You Don't Have to Earn a Very High Income to Be Wealthy, But It Helps

Later on in the book Stop Acting Rich: ...And Start Living Like A Real Millionaire the author makes a point about a group of millionaires who didn't have to earn a high income in order to become wealthy. He talks about millionaires who live in homes worth $400,000 or less (91% report they are extremely happy with life) and has this to say about them:

Most of the people who make up this low-profile millionaire segment never earned very high incomes. In fact, the median household annual realized income (from all sources) of this group was $113,334 at the time they first reached millionaire status. However, most people will never earn enough money to become wealthy and to be hyperconsumers at the same time. Do you want to become wealthy? If you do, you might want to follow the ways and means of this affluent group.

He goes on to say that the key to becoming wealthy is, as you might guess, spending less than you earn.

A few thoughts here:

• While it's not a fortune, $113k is nothing to sneeze at either. It's way more than most people earn.
• That said, the income certainly isn't "very high" as he notes in his first sentence. In addition, this is the income these millionaires had when they first became millionaires. This means (most likely) that they had salaries that were below this level that got them to millionaire status.
• Still, it's likely they had "good" salaries for much of the time on the road to millionaire-ville. That's why we not only need to keep spending under control but also make the most of our careers -- so we can maximize income. Yes, you can become a millionaire while you make $40,000 a year, or $60,000 a year, or $80,000 a year. But it's easier to do so if you make $120,000 a year, $150,000 a year, or $200,000 a year, right?
• Let's look at an example. If you earn $50,000 a year and save/invest $5,000 a year (using the "pay yourself first"/save 10% of your income guidelines) and it grows at 8% per year, you'll be a millionaire in 36 years. Looking at these numbers, you can see how someone making $75,000 then $90,000 then $113,334 a year could become wealthy well before 36 years, especially if that savings is matched in whole or part by something like an employer's 401k program.

How are you doing on the road to becoming a millionaire?

Comments

[Rob]

At first I was a little surprised by the statement "they never earned very high incomes." Sure, $100k is not a doctor or lawyer salary, but they are still in the top 1% of incomes in the world according to the Global Rich List.

[Traciatim]

Not very high? Isn't it in the top 10% of income earners? According to the chart at http://en.wikipedia.org/wiki/Personal_income_in_the_United_States#Income_distribution only 6.24% of people make more than 100K. I'd say that puts it in the "Very High" range.

[rich]

Well its important to note here that the 113k is household income, not an individuals income. So a married couple each making 55k hits that mark. While this might be a lot of money in say Tulsa Oklahoma, it would not even get you into the upper middle class of San Diego or Washington DC.

[PMT]

Agreed making 113K puts them in the top of households for income. The median income per household hovers around 50K-60K so at 113K you're talking nearly double that amount. For an individual ~40% earn less than 25K/yr so you're even further away from that 113K if you don't marry.

@FMF
When you did the calc for the last bullet did you account for inflation? When I do it w/inflation adjusted numbers (inflation @ 3.1%) I get a much much lower number of ~$336K. Even if I ratchet down inflation to 1% I get $682K. This doesn't even account for inflation on the income needed in retirement either.

$1 mil ain't what is used to be as we all know. I think the new benchmark needs to be higher...perhaps 2 mil at least that's what I'm shooting for at a minimum.

[FMF]

For those of you stuck on the $113K number being "high." Remember, the quote is this:

"the median household annual realized income (from all sources) of this group was $113,334 at the time they first reached millionaire status."

This means they earned $113k when they became a millionaire -- but the salaries that got them to millionaire status were below $113k (how far below, we don't know.)

PMT --

I just calculated the absolute amounts. That's what we're talking about here -- the absolute amount of $1 million (not the relative amount of $1 million today is worth $_____ in ____ years).

As for the "$1 million isn't what it used to be" and "what's the new $1 million", we've discussed those a few times here. I'm just back from vacation and digging out, so I don't have time to track them down, but you can if you're really interested.

[iggy]

I love these fairy tales...

[Budgeting in the Fun Stuff]

Now I feel a little poor...we're trying/planning to reach the $2 million mark by 2035 but we're "only" making a combined $80,000 a year right now. So far, we are on track for our goal. I have no idea when or if we'll ever make above $100,000 combined in today's money, but we pretty much live and pay off our mortgage debt with $40,000 a year and save the other $40,000 for a variety of goals including vacations, car funds, and retirement, so salary might not matter as much as cost-of-living...

[Old Limey]

In 1956 my income was $4,316 per annum.
In 1992 my income was $72,488 per annum, that's when we both retired.
My wife worked part time for a number of years, her income maxed at $10,558 per annum.

