The WAY to WOW Shows
Why High Earners Are Often Broke
May 13, 2026
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[0:01] Who are [music] you? And where are you going? What do you want? Hello and welcome to People Making Money. I'm your host Kevin Bemmel and I'm here every Wednesday at 10:00 a.m. Pacific time except for today cuz I'm starting late. I [laughter] got I had an early morning meeting. I got caught in traffic coming back. But uh we on People Making Money we talk about uh job hunting and being an employee, starting and running a

[0:37] business and building wealth. So the whole financial side of our lives and I've been working in repertory this year through those three subjects. And today uh I'm going to be talking about a uh wealth building topic and it is um why um high wage or why high earners, not just necessarily wagers, but why high earners in general um or not in general, but why are there some high earners who are broke?

[1:09] >> [laughter]

[1:09] >> Right, it's it seems completely counterintuitive, right? So just a a a a a real brief a sort of anecdote, um earlier in my career uh when I had my real estate business, I also had um a side practice doing business and personal management mostly for people in the entertainment business. So for anyone who knows anything about Los Angeles, you know that almost it seems like almost everybody in LA is involved in either real estate, entertainment, or both. In my case, both. And I had a client who was earning a lot of money. When I say a

[1:45] lot of money, I would say, you know, the equivalent today of probably somewhere between $25,000 a month. Okay? So we're talking $300,000 a year in today's in today's dollars. And they were constantly broke. They always It was a married couple. They always spent far more than they earned. And then when the bills would come due, they would expect me to pay them somehow. And I I you know, I finally I finally

[2:21] fired them because there was just nothing I can do I could do. Um I'll I'll just give you one example of of the the kind of spending. So, the there there was a a husband and a wife and two children, a a daughter and a son. And the the wife and the daughter went on a trip. I believe it was kind of a congratulations thing because she had done well in school or whatever whatever it was. And evidently the son felt cheated. And so in in in order that he not feel

[2:56] cheated, his father took him on a ski trip. Right? To I think it was Sun Valley, Idaho. The trip cost like, you know, $20,000. Now, you may say, "Well, but they're making, you know, three 350 a year." Right, but but take into account taxes, okay? That trip cost them roughly a month's income. And they still had to pay They were paying rent on a house in Beverly Hills, cars, you know, restaurants, all that stuff. They were just living a life way

[3:31] too big for their income. They were They were always broke. They accumulated no wealth. Right? And so, this is a trap, I think, that that high earners sometimes fall into. And it it it it is it's it's something that we need to know about, understand, and of course, avoid. So, I have five thoughts on this topic as as is my practice. So, I've talked about the first topic before, and that is lifestyle inflation.

[4:07] Right? So, it's this phenomenon where people feel as they earn more, and I I I really dislike this word, but as they earn more, they feel that they deserve more. It's like there's we do not deserve things. I I think this is one of the most corruptive ideas in in [clears throat] modern America. So, children deserve a a a safe, secure, nurturing home.

[4:45] Right? If we're going to bring a child into the world, we should do so because we can provide them with the kind of environment that will allow them to grow up and thrive. And and number one, the children didn't ask to be born. And number two, they are not able to take care of themselves, especially when they're very young. Right? You may say, "Well, teenagers, okay, you know, they they can take care of some aspects of their lives." Okay? So, children deserve they deserve, you know,

[5:21] a mother and a father, and they deserve uh you know, to be taken care of. Okay? Um our elderly relatives, they deserve our attention, our love, our caring. Okay? Um presumably, they've you know, taken care of us when we were younger. They've helped us through our lives. Those are the situations where deserve applies. It does not apply to our lives really beyond that. All of these advertisers who tell you that you deserve this or you deserve that, you

[5:56] deserve the best. Why? I mean I mean yes, sometimes life is hard and we we need to relax or we want to have some fun. And that's perfectly legitimate. But to say that we deserve it as an as an entitlement, it's a very corrosive uh perspective and it is it is one of the things that leads to lifestyle inflation inflation and especially lifestyle inflation that cripples us financially. So,

