What is the role of debt in high-income families?

January 28, 2022 8:20 AM

I often read articles about debt as it relates to middle and low income earners and families. I'm interested in reading about the role of debt in maintaining or creating the illusion of a high-earner income life-style.

This would be debt related to maintaining a lifestyle that included new/expensive cars, large houses or houses in expensive places, private schools or purchase of high end goods. Articles or reports that talk about debt within the high-earner bracket, how often high earners purchase things outright vs through accumulating debt etc. I'm really interested in personal debt, not business debt, but if people use business debt for personal reasons, then that'd be of interest too. I am also aware of inheritors of wealth (not just high earners), so maybe same question but again in terms of accumulation of debt.

I realize that the term "high-earner" is not well-defined and I'm sorry I can't think of a better term, so I'm open to multiple interpretations. This question is not intended to be US-centric, so perspectives from multiple countries are welcome.

I know this treads into a sensitive area that people will have strong opinions about, but if we could keep the answers respectful and focused on articles/reports/news stories about debt accumulation for high earners, that would be helpful.

posted by Toddles to Work & Money (25 answers total)

Debt.org has this breakdown of debt in USA sliced along all kinds of demographic markers like age, education, income, etc.
posted by MiraK at 8:27 AM on January 28, 2022 [3 favorites]

Why the super-wealthy sometimes rent homes instead of purchasing them. The article isn't directly about debt, but it addresses some related questions. It's also from 2012, so the "shockingly high" rents felt surprisingly low to me.
posted by Winnie the Proust at 8:33 AM on January 28, 2022

The high class way of describing yourself as living paycheck to paycheck is "being leveraged," which I know is really a businessy term but I've heard it plenty from people who are not business owners. High earners with a history of credit usage are very attractive to lenders, and have more and better access to credit than the plebs. Lifestyle creep is an enormous contributor to this problem. And especially for folks who earn commission or have bonus potential on top of an already high salary--many of those people live off the expected annual income instead of their actual take home pay. Don't hit your targets one quarter or the company takes a downturn? You don't make your expected commission/bonus amount and are now struggling to stay on top of all your bills and loan payments.
posted by phunniemee at 8:34 AM on January 28, 2022 [13 favorites]

I'm providing a USA perspective, since that's what I'm most familiar with.

The notion of Buy, Borrow, Die is prominent. The USA currently does not tax unrealized capital gains and has a fairly large estate tax exemption ($12M/person, $24M/couple). It's advantageous during life to incur as little capital gains as possible (since they are untaxed). Correspondingly, it's advantageous to incur as many capital gains as possible at death (since all gains up to $12M/$24M are effectively untaxed, and beyond that, other techniques come into play).

The mechanism for this is debt - borrow against the value of your assets to fund your lifestyle, with the intention of paying off that debt as far off into the future as possible. Given interest rates are (currently) very low, that's pretty easy to do. In addition, since the stock market has been doing pretty well, borrowing against one's assets has the advantage of allowing capital appreciation of assets (which are unsold) during the loan. If the assets appreciate above loan rates, the loan is effectively free or negative cost.

This is not just a billionaire technique to do. For instance, with my portfolio (large by US average standards, but many people would not consider out of place given my job), I'm able to obtain 0.75% - 1.58% loans against my assets. I use these occasionally to cover purchases and then pay them off pretty slowly, given there's no real motivation to pay off a <1% loan quickly. I don't yet maintain a continuous debt position, but it's something I'd consider later in life.
posted by saeculorum at 8:35 AM on January 28, 2022 [29 favorites]

See the book or audiobook, "Debt (the first 5000 years)" by David Graeber. It's a tome, and slightly unconventional in the path it takes (more anthropological than statisticianist), but great for this reason. I believe it references what you're suggesting directly (and certainly more)
posted by firstdaffodils at 8:47 AM on January 28, 2022 [4 favorites]

The high class way of describing yourself as living paycheck to paycheck is "being leveraged," which I know is really a businessy term but I've heard it plenty from people who are not business owners. High earners with a history of credit usage are very attractive to lenders, and have more and better access to credit than the plebs. Lifestyle creep is an enormous contributor to this problem.

