What do investment bankers, consultant physicians, management consultants, technology professionals and corporate executives have in common?
If you believe the popular perception, the people in this category enjoy fabulous lives. They have high profile, rewarding and well remunerated jobs.
As a result, they build up wealth quickly and sail their yachts off into the sunset, glass of bubbly firmly in hand.
Unfortunately, real life plays out in a very different way. The jobs I listed are indeed high profile – and they may well be incredibly rewarding. More often than not, they are very well compensated.
Nevertheless, the highly paid professionals (HPPs) are often having a much harder time growing their net worth than those in other income brackets.
Before we go any further, let’s clarify a couple of things here.
Who Are The Highly Paid Professionals?
For avoidance of doubt, I am not talking about law firm partners, senior managing directors at investment banks and CEO / CFO level executives at large multinational corporations.
Those who managed to reach this level of seniority do typically enjoy considerable monetary payoff for the hard work and risk taken over the years.
For clarity, I define HPPs as white-collar employees earning between £150k and £400k per year.
Annual compensation of £150k places you in the top 1% of earners in the UK. It also means you have lost your personal tax allowance of £11,850, your pension allowance is eroding and you are paying a marginal tax of 45%.
At the top end of the range, £400k is roughly where people tend to cap out. Unless you become an MD or a partner at a professional services firm, you are likely to leave the business before you make this much.
In the corporate world, it is rare to make this much unless you are firmly in the C-suite.
I am also not saying that being an HPP is bad. People in this category are fortunate in many respects, especially given the income inequality that continues to grow at an alarming rate.
What I am saying is that being an HPP brings with it some very specific challenges. These challenges are not always obvious and are often unexpected.
Very often, they result in HPPs saving less, amassing wealth at a slower clip and reaching financial independence much later than one would expect given their level of income.
If you are an HPP, you need to be fully aware and cognizant of these challenges so that you can put a plan in place to mitigate them.
If you are not an HPP but would like to become one, you need to be prepared for what is coming so that you are not caught off guard.
Ten Reasons Why It Is Hard To Be A Highly Paid Professional
1. Demanding, Stressful Jobs
HPP jobs may pay well, but easy they are not. As you work your way up the ladder, stress levels increase proportionately with pay and responsibilities.
Demanding clients, unreasonable bosses, adversarial colleagues, conflicting deadlines – all of these add up to stressful days, months and years. Yet the HPPs are not expected to complain because they are – well, highly paid.
2. Precarious Employment
Of course, management consulting is not exactly a job in the gig economy. But just like the tallest grass gets cut down first, HPPs are usually the first ones to be laid off in a downturn. After all, the only way to save real money is to cut expensive employees.
Having a well-paid job may seem glamorous but trying to find one in recessions is anything but.
It may take months and even years to find a new role – and you may have to accept a massive pay cut when you do. As a matter of fact, you may never make the same amount of money again.
3. You Start Making Money Later
University education, masters degrees, advanced qualifications. These things take time. As a result, you start working later in life. In the US, it is not unusual for physicians to only really start working in their 30s.
This has two practical implications. First, you don’t get as much runway to invest in the stock market. Second, while you have a higher income, progressive taxation means your absolute take home pay is lower.
Put another way, time value of money and taxes often mean that it’s much better to make £100k per year for 20 years than £200k per year for 10 years.
4. Non-Cash / Deferred Compensation
Getting a £260k bonus on a £140k base salary after working your butt off for a year sounds great. Being told that £100k of that bonus is deferred, will vest over four years and will be awarded in your company’s shares – not so much.
By the time the deferred component is paid out, the share price may be decimated – which incidentally may also leave you out of a job. Not great.
If you don’t believe me, ask the people who worked at Lehman Brothers.
5. High Taxes
This one is self-explanatory. The more you make, the bigger proportion of your pay is taxed at 45%. You also lose your pension allowance.
This in itself isn’t wrong. What is wrong is that families with income of £160k are treated differently if that income is earned by one spouse as opposed to two.
