We’ve discussed what it takes to be in the top 1% in net worth by age. Let’s discuss how to live like the top one percent without being rich.
Unfortunately, the very definition of top 1% means that 99% of us won’t get there. But once we have a goal, we do infinitely better with our finances even if we don’t achieve our goals. Further, developing consistent motivation throughout our lives is a big part of Financial Samurai.
Living in a first world country is like going to Disney Land. We’ve got free water, clean air, a functioning government, an abundance of food to make us obese, Social Security and subsidized healthcare if we need it.
With our massive head-start compared to billions of other people in the world, we have every opportunity to surge farther ahead. Yet we are constantly surrounded by people who take things for granted.
This post is about how to replicate a top one percent lifestyle while not being in the top one percent. Who doesn’t love a short cut, especially if it can lead to a better lifestyle?
Earning And Spending Like The Top One Percent
The first step to figuring out how to replicate a top one percenter is to figure out how much the top one percenter saves on average. Lucky for you, I already wrote this post: The Average Savings Rate By Income.
The top 1% save around 38% of their income.
From the IRS, we know that the top 1% earns at least $470,000 a year overall in 2021+. This means that a $470,000 income earner lives off roughly $291,400 ($470,000 X 62%) of gross income since he saves 38%.
Or, if we assume the $470,000 income earner pays a 30% effective tax rate, then we can also calculate that the top one percenter lives off of $203,980 a year ($470,000 X 0.7 X 0.62).
If you take a look at the top income scales across industries, $291,400 in gross income is much more achievable than $470,000 in gross income per year.
If you are married, then you can look at $291,400 in gross income as total household income where each spouse makes about $145,700. Suddenly, these figures seem much more attainable don’t they? The IRS numbers are based off of tax filings.
Main point: To replicate the lifestyle of the typical top one percent income earner, all you’ve got to do is make around $291,400 in total household income and spend 100% of your household income.
Let’s Get Real About The Top One Percent
Because he has no safety net, the person spending 100% of his $235,600 gross income is probably going to start stressing out. He’ll probably also run out of energy and enthusiasm at some point in his career. It’s hard to imagine things will turn out OK if people spend 100% of their paychecks each month.
OK, maybe we’ll cut $235,600 gross income earners some slack and have them contribute $18,000 a year to their 401k. They’ll still have $217,600 in gross income to spend. After 10 years, they’ll likely have over $250,000 in their 401k thanks to returns and company match.
At a $380,000 top one percent income, I know I can easily save 70% of my gross income and live off the remaining $114,000 gross a year here in San Francisco. As a result, I can argue that someone who makes ~$114,000 a year can also replicate the lifestyle of a frugal 1% income-earner.
Main point: Unlike what the mass media wants you to believe, most wealthy people don’t blow all their money and end up broke. It’s the people who aren’t wealthy who buy things they can’t afford to impress people they don’t like.
For some reason, there are people who don’t work hard, didn’t study hard, don’t spend time understanding how to invest, have a scarcity mentality, and don’t start side hustles who believe they deserve to live a top tier lifestyle. Nuts!
2) Investing Like The Top One Percent
The second step to living like the top one percent is to invest like the top one percent. It’s important to make your wealth last for as long as possible. You don’t want to be the fool who blows his entire fortune well before he’s dead.
The biggest difference between the top one percent investor and the average investor is the average investor has a net worth way too concentrated in his primary residence. It’s estimated that roughly 80% of the median homeowner’s net worth is tied up in a primary residence. Small wonder the median homeowner gets crushed during every financial downturn.
The top one percent investor is happy with 5% annual net worth returns. Before Bernie Madoff’s ponzi scheme was found out, he collected over $50B in assets from the wealthiest individuals and institutions because he guaranteed 10% a year. Meanwhile, the average investor thinks they’re Warren Buffet reincarnate and takes excess risk to try and make hero-like returns.
Just look at the asset allocation of massive university endowments. No one asset class takes up much more than 25%.
Main point: Stop trying to hit home runs with your money. Aim for singles and doubles, accompanied with aggressive savings. Your net worth should be diverse. Once you get to your number, protect it at all cost.
