Earners,

Good Friday to you and Happy Easter to those that celebrate! 🐣

Some of our fellow earners make big time bucks and yet are totally missing the plot by spending everything they make.

Today, we are going to examine what a high-earning family spends in NYC. It originally comes from a 2015 article by a blogger named The Financial Samurai. This post went super viral and received national attention for allegedly being "insensitive" and "detached" (aka it pissed off a lot of folks) as he suggested that the people in the below example are arguably “scraping by”. I imagine that with a keen focus on your earnings, you will find yourselves working with this type of income and beyond in the coming years, if you aren't already.

“I can’t breathe darlin’, hand me a Benjamin”

The chart below provides an example of annual spending for a couple who each earn $250,000/year as lawyers. They have two children, aged three and five. Both in their early 30s, they reside in New York City, one of the most expensive cities in America. They apparently feel that they are struggling to make ends meet with their current expenditure. Let's examine how challenging their situation really is. I won't dissect every item, but will highlight a few that warrant closer attention.

401k Contribution: $36,000

The first thing that is glaringly obvious to me is the 401K max contribution for both the husband and wife. I believe it is a higher limit now, but at the time in 2015, it was $18,000. Both partners are fully maxed out, which is a good thing. That means they are stowing away $36,000/year with potential employer matching which can be 100% up to 5-10% of their paycheck. That isn’t being shown here, so either they don’t have it or a pretty decent part of the puzzle is being omitted. The majority of people aren’t able to stow away $36,000 a year, not to mention the market compounding they are getting on those investments. Right away we know these people are paying themselves first - clearly, they are doing something correct off the hop.

Next thing that is insane is that tax rate. My goodness.

Taxes ($185,600, ~40% effective tax rate)

The author (Sam) in the original article states that “The number one reason why high six-figure income households are scraping by is due to taxes. It’s more efficient to earn investment income than W2 income due to lower tax rates.”

I think what he is saying here is a little bullshitty. I agree that high taxes eat into high income earners' bottom line and that's the advantage of business or investment income. It’s important to find ways to reduce your tax burden and there are more efficient ways to earn income. However, there’s only so much you can do…you probably shouldn’t spend just to save on taxes or enter an investment purely for tax purposes. Those usually don’t end too well.

I can’t stress this enough: high taxes are absolutely not the reason that high earners find themselves in a cash strapped position. It is quite literally a privilege to be taxed at a higher rate because that means you are doing well in life. The reason they may be cash strapped is the rest of the money that they do retain is going out the door elsewhere. Blaming high tax rates for why you are cash poor sounds like something only a rich person could complain about.

Childcare ($42,000)

This is just to watch the kids…

Sam states that “The $42,000 a year cost can be spent on daycare or a day nanny, although some contend that $42,000 is not enough.” I am not a parent and I am sure that it is more expensive than I think - but you are telling me that’s the best you can do? You can’t hire a nanny on Fiverr or something for less? If we break down the cost to a weekly amount, it is just over $800/week for both kids. I really don’t think this couple looked for the more cost-effective options in the city while still maintaining a good level of care for the kids. That’s my guess, but maybe I am out of touch with how expensive it is in a major city.

Mortgage ($60,000)

$5,000 / month in mortgage expense bought this family a ~$1,500,000, 3/2, 1,700 sqft condo in Brooklyn. In New York, that’s par for the course. I’d also imagine that place is worth well over $2MM in 2024, so they’ve likely done pretty well on it. I do wonder how they would fare if they set up outside the city and commuted further? Regardless, this is definitely eating into their budget.

Food For Four ($23,000)

Spending $23,000 a year on food means spending roughly $1,916 a month, or $63 a day for four, or $15.75 per person for all 3 meals, breakfast, lunch, and dinner. Can’t even lie, that’s actually super impressive. For me, food is my personal biggest expense - across everything I likely spend $12,000 annually for just me (I also allow myself to spend pretty freely with food; just an FYI in case you’re player hatin’ over there) but still, pretty great stuff here, especially for a big city like New York.

