This blog focuses on financial issues that affect high-income professionals. However, today I'd like to take a break and see if I can help the average American. I work with, treat, and am related to lots and lots of people in this category and I bet you are too. Please share this with them.

Average (okay, technically median) American! Listen up! Today is for you on WCI!

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Who are you? Well, your household has an income of about $60K, you have a total debt (including mortgage) of $137K, and you probably are carrying a balance on your credit card, have a car loan, still have student loans, and have a mortgage. You've got $96K in your 401(k). Your net worth is $45K.

Here's my financial advice for you.


#1 Figure Out Where You Stand

Add up and write down all your debts, including amount owed, interest rate, monthly payment, and expected time period to pay them all off. List all of your financial assets. Count the value of your house, your 401(k), your bank balances, and your investments but not the value of your cars, boats, time-shares or anything else. Subtract what you owe from what you own. That's your net worth. Most Americans don't even know what this number is. Just calculating it puts you ahead of the game. Concentrate on this number when making financial decisions and do all you can to make this number go up every month. Live your net worth, not your income.


#2 You Aren't What You Drive

While people with doctor incomes can often afford to make minor financial mistakes, you can't do so. Perhaps the most common financial mistake in America is driving too much car. This is usually done for one of two reasons.

First, people associate themselves with their car. If they drive a jeep they're a hard-core, nothing-can-stop-me type. If they drive a luxury brand, they're successful. If they drive the newest mini-van, they love their kids and care about the soccer team. Their car is clean and sexy so they must be too. Nope, you aren't what you drive.

Second, they justify driving a newer, nicer car because it is safer and/or more reliable. Yes, it is safer and more reliable, but minimally so. “But there is no price too high to protect my babies.” Well, if you're willing to work to 80, and live an impoverished lifestyle should something happen to you if you can't work until 80, in order to have one fewer breakdown during your life and reduce the chance of your child being injured in a car accident by 0.1%, knock yourself out. Your life, your choice. But make that decision deliberately, not haphazardly.

I've driven a $2,000 car and a $5,000 car. They both worked fine. The one I'm driving now is worth less than $10K. Your $30K car is keeping you in the poorhouse, especially if you're making payments on and fully insuring it. Dave Ramsey suggests you have less than 1/2 of your annual income tied up in things with motors. I think that's a pretty good guideline. So if you have 2 cars and your household income is $60K that's, at most, a $20K car and a $10K car, both paid for.

The difference in cost (including depreciation, financing, insurance, maintenance and repairs) between a fancy car and a beater can be about $5K a year. $5K a year invested at 8% for 40 years adds up to $1.4 Million. Want to be a millionaire? Drive a beater.


#3 Take Advantage of Government Programs

There are lots of perfectly legal ways the government (i.e. your fellow taxpayers) can help you. Know the programs and how they work and which ones you qualify for. This might include Medicaid, CHIP, Food Stamps, Women-Infant-Children, Pell Grants, Public Service Loan Forgiveness, PPACA Subsidies, tax credits, Unemployment benefits, SSDI, Worker's Compensation etc. Don't lie to get benefits, but if you qualify, say “thank you very much” to your fellow taxpayer and take advantage.


#4 Take Advantage of Your Favored Tax Status

I have this conversation with medical residents all the time when they complain about the taxes they pay. It's always fun to watch an attending get her first paycheck and realize that she'll be paying more in taxes than she used to earn as a resident! The fact is our tax system is quite progressive. Take advantage of that fact. A family of four with two kids earning $60K gets a $24K standard deduction and two $2,000 child tax credits. That means your federal income tax bill, with no fancy deductions whatsoever, is 10% * $19,050 + 12% * ($60K-$24K-$19,050) – $3,939 = $0. (The child tax credit is not fully refundable.) That's an effective tax rate of 0%. This family doesn't even pay federal income tax under current law without any fancy tax tricks or retirement account contributions. By the way, if this is your tax situation, be sure to do your retirement savings in a Roth account, at least once you've maximized the value of any employer match.


