Having A $500,000 Year-Income And Not Saving – Episode 306

This transcript was auto-generated and may contain errors.

[00:01] Welcome to the Prosperity Podcast. Welcome to the Prosperity Podcast. Now, could you imagine when $500,000 a year income is just scraping by? What do you think of that, Kim? Yeah, I think that that’s sometimes common. In fact, I will admit that, depending on your definition of scraping by, I can think about some years in our family situation that are probably very similar. I think you have a story to tell us. And before we get going, I will admit that our family uses the term, linears and green years. And we use it to define income and expense. So help our listeners understand what that means. Because when you taught me that principle, the light bulb turned on and said, this is so, so well said.

[00:56] Well, as business owners, which of course, if you’re an employee with a set salary, this may not be the case, although it could be because expenses can vary so much. As business owners, there are times when the profitability of a business is under question. And there was a particular time when we were dealing with a very heavy expense load for a particular problem that we were solving. And it caused us to have very lean years. In other words, vacations had to be cut, things that we would normally do had to not happen, items could not be bought, deferral of maintenance and all kinds of things had to occur. And they were lean years. And then of course, we’ve had other circumstances where we’ve had very green years where we could have awesome vacations and buy new furniture and

[01:45] maintain and improve areas around our home, etc. And I felt that it was an important thing for our children. And I introduced this to them when they were pretty young, I want to say 10 years old, give or take. I introduced the concept to them to help them understand that there were times that yeah, we could go out for $5 ice cream cones. And there were other times when we could not. And they got to the point where they would ask me, is this a linear or green year, mom, and then we could spend accordingly. And it was just a super helpful way to stay positive about whatever the money issues were that we were dealing with, while at the same time, stay very true and honest with our children and what we were doing and why we were doing it or not doing it.

[02:37] You know, that’s wonderful that you actually brought the kids in and let them know because too often, parents want to just hide that they’re having financial troubles. And then when you do that, you’re not teaching them anything and you’re causing the problem to just completely multiply and get worse. Very true. And the kids embraced it. It was so helpful. Now tell us about this $500,000 a year on a lean year environment. I take it. Yes, wonderful. So here is a couple from New York City. They’re making $500,000 a year, and they’re professionals. They’re 35 years old. They have two young children. And I’ll put a link to this article inside of the show notes. It’s a CNBC article. And they’re going through a lot of things. And when I went through the financial breakdown,

[03:31] I looked at it and I kind of scratched my head and I thought, okay, well, there’s definitely things they could change. So we’re going to start from the top down. We won’t get to all of the items, but I think it’ll be interesting for our listeners who may be at high income earners. And at $500,000 a year, that’s the accredited investor status, that level, because it’s over $300,000. Yet on the bottom line, we’ll get to what that number is. But that bottom line of how much they’re actually saving is just disgusting. So here we go. Their 401k contribution from the wife and husband is both $18,000 a year. And any red flags there? Absolutely. Because I’m guessing that that means they’re saving no money elsewhere.

[04:16] And so we would call 401k contributions investing. And we all know that that money is locked up till 59 and a half. And we could question whether it’s investing or gambling, but nevertheless, it’s not being saved because saving money means it’s liquid and available and under your control. And 401k contributions and 401k balances are not under our control, nor are they available to help solve emergencies and take advantage of opportunities. And I don’t know where the match is. Yet this is still, to me, an alarm because it probably means they don’t have any other money. So here they’re at a 40% effective tax rate. So their net is putting them at $278,000 a year. Now, when I see the 40% tax rate and say, Okay, got it. What we’ve talked about in the podcast

[05:09] before, and I don’t see it in their breakdown, which we’re going to get to, is you’ve mentioned that everyone should have some type of business. It’s a great tax write off, isn’t it? It’s one of the only ones left. So that would be a wonderful thing. Now, we’re going to start diving into expenses. And I’ll have you raise the red flag when you see something. But this is going to be great because I want our listeners to look through and say, Okay, high income earner, still not a lot left over. Child care, $42,000 a year. Food, $23,000 a year. Mortgage, $60,000 a year. Home maintenance, $5,000 a year. Property taxes, $20,000 a year. Property insurance, $2,500 a year. Three vacations a year, $18,000 a year. Now, notice we haven’t gotten to savings

[06:01] yet. So I see three vacations a year at $18,000 and I’m looking for savings and I go, where is that? And food. It’s hard to know in New York City. It may absolutely require that. And yet I can guess that this couple, like you said, both professionals, young children, they have crazy lives and the pace is insanely fast. And I bet that they are not conscious of the amount of money that they spend for convenience around food. And of course, they probably care about the quality of their food. So this convenience is high end Chinese takeout or whatever, as opposed to Jack in the Box burgers. And yet I’m guessing that there is still quite a bit of play in that space as well as the vacation space. Yeah, absolutely.

