How the Top 1% are Bankrupting Themselves at Record Rate

A recent Goldman Sachs study found that 40% of people earning more than half a million dollars a year were living paycheck to paycheck. In that same group of high-income earners, less than one-third of them were able to make consistent contributions to long-term financial goals like paying down debt or saving for retirement. Throughout history, there have been stories of people losing fortunes, but there have been very few, and they usually involve athletes or lottery winners. Today, financial hardship in the top one percent has shifted from affecting the minority to affecting the major

ity. So if this data is to be believed, it means that either rich people have gotten dumber with their money, or society is better at taking it from them.

Social circles and spending pressure are major determinants of wealth management. An article published by the Journal of Nature tracked over seventy-two million Facebook connections, and it found that socioeconomic status was the number one factor contributing to who people are friends with. People in circles of high-income earners feel pressure to buy as many luxury goods and services as their friends. In a group of roofers, people are pressured into leasing a new Ford F-150, but in groups of hedge fund employees, people are pushed to fly to Art Basel for the networking. In groups filled with members of the top one percent, expensive purchases are normalized, leading to some of the highest rates of economic losses ever seen.

Increasingly high costs of living are also contributing to this decrease in monetary management. In the United States, few cities offer salaries over 500,000 dollars, but the price of housing in those cities is among the most expensive on the planet. The high-income earners who live in these cities have to pay seven figures for the housing itself, then a high mortgage, income, property, and state taxes that will leave the buyer with roughly $50,000 of disposable income a year. Although this sounds like a dream to most people, for some high-income earners, this simply can’t support them for two reasons.

The first and most important factor is how companies are targeting the upper class. In recent years, companies have realized that the majority of the wealth in our economy is concentrated in the upper class. Because of this realization, the amount of goods and services exclusively for the uber wealthy has exploded. Twenty years ago, there was only one car that retailed for more than a million dollars, but today, even after accounting for inflation, there are more than 100 different models in this price range, and new offerings frequently cost more than five million dollars. Companies now offer more exclusive services at massively inflated prices than ever before.

The second reason is that people aren’t good at wealth management. An article by the British Medical Journal, as well as a survey from the University of Pennsylvania, found that most American physicians were graduating from medical school with almost no financial literacy. Since these doctors are making an income much greater than the average, it is easy for big banks to take advantage of their lack of financial literacy. After taking out a six-figure debt for medical school, physicians are much more likely to purchase a large home or car loan. High-income earners are not as smart as they think they are, and it leads to them losing fortunes.

All of this comes with two caveats. First, the upper class is being targeted because the middle class has already been optimally exploited. Between the various types of consumer debt and price increases, most normal people don’t have much left to give, which means companies have to go upmarket to increase their revenue. And secondly, despite all of this, lots of high-income households can still work in the long run. High-income paycheck-to-paycheck is still very lucrative and, despite losing some of their salary, these earners are still receiving good benefits along with their paychecks.

Today, due to massive asset price appreciation, people still aren't able to build wealth with their income faster than people can build income from their wealth.