Client spotlight: Kadan and Sara
It’s a common misconception that people who need the help of a financial coach are always of middle or lower income. But the truth is that high earners often find themselves more in need of financial help than anybody. That surprises many people, who assume that having a high salary would solve all their problems.
But as the saying goes, it’s not about what you make; it’s about what you keep.
A frequent trap of high income earners, especially professionals like doctors and lawyers, is to ramp up their spending as soon as they get that first high paying position. High end luxury cars and mansions in gated neighborhoods, both with huge debt attached to them, seem to be the norm rather than the exception.
We call it “doc-itis”.... the idea that “I deserve it” after all that hard work in med school or law school. And that lifestyle is on top of student loan debt in the multiple six figure range….$200,000 to $400,000 of debt is also the norm rather than the exception.
So when a savvy young professional couple comes along, who recognizes the danger that huge student loan debt presents to building a stable family life and building wealth for the future, I am super excited to help them learn proper money management early, knock out that mountain of debt, and set themselves up for a fabulous future. Kadan and Sara are a great example of this, and their story provides many useful lessons for anyone at any income level.
Sara is a doctor, newly out of residency about a year and a half ago, which means her salary suddenly went from a modest mid 5-figures to a very healthy midrange six figure income. But like many young doctors, that big salary came at the expense of a $200,000 student loan debt.
She and her husband Kadan, both in their early 30s, already had one child at that point, with another due soon. It was their hope, with the move to a new town and Sara’s new high paying job, that Kadan could be a stay-at-home dad. But they were also wise enough to recognize that Sara’s student loans would be a huge impediment that needed to be eliminated as fast as humanly possible.
Kadan first contacted me prior to their move, but we did not enter a formal coaching arrangement until after they had relocated. By then they had purchased a home, and thankfully they were wise enough to not get “doc-itis” and buy the kind of home most doctors think they “deserve”.
As with every client, learning to do a proper budget or spending plan, and stick to it, was a necessary and foundational first step. Again, you might be tempted to say “well I’d have no problem budgeting if I made that kind of money” (insert snarky tone of voice as you read that).
But I’ve found over the last eleven years that it’s the highest earners who have the most difficulty with self-discipline when it comes to spending. As a general rule, the higher the income, the higher the debt level and the lower their ability to say NO to themselves. For high earners, it’s not unusual to see things as necessities that those with more “normal” incomes see as mere wants.
But, thankfully, Sara and Kadan were different.
Without telling you specific numbers, suffice it to say that Sara and Kadan managed to live on 20% of Sara’s take-home pay each month, while paying 80% of it on Sara’s student loans. While they still gave generously to their church, they carefully examined every other category of their spending to avoid anything that was really not necessary.
They literally lived on less each month than 90% of my other clients who make much less income. Pretty stinking impressive.
During our 6 month period of coaching, we also made sure Kadan and Sara set up a good sinking fund to cover future big bills like insurances, property taxes, Christmas shopping and the like. We reviewed their car and home insurance policies to make sure they got the best rates, got them set up with appropriately sized term life insurance policies, reviewed their tax withholding status, and got their estate planning started with reciprocal wills, living wills, and powers of attorney. All of that with the help of properly licensed professionals, of course.
Kadan is a talented handyman and has been remodeling and upgrading their home, buying only materials and not hiring any contractors. He has carefully planned out each stage of the renovations, budgeting each part of the project and purchasing materials at the most advantageous time, without stockpiling materials that won’t be needed for months.
Taking care of their kids every day has undoubtedly slowed down his construction projects, but that has also benefited their budget by limiting purchases, and avoiding daycare costs, while they focused on paying huge chunks of money on the debt each month.
Because of their teachable nature and unquestioning discipline, Kadan and Sara paid off that $200,000 of student loan debt in just 9 months!!
They accomplished that during the time that student loan payments were not required, and while no interest was accruing, due to Covid, which means that they saved even more money compared to Sara’s doctor colleagues who likely chose to simply not pay on their loans during that period, so interest will start accruing on those again soon.
Being debt free other than their mortgage then allowed them to build up a fully funded emergency fund of multiple tens of thousands of dollars to protect against any future income loss. Completing that in a just a few months let them then move on to baby step 4, investing 15% of their income for retirement.
With Sara’s high salary, her 403(B) retirement plan at work was maxed out before they were able to invest the full recommended 15% of income. And they make too much money to qualify for a Roth IRA. So they chose an investment advisor to help them plan not only for retirement, but also for some “bridge investing” which will let them retire much earlier than 59 ½, at which age they will be able to access their retirement funds without penalty. That advisor can also help direct the funds they are investing for their children’s education into the most advantageous investment vehicles.
So with baby steps 2 (paying off debt), 3 (emergency fund), 4 (15% into retirement), and 5 (kids’ college) all taken care of, they are moving on to baby step 6, paying off their house early. And because they bought modestly and wisely to begin with, they will have the house paid off by this fall (barely more than 2 years after buying it)! With Kadan’s extensive DIY renovations, both completed and ongoing, they are increasing the value of that home by far more than the amount they are putting into it.
And the best news of all is that baby number 3 is due in just a couple more months!
With their growing family, Sara and Kadan will be upgrading their car to accommodate their bigger family, with cash of course. And despite all that, they’ll have plenty of income left over to save up cash to add to their 100% equity of their current home, to eventually buy a reallllyyy nice home in the not too distant future. In fact, depending on market factors, and their willingness to be patient awhile longer, they might even be able to buy that home with cash.
It’s frequently more difficult (psychologically) for a high earning family to live, even temporarily, like a more normal income family. The YOLO (you only live once) and FOMO (fear of missing out) mentalities are even more of a problem in the high income demographic.
That is such a tragic truth, because the potential for incredible wealth-building and the wonderful generous giving that can accompany that wealth is wasted, for lack of some simple discipline for a period of just a year or two in most cases.
The good news is that it takes only a mindset shift to overcome it. The drive that causes a higher earner to achieve in the first place needs only to be applied to the personal finance side of life.
Kadan and Sara are textbook examples of the saying that Dave Ramsey is famous for…“Live like no one else, so that later, you can live and give like no one else.” They will have progressed from baby step 2 to baby step 7 in a mere 21 months, because they have a long term perspective and were willing to sacrifice the high life of their professional colleagues for just a short time, in order to spend the next 30 to 50 years building incredible wealth, living generously, and leaving a legacy for their children and grandchildren.
No matter whether your income is $50,000, $500,000 or $5 million, your ability to build wealth depends on your willingness to live on less than you make and manage your income wisely. I can help you do that. If you want to know how, just schedule a free consultation with me using this link:
https://www.moneycoachbev.com/schedule-complimentary-consultation