I don’t feel rich. At all. Which is funny considering I do well financially and now have an upper class income. I remember when I first got a job, making $5.35/hr. That’s when I felt rich! I was getting paid every two weeks and I had money to go out with friends and buy all the stuff I wanted (I had low expectations back then). It was even more amazing when I got a $0.50 raise! I was still living at home with my parents, so I didn’t have to pay for rent or food. All the money I made was spent on having a good time (not that kind of good time – I was only earning $5.85/hr. after all.) Ah, the joys of being young and stupid. Unfortunately, the only thing that’s changed is I’m not young anymore.
When I graduated from college, I was making multiples more than $5.35/hr. And I also felt rich back then too. I was living on my own and driving a nice car. I bought designer clothes, had money to go out with friends, and travel. It was great! I wasn’t saving much, but I deserved to spoil myself, after spending four years in college. At least that’s how I justified it to myself. Besides, my paycheck could cover the cost of everything, so it wasn’t a big deal.
I expected to make more money in the future and that’s when I would start saving. That turned out to be true, but it’s not a guarantee in life you’ll make more in the future. So don’t put off saving in the future when you can save today, because that’s what living below your means is all about.
Upper Class Income, Middle Class Lifestyle
According to this CNBC article, the average family needs to make at least $150k a year to be considered upper class. I fall in this category and make multiples more than I used to, yet I don’t feel rich. Why is that? One, obviously, is I have a lot more responsibility now. A family and kids are expensive! But more importantly, I don’t feel rich because I don’t spend like I’m rich. I live below my means. Instead of looking at my paycheck and thinking about all the things I can afford to buy, I think about all the things I want to save for. This is why I save 65% of my income.
The definition of being rich is having a lot of money. Note that it says nothing about MAKING a lot of money. Of course, making a lot of money helps with having a lot of money, but one is not dependent on the other. I know a lot of people that make a lot of money, but they live paycheck to paycheck, so they’re not rich. They just spend like they are. I don’t feel like I’m rich now, but I’m on the path to being rich, precisely because I don’t spend like I’m rich.
Simple Arithmetic: Make More Than You Spend
It’s simple math, really. To build wealth, or get rich, you need make more than you spend. It’s hard to increase how much you make, so you need to cut back on what you spend. And then you need to invest what you save, so that your savings can grow.
Differences Between an Upper Class Lifestyle and a Middle Class One
I have a lot of friends that have an upper class income and live an upper class lifestyle to go with it. Trust me, the upper class aren’t very different from everybody else. These are the 5 main differences between an upper class lifestyle and a middle class one.
1. An Expensive Home
Housing is usually the largest expense, for both upper class and middle class families. The only difference is upper class homes are much nicer. But do you really need that large of a house? I live in a nice house, but it’s much smaller than something somebody with my income would typically buy. It’s great for a couple of reasons:
The more expensive your house, the higher your property taxes. And taxes only go up each year, not down. Also, when you buy a large house, you’ll need to fill it with lots of furniture and paintings, which costs more money. Finally, you’ll have to heat and cool that house. A 10,000 sq. ft. house sounds great, until you’re paying for all these costs. Homes are probably the #1 reason why lottery winners go bankrupt. When somebody wins the lottery, the first thing they do is buy one, or more, new homes. If it was just the upfront costs, they’d be fine. But those upkeep costs keep on recurring year after year. And if you’re not careful, they can bleed you dry.
Avoiding the Need to Keep Up with Others
The other benefit for down-sizing is you don’t get stuck in a keeping up with the Jones’ attitude. If you live in an expensive neighborhood, chances are your neighbors will drive expensive cars, take expensive vacations, and generally do expensive things. Who knows whether they can actually afford all these things, but when you see all of this on regular basis, you’re going to feel compelled to keep up.
This is especially true with cars, since not only are they depreciating assets, but they depreciate so quickly. It doesn’t help that it’s such a visible item. When you see your neighbor with a brand new car and the latest features, you’re going to think about getting one (a better one) for yourself. That’s when you need to remember that you have a plan, you have a goal, and you need to stick with it so that you can get to where you want to be in the future.
Saving is an Individual Sport
When you trade down on your house, you’ll have less pressure to keep up. This is partly why I don’t feel like I always have to have the latest and greatest. Also, I don’t care what other people think. Building wealth is a lot like golf in that it’s an individual sport. I have my score and you have your score. My score has absolutely no impact on your score, and your score has no impact on mine. Like golf, everybody likes to compare scores. But if what you make/spend has no impact on me, why should I care?
