$500k a Year yet Struggling? Let's Do a Double Take (opens in new tab)

Most people's idea of "Rich" is that you have a very high burn rate. Sort of fits with the "Work hard / Play hard" ethos of success in America.

Financial freedom comes from minimizing your burn rate. Far less flashy, but you can stretch money amazingly far when you aren't trying to keep up with what you think people expect of you.

Rich is when you have a high income. Wealthy is when you have a high net worth.

I find people often confuse the two and it took me a long time to clear up in my mind.

You can be rich, but live paycheck to paycheck. Even be superbly in debt. Lots of upper middle class lives this way.

You can also be wealthy but poor. These are folks with cashflow problems and a lot of illiquid wealth (like a house you can’t sell)

Short term you wanna focus on being rich. High cashflow unlocks many options.

Long term you wanna focus on wealth. Wealth unlocks freedom and peace of mind.

Being a millionare and spending a million dollars are exact opposites.

Isn't this the premise of books like "The Millionaire Next Door"?

Edit: Whelp -- not sure how I missed the link.

God, this is insane. I live in France, I earn 30k€ net worth a year, my wife is 23k€ and we feel well. We're far from rich, but at no time in those last 12 months I asked myself "can I buy this ?".

Last year I had to go to the hospital for an emergency, I stayed 3 days and paied... nothing. I'm thankfull for this even if I pay for that service.

What you earn is fondamentaly dependant of the place you live. It seems like SF is quite a hard place to live.

I find it hard to imagine making that kind of money and blowing through it all, but I do know that my wife and I put together make 3x what I would have considered more money than I would have known what to do with when I was a teenager… and we still end up every month with nothing left over.

Not in SV. $400k gets you to the lower middle class. That is you probably have a tiny chance of buying some real estate in your lifetime. House and expenses related to maintaining it is a huge chunk of change.

It sounds like you missed the key point "some of that money is going to principal".

Let's say you bought a house for $100K and for this argument it can always sell for $100K. And you have a 30 year fixed mortgage on it (debt for 30 years). After paying on that debt for 10 years, the principal remaining on the loan is down by about 20%. Now if you sell the house for $100K, you get back in cash $20K.

See how that works? You "saved" $20K over 10 years by making mortgage payments.

It is a little trickier with student loans because really what it means as you pay down your student loans is that you "owe less". Conceptually, if you decided to zero out your accounts, pay all your debts, sell all your assets. Then the amount of money left over would be "more" if you had spent 10 years paying down your student debt than if you had not. That difference is calculable and adds to your "net worth" (your cash value after zeroing everything out).

Anything that increases net worth, by definition, increases your net worth. That means you are using a currently surplus to pay down previous deficit.

The issue most "common people" have is they increase their debt load rather than paying it down.

Income - Spending = Savings. It's an accounting identity.

A common trick people pull in the shitty version of these articles is counting savings as "spending" and then declaring that "At the end of the month, there's $0 left!", because by definition if you count savings as spending, then you never "save" anything.

Let's say I have a $100k mortgage, take in $1000 a month, and spend (in the true sense of the word) $500. Whether I apply the remaining $500 to my mortgage balance or put it in my savings account has no material bearing on my net worth. The unspent money is "saved" whether it goes into cash reserves or debt reduction.

This doesn't make any sense -- paying down debt instead of SPENDING the money increases net worth and is ultimately the same as socking money into a savings account if you're debt-free.

All debt isn't the same. I see it as savings when the debt is backed by an asset like a a mortgage is, then paying it down gives you more equity in the asset. If you sell the home, this equity converts into cash. You could also get another low interest loan with the equity. It's just as much savings as a 401k which can go up or down but generally up in value over long periods of time. Paying off another type of debt like student loan debt doesn't have the same benefits.

First, I totally agree that that argument is terribly worded. Nonetheless:

a. against that median $30k income, you're building equity, which is net worth. Someone on $30k might be paying rent (and they're not able to afford a mortgage), and thus, that money is just a flat expense.¹

b. w.r.t. student loans, someone making $500k/yr is going to be able to pay vastly more into that loan, and pay down the principal a lot quicker, which will translate to lower interest costs, vs. someone making $30k/yr. (Depending on whether this is parents or the student, if that rate could be refinanced or not, etc., I would also think a $500k/yr might also net you a lot lower interest rate due to the risk of your inability to pay being significantly less.)

¹and yes, houses have their own issues, such as maintenance, and some of that mortgage is going to interest.

It absolutely is savings. Compare two people:

Person #1 - Makes $6000/month

- Has an interest-only mortgage payment of $1000/month (yes it's still possible to get interest-only mortgages)

- All other expenses are $4000/month

- Puts $1000/month in a savings account

Person #2 - Makes $6000/month

- Has a mortgage payment of $1000 interest + $1000 principal = $2000/month

- All other expenses are $4000/month

Person #1 and #2 are saving the exact same amount of money. Over time if nothing changes Person #2 will actually be saving more, because the interest portion of the mortgage payment will decrease and the principal portion will increase.

