President Obama considers single people making over $200,000 to be rich. He has specifically called for raising taxes on singles making over $200,000 and couples making $250,000 every year he’s been office. Yet, he’s been unable to pass any tax increases because I don’t believe most people agree with him that $200,000 for singles and $250,000 for couples is rich. Thank goodness there was at least a compromise with Congress at the end of 2012 for raising income taxes for those making $400,000/$450,000 and above. Why $400,000 + $400,000 doesn’t equal $800,000 for a married couple to pay more taxes, I’m not sure. The government still harkens back to its old days of believing one spouse should stay at home.
There are two aspects of monetary wealth we can focus on: Income and Capital. Some make a lot of income, but have only a little amount of capital since they are either starting off in their careers, or haven’t saved and invested an appropriate amount. That’s not going to happen to you because you read Financial Samurai and will follow my savings guide to ensure capital accumulation.
Meanwhile, there are those with a tremendous amount of Capital, with little income given they may have inherited their wealth but have no income generating skills. Capital heavy people may have invested skillfully over the years, built great companies, or were incredibly disciplined in their savings. There are many different types of folks in the Capital heavy category. It’s not a bad place to be at all.
Ideally, it’s best to have both high income and a large capital base. This is my goal, and therefore my goal for all of you as well. In this post, we’ll focus on the income side of the equation and what to strive for just in case we don’t have a trust fund from mom and dad.
HOW MUCH INCOME DO YOU NEED TO BE CONSIDERED RICH?
Instead of just saying what I think, I’m going to share my thoughts on various income levels per person for populations living in coastal cities such as San Francisco, New York City, Los Angeles, Boston, and Washington DC and work out the answer. The idea is to focus on the more expensive parts of America, which can therefore translate into living in other expensive countries in the world such as Paris, Hong Kong, London, Tokyo. Of course, if you move to much cheaper places, you’ll be considered that much wealthier.
Various Income Levels
$50,000: Not rich, but lower middle class. After contributing $22,000 to your tax-exempt 401K and IRA, you are left with $28,000 in gross income to live. With an effective tax rate of about 15%, you have about $24,000 left after taxes. $24,000 or $2,000 a month is enough to live a frugal lifestyle, however, you’ll probably want to find a partner who makes at least $20,000 a year to be comfortable with a family.
$100,000: Not rich, but middle class. After contributing $18,000 to your tax-exempt 401k, you are left with $82,000 a year in gross income, and ~$61,500 net income based on a 25% total effective tax rate. Notice there is no more $5,000 tax-exempt IRA contribution because you make over $68,000. That’s right, the government doesn’t want you to save money if you make over $68,000. Hopefully, you are following my savings guide and saving another 20% of your after tax income, equaling roughly $12,400 a year. You’ve got around $40,000 to spend on whatever you want and you’re breathing pretty good now.
$200,000: Upper middle class. After retirement contributions, you are left with $177,000 in gross income, leaving you with roughly $125,000 in after tax income. You boost your after tax savings rate to roughly 30%, leaving you with about $87,500 left. By the time you are making $200,000 in your career, you’re probably in your 30s or older and have a mortgage and kids to consider. Kindergarten/daycare may run $15,000-$20,000 a year, followed by $30,000-$40,000 in shelter costs for a reasonable home. You’re left with $20,000-$40,000 to spend on food, travel, groceries, gifts, lessons, and so forth. Not bad.
$350,000: Still upper middle class. After retirement contributions, you’re left with $332,000 in gross income, or roughly $250,000 in after tax income. With a 30% after-tax savings rate, you have $175,000 left to spend. Your family has grown to 4, and you seek a bigger home. An average 3 bedroom, 2.5 bath home in a good area in San Francisco will run you about $1,300,000 to $1,700,000. We’re not talking anything super fancy at 1,800-2,800 square feet. Your mortgage at 3.5% on $1.1 million will therefore cost around $60,000 a year + $15,000 a year in property taxes. I choose $1.1 million because that is the maximum level for mortgage interest deductibility. As a result, you’re left with about $100,000, or $8,333 a month in after tax income for school for two, travel, food and so forth. You’re doing well, and if you are frugal, you can certainly save more than $75,000 a year in after tax money along with the $18,000 401K contribution.
