Being rich doesn't mean you aren't failing

Although I would hope that the 3 families that Money Magazine featured are extremities in the typical middle class neighborhood, I am quite certain that their attitudes are all too pervasive.

Read the entire article for the sad state of their affairs. Here are some excerpts that you might want to take note of:

Robert Frank, an economist at Cornell University and author of Falling Behind, calls the desire to match what the neighbors spend, remodeling project for remodeling project, lavish party for lavish party, "luxury fever."

Not only can it prompt you to spend beyond your means, but it can also lead you to a false sense of how you are doing financially.

Nice to know a real economist agrees with me.

The Steins

In reality, moving to Wallingford hasn't improved the Stein's finances. In fact, despite a seemingly comfortable combined income of $132,000, their cash flow is a little bit worse than before because they have a bigger mortgage and higher property taxes.

All told, their house payments now run $32,000 a year, up from $22,000 in Wayne. Their other big expenditure: $26,000 a year for a full-time nanny for their three children, Eva, 3, and twins Neve and Lila, 2. Then there are all the myriad costs of a young and growing family, from diapers ($70 a month) to groceries ($800).

They now owe nearly $39,000 on five different cards, including nearly $1,200 on an American Express account with an interest rate of 30.21 percent. The minimums alone run the family $700 a month.

The result is that the Steins live mostly from paycheck to paycheck, saving very little.

Yet, they feel they can afford a full time nanny and pay him/her $26k a year.

Still, Marni's plan to solve her family's financial problems is not to cut spending and pay down the debt. Her idea involves going further into debt so that she and her husband can get additional training to help boost their income.

And that is why she will fail.

Marni is working on a Ph.D. that will add $18,000 in student loans to the Steins' balance sheet by the time she finishes next year. Stuart plans to take a $5,000 management course. "I don't think watching our expenses will be enough," says Marni. "The only way we really could be better off is if we make more money."

It won't matter if you make a million a year if you are spending a million and a half. After they get professional advice on how to get their finances on track, here is what they plan to do:

They plan to apply for a $42,000 home-equity loan - that's 40 percent more than the planners suggested - to wipe out their remaining credit card balances and to pay for Stuart's career training and a new fence around their yard.

And this is why they will never be financially secure. They will never make enough money.

The Mendells

Dave, 39, teaches fourth grade in Wallingford's elementary school. Emily, 38, is vice president of strategic affairs for the National Venture Capital Association. Together their annual income is $250,000.

what really diverts cash from their savings kitty is the cool stuff they like to buy...recently bought an $800 custom-made, handcrafted board. He has three guitars, plus a fourth...they bought a trampoline and a swing set for the backyard. Emily, nearly a black belt, spends about $3,400 a year on karate lessons for herself and the boys. Dave prefers yoga classes ($1,200 a year).

The Mendells would also like to finish their basement ($30,000), and Emily wants to trade in the family's minivan for a Mercedes M-Class ($40,000). Then there were the separate vacations Dave and Emily took to Costa Rica over the past year and the family trip to the Grand Canyon (total for travel: nearly $8,500).

This spend-thrift attitude is going to make broke debtors out of their kids, too, with their lack of parenting:

Emily, who says she has a problem saying no to her kids, admits some of it is spent on impulse purchases for the boys, who regularly return from trips to Target with a new toy. "When we're at the mall and they ask me to buy something, what do I say? 'We can't afford it'?" asks Emily. "We can."

Yet they don't think they spoil them.

Should we be enjoying our life more?

Yes, so long as you are okay with working for the rest of your natural life. So after their advising session what will they do?

The Mendells have pledged to boost their retirement savings. "I thought we were on the right path," says Emily. "But we've got a lot more saving to do than I thought." They say that they are also committed to cutting back on their spending but haven't decided how. Meanwhile, Emily is still shopping for a Mercedes.

They are failing themselves, and their children. They recognize the problem but refuse to do anything about it. They must have that Mercedes. They do not see the long term consequences of their actions. Their children will learn good money management by watching their wealthy parent's utter failures. Bankruptcy, foreclosure, repossession is in their future. Their $250k income will not last forever, and when they stumble, they will fall off a sheer cliff.

The Wrights

Read about them in the article, they are the only ones with some sense.

How I spend my paycheck

Above is a table that I use to divide each paycheck (though I usually do it on a sticky note so it never looks so neat!). This helps me keep track of where I need to send the money coming into my checking account so I don't accidentally spend something I shouldn't. The numbers are just made up.

First I deposit my check and subtract 15% for savings (another 15% is already taken out for my 401k). I subtract my readjustment/spread account payment, any bill payments that were made from my bill pay account (a separate high-yield interest checking account - ING), and any budgeted items coming up that week. In the right side I figure out how much I need to transfer to ING, which is the readjustment/spread amount, the bill pay balances, and the savings (my savings is presently being used for maximum debt repayment).

