Wealth Trap Warning – Ep. 288

Welcome to the Accumulating Wealth podcast. I’m Judson Crawford. And I’m Hunter Satterfield. We are CPAs, wealth advisors, and partners at CWA, a financial services firm here to help business owners navigate the decisions they face every day. Yeah, and today we’re talking about something we see all the time, especially with high-earning professionals, and it’s one of the fastest ways to quietly derail your long-term wealth. 

That’s right. We are talking about lifestyle creep, one of the fastest ways high earners stay broke. Despite earning hundreds of thousands a year, many people struggle to build wealth because spending rises right alongside income. You’re not rich, you’re just a high-income poor person. Today, we’ll break down why this happens and how to create real financial margin without feeling deprived. 

Let’s go. 

Okay, Hunter, so we had a client that sent us a video for the podcast and- Thank you, client. Thank you, client. The video is called Rich on Paper, Broke in Reality, and it happened to go right alongside with a Goldman pretty little thing – graph that you found. A study. Study, that’s right. 

This Goldman study made the rounds on most recently on the financial social media space, and it did. It timed perfectly. We’re like, “We’ve have to record on lifestyle creep,” which is something we’ve talked about for a long time with our clients, on here. And in fact, before we get to the Goldman study, I’ve referenced that Morgan Housel’s new book came out last fall. 

Many of you, listeners, have already read it because you shot us notes on it, so that’s super exciting. The Art of Spending, which is specific to spending. Now, it’s not focusing necessarily just on lifestyle creep, but you and I already mentioned we’re going to do another episode on book review of that one as well. So listeners, look out for that this summer. We’ll for sure do that.  

But I think the reason that this Goldman one popped back up is, we’re just, as a, as an economy, we’re dealing with tightening everywhere. And it had some shocking numbers. So this is from their sort of annual report on financial planning. 

It came out at the very end of last year, and it’s got basically six different categories, and if you want to look, you can go on and just Google, “How would you describe your financial situation Goldman Sachs,” and you can find it. But six categories, so… And these are on income. So:  

• <$50,000 a year in income 

• $50,000-$100,000 

• $100,000-$200,000 

• $200,000-$300,000 

• $300,000-$500,000  

• and then $500,000 plus. 

And it asked the respondents, how would you describe your financial situation? Living paycheck to paycheck, moderately improves each year, or considerably better? 

And the chart is shocking, right, Judson? Because as you get from the <$50,000 to the $200,000 to $300,000 category, the number of people living paycheck to paycheck plummets. 

As you would expect. As you would expect. Right. It goes from 57% of people that make less than $50,000 to only 16% of people that make $200,000 to $300,000. And, and that’s exactly what we would expect. Yep. Now, why this made so many waves on social media is those next two, because what happens, Judson, is you go $300,000 to $500,000 and then $500,000 plus. 

Yeah. In the $300,000 to $500,000 and the $500,000 plus, so mind you, going back to $200,000 to $300,000, only 16% say they’re living paycheck to paycheck. In both the $300 plus categories, 40% say they’re living paycheck to paycheck. Almost half. It’s staggering but doing what you and I do and knowing what we know, I mean, it’s not. 

It’s not. And we kick back and forth, why this was the case. I mean, there’s so many different things, obviously. But I think that’s generally people keep up with the Joneses at that point, right? 

Yeah. It is. And look we’ve seen it with clients, we’ve experienced it, but when you maybe go to move into a different neighborhood, maybe when you have a different career you start to feel certain expectations, and it increases your expenses. 

And some people, if you can’t control or pick and choose, you end up in this 40%. 

Yeah. So I think that it is very noticeable, and there’s so much to unpack here. We’re going to go through some of the stuff that’s in this video. But, to see, when you look around at folks in your life who you know are making good money or you think they’re making good money, your friends or whatever else, and you ask yourself the question like, “How? How can they afford that when I’m doing the things I’m supposed to and hitting my savings goals and things like that?” 

This is an interesting study to reflect back on because the reality is that they’re probably very, very tight, right? 100%. They’re probably somebody that’s making good money, $300,000, $400,000, $500,000 a year, and by the time they’re done with their taxes and their 401(k) and their mortgage and their auto payment, they have 500 bucks left over each month. 

