Author Topic: The "everybody seems wealthy" illusion — is it really just all fueled by debt?  (Read 90322 times)

big_slacker

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I regularly have the same thoughts as you and haven't really comes to terms with what I really think is going on. It's the vacations that really get me that I see on Facebook. I live in a pretty modest neighborhood - houses are between 150K and top out at 400K. The 400K homes are huge ass places that in nicer areas would be closer to a million. These are the families that attend school with my kids. Over the break, I noticed two families who took skiing vacations to Vail. What does something like that run?

That one riles me up too. Have a couple of friends who post almost every other week that they've gone somewhere new... then at the end of the year "brand new gigantic ass 4WD" which would have cost something like $50,000.

New friend of mine is planning 3 overseas holidays this year. And since Australia is a world a away from most places and with our currency falling it's going to cost a bomb.

Just don't understand where the money comes from...
If you don't max a 401k/IRA, that's almost $2,000 a month per person. That will fund a lot of vacations/car payments.

I know a shocking number of people that don't max 401k. Our employer matches 50% up to federal max, free money!!! And people are leaving it on the table for cars. :(

justajane

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We don't max out our 401K. We are a percentage or so over match IIRC. I'm okay with that. My husband isn't interested in early retirement. But we use the rest of the money wisely, either putting it in other retirement vehicles, college savings, investment vehicles, spending it on the house, or paying for cars in cash when needed.

We bought an old house, and since I am a homebody, when I think about going on a 5K vacation, I think, "but I could do X, Y, and Z to the house for that!" Experience, shmerience. Give me an improvement on my home that I see or enjoy every day over a 5 day experience. I guess that's the way my spendypants manifests itself, though our house is far from fancy or extravagant. I'm hoping in the next decade or so we will finish our list of improvements that we want to make incrementally. Right around the time the first kid goes to college. Egad! 

I'm a red panda

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It's incredibly entitled to think that maxing a 401k is accessible to most people.
The median household in the US, not individual, the household income is $50k. You think all the workers in a household with that income have $18k to put aside? What about the 50% of households with lower incomes? Do you really expect someone making $25k a year and supporting a family of 4 to max a 401k?

Being able to set aside $18k a year is a massive privelage!

« Last Edit: January 07, 2016, 07:18:21 PM by iowajes »

ender

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Page 39 of this PDF indicates that in 2013:

  • 5% of households made 200k+
  • 10% made 150k+
  • 20% made 112k+
  • 40% made 68k+

In other words, one in five households earns a fair bit over 100k a year. Yes, probably not location adjusted, but still insightful for this question.

When you also consider that a vast majority of those at the bottom of that graph effectively live in a different society than nearly everyone on this board (let's say the poorest 20% of households, 21k), those percentages become even higher. Keep in mind this is probably the case - most of us on this forum, with the exception of some shopping, probably never interact with people making the bottom 20% of income much in our daily lives.




aceyou

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It's incredibly entitled to think that maxing a 401k is accessible to most people.
The median household, not individual, household income is $50k. You think all the workers in a household with that income have $18k to put aside? What about the 50% of households with lower incomes. The savings rate would be extremely mustachian; while some principals are good, it's pretty damn extremist for most.

That's a good point.  We are definitely speaking from a position of privilege.  But here's the best answer I would give to your point, which again, is a fair one:

If you were making 50k combined, I'd max out the roth IRA at 11,000 before touching a 401k, since the tax bracket is going to be really low anyway.  And finally, MMM talks about not talking about the "average costs" of things like it's imposed upon us.  Spending is the better word, because it implies that we can make choices about it to improve.  In the same way, just because the median family income may be 50k, doesn't mean that's imposed on any individual family.  Yes you can find examples where that may really be the best they can do, but almost all families can get over that in time through working their skills and/or certifications.  So even if maxing out a 401K isn't currently accessible for most americans, it can be for just about any americans given time and effort. 

Noodle

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I ponder the OP's original question myself sometimes. I live in a condo complex that I would characterize as falling right at the border between modest and nice. I manage the mortgage + fees just fine on a mid-career professional salary that is low for Mustachians but very good for my career field; but it's at the top of what I was willing to pay. The garage is crammed with expensive cars, SUVs and big trucks (which is particularly ridiculous since our parking spaces are quite small and the garage is full of pillars just waiting to take out a paint job)--the kind of thing I would characterize as financially appropriate for people with much higher salaries than mine (corporate salaries, lawyers, etc). I can't decide if my neighbors are extremely prudent (ie, they want a fancy car so they pick modest housing to afford it; or, they're paid-for relics of a spendier time of which they have now thought better) or extremely dumb (ie, if they're already buying/renting the nicest housing they can afford, like a lot of people, these cars are way too expensive).

Vilgan

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Some people fuel it with debt, but the most common I've seen is just a lack of any saving. The American marketing machine constantly tells people how to spend their money, what to buy, things to do, etc and they don't have the ability to turn it off. So instead of paying off a mortgage and saving a relevant amount in their 401k they spend every extra dime on whatever. There's plenty of marketing around cars, so that's a frequent area where people spend too much.

fattest_foot

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I know a shocking number of people that don't max 401k. Our employer matches 50% up to federal max, free money!!! And people are leaving it on the table for cars. :(

Holy crap! Is this a typo? Did you accidentally hit the 0 key after the 5 somehow? That's insane!

I could probably cut my time to FIRE in half working there.

richyf

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I don't think that it's wealth that you are seeing all about you... it's spending/consuming... which is not a good indicator of wealth.
Almost anyone can present the image a "millionaire lifestyle", in the short term with the aid of debt.


