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My $100,000 friend

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“I had more spending money in college when I was a student working a part-time job.”
–A friend who earns over $100,000/year.

How does this happen?

Factor in the following:

  • Urban living, including going out frequently
  • Expensive apartment
  • Credit card debt from spending on things like going out frequently, shopping, travel
  • Student loans

It’s a combination of high fixed costs (think $1k+/month in student loans) plus poor spending habits.

But it’s too easy to simply scoff and point fingers.

In social psychology, there’s a phenomenon called pluralistic ignorance. The prototypical example is of college students, who almost uniformly believe that their peers drink and have sex more often than they actually do. This causes all kinds of odd attitudinal and behavioral responses, like increased risk taking.

The same is true of people, especially high-earners, in credit card debt. After all, if you’re earning six figures in your 20s, you’re “supposed” to know how to manage your money, right? And since you work so hard, don’t you deserve to spend a little on yourself?

These are classic scripts employed by high earners in debt.

To be blunt, nobody would be surprised by someone making $35,000 who has some credit card debt. But it’s difficult to understand when someone earns over $100,000 (especially when I’ve written that a high income solves most problems). Spending matters, of course.

I have a lot of friends who earn this kind of money in their 20s, and a surprising number of them are in credit card debt. Yes, spending matters. But there are intensely important psychological factors at work for high earners in debt. Since nobody talks about it, none of my friends suspect that some of their other high-income friends are in debt.

It’s a terribly secretive and taboo situation.

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45 Comments on "My $100,000 friend"

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patrick
patrick
6 years 4 months ago
Similiar to how people assume that wealthy people-high net worth, not high income- have a solid understanding of how money works. Not really the case, necessarily. I think the fortune 500 list of richest people has like 80% turnover over the last 20 years. That might not be the real stat, but it’s something similiarly high and shocking, so don’t worry about it too much. You’d think that people with a lot of money would know how to keep their money. Wealthy people don’t necessarily have any better understanding of money than non-wealthy money. They just happen to have more… Read more »
Zain
Zain
6 years 4 months ago

This reminds me of something my economics teacher told me in high school. He said Tom Delay (then Texas governor) had once looked at a homeless guy and said “I envy that man, he’s richer than I am”

Somehow I don’t think Tom would’ve wanted to trade places though :p

Stacy McKenna Seip
Stacy McKenna Seip
6 years 4 months ago

I grew up in southern Orange County here in SoCal, and the “visibly wealthy, but immensely in debt” thing is incredibly common. Image is everything, so everyone is mortgaged to the hilt with debt of one sort or another (or several) but no one actually talks about how difficult their lifestyle is to maintain or how their money could more reasonably be spent.

Justin King
6 years 4 months ago

I always find it really interesting when people with high incomes have that much debt – especially credit card debt.

Following the comments, I believe the problem is that we correlate “wage” with “personal money management skills.” While there likely is a correlation there it probably isn’t the perfect statistical 1.0 we would expect.

Tyler@feet2thfire
6 years 4 months ago

People with that kind of income tend to be very focused, on their jobs while at work and at play the few days a year they are not working. This often leads to their being irresponsible outside of work, they can’t find the time. It also means that they place a high value on material items, they don’t have time for experiences.

Jeremy Williams
Jeremy Williams
6 years 4 months ago

The topic of spending/saving money is the single-biggest deficiency of our education system.

Books like Ramit’s, ‘Millionaire Next Door’, and Thoreau’s ‘Walden’ should be required reading of all secondary education…or at least part of a required college curriculum.

My father used to say “if you can think of as many ways to save money as spend money, you’ll be rich”.

TheDebtHawk.com
6 years 4 months ago

If you make over $100,000 and have over $150,000 in student loan debts, that $100,000 gets used up pretty quickly.

A lot of college kids are told to live like student when in college so they don’t have to live like college students when they get out. I think that this advice needs to be extended to the first 5 years after a student graduates. With 5 more years of living modestly (maybe with roommates, inexpensive rent, used car), a new graduate can build an awesome financial foundation for the rest of his life.

George
George
6 years 4 months ago

Jeremy,
I love the quote from your father. They are great words to live by, although not easy ones.

