Are You Rich And Broke? Now, Now, Dear

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There are more people making six figures a year than you know. Retired San Francisco police chief Heather Fong makes an estimated $250,000 a year in cash as part of her pension, not salary. My 43 year old union electrician makes $150,000 a year and is required to work a maximum of 35 hours a week. He spends another 20 hours a week making $50,000 doing side jobs. Meanwhile, 29 year old MBA graduates from the top 25 schools in America earn a median salary over $100,000 a year according to US News & World Report.

Although it’s estimated that only about 12% of the working population make over $100,000 a year according to the IRS, six-figure income earners seem ubiquitous in large cities such as New York, San Francisco, LA, and Chicago. It’s very difficult to raise a family making anything less with two bedroom apartments renting for $3,600 a month on average in SF, for example. Lob in child care costs and it’s no wonder why even some families who make over $200,000 a year feel like they are just getting by.

The Wall Street Journal profiled a 40 year old woman named Sylvia who earned $200,000 a year overseeing website content for tech firms, but racked up $300,000 in credit card debt. After amassing $500,000 in total consumer debt, she filed for bankruptcy. The article talks about her hiring of a personal chef and a housekeeper, and their frequent trips with her husband and two children to Hawaii as reasons for why she got into so much debt.

I used to always ignore stories about people who paid off $50,000 in credit card debt because the only way to get that much credit is to have a large income. But to amass $300,000 in credit card debt on “only” $200,000 in income is AMAZING. Even if I wanted to charge up $300,000 on my credit card, it would take maxing my card out to $30,000 and not paying a single cent towards principal for 10 years. I wonder how she did it.

Budget

IT’S NOT HOW MUCH YOU MAKE

It doesn’t matter how big your income is, if you are making $1 million a year, but are spending $1.1 million a year, you will eventually hit a wall and go broke. I was speaking to Jim Pavia, Senior Editor at CNBC Digital who came to our offices and he mentioned that 50% of people who win more than $100 million in the lottery go bankrupt within 10 years. A financial advisor like Personal Capital earns our keep by helping clients minimize financial disasters and maximize financial well-being.

The following are some things I recommend high income earners do to solidify their financial future. I used to be a high income earner once, but I gave it all up for more freedom.

1) Remind yourself the good times will not last. It’s easy to think your income will rise forever for the first 10-15 years of your career. Unfortunately, bad things happen all the time. Your firm could go under. Your new boss might hate you. You might get sick of your job and want to do something more fulfilling but pays much less. I used to think my income would hit “make it rain” status by the time I turned 40. Instead, my income got cut in half during the financial crisis and I ultimately left the finance industry to make no money as a writer for a year. As soon as you come to the realization that your income likely won’t grow to the sky forever, you’ll be able to better manage your lifestyle inflation tendencies.

2) Keep a progressive savings rate. The government is smart. They tax our incomes per paycheck because they know that if they left us to pay our own taxes at the end of the year, many of us wouldn’t! The progressive tax system is one small way to try and keep wealth inequality from widening in the same way that a progressive savings rate keeps our wealth and spending from inflating as quickly. I began saving roughly 20% of my after-tax income a year in 1999, and progressively saved up to 75% of my after-tax income during the boom years until everything fell apart in the 2008-2009 financial crisis. But by then, my savings buffer and passive income were enough to take the “hits” of saving less.

3) Focus more intently on building net worth vs. growing income. Focusing on both net worth and income is important. But building real long-term wealth comes more from focusing on net worth. Income is just one source of wealth creation. Once you stress net worth, you start focusing on developing multiple income streams, estate planning, tax planning, capital preservation, savings, insurance and a whole host of other things that will prevent you from ever having to declare bankruptcy while earning six figures. It’s what you keep that’s most important.

4) Do not count on anybody to bail you out. The more you can convince yourself there is no financial safety net, the more responsible you will be with your money. Social Security should be completely written off if you are under 40, and even our 401ks might get taxed at a higher rate by the time we get to withdraw at 59.5 penalty-free. If Social Security and our retirement accounts are still there during retirement, then fantastic. If not, we actively saved and invested our after-tax money all those years to achieve financial independence.

