National Post (National Edition)
Finance Big income, no savings
Ten years ago, Jonathan Rivard approached a stone and stucco home with a three-car garage in the north end of Toronto. A Porsche and a Mercedes sat in the driveway and he could hear the mirth of children in a backyard swimming pool.
When he stepped inside, however, the rooms were stark, except for a few toys. He walked into the kitchen, pulled back a metal patio chair and took a seat at a glass lawn table.
“Have you been robbed?” he asked, jokingly.
“They couldn’t afford to furnish the house yet,” the advisor with Edward Jones remembers. “That to me was a wake-up call. There’s perceived wealth and actual wealth.”
People may earn a high income. But that doesn’t necessarily make them wealthy. The more money someone makes, he has the same options as you and I: spend it, save it or invest it.
That was one of Mr. Rivard’s first appointments as a financial advisor. The client was a senior executive; but between the mortgage for the home and the cottage, the car payments and private school, they were living month-to-month.
“Low interest rates make it easier to access credit — to buy that boat, to buy that car, or that house in the right neighbourhood. We’re at record debt loads in Canada. There’s this feeling about immediate gratification that people seek out,” Mr. Rivard says. “There are a lot of executives who are good at earning money and they’re good at their job but they’re not good at investing their money.”
A good example of when rich people go broke? Millionaire athletes who become penniless after they leave the sport. According to an oft-quoted 2009
article, 60% of NBA players are broke within five years of retirement.
Seventy-eight percent of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce within two years of retirement. The article cited divorce, extravagance, inexperience with money and vulnerability to exploitation.
Lottery winners who spend all of their winnings are another instance. The National Endowment for Financial Education says that 70% of all people who suddenly receive large amounts of money will lose it within a few years. According to a 2011 BMO study, 94% of affluent Canadians (those with investable assets of $1-million or more) have made their money on their own; but only 58% believed that their children would be able to manage their inheritance, emphasizing the need for financial literacy. Research shows that adults who receive an inheritance save only about half of what they receive.
“A lot of professionals who start making money straight out of school, spend straight out of school,” says Fabio Campanella, a chartered accountant based in Toronto. “I have physicians and lawyers [as clients] who make a gross income of maybe half a million a year and after two or three years, they still have nothing to show for it.”
Smarter individuals tend to earn more, but they don’t always save and invest wisely. Economist Jay Zagorsky found that people with high IQ scores missed payments and maxed out their credit cards more often than those with slightly above average intelligence.
“We get training in income — your parents say, ‘ Go baby sit, go shovel the snow,’ and people get paid. But training in wealth, training in savings is really some- thing that comes much later in life,” Prof. Zagorsky, a research scientist at Ohio State University, says.
“So I’m trained to take jump shots or slap shots, but how often do you train for your retirement?”
He recalls meeting a noted surgeon at a dinner in New York City who told him, “‘Whenever I need more money or a new car, I just schedule a few more surgeries.’ Savings were meaningless to him because he had such extremely high income and had such confidence in his skills.”
A couple of years later, he found out that the surgeon injured his hand in a bicycle accident and was no longer able to perform surgeries.
“Why do really smart people seem to mess up? I think there’s a little bit of hubris among extremely intelligent people.”
People with high income have a lot of cash flow, but there is risk to that cash flow, Mr. Rivard warns. They still have to plan for the unexpected.
Mark, for example, is a Canadian business owner (he asked that his real name be withheld). His company, which provides personal care products, pays him about $500,000 a year and he puts half back into the company. His four children all go to private school. Just before the financial crisis of 2008, he purchased several real estate properties as investments. But then his bank pulled his company’s credit line.
Instead of selling off his properties, he borrowed at higher rates of interest to pay his bills.
“I was sitting with a lot of debt. I became insolvent. I couldn’t pay two credit card bills. I really over-leveraged myself because I never anticipated the bank coming in and pulling my credit line,” he says.
Everyone, regardless of income is vul- nerable to debt, said Jeffrey Schwartz from Consolidated Credit Counseling Services of Canada.
“The lack of financial literacy can cause someone to put their financial livelihood at risk,” he says.
About 1% of their clients make more than $100,000 a year.
“What we’re seeing amongst the wealthier, more affluent clients, is that they’re getting caught up in the lifestyle that they’ve become accustomed to and perhaps they’re living beyond what their wage allows them to do. Kids are in private schools, live-in nannies, luxury vehicles, secondary properties — in order to keep up with the Joneses, they want to show the same thing.”
On the plus side, those who have a good income have more options available to address debt problems, he adds. “But ultimately, they need to show willingness to change their habits.”
Mark got through the tough time because his business continued to be successful. “I focused on the business and pulled myself out of it. I worked harder, I got new customers, I got smarter at what I was doing,” he says.
“People aren’t thinking about what tomorrow might bring, they’re only thinking about today.”