The ‘wealthy poor’


Most people would think that if you earn more than $100,000 a year in the US, you should not have any money worries. But Jana Kasperkevic writes about people who earn much more than that who still live from paycheck to paycheck.

Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth, has a client in the Washington, DC area who makes $450,000 to $600,000 a year but lives paycheck to paycheck. He spends a lot of it on keeping peace with his ex-wife.

Close to half a million a year sounds like a lot, but he has to pay $8,000 per month to his ex-wife and both of their kids are in private high school. Four years of private high school cost $150,000.

In 2014, a Brookings Institute paper found that about one-third of US households live hand to mouth. That’s about 38 million households. About two-thirds of these American households living from paycheck to paycheck are not actually poor but instead middle class or richer. They might have liquid assets or own a home that they are paying off. There is just one catch: they are spending everything they are earning even if it’s $100,000 or more a year.

Where does all that money go? It turns out that most of the money goes towards things such as sending children to private schools and trying to keep up with one’s perceived peers in terms of where one lives, what cars one drives, what kinds of vacations one takes, and how frequently one eats out.

When she first opened Ballou Plum Wealth Advisors in California, Lynn Ballou was advising a well-off couple who ate out three times a day, every day.

“They worked incredibly long hours but also, neither knew how to cook. Not even how to make toast!” Ballou said. “So I treated them to two thing: a basic cooking class for couples on the run and a cook book with Quick Recipes for two. They started saving so much by changing their habits, they were able to start fully funding their retirement plans and then soon after, started a family.”

Many “rich” people have problems accepting that they aren’t really that wealthy and the money will not last forever.

I must admit that I am often surprised by the every day expenses that people take as normal but which for me are extravagances. I know people who every morning will stop off to buy a cup of coffee from a coffee shop (or even buy breakfast) on the way to work. To me that sounds not only extravagant, but even more time-consuming and requiring more effort than making a cup of coffee at home. I just do not understand it.

The one thing that may be unavoidable is schooling costs. Our children went to public schools. We wanted to avoid private schools for ideological reasons, because we wanted our children to not be just among the privileged. When we were looking for a home to live in, we chose a community that had reasonably good public schools. But not everyone may have that luxury of choice. But I am not sure to what extent people choose private schools because the public alternative is really awful where they live and they cannot move or whether they do so because it is what people of their socio-economic class are expected to do.

Comments

  1. rpjohnston says

    Eating out three times a day? I eat out once every 3 days on average. And by that I mean mcd’s or wendy’s or chipotle. And if they’re well-to-do they probably aren’t doing construction or something (I unload a truck, stock shelves, and bale cardboard 4 days a week at a retailer).

    I’ve got a ton of privilege (mutual funds for university, rooming in a friend’s parents’ basement rent-free etc) so I’m not trying to argue that I’m the epitome of responsibility; I don’t make enough to even cover rent for actual apartments here so I’d have to get REAL work if things fell apart. And I don’t budget either, as people keep telling me, I’m just too damn scared of spending money.

    But come on, also from the article: “The clients who spend $2,00o to $2,600 per month on dining are very busy professionals.” That’s like $80 a day; $27 a plate if they eat 3 times a day, being very busy walking through airports and staff meetings? If you REALLY need 5000 calories to navigate hallways you can get it for a third of the price at a joint that’s just fine for the hoi polloi ffs.

    Not feeling any sympathy at all. $100k is enough to pay for a serviceable apartment + utilities, decent clothes, and good enough food, and plenty of toys short of golden Apple smartpoopcans in any area. Plenty of people get by with a fifth that. Having trouble? Stop being a dumbass throwing money away. Or throw it out the window in my neighborhood, I promise I’ll take good care of it. Jones got a nice car? Grow up and f’em.

    Didn’t I read something like this on the wall street journal a few years back?

  2. anat says

    My husband and I aren’t great about investment (too boring, so we leave it to professionals), so I know we aren’t as wealthy as we could have been, but when I see stories like this I see the full half of the cup. We were saving when we earned half of these levels, despite living in a not particularly cheap metropolitan area. At least we had the sense to learn to cook and do it regularly! (And other decisions)

  3. John Morales says

    who makes $450,000 to $600,000 a year but lives paycheck to paycheck. He spends a lot of it on keeping peace with his ex-wife.
    […]
    Close to half a million a year sounds like a lot, but he has to pay $8,000 per month to his ex-wife and both of their kids are in private high school. Four years of private high school cost $150,000.

    Bah. Based on the lower bound, $8,000 x 12 = $96,000, and one year at $150,000 per year is $37,500, and $450,000 – ($96,000 + $37,500) = $316,500.

    That leaves heaps, and more than sufficient for a better-than-good life.

    (Also, $8,000 out of $450,000 to $600,000 is hardly “a lot” in proportion!)

    It’s simple and plain lack of money-management skills — I remember a friend who earned more that twice what I earned having to borrow money from me, back in the day.

    Calling that hand-to-mouth is just insulting to actual poor people, nevermind common-sense.

    Sympathy — I have none. Contempt, yes.

  4. says

    Close to half a million a year sounds like a lot, but he has to pay $8,000 per month to his ex-wife and both of their kids are in private high school. Four years of private high school cost $150,000.

    His problem is that he’s stupid and makes bad choices, not that he’s poor.

  5. says

    If I may snark a bit: this guy’s problems would be substantially relieved by a massive tax cut to the wealthy. Clearly.

    I had a friend in the 90s who got some kind of big tax refund and was telling me about it. He pretty much snorted it up his nose. That was probably why he was such a big fan of tax cuts; who wouldn’t be?