5) Lock your money away. If you have a propensity to spend everything you make and more, it’s best to lock your money away in an instrument other than a savings account. For example, you can buy a 5-year CD at a lousy interest rate. Even though the interest rate might only be 2.2%, you’re much less inclined to pilfer your money due to the withdrawal penalty. You can also hire a financial advisor to professionally manage your money as well. We’ve found that once people hire a financial advisor, they have a much lower propensity to spend money due to the financial oversight. Vanguard did a March 2014 study that said due to behavioral coaching by financial advisors, clients increased their returns by 150bps per year.

EVEN IF YOU AREN’T RICH AND BROKE

Naysayers used to tell me, “Of course you could save 50% of your after-tax income due to your income level” when I had my day job in finance. They weren’t shacking up with me in a tiny studio with a high school buddy and staying after 7:30pm every day to eat free food at the cafeteria. They weren’t driving to work in an eight year old Honda Civic or taking public transportation instead of Uber. Saving money takes discipline. The more you make, the more discipline you need because there will be many more temptations.

Even if you aren’t rich and broke like Sylvia, it’s absolutely worth it to delay gratification by adopting a savers mentality. Pay yourself first, focus on growing your net worth, and keep on investing. One day you’ll wake up and be amazed by how much you have.

Manage Your Money Yourself For Free With Personal Capital

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Financial Samurai

Sam is the former Managing Editor of the Daily Capital blog. He worked in finance from 1999-2012 before deciding to focus full-time on his online endeavors - FinancialSamurai.com and the Yakezie Network. Sam is an avid tennis fan who loves to travel. He received his BA from William & Mary and his MBA from UC Berkeley.

24 comments

  1. George

    This is why I moved from NY/Connecticut to Houston,TX – no state taxes, lower cost of housing, lower cost of living not to mention gas at $3.04/gallon right now. I even moved to a job that paid me 19% more than what I got in CT/NY. Our household now has a 30 to 40% monthly savings rate…something which I can’t imagine living in an expensive area like the northeast CT/NY area.

    Reply
    • Joe Public

      Do you think the above comment about a specific city was done by a real person or a media agency. You can’t tell, neither can I, which is what is sad about it. It may be some poor schmuck who didnt make it in the big city posting their opinion or it may be a low level propagandista contributing to the internet of bla.

      Reply
      • George

        What is not sad but amusing is that you sound unaware about the large influx of migrants from the northeast to Texas and that whatever I stated about state taxes, lower cost of living and lower gas prices are empirical facts that YOU (yes, you) are are ignorant enough to contest . And that is why you had to resort to a cheap personal attack as the last line of defense. Typical of those who are unable to provide an intelligent argument. You might be taken seriously when you have an argument. Until then, thanks for proving my point.

        Reply
        • Tom

          People don’t always move because of taxes. I have elderly parents and moved BACK to NY to be near them.

          Does that make me ignorant?

          Reply
          • George

            No, but the excuse prior to my comment does.

        • Emma

          Excellent comeback to someone who is so blind that he cannot see. But seriously — I’m glad you like East Texas, cos that SURE leaves more for me here out West! Ciao for now, neighbor!

          Reply
      • Emma

        i’d say it was written by a real person. i am from florida, and did NOT leave due to weather or money. but i stay in el paso BECAUSE of the weather and a brigadoon fantasy experience of climate as well as cost of living. we’ve all got to find our niche. thankfully, i found mine.

        Reply
    • Anonymous

      welcone to Houston George !!

      Reply
  2. Tony

    BoooHoooo, 17,000 in 401k money, Really? Lets see, many who work in New York City commute long distances, so we can cut the 36,000 down to 20,000 in a heartbeat. 30,000 in childcare, Really again? Most places outside of New York City get $150 a week, so we cut 30,000 to 7,800 as savings of 22,200. Vacation, what is a vacation, savings 8,000. Food, Children s lessons? $5000????? Lessen for what? Spend some time with your kids and teach them yourself. Savings, $5000. Car payments, sell the Beamer and settle for a high MPG car like a Hyundai, car payment are now 2,8000 a year. Gas, yes you will be driving more but we just cut your MPG from 20 in the 3 series to 42 in the Hyundai so it is a wash. Home maintenance? Buy a lawn mower and cut your own lawn. Go to Home depot and learn to fix things yourself. Home maintenance, 1000, savings 2000. This entitlement lifestyle of nannies and special programs for the brats is way to Bourgeoisie.