Three Vacations A Year ($18,000)

So Sam states “Let’s say each vacation is one week long and costs $6,000. Is that so unreasonable for four people? Seven nights at a 3-4 star hotel costs $300 a night ($2,300 including tax). Roundtrip airfare for four to debt-laden Puerto Rico costs another $2,400. The family is left with $1,300 to spend on food and activities.”

He stated that 9 years ago…and I think 9 years later you can do much better than that. One thing to note: PEOPLE WHO ARE ACTUALLY “SCRAPPING BY” CAN’T AFFORD 3 TROPICAL FAMILY VACATIONS. At this point, it’s insane to even subtly suggest that these people are scraping by when they are sipping margaritas 3 weeks out of the year with their money (not on debt!). This line probably annoyed me the most out of the whole budget.

Car Payments ($9,600)

More from Sam:

“With two precious ones, the parents decided to lease two family-friendly vehicles: a BMW 5 series and a Toyota SUV with third row seating. $800 a month in lease payments means one less hassle when it’s time to get rid of the cars. They like the convenience of covered maintenance and the peace of mind by having a warranty. They are busy professionals with kids. Car problems are the last things they want to deal with.”

2 cars in New York City…. ride sharing is a beautiful thing and would probably save them some dough. They don’t need a BMW. Not to mention the leasing aspect. I understand the element of flexibility but to me this is very unnecessary. There have been several examples so far that show they are not only not scraping by, but are living a pretty luxurious life and still managing to save tens of thousands of dollars for themselves. Like - they are doing fine. If they pulled back in some key areas, they would exponentially grow their wealth and cushion.

Insurance ($3 Million Term - $2500)

Beautiful. Fantastic to see that they have term life insurance vs whole life. As a quick note for you, whole life insurance is often unnecessary and can have some real crap attached with it. Term life insurance is typically the wise financial decision and here they have an adequate amount if I were to take a educated guess at their estate (likely $1-2MM).

Children lessons ($12,000)

Sports, piano, academics, violin - worthwhile investments in their children. Clearly a luxury though, but not worth pulling if they don’t need to.

Charity ($18,000)

Now this is one that got a ton of heat and I think it is well deserved. Ethical considerations aside, it is insulting to working class people to say you are scraping by while donating almost $20,000/year to causes of your choosing - that's a joke if you think you are struggling.

Student debt ($32,000)

They might want to pull back in other areas just so they could knock this off. Without getting into the weeds, this is a huge thing that they should be focusing more of their budget towards. It's commendable that they are able to put $32K towards it as a family, though.

BOTTOM LINE ($7300)

We still have $7300 left over to save and invest which is not much considering their income but damn it, it's something.

What You Can Learn From This:

To recap:

• These people drive a luxury car

• Invest almost $40K per year

• Go on multiple vacations

• Live in a beautiful Brooklyn condo.

• Still have money left over.

They live a pretty amazing life from an outsiders perspective. If they just pulled back a bit in key areas, they'd be on a rocket ship to several million dollars.

Sam, to his credit, really lays it out well:

“With over $250,000 a year in after-tax expenses, this family must change their lifestyle quite drastically. Even after eliminating 100% of charitable givings, getting rid of both car lease payments, and no longer paying for children’s lessons, they’ve still got $200,000 in annual living expenses to cover!”

The overall takeaway for you earners is that no matter how much you make, you can piss away that money even faster. You should also make sure that you invest your time and energy into high leverage (put in some, get back a lot), high earning endeavours. Although a lucrative career as a lawyer may sound all glitz and glamy, the horrendous work hours, stupid amounts of student debt and the high taxes of a big city employee illuminate what it’s really like to live that life. It makes you think about how you can approach a standard lucrative career like law or medicine from a business perspective (multiple clinics/practices) to get really rich. Though, there’s nothing wrong with ripping a 9-5 alone as I always say; just have to plan around the higher tax rate.

Anything glaring you think I missed? If you enjoyed diving into this rich family's budget as much as I did, maybe I will try to find some more examples and break it down with you. Reply to this email and let me know your thoughts!

Also, here’s a link to the original article if you are curious:

https://www.financialsamurai.com/scraping-by-on-500000-a-year-high-income-earners-struggling/

Earn more,

Nate