Money

Here's why some families earning $500,000 still don't have any savings

If you're making $500,000 a year, you're among the top 1 percent of earners in America. But that doesn't guarantee you'll feel wealthy.

For many families, especially those in the priciest regions in America, $500,000 a year doesn't even guarantee you'll be able to save, or save enough.

As financial adviser Lori Atwood, who sees 400 clients in the affluent Northwest Washington, D.C., region, tells The Washington Post, some families earning $500,000 a year still end up with little to no savings. "It is true but ridiculous," she says. And it's mostly thanks to one phenomenon: lifestyle inflation.

Most of Atwood's clients are overspending on fixed costs, specifically, housing, she says: "They don't have to have the house they own. There are times I have said, 'You have to move.'"

Lifestyle creep exists beyond D.C., too.

In North Fulton, Georgia, a suburban area where homes sell for $500,000 to $800,000, residents earning six figures are struggling to set aside money for retirement, college and other major expenses. Some living in the area who earn $100,000 "are living paycheck to paycheck," the Post reported in a separate article, and even families earning up to $250,000 "don't consider themselves to be high-earners."

One New York City-based family of four profiled on the blog Financial Samurai brings home $500,000 a year and still ends up with very little besides 401(k) money. Even though they easily qualify as "upper class," after taxes, fixed costs, childcare and discretionary expenses, there's only $7,300 left each year to go towards other savings goals, investment accounts or retirement funds.

These situations illustrate how difficult it can be to avoid lifestyle creep, especially in expensive cities like New York and San Francisco, where highly paid Facebook engineers recently resorted to asking Mark Zuckerberg for help paying rent.

These situations may be anomalies. According to the Economic Policy Institute (EPI), which looked at the state of American retirement in a 2016 report, the top 1 percent of families had $1.08 million or more saved in 2013. The 90th percentile family had $274,000 saved, the 80th percentile family had $116,000 and the median working-age family had only $5,000 saved.

Regardless, the point stands: A hefty paycheck doesn't always guarantee wealth or financial peace of mind. By contrast, budgeting and living beneath your means, no matter your income level, can help you out tremendously in the long run.

Atwood's rule of thumb is to spend no more than 43 percent of your take-home pay on fixed costs including housing, child care, car payments, student loans and credit card minimums. Keep $3,000 to $5,000 on hand in cash if you're a homeowner and $1,500 if you're a renter, she says. This cash cushion is for any non-discretionary expenses that may arise, like home repairs or medical emergencies.

Read up on how to build a solid emergency fund. And, to keep more of what you earn, check out:

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