Posted on 05/23/2013 3:11:18 PM PDT by grundle
Jake Smith is a name Ive made up for the person who sent me this email:
"Im a physician in my early forties. I make $450-500K. I read a lot about finance and I know that technically I am in the 1%, but I dont feel rich at all. I dont know if it was the way I was raised or because for a time I was living paycheck to paycheck or if its because I have three kids (and hence, eventually will have three tuitions to pay), but I dont feel wealthy yet. Maybe its because I live in an affluent suburb of a big city and most of my neighbors seem to be doing really well. I dont know. Have you run across other folks like this?"
I had not, personally. So we arranged to speak on the phone.
LS: Tell me about your money. How much do you make?
JS: I just got my tax returns back a couple of weeks ago. My total income was higher than I thought it would be$570K. And it was pretty good last year as well. And after reading other conversations with rich peopleone in the $300Ks, one in $100Ks, I was surprised they thought of themselves as rich.
LS: Which is insane, to me. Of course theyre rich! How do you define rich?
JS: I think of rich as not having to worry about money, not having to worry about retirement, not having to worry about saving for your kids educations. I have three kids and I try to save up for their futures, and my retirement, and even with my salary I dont feel secure.
LS: Did you grow up with money?
JS: My father was a physician. I think he made a decent amount of money, but my parents never talked about it. My mom also worked. We lived in an affluent area, but my parents were pretty cheapwe never went on expensive vacations or had expensive cars. We did okay but werent living a lavish lifestyle. My parents were so cheap that my sister, also a physician, has rebelled against that and has a hyper-consumptive lifestylehigh-end cars, high-end clothes. I took the opposite approach and am frugal.
LS: Did your parents give you money when you were growing up? What about for school?
JS: They paid for our undergraduate educations, but I didnt want them to pay for my medical school so I took out loans for med school. Paying for college was obviously very helpful, though when I was in college, tuition rates were much lower than they are now. I think yearly tuition and room and board at my state school was $7K. Now I think its three times that. But other than that we didnt get any money from them, and I didnt expect it. I think thats a good thing. It allowed us to find our own way and work hard, and my parents are enjoying their retirement now.
LS: Did you go straight into medical school?
JS: I spent a year after undergrad finding myselfI travelled around Europe and South America, just had a really good time enjoying meeting people, experiencing new things, not studying. My parents paid for my tickets, and I mostly stayed with friends and spent money that Id saved. Then I came back here and spent a year doing research in a lab, and then I applied to medical school.
LS: Do you still have med school loans?
JS: I do. Its down to about $90K, which is the original amount I took out, but during residency and training, I deferred them and it ballooned to about $150K.
I was lucky enough to make a private equity investment into a health care company, and after that initial loan was paid off for this investment, its doing quite well and Im making a good amount of money from that, so a lot of my income comes from that. The ROI I get from this investment is significantly higher than the 6% interest rate on my student loans. It was a calculated risk to make this investment instead of paying down my student loans, but in the end, it paid off. So now that things are going pretty well, Ill probably pay them off.
LS: Can you explain how that investment works? Where did the money come from?
JS: I took out a business loan that I got through my practice, but I had to guarantee it personally.
LS: Where did you learn about investing?
JS: I learned from reading a lot, talking to a lot of people. A lot of the investing luck Ive had has been being in the right place at the right time. It could have turned out badly, but it didnt. Ive made some investment mistakes in the pastI invested in industries that were unfamiliar to me, and I lost a lot of money. I dont know how muchmaybe a few hundred thousand dollars. I put my family through some difficult times. During that time, we were living paycheck-to-paycheck, even with my salary. I was making $200K a year.
LS: Can you explain how that works? That is so much money. Where did it go?
JS: We lived in a townhome that cost in the low $300Ks. For my salary that wasnt expensive, but it was the losses in this business that Id invested in that caused the situation. I was putting up a lot of my own money and then the business failed, and we had to pay back some loans, and by the time the books were all cleaned up, I was out of money.
LS: Was your wife working?
JS: She was then, but after our second kid she started staying home.
LS: Does she share your same stress about money?
JS: She doesnt stress quite as much as I do. Im lucky in that shes really frugal and shes prevented me from making a lot of dumb purchasing mistakes in the past. Its good for someone like me to have someone like her to keep me grounded. She does worry about the moneyless so now, especially since the past couple years have been pretty good. But we do worry about our childrens futures. What if they want to be a teacher? (There are a lot of teachers in my family.) The middle class is not doing well in this country, Im not sure how theyre going to do if they decide to go into teaching.
