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  • Debt – the Achilles heel of higher earners?

    With almost one in five of the highest earners expressing concerns about how much debt they’re carrying, we look at what high earners can do to improve their financial resilience.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    This article is more than 6 months old

    It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

    Earning more isn’t an automatic pass to financial resilience and zero money worries. In fact, households in the top 20% take on more debt than any other income group. And almost one in five of the highest earners express concern about the levels of debt they’re carrying.

    Running a household with higher income, spending and debt, can make you less resilient if your circumstances change. For lots of us, the more we earn, the more we spend. That’s because we often benchmark ourselves against our colleagues, neighbours, or fellow parents in the playground.

    But with inflation climbing higher and finances being squeezed, do you have enough of a safety margin for impact?

    This article isn’t personal advice. If you’re not sure of the best course of action for your personal situation, speak to a professional.

    Why watching your debt matters

    Debt is a fact of life, it’s a necessary reality for most people looking to get on the property ladder. For the top 20% of earners nationwide, the average household debt stands at £185,374.10 and the bulk of this debt is as you would expect, mortgages. Average mortgage debt sits at £106,713 on higher earners’ main residence and almost £20,000 on other properties.

    The top 40% of earners take on more debt than anyone else, as a proportion of their net income. One of the reasons is because they’re confident that as long as they can continue earning at this level, they have enough to meet the payments on their debts. At the moment, this seems to be paying off, as those on higher incomes are the least likely to be in arrears.

    However, it means there’s an awful lot riding on being able to carry on earning at that level. This makes higher earners extremely vulnerable to changes in circumstances. Loss of employment or illness could suddenly mean high earners would be much less comfortable with how much debt they have, but by then it would be too late.

    High earning households with significant debt and one breadwinner are particularly vulnerable to life’s unexpected twists and turns. Any change to the breadwinner’s income could seriously affect their ability to keep up with bills and loan repayments – a looming threat to their financial resilience.

    This isn’t the only risk they’re taking. Higher earners also hold a significant chunk of debt at variable rates – including things like credit cards and tracker mortgages. It means they’re far more exposed to rate rises, which in the current environment means they could well find their debt repayments rise significantly as we go through 2022.

    Source: A savings and resilience barometer for Great Britain: a landmark study by Oxford Economics, January 2022.

    Top tips to control your debt

    What can high earners do to cushion themselves?

    With the Bank of England predicting inflation will hit 7.25% by April, we all need to get into the habit of reviewing our essential expenditure and in turn, how much we need for our emergency funds.

    Having sick pay and an emergency savings safety net of three to six months’ worth of essential expenses will help. But one in ten don’t have three months of essential expenses in easily accessible cash to see them through an emergency.

    The most effective way to approach this is starting with a budget, write down your incomings and outgoings – that way it’s easy to find the areas you can cut back on and reprioritise where you allocate your hard-earned money. Alternatively use our online Household Budget Planner.

    How to build an emergency fund

    As well as prioritising an emergency fund, there’s a lot to be said for protecting before investing. If you were to pass way or become critically ill and unable to work, it can have rippling effects for your nearest and dearest.

    If you’re employed, check what, if anything, is offered by your employer – life insurance (sometimes known as death in service benefit) income protection and critical illness cover. Plug any gaps to make sure both you and your loved ones are financially secure.

    It might be that through a flexible benefits package, there’s an opportunity to upgrade to a more comprehensive policy to cover your total liabilities, or to include family members.

    Unfortunately if you’re self-employed more responsibility falls on your shoulders to arrange protection insurance for peace of mind. The past 24 months should serve as a stark reminder that should the unexpected rear its ugly head, it’s better to be safe than sorry.

    More on how to protect you and your family

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      Important notes

      This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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