Sarah Coles, head of personal finance, Hargreaves Lansdown: “Earning more might make your finances feel bulletproof. You’re more likely to have enough savings and to have started investing, so you may be feeling relatively comfortable. However, higher earners have four major financial Achillies’ Heels. Running a household with one major breadwinner, carrying serious debts, spending far more than average, and falling short on insurance makes you much less resilient if your circumstances change.
Debt
Debts are a big part of the lives of higher earners. They take on far more than anyone else, and their debt repayments make up a larger proportion of their income. The HL Savings & Resilience Barometer shows that only around one in ten (11%) are considered to have an affordable level of debt - given how much of their income goes towards debt repayment. It’s also worth noting that they have more of this debt on variable interest rates – which indicates more of their debts are on things like credit cards or tracker mortgages. If they get any surprises when it comes to interest rates, higher earners could face the music.
The fact they borrow more is likely to be because they’re confident that as long as they can continue earning at this level, they have enough disposable income to meet debt repayments. At the moment, this seems to be paying off, as those on higher incomes are the least likely to be in arrears (only 1% are). However, it means there’s an awful lot riding on their ability to continue earning at that level, which makes them extremely vulnerable to changes in circumstances.
Spending
They’re running on a much higher level of spending too. The Barometer shows that on average these high earning households spend £71,947 a year – and £17,266 of it is on essential housing costs – like the mortgage. It means they’re spending 55% more than average on the essentials. Their average household income is £80,222, so they can cover their costs, but if they lost an income they couldn’t last long with these kinds of outgoings.
Balance of earnings
The fact that so much of the household income is made by one person concentrates the risk. This isn’t unusual. According to the Barometer, on average, only a fifth of households have enough equality of income to make them resilient. Among the highest earners this rises to 29%, but it still means the vast majority are relying on a major breadwinner. If anything was to happen to them, it would put the whole household in financial trouble.
Safety net
When things change, an awful lot depends on their safety net. To be resilient households need enough emergency savings to cover 3-6 months’ worth of essential spending – rising to 1-3 years’ worth in retirement. This should be in a competitive easy access savings account, so you can get your hands on it in a hurry. The good news is that the Barometer shows higher earners have bolstered their savings in recent years, so that 92% have enough to cover at least three months’ worth of essentials. Higher earners also score well for sick pay and income protection: 95% have enough cover. But elsewhere there are gaps in their resilience
Barometer figures reveal that only 53% have enough life insurance to be resilient, and while this is higher than the overall average of 43%, the gap is still worrying. It also shows that those with children are particularly likely to fall short, and 49% of parents in the top fifth of earners don’t have enough life cover. Often people will appreciate that life insurance needs to pay off their mortgage after their death, but they may not think about any children, and covering the cost of bringing them up.
The fact that higher earners hold so much in savings offers a solution. Last year’s Barometer revealed that the average life insurance gap for households with dependents is £89,800, and for homeowners with children it's £194,200. The average cost of closing the life insurance gap is £134 a year and for homeowners with at least one child, it costs an average of £321. Given the other assets high earners have, it might be perfectly feasible to cover their needs.
Meanwhile, only 51% have critical illness cover, and while that’s much more than the overall average of 22%, given they have so much more disposable income, and this kind of cover is well within their reach, it begs the question of why more of them haven’t taken out this insurance. It's a useful reminder that we need to look at our resilience in the round, and not neglect any corner of our finances. We need to consider exactly what help our family would need if something was to happen to us, and ensure we have the savings and insurance in place to cover it.
In some cases, people will have the time and headspace to devote to holistic financial planning – and can pick up the knowledge they need to consider every eventuality. In other cases, they can speak to a financial adviser who can take them through all the risks they face and how to counteract them. This will come with a cost, but if it means closing key gaps in their financial resilience, and covering their Achillies’ Heels, this could be money well spent.”
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