The more money you make, the higher your margin for error. If you make enough money, you can stumble into a strong savings rate.
There has been a story making the rounds on the internet recently about a couple in Kansas making $500,000 per year but living “paycheck to paycheck”.
This originated with a couple posting their budget on Reddit and asking for advice on how to save more money. They eventually took down their original post because they were receiving an overwhelmingly negative response. People on the internet have no sympathy for the financial problems of the rich.
I understand the knee-jerk reaction to say, “what are you complaining about you’ve got it made!” However, money problems are not reserved for low-income earners alone. People struggle managing money, period. Whether we are talking about $5 or $500,000 it’s hard to know what a good money decision looks like. I wish we could have a little more empathy with each other.
I have read several articles about this Reddit post and listened to people on 3 different podcasts discuss it. All of the discussion around this was how this was a classic case of consumerism gone out of control. So, I decided to take a closer look at the original budget, and you know what I discovered?
They are not living paycheck to paycheck
Let’s start by reviewing their budget.
Annual household income: $500,000
401(k) contributions: $18,000
Annual take home pay: $308,000
Monthly take home pay: $25,600
Property taxes: $2,645
House insurance: $250
Car insurance: $500
Life insurance: $300
Party supplies: $400
Child College Fund: $1,000
Investment (Vanguard account): $4,000
Total Expenses: $28,335
The first thing to notice is that yes, they have more money going out the door than they appear to have to come in.
Are there some obvious changes they need to make? Yes, of course, but before we dive into that I want to point out that for all the crap these people have received online about their lifestyle, they have a great savings rate that might be as high as 59% of their take-home pay.
Breaking down their 59% savings rate
- Let’s start with the $18,000 in annual 401(k) contribution. I’ll give them the benefit of the doubt and assume they are getting a full employer match, bringing the total 401(k) savings to $36,000 per year or $3,000 per month.
- $10,000 per month for a mortgage in Kansas, they must have an incredible house. One detail that many people seem to gloss over is the fact that they have a 10-year amortization on this mortgage. That means they are aggressively paying off the mortgage. With a 10-year amortization, I estimate that 69% or $6,900 of their monthly mortgage payment is going to principal. Since this is increasing their wealth, I count it as savings.
- $4,000 per month going into a Vanguard account is clearly savings.
- While I think it’s best to get your own financial house in order before saving for a child's education, they are saving $1,000 per month.
- While I am no fan of Bitcoin, I’ll count the $100 per month used to buy Bitcoin as savings (even if it’s actually speculation).
Add it all up and that comes out to $15,000 per month going to savings. Recall that their monthly take-home pay is $25,600 that comes out to a 59% savings rate.
While I agree that $3,000 per month on food or $2,000 per month on clothes is way too much, it’s not an overwhelming amount of their income. Spending $3,000 per month on food with a $500,000 income is like spending $300 per month on food with a $50,000 income.
I could spend all day nitpicking the line items in this budget (as the rest of the internet has) but I think that would miss the point. The more money you make, the higher your margin for error. If you make enough money, you can stumble into a strong savings rate.
I spend a lot of time discussing the importance of living a frugal life. If you want to achieve financial independence it’s important to keep your spending inline but stories like this highlight the fact that it’s equally important to focus on maximizing your income which is the second lever of Financial Independence.
Having an extremely high income can have the same impact of being an extremely frugal spender.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions