Stages of wealth

[disneysteve]

I thought of this thread the other day. I have a monthly meeting with my supervisor. We recently got new contracts and one minor change (in my opinion) is that our bonus will now be paid twice a year instead of quarterly. The amount is the same. We’ll just get half every 6 months instead of a quarter every 3 months.

She said the finance dept. wanted to make it annual because that’s easier for them but she argued to do it quarterly and they compromised with every 6 months. She said a lot of people depend on that money. Seriously? You should not be depending on a bonus check. Plus we are well paid. I will make over 200K this year. The bonus is about 10K. If I get it or don’t get it it isn’t going to have a significant impact on my life. If you can’t make ends meet on 200K there is something really out of whack.

[corn18]

I resemble that remark! Five years ago when I came here we were making $360k / year and were broke. We had $150k of consumer debt (multiple max'd credit cards, 4 car loans, horse trailer loan, mortgage), were spending $3k / month more than we made and had a negative net worth. Any issue that popped up on the income or expense side would be put on credit cards. So, I know how to be broke while making a lot of money.

I like the new way better.

[LivingAlmostLarge]

I cannot believe is how nearly everyone I know is broke, regardless of how much $ they make! I was out to lunch with 3 other faculty at my university recently- finances came up in conversation, and two admitted that they are broke! The two that said this make 170-180K per year each (I know this because we are on a grant together and all work on the budget and we see everyone's salaries). I said to them, "how is that possible!" Well, they live in the most expensive suburbs, with the 'best' schools, one has med school loans..and I guess play the role of the upper class. One said she is in the red every month (she is a physician scientist and so is her husband!) and the other said he'll be working until he's 70 and has no money saved for his kids college and no savings.

On the other end, my cousins and I are potentially going to make a buyout offer to some other relatives for their share in our family's lakefront property for 50K. I told them I have 25K saved to contribute, and guess how much they have saved towards it even though we knew this was coming years ago? Nada. One might have 10K. The other (no college, works as a school bus driver) just bought the fanciest camper I've ever seen, with granite and a gas fireplace!! WTF! Also, DH and I will be hanging alone quite a bit in retirement as it stands now; I'd say 80-90% of our close friends will not be retiring at a reasonable age if at all. Sorry, vent over.

It is a reason I like this site; there's no way I could talk about our financial status with anyone IRL for the most part.

I know tons of people like this and I don't understand where the money seriously is going. It's not going to taxes because taxes aren't that much. I mean like 25%. But then where does the rest of the money go? I have friends the same way. Literally they were making $180k and renting and I asked her where does the money go? They don't travel extravagently, no school loans, etc. But somehow they spend enough every month that they are in the red and that they wait for a bonus to clear up the little CC debt like $5k/year they accrue to pay it off. I sat there literally stunned.

But by the same token my friend who got divorced last year her jaw dropped when I said when we travel we try to spend around $100/night. That spending $250/night at Disney hotel was the most we'd ever spent. EVER. Never have we spent that much on a hotel. We do travel a lot but for the most part tickets we see what's cheap and usually get a deal. And hotels/food, etc are never extravagent. She said she didn't think they were "spendy" but easily staying at nicer hotels than best westerns ran typically $175-250/night. She said that it's easy to rack up spending on just stuff. Just eating out, shopping, traveling. It's easy to upscale and not even realize it she said. She said she figured I just spent a lot on stuff and wasn't worried about money. Never realized I was more best western hotels, not sheraton/hilton, etc. Or changing her mentality that she needed a new car every 5 years. She said it's super easy to just upscale the lifestyle fast.

And best western has been a more recent upgrade I'll admit. I've been feeling spendy lately I'll admit. That we've gone on vacations and cars. I'm hoping to stick with my minivan until it's 10 years old and DH well that's a different can of worms I'd rather not touch.

[LivingAlmostLarge]

I resemble that remark! Five years ago when I came here we were making $360k / year and were broke. We had $150k of consumer debt (multiple max'd credit cards, 4 car loans, horse trailer loan, mortgage), were spending $3k / month more than we made and had a negative net worth. Any issue that popped up on the income or expense side would be put on credit cards. So, I know how to be broke while making a lot of money.

I like the new way better.