LS: It sounds like you come from a family of physicians. Is that something youd encourage?
JS: Its lot of work, a lot of headaches. I love being a physician, but every year its increasingly difficult to deal with the paper work and the red tape.
LS: Did you choose the kind of doctor you are based on salary at all?
JS: No I didnt. I chose my specialty because I fell in love with it. If it paid much less, I would still have gone into it.
LS: Are you still living paycheck-to-paycheck?
JS: No were able to save a good amount now. Since the financial collapse, Ive become much more conservative. Ive built up a two- or three-year cushion. I think the world economy is unstablethe impending Eurozone implosion, the asset bubble in China.
LS: Where is that money?
JS: Just in a bank account, its earning hardly any interest. Whatever the rate is is hardly worth mentioning. Even our financial advisor advised putting that in mutual funds or whatever, but Im not sure what is going to happen. This way, I might lose 1 or 2% due to inflation, but Im not going to lose 30%. Having said that, Im going to use the next couple years to deleverage, pay down student loans, I have a couple investment properties with mortgage, and one with a high rate, so Ill probably pay that down.
LS: Properties! Another layer.
JS: I bought the first property during my residency. We fell in love with a condo, and during the years were there, the value increased, and then we bought another condo, then another house.
LS: So your $570K, break that down from me, where is it coming from.
JS: Most of the money is from work$320K. I think probably $50K is from our properties, and then $200K from my investments.
LS: In addition to your fat bank account, where else is your money?
JS: I dont have an online brokerage account yetI plan on getting one soon. But I do have a retirement account that my financial advisor takes care of.
LS: You mentioned tuitions earlier.
JS: We started a 529 about a year ago. I should have started a lot earlier, but yeah, we have that 529 for them.
LS: Do you talk with your friends and peers about these things?
JS: Yes, not in quite the detail Im talking to you, not hard numbers, but we do talk about it. Some are doing well, some are doing worse. Many of my friends are in the middle class.
LS: Does it feel silly to worry about money when youre making so much more than even people you know?
JS: Ive analyzed my worry, and I think a lot of my worry is not just for myselfwere all in this together. Maybe I read a lot. Maybe I read too much. Its just the way things are going for our country isnt great. I just read a good book by Mark Blythe, Austerity: The History Behind the Dangerous Idea. It explains that in the run up to the crisis, there was a lot of private sector debt, and it became public sector debt because of the bailouts, and he calls it the great bait and switch because the middle and lower classes are now paying for it through budget cuts/spending cuts. It isnt the bankers, who caused the crisis in the first place, that are paying for it. I worry about my kids having to pick an industry where they think about how much money theyre going to make instead of something they love. If I was on an island by myself, I would not be worried. But Im worried for my family, for my kids.
LS: Do you feel like your lifestyle reflects your income bracket?
JS: We are proud owners of new Toyota minivan, sleek and sexy. My wife has been loving the minivan, and my friends are making fun of me, calling me a loser and a hypocrite. I said Id never get a minivan! We also have a Subaru and I have a entry level Lexus (It was $32K). Average cars. We have a nice home in a good neighborhood in a good school district. I think our mortgage is in the low $700Ks, which is a lot, but its less than double my income. If you read The Millionaire Next Door, thats what they recommend.
I will say, once we did move to this area, there is a palpable pressure to keep up with the Joneses. When I drop my kids of at school, every other car is a Range Rover or a high-end BMW, Mercedes, Lexus. For a while I began desiring a Range Rovermy next door neighbor has one. My wife nixed that idea but I kept pining for that. Then I was like, these cars are $80K, they get 17 mpg on the highway, I dont need it. Especially since my car is seven years old and is not giving me any problems.
I was very stupid with the Lexus. I got it seven years ago and I leased it. I was under the impression that when you got a business car you had to lease it. Then I talked to an accountant, and found out that wasnt true, and after the three-year lease ended, I ended up buying it through the business. That was nice because its a tax write-off. We got a 0% loan for the mini van.
LS: How are you teaching your kids about money?
JS: Our kids are both in grade school, and we started doing allowances this past summer. The older one has a bank account, and when shes saved money, we go to the bank. I didnt really have that. But Ive read in books where they recommended doing it for kids, teaching them the value of money, the value of saving, the value of not taking on debt to pay for things. Its mostly to teach them about money.
