How a 5 Percenter in Los Angeles Does Money

Daniel (not his real name) is 38 and lives with his wife and child in Los Angeles.

ND: So, Daniel, tell us a little bit about your finances.

Daniel: As a general overview, I’m in my late 30s, married, with a kid. My wife is a stay-at-home mom. We live in L.A.

I make around $200K a year.

Do you work in the entertainment industry?

No, actually I work for an Internet startup.

Oh, very cool.

So salary-wise, I know I make a really good salary. I’m sure if you compared me against the average, I’m probably in the top 5 percent.

Even as a household.

But this is L.A.

You are in the top 5 percent — I just checked. But yes, this is L.A. How does your income stack up against your expenses?

So to rewind a little bit, my income has close to doubled in the last six years or so. When I joined this startup, I actually took a decent salary cut to have more equity in the company.

Going back to expenses, we’re doing okay. We have a mortgage, our kid goes to private school.

I know I live a really good life.

But at the same time, I think damn, I make a lot of money and I’m not exactly throwing money away left and right.

Fair enough. So you have your major expenses — home, school, I’m guessing cars, probably health care, the usual stuff — and about how much of your income does that take up?

About 60 percent of my income goes to bills. Mortgage and property tax takes about 30 percent, my kid’s school is around 15 percent, my car payment is cheap, maybe 2.5 percent.

This 60 percent also includes utilities, extracurricular activities for the kid, house insurance, life insurance, gardener, cellphone, internet, etc.

A big part of my income goes to my kid’s school. But that was also calculated in some sense. We live in an area where it’s nice but the schools aren’t great. So it was either try to find a house in a neighborhood with a good school district and pay that markup, or find a house in a less nice neighborhood and go private.

Right. I’ve heard that is a not-uncommon calculation.

We figured private actually gave us more choices. We had more flexibility in where we could live, what school we could send her to.

How much of the remaining 40 percent goes towards savings, an emergency fund, or retirement? Do you have a 401(k) and a company match?

I actually haven’t contributed to our 401(k), and our company doesn’t match.

At this point, we actually haven’t been saving much. Really, zero percent to savings at this point.

Part of that is because my salary has recently just gone up quite a bit, and part of that is because we bought a house about two years ago and we’re still working on bits and pieces of it. It’s an older house and it’s needed work.

So you took a salary cut and your salary is starting to rise again. Got it.

Yeah, I had a decent amount of savings from some previous windfalls, so it was something where I went into it knowing that there would be a period of time where I would take a 20–30 percent paycut for a few years.

It’s just taken a little longer than I expected, so we cut into our savings more than I would have liked. But I’m finally at the point where it’s starting to turn around. I’m hoping to be making closer to $250K next year.

That’s excellent. So what are your future financial goals? Are you planning on fixing up your home and selling it, or is that your “forever home?” Are you thinking about starting a company of your own? Are you thinking about hunkering down and adding to your savings? Are you thinking about retirement or college costs?

We bought our home as a forever home. It’s a small house compared to most houses these days; it’s around 1400 sq ft. There are some renovations we’re looking to do and we expect to be able to afford it maybe next year?

I’m kinda putting a lot of my eggs in this current company. We’ve been growing like crazy and doing really well. Ideally, I’m hoping in the next 5–7 years, we have a payout event big enough that I can basically retire if I want to.

Oh, that’s very cool. I am excited for you!

Retirement and college costs are kinda in line with that.

I’m less worried about college costs because the amount we pay for my kid’s school currently is probably equivalent to a lot of colleges.

At that point, I’m figuring I’ll be even further along in my career even if this company doesn’t work out.

It is interesting that you are in the top 5 percent of earners and you are operating under the same mindset that many of us (including me, who is in the second quintile) have: someday, when I have more money, I’ll save for retirement.

Yeah, though I do have retirement savings already.

Ah, good. Mike Dang will be so pleased!

I was really diligent at saving when I was younger. I probably have about $250K in retirement savings already.

That’s good to know — and now that you know the lay of the land re: your job, you are able to make smart predictions about your future income.

Yeah, I made a very conscious decision to not put money into my 401(k).

Like I said, I’m kinda putting my eggs in this basket.

I figured if I put my money into a 401(k) now and this company pays well, that money becomes essentially useless.

Fair enough! 401(k) return rates are not always that great, after all.

Yeah, it’s definitely a calculated risk.

When you emailed us, you mentioned that you wanted to talk about how the idea of wealth is relative and complex. What does that mean to you?

So I know that I’m in the top 5 percent of earners. I know I do well.

But then when I go to my kid’s school, we’re probably closer to the bottom 10 percent as far as wealth goes.

So I feel really rich sometimes, and other times I feel like why isn’t that me?

Then I see these things where the average household income in Los Angeles is $45,000. Roughly. [ED: Median household income in Los Angeles varies widely depending on neighborhood, all the way from $15K in Downtown L.A. to $200K in Bel-Air. Median household income in Los Angeles County, as a whole, was $55,909 in 2013.]

Relative to that, I’m like Donald Trump.

I think it’s a huge problem with our society that there’s so much income inequality. I’m actually really interested in the idea of a basic income for everyone — and every time I mention that, I’m labeled a socialist.

Like the Mincome project in Canada?

I’m actually not familiar with the Mincome project.

It was a project to give minimum income to everyone in Manitoba, and it reportedly eliminated poverty for 5 years, and then they ended the program. Alaska has a minimum income program too. [ED: Alaska’s Permanent Fund Dividend is less of a minimum income than an income supplement.]

Yeah, I think there’s a lot of potential for that. Even something that supplements someone’s income. I think it’s a rising tide lifts all boats idea, though I might have used that phrase wrong.

There’s also the idea that homelessness costs more than giving people homes.

Yeah, I’ve heard that before. There are all kinds of things like that. Kids do better in school, family life is more stable, etc. The Billfold did something recently about 24-hour childcare places, which sounds like a horrible idea to me.

We live in a 24-hour workforce, like it or not. Even parents with high incomes often need round-the-clock care sometimes though, right? Day nannies and night nannies?

I think work also has changed and as a society, we haven’t changed with it.

I completely agree.

Automation and robots are just taking over the world and we haven’t really kept up with it.

I look forward to seeing the future of robotics, since that seems to be where we’re headed! So let me ask you one final question: do you have any financial advice for Billfold readers?

I only have my own experience, so it’s not quite advice.

I think this has been echoed before, but as I’ve gotten older, it’s gotten truer for me: Spend more on experiences and less on stuff. Like your cruise. Drinks with friends is a great experience. Being on vacation and not worrying about that $15 drink is great.

I’ve had the really nice car, bought the really nice stuff. It was nice, but I don’t remember much of it. I remember way more about the vacations I’ve taken, the things I’ve done, etc.

I actually can’t think of the last physical thing I bought myself.

Well, the last physical thing I bought myself was a bottle of Katy Perry’s Killer Queen perfume, so… there you go.

If you’re on vacation though, I think that counts as an experience.

Ha! Fair enough!

I think that’s something you’ll remember. When you put that perfume on, it’ll bring back memories of that trip. I totally believe that, that’s a worthwhile buy. Even if it’s something you could have gotten at a local place. It triggers a different sense and it’s worthwhile.

Thank you! I hope you and your family have a great financial future. It’s always fascinating to hear about the many different ways in which we relate to money — and money is complex, no matter what percentile you’re in.

Photo credit: Angelo DeSantis