Oh my goodness, have you seen this article at WSJ – Six-Figure Incomes and Facing Financial Ruin? It’s ridiculous. If you’re making a 6 figure income, it’s probably your own fault that you’re facing financial ruin. Well, barring medical problems, that is. That can ruin anyone.
Here is the featured spender – Ms. Flores, 40 years old and lives in Oceanside, CA. She was earning more than $200,00 per year, but ran up $300,000 in credit card debt! This wasn’t her first brush with credit card debt either, she filed bankruptcy in 2005 after incurring about $500,000. How did she manage to do that?
Well, I guess if the credit card companies let you borrow money, then you might as well spend as much as you can. Live it up because, you can just keep doing it again and again. You can live way above your means when you’re still young and enjoy life. However, retirement will really suck if you don’t have any savings. (I’m assuming you don’t have much saving if you’re in $300,000 in the hole.) At that point, the credit card companies probably won’t let you borrow any money because you don’t have an income. It will be a big drop in lifestyle and for once you will have to pay your own way. Social security benefits definitely won’t fund personal chefs and lavish international vacations. Anyway, Ms. Flores is trying to turn it around so at least she might be in a better position when she’s 60.
WSJ also profiled a hypothetical couple with two teenagers in the Chicago area making $400,000. That’s a ton of money. How can they screw that up? Let’s see.
- Tax, retirement, and college saving: $127,000.
- Mortgage: $87,000. Assuming a million dollar home.
- Property tax: $24,000.
- Home maintenance: $25,000.
- Utilities, cellphones, and other household bills: $15,000.
- Groceries: $30,000. That’s $575 per week which turns out to be more than what we spend on our groceries/month.
- New car every 4 years: $15,000/year on average.
- Car insurance: $9,000
- Discretionary purchases: $21,000
- Health club due: $12,000
- Vacations: $26,000
- Sports related fees for children: $10,000
- Gifts and holiday spending: $4,000
- School fundraisers and charitable giving: $5,000
Okay… That level of spending seems absurd to me. They have a $10,000 negative cash flow every year with this budget. They’re basically broke and will need to reduce their retirement saving by $10,000 just to make ends meet.
First of all, their housing bill is around $150,000! That’s way higher than the average wealthy household. According to the U.S. Bureau of Labor, the wealthiest household spends about $38,000/year on housing in 2012. Next, their grocery bill is $575/week? Are they eating caviar and Champagne every meal? Their transportation expense is over $25,000/year. Basically, this budget is pretty absurd for this level of income.
Of course, this is just a hypothetical family. I’d hope that most families with this level of income would be a little more responsible with their money. Even if they get into trouble, they still have a huge advantage over the middle income households. They can just hire a financial advisor and turn things around very quickly simply because their income is so high. They’re living high on the hog and it would be pretty easy to cut the fat. Does anyone really pay $1,000/month for their health club? The most prestigious athletic club in Portland only costs about $200/month. Of course, the initiation fee cost $10,000 per family and you’d have to win a lottery. (ridiculous…)
I guess I’m just jealous of Ms. Flores. She filed for bankruptcy and then went through the whole debt cycle again seemingly without any repercussions. I don’t have any experience with bankruptcy, so I don’t really know much about the process. I guess she had to cut back for a few years to rebuild her credit, but she’d still be pretty comfortable with a $200,000 yearly income. Mmmm… It would be nice to have a personal chef, personal assistants, maids, a nanny, a McMansion, and a new luxury car every few years.
Of course, the big down side is when you can’t work anymore. You’d have to live on social security and it’d be a big decrease in lifestyle. Personally, I’d rather have a comfortable lifestyle now AND when I’m old. Anyway, I have no sympathy at all for fiscally irresponsible people with high income. It’s easy to get financial education these days and they are still in a much better position than the middleclass. I’m sure most high income families are doing much better than Ms. Flores and the hypothetical family.
What about you? Would you live a luxurious lifestyle until you’re 65 and then be destitute afterward? Or would you rather live within your means and maintain a modest lifestyle?
Photo credit: flickr avlxyz
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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