We had credit card debt for about a year when things were tight, but we were able to pay that off. I use a credit card for everything, and we pay it off every month. We do it for the points, for plane tickets.
LS: Do you ever feel like you are over cautious? I mean, you are making so much money. So much more that the vast majority of other American households.
JS: I think the years where I was wondering if I could make it until the end of the monthI think those years scarred me. If I were single, it wouldnt have been as bad, but there were people that were depending on me, and I felt like i was letting them down. Now, even when there is a surplus, I feel like Im letting them down. My income is certainly not guaranteedyou hear of NFL players who are bankrupt after five years. I know its very easy to squander what you have.
LS: What do you feel like you splurge on?
JS: After the baby was born, our house became a center of chaos, with the older kids and school and homework and the baby requiring a lot of attention, and we decided to hire a personal chef to save us time, and its been great. Shes worth her weight in gold. She comes once a week and cooks three meals for us. Because she makes a lot of food, it ends up being about five dinners. So most weekday evenings, we dont have to think about dinner, its prepared. Its a little bit expensive, Im not sure how long well keep it up.
LS: How much does it cost?
JS: It costs around $300 a week. Which is a lot. I know its a lot. Even before the baby came, dinner was always stressful; we knew when the baby came itd be doubly so. We dont have a nanny or an au pair and our parents dont help out that muchwere mostly by ourselves. So we did some research and happened upon this personal chef. She also does the shopping. Its only been a couple of months.
LS: What do your friends think?
JS: I think Ive mentioned it to one or two of them, but its not something I would advertise. I look like an average guy and the things I do with my hobbies are not congruent with the lifestyles of the rich and famous. Its almost out of character. But this is one thing that is a luxury, and I think its okay for now.
LS: When did you start reading books about personal finance?
JS: I read Mortgages for Dummies and Personal Finance for Dummies in the mid-90s prior to buying my first condo. Because we did not talk about money in my family, I was ill-prepared to start thinking about money and investing and buying homes. So I did my homework and learned about the whole process. In grad school, I had delusions of grandeur until I read the Millionaire Next Door. That book and other books like it are great for teaching us how to live under our means and for reminding us that material things are often meaningless and that a life pursuing status symbols can often lead to a debt filled existence.
Two years ago I read The Two-Income Trap by Elizabeth Warren (now senator from Mass.), which really rocked my world. She shows empiric, convincing data on how the middle class is becoming increasingly hollowed out by the rising costs of health care, education and houses. This is the primary reason that the middle class is falling behind and not because they are overspenders. I agree with her that overspending is not the primary reason for our countrys current situation. However, I think that she does dismiss the fact that we do live in a consumeristic culture. I mean, I have known lots of people stretching to buy big homes/cars, things that they could not easily afford. (You dont have to buy the Range Rover SUV when a Hyundai SUV will do just fine).
LS: Do you have a plan to make more money? More properties, different investments?
JS: One of the reasons I have a lot of liquid reserve is so that I can make investments. Im doing my homework right now as another opportunity to make a private equity investment has presented itself. It will take some time to research this thoroughly enough for me to be comfortable in making the investment. The returns should be higher than the interest Im currently paying on my debts.
This is why Im not going to pay off my student loans in one fell swoop (though I plan to be more aggressive about paying it off this year). I will eventually open an online brokerage account so that I can start buying public equities. It will mostly be in the form of ETFs, index funds. Im not an expert in stock picking, and so will likely pick funds that follow the broad market and buy more shares in these funds every few months or so (dollar cost averaging). Im going to start small and slowly build this up as this is the area of investing I have the least amount of experience in. But, with all these investments, I still do not want to drop below at least a two-year cushion of living expenses.
LS: What would it take for you to feel like you were rich?
JS: I dont know the answer to that. In college, before I had a job, before I was working, the six-figure mark was a goal for everyone. And now Ive hit the half-million dollar mark. I dont know if Id feel rich if I ever met the seven-figure mark. I think the important question is, can you still be happy, regardless of your income? Maybe its not so important to feel rich. Its more important to feel happy and content.
LS: But still, youre worried. What are your feelings about the economy right nowwhen did you start feeling so worried for the future? What initially inspired that?
