Living “paycheck to Paycheck” Looks Different for the Rich
Yes, $250,000 per year is still a lot of money
I recently wrote about the dark side of storytelling.
People are more likely to believe a compelling story—even when with no basis in reality—than cold hard facts.
One story that gets recycled every 6-7 months is that a shockingly high number of high-income earners live “paycheck to paycheck.”
In 2022, I wrote about this article in Bloomberg with the headline "One-Third of Americans Making $250,000 Live Paycheck-to-Paycheck, Survey Finds.” The first time I read that headline, my Bull$hit detector lit up like a Christmas tree.
Why?
First, I’m skeptical of numbers pulled from surveys—they are often taken out of context and used to spin a compelling but false narrative. Sure enough, when I read through the article, I found this passage buried near the end:
“Living paycheck-to-paycheck doesn’t necessarily mean hardship, and LendingClub makes the distinction between those who can pay their bills easily and those who can’t. Only a fraction of high earners — roughly one in ten — reported issues covering all their household expenses in April, according to the survey.”
This brings me to my second point, which is that “living paycheck to paycheck” is more of a feeling than a tangible financial benchmark.
Your net worth is a concrete financial benchmark; we can quantify it as your assets minus your debts. Living paycheck to paycheck is a term we use to describe when someone can barely cover their living expenses with their current income.
For people with a low income, living paycheck to paycheck might mean getting phone calls from the electric company threatening to shut off their power.
Most people making $250,000 per year who claim to be living “paycheck to paycheck” aren't actually—it just feels that way because the majority of their wealth is in illiquid assets. They may not have tons of cash left over at the end of the month, but their wealth continues to compound.
The wealthy hand to mouth
People making $250,000 experience living “paycheck to paycheck” in a radically different way than people making $50,000 per year.
We need a different term for high-income earners with cash flow issues.
A 2014 paper coined the perfect phrase to describe this group:
“The wealthy hand-to-mouth”
The researchers define the “wealthy hand to mouth” as households with little cash but a large amount of wealth in illiquid assets like housing and retirement accounts. The researchers studied hand-to-mouth wealthy households in the U.S., Canada, the U.K., Australia, Germany, France, Italy, and Spain to better understand how they earn, spend, and save money.
The researchers wanted to know why these wealthy households would choose to live this way. Why would they spend all their money when they could make their lives so much easier by building an emergency fund to cover periods of lower income?
I’ve been able to find two plausible explanations for this behavior.
The first comes from the paper I just referenced, in which the authors argue that having next to no liquid wealth can be justified if the illiquid assets they own provide a high return. If 99% of your wealth is in home equity and a 401k, that may work out in the long run if the value of your home and retirement fund increases enough.
The second argument comes from a 2001 paper that describes the wealthy hand to mouth phenomenon as a preventive strategy to save them from themselves. By storing their wealth in these illiquid assets, the wealthy hand to mouth can save themselves from themselves. Liquid assets are much easier to turn into cash than illiquid assets. You can’t easily spend what you can’t easily sell.
Okay, I am going to take my economist hat off now.
Do I believe high-income earners who live hand to mouth choose to do this as part of some advanced financial strategy?
Are high-income earners with no cash playing four-dimensional chess while everyone else is playing checkers?
No.
They are spending whatever they can get their hands on.
But they are lucky that, by definition, high-income earners are usually homeowners and have good jobs with retirement plans. This means they have forced savings via their mortgage and workplace retirement plan—which likely also has matching contributions from their employer.
This is another data point in my argument, which is that wealth is created from income, not mindsets. If your income is high enough, you can be quite “bad” at managing money and still wind up a millionaire.
Here’s some free advice to guard against financial bull$hit: block any online guru who suggests that your mindset is more important than your income in building wealth; that’s what the top of a sales funnel looks like.
I should be clear; I am also not saying that a high income gives you free rein to blow all your money. I’ve seen plenty of high-income people declare bankruptcy. The higher your income, the higher your margin of error with money, but that margin is not limitless.
There is a huge difference between living paycheck to paycheck and living as a wealthy hand to mouth.
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.