Free Ebook.


« Help a Reader: Two Mortgages | Main | Nine Myths of College »

October 12, 2010

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

It is truly amazing how people will live to their max. No matter what their income is they will max it out. Always something else to have I guess. The rich man is the one who lives below his means, regardless of income.

cached link is broken for me... Deadlink

D --

I went back to the original article and the link there is dead too. I dind't know that could happen with a cached page...

Classic example of Lifestyle creep (or inflation) gone wild :)

I've never heard of such an extreme example though... I think these people need to hang out with friends that make a lot less than they do. Perhaps they will pick up new cheaper ideas for entertainment...

Here is an interesting perspective on this. Think about all the things he purchases or services he uses, and how much money that is distributed back to the economy. A lot of people have made money and fed their families off of this guy. Not to defend him in any way, but maybe we need people like this in our society.

@jason - what you say is sort of the broken window fallacy in reverse. People don't add to the economy by what they spend, it is by what they produce. The economy needs people to spend but also to save and invest.

No doubt these are examples of overspending. There is certainly an argument to be made, that they could make their money go farther than they currently are.

But I think the point was to address the fact that $250K does NOT necessarily mean you should be classified as super-rich. That $250K (minus Federal, state, and local taxes) can be spent up pretty quickly. In fact, I think your point in this post tends to support that thesis ... people sometimes assume that if you make $200K or more, you've got so much money, you 1) don't have to watch where it goes and 2) can afford to fork over more of it to the Feds.

Neither of those are true.

You STILL have to budget (your point) and you WILL feel the sting of increased taxes (the Professor's point).

And to your point about student loans and relocating ... I agree, to an extent. Certainly, $300K+ in student loans is huge, and living in Chicago isn't cheap. But, consider this ... if they didn't have those student loans, and didn't live in Chicago, they wouldn't be making $250K/yr.

The point being, simply drawing a line in the sand, saying $200K is rich, isn't a fair estimation. Sure, $200K/yr equals wealth in some contexts, but in others ... not so much.

If you google the blogger's name, you can find tons of articles.

FMF -- I knew this article would set you off, haha. Glad you are writing about it.

@Michael- I agree that producing adds to the economy, and that people need to spend money to add to our economy. In this guys case, it seems to me that he produces money to other individuals by spending unwisely. His product is bad spending... You and I would not buy the things or produce the cash for a service like this guy does. In a way he is taking a huge risk at his own misfortune, but giving so much to everyone who profits from his unnecessary spending. Its like Wall Street, somebody gets rich while somebody loses, the money doesn't just disappear.

I think his point when he wrote the blog (the professor not FMF) was that at 350k he wasnt rich. He isnt rich at that income level. Should he cut back? Sure. That wasnt the point. The point of his article was that our elected leaders consider him rich at that income level.

He broke out most of his expenses and then asked if these are the expenses people think are luxurious. I dont recall him discussing his private jet or vacation home. His major expenses if I recall where student loan debt, housing, and the biggest was Taxes.

Could he move? sure. Does he want to move? no. There are reasons for locations being expensive and there are reasons some places are cheap. (Supply vs Demand- there is less demand in cheap places for a reason.)

Take another look at his life and tell me if you really think his lifestyle is 'rich'.

Tyler --

I think you're confusing two different people. The professor (and his wife) make $250k per year. The doctor in Chicago makes $350k per year. (Easy to do since the WSJ did the same.)

We don't know the net worths of either of these people, but it's safe to assume they aren't large since they both appear to be spending all they earn (and the doctor $25k more than that). So we can't say whether they are rich or not (since wealth is defined by net worth, not income.)

But I can safely say that they both are spending way too much. How can I say this? Because they are spending all they earn (or more). And anyone who is spending all he earns -- regardless of his income -- is over-spending. The fact that both these couples make such large incomes makes that over-spending even more visible.

The blog post by the professor was rescued and can be found at the end of this post: http://delong.typepad.com/sdj/2010/09/todd-henderson-we-are-the-super-rich.html

Our govt taxes people at their yearly income number not net worth and his (prof)argument was that he didnt feel like he lived a rich lifestyle at his income level. He then broke out his expenses. The three largest were housing, student loans, and taxes (the largest). His argument was that he wasnt living "richly" and that his income was far from rich. Thus, politically calling him rich was inaccurate and his taxes should not increase.

The prof, if I remember correctly wasnt spending more than he earned. He was saying life is expensive and his "rich" income wasnt all its cracked up to be.

Here is the really sad thing about the Professor and his blog, a bunch of people failed to read his entire post and decided to whine about how they make less than him and he should be fine at that income level. He and his wife received threats and the mobs reaction caused him to stop blogging or publicly posting his ideas- he decided (accurately) that it wasn’t worth it.

He provided a window into his life by using his household as an example. He felt his income didn’t make him rich as was being define by the president to justify his plans.

He wasn’t whining about not being able to afford the BMW and he wasn’t claiming he couldn’t make ends meet. He simply stated that he would make changes to his spending as a result of increased taxes. Those changes are exactly the opposite of the intended plan by the president and his advisors.