JS: Well, weve had quite a turbulent start to the millennium havent we? At least in a geopolitical and macroeconomic sense we certainly have. Look at whats happened. We had 9/11, two boom/bust cycles, two wars, a prolonged recession that nobody saw coming, and now a growing student debt bubble. Whats going to happen next? Yes, the stock market is booming and housing is making a comeback, and there is certainly a layer of calmness at the moment. What belies all of this however is still an ocean of latent instability. We live in such a globally interconnected world that it is frightening. Ive read Freefall and The Price of Inequality by Joseph Stiglitz. Both were very eye opening, you should read them.
On more of a personal level, this past decade has been a turbulent one as well. My best friend passed away, other friends have been laid off, Ive had physician colleagues go bankrupt, and the recession has not been kind to some of my extended family.
Nothing is certain, nothing is guaranteed and your life and your fortunes can turn in a heartbeat. I think thats why Im worriednot just for me, but for my family, friends, and for all of us really. (Or maybe Im just a closeted doomsday prepper!?)
Fairly accurate email. I remember the days of making peanuts and I know I am nowhere near that poverty level anymore, but after taxes and a bunch of living expenses money isn’t what it used to be.
LS: Which is insane, to me. Of course theyre rich! How do you define rich?
JS: I think of rich as not having to worry about money, not having to worry about retirement, not having to worry about saving for your kids educations. I have three kids and I try to save up for their futures, and my retirement, and even with my salary I dont feel secure.
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Great article. I agree with him. He is not rich.
How dare you! You greedy bastard. Don’t you know at some point you’ve made enought money?”
Most people who make large amounts of money (ie, $570,000) have put huge amounts at risk to get to the point where they make that much. Or they are professionals like lawyers and doctors who pay a fortune in liablity insurance. Or they have sold a business and its a one time spike in income. There are very few people who have a “9 to 5” job who make this much. They usually are very educated, work very hard and/or put a lot at risk. In fact, the clock punchers who make a lot usually work for the government or a union.
He’s paying for the indolent democrat voters. We have the illusion of affluence in this country. Someone who works hard and earns a lot is actually a cash cow for the redistribution economy.
The Overtaxed $250K Couple: ‘We’re Not Rich’
Fiscal Times ^ | 12/06/2012 | Harriet White*, as told to Colleen Oakley
Posted on Thursday, December 06, 2012 11:04:34 AM by SeekAndFind
This is another good article on the "poor" rich people in America.
Greedy is right. But what a relief (blessing, actually) to be thankful and happy for what we have — more than enough, despite making less than 1/5 of this guy.
Your sarcasm detector needs a tune-up.
Oh please.................
Much the same, from what I remember, especially if one lived in NYC.
Now, it's expanded to MD, CA, and where ever else "liberalism" is destroying common sense and fiduciary responsibility.
$500k ain’t jack shit. That’s just spending money.
A very wealthy friend of mine was talking about a book he read where at some point, depending on your personal makeup, you can make too much money - you then buy too many toys (that break, need repairs, etc.) and you are back to where you started and stressing about money.
I mentioned to him “So I’m guessing that is why you don’t have a bunch of vacation homes, extra fancy cars, boats, planes, etc.?” (He could afford them all and more).
“Yep...”
He still has children in college, and is in school to start a new career - and will be taking a huge salary cut. But he wants to learn and do something different. Although he enjoys his current job too. Some folks seem to work and struggle just so they can make more money. This guy worked and struggled so he can DO more, and the money follows. And he doesn’t let the money rule over him.
your income does not make you ‘rich’
what you’ve accumulated does
Right on, it’s now how much you make, but how much you’ve managed to keep.
“Great article. I agree with him. He is not rich.”
I also agree. The money is great, but where is the GOLD, which is the ONLY thing that will mean anything when the world (i.e., China) is finally sick of our decrepit Dollar.
He shall learn, just as others learned in Russia, and Argentina, and Mexico, and many other countries - that government can simply DEVALUE his savings by 90 to 99%, and leave him in the dust.
Great article, thanks. I enjoy reading the words of someone who is level-headed.
“I have three kids (and hence, eventually will have three tuitions to pay)”
The guy is raising 3 moochers — self entitled, if not rich, moochers. Those “kids” should learn to earn and pay their way through college.
Doc is a contemptible whiner in my book. Here’s why:
I dream of making 10% of his income in at least one year before I die. Don’t think it’s going to happen.
I think I’m doing pretty well; debt-free, enough savings to live comfy for ten months or scantly for maybe three years.
Anybody who can’t feel secure on 20x my income needs a whack upside the noggin.
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