#5 Don't Diss Social Security

I know, now you're wondering where all that money taken out of your paycheck is going. Well, some of it is the fact that you claimed the wrong number of exemptions on your W-4 and you're loaning money to the government at 0% only to rejoice next Spring when you get your tax refund. But most of it is your payroll taxes. The majority of your tax bill is payroll taxes, 6.2% for Social Security and 1.45% for Medicare. That's actually only half your payroll tax bill. Your employer is paying the other half on your behalf. But 7.65% is way more than 0%. However, don't complain too loudly. Those dollars you're paying toward Social Security are actually a pretty good investment at your income level. Up to the first Social Security bend point, your rate of return on that money is a not insignificant 5.5%. Increase that by 50% if you're married to a non-earner. And Medicare? You're paying 1.45%*$60K = $870 a year for basically a year of Medicare benefit later in retirement. That's a screaming deal. People buying their own health insurance, even a crummy high-deductible plan, may be paying twice that much EVERY MONTH.


#6 Grow Your Income

Guess what? Your income isn't static. I'm not talking about that paltry cost of living raise your employer hands out most years either. As a general rule, I have found that people at all income levels dramatically underestimate their ability to increase their income. Here are ten possible ways:

  1. Ask for a raise
  2. Change jobs
  3. Relocate to somewhere that pays more
  4. Get more education
  5. Accept a promotion
  6. Change careers
  7. Work overtime
  8. Get a second job
  9. Start a business on the side
  10. Start a “side hustle

When you lose your $500K a year job as a small hospital CEO, there are only so many other jobs out there that you're qualified for that pay the same amount. When you lose a $30K a year job, almost every other job out there will pay you the same or more. If you're making $2K a month, driving for Uber on the weekends might increase your income by 50%. Delivering pizza every Friday evening leaves you most of your weekend and still increases your pay by 20%. You can probably double your income screwing around with credit card and bank/brokerage account bonuses. Yes, you'll have to be disciplined and keep diligent records to ensure you don't screw it up, but there are dozens of bloggers out there teaching you how to do this. There's not much that improves your financial situation quite as much as increasing your household income from $60K to $80K.


#7 Defeat Child Care

This one is tough. While the most common financial mistake made in America is driving too much car, the cost of child care is so high that having children may one day take its place (don't tell my kids I said that). If you have an income anywhere near the median US household income, you must come up with a solution to this dilemma. Not having kids works well. So does a stay-at-home parent. Or living near a family member who can help out. Or child support for divorced/single. Again, if none of this is an option, be sure to check into any available government programs. It might not make a lot of sense to work for $2K-$3K a month if you're paying $1,000 each for two kids to be in childcare.


#8 Spend Your Money on What Makes You Happy

Doesn't that sound nice? That's my way of saying “Budget, darn it!” What is a budget though? A budget is making sure your limited resources (and all of our resources are limited) are going toward what you care about most. Make your priorities and fulfill as many of them as you can until the money is gone, then stop spending. Food is usually pretty high on the list for most people, but there is a dramatic difference in what one can spend on food. Utilities usually comes next, followed quickly by rent/mortgage.  Then transportation to the job. By the time you pay for all that, there might not be that much left. Choose wisely! Try to get in the habit of saving something for retirement. You probably don't need to save the 20% of gross income that I tell doctors to save, but 5-15% in addition to Social Security would sure make a big difference in retirement. “But I don't want to save money for retirement.” Think of it as purchasing your freedom, and then you're likely to put it into the right place in your prioritization list.


#9 Learn the Rules of the Game

The money game has rules. There's an old adage that if you took all the money in the world and divided it evenly among everyone in the world, within a few years it would be more or less back in the hands of those who have it now. This obviously isn't 100% true, but there are some elements of truth to it. Money generally flows from those who don't know the rules to those who know the rules. From those who don't have the knowledge and discipline to manage and grow it to those who do. From those who pay interest to those who earn interest.

Where are these rules written down? How can you learn them? Believe it or not, they're widely publicized in blogs, internet forums, good books, and even IRS publications. There are almost no barriers to learning them if you've got a high school education and an internet connection.


#10 Don't Be Afraid to Relocate

average american financesThis might come as news to you, but not every location in these great United States is equal. State income, property, and sales tax rates differ. Cost of living varies. Job opportunities differ. Salaries vary. Those who are willing to leave familiar surroundings are often rewarded with raises, better jobs, higher salaries or simply a financial environment more conducive to building wealth. This might mean leaving California for the Midwest where you can afford a house. It might mean leaving small-town America for a college town where you can get an education, or the big city where you can get a real job. It might even mean moving back home temporarily, or closer to family and “free” babysitters. Don't rule it out.


Hope that was helpful. Next time, back to our regular programming where we help those who most people think should be rich but aren't.

What do you think? What advice do you have for your friends, patients, family members, and neighbors with more average financial resources and dilemmas? Comment below!