Moneymonk
6 years 4 months ago

@ Jeremy

Your father has a wise quote there

Thanks for sharing

Ramit,

This post can be summed up as having “Lifestyle inflation”, the more we make the more we spend. It is almost human nature in America

Christina
Christina
6 years 4 months ago

How about… “if you can think of as many ways to earn money as spend money, you’ll be rich”.

I think that’s wise too.

ctreit
6 years 4 months ago
I also have seen too many people who make a good living but who are also in debt. More income seems to find a way to be spent very easily. I almost got caught in this trap myself, when I got my first substantial raise. I felt “wealthy” which also meant that I could afford stuff. Alas, that was not really so. I find it funny that pluralistic ignorance applies to the things we want (and value?) like sex and booze in college, but we don’t really seem to suffer from it when it comes to things like debt load,… Read more »
Wealthystudent.co.uk
6 years 4 months ago

Is is though, that when we have an abundance of money we don’t know how to spend it wisely. On the other end of the scale, when we have less – we spend is wisely.

Peer pressure and social conditioning also come in here. If you are a student, your friends will assume that you are going to spend less and therefore you fit in with them.

When you earn $100k, then the people you hang around with will change. They spend money going out, you go with them and that’s the lifestyle you now have.

Magda
6 years 4 months ago

I have to agree with this. Now that when I am working full time, I have a car, a mortgage, credit cards, and most expensive – expectations. It is just a thing in your head that tells you that you are not working your bum off whole day not to be able to buy something expensive. I also feel I have to reward myself from time to time for working hard, as I feel I deserve it (even though I may not be able to actually afford it).

MoneyEnergy
6 years 4 months ago
Same thing as doctors and health care professionals who clearly don’t practice the steps involved in living healthily (healthfully?). Just because you have the title, doesn’t mean you have the knowledge (or wisdom?) that we associate with that title. I can certainly agree that if you know what you’re doing and plan it ahead of time, then a higher income can really solve most of your financial problems. But if people start making 100k in their first or second job out of school, seems they’re likely not to have any practice wanting after money. (I’m assuming they fully used their… Read more »
Jay in CA
Jay in CA
6 years 4 months ago
Hey All, I happen to be one of these guys. I currently make 100k a year from my full time job. I have an awesome job at an awesome place, but it took me 7 years of college and grad school and over 70k in student loan debt to get here. On top of that I have around 30k in credit card debt from medical bills (from a bad accident 2 years ago) which I am slowly paying off. I came from a family which was middle class, but didn’t really ever talk about managing money, or even did much… Read more »
Lazarus
6 years 4 months ago

I’m not making 100,000$ yet, since I’m still a grad student. However, apparently I’ve been able to save more than some of my friends who are making 5 times as much as I do. I used to find that really weird, but now … not so much.

Like Benjamin Graham once said or wrote (and I’m paraphrasing): The best way of being financially sound is to live within your means. People seem to forget that.

Jeff
6 years 4 months ago
I’ve heard arguments by in debt 100k+ earners that the jobs they have require that they keep up a certain lifestyle for advancement. While I might be willing to concede that there is some truth to this argument, I’d be far more convinced if there existed systemic evidence of this phenomenon. Heck, even really good anecdotal evidence would be good. Are we to believe that not taking an expensive vacation or failing to spend sick amounts on liquor are going to kill your career? I think that for every partner or senior executive you offend, you’re probably likely to impress… Read more »
Vikram
Vikram
6 years 4 months ago
Let’s see – I live and work in the Washington DC area and just about everyone I know is earning somehwere between $100-$200,000 a year. Most making less than $140,000 a year are struggling to make ends meet: 1) They bought a house a few years ago and are underwater on it. 2) They vastly under estimated the cost of living. 3) The wife decided to stay at home to raise the kids. 4) Something unplanned happened (car finally died etc.) Most people making $120,000 a year in Loudon County probably live paycheck to paycheck. I honestly don’t know what… Read more »
Alex
6 years 4 months ago

