Last week, personal finance site Financial Samurai posted a blog that went viral: Scraping By On $500,000 A Year: Why It's So Hard For High Income Earners To Escape The Rat Race. If $500,000 is "scraping by", it's time for some serious financial literacy.
Photo by Stokpic
The post points out that the expenses of a high-income family are almost a necessary part of earning a lot of money. As you can imagine, the post got a lot of criticism for this. Sure, I guess there are more expenses associated with being rich, and I won't pretend to know their "struggle" (though I hope to find out someday). All I can say is, there's one glaring difference between the financial struggles of the rich and the financial struggles of the poor: Opportunity. When you earn a lot of money, you have the opportunity to pare down, even if does affect your lifestyle or even your earning potential. When you don't earn a lot, you can only pare down so much! In other words, yeah, it sucks to take fewer holidays in a country that you already don't holiday in very much, but at least you have the option to do that.
That's not even what strikes me about the breakdown, though.
What I found most interesting is that, even at $500,000 a year, the couple profiled in the article seemed to have the same financial problems as someone earning $50,000 — or less. They're overworked, stressed and they can't figure out how to make ends meet. Let's be real, though. For most people, $500,000 a year, even with taxes and expenses, would solve a lot of problems. However, if this post teaches us anything, it's that money won't solve all of your financial problems unless you learn how to manage it, too.
Sam addresses this issue in the piece: "Golden handcuffs are incredibly tough to break," he says. It's true, and it's why personal finance is important.
Spend less than you earn is the most basic rule for building wealth. But many of us spend more than we should to enjoy certain luxuries and conveniences. Once you get used to this lifestyle, it's easy to get attached.
It brings to mind something Amy Daczyczn, author of The Complete Tightwad Gazette, has to say about frugality:
Nearly everyone that earns more automatically spends more. For this reason, regardless of their incomes, many families seem to have exactly enough to get by. Telling you to earn more instead of saving more is like saying "Don't eat less, exercise more." When I learned that walking a mile burned up the same amount of calories as an apple I wondered how many miles I would have to run to burn the calories in a candy bar. It made more sense to give up the candy bar. Most Americans are running to burn up candy bars. They are running out of the house, running to the daycare center, running on the job… so they can afford candy bars and Nintendo games, meals at McDonald's, and designer sneakers.
Keep in mind, Daczyczn's book was published back in the '90s, when the middle class was still a thing. But she still makes a good point: Despite earning more money, many people still end up behind because they forget (or never learned) some important money lessons. Here are a few points that came to mind when I read this post:
- The best money skill as nothing to do with maths. It's resourcefulness.
- Financial success has a lot to do with your mindset.
- Having money means having the freedom to make good financial decisions.
In other words, it's not enough to just earn more money, you want to know how to take control of that money, too. Five hundred thousand dollars a year is a pipe dream for most of us. But to put it into a somewhat realistic perspective, good financial habits will help you optimise the way you use a $1000 bonus. Or a $600 tax refund. Or a $3000-per-year raise.
It isn't half a million, but there are still ways the rest of us can make the most of smaller windfalls.