Well, and I think the other thing is if you are in that position and you feel that way, I think it’s good to know you’re not alone, but you’re also in the fortunate position of having the income, and we can help you.  

Absolutely. You don’t have to feel like you need to do that alone or be embarrassed of it because, again, there’s other people out there that are in the same position as you, but you also don’t have to stay that way. 

Yeah, I mean, Judson and I are almost maximizing our IRA each year. So I think we’re pretty good experts on this. Yep. 

Well, and again, we’re not going to go into artist spending today because there’s so much more to it, but one of my favorite quotes between that I think is a good way to kick off this video is Morgan Housel says, “The only way to build wealth is to have a gap between your ego and your income.” And I think that’s that gap that we see in this bar chart is that people are not willing to have that gap. 

Because where that gap is between your ego and your income is your savings, right? And that’s how you build true wealth. And wealth looks like different things for different people. It doesn’t necessarily have to have money in the bank. It could also just be time that you get to spend because you can use money for other things. 

So I think that gap is super important. But we’ll go into some more of that when we cover his book in general. But Judson, you want to talk a little bit about just this video? We’ll go through some of the stuff that it talks about, but just as you watch the video, some things that you took high level from it. 

 Yeah, absolutely. One of the interesting things, one of the big takeaways and this was actually a study done by The White Coat Investor that they referenced in the video, but what it says is the average physician earns between $150,000 and $500,000 per year. And we would say that for our clients that’s probably true if not more. 

Yet data shows that 25% of physicians have a net worth of less than $1 million, even after decades of working. 

Yeah, it’s a staggering number, but it’s true. I was going to say, can confirm. Yeah, you’re right. I think it’s an accurate one, and I’m glad the video brings that up because the reality is that folks that are earning in that spectrum, they’re spending it on cars and vacations and all these things and those things are- wherever you end up on them is fine, but they don’t build net worth either, and I think that’s a lot of why we see that gap. Alright, what else?  

Yeah, so one of the things that was really interesting and you and I discussed this and we never really thought about it this way but I think this is so true, is, that our clients who go to school for a longer period of time than many of their peers, often lose a big chunk of that most powerful decade for compounding, right? 

And that can be most of your 20s, And what that creates is the feeling of being behind, okay? And what it also creates is this feeling that you have a sense of delayed gratification because you’re seeing your friends who may have been in their career for an extra five, seven years- who are doing the vacations, and they’re buying the nicer cars, and they’ve been saving for a while. 

And so when these people start, when they actually graduate and start earning, they want to catch up to their friends automatically, right? By buying the house and the car and taking the vacations, and I never really thought about it that way. It makes all the sense in the world. 

Yeah, I totally agree because we’ve always seen them, we’ve been here 20 years, and we always talk about that first client that we see straight out of dental school or straight out of residency, and they come in, and they’ve typically got a kid or two, maybe they have kids on the way. 

They just got married, but it’s like, “I need a house, I need a car, I need this, I need that,” but they have student loans. They have the cost to set up a practice. They have all these things, but it’s like, “Judson, I need these things because as I look around” … And, again, we never put it together necessarily, and I appreciate this video mentioning it, but “as I look around, all my friends have those things.” 

Yep. And I think that it creates this mentality almost of, “I have to catch up I’ve been waiting so long, I deserve those things,” whatever else it is, and they get themself in a really bad spot really quickly. Yep, and 99% of the time they do that before they come see us. 

Yes. Right? Yeah, so please, that’s number one. Call us first. Don’t wait and make those decisions and put yourself into situations that are difficult before calling us. 

Yeah, one of the things you mentioned before, but why don’t you define again lifestyle creep for us? 

Yeah, I think it’s this idea of like every client that we deal with, and creep is not- it’s like creeps higher, not creep like the guy checking you out. One of the things that we see all the time is that all of our clients in dental school, in residency, whatever else it is, they say, “Man, I remember living off almost nothing.” 

And Carrie and I when I first graduated, I was working for Ernst & Young. I was making $38,000 a year. She was in graduate school, and we totally made it. And yes, a lot of our meals were sitting on our couch or sitting at our table. Our exciting activity for the entire month was maybe going to see a show or a movie or whatever. 