[6:34] as people earn more often times they increase their spending in lockstep. So, they get a raise, they immediately buy a nicer car, they buy a bigger house, they take on more expensive travel, they start eating at at at more expensive restaurants. Uh that is a recipe for disaster. So, uh and and the and the problem is is that certain expenses are relatively fixed. If you buy a big house, you've got probably mortgage payments, property tax payments, insurance, maintenance, and

[7:11] now you're you're locked in to these expenses and then if something happens to your finances, what do you do? Right? Well, you may have to sell the house or worse, you can't keep up the payments and so then you lose the house. So, just because we're making more money shouldn't mean that we're expanding our lifestyles. Maybe expand it a little bit, but but you know, keep in mind that as we make more money, that should be giving us more options, one of which is to build wealth. So, as we let our income I mean sorry, as we

[7:48] let our lifestyle increase at at the same pace or faster than our income, so now we have no we have no margin left and we're constantly living on the edge. So, uh it it it's you know a problem, some kind of income disruption or some kind of serious event, it doesn't just tighten things, it the whole house of cards starts to fall apart. And I've I unfortunately seen it too many times. So, the first thing we need to do as we earn more is to avoid lifestyle inflation.

[8:27] Okay? Next, the higher income tends to give us sort of this illusion of security, right? Well, I've got a lot of I've got a lot of money coming in and so that I'm going to be fine. So, it but that sense of financial security is false. Um and and the reason is because that income stream can get cut off. Look at what happened during COVID, for example. Now, that's an extreme example, but uh there were a lot of people whose

[9:02] businesses essentially were shut down, not literally overnight, but in a very short period of time. And so all of a sudden that income stream was was caught was cut off. And so, making a lot of income all by itself is not a is is not financial security. What what you do with that income to build wealth, that becomes the a part of the foundation of financial security. As So, building some emergency reserves, for example. That's

[9:38] where you you start to develop some financial security. As well, diversifying your income streams. So, if you're making a big income in your job, or maybe you have a business that is you know, paying you a big income, that's fantastic. However, if that's your sole income stream, then you know, if something happens to disrupt it or cut it off, okay, you're going to be in very dire straits. So, what can you do to diversify your income stream? So, I've I've talked about this

[10:15] on other shows as well. Maybe start a side business, or maybe make some investments that are that that that pay an income stream, right? I was at the meeting I was at this morning, it one of the people that the the presenter was talking about retirement plans, and one of the people listening asked a question. He said, "I've got a I've got a client who's a real estate broker, and he makes about $100,000 a year in his real estate work, but he has a trust fund that pays him $400,000 a year. And

[10:51] and you could hear it ripple through the crowd like, "Huh, why does he bother working?" Well, I mean, there's lots of good reasons for him to work. And and by the way, I think it's laudatory that that he works, and and does, you know, pretty well. $100,000 a year as a real estate agent, he's working pretty hard to to generate that kind of income. Number one, number two, it's smart. He has diversified income. What if something happens with the trust? I mean, you know, what if the trustee absconds with the money? All of a sudden, you know, that that income is gone. What if the What if

[11:26] there's some investments that that fail, or that their performance declines? All of a sudden he's not making, you know, $400,000 a year. He's making considerably less, right? There's all There's things that can happen even in what seems like the most secure single income stream that makes it insecure. And so, this is what This is what we we need to look at and and figure out, okay, just because I'm earning a big income doesn't mean that I'm financially secure. So, uh com the you know, confidence in the

[12:01] earning power, it it replaces an actual actual strength on a balance sheet, right? Whereas, real financial security is going to come from having that strong balance sheet. So, when the income stops, if you don't have that that, you know, that that strong balance sheet, that high that high net worth or just a reasonable net worth that you've built up by devoting part of your high income to to savings and investment, all of a sudden the illusion of financial security disappears. And so,

[12:37] you know, there there's a um a famous book that I've talked about, I think it was on this show, called The Richest Man in Babylon, and one of its philosophies is 10% of all you make is yours to keep. Meaning, you take 10% off the top for savings and investment before you spend the money on anything else, right? That's a That's a a very simple and yet brilliant plan for building true financial security. Okay, next. Um you have something called concentration