$500,000+: You are rich! With $482,000 in gross income after maxing out your retirement contributions, you have about $300,000 in after tax income (effective at 35%, which includes 10% state). That’s right, you are paying around $183,000 in taxes alone, yet the government still wants to take more from you! Undeterred, you crank up your savings to 35%, and put away another $105,000, leaving you with $195,000. Subtract $70,000 for annual mortgage/property tax leaves you with $125,00. Then subtract another $40,000 in tuition for two. With around $7,000 a month in money available for travel, food, entertainment, goods, gifts, you are sitting pretty, especially since you are putting away away $122,000 a year in savings.
* As you can tell from the examples above, the tax bill gets quite onerous the more you make. Can you imagine paying roughly $180,000 in taxes every year and be asked to pay more while those voting to raise your taxes don’t have to? I’ve allowed for a larger house for family and some lifestyle inflation. However, I’ve stuck to my savings guidelines for every single income level to ensure a strong capital base come retirement.
* For 2015, you are now allowed to contribute up to a maximum $18,000 of pre-tax income to your 401k as an employee.
* I use Personal Capital’s free financial software to not only methodically track my net worth, but manage my cash flow and run my investment portfolios at least twice a year through their Portfolio Fee Checker. I discovered I was paying $1,700 in fees I had no idea I was paying! Personal Capital also has a great Retirement Calculator where you can run your numbers to see whether you are on course. The above average person takes action and leverages free technology to his or her advantage.
SO HOW DO WE GET RICH?
* Depend on yourself. Earning a high level of income is a choice, no matter what the naysayers tell you. It is up to each of us to further our education to develop a skill-set that enables us to earn more. It is up to us to work longer than our peers, so that after 2 more hours of work a day, we’ll have made over 600 more hours of progress a year. Don’t you think you could develop something amazing with 600 hours of time? You know you can.
* Get a mentor. If you want to learn how to become wealthy, learn from someone who is already wealthy, not someone who tells you how to get wealthy without being wealthy. Those folks are charlatans, and some do it very well, which is why they are wealthy. Instead, seek out a mentor and do everything possible to ingratiate yourself into their circle. Successful people want to give back. It’s the way they are hardwired.
* Remove disabling beliefs from your mind. Wherever you go, there you are. You mind is either like a power plant of positivity, or a cesspool of negativity. You must believe in yourself, otherwise nobody else will. I am so internet/computer illiterate that I thought there was no way I could start a website, until one day in 2009 I said ,”fuck it” and got it done. I’m only slightly more literate than a doorknob now, but at least things are running and I can just do this full-time if so desired.
* Go the traditional route. Earning six figures and saving millions of dollars is straightforward. It just takes time. When you are incredibly rash, you do stupid things and screw up your financial goals. Save and invest even 10% of your income over 30 years and you will likely have more money than you will ever need.
* Go the berserk route. Crazy people do crazy things, and sometimes those crazy things turn out to be miracles. Time and time again, you stumble across stupid shit that turn out to be big hits. Twitter, for example, was one cockamamie idea that has revolutionized the way we communicate. AirBnB.com is another idea that has helped lower costs in the hospitality industry. Deep in your heart, you know whether you’re putting in good work or not.
WEALTH EQUALIZATION FACTOR
Some of you who live in other parts of the country can live on much less than the amounts above. Meanwhile, public school systems are good enough where you are, so you’re willing to send the kids without fear of long-term failure. Hence, if it pleases you, take a 30%-50% discount to the above numbers. The great thing about these income levels is that we’re only considering one individual. If you have a partner who earns even just $30,000 more a year, it goes a long way to helping out the family.
I’m of the mindset that we should maximize our income, so we can maximize our capital base, so we can sooner do what we really want and never have to worry about money again! Methodically saving money is the foundation of personal finance. But the rich get rich by deploying their savings into assets that have the potential to increase in value. Decide to take action and watch your net worth grow beyond your wildest dreams over time!
* Manage Your Money In One Place: Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely check to see how your finances are shaping up as it’s free.
* Shop Around For A Mortgage: LendingTree Mortgage offers some of the lowest refinance rates today because they have a huge network of lenders to pull from. If you’re looking to buy a new home, get a HELOC, or refinance your existing mortgage, consider using LendingTree to get multiple offer comparisons in a matter of minutes. The Fed is signaling interest rate hikes due to inflationary pressures now. When banks compete, you win.