The Darwinian Doctor 
The Dr-ess and I had an interesting talk earlier this year after doing our taxes.
It went something like this:
The Dr-ess: “Holy crap! We made a lot of money last year!”
Me: “You’re right! But where the heck did it all go? And why don’t we feel rich if we’re making that kind of money?”
To recap, I racked up $300,000 in student debt while in medical school and residency. Luckily, during that time my wife was dutifully working and saving money. Her parents also contributed a lot of money towards our first house, which we purchased near the bottom of the market in 2010.
Read more: How we amassed an investment portfolio of over $1 million
With the help of an unprecedented bull market, our stock investments in 2018 eclipsed over $1 million. Together, we also make a great income, allowing us to call ourselves part of the “1%”. We definitely feel lucky.
But we don’t feel rich. Especially in Los Angeles, we feel decidedly middle class and far from financially secure.
*cue the world’s tiniest violin*
Hate and scorn
If this scenario doesn’t elicit a lot of sympathy in the depths of your soul, you’re not alone. There have been a lot of people annoyed about the phenomenon of rich people claiming they’re middle class, or just not admitting that they’re rich.
These articles pop up with regularity in the press and media:
Check out this one from 2017 in the NY Times:
“The rhetoric of “We are the 99 percent” has in fact been dangerously self-serving, allowing people with healthy six-figure incomes to convince themselves that they are somehow in the same economic boat as ordinary Americans…”
Stop Pretending You’re Not Rich by Richard V. Reeves
I readily admit that on paper, my financial situation look pretty peachy. But for many reasons, I don’t feel rich.
According to a new survey in USA Today from Ameriprise Financial, I know that I’m not alone in feeling this way.
This survey of over 3000 high net worth Americans found:
- Only 18% of millionaires felt wealthy
- 60% percent of the millionaires felt they were upper middle class
- 25% felt they were middle class
So not many millionaires actually feel rich! What could explain this phenomenon? I believe there are three main reasons:
- Paper wealth is different from financial independence
- Home equity doesn’t produce cash flow
- There are poor 1%-ers and rich 1%-ers
Paper wealth is different from financial independence
If you’re a high income professional, you may have plenty of money coming in via your paycheck each month. You might also have a lot of money stashed away in your retirement accounts.
But if your expenditures are massive, even a sizeable war chest can be rapidly depleted with a job loss.
I believe this is a primary factor that keeps high income professionals from feeling rich, even if they have plenty of money stashed away in their retirement accounts or investments. Without the constant stream of income from their day job, their lifestyle can quickly grind to a halt.
“Rich” people are supposed to have the financial means to live the life they choose, without having to rely on others. If you can’t support your lifestyle without the income from your job, you are not financially independent. This dependence on the job translates into a feeling of financial insecurity that the truly rich are not supposed to have.
I’d be in trouble if I were fired
If I were fired tomorrow, I’d be in trouble. Our cost of living currently is quite high, and unless I got another job lined up fairly quickly, we’d have to quickly dip into our savings to cover our costs.
I’m trying a grand experiment to keep our lifestyle intact while simultaneously working towards moFIRE, but it’s a work in progress. Only time will tell if we’ll be able to pull it off.
This is of course a great argument against having high living costs. It’s much easier to get through a job transition when your living costs are low.
Home equity doesn’t produce cash flow
Another factor why the rich don’t feel rich is the way their wealth is typically stored.
As I pointed out previously, the super rich do things a bit differently, with most of their wealth concentrated in business and real estate.
Check out this great chart again:
The mere mortals (net worth between $471k – 10.3M), still hold most of their money in:
- Equity in their primary home
- Retirement accounts
- Stocks, securities, mutual funds and trusts
The biggest chunk of money, even in this group, is still concentrated in the primary residence. But even if you own a 14 bedroom mansion in the middle of Beverly Hills, your equity in the home is not readily accessible when sh!t hits the fan.
Likewise, there are costs and penalties, both monetary and psychological, to accessing stocks and retirement accounts.
The “ultra rich,” on the other hand, have 49% of their wealth concentrated in business and real estate, two areas which typically can generate significant cash flow.
