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Why Your Million Dollar Salary Doesn’t Mean High Net Worth

Why Your Million Dollar Salary Doesn’t Mean High Net Worth

June 12, 2019
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It’s easy, right? Now that I’m making a major league salary, reaching a high net worth should follow with minimal effort, right? Wrong. While your salary may be correlated to your net worth, correlation does not necessarily mean causation. Essentially, your six to seven-figure salary alone won’t guarantee your net worth.

Let’s explore.

According to research by DQYDJ, a comparison between income and net worth in the United States resulted in a surprisingly mediocre correlation of 50.6%.

What does this mean? Again, you will not be wealthy solely based on your high or ultra high income. The following article will elaborate on some of the primary factors impacting your net worth. As a result, we hope that you will find new ways to make the most out of your million dollar salary as you progress toward your real goal – financial freedom and happiness for you and your family.


Millionaires Filing Bankruptcy

According to the Bankruptcy Research Center (ABI), Chapter 11 bankruptcy filing (typically reserved for corporations) can be utilized by high net worth individuals who generally have millions of dollars in assets. Oftentimes, a brief inventory of these individuals will lead to the discovery of the following:

  • Private jets
  • Lavish supercars
  • Extraordinary mansions
  • Exotic pets
  • Tropical islands

The same inventory results in a surprisingly low quantity of ‘zeros’ in their bank accounts – at least, not enough to cover the recurring costs of their bougie lifestyle.

Perhaps the above paragraph sent a shiver down your spine as you peer out the window and notice the Lamborghini parked on your 100 acre multi-million dollar estate. Despite what you may be feeling, we ask that you consider scales. That is – a Lamborghini to a Texas oil king may be the equivalent of a Corvette to a locally renowned corporate lawyer. In either case, an unsustainably priced asset when compared to your income could lead to an unsustainable lifestyle.

Let’s continue on.

A Case Study: Professional Athletes

While untouchable on the field, athletic mastery has an extraordinarily low correlation to financial mastery. In fact, according to research by the Global Financial Literacy Excellence Center at George Washington University, 1 of 6 NFL players will go bankrupt during retirement due to misplaced trust, excessive spending, and bad investments. For every time a high profile athlete make headlines due to poor financial planning, several lesser-known millionaires enter into similar circumstances.

By now, you can start to see a common trend (which you knew all along): high spending + low savings = lower net worth. Making the association between spending and net worth is not the purpose of our article, however. As a high net worth individual, you should recognize that the above connection is actually incredibly elementary.

Moving forward, we will explain why over spending is common amongst millionaires, and how to avoid the trap…the real purpose of the article.

Loans - Take Caution

Here is an interesting data set. Research by the U.S. Treasury Department discovered that over a span of 9 years, fewer than 50 percent of individuals who ranked in the top 1 percent of income managed to remain in the top 1 percent. Toward the highest end of the 1 percent, fewer than 25 percent remained. In other words, higher income may mean increased volatility of income, and without a proper savings and budgeting plan in place, your net worth may be especially volatile.

So where do loans come into play?

Imagine taking out a $300,000 loan. Perhaps you already have… Whether the loan was for school, housing, or your new Bentley (hopefully not), one truth remains constant: $300,000 is a considerable amount of money – no matter who you are.

Despite how much money you have in your bank account, the moral of the story is that large debts and purchases add up quickly (the same is even true for small expenses). When it comes to loans, the cost adds up even quicker due to interest. If you are not careful, you could find yourself in a spiral. Ultimately, you may be fueling the accumulation of unnecessary debt. Needless to say, consider taking a walk before purchasing that rare leopard fur coat, especially if you have many purchases just like it. 

Contributing Factors

Time and time again, you have heard that money does not buy happiness. Research by the Proceedings of the National Academy of Sciences of the United States of America (PNAS), however, says otherwise. That is – to a certain extent. According to PNAS, “when plotted against… income, life evaluation rises steadily. Emotional well-being also rises with… income, but there is no further progress beyond an annual income of ~$75,000.”

If you are a reasonable millionaire, your ultimate goal may be to achieve happiness in the long run for both you and your family. What we ask is that you paint a picture of what happiness truly looks like. While making 6 to 7 figures, you may fall trap to a common misconception that you should be living an equivalent lifestyle to your neighbor. Instead, independently consider what brings you happiness, and how each little bit “extra” is only taking away from your financial independence.

Here are a few of the (preventable) common traps that lead to always wanting more.

  • Sub-par financial literacy skills
  • Comparing lifestyles to wealthy friends or neighbors
  • Falling prey to ill-intentioned “advisors”
  • The “rush” of impulse purchasing

Notice how each item on the above list is quite preventable with proper planning and discipline. At the end of the day, we simply urge you to reconsider the fundamental motivation that drove you to earn your impressive salary: happiness.  

Closing Thoughts

Perhaps you are making a heavyweight salary without the heavyweight spending. If so, good for you! Continue along your path, and you will find financial independence to be relatively easy to obtain. Perhaps you and your spouse are both contributing money from your modest income into a retirement account, and are conscientious about your spending. Again, that is fantastic! You are establishing good practices that lead to long term financial freedom.

Consider the latter example in the above paragraph. In many cases, high net worth households are comprised of two individuals making modest amounts of money who simply know how to save. While they may not have impressive salaries, their ability to implement frugality into their lifestyle puts them in a much better position than someone making 7 figures who spends 98% (or more) of what they make.

In conclusion, have a contingency plan, do the math with a trusted advisor to see how you will fare throughout retirement, and ask yourself the question – “would I be able to sustain this lifestyle if the river stopped flowing?” 

Here at Castle Financial, we understand that you ultimately decide what makes you happy. Whether spending money now gives you the most enjoyment, or taking console in the safety net of zeroes in your bank account, only you can decide what brings you happiness. Our blog post is simply a general guide for individuals who value financial security. 

If you are a high net worth individual with a $250,000 or more investment account and need help with financial planning and investment management, Castle Financial is here for you with a complimentary consultation. We have assisted hundreds of clients like you in establishing financial freedom and saving for the long-run. Check us out on our website to get in touch –