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Rich People Feeling Poor?
Feb. 22nd, 2024 01:28 pmI saw an interesting article in my newsfeed earlier this week. It's "Are You Richer Than You Think? A Surprising Number Of People Consider Themselves 'Poor' But They're Actually In The Top 10% Of Earners" (Yahoo Finance, 20 Feb 2024). Well, the headline was interesting. The question posed by the article is interesting. But, alas, the article itself was fairly unenlightening. The author didn't have much to say, and half of what she did say was inaccurate as it embedded and reinforced common misunderstandings.
I've remarked before about the generally poor quality of articles in the general media about wealth and finance. An online wag years ago explained, "Imagine that every feature article you read was written by a lowly paid twenty-something with a liberal arts degree." He's not really wrong. Even though the author of this article claims to have "written about personal finance and investment for the past 13 years in a variety of publications"— I'm going to assume that doesn't include her high school student newspaper so she's older than her 20s— the level of the content fits the stereotype.
So here's how I'd answer the question posed by the article. And no, I don't mean the question literally in the title, "Are you richer than you think?" I mean the more interesting question it really poses: Why do many high earners think of themselves as poor?
Five Things:
1) First off, wealth and income are not the same thing. I've written about this before. It's a common misunderstanding to conflate the two. Wealth is like how much water you have in your bucket, income is how fast the spigot is pouring water into it. Over time a gushing spigot (high income) will fill the bucket (generate wealth), but that's A) over time, and B) depends on your expenses. Imagine that bucket you're pouring water into also has water being taken out on the regular. What's being taken out is to pay for housing, food, utilities, health care, transportation, student loans, etc.
2) The earning threshold of $175,000 used in the story is not particularly high. Yes, is small town America it's a lot, but not in costly cities like New York and San Francisco. And BTW, most of the people who earn such high incomes? They earn it because they're in costly cities like New York and San Francisco. Articles like this never seem to acknowledge that major regional cost-of-living differences are a thing.
3) So, what's $175k in HCOL areas like SF? From living here for many years I can tell you it's not "wealthy". Unless you already have significant wealth, an income of $175k lets you afford a middle class lifestyle. If you're earning $175k here and supporting only yourself you're comfortable, not wealthy. Like, you're not going to be able to buy a detached 3-bedroom house on that salary alone, but you could definitely buy a condo. And if you've got to support a family on $175k you're not even particularly comfortable. You'd be tenuously middle class, probably close to living paycheck to paycheck... and not because you're spending extravagantly on fancy cars and travel and luxury goods, but because the basics of housing, food, health care, transportation, etc., are freakin' expensive.
4) Even people who've amassed some degree of wealth from saving and investing over time may feel their wealth is at risk. In the US one of the big hobgoblins of middle class wealth is medical bills. A severe long-term illness can not only knock out much or all of a family's income but it can drain tens of thousands of dollars, even $100,000, per year, even with insurance. And BTW the cost of that insurance has skyrocketed in the past few years. So we're all paying a lot more for health care, even when we're not sick.
5) Finally, there's the conundrum of upwards comparisons. People tend to compare themselves to those who have even more. Yes, this the go-to explanation of pretty much every article nowadays about wealth and happiness, including the one linked to in this blog. Yes, it's also a very real thing— but it's not the #1 thing. I mean, here I'm calling it #5 on a list of 5. It's simply absurd to act like this one thing explains the whole situation and ignore the very valid items #1-4 I've explained here.
I've remarked before about the generally poor quality of articles in the general media about wealth and finance. An online wag years ago explained, "Imagine that every feature article you read was written by a lowly paid twenty-something with a liberal arts degree." He's not really wrong. Even though the author of this article claims to have "written about personal finance and investment for the past 13 years in a variety of publications"— I'm going to assume that doesn't include her high school student newspaper so she's older than her 20s— the level of the content fits the stereotype.
So here's how I'd answer the question posed by the article. And no, I don't mean the question literally in the title, "Are you richer than you think?" I mean the more interesting question it really poses: Why do many high earners think of themselves as poor?
Five Things:
1) First off, wealth and income are not the same thing. I've written about this before. It's a common misunderstanding to conflate the two. Wealth is like how much water you have in your bucket, income is how fast the spigot is pouring water into it. Over time a gushing spigot (high income) will fill the bucket (generate wealth), but that's A) over time, and B) depends on your expenses. Imagine that bucket you're pouring water into also has water being taken out on the regular. What's being taken out is to pay for housing, food, utilities, health care, transportation, student loans, etc.
2) The earning threshold of $175,000 used in the story is not particularly high. Yes, is small town America it's a lot, but not in costly cities like New York and San Francisco. And BTW, most of the people who earn such high incomes? They earn it because they're in costly cities like New York and San Francisco. Articles like this never seem to acknowledge that major regional cost-of-living differences are a thing.
3) So, what's $175k in HCOL areas like SF? From living here for many years I can tell you it's not "wealthy". Unless you already have significant wealth, an income of $175k lets you afford a middle class lifestyle. If you're earning $175k here and supporting only yourself you're comfortable, not wealthy. Like, you're not going to be able to buy a detached 3-bedroom house on that salary alone, but you could definitely buy a condo. And if you've got to support a family on $175k you're not even particularly comfortable. You'd be tenuously middle class, probably close to living paycheck to paycheck... and not because you're spending extravagantly on fancy cars and travel and luxury goods, but because the basics of housing, food, health care, transportation, etc., are freakin' expensive.
4) Even people who've amassed some degree of wealth from saving and investing over time may feel their wealth is at risk. In the US one of the big hobgoblins of middle class wealth is medical bills. A severe long-term illness can not only knock out much or all of a family's income but it can drain tens of thousands of dollars, even $100,000, per year, even with insurance. And BTW the cost of that insurance has skyrocketed in the past few years. So we're all paying a lot more for health care, even when we're not sick.
5) Finally, there's the conundrum of upwards comparisons. People tend to compare themselves to those who have even more. Yes, this the go-to explanation of pretty much every article nowadays about wealth and happiness, including the one linked to in this blog. Yes, it's also a very real thing— but it's not the #1 thing. I mean, here I'm calling it #5 on a list of 5. It's simply absurd to act like this one thing explains the whole situation and ignore the very valid items #1-4 I've explained here.