Bertram

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Some people fuel it with debt, but the most common I've seen is just a lack of any saving.

I agree with this. And also with the prior comments saying that family helps out a lot.

Personally I don't see the argument holding water that it *mostly* financed with debt, simply because paying with debt for something makes it more expensive, and carrying large debt (and the interest it costs) sucks away money that could otherwise be used to consume. So if you look at the mid- to long-term and compare the same income someone with less debt will be able to consume more and live a more lavish lifestyle than somebody with a lot of debt. Anything else really only works short to mid-term at best.

Bertram

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And of course this one seems especially true:

I think there are a lot of people who do things like that; but since they trade off things other people don't think about, all other people see are the big things. And since everyone has different "big things" eventually all the trade offs seem to disappear.  (The Smiths have a big house, the Jones have fancy cars, the Browns always go out to eat- so people then think they should get ALL of that).

I think this problem of perception is especially true. And I've fallen into this trap as well myself. Everyone has some topics that they are passionate about, and it's easy to sort of blend all the people together and get the impression that everybody is spending a lot on everything, when that's not necessarily the case.

Fishindude

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Many are over their heads in debt, and a whole lot are simply cash flowing things living right at the edge of what their incomes can pay for.  They have little if any safety net, and very little net worth.  Creditors own most of the shiny things they enjoy daily.

I see this daily with employees (I know how much they make).  My first home was $25,000 and when the kids were young a nice vacation was to rent a small cabin on a lake for $700 a week.   I see these young folks driving brand new cars, some have had new homes built, they frequently go to expensive restaurants, and take fancy western skiing and Caribbean beach vacations.

A few missed paychecks and they would be in trouble.

Rural

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Many are over their heads in debt, and a whole lot are simply cash flowing things living right at the edge of what their incomes can pay for.  They have little if any safety net, and very little net worth.  Creditors own most of the shiny things they enjoy daily.

I see this daily with employees (I know how much they make).  My first home was $25,000 and when the kids were young a nice vacation was to rent a small cabin on a lake for $700 a week.   I see these young folks driving brand new cars, some have had new homes built, they frequently go to expensive restaurants, and take fancy western skiing and Caribbean beach vacations.

A few missed paychecks and they would be in trouble.


And it's all about perspective, as you implied. I can't even imagine spending $700 for a week's accommodations. Not of my own money,anyway, though I've had to on business trips.

andy85

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It's incredibly entitled to think that maxing a 401k is accessible to most people.
The median household in the US, not individual, the household income is $50k. You think all the workers in a household with that income have $18k to put aside? What about the 50% of households with lower incomes? Do you really expect someone making $25k a year and supporting a family of 4 to max a 401k?

Being able to set aside $18k a year is a massive privelage!
agreed

By my rough calculations, if you spend 25k per year you need to roughly earn around 54k/year in order to max a 401k. This is assuming that you set ZERO dollars aside in any type of cash/emergency fund. Even with a small mortgage, which I consider myself having, at 557/month, that takes spending down to around 18k/year.

By my calculations, spending 30k/year (which includes my mortgage), I need to be making between 55k-60k in order to max my 401k, and by estimations that wont happen for another 4-5 years. But...I'm totally ok with that. as aceyou stated, it is possible to do given the time and discipline, and the majority of people lack the latter.

justajane

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Many are over their heads in debt, and a whole lot are simply cash flowing things living right at the edge of what their incomes can pay for.  They have little if any safety net, and very little net worth.  Creditors own most of the shiny things they enjoy daily.

I see this daily with employees (I know how much they make).  My first home was $25,000 and when the kids were young a nice vacation was to rent a small cabin on a lake for $700 a week.   I see these young folks driving brand new cars, some have had new homes built, they frequently go to expensive restaurants, and take fancy western skiing and Caribbean beach vacations.

A few missed paychecks and they would be in trouble.


And it's all about perspective, as you implied. I can't even imagine spending $700 for a week's accommodations. Not of my own money,anyway, though I've had to on business trips.

Do you have young kids, though? I would say with a family of four or above, $700 a week would be the minimum, unless you were churning credit cards or had some other kind of "in" to get you cheaper, non-camping accommodations.

We went to an obscure lake in the rural Midwest, stayed in a pretty crappy cabin that many people probably wouldn't deem nice enough, and it was $125 a night this past summer.

Whenever friends post semi-local vacations on FB, I go to look at how much it costs in order to see if we would want to do it, and more often than not, these types of cabins or hotel suites that can accommodate our family of five are $200+ a night. And this is nothing fancy, trust me.

Miss Prim

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Re:
« Reply #65 on: January 08, 2016, 07:23:52 AM »
Yes, it is an appearance for a lot of people.  My daughter had a friend who had a huge house on a private small lake in a fancy subdivision.  Her dad was a builder and when the economy went downhill in 2008, they lost everything.  In the meantime, he than had an accident and couldn't work anymore.  They ended up living in a flea bag apartment in Florida, just scraping by. 

I'm sure they lived way beyond their means and amassed a lot of debt.  We live in a fairly affluent community and I have seen a lot of this type of stuff happen to people you thought were wealthy.  Turns out they just had a lot of debt.  We live in a modest house on 4 acres and I would see these people's houses and be kind of jealous, but I hated debt, so was not going to take it on just to try to live like the "Jones".  I prefer to spend my money on travel anyway.

