The problem of high earner debt in the cost of living crisis

Category: News & United Kingdom

The current cost of living crisis has been driven by a series of different factors. These include:

  • Massive rises in energy prices, with further rises set to follow
  • UK inflation reaching 10.1%, with the Bank of England projecting it could reach 13%
  • Wages not keeping pace with inflation
  • Interest rates going up, and likely to go higher.

This “perfect storm” of financial events has meant that an increasing number of people are already facing severe financial challenges and, as a recent report in Money Marketing confirms, even more will struggle to maintain the lifestyle they’re used to.

For many, rather than cut unnecessary expenditure, there’s a natural temptation to use borrowing to sort out the problem and ride out the storm. This can easily create a debt cycle that’s hard to get out of and that can quicky spiral out of control.

That’s where problems can start and, as you can read below, it’s high earners who could be more likely to face debt problems than other earnings cohorts.

High earners are more likely to fall into debt

The report revealed that high earners can be just as likely to fall into debt as the less well-off.

The report showed that the higher an individual’s income, the more of it they are spending on servicing their debts.

The two key factors driving this are the fact that high earners are more likely to have borrowed more than those on lower incomes, and that also they are more likely to have borrowed a higher percentage of their total earnings.

The report says that higher earners are actually twice as likely to have variable-rate debt, so will be more susceptible to the effects of interest rate rises than anyone with fixed-rate borrowing.

To quote directly from the report itself: “Typically, the more people earn, the less affordable their debts are now – and the worse they’ll get over the next 12 months.”

A misplaced feeling of security

If you’re a higher earner, there’s a temptation to feel more insulated from the cost of living crisis than those on lower incomes, simply because of the income you have coming in each month.

However, it’s possible that the feeling of security that higher earnings gives you may well be misplaced.

It’s that false sense of comfort that could well prevent you from taking action to help mitigate your debt situation and make it more manageable.

For example, the time to switch to a fixed-rate mortgage was several months ago when interest rates were lower. While there are still offers available, they are likely to be offering a higher rate than previously.

The psychological aspect of managing debt

Another contributory factor could well be the whole process of managing your debt.

If you’re on a lower income, it’s likely that you’ve grown used to having to watch every penny and carefully control your household budget.

Such caution may not be the case if you’ve always been comfortably off and not used to having to cut back on spending.

A long period of minimal inflation and low interest rates may well have exacerbated this and created a subconscious belief that the good times would last indefinitely.

How strong is your debt resilience?

In simple terms, debt resilience is your ability to manage and service your outstanding debts. Your level of resilience is personal to you and dependent on your circumstances.

The Money Marketing report outlines several measures of debt to help assess your overall debt resilience.

These include:

  • The affordability of your debt
  • The certainty over future payments to service the debt
  • The amount of your debt arrears
  • Your perception of how much debt you have.

Using those criteria, your debt resilience is then expressed as a percentage. The higher the rate, the better your resilience.

The report states that the average debt resilience in the top 20% of earners is projected to drop 12% to 59% in the coming year.

In contrast, the resilience of the bottom 20% of earners will only fall from 78% to 75%.

90% of top wage earners currently have enough scope in their budget to remain comfortably off, despite the current financial challenges.

Yet, within the next 12 months, this will fall to around half of the top 10% of earners.

As you’ve already read, higher earners tend to be more prepared to take on more debt. Equally, they are increasingly expected to borrow more to cover some of their rising costs over the coming year.

The time to act is now

Even if you feel you’re comfortable with your current financial situation, it’s always prudent to take some simple steps to cut your costs and keep your borrowing under control.g5fvt4me simple ways to do this are:

  • Ensure you have a clear understanding of your income and expenditure
  • If you have outstanding debt, get a proper idea of how much it is and the cost of servicing it
  • Put a plan together to reduce, or even clear your debt
  • Prioritise unsecured debt such as credit cards, which tend to incur a higher interest rate.

You can give yourself valuable peace of mind and avoid future financial difficulty by taking decisive action now if it’s needed.

Get in touch

Please get in touch with us if you’re concerned about your debt and want to talk through how you can manage it.

Please note

This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances.

All contents are based on our understanding of HMRC legislation, which is subject to change.