Higher earning families are playing fast and loose with their finances by racking up expensive types of debt often balanced on a single breadwinner’s shoulders, according to new research – but there is often a simple answer to getting back on track.
The top fifth of higher earners have a triple whammy of debt and very little insurance to cover its repayment – they have more debt than any other income group, higher debt repayments as a percentage of their income, plus a bigger proportion of their debt on expensive variable rates than people on lower incomes.
All this borrowing is being driven by high levels of spending, with higher earners’ essential housing costs alone at 55% higher than the national average – at £1,439 a month on average per household.
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Alongside high debt and high spending, above average earners’ lifestyles are being made more precarious by households being typically over-reliant on one main breadwinner, and having too little insurance, according to findings from Hargreaves Lansdown’s latest Savings and Resilience Barometer.
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The top 10% of earners also pay more than half of all tax and are a significant target for tax rises in the upcoming Autumn Budget.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “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, running a household with one major breadwinner, carrying serious debts, and spending far more than average and falling short on insurance makes you much less resilient if your circumstances change.”
How much is too much debt?
Debts are a big part of the lives of higher earners. The HL Savings & Resilience Barometer shows only around one in 10 (11%) have an affordable level of debt, given how much of their income goes towards debt repayment.
Plus, more of this debt is on variable interest rates – things like credit cards – which tend to be more expensive to service.
High earners likely borrow more because they’re confident they have enough disposable income to meet debt repayments. And it’s true those on higher incomes are the least likely to be in arrears (only 1% are).
But it means they are extremely vulnerable to changes in circumstances.
High earners’ spending habits
On average, high earning households spend £71,947 a year – and £17,266 of it is on essential housing costs, like a mortgage. It means they’re spending 55% more than average on the essentials, according to Hargreaves’ research.
Their average household income is £80,222, so they can cover their costs, but if they lost an income, these households couldn’t stay in the black for long with these kinds of outgoings.
Dangers of a single breadwinner
With high earners’ debt and spending at elevated levels, the fact that so much of the household income is made by one person concentrates the risk, and isn’t unusual.
According to the Barometer, among the highest earners 71% are relying on a major breadwinner. If anything was to happen to them, it would put the whole household in financial trouble.
Is it worth getting insurance?
Insurance is high earners’ final money weakness – and also the solution to guarding themselves against the risks from the other financial pain points.
Jude Dawute, managing director at wealth manager Benjamin House, said: “Many higher earners carry large debts and rely on a single income and often overlook the very thing that protects their household – insurance.
Only 53% of high earners have enough life insurance to be resilient, according to Hargreaves’ research. The analysis also shows 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 consider life insurance needs to pay off their mortgage after their death, but may not think about a policy which covers the cost of bringing children up. The average life insurance gap for households with dependents is £89,800, and for homeowners with children it's £194,200, according to Hargreaves’ data.
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.
“Life insurance is a basic must-have,” said Dawute, “it clears debts, replaces lost income, and gives dependents breathing room”.
“Even couples without children should consider it – especially if one is financially dependent on the other. Taking it out early means locking in a lower premium before any health issues crop up.”
Meanwhile, only half (51%) of high earners have critical illness insurance, according to Hargreaves Lansdown’s figures, which provides you with a lump sum of money if you are diagnosed with certain illnesses or disabilities and can’t work.
“Critical illness cover is arguably even more important than life insurance,” said Dawute, pointing to statistics from insurer LV= that found you're more than four times more likely to suffer a serious illness than to die before retirement.
“That could be cancer, stroke, heart attack – all of which can leave you unable to work for months or longer,” he said.
A lump sum payout means you can take time to recover, cover ongoing bills, or make lifestyle adjustments without financial panic. And if you're the main breadwinner? It’s even more critical.
“No one’s coming to save you. Protecting your income is protecting your entire household,” Dawute said.
