I’m talking about those in the top 10% in the UK, sometimes the top 1%, or 0.1%.
In the US it seems around a third of this demographic is living paycheck-to-paycheck. According to a survey conducted by Willis Towers Watson, 35% of employees earning $100,000 or more say they are living P2P. A similar survey by LendingClub and PYMNTS found that 36% of those earning $250,000 or more are doing the same.
Sadly these figures are not available for the UK population. But we can extrapolate from the overall level of living P2P in the UK and assume that at high income levels the picture is broadly similar.
What are these people doing? They have no business living P2P. So why are they?
I don’t mean when you start to earn a bit more and start “doing lifestyle” by going to expensive restaurants and luxurious holidays and “popping bottles”. Although perusing Instagram I can see that this does happen, what I’m referring to is a far more pernicious mechanism.
If you’re not careful, your minimum standard for everything in your life slowly starts to rise as your income increases. Your budget for rent used to be £800 but now you want a place to yourself for £1,250. You used to buy frozen meat from Sainsbury’s but now you only buy fresh organic beef and chicken and lamb from Waitrose. You used to walk into a bar and enquire as to the cheapest lager available but now you order a G&T and don’t check the price as you tap your phone.
“But Haydn, isn’t that the point of earning more money? To increase the quality of my life?”
Well, sort of.
There is nothing wrong with spending more when you have the capacity to do so…on things you care about.
The problem is that when your income starts to increase, you suddenly feel like you should be increasing the quality of everything you buy because you can. You enforce the preferences of others at your shiny new income level upon yourself. This is a mistake that will kill your ability to accumulate capital, preventing you from enjoying the freedom and security that comes with it.
It’s good to have hobbies
A good way to get fat is to treat eating as a hobby. Food becomes something to be explored, something to be enjoyed.
The problem with this is that there is a correlation between how nice food is and how fattening it is; almost everything that tastes delicious is bad for you. So maxing for enjoyment leads to overconsumption of fattening food (rather than the nutrient-block-for-fuel savages like me eat). This makes you fat.
A similar thing happens with spending.
All the funnest things to spend money on, you don’t actually need. These things are usually expensive too. It’s much more fun buying a designer handbag than buying a new lightbulb to replace one that’s broken.
A good way to stay living P2P is by using spending as a hobby.
0 (financial) self-awareness
Which you wouldn’t do, if you had some knowledge of personal finance and investing.
You would know that you should pay yourself first, and that increases in income should mostly be funnelled towards increases in your saving and investing rates.
People don’t have this knowledge due to laziness. It is lazy to refuse to learn about these important topics, even if you don’t want to. I’m all for not paying attention to things you find uninteresting, but some topics simply have to be studied.
It’s also lazy on a deeper level. It’s easy, in a way, to put your head down and work hard and climb the corporate ladder in whatever industry you choose. Or to spend increasingly more on X, Y, and Z because everyone else is and you can “afford” to.
Going back to eating (I am clearly hungry), it is better to build the habit of eating healthy foods early in life, when you don’t necessarily have to. The earlier a habit is formed (and understood), the more likely it is to stick.
This also prevents you from making a change too late. When it is too late.
You must build good financial habits now, whilst you don’t need to. Because when you get older, it’s a lot harder to do so. Your expenses will be higher and less flexible. Your income is less likely to increase and you’re less likely to get promoted. You will probably want to be investing more for your future as well.
You can get ahead by starting now.