Sometimes we all need a redo in life. About once every couple of years, a Financial Samurai post goes a little nuts on the internet. Recently, Twitter got a hold of “Scraping By On $500,000 A Year: Why High Income Earners Can’t Escape The Rat Race” and consumed it like a rabid dog shaking a rag doll.
I first started noticing Twitter activity one Friday morning. Overnight, it seemed, about 500 new tweets of the post had appeared. By Monday, the tweet count had risen to a whopping 40,000+! What the heck was going on?!
Apparently, the internet found the $500,000 a year couple’s budget so absurd it started poking fun at the post. Some say my chart has even reached meme status. Well pinch my nuts! I get to check off another bucket list item before I croak.
The budget I originally posted is actually a real life couple’s budget shared with me to share with you. Their budget has been corroborated by hundreds of other couples and individuals making similar incomes while living in an expensive city like NYC, SF, London, Paris, LA, and Hong Kong. Financial Samurai already gets over 1 million organic pageviews a month, so it’s easy to gather feedback. Just check the comments on the post to see for yourself.
Some points I wanted to make from the post:
1) It’s not what you make, it’s what you keep.
Without discipline, it’s easy to spend everything you earn. Lifestyle inflation is the biggest culprit for why folks never feel like they have enough. It’s not just the cars and houses that people compete on, it’s also the schools parents want their children to attend.
Hopefully, the post encourages everyone to take a hard look at their own finances or if they haven’t already done so, create and monitor their own budget. “If you can’t manage it, you can’t improve it.” – Peter Drucker.
2) High income comes with high costs.
Yes, it’d be nice to earn big bucks living in the heartland of America, where I’m bullish, but in the heartland, those high income jobs are harder to come by. If one shouldn’t spend any more than 3X – 5X their gross income on a home, how much does one have to make in order to afford the $1.2M median home price in SF or NYC?
Answer: $240,000 – $400,000 AFTER coming up with a $240,000 downpayment. Unfortunately federal income taxes adjust based on income amounts and not on the costs for living.
3) Think about geo-arbitrage.
Technology and the internet are allowing people to untether themselves from an office. Find companies that allow you to work remotely in a lower cost area. You might not get to relocate to Bali, Indonesia, but there are plenty of fantastic cities that are much cheaper than NYC, SF, LA, Boston, and Washington DC.
I’ve interviewed several CEOs in SF and they all say that given SF’s tight labor market and high cost of living, they are hiring more remote workers. Better yet, have your own internet-based business. Take advantage of the best technological shift in history. Then again, not everybody wants to relocate. I don’t many Asian-Americans are clamoring to relocate to Atlanta after the shootings at the massage parlor.
4) Save and invest often over the long run.
There’s great value in maxing out your 401k and building home equity over time, even if you have very little left over. According to the Bureau of Labor Statistics, only about 55% of the American workforce has access to a 401(k) and only about 38% of the total workforce participate. Doing some low level math, that means roughly 31% of those who have access to a 401(k) are not participating.
I strongly believe that over time, home equity is one of the major reasons for a widening wealth gap between home owners and renters. Find a place you know you’ll be for the next 10 years and try and get neutral real estate by owning your own place. Of course, be responsible with your purchase.
5) Ask what it’s all for at the end of the day.
I know plenty of high earning people who are not happy because they are stressed at work and can never spend as much time with the people they love. Not only that, they know the work they’re doing isn’t really helping society so they feel they’re selling their souls. They can’t leave due to an unhealthy desire for prestige, money, and power. Realize there’s a wonderful life beyond just making lots of money. Seek your happiness before you look back on life full of regret.
I realize it’s only human to judge others, even if we’ve never walked in their shoes. However, simply judging others does nothing to improve our own situations. Therefore, let’s do our best to approach things with open minds. With open minds, progress can be made.
Financial Samurai has always been about finding solutions to problems. I’d like to provide an optimized budget for this $500,000 couple. I’ll conclude by highlighting some interesting observations I’ve made about the public’s reaction to my original post as well.
Redo: Making A $500,000 A Year Couple Rich Again
Here is the optimized budget compared to the old budget. Let’s get their mojo back with a redo!
Let’s go through the major line-items one by one!
Income Taxes ($11,845 savings) redo:
I’ve brought the couples effective total tax rate down to 38% from 40%, saving them $9,280 a year. Their total tax bill of $173,755 includes federal income tax, state income tax, city income tax, FICA tax, and sales tax. It’s very hard to bring your tax liability down as a W2 wage earner. They’ve decided to contribute the maximum $6,750 per couple in a Health Savings Account (HSA) to pay for current health care expenses and save for those in the future with pre-tax dollars.