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mm1970

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Like most have said....

It isn't all debt, I take a few decent vacations(Maui, Vegas, FL, Dubai), and own a fancy pants sports car and do some track events. All very outwardly 'rich' activities.

Though we live in a small townhouse (by choice) and have a very high income of around 250k. (Mortgage being under 70k)

We still end up saving 50% or more yearly and are on target for a total working career of 10-15 years before FIRE in our mid 30s. So we could sell the car, cut the travel and retire a year or two earlier, but it seems like a small price to pay to keep our 'standard' of living.


Most of my buddies are scraping by unfortunately, and cannot fathom the ability to save large amounts AND splurge on a few fun activities. So I avoid the finance topic with them. The OP, somewhat reminds me of a some things I have heard my friends say.

The $250k income make a HUGE difference. I just can't fathom that everyone I see with signs of wealth are making $250k, but maybe there are more big earners out there than I realize. To my way of thinking, those are rare jobs. Maybe I'm way out of touch with reality (more than I'm aware of, that is).

Again, comes down to cognitive dissonance of hearing about the average or median incomes which are nowhere near $250k, basing my mental calculations on that. Based on incomes of $250k, nothing would be confusing at all. But just doesn't seem like there could be that many jobs paying that much out there.
That income is going to depend on what you do and where you live.

I'm an engineer in my 40's, and a bit underpaid.  My husband has a PhD in engineering. Our total household income is about that.  We live in CA, but not the Bay area.

In my town, that would not be uncommon - an engineer and a pharmacist.  A PA and a contractor.  A nurse and a scientist.  A partner in an engineering firm and an accountant.

It would be equivalent, say, to my relatives who were both teachers in my home town.  By the time they retired, they were making $75k a piece, but the cost of living was very low.

Chris22

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Like most have said....

It isn't all debt, I take a few decent vacations(Maui, Vegas, FL, Dubai), and own a fancy pants sports car and do some track events. All very outwardly 'rich' activities.

Though we live in a small townhouse (by choice) and have a very high income of around 250k. (Mortgage being under 70k)

We still end up saving 50% or more yearly and are on target for a total working career of 10-15 years before FIRE in our mid 30s. So we could sell the car, cut the travel and retire a year or two earlier, but it seems like a small price to pay to keep our 'standard' of living.


Most of my buddies are scraping by unfortunately, and cannot fathom the ability to save large amounts AND splurge on a few fun activities. So I avoid the finance topic with them. The OP, somewhat reminds me of a some things I have heard my friends say.

The $250k income make a HUGE difference. I just can't fathom that everyone I see with signs of wealth are making $250k, but maybe there are more big earners out there than I realize. To my way of thinking, those are rare jobs. Maybe I'm way out of touch with reality (more than I'm aware of, that is).

Again, comes down to cognitive dissonance of hearing about the average or median incomes which are nowhere near $250k, basing my mental calculations on that. Based on incomes of $250k, nothing would be confusing at all. But just doesn't seem like there could be that many jobs paying that much out there.
That income is going to depend on what you do and where you live.

I'm an engineer in my 40's, and a bit underpaid.  My husband has a PhD in engineering. Our total household income is about that.  We live in CA, but not the Bay area.

In my town, that would not be uncommon - an engineer and a pharmacist.  A PA and a contractor.  A nurse and a scientist.  A partner in an engineering firm and an accountant.

It would be equivalent, say, to my relatives who were both teachers in my home town.  By the time they retired, they were making $75k a piece, but the cost of living was very low.

Yup, any major metro area is going to have a lot of large companies, and professional-level jobs (engineering, finance, etc) with a college degree pay $100k+ maybe 5-10 years into one's career.  You put two of those in a household and add in a couple bonuses, $250k is perfectly doable. 

mm1970

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Quote
When you also consider that a vast majority of those at the bottom of that graph effectively live in a different society than nearly everyone on this board (let's say the poorest 20% of households, 21k), those percentages become even higher. Keep in mind this is probably the case - most of us on this forum, with the exception of some shopping, probably never interact with people making the bottom 20% of income much in our daily lives.

I wouldn't be so sure there.  Maybe I'm just special, but many of my family members fall, or have in the past, into that bottom 20%.  Including me when I was growing up.

My son's school has more than 60% of the families on free and reduced price lunch.  I have quite a bit of interaction with the poorest 20% of households.  Which is maybe why I have a lot of sympathy.


On a side note of looking poor or being poor... my older son, many times, has talked about how his friends are "richer" than he is.  Friend A has THREE DIFFERENT VIDEO GAME CONSOLES.  And two SUVs.  And we don't.  (They have owned their house longer so lower mortgage, only have one steady income.  At one point the mom said to us "it must be nice to be able to pay for summer camp and not use it.")  Our sons were in one week of camp together (my son was there all summer), and our son had a dentist appointment and dr appt in the same week, right before school.  So he missed 2 afternoons.  They live closer to the edge than we do for sure.

Friend B has a nice RV.  But they bought their house 2 years before we did, which means their mortgage is $1400 a month less than ours.

I know some people think we are struggling because I choose not to spend on some things, like cars, a bigger house, eating out, and fancy vacations. 

sam

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I think the answer is to not compare yourself to others.

You’ll never know what their story is.

Sam

TheOldestYoungMan

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Understand that there are two worldviews out there with regards to healthy finances.  There are those that have a problem with debt, they recognize the risk you take on by obliging yourself to a negative cashflow situation.  We have a risk aversion to this situation, even when it would make good financial sense to take on debt, many MMM still avoid it with pathological obsession (myself included).