Its considered a savings because you're increasing equity in the house, which you can later resell. Its not a general statement about debt.

My guess is the author considers it savings because you are contributing to net worth presumably by:

1) increasing home equity, which increases your net assets 2) increasing earning potential via education, which increases your ability to acquire future assets

Both come with assumptions of course (like the home value stability/appreciation or the education actually resulting in higher earnings).

It all depends on the interest rates.

If I can invest with a 10% return, and can borrow at 0%, I'm better off borrowing as much as I can to invest.

But if I have to borrow at 10% and can only invest at 0%, paying off debt is better than saving.

Paying down debt against an appreciating asset absolutely "counts as savings". Every dollar applied against the mortgage principle is an extra dollar of net worth.

Can you explain in more detail why you don't consider it savings? Maybe it is obvious but I am curious.

I guess then net worth should be seen as savings

Making $10k/yr allows you to do very little.

Make $50k/yr allows you to do more, but still not a lot.

Making $100k/yr opens some doors you didn't have access to before.

Making $200k/yr puts you in pretty good comfort overall, but doesn't enable you to go get that supercar/yacht/private jet you wanted

Making $300k/yr-$500k/yr probably puts you in $1m home, $200k supercar territory depending on how badly you want to stretch it.

I think when you look at it as "income + wealth unlock levels", it makes more sense.

I can't really go on lavish vacations, but nobody making $30k/yr is going to feel bad for me.

I can't go reasonably buy $20k jewelry, but somebody making $500k/yr probably could.

Then you get to yacht / private jet level of wealth that I know very little about. :P

The linked CNN article[1] breaks it down as essentially $52k on childcare and expensive child activities, 23k on food including some undoubtedly expensive "date nights" and the rest on the sort of insurance and maintenance costs you incur when everything you have is very expensive. The Bloomberg author's probably aiming to make it seem even more frivolous by having "other" as a massive line item, not that I'm convinced sure many people facing real rather than self-imposed spending constraints would consider $9k per annum on "no fancy bags, shoes or threads" clothing an example of the sort of thriftiness the article subjects seem to think they're demonstrating, or $23k to be a food budget for two adults and two kids that couldn't possibly be trimmed a little...

[1]https://www.cnbc.com/2018/03/06/budget-breakdown-of-a-couple...

Apparently "miscellaneous" is only $10k/year, "other expenses" is separate from that. The single biggest line item outside of taxes!

There is a further breakdown in the linked article: https://www.financialsamurai.com/scraping-by-on-500000-a-yea...

It includes things like food, student loan payments and "children's lessons".

It’s crazy how accurate the “$100 gas $800 rent $400 food $2000 $impulse_expense please someone help me budget my family is dying” meme is.

At the risk of repeating what gets said every time this topic comes up, basic financial education should be taught in schools.

Yeah. What's crazy is the article didn't talk about it. Biggest red flag right there.

Eating all organic, fresh-from-farm food, eating at luxury restaurants, attending internationally acclaimed shows in the best seating, and maybe even investing in a little bit of modern art? Oh, and purchasing all the best in skincare, makup, spas, saunas, cryotherapy, light therapy, etc? Personal trainers, coaches, cleaners, cooks? I could imagine a combination of all of those could be 8,500$ a month.

(EDIT: And I bet it's still feel inadequately uncultured compared to an even wealthier peer who owns several paintings, vintage wines, attends every big show in the best seating + hires a personal stylist!)

Do you have kids? Maybe not 8500 but there is always something from summer camp to orthodontics etc... Life with kids is worth it 200 percent but expensive.

Probably child care / private schooling for the two children. Don't see it itemized in the table.

That's probably utilities, cell phone, tv, after school/nanny/sports/etc for kids activities, Starbucks, food, etc. Not that it isn't a lot but I don't see any other line items for all the stuff and it can add up depending on how you live.

The Bloomberg article did a pretty poor job summarizing the expenses - the linked article actually has a better breakdown: https://www.cnbc.com/2018/03/06/budget-breakdown-of-a-couple...?

$42k for childcare and $23k for food are two of the biggest items listed as "other".

Private school for two kids could be that much in NYC.

They have mortgage payments: it's trivial for a house to just up and eat $10k of your money, for one example. That's the big differentiator: at this level of income, they can afford to just pay random expenses that many folks would have to just jam onto eternal credit card debt.

EDIT: nvm, I misread the parent, and other sibling comments illuminate the actual breakdown of this line item.

That would be the monthly credit card bill :-). It autopays the gym, the uber rides, the gifts, etc etc etc.