Obviously, don’t trade down to an area that’s unsafe just because it’s cheap. And if you have kids, make sure you’re in an area with a good school district so you won’t have to pay for private school.
2. Expensive Cars
Another area where the upper class differ from the middle class is the car you drive. Like I mentioned above, a car is a depreciating asset, so you don’t want to spend more than you need to. Is a $100k car twice as nice as a $50k one? Of course not. Margins are always higher for more expensive vehicles, which is why auto manufacturers are always trying to push them. They know the wealthy are willing to pay for better performance, but more importantly, the status symbol that an expensive car brings with it.
When I was looking at new cars, I considered a Telsa. But it’s hard to justify spending $100k on a car. Even if it is really, really cool. If you can afford one, great for you. But in my case, I can get as much satisfaction from a much cheaper car and I can use the difference to invest in appreciating assets. Also, more expensive cars mean more expensive repair and maintenance costs.
3. Expensive Vacations
A vacation is time for you to get away from reality and enjoy yourself. When you’re making an upper class income, it’s easier to justify a completely discretionary purchase. Also, it’s a status thing too. There’s not much to brag about when you have a staycation. A trip to Bali, on the other hand, sounds a lot more exciting.
I’ve stayed at expensive resorts and $1,000/night hotels. It’s usually for work, so it’s actually a complete waste of money for me since I spend all of the time at a conference or I’m out for dinner. I’m really only in the hotel to sleep.
Yes, the service is much better at an expensive hotel. And the ambiance is much nicer as well. But it’s not worth the money in my opinion. When I go on vacations, I’m there to experience something. The hotel is just the place to sleep in between experiences. I’d rather spend less on the hotel and spend more on an actual experience. If you are planning a vacation, here are my suggestions on how to save money.
One thing I will say, is although I’m frugal in many (every?) way, I believe vacations are worth splurging on. My goals are to go on safari or visit Antarctica with my family one day. These trips will definitely not be cheap, but they would be once in a lifetime experiences, partially because I could only afford to do it once.
4. Private School
This is probably the biggest difference between an upper class lifestyle and a middle class one. Even though upper class people live in nicer neighborhoods with better school districts, they’ll still send their kids to private schools that can cost over $50k/year. If you think that’s bad, these same schools will ask for donations throughout the year! Talk about being kicked when you’re down. Imagine paying $50k a year for 17 years per child, just for education. That basically works out to $1 million per child.
Fear of Missing Out
The reason upper class families send their kids to private school is because you can’t put a price on your children’s future. Well, I can, and it’s under $50k a year. What it really boils down to is fear. There’s no way to tell if all the tuition money is worth it because every child is different and they can only have one education. If your child gets into Harvard, is it because of the private school, or was he/she that smart to begin with? Regardless, it doesn’t matter because your child got into Harvard. But if your child is a screw up, at least you can say you gave him/her the best education possible.
The second reason most families send their kids to private school is so they don’t look like bad parents. If all your friends and neighbors are sending their kids to private school, you look like you don’t value your kid’s education if you send them to public school. Again, it’s part of the keeping up with the Jones’ attitude.
I’m not worried about my kids because I live in a good public school district. Also, there’s something to be said about being exposed to diversity, something that you don’t really get in a private school setting. I’m also fine if my kids don’t get into Harvard (my bank account will be happy too!) What’s important is that they go to a school that they want to attend.
5. Designer Clothes
I’m not a fashionable person by any stretch of the imagination. It’s beyond me why anybody would spend thousands of dollars on an outfit. But again, it’s a status symbol. Upper class families will spend more on clothes. I personally refuse to, since a) I’m not fashionable, and b) I’m married, so I have nobody to impress.
How to Save and Build Wealth
Like I said before, upper class families aren’t very different from everybody else. They just spend more on everything. Partly because what they buy is better, partly because of the need to keep up with others. Remember that even though somebody makes more than you, they might actually have a lower net worth than you. If your goal is to become upper class and also have a positive net worth, focus on lowering expenses. Do you need that monthly gym membership that you never use? Do you really need cable, or at least all those channels? Is the whatever-of-the-month club really necessary for your survival?
Next, focus on areas where you can lower the cost of things you need. For example, using Netflix or Hulu instead of cable. You can easily save $100-200/month by cutting out cable. Or try making your own coffee or lunches. That’s good for at least $5/day, or $100/month.
Becoming rich is all about living below your means. Saving is the opposite of spending, and it’s a lot less fun, but saving buys freedom. Freedom to not worry about bills. Freedom to quit your job. Freedom to retire early. Freedom to do whatever you want. It’s that freedom that I value over nice clothes and expensive cars.