But then there are those that do not have a problem with debt.  Their risk tolerance for the negative cashflow situation is very high.

We can pass all the value judgment aspersions on this second group we want, but if you want to know how they "afford" these things, you just need to realize that to the extent you are OK with debt, then as long as you can afford to pay all of your monthly obligations, you actually are doing fine.

To clarify, it isn't a choice I would make, and I don't see it work out well long term for anybody, but that's what they think about the situation.

So if the median wage was 40k, and lots of people have a spouse that works, then you're looking at 80k as a reasonable estimate for household income in many of the places we MMM folks are going to be living.  Probably 80-150k more likely (this isn't a poor man's  internet hangout spot).

So if you're making close to 5k/mo after taxes, you can "afford" a shitload of stuff.  You and I wouldn't make this choice, because being one paycheck away from oblivion isn't fun for us.  But some people can tolerate that feeling better (maybe because they just aren't aware of it).

Then you really dig into it, and tear into people's finances.  That 40 something that has always lived in their own house and owned their own new car?  Well, they've usually held down a job too, and they've earned close to $1 mil just off wages.  Even spending like a knob you'd be hard pressed to have nothing by then.  The forced savings account of a mortgage and a car note have probably made it so they have a net worth excluding debt of around 200k by the time they're 45.  So you look at their total debt number and it looks insane to you, but their debt to equity ratio might be better than the 20 something mustachian who is OK with a high mortgage number.

What I think a lot of people don't see is the total history of the folks you interact with.  If one of us hit age 40 and decided that we'd had enough of FIRE, re-entered the grind making as much as we could, and lived off that new amount, in some hedonistic post FIRE splurge, we'd be in a situation where we could FIRE at any time and yet can still live an insane lifestyle.

And you can read through the postings to see people that do exactly that.

But I don't think that's the way most do it.  I think most end up with a high long term debt payment in their 20's (mortgage or student loans or both) such that they get used to the idea of a debt payment, and then they just keep tacking on more and more.

As one of those types described to me "to the extent you have debt, it doesn't really matter how much."  He was trying to explain why it was OK for the government to to keep borrowing money in a limitless way, but that he could even utter that sentiment made me feel all hollow inside.

I recently met up with him after spending several hours (after he and his wife specifically asked) walking through how to improve their financial situation.  We went through each debt, each payment, talked at length about what their action plan would be, them nodding the whole time, about 6 months ago.

They drove up in a brand new BMW 6 months later.  *facepalm*

But it works for them.  They've been living this way for a decade now.  IF it all falls apart at some point, then maybe it wasn't a good idea, but it may very well work out fine, and it is their choice to make either way.

partgypsy

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Re: The "everybody seems wealthy" illusion
« Reply #71 on: January 08, 2016, 08:58:15 AM »
Page 39 of this PDF indicates that in 2013:

  • 5% of households made 200k+
  • 10% made 150k+
  • 20% made 112k+
  • 40% made 68k+

In other words, one in five households earns a fair bit over 100k a year. Yes, probably not location adjusted, but still insightful for this question.

When you also consider that a vast majority of those at the bottom of that graph effectively live in a different society than nearly everyone on this board (let's say the poorest 20% of households, 21k), those percentages become even higher. Keep in mind this is probably the case - most of us on this forum, with the exception of some shopping, probably never interact with people making the bottom 20% of income much in our daily lives.

When I was going to graduate school, most of the fellow students I knew, were being helped by their parents on either a monthly or yearly basis.
 
We live in an above average net worth neighborhood, and the school is as well, so the kids play with other kids living in very nice houses, with their own bedroom and often their own playroom. As far as who lives in the houses, a lot of university people where one spouse has a very good income, some double income parents along with some who were helped by parents to purchase their first house, a few multi-millionaires, and I'm sure some who have quite a bit of debt.
I tell my kids, it is easier to see the people who are doing better or who have more than you, than the people who have less. The poor are essentially invisible, especially if your school or work never takes you through those neighborhoods.  My oldest is learning about the Industrial revolution and how children were working in mines or unsafe factories and working 7 days a week 12 hours days for very little or even nothing. And we talked about how in today's age how there are places like that still in other countries.  I am grateful for where I am, but at the same time I want to do better.

Apples

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It's always easier to have one of the nicer homes on the block and make a bit above the average income of the neighborhood where you live.  That way your spending after a normal level of saving is in line with people who make a bit less than you and don't save at all.  Also, I think most of the country doesn't save at all, except for "we're not going out to eat quite as much this month b/c we're going on vacation next month and saving up for it".  Which a lot of people do who consider themselves prudent with their money.  They don't quite go for the credit card debt, but they never really cut back on their lifestyle to get any sort of significant savings going.

Also, parental help.  I've received plenty as they were willing to pay for college and since I got scholarships helped renovate the house DH and I live in.  Families that own businesses and have one child taking it over, may give gifts or pieces of ownership to the other siblings for the one in the business to buy them out.  My uncles have gotten some years of $30k to $50k windfalls over time from this transition plan. 