[13:12] risk. So, this is I I I talked about this a little bit in the last point, but so, executives, professionals, business owners, they're heavily reliant on one income stream, right? And that income could be dependent on market cycles or personal capacity, right? So, this is something you know, that I'm concerned about. I'm I'm a solopreneur as they as as you know, we call them. If I can't work, you know, my my income is is going to drop. And so, you know,

[13:48] I'm I'm looking for ways to diversify my activities to um create some income streams that aren't reliant on my being able to, you know, come to the office every day, right? So, I don't I want to I want to um deconcentrate my income to to you know, avoid concentration risk. So, uh you know, so, if you look at a a smart investment portfolio, generally the investments are

[14:23] diversified in terms of sector, in terms of types, in terms of maturity dates, etc., right? So, we we we think we we that's sort of a standard concept in investing, but in terms of income, if we have a sole stream of income, we don't have that diversification. It's highly concentrated, and that creates a lot more risk. And so, we want to avoid that. So, if you lose, you know, if you're an employee and you lose your job, your income goes down to zero. If you you burn out or you have other health issues, right? And you just you

[14:59] just can't work anymore, at least for a while, again, your income goes to zero. This, by the way, is one of my um main arguments for being a business owner. So, the difference between an employee and a business owner is an employee has one client, and typically a business owner has multiple clients. So, if you're an employee and your client fires you, your income goes to zero. If you're a business owner and you have, let's say, 10 clients, now of course they're not they're not going to be, you know, evenly like from each one you get

[15:36] a 10th of your income, but just for the sake of example, if you got a 10th of your income from each client and when a client fires you, okay, you've lost 10% of your income, but you still have the other 90%, right? So, that's a much more secure income stream even though it's still concentrated in a single source, right? So, if you are an employee, maybe you need to think about starting some kind of side business. Again, I've I've talked about this in a prior episode. Maybe start some kind of consulting gig or something that's, you know, working in

[16:11] the same area of expertise as as as what you do as an employee or maybe you're going to get into involved in some investing. So, uh a lot A lot of people who are real estate brokers, uh they also invest on the side. So, they're in the market all the time seeing properties. If they find a particularly good one, they may buy it on their own account. Maybe they fix it up, turn around, sell it. So, they actually are diversifying their income that way. And there are opportunities uh

[16:47] in in all kinds of businesses. So, um when I had my real estate company, I had a client who uh they auctioned off and appraised uh machinery and equipment, right? But sometimes they would find a particular item and they would buy it themselves and then they would fix it up and turn around and sell it and make a big profit. So, they would do that sometimes with cars, for example. So, look at what opportunities are there within your field of expertise that that you can be in which you can be

[17:22] involved that will give you a different income stream than your primary income stream and and perhaps maybe it will eventually grow even into an actual business. It that that maybe you'll become a part of that business even even though now you're an employee. Okay, let's take a quick break and we'll come back and talk some more. When life brings unexpected changes, managing inherited property shouldn't add to your stress. Magnum Properties specializes in probate

[17:58] and trust real estate management. We handle the complexities while you focus on what matters most. From property maintenance to tenant relations, from legal compliance to maximizing value, we're your trusted partner through every step. Magnum Properties Inc. Turning property challenges into peace of mind. Call us today at 213-264-4396 or visit magnumprops.com. Okay, so uh next So um

[18:35] high income earners have a disproportionately higher tax obligation. We have what's known as a progressive taxation system uh at certainly at the at the uh federal level. Um even some states, I know here in California, our our tax rates are highly progressive, meaning the more you make, the higher your tax rate. And it doesn't take a whole lot of income to get into the top rate, which is roughly 10%. I think it's 10.9% if memory serves. Right? And so, this is another

[19:11] thing that high earners sometimes they don't realize the impact. So, whereas when they were earning, I'll just pick a number, $75,000 a year, maybe their while they their marginal tax rate might have been, you know, 25%, but their actual tax rate will be lower than that because it's it's a it's you know, it's a stepped tax rate. Right? So, they may think, "Okay, well, my my overall tax rate right now is 15%." Okay, and then they start making $150,000 a year and they're only

