Income is not Wealth

[FrugalToque]

http://www.torontolife.com/daily/informer/from-print-edition-informer/2012/02/15/almost-rich/#more

"An income of $196,000 places you in the country’s top one per cent of earners. But does it make you wealthy?"

That's quite a chunk of comedy in the opening.  Of course a high income doesn't make you wealthy.  Not spending your high income is what makes you wealthy.

[arebelspy]

I'd add one word to the thread title: earned.

Earned income doesn't make you wealthy.  But passive income...?

Perhaps.

[Physics]

Wow that article and some of the "family spending" articles linked from it are like case studies in "how to waste your income on things that ultimately don't make you happier, but do make you poorer." Ha!

[FrugalToque]

Earned vs passive income.

Indeed.  I guess my point was that the statement "I have high income" does not necessarily link to "I am wealthy".  There's a gap there and the writer of the article seemed to be expressing surprise that people with high incomes could possibly be non-wealthy.

But then, as Physics points out, the people in this article are dropping $1000/month on clothing alone.

[velocistar237]

I guess I'm not surprised, but I am a bit flummoxed by the idea that people earning $200K/year would waste it all. Wealthy means having valuable material possessions (at least in the financial sense), and you can't have valuable things if you keep exchanging your income for things of little value. Duh.

From the first family:

At the end of the month, after all the bills are paid, they usually find they have nothing left.... Annual expenses ... Clothes: $3,000. (“When you have young kids you really cut back on stuff for yourself.”) RRSPs and investments: $0.

Do these families really get that much more out of living in a nice place, eating out, buying new clothes, having unlimited data plans for their smart phones, etc? I imagine they're a little happier for it, but is that happiness wiped out by their financial insecurity?

Fortunately for the common earner, value is somewhat subjective, and diminishing returns means it doesn't make sense to buy beyond a certain level anyway. If your possessions are valuable compared to your expenses, you can call yourself wealthy. Whether other people will also call you wealthy is a different matter. I wish I could say I was totally immune from social status pressures.

[SailingStache]

Wow.

Well, there was one redeeming part to that article, and that was all the comments at the bottom, primarily from those as unsympathetic as us at the ridiculous spending habits of these people living on month to month "on the edge".

[Guitarist]

Wine: $400–$500

Holy crap! We have some local wineries we like to go to, average bottle is under $15.00.
If we said they were $15, we'd basically have to have a bottle per night to reach those numbers.
If you buy cheaper...

[saudisimon]

I'm constantly amazed to read things like "mortgage payment" or " car  payment" in a list of high-earners' expenses.  If you're making that sort of cash(and you've been making it for a few years) Why the heck wouldn't you have the house and car bought for cash?  Is it just a lack of financial education?
The old couple who are living of investments are doing the right thing, the right way round.  If it is coming in without you having to graft for it, and you've done all your spending on raising a family etc, there's no point saving so enjoy it!  Let the kids and grandkids make their own heap of dough.

[arebelspy]

I'm constantly amazed to read things like "mortgage payment" or " car  payment" in a list of high-earners' expenses.  If you're making that sort of cash(and you've been making it for a few years) Why the heck wouldn't you have the house and car bought for cash?  Is it just a lack of financial education?

Possibly.  Many higher earners spend all they make (and more), so they have debt like mortgages and car loans.

However... Likely no, not lack of financial education.  Despite what drums some pound, debt can be quite good.  Many, many rich people have car loans and mortgages, simply because they're good with money, and it's free money (or cheap).  They want a new, fancy car (I know, I know, not very Mustachian of them.. but say they're buying one anyways).  They can afford to pay cash.

They're also offered a 0% loan.  Why NOT take the free money?

Mortgage rates are at the lowest point they've ever been in history.  Yet some people are still paying them off?

You look at the rich people with these low interest loans and say "why don't they pay it off?  lack of financial education?" .. while those rich people look at you and say "why are they paying off that mortgage early?  lack of financial education?"

And neither of you would be wholly right, or wrong.

Hope I made you think a little.  ;)

[velocistar237]

I'm constantly amazed to read things like "mortgage payment" or " car  payment" in a list of high-earners' expenses.  If you're making that sort of cash(and you've been making it for a few years) Why the heck wouldn't you have the house and car bought for cash?  Is it just a lack of financial education?

For people who don't want to retire early but do want to be rich, mortgages are a cheap way to borrow money for investing.

http://badmoneyadvice.com/2010/03/the-truth-about-mortgages.html

I disagree with the philosophy, but the reasoning is sound.

[Tim]

Are we to believe that if these people lived somewhere other than Toronto, everything would be peachy? My guess is that they'd spend everything they have either way.

[arebelspy]

For people who don't want to retire early but do want to be rich, mortgages are a cheap way to borrow money for investing.

http://badmoneyadvice.com/2010/03/the-truth-about-mortgages.html

I disagree with the philosophy, but the reasoning is sound.