    Reply
    • Financial Samurai

      How does a parent teach their child violin lessons when the parent doesn’t know how to pay?

      Where do you live Tony and how many children do you have?

      Reply
      • kjgard

        Fair enough, Financial Samurai. I’ll throw in the violin lessons. But Tony’s overall point is well taken. $8,000 vacation? What?! Skip the vacation or drive to the beach for a week. Cost: $1,000. Savings: $7,000. Childcare = $30,000? What?! You don’t need a live-in Nanny. Cut that cost down to $150/wk or $8,000/yr. Savings: $22,000. $700,000 home? What?! Downsize or move away from the City and save half of that. There are other areas to cut, too, but you get my point. Sure, anyone can easily spend $200,000 if they want to. But, I don’t feel sorry for someone who has to file bankruptcy after spending lavishly as in your example.

        Reply
        • Financial Samurai

          I don’t feel sorry for the person making $200K and filing for bankruptcy either given her spending. I just created the $200K income chart to highlight how easily it is to spend $200K, especially if you have a family and live in a more expensive place like SF or NYC. You can’t buy a 2 bedroom condo for under $700,000 in SF. Median homes cost $1 million.

          Reply
      • Emma

        If the kid wants to play violin, he’ll play. Lessons will ruin his creativity. Just like schools damage intelligence.

        Reply
        • Financial Samurai

          Schools damage intelligence? Hmmm. Can you elaborate? Thx.

          Reply
  3. Kaitlyn Cocuzzo

    Thanks for the share. This makes a lot of sense, its all about money managment. Still I dont quite understand how that family in the example feels like they are “just getting by”. Most families dont get a $8000 vacation annually. They are very giving which is good, and their children seem to have a lot of activities and enjoyable things going for them. Those clearly benefit the children but are not a true necessity. They have considerable miscellaneous expenses and are saving quite a lot of money for retirement, and still have $7,000 to play around with.

    Reply
  4. Don

    Don’t worry, the same people who leave high tax states will vote for big spenders in there new low tax state making it a high tax state. Liberalism is a mental disorder. So many of the products we buy now are imported, why? High taxes and regulation in America. Don’t believe me, where was your computer made? How about your foot wear? What about your clothing? How about the oil and gas to power your car? Look at all the stuff around you? Americans will keep voting for Big Gov’t regulations to solve the problems that create. Impossible.

    Reply
    • Nervous Cat

      And how is this Liberal Vs. Conservative smack down comment related to this article?

      Reply
    • Emma

      Thank you Don!

      Reply
  5. Froogal Stoodent

    This is great advice that can’t be repeated enough! Well-said–income doesn’t really matter! Famous athletes and musicians sometimes go broke, despite multi-million dollar annual incomes. Why? Because they don’t know how to manage their money. Money management, not income, is what truly matters.

    Reply
    • Emma

      You got that REAL right, m’dear.

      Reply
  6. mike

    This whole article is way beyond the reality of over 90% of Americans. Like the politicians they have no clue of what the rest of the country is forced to live on. An 85 dollar an hour electrician?? Perhaps in NYC but no where else.

    Reply
  7. Tariq Jawed

    200k in bay area would be just like 70k or less in Dallas or Houston, since the cost of living is way too high. But people tend to live lavish lives when they are making more, and that’s why stuck in all the mess.

    Reply
  8. TK

    Sam (aka Financial Samurai) I appreciate your article and breakdown of the numbers. I often find comments by the masses quite amusing and wonder why are people arguing? Do we live in a world where everyone must get in the last word and feel like their opinion is always right and the only one? The Internet is overflowing with articles on finance and pretty much anything you would like to educate yourself on. My purpose is merely to thank you for your article because I can relate to making a 6-figure salary but somehow I feel like I am living paycheck to paycheck. I don’t take expensive vacations and I drive a 2010 Camry. A good portion of my money goes to child support, which is a whole other argument to get into because I believe the system is “broken” to accommodate for those that just don’t pay. Anyway, I don’t want to go on and on here…again, thank you for posting your thoughts and the article.

    Reply
    • Financial Samurai

      Hi TK,

      Thanks for your comments and stopping by to read!

      Sam

      Reply

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