It seems logical that the more money you earn, the more money you would manage to accumulate over a lifetime.
Starting with a decent tailwind on the income side must surely lead to a easier time scrapping your way to multimillions, right?
In fact, there are often hidden headwinds that can affect a high earner more than someone with a more modestly paid “regular job.”
Some of these obstacles get in the way of just stacking the benjamins far and wide.
In this post, from Banker on FIRE, we learn six reasons that a fat salary might not translate into lifelong riches.
The story of Rick Fuscone has got to be one of the most amazing falls from grace in personal finance.
A graduate of both Dartmouth and the University of Chicago, Rick went on to have a storied career in international finance.
Over the course of 21 years, he rose to become the Global Head of Fixed Income at Merrill Lynch, accumulating a multi-million fortune along the way and retiring in his 40s to become a philanthropist.
You could pretty much call him the pioneer of FIRE!
And then, less than a decade later, everything fell apart.
The global financial crisis hit Rick while he was both over-levered and illiquid. Just two years later, Fuscone spectacularly filed for bankruptcy just to keep a roof over his head.
To give credit where it’s due, he at least managed to get (and stay) rich for a period of time, however short.
Not so much for many of the people I’ve come across in my decade in investment banking, law, and consulting.
Despite multi-decade careers and cumulative earnings well into seven or eight figures, many folks are barely past first base when it comes to personal finance.
Once, over a drink at a fancy European ski resort, an MD-level banker in his 40s confided that he was still on an interest-only mortgage, having failed to make a dent in the principal for over 10 years.
Another former colleague had to yank his kids out of private school shortly after getting the chop (“what emergency fund?”)
Many others avoided going over the cliff yet had very little to show for years and decades of grueling effort in highly paid professions, continuing to work well into their 50s and 60s.
This is all a real pity, because for the vast majority of people out there, a well-remunerated 9-5 career remains the absolute best way to get rich.
If that’s the path you are planning to follow, here are six things that can torpedo your quest for getting rich:
#1: You Aren’t Making THAT Much Money
A $300,000 or even a $500,000 salary may sound punchy, but in reality, it’s far from being an obscene amount of money that will make you rich.
This is especially true in higher-tax locations like some US states, Canada, or the UK.
Take California as an example.
Someone on a $100,000 salary makes about $71,000 after tax. In contrast, someone on a $300,000 salary will pull in $186,000 after tax.
The difference is $110,000. Is that a lot of money? Sure.
But… it will take you about 20 years to compound those savings into a $5 million nest egg. That is a great outcome but not exactly an instant home run, now that you are in your mid-40s or early 50s.
In the meantime, you’ve got to keep living on the equivalent of a $100,000 salary, which isn’t easy once you’ve got the bling in your eye.
In addition, few people start out at $300,000. You’ve got to work your way up there over a number of years before you can really juice your investment account.
Will you end up well off? Absolutely.
Will you become obscenely rich, with a Ferrari, a mansion, and a private jet? Absolutely not. Sorry.
#2: You Spend Before You Make
Another great way to sabotage your financial future is spending like you are making $300,000 (or more) BEFORE you get there.
It’s an easy trap to fall into, especially as you watch your more senior colleagues rake it in.
“I’ll make it back,” you whisper to yourself as you put yet another luxury weekend getaway on your credit card.
Except many people never do.
Not everyone succeeds at climbing the career ladder. And those who do hit the proverbial bonus jackpot may realize that much of their comp is deferred, or awarded in worthless stock (Lehman Brothers, anyone)?
For folks in tech, the payoff is typically at IPO. It can work spectacularly well, but it can also backfire in an equally spectacular manner, leaving you with nothing to show for years of effort.
#3: Your Spouse Doesn’t Work
Here in London, I do know some couples where both husband and wife hold down high-earning jobs as lawyers, bankers, or private equity professionals.
Usually, that means outsourcing pretty much all household and childcare chores. Setups with three nannies (day, evening, and weekend) along with housekeepers are how they solve the inevitable time crunch.