Corn where did the $360k/year money go and was spent? I'm asking most seriously. Did you have expensive cars or travel a lot? I mean I recall your house wasn't ridiculously expensive right? I mean $30k/month and the mortgage maybe $3k? Sure let's say taxes are $10k. but that's still let's say $15k to spend a month. What do people spend it on?

[corn18]

It is frightening to look at:

Monthly expenses (average / month)

$12,678 - Discretionary
$4,448 - Non-Discretionary (I use the term loosely here)
$6,891 - credit cards (lots of big lumpy payments in addition to the minimum monthly payments, this is the average / month)
$2,240 - loans (4 cars and a horse trailer)

$26,257 Total / month

$315,084 / year expenses

Income

$368,320 total income (includes W-2 and pension)
-$110,265 Taxes (fed, state, local, FICA)

$258,055 take home pay
- $315,084 expenses

-$57,029 net / year

Yikes!

The data might be off a few thousand here or there, but that doesn't change the problem.

[LivingAlmostLarge]

It is frightening to look at:

Monthly expenses (average / month)

$12,678 - Discretionary
$4,448 - Non-Discretionary (I use the term loosely here)
$6,891 - credit cards (lots of big lumpy payments in addition to the minimum monthly payments, this is the average / month)
$2,240 - loans (4 cars and a horse trailer)

$26,257 Total / month

$315,084 / year expenses

Income

$368,320 total income (includes W-2 and pension)
-$110,265 Taxes (fed, state, local, FICA)

$258,055 take home pay
- $315,084 expenses

-$57,029 net / year

Yikes!

The data might be off a few thousand here or there, but that doesn't change the problem.

What is discretionary expenses and credit cards? How is that different? And non-discretionary is mortgage + pretax/posttax paycheck stuff? I guess I sort of see how people get into trouble. If you already have a spending problem and there are CC debt $6900/month and then still are spending it's tough to dig out because you have to stop the discretionary stuff.

Easier when you don't have lots of debt.

[TexasHusker]

Right now, I would count myself as "broke". We have been pouring resources into our businesses like crazy, and that leaves us cash poor. But I own two businesses that do about $310K a year net, with zero debt on them, so that's not too bad. I also have 40% equity in my house, and probably $450K-ish in vacation rentals that are producing around $95K a year net income. But we are going to use about $125K-ish of that equity to fund a fourth location for our franchise.

But when we have cash, it's going into those businesses or properties at least at this time. We are still in "building" mode.

On the flip side, I have no IRA or 401K. But there are many roads that lead to Rome.

I would guess I have maybe $1.6-8 million in net worth, and with really good cash flow, but only about 300 bucks in checking.

[disneysteve]

only about 300 bucks in checking.

Do you seriously not keep any liquid cash reserve? I'm curious how you can manage that with several businesses and rental properties. Or do you just mean in your personal account as opposed to in your business accounts? Cash flow is great but if every dollar is being spent each month, what do you do when something out of the ordinary pops up?

[james.hendrickson]

Right now, I would count myself as "broke". We have been pouring resources into our businesses like crazy, and that leaves us cash poor. But I own two businesses that do about $310K a year net, with zero debt on them, so that's not too bad. I also have 40% equity in my house, and probably $450K-ish in vacation rentals that are producing around $95K a year net income. But we are going to use about $125K-ish of that equity to fund a fourth location for our franchise.

But when we have cash, it's going into those businesses or properties at least at this time. We are still in "building" mode.

On the flip side, I have no IRA or 401K. But there are many roads that lead to Rome.

I would guess I have maybe $1.6-8 million in net worth, and with really good cash flow, but only about 300 bucks in checking.

Texas, you're not a stock guy, that make sense...but what about REITs? Some of them have 8 to 10% distribution payments.

[TexasHusker]

Actually I am a fan of REITs for dependable income that is usually a multiple of CDs. But there is added risk with that income. Do your homework.

With REITs however, you miss out on most of the magic of real estate - leverage.

Here is an example: 18 months ago, I bought my dad a vacation rental for $182K, for income to pay for his care (he has Alzheimers). He paid cash for the house, but for a moment let's presume that he financed 70% of it.

That would be a $54,600 initial investment, and let's toss in $5600 for closing costs and prepaids to make it an even $60K.

Assuming 5.5% @ 30 years, the monthly debt/principal repayment is $728.

