The income trap

People are getting paid more than ever before. Salary scales are increasing at an even faster rate than during the Celtic Tiger. And a lot of people are getting caught in the income trap. They are earning a lot of money and to look at them you would think they are rich. They have designer clothes, new cars and always seem to be spending. But they are not wealthy. Why is that?

Spend what you earn

C. Northcote Parkinson wrote in The Economist that “work expands so as to fill the time available for its completion”. It is now called Parkinson’s law and a derivative of it is applied to money in that your expenditure rises to meet your income. In other words, the cost of your lifestyle increases as your income increases. And there is nothing wrong with this per se, but there has to be a limit. The clear limit is when you spend all the money you earn and you do not save anything.

But if I earn loads of money, why do I need to save? I can pay for everything out of cashflow. School fees, holidays etc…all paid straight from the bank account.


Because you have a high income, the bank loves you. You only need to the minimum deposit which you can get easily enough and you can get the new house. Now consider this, mortgage of €650,000 over 30 years will cost €2,800 a month. You will have to earn €65,000 a year gross to pay for this. That equates to €1.93m to be earned to pay off the mortgage. That’s a big commitment to make!

Cars tend to be bought with borrowed money or more likely these days with PCP. The car is also paid for on credit and replaced every 3 years. Remember, a car is a depreciating asset, so you are paying extra for something that is constantly falling in value.

And then the music stops…or you want to turn down the volume

People do not earn high incomes without having to work hard for it. In 20 years advising clients, I haven’t seen one instance of someone who earns a high income for doing little. And with that comes the stress, pressure, time and energy to maintain those high levels. At some stage, you will want to reduce your work load or even stop completely.

But you have created a lifestyle based on your high salary. With little or no savings to pay for your lifestyle in retirement, you don’t have many options:

  1. Use up the savings you do have in the first few years of retirement and figure out what to do afterwards.
  2. Make drastic changes to your lifestyle to match your new, lower income.
  3. Carry on working

Options 1 & 3 are the most common choices. After decades of a certain lifestyle, people don’t want to give it up so they either carry on working or hope that something just magically sorts out their income problem in the future.

How to avoid the income trap

First of all, you need to recognise that you need to make changes to your expenditure.

  1. Go through all your expenditure for the last year. Categorise it into household, car, debt, children, personal.
  2. You will clearly see that you spend a lot of money on stuff that you don’t need. This is where your savings will come from.
  3. Automate your savings. Make it like a bill that gets paid every month coming straight out of your account. It can be directly into a pension plan which you get tax relief for or another savings plan.
  4. You have now reduced the cost of your lifestyle and increased your savings. As your cost of living has reduced, you don’t need as big a savings pot when you stop working.

Sounds easy doesn’t it? It’s not, it’s very difficult because you are trying to change spending habits of a lifetime. It’s like trying to lose weight, you know you have to be in calorie deficit to lose weight but you like having a snack in the evening. It takes hard work and a change of habit to achieve your goals. Being accountable to someone for these changes can also help.

Do you have trouble saving, spending what you earn? Let me know what your issues are at