Articles asking us to sympathize with high-income couples barely scraping by or even falling deeply into debt despite income in the high six-figures are staples of the financial press. The idea seems to be that wealth doesn’t buy happiness or even, really, wealth, so we shouldn’t judge these people too harshly.
The flaws all these articles have in common are on display, as it happens, with the latest entry in the genre, entitled “Scraping By on $500,000 a Year: Why It’s So Hard for High Income Earners to Escape the Rat Race.”
It comes from Sam Dogen’s personal finance and investing website financialsamurai.com, and features an ostensibly real but unidentified couple living and working in New York City, earning a combined $500,000. After their annual expenses, “what’s left,” according to the piece, is $7,300. The piece already has drawn blistering commentary on the website and on Twitter.
But an examination is still worthwhile, to give you a sense of what to watch out for when reading. To show how common its flaws are, we’ll also examine a 2014 Wall Street Journal piece along the same lines, featuring a hypothetical couple failing to make ends meet on $400,000 in Chicago.
The key to understanding these couples, of course, is examining their spending. What one invariably discovers is that couples that earn $400,000 or $500,000 maintain lifestyles they think are commensurate with those incomes. “What’s left” is typically the remainder after expenditures on what actual middle-class families — say those living on $70,000 to $150,000 per year — would consider unattainable luxuries.
That’s the case with Mr. and Mrs. Samurai, who are described as two 35-year-old lawyers each making $250,000 a year, with two children ages 3 and 5. They’re putting a combined $36,000 a year in their 401 (k) plans, contributing $18,000 to charity and spending $5,000 a month on the mortgage on their $1.5-million, 1,700-square-foot three-bedroom Brooklyn apartment. They’re also paying off $32,000 in student debt.
One might consider those all fairly reasonable, even responsible, expenses. Then there’s this: Child care ($42,000), three vacations a year ($18,000), car payments on a BMW 5 and Toyota Land Cruiser ($9,600), food for four including “date nights” every two weeks ($23,000).
These are the expenses that made a lot of commentators stop and say, “Whoa.” Three vacations a year at $6,000 each? Where are these people going, and where do they find the time? Three weeks of vacation is twice the average enjoyed by all American full-time workers, though it’s commensurate with professional employees after 10 years of service. But that puts our couple in the privileged class. The Samurais are taking what appear to be full-scale getaways three times a year.
Cars? In New York City? New York is one of the few cities in the country where one can do without a car; not only that, but keeping a car in the city is uncommonly expensive, what with parking, gas and insurance. The BMW and Land Cruiser are un-necessities by any measure. Date nights every other week: This plainly drives up the child care costs and surely makes average couples with two toddlers at home go, “I wish.”
Even the charitable deductions deserve some scrutiny. Financial Samurai lists these hypothetically as Feed the Children, which is a worthy cause, and “college alumni,” which is not necessarily — does a young couple raising two kids really need to contribute to what are (let’s guess) elite universities with healthy endowments?
Then there’s $10,000 for “Miscellaneous (something always comes up)”. In other words, the couple isn’t really left with $7,300, but $17,300.
But it’s only right to observe that much of the spending here is either optional, the result of decisions that the couple could have made differently, or exaggerated. They could choose to trade the city for the suburbs. Even if that wouldn’t mean a lower mortgage, they certainly would find larger quarters for the same price. Child care would likely be cheaper, as would the children’s sports, piano, violin and academic lessons ($12,000 for a 3- and 5-year-old, really?). The couple’s student loans are temporary — since they typically take 10 years or so to pay down, they’re probably within a few years of disappearing, at most.
In other words, saying this couple has only $7,300 left over is putting a huge thumb on the scale. One might just as easily say that they have $155,000 left over, out of which they can pay for their retirement funds, child care, cars, vacations, charitable contributions and miscellaneous expenses.
This sort of tilted playing field is characteristic of all these stories. The Wall Street Journal piece referenced above is guilty of the same thing. Its hypothetical $400,000 couple was calculated to spend $87,000 on a mortgage, $25,000 on home maintenance, bought a new car every four years (averaging out to $15,000 a year), and spent $26,000 on two family vacations and a weekend getaway. Then we were expected to shed tears because this put them $10,000 in debt. This is not discretionary spending, but undiscriminating spending.
Some of it, compiled for the Journal by Northern Trust Wealth Management — which arguably feeds on free-spending clients — was plainly bogus. Northern based its mortgage estimate on a 15-year, $850,000 mortgage at 6.25% on a $1.2-million home. By my calculation, extend that loan to 30 years and refinance it at 4%, and you’ve cut the mortgage bill by more than half, saving a cool $50,000 or so. Is there some reason a family needs to buy a new $60,000 car every four years? Only if it wants to land in debt.
The motivation underlying these articles are insidious. They strive to show that for people in certain cities, $400,000 or $500,000 doesn’t make them “rich” — they’re in the same middle-class boat as you or me. They also aim to reassure the wealthy that their financial travails are not their own fault — they’re inevitable outcomes of life conditions.
Both arguments are absurd. In fact, they’re so transparently absurd that the real mystery is why their authors even try to make them.
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11:31 a.m., March 26: This post has been updated to reflect that the couple described in the financialsamurai.com article aren’t hypothetical, but ostensibly real though unidentified.