One of the interesting phenomena in times of surging inflation and high, spiraling living costs is one in which high earners end up being financially insecure, popularly referred to as “HIFIs”: High-Income, Financially Insecure. It means that despite high earnings, people are not able to save significant amounts of money and frequently fall into the trap of overspending on luxuries or falling into lifestyle creep.
In particular, as maintained in Bain & Co.’s report, millennials and Generation Z topped spending on luxury items by 22% in 2022. The younger generation tends to spend over their budgets on luxury fashion brands, travel experiences, and fine dining due to celebrity culture and social influence.
“They’re spending every cent they make and not setting aside a dime,” she observes, founder of Alaphia Financial Wellness, a financial planning and wealth management firm, Natasha Knox, told Financial Planning. For her part, Knox said many HIFIs use her services knowing the insecurity in their underlying finance.
The two culprits extrapolated to be behind this precarious situation are inflation and an increased cost of living. Inflationary rates have more than doubled during the last decade, while the consumer price index for US cities, a measure for the cost of living, has shot up by about 8%, the nonstop drain on household budgets.
Knox explained that HIFIs tend to underestimate their real spending power by measuring the amount of money they spend against gross income, and not against what remains after taxes, retirement contributions, and the big-ticket items such as rent and food are paid for. This can be particularly true when a bonus or a raise creates an overspending high, assigning that money in some clients’ minds to multiple large purchases, thereby “three times over.”
Spending psychology in HIFIs can boil down to a yearning for belonging and a desire for social acceptance. People work hard to spend their lives according to the level of their peers by affording similar luxury goods such as designer clothes or concert tickets. In essence, this overspending will continue unhindered, basically to keep up appearances.
However, Knox points out that granular, thoughtful changes in spending can make a world of difference in long-term wealth creation. HIFIS can regain financial stability without having to sacrifice the kind of lifestyle they want by simply setting plausible budgets, tracking expenses effectively, and saving vigorously enough for retirement and emergencies.
“I think most people really underestimate how wealth can or how assets can accumulate bit by bit,” Knox remarks. “And, on the flip side, small reductions in overspending can make a meaningful difference.”
This stands as a glaring paradoxical cautionary tale: most of our expenditure should be towards the long-term goals, but the impressions of pleasures and pressures of society lurch us forward to serving excess and luxury. It is with a budget, mindfulness, and keen commitment to savings that HIFIs have the potential to break financial insecurity cycles and take sure steps in building real wealth.