A solid article overall, if a bit boring (MMM has me spoiled with punches to the face), but that last paragraph was just brilliantly put.

Thanks for sharing.

EDIT: A commentator made a good point

Speaking of Dave Ramsey, this spat of super-low rates is going to trip him up later down the road. In a few years (maybe 3, maybe 10), interest rates will rise again and you WILL be able to get 100% safe CDs that pay more than every fixed-rate mortgage getting issued today. Given that his insistence on paying off the mortgage is based on risk, what will he advocate doing then?

Right now interest rates are so low, you can lock up something in the 3.xx.  3s!  (With inflation that's basically a loan cost of.. nothing).  In a few years, if/when interest rates shoot up, and you have cash, will you be putting your money into paying down your mortgage at 3.xx%, or will you stick it in a CD earning 4-5%? 

The "no debt" people would pay down that mortgage.  But I'm hoping most Mustachians would keep the cheaper debt.

Mortgages aren't always good, and negative leverage is bad.  But in today's environment, mortgages can be called by their other name.. free money.

[Mike Key]

There is a huge gap between those high earners who try to live the MTV lifestyle because they are high earners, and the world that those who have net worths over 500 million live in. If you're a billionaire, forget it, you live in a completely different reality. There has been plenty written about the lifestyles of these people. Mr. Money Mustache Frugality tips are the least of their concerns. Although I'd argue some of them who used it to become rich still employ these habits. Take a look at Buffett compared to the way Richard Branson lives. Different tastes for different personalities.


But what gets me, is the media will examine people who make 250K a year and treat them like their the same as those who make 3 digital millions or have billions. And then draw the conclusion that they're just like us, only in debt on a whole other level. YEAH RIGHT. Not even on the same level.

[Reido]

Yeah, I love that - if income is the only thing that matters, then technically every college student would be on welfare!  That is assuming they're paying 30K per yr in tuition with little to no earned income.

It's also frustrating that someone who works to earn a living can get hosed by the taxman moreso than passive income.  For example, a pharmacy manager - who might make $150K/yr ends up paying an effective federal tax rate of 23.7% versus under 20% for Mitt Romney.

Of course this just adds more incentive to become Mustachian.  Rather than working harder and harder for less money, savings and low-taxed passive income is obviously the way to go...

[menorman]

Do these families really get that much more out of living in a nice place, eating out, buying new clothes, having unlimited data plans for their smart phones, etc? I imagine they're a little happier for it, but is that happiness wiped out by their financial insecurity?

Actually, no. A quick trolling of Google found this article, where they found that people making $20k/year were only slightly more "unhappy" than those making $100k and that those making only $20k had double the amount of time to spend socializing or just doing non-obligatory stuff. There was also a study done by Gallup that found a correlation between happiness and income, but only up to the first $75k/year.

[MountainMan]

Right now interest rates are so low, you can lock up something in the 3.xx.  3s!  (With inflation that's basically a loan cost of.. nothing).  In a few years, if/when interest rates shoot up, and you have cash, will you be putting your money into paying down your mortgage at 3.xx%, or will you stick it in a CD earning 4-5%? 

The "no debt" people would pay down that mortgage.  But I'm hoping most Mustachians would keep the cheaper debt.

Mortgages aren't always good, and negative leverage is bad.  But in today's environment, mortgages can be called by their other name.. free money.

Man, I wish this forum had "Like" buttons, so I wouldn't have to say:

"I like this post!"

[arebelspy]

Man, I wish this forum had "Like" buttons, so I wouldn't have to say:

"I like this post!"

Heh, thanks.

I know there's some that will disagree philosophically, and just don't want debt, and that's fine, but it's hard to disagree mathematically.

HOWEVER, someone on the e-r.org forums made a good point about putting extra money into your mortgage instead of bonds for the fixed asset part of your AA - basically returning better than bonds are currently.  It'd shift your equity position higher, but might work out more mathematically.  It's an interesting concept.

I could see paying things off in retirement, to not have the hassle.  When you have "enough," why do you need the free money? 

There's not much excuse though, IMO, to be paying down cheap student loans and cheap mortgages while still in the accumulation phase. I understand you want to be debt free, but by buying assets instead of paying down that cheap debt, you'll accumulate much faster and be able to reach financial independence much faster!  Accumulate those assets, and then go debt free right before you're FI.  Not way early.

[keith]

Man, I wish this forum had "Like" buttons, so I wouldn't have to say:

"I like this post!"

I know there's some that will disagree philosophically, and just don't want debt, and that's fine, but it's hard to disagree mathematically.

Thats kind of where I sit with this... as someone who has been beaten up by debt and poor spending habits in the past.

I don't want to keep it any longer than I have to - even if the math disagrees.