Anecdotally, I have a friend who went through this. Their father was a high-paid executive, and the family always had new cars, upgraded houses and several vacation houses, and lavish living all around. But something went wrong (maybe a missed bonus payment like was mentioned) and in a very short period of time it all went away in bankruptcy and foreclosure. It was all funded by debt, and keeping things moving meant both servicing the existing debt and taking on new debts.
posted by Dip Flash at 9:02 AM on January 28, 2022 [2 favorites]

I once had a boss who revealed to me her deep credit card debt, both to sustain her family's lifestyle (one son needed his sailing lessons!), and to keep her vanity business (my job) afloat. The vanity business eventually declared bankruptcy, and she still owes me about 3k. Ah well.
posted by coffeecat at 9:12 AM on January 28, 2022 [1 favorite]

I’d look for articles a year or so after stock market crashes, so in the US especially 2009, 2000, 1989; that’s when a bunch of leveraged people have to "unwind" all at once, making it worse for each other. And the rest of us, often.

The other term I remember from 2000 especially was "jumbo" mortgages.
posted by clew at 9:14 AM on January 28, 2022

Young high earners have not accumulated wealth but may want to live the high income lifestyle right away. If they are confident about maintaining and increasing their income this is even sustainable. So they get things like expensive cars, apartments, hell, even things like restaurant dinners and wine clubs, that require debt to even out.

Also: Two of their biggest expenses will be their mortgage and their children's education. The mortgage goes down as a percentage of their income over years, and of course at some point the child expenses stop or at least become totally voluntary and much lower. So front loading on debt, if you want the big lifestyle, is actually easy to pay off (assuming nothing bad happens, of course.)
posted by mark k at 9:16 AM on January 28, 2022 [4 favorites]

Statistically, in the US, debt scales almost linearly with income until you get to the top earners, who are extremely unleveraged - ie: they have far more income and available net worth than they have debts.

Middle income earners tend to be the highest leveraged as a home plus car can be 4X-5X income.

I guess it depends on what you mean by high income earners though - and what stage they are in their career, because the answers would be very different. Remember that unless one gets all their income from inheritance or trust [statistically a small number of people] they will be leveraged compared to their income, but it radically shifts as they get older [where older can mean 30s]. Also most people don't inherit much money until later in life.
posted by The_Vegetables at 9:25 AM on January 28, 2022 [1 favorite]

It's older and may not be that useful to you but I found The Millionaire Next Door had a bit of insight into the way companies that offer debt aggressively pursue people in professions like doctor, lawyer, etc.
posted by warriorqueen at 9:26 AM on January 28, 2022

saeculorum has it. The idea that rich people don't borrow is a myth, albeit one whose falsity can fluctuate a bit with interest rates. Remember that every single mortgage is not just debt, but leveraged debt, too.
posted by praemunire at 9:30 AM on January 28, 2022 [2 favorites]

The other term I remember from 2000 especially was "jumbo" mortgages.

This would not be helpful. Jumbo mortgage rates [above $750k] are variable, but often less than traditional mortgage rates, representing the higher incomes and lower leverage that people who can afford jumbo mortgages represent.
posted by The_Vegetables at 9:30 AM on January 28, 2022

You might find some relevant material by following the links from the Wikipedia entry for the phrase "Keeping Up with the Joneses".
posted by Winnie the Proust at 9:44 AM on January 28, 2022 [1 favorite]

+1 to comments above noting the low cost of debt because of low interest rates. If you are wealthy and can buy a $1M house outright, or finance the house with an $800k mortgage at ~3%, you're likely to take the mortgage because it is more valuable to you to have $800k invested in securities, hopefully earning more than 3%, than having that money sitting in home equity. Also, your securities are more liquid than your house. So, debt - especially cheap debt (low rates) - is important even to people with plenty of money.
posted by Mid at 9:50 AM on January 28, 2022 [7 favorites]

Are you interested more in high income borrowers right now, or since WWII, or historically, or what? Because the last couple decades are not like the last fifty years, let alone the last four generations or since the beginning of modern banking etc etc.
posted by clew at 9:55 AM on January 28, 2022 [3 favorites]

Another (U.S. centric) angle is "the wealthy" + "tax avoidance."