I don’t think he was asking anyone to “boo hoo” for him and his wife for “only” making 250k. He was asking people to realize 250k wasn’t as rich as people might think and to simply think about his argument- right or wrong.

It’s too bad it was easier to ridicule him than hold a civil discussion. But then again, what can we expect from a society at the bottom of the worldwide education rankings.

Thank you for posting the blog M.

Here is the prof final blog post.

http://truthonthemarket.com/2010/09/21/time-to-go/

Tyler --

Here's where I agree and disagree:

Agree that income and net worth are not the same and the government saying they are taxing the "rich" is a misnomer because they're actually taxing high income individuals, not wealthy (high net worth) individuals (necessarily).

Agree that he probably doesn't feel rich. Who does? Surveys show that at every level people think the "rich" are those people one economic level above their level.

Agree that he has large expenses in housing, debt, and taxes. Of those three, two were personal decisions he made and now has to live with them (and I believe his house was quite high in value -- perhaps he should downsize?)

Disagree that those were his only expenses. I believe he cited daycare/nanny/housekeeper, entertainment, and a few other things that when compared to what most people spend on those is a pretty large amount.

Agree that his life is expensive in his view. It's expensive in everyone's view who can't control their spending -- whether they make $40,000 or $40 million.

Disagree that his "rich" income isn't all that it's cracked up to be. According to what I could find, Chicago is 12% more expensive than the US average. Take 12% off $250k, move somewhere else, and he still earns a decent living. Or take 50% off if you like -- he still earns a good amount.

Agree that "hating" people for their opinion is wrong. Unfortunately, the web does that to some people. It's ok to disagree, but why threaten violence?

No sympathy from me on this topic, none of our incomes are what they are cracked up to be. The reality is we have to pay taxes and have a roof over our head and pay off debts that got us here. At least we have the right to sit around and gripe about it in our air conditioned or heated homes and not risk charges of treason! Nobody likes taxes and even the lowest level of earners must pay 1/3 of their income to it, whether it be income/sales/property, but we live like kings here in America. Anyone who wants to whine about it should go try to live in Socialist China. I don't feel sorry for anyone who makes 250k or 350k because they think they should be "living richer". Then again, maybe I do feel sorry for them and how badly the damage to their head is.

I've been fascinated by this topic over the past few weeks, especially the (sometimes specious) arguments made against the proposed tax increase by those earning over $250k. To FMF's point, a core issue is that most people never feel "rich."


Carl Richards at the NYTimes "Bucks" blog has a nice post breaking down what feeds feelings of discontent with our income (even when its relatively high), which is a good starting point to examine what we ultimately expect our money to do for us.

http://bucks.blogs.nytimes.com/2010/10/11/all-of-our-warped-financial-expectations/

Having been a reader here at FMF for over a year, I know readers/commenters are pretty savvy and seem to avoid the perils of lifestyle envy and lifestyle creep, but I'm curious: if/when lifestyle expectations start to rise, what are your go-to strategies to reset expectations and diminish discontent?

I recently moved to a top 5 city from a top 20 city. While the move has advanced my professional career (including nearly doubling my salary, which more than makes up for the COL increase), it has also made me far more aware of the purchasing power of the economic level above me (manifested in hard-to-miss jewelry, frequent dining out, etc.). My goal is to try to find friends who don't need to spend a lot to have a good time to at least eliminate peer pressure to spend. Other thoughts?

Jason- the lowest level of earners pay zero income tax. I'm not going to do a bunch of research but you have to make well over 100k to be paying 1/3 of your income in federal taxes.

This concept that one can just up and move someplace and earn the 'cost of living' adjustment is nice in theory but doesnt exist in practice. The U of Iowa doesnt pay the same as Chicago U- cost of living adjusted. And there are less opportunities. And the quality of life is different (Id rather shoot myself, but some love Iowa). As I've said, there is a reason the cost of living is less. If my passion is surfing, I'm not moving to Michigan.

His income is a factor of his high degrees. You cant look at the debt to acquire his degrees without adjusting his income. Its a cost of his business- revenue of 250k-debt expense etc is real income.

Is 250k and all the costs in have that income a high enough income that his tax bill should be increased?
Costs: education, location adjustment, current taxes, etc

I think 250k looks like a lot of revenue but the costs of that income are also pretty high. 75k might have less costs of acquiring the revenue.

If his tax bill increases again, he will fire the nanny, fire the lawn guy, fire the massage therapist, fire the cook at the restaurant, fire etc as he downgrades his life appropriately to fit his budget. Increase his taxes, and he will degrease his spending- as all financially responsible people would do as a cost increases.

My ex-husband was just like this couple--he was all about living the life he felt he deserved, and especially about living up to the image he wanted people to have of him. And yup, together we made just about $250K & when we divorced I found out he had about $20K in "secret" credit card debt.

He's still like that, unfortunately--he brags about his $10-20K vacations that he takes twice a year, collects vintage wine, & lives in a McMansion that he bought at the height of the bubble. Oh, and he complains about having to pay child support because "he can't afford it". !

Isn't the whole point that if the socialists want to tax "the rich", they should go after people with $10 million in double tax free bonds who pay no taxes, and not people just because they make $250K per year?