Having a business is consistently one of the key differentiators between the rich and the rest of us. If you’ve got a business, you can deduct many of your overlapping life expenses as a business expense e.g. business trip to Honolulu for a semi-annual offsite. You can also contribute more to your pre-tax retirement savings (up to $54,000 for 2017).
Property Taxes ($10,595 savings) redo:
The property tax rate in Park Slope, Brooklyn (King’s County) is surprisingly only 0.627% compared to the New York State average of 1.5%, and the national average of 1.2% (that’s what it is here in California). Therefore, on an assessed value of $1,500,000, the couple really only pays $9,405 in property taxes versus the $20,000 originally estimated. However, because there are all sorts of weird property tax assessments in NYC, I’m still inclined to believe the figure is higher. If anybody else owns in Brooklyn, please share your wisdom.
Childcare ($6,000 savings) redo:
If you haven’t figured out by now, children are expensive! Every parent wants the best for their kids, which is why demand is relatively inelastic and child-related expenses remain high. Given all the backlash from the internet, however, the couple is able to find a better deal, albeit a little farther away. They’re now only spending $1,500/month per kid compared to $1,750/month per kid. As their kids enter kindergarten and spend more time on lessons, childcare costs will gradually decline.
Food For Four ($2,400 savings) redo:
Unfortunately, date night every two weeks has got to go! Each date on average was costing the couple over $200 when you add up transportation, food, wine, tip, taxes, and a Broadway show. Try landing a ticket for Hamilton for under $100. Good luck, sucker! Therefore, the couple is seeing fewer shows, more movies, and now saving $2,400 a year. Not only is this couple saving money, they’re also eating healthier for a double win.
Home Maintenance ($3,800 savings) redo:
Both parents start spending time getting smart on YouTube to fix their own toilets, paint their own walls, and unclog their own faulty dishwasher valves. They also do all their own cleaning. Nothing is more attractive than being handy with a wrench and smart in the office. Total annual savings: $3,800
Still Three Vacations A Year ($3,000 savings) redo:
By deciding to vacation in NYC for one of their three vacations, the couple saves $3,000 on airfare, hotels, and activities. NYC is the greatest city in the world for six months of the year. There are so many free and fun activities all around. There’s a reason 48.8 million people annually visit NYC! Yes, $15,000 still seems like a lot of money, but it’s divided among four people across 21 days. Without living it up a little on vacation, this 60+ hour a week couple might burn out at work or blow up their marriage because they hate life so much.
Children’s Lessons ($6,000 savings) redo:
Screw violin! I learned violin for three years and hated it. Even if I got any good, it’s not like I’d bust it out at a party and play. That’s what a guitar is for, which can be easily learned online for free. Athletics is part of Americana, so the kids are still receiving swimming and tennis lessons. Who knows, both of them might get athletic scholarships one day. At the very least, college admissions officers and employers look much more favorably on scholar athletes. Just having a 4.0 GPA and a near perfect SAT doesn’t cut it anymore, especially if you’re Asian.
Charity ($6,000 savings) redo:
Sorry alma mater, your tuition and endowment are already massive enough. Harvard, Yale, Princeton, and Stanford all have endowments over $20 billion. MIT, U Penn, Michigan, Texas A&M, and Columbia all have endowments over $10 billion. It’s best they save their money for those who really need help. Giving $1,000 a month to Feed The Children means a lot to this couple. 300 million children go to bed hungry every day while 68% of America is obese. Something is wrong with this picture and they want to do their part in making a difference.
Miscellaneous ($5,000 savings) redo:
Something always comes up, otherwise why doesn’t everybody have a perfect financial record? Because this couple is now more self-sufficient, they should be able to minimize any excess spending or surprises. Financial independence is all about generating enough passive income streams to cover your expenses indefinitely. If you can also build, cook, clean, fix, and maintain, you’re golden. Not too long ago we had to start our own fires and hunt for our own food. A self-sufficient woman is a rich woman.
College Savings ($12,000 expense) redo:
One glaring expense the internet pointed out was that this couple wasn’t saving for their children’s college education. Annual tuition alone now costs $15,000 – $55,000 at many universities (William & Mary in-state tuition = $16,370, Columbia University tuition = $52,476). Add room and board and we’re talking $30,000 – $80,000 annual outlays for four to five years!
Can you still afford to give money to your alma mater? In 10-15 years when this couple’s kids attend college, the cost could easily climb by 50%. Let’s hope these kids get into public Bronx High School of Science, Stuyvesant High School, or Brooklyn Technical High School to save their parents the expense of private grade school tuition. Related: Public Or Private University: Depends On Your Fear And Guilt Tolerance
Total Cash Flow Improvement: $48,890
Total Cash Flow After Improvement: $56,190 ($48,890 + $7,300)
Total Cash Flow + Net Worth Addition: $117,190 after contributing $36,000 to their 401ks and paying down $25,000 in mortgage principal.
