The Ultimate Guide to Making Money

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

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  1. 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 money at the moment.

  2. 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

  3. Stacy McKenna Seip Link to this comment

    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.

  4. 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.

  5. 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.

  6. Jeremy Williams Link to this comment

    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”.

  7. 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.

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

  9. @ 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

  10. 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.

  11. 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, frugality, etc.

  12. 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.

  13. 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).

  14. 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 credit cards during college knowing they’d be making the 100k soon afterwards).

  15. 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 of it. I really didn’t know a thing about managing my money–until I read Ramit’s book.

    Since reading the book I am in much better shape–I’m not a money idiot anymore. I calculated my fixed costs and know what they are, I have all my bills or anything else that needs paying being done automatically, I also started saving automatically and have a solid plan. After my fixed costs and things like gas, I end up with like 400 a month, of which I try to save 200 dollars. I was never a big spender to begin with but the situation still isn’t great nonetheless. My credit is pretty crappy because of all the debt now too. I wish I could just get it all rolled up into one big thing and throw $1500 a month at it instead of sending out like 8 checks each month.

    Ramit, It is true that my friends really think I am rolling in money. They always ask me to pay for stuff or if we go out to dinner, to take a bigger share of the bill. Ever since I read Ramit’s book though, I’ve completely stopped and aim to optimize and track every dollar I spend. The last few months have been there’s been alot of “Why is Jay so cheap all of a sudden?” I’ve explained and recommended the book to my friends and shared some of the ideas with them, but most of them don’t seem to care. A couple have bought the book though and we talk about this stuff all the time now, our other friends think we’ve joined some personal finance cult. Is it really that weird to call your friends and be like “Dude, you’ll never guess how I just got this {insert random fee here} waived?

    Now if I could only shake this debt somewhow…

    Jay in CA

    • All you need to do is start wearing t-shirts with my picture on it. And using special code words, then laughing conspiratorially. That will complete the conversion process.

  16. 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.

  17. 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 two more. Just a thought…

  18. 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 these poor slobs can do about it aside from go ultra minimalist and downsize everything to the point of absolute boredom.

    It sounds like a lot of money but:

    1. Your rent/mortgage for your family will be between $2,500-$3,500 a month.

    2) You will pay a retarded amount in taxes (property taxes, car taxes).

    3) If you have kids your school & peers will pressure you into getting them enrolled in various activities

    4) Daycare and childcare is $$$$

    You can follow all the “be frugal” BS out there and still scrape by.

    Bottom line – you need to make more money or move out to someplace even further out (West Virginia) and commute 3hrs to your job.

    Sadly – most 6 figure salaries are in really high cost of living areas like this.

    If you’re single and in your 20′s and pulling in 6 figures around here you’ll be comfortable.

    Once you throw on a mortgage, wife & kids you’re fucked up the ass.

    Earn more money (or die trying!).

  19. 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!

  20. 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 “supposed” to know how to manage your money, right?” – This tells us that we can fall for the halo effect when we’re looking at ourselves, not just at other people.

    “And since you work so hard, don’t you deserve to spend a little on yourself?” – you do, except that if you’re in serious debt, you’ve almost certainly already spent a lot on yourself! The trick is to make sure that the new spending really is a little in absolute terms, not just a little relative to your income.

    Oh, and I seem to recall something from economics lectures about the “permanent income hypothesis” – the idea is something along the lines that we spend according to some sort of smoothed average of our historical and projected income, rather than our actual current income. So what you need to do is discount the future more, especially as job security (and even income security) is probably lower for white-collar types than it has been for decades.

  21. 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 to be ‘rich’ and ‘sexy’, but that’s where the money went.

    In contrast, I have friends who earn like 30k who would spend thousands on clothes and accessories and blow all the savings. Well, they feel happy because they deserve it. There’s no right or wrong answer, and it’s not for me to give advice. But deep down inside I’d hope they’re financially aware of what’s happening. Just deep down inside…

  22. 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.

  23. 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

  24. @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.”

  25. 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”.

  26. 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.

  27. 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.

  28. 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 afford comfortably; we decide to move to an even bigger house that our new budget has trouble accommodating.

  29. 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…

  30. 100,000 is just soo crazy!

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

    haha

  31. @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 see another bill, because you’ll be gung ho and ready to pay it. Check out his site at daveramsey.com and listen to the show archives (it’s free streaming online, if you don’t pay for the commercial-free versions). His course is on sale right now for about $129 (free shipping).

    You are not alone. You don’t have to go through it alone. Get into a class, and get going on paying down those debts.

    Thomas Stanley, in “The Millionaire Mind”, profiles lots of millionaires in America. Typical millionaire lives in an older home, in an older neighborhood, clips coupons and lives frugally. Has cheap or free hobbies, like visiting museums and so on. Stanley differentiates between the Income Affluent (high-income earners, who don’t necessarily have a positive net worth) and Balance Sheet Affluent (people with high net worth).