This diversification of income and cash flow sources protects the ultra rich from financial risk.
Without cash flow producing investments, wealth as measured by home equity and stock investments can feel remarkably imaginary.
My wealth seems ephemeral
I feel this to some extent when I check my net worth on Personal Capital.
The pixels on the screen change from month-to-month but my wealth feels ephemeral as ever.
I’m trying to remedy this issue by moving more assets into real estate, but it’s also definitely in the experimental phase.
Read more:
- Why I’m investing in real estate over stocks – Part 1
- Rental house #1: Purchased!
- Rental houses vs. stocks: a 25 year portfolio projection
There are poor 1%-ers and rich 1%-ers
Finally, wealth stratification amongst the 1% is a real phenomenon. If you are just barely qualifying for membership into the 1% club, you’re like that frumpy high school kid trying to hang out with the better dressed cool kids. It’s not a comfortable position.
This article from 2015 from the Mic website explains this point:
“The rich themselves are extremely stratified, and the higher up the ladder you go, the wider the gulf between the rungs.”
Why Do So Many Rich People Think They’re in the Middle Class? by Zeeshan Aleem
There’s definitely evidence for this. An article from CNBC looked at the difference in the income required to be in the 1% in various cities around the US. It then compared this to the average 1%-er income in each of those cities.
Let’s look at California:
- Annual income required to be in the top 1 percent: $514,694
- Average annual income of the top 1 percent: $1.69 million
The 1% are not all alike
Even though the Darwinian Dr-ess and I are technically part of the 1% by virtue of our dual income, we are nowhere near the average income for the 1% in Los Angeles.
If I tried to lump myself into the same pot as all the other 1%-ers, I may feel that we should all go to the same schools, drive the same cars, and live in the same neighborhoods.
But if the average 1%-er is out earning me by a factor of three, it’s not so easy to keep up with the Joneses.
We ran into this issue recently when we considered moving our 5 year old from his current private school to a “better” one across town. The cost of his annual tuition is already about $25,000 / year. The other school is about $35,000 a year (yes, for kindergarten).
We didn’t make the move for a number of reasons, including cost. For your average Los Angeles 1%-er, the extra $10,000 wouldn’t have been an issue. It certainly was a consideration for us, though.
Conclusion
Perhaps like me, you make a good income and have socked away a respectable nest egg. But at the end of the day, you don’t feel rich and don’t know why. Perhaps now you know why.
I know that I’m never really going to feel rich until I achieve these 3 things:
- Financial independence
- Cash flow producing investments
- More comfortable membership in the 1% club
It’s going to be a long and bumpy road on my journey to get there.
Until then…
— TDD
Are you nodding your head or are you feeling some good old fashioned Hate and Scorn? Comment below! Share and subscribe for more content!
Related Posts
- Why I’m investing in real estate over stocks – Part 1
- Rental house #1: Purchased!
- Rental houses vs. stocks: a 25 year portfolio projection
- What is moFIRE (morbidly obese FIRE) and why do I want it?
- My 15 year plan to financial independence, moFIRE style
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9 comments
It’s so odd reading the costs of basic things such as childcare in the US.
Yes, reading this makes my eyes roll a little.
$35,000 for kindergarten?! That’s crazy. Why? Why pay $2,000-3,000 per kid for kindergarten.
But, it’s a different system.
Our childcare, education, healthcare and pension are all covered through taxes. Doesn’t matter, somehow these things need to be paid for, but it does sound like a lot of basic things have become businesses in the US. The costs just do not make sense to me.
How much should childcare cost, really?
When you say you’re in the 1%, does that mean your income is > 500,000?
Me and my wife are in Finland in the 1% with about 240,000€. We feel rich. Not super rich though.
We’ve also managed to get almost 1,000,000€. https://www.thewealthyfinn.com/2019/05/how-we-grew-our-net-worth-to-900000-by.html
Well, probably around 900,000€ but still. Soon in the double comma.
I think it all comes down to the standard of living we’ve grown used to. And if that’s the case, then it feels it’s a choice.
But good that you don’t feel stressed about it. Would be interesting to see how exactly you spend money annually.