I think the comment about how to prevent "lifestyle creep" asks a good question: often when you are promoted into a job with a much higher income, you also are suddenly expected to hang out/entertain with your work colleagues, some of whom are much richer than you are.

For example, if you get invited to a lavish dinner party by 1 or 2 new colleagues, you kind of have to try to reciprocate somehow even if you don't have a golf course home or you don't want to spring for a caterer and fine wine for 10. Or you might actually "need" a golf club membership if that's where everyone does business and you want to build your career.

I think the key is to keep your housing costs reasonable no matter what---not buying the large house saves you so much that if you do increase some spending in other areas you'll still be way better off than if you bought the big house too.

Other suggestions?

anon- I aways played a trick on myself when I felt the urge to over consume because of my peers. I would tell myself that its likely they financed the purchase, which is not only true, it helped to discredit the purchase. I would then tell myself that I am purchasing freedom and flexibility instead of physical goods- so the money was spent and I couldnt afford it anyways. I worked in expensive cities, in a very expensive industry and I would tell myself I couldnt afford it. Naturally, it didnt always work for me (Why did i pick up that tab last night- stupid? etc), but it made enough difference.

"boo hoo" is a good summary.

That professor made news a few weeks ago. He's not "only making over 250k", he's "only making approximately 400k".

His house is approximately 2 mil to 3 mil.

He took the post down because he started getting hate mails from everyone else who either made it on much less or aren't making it on much less.

MC-- Great suggestion to keep housing costs relatively low to allow for slightly higher occasional expenditures elsewhere. I'm planning to rent for the next 3-5 years, and while I want to find a place where I can host a few people (game nights, football games, book club), it certainly doesn't need to be lavish for everyday use. And, in the event that it would be appropriate to spend on something a bit "nicer" with friends/colleagues a few times a year (e.g. treat another couple to dinner), there would be plenty of room in the budget to do so.

Tyler-- I really like the thought of "purchasing" freedom and flexibility; that definitely is motivating! Tweaking your mantra just a bit, I might try pepping myself up with the thought, "I could afford it, but choose not to." Sometimes what's hard for me is that while I may have the funds in the bank and could technically "afford" it, I know that my priorities lie elsewhere. I like the idea of acknowledging that I've worked hard and could indulge like others if I wanted to, but that instead I'm choosing a different path. Essentially: I'd rather feel like I'm rejecting a purchase vs. feeling denied the purchase. :)

Delphine is right. Some people ran the numbers and found the professor guy to actually be making more than $400k (household income). He also did some weird stuff with his house - taking a bunch of equity out? can't remember - which made him seem none too smart and to be in serious financial trouble. And lastly, apparently his wife was mad as hell with him for writing the post in the first place :)

So Guinness who ran the numbers? I know who did and I know how he got to the 400k number. If you had wanted to do any research it would have been easily accessible. The Prof has stated he didnt make 400k- it still misses the point of his post. It would miss the point of his post if he made $10mm. Let's all do a little test. Read his original blog post and then tell us what the theme, or thesis, or purpose of his blog was. Thank you for telling us you cant remember what he did with his house- maybe that's because it was never disclosed that he did anything with his house other than remodel. In his final blog post, he does state that his thoughts cause harm to his relationship with his wife... its not apparently, its fact.

aron- totally agree. I also use that same line of thinking. "I could buy that with cash, but I choose not to". With this type of thinking, I am in control and making the decision not society or the pressure of my peers. Being a leader and getting the respect of your professional peers rarely means you do what they do. There will be times when you need to pick up a tab that hurts, tell yourself that you save in other parts of your life so you can make this investment in relationships. Try to only spend/splurge when it has an investment/giving component. People care more about the drink you bought them, than the car you drive.

I'll just continue to become wealthy on my pitiful average salary. Let the over-educated geniuses try to figure it out.

A much better written post in NYT by Professor N. Gregory Mankiw "I can afford higher taxes. But they'll make me work less"
http://www.nytimes.com/2010/10/10/business/economy/10view.html?_r=1&ref=your-money

@Mycroft

To see the dishonesty in Prof Mankiw arguments, read this:

http://motherjones.com/kevin-drum/2010/10/mankiws-taxes

and this:

http://voices.washingtonpost.com/ezra-klein/2010/10/greg_mankiws_tax_bill.html

The key is cut your expenses and keep building up your salary, just like FMF has been saying for years.

When you get to the point of 50 - 100 years of yearly expenses saved up, you don't get bothered by the threat of losing your job anymore. Instead you can stare the threat in the face and laugh out loud. It's the ultimate freedom feeling.

-Mike

BOO HOO! That's funny. FMF is getting snarky. LOVE IT!

So I read the linked article, and I can completely understand why that guy is getting hatemail. A nanny, lawn service, maid, expensive home, and he is "just getting by"? LOL

The comments to this entry are closed.

Earn Extra Money

Save!


Enter your email address:

Delivered by FeedBurner

Disclaimer


  • Any information shared on Free Money Finance does not constitute financial advice. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. All posts are © 2005-2012, Free Money Finance.

Stats