Whenever I feel the green eyes of jealousy coming around, I turn on the Dave Ramsey show podcast.  We're saving up to buy the family business and my father has given us several warnings that I may get gifts of equity in the future while my brothers get $50k checks written to them.  And he emphasizes how it's hard to stay the course while watching your siblings use 20% of that money for a really  nice vacation, throw 50% into savings of different sorts, and use the rest as needed for a year or two.  It will make anyone feel poor in comparison.  So sometimes right now I see friends doing "cool expensive thing" and I go turn on the DR podcast and remind myself we're in "baby step 3b" and that goal is important and look there's all these other people living on budgets and not taking vacations in order to reach their goals!  I'm not even a big DR fan, but the positive reinforcement of hearing about other people living prudently makes it easier to stay on course.

ETA:  I listen to the podcast so I can skip his rants, promotions for their events and products, and every now and then when he gives cringe-worthy advice.

honeybbq

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I often wonder this myself, who are these people and why/how are they spending all this money?

So, I'm in a 1%er household in a HCOLA. And I am *shocked* by friends, co-workers, strangers clogging up Nordstrom, Pottery barn, etc. I feel like *I* can't afford to shop there, I'm not sure how 'average' Joe or Jane can shop there. A coworker bought a $2000 coffee maker thing to "save money" and not go to Starbucks every day as opposed to drinking the free work coffee. But he still goes to Starbucks, bless his heart.

Same goes for restaurants. We got a GC for Red Lobster -- we went on a Tuesday night or something - the time to wait was almost an hour! Who are these people who can afford to eat that kind of food on a Tuesday? I can' t imagine everyone was on a GC.

Last minute plane tickets, new cars... I really think people just don't save for retirement, float credit card debt month to month, and live paycheck to paycheck. All you have to do is read the antimustachian thread and read about everyone panicking about their paychecks showing up 1 day late and you see that all hell breaks loose.

Disclaimer:

Now, we are in the subsection of people who like to earn money and like to spend money; we could pull the plug and buy a smaller house in the burbs somewhere for cash and live there for the rest of our lives, but we do like to travel, fund our kid's 529s, etc. So we certainly could cut back if we wanted, but we choose not to.



JLee

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It's incredibly entitled to think that maxing a 401k is accessible to most people.
The median household in the US, not individual, the household income is $50k. You think all the workers in a household with that income have $18k to put aside? What about the 50% of households with lower incomes? Do you really expect someone making $25k a year and supporting a family of 4 to max a 401k?

Being able to set aside $18k a year is a massive privelage!
Unless this family of four earning $25k/yr is buying new cars every 2-3 years and is taking $5000 vacations, I'm not sure how that's relevant.

Two $5000 vacations and two $500 car payments = $22k *net* per year. That's easily a maxed 401k and IRA....hence my comment.

Neustache

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etc.
« Reply #75 on: January 08, 2016, 10:03:46 AM »
We could easily have a much 'nicer' life on paper and we are a one income family, making 100K with a 16k/yr defined retirement contribution on top of that.

We have about 2500 a month extra for investing.  We already have a huge house, but it's in a poorer area.  Upgrade to a fancy pants house in our area would be about $500 a month.  So 2K left.  - low cost of living area here-

If both of us had fancy cars (on credit), at $500 a month each, then we'd still have 1K a month to spend.

Fancy meals each month?  Sure.  Let's spend $200 on that.

That leaves $800 a month for vacations.  We could take 1 really luxurious vacation or 2 moderate ones (we usually spend 3K a year on vacations). 

And then we look rich.  And we would be 'saving' 16K a year with the company contribution, so it's not like we were in a huge amounts of trouble.  And that's on one income.  Say I become a teacher, we then have $2500 extra a month to spend, whether that's on retirement or other fancy pants expenditures.  But that's after contributing the required 15% to my pension while the district matches that.   So we'd still be saving a good deal for retirement, but we'd be spending a heck of a lot, too. 

We would look super wealthy if we started blowing my teacher's pay.  And that's on a 140K gross income.  Not too hard to reach that level of income with two earners with degrees at the ages of 35/34.   

I'm a red panda

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It's incredibly entitled to think that maxing a 401k is accessible to most people.
The median household in the US, not individual, the household income is $50k. You think all the workers in a household with that income have $18k to put aside? What about the 50% of households with lower incomes? Do you really expect someone making $25k a year and supporting a family of 4 to max a 401k?

Being able to set aside $18k a year is a massive privelage!
Unless this family of four earning $25k/yr is buying new cars every 2-3 years and is taking $5000 vacations, I'm not sure how that's relevant.

Two $5000 vacations and two $500 car payments = $22k *net* per year. That's easily a maxed 401k and IRA....hence my comment.

The comment was not to yours- it was to the person who said a "shocking" number of people don't max their 401k. 

It's not shocking to me at all the the vast majority of people do not max their 401ks.  It is shocking to me the number of professionals who do not take advantage of a match, but to max? That is a LOT of money.

JLee

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It's incredibly entitled to think that maxing a 401k is accessible to most people.
The median household in the US, not individual, the household income is $50k. You think all the workers in a household with that income have $18k to put aside? What about the 50% of households with lower incomes? Do you really expect someone making $25k a year and supporting a family of 4 to max a 401k?

Being able to set aside $18k a year is a massive privelage!
Unless this family of four earning $25k/yr is buying new cars every 2-3 years and is taking $5000 vacations, I'm not sure how that's relevant.

Two $5000 vacations and two $500 car payments = $22k *net* per year. That's easily a maxed 401k and IRA....hence my comment.

The comment was not to yours- it was to the person who said a "shocking" number of people don't max their 401k. 

It's not shocking to me at all the the vast majority of people do not max their 401ks.  It is shocking to me the number of professionals who do not take advantage of a match, but to max? That is a LOT of money.

Ahhh, yeah. I absolutely agree.