I checked my living expenses last year and came to 26,477€. https://www.thewealthyfinn.com/2019/04/all-things-i-spend-money-on-in-year.html
We don’t have kids, so that makes it easier. But even if we did it wouldn’t be a huge difference. Max a few hundred euros per month.
Hi Eelis, thanks for stopping by my blog.
My wife and I argue about the private school issue almost every other week. It’s a huge drain on our resources. There’s likely going to be some developments on this front in the near future. Stay tuned.
We’re trying to balance giving our child the best head start, while also making sure we’re keeping on track with our financial plan.
Yes, when I say we’re in the 1%, I mean that my family’s combined income is > $500k. We are lucky to both have fairly high paying jobs.
But we definitely don’t feel rich.
For my exact annual expenditures, check out this link: The Darwinian Doctor’s 13 Monthly Expenditures (with real numbers)
The kid phenomenon is a much bigger issue in the US, I believe, where we don’t have the substantial social systems common in Europe.
Congrats on your financial success!
— TDD
You’re on to something, DD.
I was where you are (not L.A., but a new millionaire) about 7 years ago. It was a pretty cool milestone, but I wouldn’t say I felt rich at that point.
Since then, the number has doubled and double again, and now I can say we feel wealthy, being comfortably FI by a good margin. But is it enough?
Most wealthy people polled will say they’d be more comfortable with about 50% more than they currently have. I’m fighting the urge to feel that way, because the goal posts keep moving if you do, but it’s hard not to have that mindset.
Best,
-PoF
Hey PoF, thanks so much for your thoughts! You’re absolutely right. “But is it enough,” is the stumbling block to feeling that financial security that I’d envision the “truly wealthy/rich” feel when they go to bed at night.
It helps to have a financial plan with set goalposts, though I do admit they’re set in sand, rather than concrete.
— TDD
I think one reason I feel wealthy in the rural southern US is that my paid for house represents far less than 10% of our net worth. The same house in most of California would cost 5 times as much, probably more. So my net worth is almost all in investments and my property taxes and insurance are trivial. I’m totally comfortable with what we’ve got and have been retired three years and just watch our net worth go up every year. We never had private school costs and all three kids got four year degrees totally free due to academic scholarships. Actually every kid that goes to high school here gets free tuition and fees to college now thanks to a local company. We will never spend what we’ve saved and invested, it would be impossible.
Steveark! You’ve hit the nail on the head. Bloated housing costs, taxes, and lifestyle choices like schooling can devour wealth and financial security faster than a pack of hungry wolves.
By choosing to live in Los Angeles, I suppose I’ve called the wolf pack down on myself, which some would say is not smart. But for now, I’m content to try to make it work.
Congratulations on winning the game!
— TDD
Congrats on hitting the 7 figure, 2 comma club.
You are spot on that where your wealth is concentrated has a lot to do with your feeling of wealth/being rich. If you are house poor and have all your assets concentrated in your primary residence, you do not have capital bringing you cash flow into the household.
I started feeling wealthy once I realized my passive income streams are getting to the point where it is already hitting my annual living expenses. This allows me to further snowball this by using my w2 income to invest in more (I’ve used the term capital snowball in my writings before and it really does grow like a snowball rolling down the hill).
Geographic arbitrage has helped me because I live in a very LCOL area.
I don’t make nearly what you do but I definitely qualify as upper middle class based on my income. And I don’t feel it by any standard. Each month, I look at my paycheck and realize my income is high. Then I allot money to various sub accounts and throw some at retirement and suddenly I don’t feel well-to-do anymore because the only money I have is what I’ve budgeted for for the month (about $1200). So nope I don’t feel rich or even well-to-do because I keep myself on a semi-strict spending regimen. I’m hoping it’ll get better as my savings and retirement accounts grow but I’m not optimistic.
Hey Abigail, thanks for stopping by!
The automatic investments that funnel income straight into investments are excellent for keeping the investments growing and our spending under control.
I don’t know if I feel that “feeling rich” is a goal of mine, but I do want that financial security that the truly rich seem to have.
I appreciate your comment!
( ps – I added in your edit )
— TDD