That’s what they called them back in the day, kids, picture shows. And we had a happy, simple life, and this concept of lifestyle creep is as you add kids and you want to keep up with the Joneses or whatever else, and as your income rises, instead of your income going into things like savings or whatever else, your lifestyle just creeps higher and a little bit higher and a little bit higher. 

And so we see oftentimes these clients that’ll come in in their 40s and they’re spending $300,000, $400,000, $500,000 a year and they’re like, “Judson, I can’t not spend this” when the reality is when they were first out of school or in dental school, yeah, you could.  

So it’s that lifestyle creep that just comes naturally as a proportion to your income, and so what ends up happening is your savings stay the same or sadly goes down. 

 Yeah, one of the things that this video recommends is to live like a resident for two to five years after starting your earning, And what it specifically says is, “Hey, try to live off of $60,000 per year while you’re earning that $150,000, $200,000, $300,000 per year for two to five years.” 

That’s going to be hard, right? I think, though, that the point of it should be well taken, which is just because you all of a sudden are going to go to earning, let’s say $300,000 a year, means you should intend not to spend that automatically, And so how do we recommend that our clients, for our clients that are coming in, how are ways that we help them ensure that that creep doesn’t happen all the way up to their income? 

 Yeah. It’s a great question because here’s the reality, folks, and I heard this a long time ago and I think it’s really it’s pertinent to this and to the answer to your question. The quote I heard was, “One’s current definition of ‘more,'” in quote, “more,” ” becomes that person’s future definition of not enough.” Right? 

I mean, it’s an incredibly convicting statement, but your definition of more, “I want more, and if I just get that more, it’s going to be fine,” becomes your future, “Well, now this isn’t enough. I want the next thing.” 

And so I think when you come to something like that, you have to create structure. You have to create systems to where… as your income does increase, you’re able to say, “Hey, you know that more I wanted? That is actually enough.” 

So I think it’s all about saying, “Okay, I’m going to keep my savings rate increasing, not just the same or allowing it to decline,” and really understanding, what am I saving, and ensuring that that not just stays the same but continues to rise. Another great example is when you get that raise, add that raise straight into your 401(k) instead of taking that raise and taking it home as well. 

So it’s again these systems and processes to where that future more actually just becomes your enough. Yep. 

Absolutely. One of the things I loved in this video, a recommendation that they made, was to – not upgrade a fixed cost immediately after a raise but instead wait 12 months. And so if we think about this, okay, let’s say that, whether it’s a raise or whether it’s because you’re producing more in one of our offices and your income increases, this cooling off period of 12 months I think is a really great idea because if you can wait that 12 months and you can save that surplus, then you can make the right financial decision about that fixed cost to increase. 

The other thing they pointed out is sometimes if you wait that 12 months- You decide you don’t need that fixed cost.  

Exactly. I think this is what we would call, like, people spending it before it’s even in their bank account, right? Yeah. In your mind, you’ve already spent it. Like, it might have actually hit and, but you’ve already spent it in your mind versus saying, “You know what? I’m going to allow it to become a part of my income, save it.” 

I mean, how awesome would that be for that first year? I think that’s a great concept. Like, save that and then maybe take that next step. And I think from a fixed cost perspective, Judson, like one of the biggest ones is that as folks see their income rising, it’s like “I know I’m going to get a raise next year, and so I’m going to go ahead and reach now on that new car,” or, “I’m going to go ahead and reach now on that new house,” not realizing that maybe that new house is going to come with other expenses as well that my income is not rising yet to prepare for, whether it’s repairs and maintenance or upkeep or, parties that I’m hosting or whatever else. 

And so that fixed cost actually becomes a bigger and bigger portion of their lifestyle. So if you take that year off, see how you can settle into the new one, then make that decision to add the fixed cost, I kind of love that idea. Yep.  

 The other thing, one other area that I really loved on this, and I think that you and I both from our experience can attest to this being 100% true, which is, what they said is they said, don’t focus on the small stuff, okay? 

Because the small stuff is just that, it’s small. But there are three main areas that are going to dictate your financial destiny. Hunter, what are they? 

 Your house, your car, education. 

And that is so true. It couldn’t be more true. And here are the reasons why I think they say that, is, Carrie and I’s big vice and your big vice actually too is travel. 