TheAnonOne

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Re: etc.
« Reply #78 on: January 08, 2016, 11:13:18 AM »
We could easily have a much 'nicer' life on paper and we are a one income family, making 100K with a 16k/yr defined retirement contribution on top of that.

We have about 2500 a month extra for investing.  We already have a huge house, but it's in a poorer area.  Upgrade to a fancy pants house in our area would be about $500 a month.  So 2K left.  - low cost of living area here-

If both of us had fancy cars (on credit), at $500 a month each, then we'd still have 1K a month to spend.

Fancy meals each month?  Sure.  Let's spend $200 on that.

That leaves $800 a month for vacations.  We could take 1 really luxurious vacation or 2 moderate ones (we usually spend 3K a year on vacations). 

And then we look rich.  And we would be 'saving' 16K a year with the company contribution, so it's not like we were in a huge amounts of trouble.  And that's on one income.  Say I become a teacher, we then have $2500 extra a month to spend, whether that's on retirement or other fancy pants expenditures.  But that's after contributing the required 15% to my pension while the district matches that.   So we'd still be saving a good deal for retirement, but we'd be spending a heck of a lot, too. 

We would look super wealthy if we started blowing my teacher's pay.  And that's on a 140K gross income.  Not too hard to reach that level of income with two earners with degrees at the ages of 35/34.


Right, if my Wife and I stopped putting any money in taxable accounts, maxing both 401k's, and maxing IRAs, we could blow about $100,000 more yearly and we already live pretty good IMO.

What could 100k YEARLY do?(After tax in pure spend...)
Well, it could be a Lambo....Or a million dollar house..... Or some sort of mega world trip(yearly)..... Or a new Corvette every 6 months (Without selling them at all) and enough to build a hangar to keep them in.

It's pretty impressive.... Yet, I prefer to attempt to buy my freedom. If I want the above items, I can just work a year or two longer after my FIRE date, and get it all.

Bertram

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Understand that there are two worldviews out there with regards to healthy finances.  There are those that have a problem with debt, they recognize the risk you take on by obliging yourself to a negative cashflow situation.
...
But then there are those that do not have a problem with debt.  Their risk tolerance for the negative cashflow situation is very high.

Not only that, It goes further than that. And I would take leasing a car as an example to illustrate it. Some people are convinced that you are only living within your means if you have bought the car, i.e. if you were able to save for it and then buy it. They will say that if you are leasing the car you are living above your means.
Whereas another school of though will say that leasing a car means paying for the depreciation in value as it happens (more or less, i.e. linearized over 24-36 months), hence if you are able to afford that cash-flow on a month by month basis (and the other running costs obviously) you are living well within your means. So in contrast somebody who did not have a car for 10 years to save up and bought the car from savings and could not afford the monthly leasing payments is the one who is living above his means (even though he never used any debt).

Much in the same way you can argue that somebody who never goes bankrupt and is always able to service/pay off his debt is not living above his means. However he is certainly foregoing the possibility of saving for old age by living better today - or more simply: the prefer certain current consumption over uncertain future consumption. I've heard surprisingly many people say that they don't want to get old and do not expect to live much beyond the retirement age.

big_slacker

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I know a shocking number of people that don't max 401k. Our employer matches 50% up to federal max, free money!!! And people are leaving it on the table for cars. :(

Holy crap! Is this a typo? Did you accidentally hit the 0 key after the 5 somehow? That's insane!

I could probably cut my time to FIRE in half working there.

Seriously, and there is no vesting periods like most companies. Free 9k+ a year. And up to 15% of your income in 10% discounted stock. I say again: Free. Money. And people don't immediately max it, they're buying cars and shopping at Nordstrom. :(

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Seriously, and there is no vesting periods like most companies. Free 9k+ a year. And up to 15% of your income in 10% discounted stock. I say again: Free. Money. And people don't immediately max it, they're buying cars and shopping at Nordstrom. :(

That is a really nice match.
I'm really lucky as my company puts in 13% and requires you to put in 2% (no match). But we have 2 year vesting.

However, I recently found out that because the 2% is compulsory it doesn't count towards the $18k limit, so I can put in 18k in addition to that 2%.

JLee

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Seriously, and there is no vesting periods like most companies. Free 9k+ a year. And up to 15% of your income in 10% discounted stock. I say again: Free. Money. And people don't immediately max it, they're buying cars and shopping at Nordstrom. :(

That is a really nice match.
I'm really lucky as my company puts in 13% and requires you to put in 2% (no match). But we have 2 year vesting.

However, I recently found out that because the 2% is compulsory it doesn't count towards the $18k limit, so I can put in 18k in addition to that 2%.

Are you sure? I've not seen that before.

I'm a red panda

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Seriously, and there is no vesting periods like most companies. Free 9k+ a year. And up to 15% of your income in 10% discounted stock. I say again: Free. Money. And people don't immediately max it, they're buying cars and shopping at Nordstrom. :(

That is a really nice match.
I'm really lucky as my company puts in 13% and requires you to put in 2% (no match). But we have 2 year vesting.

However, I recently found out that because the 2% is compulsory it doesn't count towards the $18k limit, so I can put in 18k in addition to that 2%.

Are you sure? I've not seen that before.

