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You might think that people earning six figure salaries ($100K or more) would have all kinds of savings. Right? Wrong. Lifestyle creep is real my friends. In fact, it has a name (Parkinson’s Law). Read on to learn how you can turn your six figure salary into 7 figure savings (over time).
Whether you’re earning close to, or well over the six figure salary mark, I can almost guarantee a few things have happened since those earlier days when you were earning half that amount.
- outsourcing tasks to save time (hiring a house cleaner or maybe a nanny)
- spending on convenient services like grocery delivery (which is brilliant)
- shopping for sport
Now, when it comes to paying for services that save time, this can be super smart because it frees you up to:
- make more money
- be well rested so you can make more money
- do something else that makes you happy.
If that’s the case, then outsourcing can be a solid investment in the quality of your life.
But what about the stuff that’s not adding to your quality of life?
- Shopping for the sake of shopping (with friends or solo)
- Eating at expensive restaurants
- Buying expensive wines
- Buying new furniture to fill up your new (bigger) house
- Upgrading your car to something fancy and new
These things aren’t life enhancers, but they may feel that way because your peers who are also making six figure salaries are doing the exact same thing so they feel like normal choices.
That my friends, is lifestyle creep and it’s so easy to get caught up in (<-yep, I’ve been there). Without a clear sense of how our incomes are funding our goals and happiness, we tend to do what everyone else is doing because it’s part of our behavioral DNA.
Parkinson’s Law and your need for fancier things.
Parkinson’s law suggests that our that our expenses will rise to meet our income and in many cases exceed it. We see evidence of it everywhere we look. In fact, a recent survey showed that half the participants earning over $100,000 had less than $1000 saved and 18% of them had saved nothing. That’s startling!A recent survey on savings rates for 6-figure earners discovered that 50% had less than $1000 saved. 18% of them had saved nothing. Wow.
So what do you do to start saving? Clip coupons and make your own dish soap?
Not at all. Small, incremental money-saving tactics will barely move the needle once you’re a six-figure earner and spender. You’ll get much further by putting your focus on reducing higher-impact spending behaviors.
The first Step to Saving More: Dig Into Your Spending Habits
If you want to create a plan for saving more money, then you have to know where it’s going, first. To do this, I recommend tracking your spending. Yes, you’re a busy person, but this doesn’t take much time if you avoid using cash and instead use cards (ATM cards are fine) for all your expenses.
That way, you’re tracking by default because all those little expenses are going to show up on your bank or credit statements. You can also connect your accounts to Personal Capital which gives you an even clearer picture of where your $$ is going.
Color Code Your Spending
Then, at the end of the month, sit down with 3 colored highlighters, print out all your bank & credit card statements or your Personal Capital report and start going through each expenditure, line item by line item.
- Highlight one color for “necessities” – groceries, toll fees, gas, etc
- One color for wants that “add value to your life and actually make you happier”
- One color for “everything else”
Note – When it comes to things like car or mortgage payments, think about how much of that cost is necessity vs wants. You may need a car, but you probably don’t need a fancy one or a new one. If your car expense exceeds what a reasonable car would cost then consider labeling it a “want” or put it in the “everything else” bucket if it doesn’t bring you true happiness.
Once you’re done, take a look at what color is dominating your statements. Is it all necessities? If so, go through that list again and ask yourself – is this really a necessity? Do the same for the items you labeled as “adds happiness”. Is that really true?
I love this exercise because there’s something visceral about going through each expense and giving yourself a moment to reflect on it. If you end up highlighting a ton of items that are “everything else”, then you know exactly where you can start cutting your spending.
Finding Funds In The “Not-So-Important” Expenses
If you start cutting out the expenses that don’t add value or happiness, I can assure you, it won’t be that painful at all. These are typically the things you buy that become unwanted clutter or expenses that you don’t even use (like 300 channel cable packages).
Also look for high-ticket items that don’t add to your happiness, like recurring expensive dinners, wine club memberships, or a pricey car that the fascination has worn off on. If you can get out of these things, do it. If you can’t, accept that you made a poor financial decision (welcome to the club) and commit to doing better in the future.
Reallocating Found Funds
Once you’ve found some extra funds (I challenge you to find $400 – $500) reallocate those dollars to your investments and savings vehicles. I recommend starting with funding your 401K or RRSP (if you’re Canadian) before anything else because it will reduce your taxable income and very often you can take advantage of an employer match (hello, free money!).
This of course, assumes you don’t have consumer debt. If you’re carrying a car payment or credit card balance, this needs to go first.
Your next goal should be to build up a 6-month reserve of income. This is not just a financial strategy, it’s an investment in your peace of mind. Having a reserve of cash means you can confidently navigate the shit sandwiches life will most definitely toss at you. We all get these. It’s not a matter of if, it’s a matter of when.
Once you’ve paid off all consumer debt, set up automatic investments to your 401K or RRSP and built up a 6-month cash reserve of monthly expenses, you’re ready for bigger-picture savings goals that will support your values and intentions.
The best long-term money strategy six figure earners?
Be very clear about your financial priorities. Maybe you want to retire early, stay home with your kiddos or just not be shackled to a high-paying/high-pressure job. Whatever your “why” is, just keep it front and center and let it be your gut check every time you think about making a purchase (big or small).
You’re also 10x more likely to save money if it’s automatically withdrawn from your paycheck. It’s that simple, yet so many people find themselves growing their spending along with their earnings because they haven’t considered doing anything else with it.
The Danger of Not Saving First
As a high-income earner, there’s a real danger to inflating your spending to meet your income. Jobs that pay well are often stressful and competitive. If you slip into a lifestyle that keeps you dependent on a high salary, you have no recourse if you lose that job or get burned out. Feeling trapped because you’re financially committed to the salary you’re earning is a miserable place to be. I know this from experience.The feeling of being trapped in a 6-figure job you hate because you can't afford to leave is a common issue. Here's how to get out of it.
My six figure salary spending Story
When I first moved to Silicon Valley I was making more than I ever thought I would. My money mentality shifted very quickly and suddenly I felt justified to buy fancier clothes, rent a pricey apartment and of course, buy myself a BMW.
But within two years I was completely burnt out from that job and I had to leave it. I ended up selling most of my belongings and moving to India for 3 months, and in that process, I had to face the reality of how much of my income I had squandered.
Fast forward 10 years and in my last full-time role I was making 3 times what I made when I first came to California, but my mindset has completely shifted in terms of how I spend. I know I can afford anything I want, but the thing I want more than anything is freedom.
With that idea in mind, it’s not hard to say no to spending as much as I earn. I don’t live frugally by most people’s standards, but between my husband and myself, we are able to save at least 30% of what we earn – often more. Sometimes I still have to talk myself out of things I want, but honestly, it hasn’t been that difficult because the taste of freedom overpowers my interest in stuff.
Does this resonate? I’m really curious to know if there are other 6-figure earners out there that struggle to save.