Last week, I read this little nugget of goodness at Budgets are $exy, one of my favorite personal finance sites.
“Two thirds (67%) said they would rather have a steady job with a modest income than become a millionaire with a chance of going broke within a few years.”
This was from Capital One’s survey of Millenials’ attitudes on spending, saving, and sharing. Wow, that’s crazy. This tells me that 67% of Millenials are extremely bad at personal finance. I don’t know why anyone would choose a steady job over a million dollars. There is just no good reason to do that. Well, if inflation is 5,000%, then maybe a steady job would be better. (Zimbabwe – 79,600,000,000% inflation per month in 2008. Basically, price doubled every day.) Other than that, I can’t see why anyone would choose a steady job over a million dollars in the bank!
Am I missing something? I guess 2/3 of Millenials prefer income over net worth, but that’s just wrong. Of course, the best scenario would be having high income and high net worth. But if you have to choose just one, go with wealth. It’s no contest and here are some reasons why.
The Government taxes income, not wealth
We have a progressive tax system here in the US. The more income you make, the bigger percentage Uncle Sam will take. If you have a stable job*, you’ll pay $13,225 in tax according to the TurboTax free tax calculator. That’s about 17%. On the other hand, if you have a million dollars and generate $80,000 from dividends and long term stock sales, you’ll pay $4,838 in tax. You’ll pay almost 3 times more tax with earned income than passive income. The tax structure is biased toward the wealthy and a million dollars will get you there much faster than a steady job.
*For simplicity sake, let’s assume a stable job with a modest income earns $80,000.
Myriads of government benefits are based on how much income you make. Someone with a steady job will not qualify for Medicaid, Obamacare, student loan forgiveness programs, and many more. You simply make too much income to qualify. However, if you have a million dollars, you can manipulate your income to qualify for many of these benefits.
For example, a family of 3 that generates $40,000 in passive income will qualify for about $5,000 in benefits under the Affordable Care Act. That income is about 200% of the poverty level. Once Mrs. RB40 retires in 2020, we’ll be able to get health insurance at an affordable price. Well, we’ll see how healthcare goes over the next few years. The price of health insurance is increasing very rapidly.
I’m not saying millionaires should take advantage of these programs, but they can and do.
Someone with a steady job will never catch up to someone with a million dollars invested due to compound interest. If a million dollars is invested conservatively and generates 7% return, it will double in about 10 years. In that same period, it’s very unlikely for someone with a steady job to accumulate one million dollars. You’d have to invest $70,000 each year to accumulate a million dollars in 10 years. That’s impossible with a $80,000 per year job. It’s much more difficult to start from zero.
Try it out on a compound interest calculator if you don’t believe me.
Money in the bank
A bird in hand is better than two in the bush. Everyone knows that. A million bucks in the bank is much better than a steady job. Besides, no job is really secure these days. That steady job might not be very secure when the next economic downturn hits.
You will spend more when you have high income
Almost everybody spends more when their income increases. That’s why our national saving rate is so low, at about 5%. The temptation to spend money is practically uncontrollable when you have a nice fat paycheck coming in every 2 weeks. Why not go ahead and go out for dinner and buy a new iApple? After all, you will get another paycheck in 2 weeks!
On the other hand, if you have a million dollars invested, you want to see it grow. You don’t want to draw it down unless you really have to. Well, that’s my experience anyway.
You can still get a job even when you are a millionaire
Yes, millionaires work, too. Nothing is preventing you from getting a steady job when you are a millionaire. If you need training or more education, you will have money to pay for it.
In fact, a million dollars in the bank can mean freedom. You probably can’t retire fully with a million dollars, but you can invest it to generate some passive income. That investment income can offset your cost of living expenses and it will free you up to pursue your interest. That’s what I did. I left my well paying, but stressful engineering career to become a stay at home dad/blogger. I’m making much less income now, but our quality of life is so much better. Our investment income helps offset our monthly expenses so I don’t have to make as much money.
Choose wealth over income
The only downside to choosing a million dollars is you won’t know how hard it is to accumulate a million bucks. As a result, you might not appreciate it as much. That’s probably why all those lottery winners lose it all in just a few short years.
If you ever have a chance to choose between a steady job or a million dollars, I hope you’ll make the right choice. You will get bored with the steady job someday, but you will never get tired of your million dollars.
Would you rather have a rather have a steady job with a modest income than become a millionaire with a chance of going broke within a few years? Is this a trick question?
Common Creative image by spirobolos