His yearly expenses would be as follows:

$8736 P&I
$900 Property taxes
$1200 insurance
$4500 utilities
$2500 repairs and maintenance

Total rental income is around $32,000.

Net yearly income is $14,164.

That is a 24% return on investment per year. Remember, the amount invested is $60,000. And I am not factoring in the added income from depreciation if I chose to take it, OR the principal that the renters are steadily paying back. The real rate of return might well approach 30% a year.

Just as a nice bonus, due to a tremendous price appreciation, it appears that my dad's cabin is now worth around $227,000. So toss in another $45,000 in profit potentially, after just 18 months.

Hopefully this helps delineate the difference between REITs and a direct real estate investment.

[Singuy]

Frankly have I no idea how people can live so close to the edge of not having any money. How do you people sleep at night? Praying that you don't default on a bill as payday draws near. How is living like this enjoyable? I commissioned a guy to do a diorama for me. Pricey piece, almost 1k...he just finished but the last thing he wrote was "can you please send me the second part of the payment today because there are some debt I have to pay off". So this guy literally is relying on my 300 bucks to pay a bill?

Many people goes to get their eyes checked and end up having their debit card denied at my wife's business. These are Target shoppers at an area where the house prices are 100k above the city average. How do you go through life with that little cash on hand? Also how are people making 16 dollars/hr buying brand new Toyota Tacomas? Have another tech who makes 16/hr is asking me if he should get a Tesla.

[corn18]

Frankly have I no idea how people can live so close to the edge of not having any money. How do you people sleep at night? Praying that you don't default on a bill as payday draws near. How is living like this enjoyable? I commissioned a guy to do a diorama for me. Pricey piece, almost 1k...he just finished but the last thing he wrote was "can you please send me the second part of the payment today because there are some debt I have to pay off". So this guy literally is relying on my 300 bucks to pay a bill?

Many people goes to get their eyes checked and end up having their debit card denied at my wife's business. These are Target shoppers at an area where the house prices are 100k above the city average. How do you go through life with that little cash on hand? Also how are people making 16 dollars/hr buying brand new Toyota Tacomas? Have another tech who makes 16/hr is asking me if he should get a Tesla.

Are you asking or judging?

[Singuy]

I am genuinely curious how over 70% of Americans can sleep at night with so little cash on hand. I know us Asians would jump off a bridge already if we were in the same situation.

[disneysteve]

Frankly have I no idea how people can live so close to the edge of not having any money. How do you people sleep at night? Praying that you don't default on a bill as payday draws near. How is living like this enjoyable? I commissioned a guy to do a diorama for me. Pricey piece, almost 1k...he just finished but the last thing he wrote was "can you please send me the second part of the payment today because there are some debt I have to pay off". So this guy literally is relying on my 300 bucks to pay a bill?

Many people goes to get their eyes checked and end up having their debit card denied at my wife's business. These are Target shoppers at an area where the house prices are 100k above the city average. How do you go through life with that little cash on hand? Also how are people making 16 dollars/hr buying brand new Toyota Tacomas? Have another tech who makes 16/hr is asking me if he should get a Tesla.

I don't think it is enjoyable but I think the folks doing it don't know any other way. It's probably what they were raised with and they've continued to do the same thing as adults. They just think life is a constant struggle to make ends meet. They don't have that "saving gene" that many of us have, or at least they haven't hit the bottom and realized that something had to change.

As for the low income folks driving high end cars, they are either leased (most likely as 50% of luxury cars are) or they are purchased on 96-month loans. They can manage the $500/month payment when they spread it out over 7 years. That means they can "afford" the car. I've worked with a number of people who did this while I was driving my 14-year-old Camry that was bought used and paid for 13 years earlier.

[disneysteve]

I am genuinely curious how over 70% of Americans can sleep at night with so little cash on hand. I know us Asians would jump off a bridge already if we were in the same situation.

There is definitely a cultural difference, too. Debt is ubiquitous in America. It's just become a way of life. If you don't have debt, you're the oddball. And it has little to do with income. As people earn more, they just spend more and borrow more.

[TexasHusker]

Whether any of us cares to admit it, we are all just renters and keepers of a few nick knacks. It will all end up in a flood, fire, or garage sale at some point, while our remains quickly rot away 6 feet under. Of course you can hasten all of that with a cheap cremation.