Does it matter that it is a 403b?
But yeah, $18,000 is the limit on elective contributions. What the company requires is not elective, it is a condition of employment and the IRS separates it.  It is just subject to the limit on annual additions- employee + employer, which I think is $53k.
« Last Edit: January 08, 2016, 01:48:35 PM by iowajes »

BlueHouse

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If you don't max a 401k/IRA, that's almost $2,000 a month per person. That will fund a lot of vacations/car payments.
THIS.  Sums it all up in two sentences. Well done. 

GodlessCommie

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We socialize mostly with other immigrants who, like us, came with no real money, but to good IT jobs waiting. It seems like people in our circle tend to fall into one of two extremes... One is trading a new BMW for a newer BMW every two years, wear designer clothes, take frequent and expensive vacations, and not even think about 401K or anything like that. Another one is to live in modest (by HCOL standards) houses on two 100K+ (estimated) incomes, never eat out, complain that there is no money for anything, but flat out refuse to go into details. Which is all fine, except it's exactly the people who could probably share something about money who don't like talking about money.

oinkette

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I used to wonder the same, especially in higher COL areas. I've lived in LA and now NYC and the way I see some people live, boggles the mind. Then I think about the fact that I'm saving ~70% of my income and how I would live if I didn't. Heck, even if all I did was simply max out my 401k I'd have a pretty fly lifestyle.

If you're on the MMM forums, chances are you are saving a goodly portion of your income, far and above what 90% of Americans are. For most of us, that's going to mean a drastic difference between your lifestyle and that of your coworkers.

I don't think it's debt, at least entirely, but also lack of savings.

Albert

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When you also consider that a vast majority of those at the bottom of that graph effectively live in a different society than nearly everyone on this board (let's say the poorest 20% of households, 21k), those percentages become even higher. Keep in mind this is probably the case - most of us on this forum, with the exception of some shopping, probably never interact with people making the bottom 20% of income much in our daily lives.

This is true, we don't tend to socialise much outside our income bracket. Not because we are such snobs, but because those people just don't seem interesting and we don't have much to talk about. I was just thinking that the lowest earning person (aside of students and apprentices who are very young) I know in this city makes about $70k. On the other side a good friend of mine together with her husband makes about $300k. I don't think I know personally anyone even wealthier than that.  It's a bit different with relatives as those you don't choose.

use2betrix

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Ideal yearly savings for a dual income couple in the U.S. = $18k*2 (401k) + $5.5k*2 (Roth/Trad IRA) + $6750 (HSA) = $53.75k. Obviously some will save more/less depending on income.

So let's say a household earns 250k total. They put $4000 every month into tax advantages accounts. They earn 8% for 30 years as they like their jobs and lifestyle. By the time they retire, they will have nearly 5.8 million! They could have a SWR of 200k and leave the whole stache to their kids.

On top of that, they could spend 100% of their other 200k in taxable income. That leaves a LOT of stuff to be owned. House, cars, vacations, etc.

Not everyone wants to retire in 10 years. Some love work and their lifestyles. No one should really judge them. The reason why it "seems" like so much to us, is because most of us want to retire 20,30,40 years before everyone else.

Of course, this isn't everyone. This isn't most. I think most cut their finances and debt very close. This would just be ideal for some.

Helvegen

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I know a shocking number of people that don't max 401k. Our employer matches 50% up to federal max, free money!!! And people are leaving it on the table for cars. :(

Holy crap! Is this a typo? Did you accidentally hit the 0 key after the 5 somehow? That's insane!

I could probably cut my time to FIRE in half working there.

Seriously, and there is no vesting periods like most companies. Free 9k+ a year. And up to 15% of your income in 10% discounted stock. I say again: Free. Money. And people don't immediately max it, they're buying cars and shopping at Nordstrom. :(

Damn, and I thought I had a good gravy train at my job...Time to work where you do!

Gin1984

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georgec, I wonder this as well. The vacations on Facebook are the ones I find most baffling. A friend who bought a Wii from me a couple of years ago (on a payment plan!) posted from a fancy resort in the Caribbean. I thought WTF?! how did he afford that? Parents is probably the answer but still strange.

Cars are my big confusion. I live in a very modest neighborhood (gentrifying as we speak) and one of the houses on the block has peeling paint and a shedding roof. It also has a brand new SUV in the driveway. My unemployed neighbor has a boat, a giant new truck to pull said boat, a new smaller truck and a new sedan (his girlfriend's, who actually has a job). Though maybe he's a lesson in FI!
Our last vacation probably looked expensive, we went to NYC.  But the rooms were free because of points.  And our major event was Xmas to each other plus a serious amount of fun money saved. 

Xlar

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I used to wonder the same, especially in higher COL areas. I've lived in LA and now NYC and the way I see some people live, boggles the mind. Then I think about the fact that I'm saving ~70% of my income and how I would live if I didn't. Heck, even if all I did was simply max out my 401k I'd have a pretty fly lifestyle.

If you're on the MMM forums, chances are you are saving a goodly portion of your income, far and above what 90% of Americans are. For most of us, that's going to mean a drastic difference between your lifestyle and that of your coworkers.

I don't think it's debt, at least entirely, but also lack of savings.

I definitely think it is a lack of savings.

I live in a HCOL area and my coworkers complain that they can't even hit to company match of 6% but they're easily spending more than $1500 a month eating out! Then add on a hefty car payment, mortgage, vacations, etc. and suddenly they're living paycheck to paycheck.

As mustachians we're making the opposite choice. Just think of what you would be able to buy if you didn't save a penny and I think you'll realize why people are able to afford these things.

use2betrix

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I know a shocking number of people that don't max 401k. Our employer matches 50% up to federal max, free money!!! And people are leaving it on the table for cars. :(

Holy crap! Is this a typo? Did you accidentally hit the 0 key after the 5 somehow? That's insane!

