Why 1/3 of Americans are Living Month to Month Making $250,000 Per Year

You can be broke at any income level

There’s a story making the rounds that has made a lot of people do a double-take. Look at this headline and you’ll understand why:

One-Third of Americans making $250,000 live paycheck-to-paycheck: Survey

More than a third of Americans making an annual salary of $250,000 say they are living paycheck to paycheck, according to a recent breakdown of surveys on Bloomberg.com.

Bloomberg.com reports that some 36% of households taking in nearly four times the median US salary must use nearly all of their income to household expenses, citing a survey by industry publication Pymnts.com and LendingClub Corp.

The data shows it’s particularly true among millennials in their mid-20s to early 40s. More than half of top earners in that generation report having little left at the end of the month.

According to US Census Bureau data, the $250,000-plus income bracket roughly represents the top 5% of earners in the country.

...Out of all the consumers surveyed, 61.3% reported living paycheck-to-paycheck in April, a 9% increase from a year earlier, LendingClub said in its report.

You might be wondering how 1/3 of Americans making 250k per year could possibly be living month-to-month. At first glance, it makes no sense at all.

However, the unfortunate reality is that you can be broke at any income level.

One classic example of that out of many is Mike Tyson. How much did Mike Tyson make at his peak? An almost unimaginable amount:

Mike Tyson, at his peak, reportedly made more than $700 million from his boxing fights alone. However, his highest net worth has been estimated to be just above $300 million.

You might think that a human being would have trouble spending that much money in one lifetime. However, Tyson managed to pull it off and had to file for bankruptcy in 2003:

Mike Tyson fell deeply into debt despite his immense earnings and was forced to file Chapter 11 bankruptcy in 2003, according to Benjamin Law. The law firm reported he owed $38.4 million to creditors, including the Internal Revenue Service and his ex-wife, Monica Turner. His bankruptcy filing indicated he had $23 million in debts specified in the Chapter 11 petitions, which were filed with the United States Bankruptcy Court in Manhattan, New York.

...The New York Times reported he viewed his “record earnings in the boxing ring became a license to spend — on jewelry, mansions, cars, limousines, cellphones, parties, clothing, motorcycles and Siberian tigers.” He “picked up a $173,706 gold chain lined with 80 carats in diamonds” from a Las Vegas jewelry store and failed to pay for it, the article said.

...“A camp aide named Crocodile – whose sole function was to dress in fatigues and repeatedly shout “guerrilla warfare” at Tyson news conferences – was paid $300,000 in 1996,” the Associated Press reported.

...Tyson gave lavish gifts, and among them was a $2 million gold bathtub he bought for Givens, according to Celebrity Net Worth. The news outlet also referenced unconfirmed reports that he would give out gifts to strangers including $100,000 watches.

Tyson’s divorce settlement with Monica Turner included a payment of $6.5 million and the keys to their 61-room Connecticut mansion

Don’t feel too bad for Tyson. He’s an incredible athlete and making millions after coming out of retirement. However, he’s showing one of the two ways that the ultra-rich tend to go broke. They act as if they have “infinite money” and think nothing about spending more than the average person makes in a year on trivialities. For the most part, it’s a waste of time. I always think about something I once heard the late, great Amway guru Bill Britt say on that front. It was something very much like:

No matter how much money you make, you can only get a steak that’s so thick, a bed that’s so soft, and a car that’s so quiet.

If you’re wealthy and careless with that wealth, you can find yourself paying staggering sums for things that add only a very trivial amount of value to your life.

The other way people who make that kind of money go broke is by getting overextended in risky business ventures. Then, next thing you know the business environment changes, money becomes much harder to come by and their immense fortunes collapse. Although he’s a particularly shady example, that’s what happened to Bernie Madoff, who ran the biggest Ponzi scheme in history. Bernie Madoff operated successfully for 17 years and the only reason he was caught was that the economic crash in 2008 made it impossible to bring in a new wave of “investors.” This kind of thing can happen to more reputable businessmen as well when the money dries up, they can’t keep floating their ventures and they find that can’t afford the new demands on their cash flow.

Of course, that’s the ultra-wealthy. What about the poor?