At the bottom I take the current balance of my checking account, add the deposit amount and subtract the ING transfer amount. That gives me my actual account balance. Next to it I subtract the budget amounts, which stay in the checking account until I spend them that week, and I get the "Available" amount, which is what I have for spending on whatever that week.

Of course, this particular table doesn't include nearly as many bills as I usually have - for simplicity, so my available spending balance is rarely so high!

A real saver...

This guy makes $20,000 a year. I consider him rich. Why? Because unlike most people, he is set to retire with more money than he earned during his working years. In a safe portfolio he is looking at an income of around $40k not including social security. If someone making $100k/yr lived by the same principles, let's say, we can safely assume they would have a few million in the bank (adjusting for inflation) to draw from for retirement.

This just doesn't happen enough. Though we can attribute some of this man's earnings to wise stock investing, the meat and potatoes of this story is that the man saved. He didn't spend all of his income and he likely did not dig himself into debt (though the article doesn't say, this man is from a generation that frowned on debt so I safely assume he has little to none). You save your money and make it work for you, not borrow it from a bank and pay them for the privilege. That is how you build wealth. That is how this man making $20k a year has more money than many fresh retirees who are applying to Walmart because their savings portfolios consist of a company 401k that they already borrowed from to buy a new kitchen for their house.

Money does not build wealth.

Not to worry, maybe you can turn your hobby into a career (video) instead of retiring. Meanwhile, the parking lot attendant you smirked at from inside your BMW is working on his backhand.

Broke making $150k a year

Here's a depressing story from CNN about a couple with 4 kids who are now neck deep in debt and broke. They had 1 kid, planned on having a second and instead had triplets (another reason not to use fertility drugs!).

The real tragedy of this story though is that they had $175k in savings and an income of $90k a year entirely from one spouse. After their triplets came, their savings vanished and they went into debt. I wondered how 3 healthy babies could drain $175k in such a short time when you have $90k a year in income and a stay at home mom!

Now 4 kids is a lot. But many families have more and make it just fine. Yet this couple was spending $2k a month on 3 part time caregivers! Then they had real estate investments, which began to become unprofitable (or even break even). In 2 years they went from $90k a year and $175k in the bank to over $155k in DEBT plus a loss of the $175. 3 extra kids had cost this couple $165,000 a year! That's $55,000 PER CHILD.

It gets worse. They sold some giant farm mansion they were building, cashed out some unpaid leave, yet they were still $127k in debt. They worry about paying preschool tuition (are you kidding?) and saving for college. At the same time, the husbands income has increased a large amount and yet they still can't get by!

They should sell all their real estate (ticking time bombs), stop sending the kids to preschool, get rid of all the nannies, stop contributing to the kids college funds, rent a small house, live off of $50k a year and pay off the debt within one year and slowly begin increasing their lifestyle while socking away most of their income. In 5 years they could be better off than when they started.

This couple has about $150k in income and a 12% employer-provided retirement savings, yet they are wallowing in $120k of debt.

Why is this couple in so much trouble? In my opinion, its because they can't admit they're totally broke.

Dennis says he agrees with the advisers that the couple should pay down their debt and create a cash reserve. But he's reluctant to diversify as much as they suggest and wants to keep enough free cash on hand to cut real estate deals. "I'd like to have $75,000 in my foxhole waiting for the next thing to jump up and buy," he says.

There are so many families that have more kids than these folks and live off of a fraction of what they do. This is a perfect example of how money does not create wealth.

Getting nowhere at $250,000 a year

MSN Money has a report about the savings trends in different income brackets. The article focuses on those making up to $250,000, and how they do not save as much (or at least as consistently) as those making $50 to $100 thousand.

Do the rich (and I would classify them as rich) feel less concerned with having an emergency fund as the middle class? I would think they'd be more concerned. Owning a million dollar home (read: owing a million dollar mortgage) and a couple of leased Mercedes might be fine when you're bringing in top dollar, but what happens if you suddenly lose your job? Not only do you have to weather the period of unemployment, but finding a $250,000 job is going to be a lot harder than finding a $50,000 one. 6 months expenses? Try a couple of years of expenses.

These quotes stood out in my mind:

when HSBC asked what prevents them from saving more, the top answer was the need to pay everyday bills

Not surprisingly:

The savings rate in the United States dipped to zero in 2005 and has even fallen into negative territory

Of course, excuses are abound.

HSBC found that 49% of respondents with at least $250,000 in income aren't saving more because they simply "want some spending money."

Spending money can't be found in a quarter million a year budget?

respondents say they do not save more because "something unforeseen always comes up."

At least we know being in debt and not saving is not a class issue. Our excuses are the same, from the poor families on welfare to the high rolling elite.

I'll end with this gem of a quote, because it left me laughing.

people who earn $250,000 or more say they aren't even earning "enough to make ends meet as it is."

Right.