Scraping by on a $500k Income

Mark Meredith, CFP®

Originally published 07/25/2019

An article on July 13th by Shawn Langlois of MarketWatch shares the story of a Reddit discussion where an anonymous man posted his household monthly budget, and how they are struggling to get by on a $500k annual household income. One more thing, they live in Kansas….

It may be fake but here is the budget posted:

I assure you there are real people that live like this. I’ve met with people that had well over 7 figure net worths that were undoubtedly going to face tough times later in life if their spending habits didn’t change significantly. But once you have shiny toys and have played with them, you don’t want to give them back. It would be like going back to eating at Taco Bell after you have tried Qdoba. Scary, I know.

Someone who is scraping by on a $500k annual income, would scrape by on a $1 million income, or a $5 million income. The problem these people are trying to solve, cannot be solved with more money. They have a misguided view of what is missing in their lives.

This person does seem to be building some wealth still, with a maximum annual 401(k) contribution and $4,000 per month going to Vanguard, which makes the post a bit misleading. They are probably saving more than 99% of Americans on an annual basis.

Building and maintaining wealth is quite important, as it allows us to be more free. But when what you formerly viewed as luxuries have now become necessities, you are experiencing the slippery slope of “lifestyle creep”. Lifestyle creep happens naturally to an extent, but if your expenses always grow in lockstep with your income, it’s time to take a look in the mirror. That is not a good strategy to build wealth.

I’ve noticed people react quite differently when they are presented with an increase in annual income…..

What prudent savers say: “I just got a $10,000 raise at work and I decided to increase my annual 401(k) contribution by $8,000”.

What knuckleheads say: “I just got a $10,000 raise at work so I bought a $50,000 SUV”.

Morgan Housel stated in The Psychology of Money, when you see someone driving a nice car you don’t think “Wow the person driving that car is cool”. You think “If I had that car people would think I’m cool”.

But what’s even cooler, is living within your means.

Originally published on July 25, 2019

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