That’s nuts, but I believe it! Being in college, I barely spend any money. I make maybe $600 a month, so spending is almost out of the question. It’s been a good experience not having a lot of money because as it starts coming, I still do not spend. It just amazes me how much people can get caught up in spending what they don’t have even if they are making a lot of money!

grumpy
grumpy
6 years 4 months ago
One of the biggest mistakes you can make is thinking of that piece of plastic as a credit card rather than a charge card. Don’t put anything on the card if you won’t be able to pay the bill when it comes in. I’m not a fan of “debit” cards, though – I’d rather use someone else’s money as a float; fraudulent/erroneous transactions are less of a problem when they don’t come out of your cheque/savings account; and you get some extra benefits with credit cards (eg, points, insurance). “After all, if you’re earning six figures in your 20s, you’re… Read more »
Ken Siew
6 years 4 months ago
High income doesn’t solve your money problems. In fact it might even cause more money problems because you’ll start spending more and racking up more debt! Of course nobody wants to be poor, but what matters at the end of the month is your cash flow, not how much you earn. That’s why businesses that don’t profit will go under, no matter how many millions they make. And I admit I instinctively think that my friends who earn more are probably not in debt, because they’re richer than me! But then logically, most of them probably are. They might appear… Read more »
Ken Siew
6 years 4 months ago

Agreed, that’s why I’d rather be on the high side. And of course a more comfortable lifestyle follows high income too, and at least you can make actually pay all the bills IF you cut down on overspending.

Zain
Zain
6 years 4 months ago

Plus with a higher income, you’ll be able to have a better lifestyle, even if that’s only because you can get away with higher levels of debt :p

Angela
Angela
6 years 4 months ago

@Vikram, I take issue with your insulting and incorrect assumption that the “wife and kids” are dragging these poor, hardworking men down. First of all (don’t be shocked), millions of wives and mothers work outside the home and earn money! Secondly, husbands AND wives make the decision to have one of them stay home with the children- it’s not simply the wife choosing to selfishly stay home against the husband’s wishes .

I won’t even get into your calling taxes “retarded.”

Arsene Hodali
6 years 4 months ago

Great post and great comments.

Taboo and secretive are the perfect words for this. So many people live this life yet never talk about it.

It’s even more ironic when these people are expected to pass on advice on how “not to be in debt”.

Kelly
6 years 4 months ago

What higher income really gives you is more options. More options can be used to solve problems OR create problems. The fact that many high earners have used their options in life to make poor choices (ie purchasing a house) doesn’t mean they don’t have the ability to solve their money problems.

Kate
Kate
6 years 4 months ago

If Ramit’s friend would not have been able to get his $100k+ job without the college degrees (and corresponding student loans), is that debt considered a long term investment in his career? Presumably the degrees will enable him to earn a significant amount more over the course of his career than he would earn without the degrees.

Good article. Very interesting points to think about.

Kimberly Cole
Kimberly Cole
6 years 4 months ago
Living and spending beyond our means is a problem in all age groups and at all income levels. It’s why mutli-millionaires declare bankruptcy. I think it’s particularly difficult when you make a lot of money as a young person because typically you have very little experience managing money. It’s part of our nature to want to stretch our budget to its full potential, and then some. It’s why we do things like buy the most expensive house our budget will allow, and then once we get more money, we don’t stay in the house that we are now able to… Read more »
Ken Siew
6 years 4 months ago

Reading the comments reminds me this: having more money will amplify your circumstances. If you had been creating money problems for yourself before you earned more, you would probably have worse money problems. If you’d been learning how to manage your money well, having more income now would solve most of your problems and open up a lot of options. Food for thought…

Free advice on everday problems

100,000 is just soo crazy!