    A lot of Americans seem to think high income means “wealthy” but in fact *wealth* refers to net worth – how much is the total value of your assets minus your liabilities.

    Rule of thumb, your assets need to be worth more than your debt. Otherwise, you will have a negative net worth.

    I guess the Tom Delay quote (posted by another commenter) meant Tom’s net worth was negative, since a homeless person is probably at break-even zero net worth. :-)

    This reminds me of a story a friend told me once. She and her husband had just moved to Baltimore, and were shocked at how expensive everything was. She was walking along a street one day, feeling really down about their situation, and was approached by a homeless panhandler. She burst into tears when he asked her for money, and told him how they just moved there, were originally from North Carolina, had no money, couldn’t believe how expensive this city was, etc etc The homeless guy was like “You’re from North Carolina?!? ME TOO!!!! Here, have some money, don’t cry,” and he pulled probably hundreds of dollars out of his pockets and shoved them at her. Hahaha. I guess he was Balance Sheet Affluent *and* Income Affluent!

  32. @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 customer, so you owe me commision now) I went to a couple of banks with him, got their list of accounts, investigated the fees on all of them with him (almost no more free checking accounts) and told him what he needed to look out for and had him pick one. He really loved it and learned alot and came away telling me “wow this is complicated, i’m glad you’re here to teach me this stuff.” (awww, what are mentors for? it was a touchy moment. we hugged)

    3 months later, he now has a checking account, a savings account, 1000 dollars in savings and even convinced his mother to transfer his cell phone to his own account, so he can pay it automatically every month. He will have his first credit card about a month before his 18th birthday. He gets paid from his after school job about 250 a week and saves 150 of that a week and spends the other hundred split up over a couple of weeks. (He had 2000 saved already but I let him use 200 to pay for a trip he’ll be taking before graduation in may so now he has 1,800). He keeps telling people that his “rich” mentor is helping him learn about money and got him a book on how to b rich and the funny thing is I keep telling him “You’re actually a lot richer than me right now.” He just smiles and really thinks I’m joking. Ah to be naive and 17 again!

    Jay

  33. @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!

  34. @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 money management, interest, loans, etc. i think it will be a good thing for him too, to be exposed to as much of this as possible early on, so if nothing else, he understand how insanely complex this all can get if you get yourself into trouble. nothing like scaring them on day 1 to really drill your message in!

    Jay

  35. @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 don’t absolutely have to write a check for.

    I have left a small credit *balance* on my credit card account, so it will show activity every month, which keeps my FICO in shape. It is not necessary to make purchases on a credit card to get a good credit score. Just leave a small balance. I think I have a balance of minus$6.50 on my last Chase credit card statement.

    I feel a bit smug that the cost of printing and mailing me my statement every month is going to cost them more than $6.50 in the long run, and to top it off I get a good FICO anyway. At Chase’s expense. Hehehe.

    The only reason I don’t close my credit card accounts and just get rid of them entirely is b/c I am a homeowner, and (Clark Howard said that) homeowner’s insurance premiums are based almost solely on your credit score.

    Unlike Dave Ramsey, I am not wealthy enough to self-insure, so I need a good credit score, but I don’t want any credit-card-kissy-face with the banks in order to get it. Leaving a credit balance on the account is a good and (apparently) safe way to get around all of that mess.

  36. 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.

  37. 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.”

  38. 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.

  39. 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 was simply the values about money that were learned from their parents/relatives/neighborhood while growing up that shaped their attitudes regarding money and spending and saving and investing. For many folks wanting to save/invest, a careful examination of their beliefs about money is the best place to start.

  40. 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.

  41. [...] (nesmieklīgais) tāds, ka vispār nav pieņemts runāt par naudu (arī Amerikā). Es domāju, ka neesmu ļoti finansiāli attīstīta, un attiecīgi labprāt parunātu ar draugiem [...]

  42. 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 in federal income tax alone last year not counting social security and medicare. I came down with prostate cancer last year and had medical insurance and still had to pay $10k out of pocket for radiation therapy and surgery. So yea you can make over $100k a year and be broke as hell.

  43. 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, travel costs, daycare, conveniences, etc (ie. all of the things I have to pay for just to be able to work), take up about 1/2 of my take-home pay. So, if you look at it from that perspective, you could find a job that paid $50,000 and work from home in your underwear, and would have the same net pay and probably enjoy lots of additional benefits like more time with your kids, more freedom, and less time commuting. More money can be a huge help in getting your finances in order, but it’s not always the solution.

    My wife and I are on track to have all of our student loans and mortgage paid off in 8 years at age 40, and we have calculated that we could live just as well as we do now making $175,000 on less than $60,000 per year for the rest of our lives.

    I think in some ways that spending money has become mainly sort of a socially-acceptable way to relieve the monotony of spending your days doing boring things. See Tim Ferriss’ ‘The 4-Hour Workweek’ for some great ideas about how to make good money while spending very little of your precious time doing it!