Why 'Keeping up with the Joneses' Can Send You Broke

You might be surprised to know that those on a high income often have just as many issues with debt as those who are on a significantly lower income. Take lawyer Mark*, as an example. He is in his mid-30s and earns $200,000 a year. But he also owes $100,000 across six credit cards, for which he pays more than $18,000 a year on interest alone.

Mark’s situation is a common problem among high earners, as they are often time-poor and want to reward themselves for working hard. It is often a case of the “keeping up with the Joneses” mentality, as they want to prove to those around them they are successful through material means. The long term impact of this is that high earners are often spending everything they earn and not building any wealth at all.

So, what can be done about this?

Let’s get back to Mark, his first best move will be to pay off the credit card debt. To do this, he would need to stop using all six credit cards and then look to transfer some of his credit balance to an interest-free card to avoid accruing further interest on the balance while he pays down the debt over time.

Often times it is cars and travel that are big spending items for high earners, and so for Mark to get a good financial outcome, he will need to commit to changing his current behaviours around these types of high ticket items. This means saving for his next overseas trip and not paying for it with a credit card.

Another option for those with high credit card debt, if they have a home loan, is to use the equity in the house to pay down the credit card debt. This has the advantage of paying a lower interest on the loan over an extended period, instead of over a shorter period of six to 24 months.

However, it is vital that people understand what the ramifications of doing this can be, as the temptation to go out and get another credit card will be high for some. Undoubtedly, the most difficult part about paying down debt is sticking to the plan and changing behaviour in order to meet financial goals within a scheduled timeframe. The real benefit that high income earners have is the ability to pay down a considerable amount of debt in a shorter period thanks to their higher income.

It is vital for people in this situation to shift their mindset from one of instant gratification for keeping up appearances, to one where they are spending on things that will really align with their personal values and long-term goals. It is the old scenario of short term pain for long term gain and the reality is that in the big scheme of things, other people probably won’t even notice that they didn’t take that overseas trip this year or that they are not driving the latest German automobile. Most people are more concerned with their own appearance/lifestyle to notice what you or anyone else is doing.

The reality is that getting rid of debt is a stepping stone towards a bigger financial goal and often an investment in a lifestyle & life plan that will ensure that even after your high income is no longer in play, you can still enjoy life and the things you truly love.

Photo by Jeremy Beadle on Unsplash