Kids school could be zero if you would go to public school. You can eat out less and eat cheaper food at home cutting the grocery bill by a lot. You don't have to travel. Your misc expenses seem high as well, you could buy an older reliable car (some cars are much cheaper to maintain than others). You could probably get a cheaper house.

You don't WANT to do those things - I don't blame you - but that doesn't mean you can't.

After your expenses, you still have 28k (post tax $ per month) - 12 (added all your expenses) ~ 16k per month = 192k per annum. 192 - 38 - 15 = 139k still left after taxes, expenses, 401k, and 529. Isn't that a really huge number?

> kids activities is $2000

Woah... My wife is a teacher and grosses $2000/month.

This is a crazy thing to spend 2,000 on.

My first job after moving out paid weekly, my second job paid monthly, my subsequent jobs have all paid twice monthly.

I learned a LOT about managing spending in that first year or two. Changing when you are paid changes everything when you are paycheck to paycheck, UNLESS you comfortably have a month of savings in the bank. (For anyone in this situation, I learned to first pay your bills, put some money in savings, THEN buy your food and gas and stuff you can technically do without or have the option to choose cheaper alternatives. You can always remove money from savings, but never do it for something that you don't need to survive.)

I can't say anything for most of those but clothes for 4 people should not come out to 10k a year, especially since they said nothing fancy. Even buying high-quality name brand clothing, how do you go through enough in a year to need to buy more? All of the >$20 clothes I have have lasted years, and will continue to be usable for the next few. I would be surprised if most of them don't get donated, in close to perfect condition.

I get that they have kids and so must buy new clothes more often, but if you buy designer brands for your kid that's the problem.

It's instructive to take the "What's left over" amount ($7,300) and add back all the things which are actually savings (401k, ~half of the mortgage, student loans): $47,600. This couple has a national household median income (pre-tax!) worth of money left over after their already ridiculous expenditures.

They should just stick the $7,300 into an "Other savings" line item and proclaim themselves to be living literally paycheck-to-paycheck.

They are not struggling. They are increasing their networth faster than you are earning money. It's just a stupid accounting trick.

With four kids is it cheaper to just hire a nanny?

So after daycare a couple making $0.5M/yr would "only" have $423,000 left to work with. What does rent cost? A 6 bedroom house can be rented for $11,500 a month [1]. So after rent and daycare the family has $285,000 to work with. Still very very far from struggling.

1. https://www.apartments.com/1934-powell-st-san-francisco-ca/e...

Anyone living in a high COL city with multiple kids should look into importing an au pair. $2k a month would really help the au pair and her family back home and save the family potentially hundreds of dollars a month

That's your choice isn't it?

> my wife and I

One of you stay home and raise your kids; that's rather the point of getting married.

> With the upcoming summer, if we still lived in SF, we'd have four children in daycare. $6,400/mo.

If paying other people to raise your kids is even on the table, you're doing it wrong.

Sure it will. That's a $1.2M house with 20% down. There are plenty of 2-3 bedroom 1200-1500sq ft houses around here in that range. Sure, it would be an average school district and maybe have a bit of a commute, but you can find stuff in that range for sure.

What does this have to do with the article about the couple living in NYC feeling average on 500k a year? In another separate market, in another region in the country... they'd pay more? OK.

Are you really sure about that? 60 000$ mortgage payment is probably more than 1 million in loan, and the property value can be double the loan (appreciation since they bought + initial payment outside of the loan). I don't exactly know the prices of houses but I guess 2 million dollar should buy you a house?

Depending on the down payment that is 1.25M home +/- 250K.

SV is huge. You can definitely get a home for that.

Note: property tax is extra.

I'm in San Jose, with pretty good school district. In this area ~1400 sq.ft. townhomes are about $1.0xM.

From another article with more details on this couple: "$5,000 a month in mortgage expense bought this family a ~$1,500,000, 3/2, 1,700 sqft apartment in Brooklyn a couple years ago."

https://www.financialsamurai.com/scraping-by-on-500000-a-yea...

Million dollar 30 mortgage is approximately 5k / month which is 60k / year. Are small homes substantially more than that?

If you can send every kid to private school, you're not "struggling".

Hi!

My wife & I are raising 2 children in Berlin (a major world city) & earn a lot less than $500k while not struggling at all (in fact I save about 1/3 of my net pay even after deductions for both private and public retirement funds).

Sending your kids to private schools is hardly a must, especially if you live in at least a middle-class neighborhood (which I assume you do on a $500k income).

I mean, this very linked article lays out the finances of some people who are doing just that and it appears to be the result of some very expensive personal choices rather than a fact of life.

Holy smokes, with those kinds of expenses, you might have to hang on to that BMW 5 series a few more years before replacing it. I don't know how people are supposed to get by these days.