Well, first of all, many people that are poor simply don’t have enough money coming in to get ahead. In fact, I can still remember a conversation with my father that I had when I was in my mid-twenties and extraordinarily broke. He asked me why I wasn’t saving up any money. My honest answer was that I just didn’t have enough money coming in to save much of anything. By the time I paid my rent, bought groceries, gas, paid the power bill, etc., I had almost nothing left over. I can still remember having checks bounce because I was getting down to a few dollars difference between what I had and what I was spending in my bank account so an unexpected small fee from the bank was enough to drive me to a negative balance. My father implying that I was just choosing not to save money wasn’t true in my case and similarly, it’s not true that all or even most poor people are poor because they’re buying iPhones, Starbucks, and eating out too much. Of course, that also reminds me that another suggestion my father used to regularly make during that time in my life was, “If you don’t have enough money coming in, why don’t you get a 2nd job?” At the time I thought it was ridiculous until I actually did it and it actually allowed me to start putting some money back. There’s a reason most of us would be better off listening to our fathers.

In any case, once you get past the poorest Americans to the different strata of the middle class and even the comparatively wealthy people making $250,000 per year, the problem is almost always on the expense end. That’s when simply wasting too much money can be a big problem. However, there are two particular areas that tend to hose even a lot of middle-class Americans that are, for the most part at least, responsible with their money. It’s the house and the car. These are big purchases and if you spend too much on them, it simply crowds everything else out.  An awful lot of people ignore the old “spend no more than 30% of your income on a house” rule and the truth is that 30% is arguably too high for most people in the middle class. Can it work under perfect circumstances? Sure, but how many of us live in perfect circumstances? We don’t. We’re paying off car loans, car repairs, student loans, credit cards, trying to take a nice vacation or two, AND put aside money to save, invest, and for the kid’s college fund. When 30% (and let’s not kid ourselves), and in many cases 40% of our income off the top is going to a house that’s a little too big, it makes it difficult to pay for everything else. Along similar lines, car payments can be a big problem, too. A lot of people buy new cars and then want to trade them in in a few years once they start to feel worn down. The problem with that is the average cost of a new car in 2022 is $46,085 dollars. If your down payment isn’t that big, you can easily get your payment up in the $800 or $900 range per month. Now think about that times two because the husband isn’t going to be driving a new car while the wife is stuck in a beater.

Of course, we’re talking about people that are middle class here. You can do the same, exact thing making $250,000 a year – especially in the more expensive parts of the country. Do you want to know what the MEDIAN (not the top of the line, just the median) price of a home that was sold in San Francisco this year was? It was 1.6 million dollars. As someone who lives at the beach, I can tell you an awful lot of people have vacation places here. Some of them come a lot. Others might show up 2 or 3 times per year on a weekend. Now start tossing in some other higher-end perks. Private school for the kids. Paying off private school student loans. All the bills (insurance, maintenance, repairs) that come with having a big house, 2 or 3 high dollar vacations per year, etc., etc. and you can eat up a lot of money in a hurry. We also can’t forget that in that bracket, the taxman is going to eat you alive. In addition, just because you’re making 250k this year doesn’t mean you made it last year or will make it next year. Human beings have an awful tendency to raise our expenses to meet our current level of income without considering whether that stream of revenue will continue.

It’s very easy to laugh at these guys and say, “If I were making that much money, there’s no way I’d be living month-to-month.” However, the reality is that most of the people making $250,000 and living month-to-month would have told you the same thing before it happened to them. In fact, the only real difference between them and a lot of other Americans that are bad with money is that the sheer amount of cashflow they have rolling in helps paper over their poor money management skills.

There was a time in America when this country placed a heavy emphasis on saving money and investing money for the future. Our government’s overly generous welfare programs and poor financial choices that have put many Americans in a position where they feel like they have to not only save but MAKE a good bit of money to beat inflation have helped undermine that attitude. However, there’s a big price to be paid for that. Independent people find a way when dependent people are just stuck. The time is going to come, likely in the lifetime of most people reading this column and perhaps even in the next decade, where Social Security and Medicare aren’t going to be enough to pay people’s bills. Anyone looking for the government to keep them afloat once we get to that point is going to be in a lot of trouble. The people that will be the best off in that situation will be the Americans who understand budgeting and investing, who have money set aside, and who aren’t living paycheck-to-paycheck. It doesn’t matter where anyone is today financially so much as where they’re going to be in a decade or two financially. The principles that help people manage their money are no secret. They’re out there for anyone who wants to look for them. Long term, it benefits all of us to do exactly that.

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