Most people, however, decide that one of the spouses will take a step back professionally to allow the other one to pull those 80+ hour weeks with a highly unpredictable schedule.
From a lifestyle perspective, that’s great. For full disclosure, it’s a direction my wife and I are heading in as well.
But make no mistake, it’s a decision that bites hard financially.
Not only it’s punitive from a tax perspective, but there’s also a cognitive bias working against you here.
You think you are making $400,000 a year, but in reality, you are making $200,000, and so does your spouse. And so, you just can’t afford to spend like someone on a $400,000 salary.
#4: You Keep Moving Around
In many industries, the way to ascend the career ladder is to move around geographically.
In some cases, the company will designate you as one of the future leaders and will want you to get experience across a number of divisions and geographies.
And in some other situations, you may want to be opportunistic. Why wait three years for a promotion in NYC if there’s an open slot right now in Mexico City?
This is all fine and dandy as long as you are mindful of the financial drawbacks.
One is that it further reduces the likelihood that your spouse will be able to work.
Yet another is that it reduces the government social security you will get when you retire. For example, if I was to leave the UK before working here for 10 years, I will get absolute zilch from the UK government when I retire.
It doesn’t seem like much, but assuming a 3% SWR, even a $100/week payment has a headline value of $173k. Nothing to sneer at.
But most importantly, moving around may preclude your ability to build home equity.
You either end up renting for big chunks of your life, or you end up selling and buying houses so often that transaction costs decimate any equity you’ve built up.
In other words, tread carefully.
#5: You Don’t Make The Effort To Manage Your Money
Believe it or not, well-paid professionals can be really bad at managing their money.
For some, it’s a function of the role – you can hardly expect technologists, consultants, or lawyers to be 100% fluent in personal finance matters (although they are certainly intelligent enough to learn).
That being said, the finance professions have zero excuses here – and yet I always found it striking just how bad they can be at personal finance.
People who advise their clients on multi-billion M&A deals often don’t take the time to understand how easy it is to become a pension millionaire, get free money in their Lifetime ISAs, or even minimize fees on their investments.
And that’s before we get into some of the more bespoke areas of personal finance.
Around Covid, the value of my vested shares had dropped significantly below the award price.
As such, I made the obvious decision to sell my shares, generate a capital loss in my taxable accounts, and re-purchase the shares in my ISA, waiting for the inevitable recovery.
When I outlined the maneuver to a few of my colleagues, they all looked at me as if they saw a unicorn.
They were all “too busy” to do the same – and all ended up with six-figure tax liabilities once the shares rallied in late 2020.
#6: You Only Have One Source Of Income
Given the long hours involved, you will rarely find lawyers or consultants building up side income streams. There’s just not enough time in the day.
In addition, many if not most highly paid jobs come with an explicit restriction on your ability to make money on the side.
You are expected to declare all outside business activities to your manager and get written permission to engage in any work outside your day job.
Ditto for private investments, whether it’s real estate, venture capital investments, or passive business stakes.
Now, it’s possible to get approval (as I do for every single property investment).
But it’s a process that’s fraught with career risk (“why are you doing all of this on the side?”) and designed to discourage you from spending your waking hours on anything but company business.
And that, my friends, is one of the biggest reasons many high earners will never get rich.
A well-paid 9-5 job can and will allow you to accumulate a decent chunk of initial capital.
But the ONLY WAY you will ever get rich is to re-deploy that capital into attractive, growing businesses where you have proper skin in the game and full equity upside.
The only reason I am able to entertain the idea of early retirement at 40 is the fact that my wife and I own a seven-figure property portfolio and continue buying about $1m of real estate a year.
Was the process of accumulating that portfolio alongside a full-time banking gig painful at times? Sure.
But you know what’s even more painful? Being a 40-year-old banker and realizing that you’ve got another 10+ long years ahead of you before being able to hang up the gloves.
Of course, real estate is not the only option. But whatever you do, be careful:
You don’t want to get so caught up in your high-earning job that it leaves your salary as the only source of income.
As always, thank you for reading – and good luck!