[19:46] planning on paying 15% in taxes, but because they were pushed into a higher tax bracket, uh now all of a sudden their combined tax rate may be more like uh 20% or 25%. It's going to take a much bigger chunk out of their income. And so, those those higher tax obligations, they one needs to plan for them to make sure that you're not increasing your spending in such a way that now, you know, you can't pay your taxes, especially right after there's an income increase, okay? Because

[20:22] sometimes, you know, you may adjust your withholding, for example, um but it may not be enough, right? And so, that has to be looked at very carefully in order that you don't you know, you know, outstrip your income. So, um the other thing is things like bonuses, equity compensation, deferred income, all of these can have unpredictable tax consequences. And especially if you did not have any say in how they were structured. So, you may be getting those benefits. You may get a payout uh and then not realize just how

[20:59] uh how large the tax consequences are. And and again, this is another thing. So, I was listening to a podcast about I think it was Anthropic. And it was they were talking about the kind of bonuses that just regular employees were getting, literally millions of dollars, right? And that was evidently one of the incentives to go to to work for the company. Well, that's fantastic, but what were the tax consequences of getting those those payouts, right? And

[21:36] and this was all maybe it wasn't Anthropic, maybe it was um maybe it was uh OpenAI. Um it one of them is doing a is getting ready for a a large public offering and and employees were but employees were able to sort of cash out before this offer before this offering. It's kind of a more recent financial phenomenon cuz usually employees cash out at the time of the public offering. But in any event, um the point is that hopefully

[22:11] before these employees got these big payouts, you know, they had sat down with their accountants to to examine what are the tax consequences of getting this big chunk of money. Now, it interestingly enough, one of the things that the person talking about it said was in some cases people got so much money they didn't know what to do with it. I'm thinking to myself, yeah, I'm skeptical about that. So, I mean, okay, maybe some people, you

[22:47] know, they're going to continue to live modest lifestyles des- despite getting, you know, seven and eight-figure, you know, payouts, but but let's be honest. The typical person, they're going to find something to do with that money. They're going to invest it. They're going to perhaps uh create a legacy for their children so that their children's lives will be more financially secure. You know, whatever they're going to do. But all of that can be derailed if the tax consequences of getting this big uh you know, payout are not considered and

[23:25] and handled effectively. Right? So net, meaning meaning after-tax income, may in fact be much lower than than the person expected. Okay? And so they and you know, the the the scenario is you know, I'm oh, I'm I'm going to get a $10 million payout not realizing that maybe they're going to have to pay uh actual, you know, um uh not capital gains tax rates, but earned income tax rates. And so that that, you know, 10 million pretty quickly becomes

[24:01] only, you know, 6 million if you're living in a state like California. And not that $6 million isn't a lot of money, of course it is. But it's a lot less than 10, right? And so, you know, the person may be thinking, "Oh, I'm going to buy, you know, a a a $5 million house." Well, not with $6 million you're not. I mean, you can pay cash, but you're not going to be unless you have a huge huge income besides the payout, you're not going to be able to afford the payments, right? So, whereas with a a you know, a $10 million payout, so maybe you can pay $5 million

[24:36] in cash for a house and still off of the other 5 million maybe it's generating, you know, several hundred thousand dollars a year and that will support the house. So So again, um these all the the tax consequences of of your of your income and your cash flow need to be examined to avoid what's sometimes called cash flow compression, right? So, without proper planning, even at high income levels, liquidity crunches happen, okay? And and

[25:11] I you know, there there's a segment of high earners that they seem to feel somehow that they're immune from that phenomenon and and that is not at all the case. Okay. And then finally, you have situations where um you someone can be um asset rich, but cash poor. And so they've got in fact, I I'm handling a trust right now. Um there there is somewhere between um 19 and maybe 28 million dollars in

[25:49] assets in this trust. Okay? That's a lot of assets. Um and the the gross income for the trust is, you know, $300,000 a year, which sounds like a lot of money, right? I think most of us would be happy to make $300,000 a year and have, you know, even $19 million in assets, let alone, you know, larger. Here's the thing. The expenses for the trust are um conservatively 6 to $700,000 a year.