A combination of living well below our means, saving all we could, not spoiling our children rotten like contemporary parents we know, savvy investing (active mutual fund selection - market timing - no index funds - no ETFs - no buy and hold), the stockmarket during the wonderful Clinton years, and now in 2010 we are multi-millionaires and our total income is at an all time high and our earned income is zero.
I guess we fit the premise of this topic.

Could we do it again? I have my serious doubts since times have changed dramatically since 1956.
High budget deficits - high national debt - "Made in the USA" a thing of the past - high energy prices - peak oil - world overpopulation a big threat to prosperity.

[Eugene Krabs]

Aw, come on Old Limey, don't depress the rest of us who have to make it in this day and age. :)

I believe that it is indeed possible, and that opportunities still abound. In fact, I see it every week. Just a few weeks ago, Tesla IPOed, and it went extremely well (I did not buy in), and Apple Computer rose from the grave, and recently, overpowered the mighty Microsoft in market capital (which I do own some shares of).

In fact, I would argue that the past was actually a more difficult environment, having had to deal with the repercussions of WWII, the Cold War and the nuclear threat, as well as the Vietnam War, and then, decades of rampant consumerism.

I think those who put forth the determination, effort, and the savvy can still carve out a good financial life for us.

[brooklyn money]

Also, no more pensions. That makes it much harder as well.

I'm on track if I don't buy a house and keep saving at the rate I'm saving to get there in 11 years. But so many things can happen between now and then.

[jeffinwesternwa]

saving only 10% a year isn't enough with a high "2 or 3 digit" (before the comma) income. Less consumption, 20-50% saved is MORE like it! I never made over $45K before 1992 when I opened my own business with a net worth of $250~K and made $5K in year one and $135K to a high of $440K over the next 16~ years. Retired at age 47 w/ $2.8M~ (Even paid out almost $1/2 M in a divorce in 2000). Sim ly kept the lifestyle one of making $50K~ a year and saving/investing the rest. Lived well, worked VERY hard and called it quits at 47! Very doable for the disciplined!We're a RICH country, don't get caught up in the ultra large house, mall trips on Sat, spoiled kids, 2 SUVs new every 3 years, five phones and $100~ month TV bill. Leave that to the "real poor" working slobs who'll never get rich....

[Jenna]

Hopefully investing wisely and making good business decisions in an attempt to Crush It - and hit a million sometime before I die of old age...

[Cody]

@ jeffinwesternwa:

I am 23 and aspire to follow a plan such as the one you laid out in your comment. Thank you for the inspiration!

[Rob]

@ Jenna - I like the Crush It! reference, assuming you have read the book that is.

It sounds like @ jeffinwesternwa already did Crush It and now he is retired!

[Old Limey]

@jeffinwesternwa
I have great admiration for entrepreneurs like yourself. Silicon Valley is full of them, a few with big names are Apple founders, Jobs and Wozniak, Hewlett & Packard, Cisco, Google, Yahoo, and of course Robert Noyce & Gordon Moore, two of the eight founders of Fairchild Semiconductor, that left Fairchild to form Intel. It takes a risk taker with a lot of guts to start a company and of course many fail to make it.

I well remember the day that my department hired a young kid out of the University of Minnesota in our structural engineering department and put him to work with me. He surprisingly had an MS in Physics and was clueless about some of the engineering terms we used every day. Pretty soon we realized this kid was very smart indeed. I would say that it took him about 15 years to become the most valuable guy we had and the developer of the computer code that became the mainstay of our department and was later shared with all the other divisions of the company throughout the USA. We became close friends and worked together on many projects. About a year before I retired he decided to bail out and start his own company. His first and second customers were GM and Ford and even though it's only a two man company he was recently offered $13M for it. When he got the first call from GM he hung up thinking it was a crank call, but fortunately they called back. They use his software for performing crash analysis studies on the computer, since it was cheaper and easier than using cars and dummies. Today many companies use his software, they have expanded into other technologies, and he gets paid an annual license fee for every engineer that uses it.
He's moved up in the world, a nice home on 2 acres in one of the valley's most prestigious communities, and a nice condo in an exclusive development at Lake Tahoe. He's a little unusual that he still drives the VW Beetle that he had when I first knew him, and he and two of his musical buddies play gigs on guitar in a local bar and practice in a soundproof studio on his property. Unlike me he drinks $100/bottle Chardonnays out of a plastic wine glass whereas I'm very happy with a $3/bottle Chardonnay out of cut crystal - it clinks better when I toast my wife every night at dinner!