How the wealthy use debt ‘as a tool to screw the government and everybody else’

The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax
posted by oceano at 9:57 AM on January 28, 2022 [1 favorite]

Buy, Borrow, Die: How Rich Americans Live Off Their Paper Wealth
posted by oceano at 9:59 AM on January 28, 2022

There's also the effect that in the later years of a long mortgage, the money you have or earn is worth more due to inflation. Paying off a 2001 debt with 2021 dollars works out well.
posted by Dashy at 9:59 AM on January 28, 2022 [4 favorites]

Supplementary viewing: The Queen of Versailles.
posted by Lawn Beaver at 11:27 AM on January 28, 2022

If you’d like to see a great fictional film representation of this, Rosalie Goes Shopping is wonderful.
posted by FencingGal at 12:07 PM on January 28, 2022

Just want to point out / make explicit a distinction that I see getting blurred in the question and coming out in the answers: "debt" isn't necessarily "net debt". If you have $5m in cash or investments and loans/debt of $1m, or in general if you have voluntary debt that you could pay off whenever you wanted just by writing a check, that isn't usually what we would colloquially call being "in debt". I'm not quite sure which one specifically you were asking about - the use of debt to grow one's assets is different from the use of debt to prop up a short-term lifestyle while draining those assets (or in anticipation of future assets that may not materialize).
posted by Lady Li at 1:22 PM on January 28, 2022 [16 favorites]

I enjoy reading the Fire v London blog, an anonymous wealthy Londoner who talks about his finances quite openly. Given that a lot of personal finance blogs are people with closer-to-average incomes, or aiming to “FIRE” at a reasonably modest level of wealth, I find it fascinating how different this guy’s finances are. And I like that he’s not embarrassed by it, but also realises how very fortunate he is.

For example, here’s a recent post about buying a £2m second home, which includes a lot of discussion about his now £3m loan.

And here’s a post from May about margin loans - loans against the value of someone’s investments.

As a result of being low risk loans from the point of view of the stockbroker, margin loans can be very cheap loans. You can get margin loans in GBP for as little as 0.6% above base rates, i.e. under 1% per year. In the case of a margin loan there may be no additional fees at all, so the ARPC is the same as the headline rate.

If you have seven or eight figures of investments, getting a cheap seven-figure loan is a good way to finance houses etc, in the knowledge that you can pay it back eventually, especially if your investments, and property prices, continue to go up. Another world.
posted by fabius at 5:41 AM on January 29, 2022 [6 favorites]

It really does make sense to take on debt for an appreciating asset. Agree with the above: were I to have a 7 or 8 figure investment portfolio that I could leverage to purchase an appreciating asset (property/house), I absolutely would. In a hot market, even if you need to liquidate quickly, the risk of loss becomes quite low.

The issue is that many people use this technique of debt financing to finance lifestyle choices, not investments. I think this is the big change that has occurred in recent decades. When capital is scarce, one must be much more careful. When capital is cheap and plentiful, bad decisions get made.

While we all know that this will end poorly down the road, the big unknown is: "when".
posted by tgrundke at 7:29 AM on January 29, 2022

A classic book, which comes from the other direction but is very illuminating on this topic, is The Millionaire Next Door, by Thomas Stanley.

(On re-reviewing, mentioned above, but not linked.)
posted by yclipse at 6:41 PM on January 29, 2022