And we have a lot of clients that- I’m glad you didn’t bring up the other one … Good point. 

We have a lot of clients that suffer from that one as well, but the thing about travel is it can be turned off like that, right? I mean, yes, it can be hard to say, “Oh, I don’t get to take a trip this year,” or whatever else it is, but they are one-time non-recurring unless you make them recurring. 

And so they don’t really dictate or drive your financial life in a negative way, in any way. A house, a car, education expenses, those are things that become somewhat permanent and you can’t get off of them once they’re in there. Those are the definitions of lifestyle creep. 

Well, and if you’ve made the decision on those three items and you’re finding yourself tight, then you’re required to focus on the small stuff, and that’s really hard to make an impact with, right? 

Absolutely. I have that example of that client years ago that they were overspending. I’ve used this one before. They were overspending and they were like, “Hey Hunter, can you help us cut this?” And so we spent a ton of time on their spending over the course of our meeting that day- And they’re like, “We just, we really don’t feel like cutting this $20 subscription or this $40 whatever it is really going to do all that much.” 

And I’m like, “You’re right. It’s going to have to be something big or it’s going to have to be 20 of those small things” And 20 of the small things are probably the things that actually impact you more than you realize because you become accustomed to them. That’s right. You know? 

And so I think building your lifestyle around these three things, ensuring that you are well below where you need to on the housing cost, that one I think can be one that really sinks people because a house is illiquid both from how quickly you can move it, and then secondarily it’s illiquid because of the memories that you tie nostalgically to that house. 

And so people just don’t want to give that one up, but that one can just completely consume your life if you have not made a really good sort of systematic decision on how much you’re going to spend there.  

 Yeah, the other thing they brought up when they were talking about this is a point that we talk about a lot and it’s something that we try to help our clients understand. 

But they used private education as an example in this, and they said, “Okay, if you’re making a decision about sending your kid to a private school that costs $30,000 per year, you have to make sure that you understand that you have to earn $50,000 in your business or, for that matter, in your wages in order to take that out, pay taxes, and have the $30,000 net in order to pay that.” 

So a lot of times you have to think about these expenses, as not just what you’re going to pay for that private school, but what you’re actually going to have to pay the private school and the IRS in order to afford that, and I thought it was a great point. 

 Yeah, for sure. And then you have to understand that what are the opportunity costs on that $50,000 that could have gone elsewhere? 

Or the $30,000 net of tax that could have gone into savings or whatever else it is. I mean, the opportunity cost of it that you might miss out on an investment or something like that can be problematic, or you miss out on compounding, for instance. 

But I think this is where the sort of subtle nuance comes in, Judson, because my kids at times have been in private school. They’re in public schools, they finished high school but they were in private elementary school. Your kiddos have been in private school at times as well, so I mean, we’re not saying that’s not something that is important. Like, for my kids in particular, I think it built an incredible foundation for who the men that they’ve become and so I’m super thankful for it. 

And so I’m not necessarily against that in any way, and I’m not one that’s going to say, “Oh, we have to focus only on compounding and investment rate of return,” or whatever else it is. 

But Carrie and I had designed that, you have designed that into your life to where we’ve given in other areas. And that’s really how you manage these things- to where they don’t consume your lifestyle budget as you grow, you have to build it in and then build the rest of your lifestyle around those three things. 

Well, and I was thinking about this as we were talking about the three major things, house, car, and education. And when I see clients and those three decisions, as hard as the house and the car is, I think that probably for our clients, the decision to remove their kids from a private school that they’ve already decided upon is almost non-negotiable. 

And I understand that, right? Because not only does it affect… Well, it’s because it affects your kid, right? They’re already in this private school. They already have their friends or whatever it is. And so it’s a big decision. 

Yeah, I remember years ago I had a client that was literally bankrupt and they ended up declaring bankruptcy, and I remember where I was sitting in my old office at our old building going through their lifestyle, and I mean, we had stripped almost everything out. 

And the bankruptcy was for a whole lot of different reasons. We had stripped almost everything out. And I looked across the table and I said, “Hey, like it’s going to be time to sell the house, and it’s going to be time to pull little Johnny,” not really their kid’s name, “little Johnny from school and stop his 529 funding.” 