[06:54] So I’m going to pick a couple of other ones that really stand out to me. So here’s another one. They have the car payment of $9,600 a year. We’re going to jump down a bit. Life insurance, $3 million term, $2,500 a year, but they don’t have whole. They haven’t done anything that’s actually planning for the future. And I know I used the word plan, but you know what I mean? Well, certainly nothing permanent. And isn’t it interesting also, does it identify who the life insurance is on? It doesn’t, but you know, and I don’t know how they did it. Did they do an umbrella? Did they do a million and a half each one? Two, I don’t know how they did it. Right. You know, that’s shocking. Then we jump down. We see

[07:37] charity for college alumni, feed the children 18,000. They still have student loan debt of 32,000 a year. And then we see this little number says miscellaneous, which doesn’t say savings. That’s only 10,000 a year. So all of the total costs, they’re left with $7,300 a year. That’s it. Can you imagine that? It is very common. I know that my first few years out of college were at a bank and I was a loan officer and I sat next to the trust department. So I was well aware of all the trust department work that was being done and I opened new accounts. And so I saw hundreds of people’s personal financial situations and I learned not to be shocked because I saw people paying more for their cars every month than they paid for their

[08:36] homes because that was their value choice, which was fine. Nothing wrong with that. Just interesting. And I saw people saving crazy amounts of money with unbelievably simple lifestyles. And then of course, completely the other way around, people with incredibly lavish style lifestyles and saving very, very little money, even though literally the income could have been the same and all over every place in between. So this is really an interesting thing for us to be conscious of. And I’m so glad we’re bringing it up. I hope more than anything that it causes people to have conversations around their family’s finances. And that is because talking about money is so important and so few families do it. And so

[09:24] few parents, as we said earlier, are comfortable helping children in being involved with the money and talking about the money and being conscious of the money. And I think same is true with spouses. It’d be interesting to know does one spouse in this family handle all the finances and maybe the other one doesn’t even know about it. I find a lot of times one spouse handles all the day-to-day cash flow and another one handles the quote investments and the two of them never talk about them. That is crazy to think about that you have two of those critically important things, yet no communication between the two. It is so necessary to have communication and to be non-judgmental in that communication, which

[10:06] of course is not easy. When I read this from my perspective, they’ve got 7,300 leftover for savings and other investments. Me coming from a business and real estate background where my thoughts would be turning to would be cash flow. And how can I take this good healthy income and create as much additional cash flow as possible? Be it rental properties or be it bridge loans or alternative investments. Those are the types of things that I’m thinking of. But honestly, before I even get to that, it has to be savings. And that’s the one thing that you’ve always and always talked about. Well, it’s such a boring subject, savings. And most financial advisors, planners, wealth managers do not talk about it for a couple reasons. One, it is boring. Number two,

[11:03] they’re not paid to talk about it. Most financial professionals are paid for what are known as asset center management, which is typically money in stock bond and mutual fund arena and cash does not count. And I do know some advisors that have figured out a way to try to include the cash balances on their overall assets under management because they want to make an attempt to be more savings focused. And yet we have clients that resist that because the client is saying, you’re not helping me with the cash. It’s just sitting here. And yet cash is so important for the control and the liquidity that it provides us. And we want to be able to use that cash, which going back to the 401k deposits or contributions,

[11:53] we clearly don’t get to use that money. And the emergency that may come up with this family, hopefully it doesn’t ever, is then potentially so stressful because they have no cash. Now, maybe they have available credit cards or whatnot, and that’s fine. Maybe they have available home equity lines of credit. That’s fine. And yet either of those can be taken away. Yeah, absolutely. Absolutely. They can be taken away. So if you were in the room with them, and obviously I’m putting you on the spot without all the information, but if you’re in the room with a high income earning couple and you see something like this, what would you say so that you can start to correct the course? Because we know you can’t

[12:37] fix it all, but what’s a couple of things you would say? Well, my all-time favorite thing is to save first rather than to try to budget because as you went through their expenses in the order that most people do, clearly if you wait for savings until the end, in other words, try to save what’s left over, there’s never going to be anything left over. And that is just a horrendous problem inside of America. Other countries do so much better at this than we do. So that would be my first suggestion. And then of course, the question is going to be, well, how? Where do we start to cut back? And of course, we want this family going on vacation. That’s going to generate fabulous family memories. And yet we all know that