[Jeffinwesternwa]

$3 bottle, well......if it fits w/ the food on a weekday "ok" but, no plastic to taint the wine! I wasn't the brighest bulb,bored with high school as a 2.0 student but graduated Cum Laude 1982 at a state college w/ a double major (in 4 not 5+ years that seems the norm today), graduated w/ NO student loans, just two old but, paid for cars and about $1K~ in the bank. Became a commissioned floor salesperson w/ only minimum wage ($3.35 hr) base pay, lucky to get a job in the terrible-like today, recesssion of '82. Great success at that Fort 500 co wotring up the ladder but, all work, no play by age 25, so I joined the Air Force at a 40% pay cut, graduated the bottom 1/3~ of my OTS class but, served 71/2 years on AD until becominng a financial planner. MAde $4400 my first year in business! Ate pasta, chicken, tuna and lived in a nice small apartment that year!. Worked an honest 65+ hours a week. Watching my clients taught me MORE than the books ever could, just "don't do what they did"! Always a saver like my depression era parents, I lived a nice middle class lifestyle but, NEVER had and credit card nor even mortgage debt! Saved and paid cash! Got a 48 mo car loan in 1983 but, paid it off in 19 mos. Lived in a used trailer for $8K as a 2LT in expensive CA but, paid for it in less than 3 years. Only debts EVER! Saved a MINIMUM of 10-15% when young to over 50% when making mid six digits! Still lived a $50K~ lifestyle, which with no debts is fine. Paid taxes on some of the $2.85M I amassed by retirement, built a nice $250K townhome just a block off the lake and the $1.250M homes. My taxes a year is probably one month of their taxes, maintenance utilites. bought a Jeep and travel. Over $21/4M~ left. No worries, no cares, just workout an hour a day and take my time. I am the (multi)millionaire next door no one ever notices, cept' folks say I'm "gone a lot" yep......life, is GOOD! 50 goin on 40!

[Old Limey]

Jeffinwesternwa
I was sorry to read that you had a divorce in 2000 that cost you $1/2M. My 49 year old daughter got divorced in 2007 but she was a stay at home Mom and received $2M+ and $20K/month for 9 years. She has been going with an engineer (BSEE and MBA) for almost year that is an executive at Synopsis, now Cisco is pursuing him and he is meeting with them tomorrow. They met through eHarmony.com - the best outcome will be when the last of his children starts college and they can live together. Everyone needs a soulmate!

[jeffinwesternwa]

In 2000 $/2M was about 40% of my (our) net worth, no kids so no child support, etc.,and I came into the marriage in 1989 w/ over $100K, my spouse, (we're still good friends, just had small debts), I guess a fair deal ...I guess,... so those great working years last decade and decent investments went from just over $1M to under $1M with divorce and market drop of 2001, then UP to the $2.85M (with added investments of course) in 7~ years...

[tdizzle]

Is it even possible to get 8% a year in the casino that is the stock market anymore? I was prudent in saving the last 10 years since I graduated college. Did all the right things, except I was aggressive in my investments, like I was taught in school (you're young, take risks, be aggressive etc.). I've lost nearly 50% of my savings (partly because of stupidity in investing, and thought I was smart). I'm not blaming anyone but myself, but apparently buy and hold wouldn't have made me rich in the last 10 years either.

It's hard to see people who have no college degree, worked all their lives at one company, and retire with a pension & social security. Good for them, but it won't be like that for me and my children. We'll have to work twice as hard, for no pension or social security. Sad, Sad.

[jeffinwesternwa]

Those who invested thru the 70's and 80's were the wealthy of the last two decades! Be GLAD you are young when you CAN have high stock market exposure. Diversify, Dollar cost average for LONG periods, accumulate shares, and watch...

[JimL]

I have concern over the market for the reasons mentioned by Old Limey. We fall into the $1+ million club and don't want to risk falling out. Further, I was recently diagnosed with a cancer that can be aggressive (fortunately, caught it early). As such, we have shifted a good portion of both the retirement account and the investment accounts into low risk mutual funds (same/similar mentioned by Old Limey). We are fortunate to have a good pension plan to boot.

With the remaining balances and new investments, I am putting those into good growth mutual funds/index funds as I want to have adequate savings if I am blessed with a long life.

[Holly]

Wow--best of luck to you, JimL, with your health...and congratulations on your good investment strategy. Sounds like you have a solid approach planned to secure your financial future.

@ jeffinwesternwa: I can only wish we had made the decisions to save, earn, and invest that you have. Very intriguing...