I could probably cut my time to FIRE in half working there.

Seriously, and there is no vesting periods like most companies. Free 9k+ a year. And up to 15% of your income in 10% discounted stock. I say again: Free. Money. And people don't immediately max it, they're buying cars and shopping at Nordstrom. :(

That's about how mine is. I'm 100% vested since day 1. Because my income is high enough, they will put in about 7500/yr into my 401k just as their match. If I work overtime, they'll do even more.

ShortInSeattle

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I also wonder about this.

We've got friends who have giant fancy houses, new cars, private school for the kiddos, off on luxury vacations, twice daily dog walkers... the whole shebang.

Are their incomes freakin' amazing OR is that shiny veneer of consumer goods covering up a mountain of shitty debt and despair?

I wanna sidle up to them and whisper... Hey! Are you super-rich or are you just faking it?

But that's really none of my business. And it would be super rude of me to ask. So I don't.

I'm super curious though.

SIS

use2betrix

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I hate going to Wal Mart because I rarely see people in the stores.  I probably average about 1-3 people when I go.  The rest are just slaves to the system.  I see nothingness in their eyes.  It's like I see poor shadowy figures in Purgatory trudging along aimlessly.  Exhausted, no soul, inner truth, life. 

Scary.

I think you're referring to Schindler's List. I've been to probably 100+ wal marts and have never seen one so... Solemn...

okits

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I also wonder about this.

We've got friends who have giant fancy houses, new cars, private school for the kiddos, off on luxury vacations, twice daily dog walkers... the whole shebang.

Are their incomes freakin' amazing OR is that shiny veneer of consumer goods covering up a mountain of shitty debt and despair?

I wanna sidle up to them and whisper... Hey! Are you super-rich or are you just faking it?

But that's really none of my business. And it would be super rude of me to ask. So I don't.

I'm super curious though.

SIS

Well, eventually the tide will go out and you'll get to see who's been swimming naked.

I think it's human nature to speculate, but bear in mind there are so many sources of money you may not readily see.  Job, spouse's job, previous savings, inheritance, parental support, debt, even government programs that subsidize or cap certain costs depending on someone's eligibility based on rules.  It's easy to see the goods and services a person consumes but not how precarious their continued access is to those things (if they're FI, access is solid.  Up to eyeballs in debt and no job security, access is very shaky.)

I'm curious, too, but in the end I try to focus mostly on my situation and how to optimize it.  Maybe that's easy to say because I am in a pretty good position, but at least some of that is due to my inward-looking efforts.

MrsPete

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Two thoughts:

- Putting aside the idea of "everyone's living on credit", which probably has some merit, a whole lot of people are living on exactly what they earn.  If I weren't saving aggressively, I could live in a bigger house, go out to eat more often, and take some pretty nice vacations. 

- It's easy to see a "slice" of someone's life and fill in a bunch of blanks to fill it in.  For example, say you have a co-worker who travels frequently ... and a friend who lives in a house that could be pictured in House Beautiful ... and another friend who drives a drool-worthy sports car.  It's easy to let your imagination run wild and think to yourself EVERYONE EXCEPT ME is traveling and living in a mansion and driving something hot ... when in reality, your friends may be living frugally in one area of their lives to pay for their splurge item. 

Nickels Dimes Quarters

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There are so many social and mental issues at play with this question. Maybe it isn't debt, but many people like to have big showy homes, newer cars and all the newest tech gadgets. Maybe they have great jobs, carry no debt and that's just who they are. Yet we all know that not everyone has the sort of income to do this and go into great debt to look wealthy to others. It's a sad story.

I have family members who earn a lot of money and live modestly, and others who will never earn enough to afford the lifestyle they want. Until a person is content with their life, happy in their relationships and comfortable in their own skin with who they are and what they value, it's easy to use "things" to compensate.

So no, I don't think it's fueled by debt. Debt isn't the problem, it's just the means to getting the "drug" of stuff to make oneself feel better for all things lacking in life. Self-medicating with stuff, purchased through debt, is the problem. Once you get comfortable and happy with who you are, what you have and your life, you don't need the rest.

NDQ

Zamboni

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You are experiencing relative deprivation, which is more a state of mind than any truth about your financial situation.

I take the back way to work pretty regularly. Partly it is to avoid traffic and a construction zone, and partly it is because it is a really low income neighborhood that runs along the train tracks. Honestly that morning drive erases any relative deprivation I sometimes experience. I also deliver meals to low income seniors, and that is quite eye opening. We have it really good.

Also, bear in mind that many quite wealthy people don't actually appear to be wealthy in the stereotypical sense (aka the millionaire next door.) Most of those you are observing who have very high burn rates have cash flow, or at least credit flow, but are not actually wealthy.

faramund

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I'm now 46, and I used to feel like this a lot back in my 20s. Most of my friends spent everything they earned, and maxxed out whatever credit they had. So back then, they were always buying much more 'stuff' then I ever did. In contrast, my wife and I saved up a deposit, and generally avoided non-mortgage debt, and over the years built up investments. Now, they seem the most financially limited - many of them live in rented apartments, have no assets, and periodically complain about how much debt, how little money they have. If I ever mention my retirement plans, the usual reply is that they don't know how they'd ever do it.

So, debt/non-investing can certainly allow people to consume more, but not forever. And for most people, their spending only has a loose correlation with how much assets they have.