  6. StevoR says

    Most wealthy Western nations particularly european (& also even some central American ones that are, what, second world or something?) – have both free healthcare and free education provided to all citizens by the state. Makes a helluva difference for the better even if it does mean higher taxes.

    Sadly Australia seems to be following the US example more than the Scandanavian (Costa Rican?) one – we once had but have now lost free tertiary education and are now looking worryingly like losing our medicare health system to “save” costs. (But jepordise lives and standards of living and probably make people less willing to spend money because of increased insecurities etc .. Grr..)

  7. says

    At $500K per year, a person makes enough to hire live-in help to cook and clean five days a week. How many of these people make their living as “money managers” but can’t manage their own?

    While I also feel the same disgust that others here feel for the wealthy in that position, it makes me wonder if it’s a chance to change people’s minds and opinions. Get the wealthy or upper middle class living week to week to understand how those less well off live, how the poor aren’t wasting money on luxuries and still can’t make ends meet.

    And whether it’s the rich or the poor, it’s distressing to see the growing number of people who don’t know how to cook, who constantly eat out or eat packaged foods. Here in Taiwan, many “apartments” are nothing more than single rooms, often with a shared bath and no kitchen. Young people are eating out three times a day, and growing up in families with hired help, people from Indonesia, Malaysia or elsewhere. It’s a generation of privileged kids who never learn how to make food who end up eating takeout morning, noon and night as adults because they have no idea how to cook for themselves.

  8. EnlightenmentLiberal says

    Sympathy — I have none. Contempt, yes.

    That’s harsh. Too harsh IMHO. Being a fool is not generally something that should be contempt-worthy IMHO.

  9. John Morales says

    EnlightenmentLiberal, I’m speaking of those who earn half-a-million-odd dollars US per year.

    (I could happily live with such foolishness, myself, and its attendant contempt from the current me!)

  10. Johnny Vector says

    Close to half a million a year sounds like a lot…

    That would be because it is. I also live in the DC area, and yes it’s more expensive here than, say, rural Pennsylvania. But come on. I also paid absurd amounts to my ex-spouse, and (always consult a lawyer when getting divorced, people!) 100% of college costs for two children. And yet, despite earning significantly less than half of the bottom end of that one guy’s income range, I’ve always felt quite well-off. If I have enough to build a custom house (Energy Star Certified, plus mini-split HVAC and enough solar PV to be net carbon-negative, woo-hoo!), then so does he.

    Wealthy poor my eye.

  11. doublereed says

    Just because he chooses to live paycheck to paycheck doesn’t mean he’s poor.

    This sounds like a massive exception that conservatives like to bring up to explain why the poor don’t need help, they just need to be responsible. It seems exception even among those that aren’t poor and living paycheck to paycheck.

    It has the added BS attitude of “kids these days!”

  12. deepak shetty says

    We wanted to avoid private schools for ideological reasons, because we wanted our children to not be just among the privileged. When we were looking for a home to live in, we chose a community that had reasonably good public schools. But not everyone may have that luxury of choice

    Atleast in the bay area – it doesnt matter . You either pay for the private school or pay exorbitant rents to stay in an area with a good public school or pay an even more exorbitant mortgage for a house in a good school district. If you want a higher ranked public school – you have to have money.

  13. Tsu Dho Nimh says

    I remember a co-worker who was REALLY poor … yet she refused to do what I (middle income) did and buy bread from the “Day-Old” store and shop thrift stores.

    Why? Because she didn’t want people to think she couldn’t afford to shop for new stuff!

  14. mnb0 says

    Hehehe.
    I make about 600 USD (incourant valuta: the Surinamese Dollar) a month and manage to save. Granted, my son who studies math and informatica in Amsterdam has a government grant due to my low income. His debt will be about 28 000 Euro.

  15. lorn says

    It wasn’t uncommon a few years ago when I was doing residential calls that I would pull up to a large, sometimes beautiful, home with three or four vehicles, not counting the pair of Jet Skis, a boat, or two, and a brace of ATVs or motorcycles. I started thinking those people had it made. Over time it became apparent that many of these people are one or two missed paychecks away from having their empire falling around their ears.

    Over time I found out that all the vehicles, toys, and the house were all financed, often at unfavorable terms, and sometimes leveraged. It seems that rich or poor alike a good percentage of the population is perpetually living beyond their means as determined by income.

    I saw the same thing when I completed a training program. A few years in the pay rate bumped up significantly, roughly 25%. People who were just making it on their previous rate were suddenly presented with a larger check, a boost that could be counted upon to be there every week for the long haul.

    The reaction was interesting. A few, including myself, didn’t significantly change their lifestyle or purchasing pattern. Perhaps a one-time steak dinner to celebrate. The bump mainly went into savings. A good number immediately set about finding ways to spend the extra income but no more. They did what I call “aiming at zero”. They work hard at making it to the next paycheck with nothing left in their pockets. A good number of ATVs and trucks were financed. The remainder leveraged the extra income so they could, as most in this category were already doing, continue to live well beyond their income.

    None of those finance strategies are changed conceptually by the actual amounts of money involved. There are differences. A rich man financially embarrassed can always eat Ramen noodles and boiled eggs. A poor man going through a similar rough patch is in danger of starving.

    Going the other way around downsizing, short of homelessness and the hard edge of deep poverty, is no big thing for the poor. It is what we do daily, often with considerable grace. But it is hateful and deeply humiliating for people used to being seen as having money. Particularly if they have emotionally invested in poverty being a sign of weakness or defect, or, the flip side, wealth as a sign of divine favor. I’ve personally witnessed people who would spend real money to have the grounds around the house manicured, and the car detailed while the inside of the house is a squalid mess and the vehicle is barely running. It is all about appearances.

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