3) Work Like The One Percent
The top 1% consist of largely working professionals who pay a massive amount of taxes because most of their income is W2 income. Most of them work way more than 40 hours a week; think banking, law, consulting and medicine. 70+ hours a week in these fields is the norm.
Many one percenters must spend extra time in school to get a graduate degree or higher. More time in school means later start times to earn income and likely more student debt.
Here’s a chart of a $500,000 top one percent income household. You can see how quickly money goes due to taxes, kids and expensive city living.
The income cutoff for the top 0.1% is around $1,000,000. The top 0.1% can consist of those in the top 1% who last long enough to get into the top 10% of their respective professions. The top 0.1% are also the small business owners, celebrities and professional athletes.
Main point: Getting to the top one percent doesn’t just happen. There are sacrifices that need to be made. Once you get to the top one percent, life can be more stressful due to demanding work and lifestyle inflation. Money does not cure misery.
There’s Not Much Difference In Lifestyle
The lifestyle difference between the top one percent and the middle class lifestyle is small. It’s only when you reach the top 0.1% that you can really start experiencing a lifestyle difference like flying in private planes, paying cash for $10 million dollar homes, eating 12 oz Kobe beef steaks until you puke and driving $200,000+ cars.
If you’re making $380,000+ in San Francisco or Manhattan and want to buy a modest $1,500,000 home, you’re going to need $300,000 down and a $1,200,000 mortgage. You’ve got to work and save diligently for a downpayment if the Bank of Mom and Dad isn’t open and then work harder after purchase to ensure you won’t get kicked to the curb due to your massive mortgage!
At $8,000 an hour on NetJets, there’s no way a $380,000+ salary can afford flying private more than once a year. Meanwhile, private school tuition often costs in excess of $40,000 a year, or $70,000 in required gross income. There really isn’t much difference between a public school education and a private school education. I attended both for years and I’ve seen both types of graduates do well.
At my tennis club, whether you are a billionaire, a recent college graduate or a sexy personal finance blogger, we spend the same two hours whacking balls and grabbing a $3 drink at the bar upstairs. Sure, the billionaire might go back to a $25 million mansion, but we still get to breathe the same crisp air, enjoy moderate 68 degree weather and go back to comfortable beds as well.
Despite a widening wealth gap, the socio-economic gap is narrowing. We have less inequality and more free access to information. Smartphones are 100X more powerful and 99% cheaper than mobile phones from 20 years ago. Free access to Google Docs means nobody has to spend $500 for Microsoft Office software ever again. Fintech companies make managing your net worth free and easy. What more do we really need?
Don’t Envy The Rich
We can really only envy the rich who did nothing to get rich – you know, the trust fund kids or those who married into wealth. But even then, can we really blame them for being born or finding love? I don’t. They are lucky, just like many of us are lucky.
Some of my best memories are from when I was a poor exchange student living in Beijing. I slept on on a one-inch thin mattress in 90 degree heat while a fan automatically rotated to my side every eight seconds enabling both my roomie and me to breathe.
We students pooled our resources to buy food and cook on portable gas burners in our dorm hallways. After lunch, we’d take turns using the shared squat toilet stalls. So much fun! I’m way wealthier than I was back then, but am just as happy. Think back to when you didn’t have much and compare your happiness level today.
Based on the way I’ve set up my business, I make a very middle class salary for San Francisco. I don’t mind because I don’t work nearly as hard as I used to. Further, I’ve leveraged the internet to maximize my freedom. The more freedom you have, the LESS money you’ll want or need.
Get Into The Top One Percent With Real Estate
Real estate is my favorite way to create wealth because it is a tangible asset that is less volatile, provides utility, and generates income. If you want to become a top one percent, real estate is a tried and true method.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.
Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
Recommendation To Build Wealth
In order to optimize your finances, you’ve first got to track your finances. I recommend signing up for Personal Capital’s free financial tools so you can track your net worth, analyze your investment portfolios for excessive fees, and run your financials through their fantastic Retirement Planning Calculator.
Those who are on top of their finances build much greater wealth longer term than those who don’t. I’ve used Personal Capital since 2012. It’s the best free financial app out there to manage your money.
Related post: How To Feel Rich Even If You Can’t get Rich