably not perfectly accurate for all the usual reasons, but it’s almost certainly more true than false.

A person making $250,000 per year will have that million dollars in 4 years. What are they doing with it? They’re spending all of it. A lot of them are spending all of it and then some; high earners are actually more likely than low earners to carry a credit card balance!

There seems to be no upper limit to this phenomenon. I’m not exaggerating when I say that; no matter how high up the socioeconomic ladder you look, you find people with the same problem. Even Prince Jefri Bolkiah of Brunei, the brother (and trusted financial companion) to the one-time richest man in the world, managed to blow through over $14 billion with his profligate spending and land himself in a lot of trouble when a lot of that turned out to be money he didn’t actually have. Even if you’re that incredibly rich, you still can’t earn more than you can spend.

The simple solution

Chris Parnell’s timeless SNL advice, Don’t Buy Stuff You Cannot Afford, may sound a bit glib, but he’s (no pun intended) right on the money for the majority of cases. There are definitely exceptions, (many of them involving medical costs; the Left is absolutely right when they talk about medical pricing being out of control, but hopelessly wrong about how to go about dealing with it, and they love to studiously ignore how their efforts to do so have only made the problem worse,) but far more often than not, living paycheck to paycheck is a self-inflicted wound. And the proper treatment is to stanch the bleeding: just spend less.

You don’t have to keep up with the Joneses. (And more to the point, you don’t have to keep up with them right now. Have some patience, it will pay off.) I know this from my own experience. I’m about the last person anyone could credibly accuse of coming from a privileged background or being born with a silver spoon in his mouth. I grew up in a miserable hell of poverty, deprivation, and abuse. The only real advantage I ever got was an absolutely angelic mother who truly loved me. She taught me the Gospel, which kept me from straying dangerously far during the wild days of my youth, and she taught me basic principles of managing money that no one ever even tried to teach me or my classmates in school.

When I got out of college, I was heavily in debt, having bought into the standard lie my entire generation was fed. I took whatever grunt work jobs I could find, working in fields, in fast food, as a janitor, and so on. I ate a lot more ramen than I probably should, I rode the bus rather than buying a car, and I put every dollar I could spare into paying down my student loans on an accelerated schedule. Not gonna lie, it really sucked for a bit, living like that. Then one day I happened to notice an ad for a computer programming job that was actually incredibly relevant to my skillset, at a company less than 20 miles away from where I lived. So I took the bus over there, walked into the office, and asked the first person I saw if I could speak to HR about the opening. They had no idea what I was talking about, so they did what any good corporate worker does: fobbed me off on the manager. The manager, it turned out, had one tiny block of half an hour free that entire day, and it was right when I showed up.

A few interviews later, I’d demonstrated to their satisfaction that this fresh-faced walk-in actually knew his way around programming, and I got the job. I’ll be the first to admit I totally lucked into that position. With it came a salary that, while modest by today’s standards, was still significantly better than I ever made before that. So now I had a lot more money to pay down my student loans with! Within 4 years I was debt free.

The fifth year, I finally bought a car. Paid 50% down, had the rest paid off 3 years into a 7-year loan, and I was debt free again. Soon after, I met someone very special and, after a while, we ended up getting married. She had a bunch of student loan debt that I helped her pay down, and eventually we were debt free again, until we used a significant portion of our savings to put 20% down on a house. Now we’re working on paying the mortgage down on an accelerated schedule, and we hope to have the whole thing paid off in under 10 years, rather than the standard 30, and be debt free again, hopefully for the last time this time around.

Through it all, my career’s been pretty good to me… when it hasn’t been awful. Software’s a volatile field. I’ve been on more than one team through the years that had an annual turnover rate of over 100%, and I’ve been caught in that churn a time or two and ended up needing to find another job pretty quickly. But through it all, there’s never come a point where I felt like I didn’t know if I’d end up out on the street next month. And I can lay the credit for that at the feet of my mom and the basic principles she taught me about financial prudence.

Financial priorities

The most important things I learned about getting by:

1. Have a rainy day fund. First and foremost, above all else, put away some money in the bank that you can spend down if things go south. Because it’s virtually certain that they will, somehow, some way, some day. So be prepared for it. Have some money saved up, and have some food and water saved up too. I’m not saying you need to be a “doomsday prepper” or anything like that; just recognize that it won’t take a doomsday event, a war or natural disaster or whatnot, to bring about a personal disaster. They will inevitably come. Be ready for them.

2. Get out of debt. Don’t spend your rainy day fund on this, but once you’ve got one comfortably established, put every spare dollar you can into wiping out any outstanding debts. If you have more than one, start with the one with the highest interest rate, and once that’s gone, pay down the one with the next-highest rate and so on. Do this even if it means accepting a lower standard of living.

3. Profit! There’s no missing ??? step here. When you’ve developed the financial discipline to live within your means and pay off your debts, that skill sticks with you even when the debts are gone. You’re not spending your whole paycheck, which means you can save a little of it (your rainy day fund gets bigger) and invest a little of it (suddenly you’re earning interest rather than paying it!) And those monthly payments are off your back, so all of a sudden, you can safely afford to spend more. Now you’re not just keeping up with the Joneses, you’re getting ahead of them, because they’re in debt and you’re not. (Sadly, now the Joneses are statistically likely to go into even more debt in an attempt to keep up with you!)

It took me years and years to get here, but today my family has a pretty comfortable life. I just got my latest paycheck, and when I looked over our bank records I saw that despite some unexpected expenses over the past month, like having to replace a dishwasher that crapped out on us, we’d only spent about half of the last one. (So where do you think the rest of it is going to go? That’s right. Woohoo! There’s that much more that I’ll never pay another cent of interest on! Take that, bank!)

Take those three points above. Read them. Learn them. Internalize them.

Then you’ll be wiser, and better off financially, than 1/3 of the super-high earners out there.