There’s a misunderstanding in personal finance that increasing your income is the key. The stark reality is that many people with high incomes get it just as wrong as people with low incomes. We have enough cautionary tales. When people are accustomed to or transition to high incomes there are some traps they should watch out for. We have 7 traps that high-income earners should watch out for.
Well, start with the obvious in Parkinson’s law. It’s a very simple idea that lifestyle inflates to match income. It makes sense because with a higher income you can afford many things. However, being able to pay for something doesn’t mean you should buy it. What Parkinson’s law does is keep your residual income (savings) low and impact your ability to invest and grow your net worth. At its worst, you could be high income and relying on debt.
This one hits close to home because I love helping people. To many people, the whole point of having more money is to do more with it; helping people certainly counts as doing more. The problem comes in two expressions. Firstly, helping people where strains your finances and exposes you to trouble. If things go wrong we will have two people with nothing. Secondly, not all problems are because of money and as such money is a temporary solution in such cases. You may not be helping people as much as you think.
This goes hand in hand with Parkinson’s law and partly explains it. Arriving is the feeling of achievement and believing that a high income, in most cases newfound, has elevated you to a different plane of existence. Suddenly the things you are used to buying or doing no longer befit a person of your stature, status or class. While there is undoubtedly a reason to want better, it doesn’t always mean being more expensive. Price is what you pay, value is what you get and the two aren’t always correlated.
Another thing you have to watch out for as a high-income individual is being targeted. It may be in the form of people coming to you with great ideas or it may be malicious attacks meant to swindle you. You must guard against being led by other people’s urgency or great ideas. Many have lost significant amounts because of being targeted by Ponzi and pyramid schemes.
Trying to do everything
We all have dreams and a high income feels like the ticket to achieving those dreams. Trying to achieve all those things at once may prove problematic. You want to buy a house, a German car, study, save, invest, pay off debt, help others, upgrade your wardrobe, travel, get the newest phone and a whole lot more. Fighting on too many fronts will frustrate your finances even with a high income. There’s a chance you will achieve none of these things. Instead, work on a priority list.
One might surmise that one of the things high-income people should do to protect themself from targeting, scams, and wasting money thinking they are helping people and other ills are to isolate themselves from people. This, in itself, is a high-income trap. Save for extremely rare cases your relationships with people have never depended on financial status and it shouldn’t start now. Staying connected with people is important in life but, understandably, some people may not have your best interests at heart.
Throwing money at things
Money has another quality that is not often discussed. It applies almost universally or at least it feels like it does. Need more time? Use the money to buy time! It feels like all of our problems can be solved by money but that is not always, in fact rarely, the case. You may start thinking because you have a lot of it you can address your problems through money but that usually results in losing money and remaining with the problem. Before you throw money at a problem, make sure that you have the right solution.
I hope the list above was both relatable and useful to you going forward. High incomes don’t necessarily come from huge amounts, a small increment in your income could make a difference in your life and you may start to see some of these traps forming around you.