[13:19] can be done less expensively or more expensively. And of course, we want this family to contribute to their 401k plan up to the match level, MATCH, but at 18k, they are at the MAX level. And that’s not something we typically recommend, especially because at a 40% tax bracket with the thought that taxes are probably rising in the future, they may think they’re going to be in a lower tax bracket at retirement. And yet that is not typically what we’re finding that clients actually even want to have happen because lower tax bracket equals lower money, lower income, lower capability. Something else too, that I would encourage this couple to work through. And it would require, of course, probably a larger breakdown

[14:07] than what you have there in front of you, or maybe you have it and it’ll be on the links. But there’s a lot of things that I think we human beings do that is a very interesting use of resources. And I’ll share a personal example, because I have seen this, and I don’t tend to go through people’s cash flow. But on occasion, if somebody asks me to, I have seen this in other people’s lives as well. And it used to be in my life. And that’s the area of personal care. So I’m talking like haircuts and massages and the gym and workout clothes and nails and other things that especially women do to their hair that can be quite expensive, etc, etc, etc. And again, this is just a value play. And if this is

[14:53] what’s super valuable to you, then this is where you should be spending your money. And yet I think sometimes people do this without a lot of thought. And so I know for me personally, thinking way back to again, this time, right when I was fairly new out of college, probably three or four years out, and I’d started to earn some money. And I decided to start getting my nails done. And of course, I absolutely legitimized this, argued for it, because I was sitting in front of face to face people at that time, I didn’t have the virtual business that I have now. And about a year later, somebody added up, and it was a guy, so that’s fine, you know, women, we have these things that we do. But somebody added up the amount of money

[15:39] that I spent on getting my nails done every two weeks or whatever it was that I was doing. And it was $3,000. That was a lot of money for me at that time, even though I had the money, I wasn’t having credit card debt to get my nails done. Yet, I was still shocked by looking at that number annually. And so it was kind of interesting, all these things that you shared with us were annual numbers. And yet most people don’t look at their numbers annually, they look at them monthly, or even sometimes every two weeks. And so I encourage people on occasion to look at their numbers annually, because I stopped getting my nails done. Now, somebody else might say, Oh my gosh, that’s three grand, you know, that’s so worth it.

[16:19] Awesome. Then that’s your value judgment. For me, I felt like I could make much better use of those resources. You know, what a different perspective to be able to give just by you saying, looking at it from an annual basis or monthly basis and, you know, to have it from that perspective. And obviously, as a male, I’ve never had my nails done. I hear $3,000, I say that’s a lot of rounds of golf. It’s quite different. But you know, as we go through these finances, one of the key things that you said was, you’re not always going through a person’s cash flow. Yet because of the principles that you’ve developed and the principles that you stand by, you’re able to look at these problems, regardless if you’re

[17:07] making 500,000 a year, a million or 100,000 a year or less, you’re able to use guiding principles to look at a situation and make the changes that will make a difference. That’s what was really admiring that I was hearing during our conversation today. Well, I’m always grateful to add that slightly different perspective. I think it’s a trademark of our work, whether it’s about people’s money or about their values or their mindset or anything that us human beings deal with. And I’m just always looking to learn from everybody. You shared some great ideas with me during our various times together. And I know you have with our listeners as well. And I think that’s a fun thing to do. Because if we

[17:54] want different results than we’re seeing our society getting, then we need to be thinking differently. We need to be acting differently. And we absolutely need to be using our money differently. Absolutely, we do. So I want to do a call to action for our listeners, and it’ll work like this. If you aren’t satisfied with the way that your financial picture snapshot looks right now, regardless, if you’re a high income earning couple of 500,000 a year or wherever you may stand, you don’t have to go into all the details and say, Hey, Kim, solve this Rubik’s Cube of problems. You can just say, Hey, Kim, would you mind giving me an idea of what principles to follow and where to go? And you can send those questions to hello at partnersforprosperity.com. Sound like a plan?

[18:44] I would love to help with that. Excellent. Well, thank you listeners for tuning in. And we’ll make sure to get you another episode that will help you out with your family finances and help you understand that having these principles of prosperity will make you healthier and wealthier. Thank you again for listening to this episode. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review. Thank you for listening to the Prosperity Podcast.