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Why High-Income Earners Are Not Safe From The Threat Of Bankruptcy

Lewis Humphries

If you were to ask the majority of social commentators and everyday citizens in the United States, they would say sub-prime borrowing and a subsequent collapse of the U.S. triggered the Great Recession housing market. It is also logical to surmise that the irresponsible loans extended by banks and financial institutions were at the heart of this crisis, as individuals without savings, suitable incomes or long-term job prospects were able to purchase homes.

While some may argue that the individuals themselves must take some responsibility for their financial decision making during this time, the cause of the recession is arguably its least contentious aspect. Determining its exact impact is likely to trigger far more debate, especially in terms of addressing the challenges facing the lower and middle classes. While lower-wage workers have seen their average salaries drop by 4.1% since 2009, for example, the level of rising inequality in the U.S. means that the poorest 50% of all Americans now own just 2.5% of the nation’s wealth.

The Issues Facing High Earners in the U.S.
So while wealthy financial institutions have been forced to accept responsibility for the financial crisis, it is the poor who continue to carry the burden. This is the way it appears, especially when you consider the fact that American-born CEOs currently earn 44 times more than the average worker, which is disproportionate both to the level of value that they offer and the wider economic climate. The truth is always more complex, however, and the fact remains that both low- and high-income earners face many of the same fundamental challenges in a struggling economy.

Perhaps the best example of this is the challenge of turning an existing level of income into wealth and financial security, as this is something that the vast majority of citizens struggle with in the current financial climate. While it may be fair to say that low-income individuals have less capital with which to work with in the first place, the risks facing those with higher incomes or investment interests are far more diverse.

The Correlation Between Spending and Earning
On a fundamental level, there is a strong correlation between the amount that you earn and the money that you subsequently spend. The latter must not be disproportionate to the former, regardless of your precise level of income, job type or long-term employment prospects. This may provide more of an issue to high-income earners, however, initially because they have more disposable cash and the opportunity to invest in bigger-ticket purchases.

Beyond this, however, the presence of low interest rates and readily available credit only serves to further complicate the challenge facing high earners. With the Federal Reserve pledging to keep interest rates low until the national unemployment rate reaches pre-recession levels, it is relatively simple for those with higher incomes to secure credit and make purchases that are outside of their existing means. Pursuing this can create debt levels that overwhelm an existing rate of income, rendering even the highest salaries inadequate.

A Lack of Financial Literacy
Financial literacy has been highlighted as a key issue in contemporary America, with a growing number of states integrating personal finance lessons into existing curricula. This has been largely inspired by the Great Recession, as local authorities strive to increase financial awareness and cultivate a greater sense of fiscal responsibility among the next generation of consumers. While this has positive implications for all social demographics, it is perhaps more important for individual who have access to considerable sums of disposable income.

You need only examine the behavior of lottery winners in the U.S., who are suddenly exposed to significant amounts of money that they are ill-equipped to handle responsibly. The National Endowment for Financial Education estimates that 70% of all individuals who suddenly receive large sums of money will encounter bankruptcy, while a 2011 BMO study in Canada revealed that just 58% of respondents with investable assets of $1 million or more believed that their children could manage such an inheritance. As the experiences of numerous, elite-level athletes also proves, even those who accumulate wealth through the course of a career can lose everything through a lack of financial literacy and awareness.

The Risks Posed by Investment and the Stock Market
While home ownership remains the primary driver of wealth in the U.S., there are alternative and less secure forms of investment available to those with high incomes. The stock market represents the best example of this, with derivative products in particular encouraging investors to part with their money in the pursuit of sizable financial returns. It is estimated that $1.5 trillion is traded each day in the forex market, for example, which also offers traders access to considerable leverage and the opportunity to profit even in a depreciating market.

These so-called benefits also create risk, however, especially for those who lack fundamental market knowledge or a carefully cultivated investment philosophy. The market has remained particularly vulnerable in the wake of the Great Recession, with one of the most recent threats being posed by a reported collapse of liquidity within the government bond, cash and credit, equity and derivative markets. With this in mind, high-income earners must be extremely discerning about their investment outlook if they are to translate income into tangible wealth.

The Bottom Line
While few will spare a thought for high-income earners in the U.S., it is important to remember that they too face significant challenges in the current economy. Given the fact that these individuals also drive economic expansion through the procurement of property and other investment vehicles, the risks and problems facing high-income earners in the must be addressed if the U.S. is to sustain a long-term recovery.