Unlike the self-employed / small business owners, HPPs cannot utilize tax deductions. The more you work, the bigger the cut that goes to the taxman.
6. High Cost Of Living
Like it or not, most HPPs need to live in places with a high cost of living as that’s where the jobs are.
I would love to live in Bristol but unfortunately there are no investment banking jobs there. Ditto for Magic Circle law firms, Big 3 consultants and Google / Facebook.
Then there’s the support. Because you work such long hours and tend to travel a lot, more often than not you cannot have your children in nursery, hence you need a nanny.
You haven’t got time to clean or do laundry – bring on the house cleaners.
Your headline comp may be high but if your job forces you to get a lot of external help, you end up spending a lot of money.
7. Private Schools
You could argue this could be included in the cost of living category above but I believe it is a specific item that merits its own category.
#1 – it’s expensive. After all, private schooling for two children can run £5k / month in places like London.
#2 – it’s really non-negotiable. You can drive an old car, take cheap holidays and buy a house way out in the suburbs. Somehow, you will find it very hard to send your kids to a state school if you think you can “afford” a private education for your children.
Of course, the reality is that more often than not you cannot really afford it, but you do it anyway.
8. No Time
I have yet to come across an HPP who works 40 hours a week. 50-hour a week HPPs are rare beasts. 60, 70 and 80+ hour work weeks are the norm in highly paid professions. Late nights, all-nighters, weekends, holidays – anything goes.
Lack of time has a direct correlation with bad / high spending habits.
Highly paid jobs require stellar qualifications. A top undergraduate degree, an MBA, a CFA, law or medical school – all of these require a significant upfront investment.
Unless your parents funded it, you are likely to have considerable student loans, which can easily run into six figures. This kind of debt can be crushing unless you are making well into six figures.
Then there’s the professional debt in partnership institutions – i.e. the Big 4 accountancy firms or the Magic Circle law firms. To become a partner, you need to stump up an initial equity contribution – which then needs to be paid back over time.
The debt, of course, is paid off with after tax income. At a top marginal tax rate of 45%, this means you have got to earn £182k to pay off every £100k worth of debt. It takes a long time to earn and put aside £182k…
10. Less Flexibility On Side Hustles
This may be the last point on my list, but it is one of the most important ones. It is really hard to have a side hustle as an HPP.
First of all, you rarely have the time. Secondly, it is often prohibited by employment agreements and seen as lack of dedication to your day job.
Finally, social perceptions often mean that running a side hustle may hurt or even kill your career prospects.
If you work in the construction industry and take on a real estate renovation project, your mates and bosses will probably be impressed. If you are an investment banker and do the same – not so much.
Cracking The Curse
As an investment banker, I have first hand experience with many, if not all, items on the above list.
I remember clearing the £150k level in my second year as a banker and being shocked at how little I had to show for all the hard work and sacrifices.
As a matter of fact, the primary reason I started Banker On FIRE is because I am frustrated seeing smart, ambitious, hard working people get defeated by the realities of life.
There is a better way to live your life. And it does not involve working your 80-hour a week job until you are 60.
Despite the long laundry list of disadvantages above, HPPs are incredibly well placed to build wealth and reach financial independence.
So what do you need to do?
- Learn to invest. This is the one area you cannot afford to outsource. You should know how to invest across asset classes, but at the very least you should be comfortable investing in stocks and real estate.
- Use all the wealth-building tools at your disposal. As an HPP, you are uniquely placed to use pensions, ISAs, Lifetime ISAs, Junior ISAs, even credit cards. Ignore them at your own peril.
- Maximize career growth and earnings. Being an HPP is precarious territory. Working hard will only get you so far. Put in the time to understand how the corporate world really works.
- Create passive income streams. One of my best investments makes me $20k / year and requires pretty much no effort. If I can do it, you can do it.
- Focus on personal growth and development. If you think money will make you happy, you are in for a surprise. The only way to happiness is continuous self improvement, a sense of purpose and an ability to control your own life. The faster you learn this, the happier you will be.
Readers, what do you think? What are the biggest obstacles you think are facing HPPs and how are you solving them?