Experts explain connection between income and spending habits
Financial advisers have said that many high-earning households may actually be only “fake rich” due to massive debt.
According to Stuff.co.nz, New Zealand’s household debt hit an all-time high with 163.9% of gross income. Those earning more than $150,000 said that they have insufficient income to cover their costs, which experts thought may be due to the household’s debt-dependent lifestyle.
Martin Hawes, one of the most widely known financial advisers in New Zealand, said that it was common for people who looked well-off to carry large loans.
“I think there's quite a group of people who look like they're wealthy, with good jobs, a nice house and car and all those things, but when you do a snapshot of their net wealth, their assets minus their liabilities, they're not particularly wealthy at all,” Hawes told Stuff.co.nz.
In recent years, the size of the average mortgage rose faster than house price growth – with 40% of new borrowers having loans that were five times higher than their actual income.
Hawes explained that as people’s income rose, their spending tended to increase faster until they’re drowning in debt.
Liz Koh, financial adviser at Moneymax, added that one of the main personalities of “fake rich” people was being an “achiever.”
“These people want the lifestyle of wealthy people but without having done the hard yards of creating the wealth to support it. They get around this by taking on debt – for example, a large mortgage to buy the kind of house they want to live in, a car loan, as they like upgrading their vehicles on a regular basis, and credit cards with high credit limits,” Koh told Stuff.co.nz.
“They generally have high incomes but high outgoings. If they were prepared to accept a more modest way of living they would be able to create more wealth through saving and investing. Achievers often suffer stress from living from payday to payday, as they live up to and beyond the level of their incomes. They want the high life now, not later.”