[26:25] Meaning that the vast majority of the assets generate no income, but because they're real estate, there's property taxes that have to be paid, there's insurance that has to be paid, and there's other costs, legal costs, etc. The trust is massive has a massive negative cash flow, probably somewhere between 3 and $400,000 a year. May maybe more, okay? So, the the the the trust is asset rich, but it is cash poor. And what's going to happen if I can't get

[27:01] this straightened out is one by one, the properties are going to have to be sold to pay the operating expenses of the trust. And so, the asset value is going to decline even as the income situation remains precarious. Right? And And again, you think, "Well, $300,000 a year, what would I do with that kind of an income?" Right? Again, for for most of us, that would be outstanding to have that big an income, but that doesn't mean that income on a gross basis doesn't mean that, you know,

[27:38] that that financially the situation is sound. And so, you know, if assets are tied up in a I mean, if if if wealth is tied up in illiquid assets, things like real estate or private equity or in a business, right? Um and and and let's say the real estate is is land, which generally speaking doesn't generate any kind of income. Private equity, you know, sometimes they're income-producing, sometimes not. Sometimes a private equity arrange a private equity deal is arranged um for for capital growth, not income. Business

[28:13] ownership, too. You can have huge value in the business, but you can't tap into it. And if the business goes through hard times, the, you know, the income can drop precipitously. And even though it still may be a very valuable business, there's no way to tap into that from an income perspective. Right? So, um so, that becomes a problem. And the fact that they're illiquid means that to sell them, especially to sell them quickly, is difficult if not impossible. And if you do have to sell them quickly, often times it means taking a big price cut in order to essentially motivate

[28:50] someone to buy this asset, right? And so, it becomes a downward spiral. And then, the other thing is is high high earners sometimes they appear wealthy on paper, but because they're illiquid, they don't have anything like the flexibility that they need in order to really build wealth. They're they're really just a a dependent on their assets appreciating, which is fine if the market is strong, whether it's the real estate market, the stock market, whatever. But, if if there's a downturn

[29:27] and and and real estate starts faltering or or there's a disruption and the stock market drops, you know, the value of those assets are going to drop and hence their net worth will as well. And so then, what ends up happening is financial stresses emerge, and and then there's a there's a a need for immediate liquidity that can't be met, and you know, the whole house of cards falls apart. So, what do we do about this? What we do is minimally we follow the advice from The

[30:02] Richest Man in Babylon. I believe if memory serves me, his name was Arcadie or Arkady. 10% of all we make is ours to keep, whether we're making $40,000, $400,000, or $4 million. 10% off the top goes into investing. And we we develop a well-balanced a portfolio of investments. We make sure we have a rainy day fund. We make sure we have proper reserves based on a a proper lifestyle relative

[30:38] to our income, and that way we have the opportunity to not only uh you know, really exercise and reap the benefits of being a high earner, we also are building a financial foundation that provides us stability going forward. So, I thank you very much for joining me today. And slate of shows, Mondays at 10:00 a.m. Pacific time, Trust and Estates weekly. Tuesdays at 10:00 a.m. Pacific time,

[31:13] Business Lessons from the Military. Wednesdays, like today, People at 10:00 a.m. Pacific time, People Making Money. And then every other Thursday at 5:00 p.m. Pacific time is my show Jigger's Place, where we sit back, have a cocktail and a schmooze, and talk about non-finance related issues, books, values, life, movies, uh all the things that make life enjoyable in addition to engagement in our professional lives. So, once again, oh um real quickly, if you have any uh thoughts, comments,

[31:48] criticisms, questions, uh look below where you're watching the show, and you'll see links to social media. Feel free to post a comment. My email is there as well. You can send me an email. I'm happy to answer your questions if it's within my area of expertise. And show is available, as you see, across the the as you see on the the screen crawl below me, show is available uh on YouTube, Spotify, and Apple Podcasts, the three biggest podcasting platforms. So, uh if you're not a subscriber, would really appreciate if you would consider subscribing, and that

[32:23] way you'll never miss any of the Way to Wealth shows. So, once again, thank you for joining me. Wishing you a wonderful rest of the day, and signing off as I always do. Marie Darling, you are my bell. Courage at all times.