Still Building Wealth On $500,000 A Year
$117,190 equals a respectable 23% gross savings rate or an impressive 36% after tax savings rate once we adjust for paying taxes on the $36,000 401k contribution amount. This couple should be able to build their net worth by at least $1.2 million every 10 years, assuming their incomes don’t continue to rise and their expenses stay the same.
The problem with this new scenario is that despite optimizing their budget by $48,875 a year, they still have a $230,305 annual after-tax nut to cover! Given they have no other significant passive income streams, they need to likely work for at least another 18 years until after their kids graduate from college to even consider doing something other than 60+ hour workweeks in the law office. But given 80%+ of people wash out of big law by year eight, expecting to last for 18 years isn’t very good planning.
The point of aggressively saving and developing a side-hustle when you’re young is so that you one day have the OPTION to do something else with your time when you start hating your life. Believe me, that day will come because everybody will hate their job at one point. Unfortunately, too many people start aggressively saving and side-hustling AFTER they start hating their jobs. Misery ensues for years.
There is NO rewind button in life, which means we all have to try and anticipate the future today. A redo is nice, but in actuality, you’re losing a lot of time in the process.
Observations From The Internet’s Response
With over 42,000 tweets, 5 million+ views of the chart, and media mentions from CNBC, The LA Times, Jalopnik, MarketWatch, Apple News, Yahoo Finance and many more, it’s been fascinating to observe the reactions. Here are three common themes I’ve observed:
1) Shoot first, ask questions later.
A study by the Media Insight Project, an initiative of the AP-NORC Center for Public Affairs Research and the American Press Institute highlighted that 60% of readers just read headlines, and not the actual article. As a result, the use of “Scraping By” instigated many people to condemn this couple’s budget (and me by extension) because they hadn’t read the substance behind the post. The featured image in my post with the caption, “Help! I’m drowning from all my money!” provided a clue to the astute reader that I was also poking fun at the subject.
2) People see what they want to see.
With over 100,000 comments left on Financial Samurai since it started in 2009, I’ve observed this phenomenon many times. There is a perpetual echo chamber of people refusing to see the other side. It plays out in politics, stubborn arguments with friends and loved ones, generational wars, and in the work place all the time.
The more we can try and understand another’s point of view, the more we can improve. Trying to see the other side is why I’ve given over 500 Uber rides, keep up with my Mandarin, coach high school tennis, constantly travel abroad, and invite people from different backgrounds to write guest posts. It’s easy to contract Dunning-Kruger disease and think anybody can do it if they just work hard enough. When you see the other side, you gain empathy and understanding.
3) Humor is incredibly effective.
Understandably, a lot of people were mad at the budget because 99% of households earn less than $500,000 a year and must make tough choices to make ends meet. You can take a salty stance like Pulitzer Prize winner, Michael Hiltzik did with his column in the LA Times. You can focus on class warfare like wealthy Boston University alumni, Jeremy Binckes did in his Salon article. Or, you can take Kristen Lee from Jalopnik’s approach and focus on humor to get things across.
Remember, the way you approach anything is a reflection of your own state of mind. You have a choice to look at the bright side or at the dark side. I’d certainly much rather grab a beer with an uplifting person like Kristen, than listen to Jeremy attack the woes of high income earners.
When you come from a privileged family whose parents can afford $50,000 a year in tuition, it’s quite interesting to witness his negative viewpoint on wealth. Perhaps there’s an area of “rich guilt” I can delve deeper in a future post. For those of you experiencing rich guilt, please share with me your thoughts!
Making $50 Million A Year Can Still Feel Average by Kristen Lee from Jalopnik
Got Me Some Body Doubles To Throw Off The Assassins! by Dan Amira, Daily Show writer
Control What You Can Control
Writing about personal finance is generally pretty boring. After all, how many ways can I tell you to stop spending like a donkey? But we know nobody is perfect. Some people actually make mega millions over their careers and still file for bankruptcy! We’re all trying to get a little better.
Love or hate my article, I’m just happy that so many more people have decided to take a good look at their finances. Many have written in to say sheepishly they’ve finally created a budget of their own, but have not told anyone for fear of judgement. Who knows, maybe the next financial crisis won’t be so bad because millions more people are more prepared after reading these posts.
Making a lot of money is great, but building wealth that can generate money for you so you don’t have to is even better. Sooner or later you will tire of the same old grind at work. When that time comes, you want to be armed with multiple income streams and a war chest of savings to carry you through to your next adventure.
It’s been a little over five years since I had a day job. Even though I don’t make a lot of money now, I’ve got enough to be happy. It feels amazing to help other people with their financial problems. Find your enough and you’ll feel like the richest person in the world!
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