And I mean, the mom was not having it. Beside herself. Obstinate. Yeah. Like, “No, I’m not. I’m just going to declare bankruptcy. I’m going to go into more debt,” or whatever else it is. And I don’t know, is it a status thing? Is it “I love little Johnny, and so we’re going to do whatever we can for him”? 

But the reality, I think on all of these things, whether it’s “I have to be in this house, in this neighborhood so that my kids or my family or whatever else it is have something better,” or “I have to drive this nice car for whatever reasons,” or “my kids have to be in this private school,” the reality I think that- the other sacrifices you end up making may be ones that if you ask little Johnny, he’d probably say, “I’d rather have those things than the private school or that house” or whatever else it is. 

So again, lots there to unpack, but I appreciate that those three… You know, one of the things that they could add to it is whether you have sons or daughters. True. 

My sons are relatively inexpensive now. Now. Food is the only problem. Yeah, I was going to say, you eat much more food. Yes. I don’t eat much more food. Is that a fat joke? No, it’s not. Okay. It’s that you’re boys. I’ve seen them eat. 

I think that the funniest thing in this video, and again, there’s a lot of really good here, so we’re not teasing completely at it, but it is that they talked about a $30,000 car being a standard. Yeah, standard car for a doctor. 

Yeah, Yeah, clients hear me. From now on- That’s your budget. That’s how you approach lifestyle creep, just spend $30,000. That’s right.  

Okay, the last thing I want to bring up in this video, because I think it’s a good point and I won’t go through the whole comparison, but they did this comparison of two docs, all right? 

And they talked about savings, and they talked about everything, but these two doctors made the same $350,000. But one lived off of the entire $350,000 and only saved 5% in the 401(k) plan, and one lived off of $120,000 per year. Now, I’m not going to go into whether that’s reasonable for you or whatever or not, but the point is for these two doctors. 

And when they got to the end of it, they said, the reality of this is that Dr. A is going to need $10 million to sustain their retirement, where Dr. B only needs $3 million. 

And I thought, yeah, we’ve already been through the spending creep, we’ve already been through all that kind of stuff, and clearly somebody that spends less is going to be able to save more. 

But then that final point of the difference they need in retirement is also so true, right? Absolutely. No client’s ever saying, “I’ll take less in retirement.” Absolutely not.  

And to think about the fact that, and one of the reasons that we do track our clients’ expenses is not because we want to judge it or anything else like that if they can afford it and do their savings, but it’s because how you spend today is a projection of how you’re going to spend in retirement, bottom line. 

And the point between these two doctors is that, yes, hey, you know what? If your spending really stays low, you need much less in retirement than you do if your spending is high, right?  

Our goal is to get you there either way no matter what you need, but it’s a significant difference. 

Yeah, if you are sitting in a situation where you might be late to saving or lifestyle creep has consumed your ongoing cash flow so you can’t save as much, and your answer is, “Well, I just won’t spend as much once the kids are gone and I’m retired,” hear us loud and clear, that’s not going to happen. 

You’re going to be forced to because you may not have as much money, but you’re not going to want to. It’s very rare, very rare to see. I think it’s that delicate balance and why we talk all the time about the health of a financial plan is one that balances the today and tomorrow, right? 

It is, “I’m not going to sacrifice today for tomorrow, and I’m not going to sacrifice tomorrow for today.” And that balance becomes incredibly important when you deal with this literal million-dollar elephant in the room, which is lifestyle creep. Because that lifestyle creep can absolutely force you to sacrifice tomorrow for today. 

And so just be aware of that if you’re in the bucket that’s like, “Hey, I’m paycheck to paycheck right now, and I’m barely, getting by,” yeah, you need to call us. We can absolutely help you get those in balance because there are ways to do so to where you’re not having to sacrifice tomorrow because you won’t want to. 

Yep, absolutely. Now, before we wrap up, we’re going to do a test to see how much you know me. Based on all of this that we’ve been talking about, what’s the song that’s been running through my head this entire time? Is it “Creep” by Radiohead? You do know me. I know. I know you just- I’m a creep… I’m a weirdo.  

Oh, sorry. I didn’t know you wanted me on that one. That’s a great song. 

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