I remember when money like that back in the day would be a millionaire of today.

haha

lynn
lynn
6 years 4 months ago
@Jay in CA: I make $21K, and am debt free except for my mortgage (well, I live in a very inexpensive state, in a very inexpensive older neighborhood, and my Dad helped me with the down payment – full disclosure). I recently completed Dave Ramsey’s Financial Peace University class. I highly recommend it. He says that until you are debt free, you shouldn’t see the inside of a restaurant unless you work there. Yes, you will have no life while paying off debt, but if you get “gazelle intensity”, you’ll feel good every time you look in the mailbox and… Read more »
Jay in CA
Jay in CA
6 years 4 months ago
@lynn, thanks for the tip w/ the dave ramsey class. I’m going to look into it today. I feel you on the other comments as well. I mentor a kid who is about to turn 18 in a couple of months. About 3 months ago, I started having the financial talk with him, about himself, his money and his future. (why didn’t I get this from my mom and dad?? thanks for nothing!!!) I got him turned on to ramit’s book as well and he loved it!!! (@ramit–I gave you a lifelong follower, who will definitely turn into a paying… Read more »
lynn
lynn
6 years 4 months ago

@Jay

I hope you got him signed up for a credit card from a small community bank or a credit union. The “giant monster megabanks” (as Clark Howard likes to call them) eat 18-year-olds for breakfast…

🙂

Good luck to you! It sounds like you are on the right track, so hang in there!

Jay in CA
Jay in CA
6 years 4 months ago
@lynn, yes it is a local credit union which has an office a few block away from where we live. i would never have him open one with a monster bank, i’m all too familiar with them. when we spoke to them, they were nice enough to offer him a chance to open it up a couple of months before turning 18, at the time of graduation, as a sort of gift to him, on condition he attends two sessions of this free financial literacy workshop they run. i already looked into it, its definitely kosher, and covers basics of… Read more »
lynn
lynn
6 years 4 months ago
@Jay That sounds cool. Tell him not to use the credit card for ANYTHING. Tell him to just buy a coffee at McDonald’s for 90 cents with it ONCE, and when the statement comes, to send them a check for $10 and never use the credit card again. That way he will have a *credit balance* at all times, and it will keep his credit score high without his having to use debt to make purchases. It’s a tip I got from the Clark Howard radio show. What I do is I just use my debit card for everything I… Read more »
Jonathan Butterworth
6 years 4 months ago

Like you said, higher income will solve a lot of problems, but only if we know how to be smart with our money. I think most people probably think that more money will make them happier and I believe it can but most people don’t understand there is added responsibility they must confront when they start earning more.

prufock
prufock
6 years 4 months ago

I don’t think “going out frequently, shopping, or travel” should be deducted when calculating how much spending money he has. These things ARE all uses of “spending money.”

Nick@FirstChoice
6 years 3 months ago

First, “going out frequently” is something that I would categorize under “spending money”. Second, earning $200K should fix that little problem of not having enough money.

Dwight Kellams
6 years 3 months ago
I work for Your Financial Watchdog.com, and this is my personal opinion. As a long time financial planner I learned first hand the truths about accumulating wealth. People that came into my office with high net worths almost always had no debt and lived substantially below their means. The ones that came into my office with lots of debt had no net worth and lived way beyond their means. In some cases, people were simply addicted to spending. For others spending was a symptom of another problem like a troubled marriage, low self-esteem, etc. But for a significant portion it… Read more »
Mark
6 years 3 months ago

I can see this happening. People tend to live out of their means. Then if something comes up and they lose their job, or have an injury people can really get into trouble quickly with poor spending habits.

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Texas Tom
Texas Tom
6 years 3 months ago
My wife and I got a divorce three years ago due to arguements about her financial irresponsiblity. I am 54yo and have made over $120k for the last 10 years and was always broke. We were married 22years. My wife got a $82k settlement (from my 401k, she didn’t have one) and $1200/month till 8/2010. She has spent all the money and has now filed for bankruptcy. I made over one million dollars over the last 10 years and its all gone. I drive a 10 year old chevy and take my lunch to work. I paid $20k in 2009… Read more »
Kevin Druhan
Kevin Druhan
6 years 3 months ago
The book ‘Your Money Or Your Life’ (Joe Dominguez) totally changed my outlook on money and working. There is a simple exercise in the book that opens your eyes to your spending habits, helps you calculate your real income (not your gross pay), and provides a way to evaluate all of your spending and purchases based on your personal values. This is similar to Ramit’s notion of ‘spend like crazy on the things you love, but mercilessly cut costs on those you don’t’. For example, although I make $100,000 per year, the car, insurance, fuel, parking, suits, ties, business lunches,… Read more »
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