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!
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:
- Ask for a raise
- Change jobs
- Relocate to somewhere that pays more
- Get more education
- Accept a promotion
- Change careers
- Work overtime
- Get a second job
- Start a business on the side
- 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 $2-3K a month if you're paying $1,000 each for two kids to be in child care.
# 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
This 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!
“Next time, back to our regular programming where we help those who most people think should be rich but aren’t.”
That’s a hilarious way to end this piece, but oh so true.
Thanks for thinking of the average Joe. I think you are right that the margin for error at this income level is so much less. As a resident I made a few financial mistakes and ended up having to borrow money from my grandmother to fix it. Thankfully, she had a $5,000 CD maturing that fit exactly what we needed. Poor planning can be painful when you don’t have the cash flow to make up for the mistake.
TPP
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.
We violently agree on this yet when I blog about this (which I’ve done twice) I see even really experienced and smart money bloggers defend the tax refund. I just don’t get it, in any way shape or form.
Great advice here, especially the point about cars. I love it that you’re a doctor and make even more from this blog but still drive a car worth less than $10k. Walking the walk. Cars are such a waste of money and as you said people foolishly wrap their identity up in them. Because in our car-dependent environment it’s the necessary “costume” they have to wear to go out in public.
This is because although it’s a 0% interest loan, it forces people to save, and at least a percentage of people are not going to use that extra income every month to pay off debts. Just because they should, does not mean that they do. If there were a much more viable option, like having the difference of taxes owed held in an account gaining interest (however low the rate) versus held by the government at 0%, then that could be a way for people to not view the tax refund as a bonus or forced savings. $50 additional per paycheck feels like far less than a $1300 refund in April, and doesn’t motivate as many to make the change, and few want to run the risk of the calculations resulting in money owed to the government.
The best way to force yourself to save is to set up automatic contributions of the same amount to your investment accounts. It accomplishes the same thing – you never see the money. But best yet you’re not giving the government an interest free-loan, having them hold your money hostage. And let’s not forget that while they’re holding your money hostage it’s being eroded by inflation, so they give you back LESS than they took. It’s a bad deal on so many levels.
I’m also incredibly lazy and getting a new car takes work. That laziness keeps me out of a lot of stores too.
God I hate to shop….for anything…car, food, clothes, shoes etc…
Most of it is the waste of time I perceive in the actual physical task. This fact has saved me literally thousands over the years. The hatred/laziness of going to a store.
Unfortunately Amazon Prime and the Internet have increased my spending habits. Have you ever done a post on the effect that internet spending is having on our society? I know that I spend more because of it.
I’m confident I do as well, but no, I don’t know of a study.
After nearly a decade, cancelled the Prime. Anecdotally, spending is down. Using other places like Walmart helps, but the fact that I know it’s cancelled is a behavioral win.
That laziness keeping you out of stores does not work as well for some with the advent of online shopping. Being able to purchase things with a quick click, swipe or touch is making it far too easy so spend money without thinking about it, particularly on the smaller items that add up. Look at half of the junk and needless crap they sell on Prime Day, and how much they sell out every time. There are so many storage units people pay money for every month to store junk they don’t need, and half of them don’t even know is there.
It’s not all bad. That time I don’t spend shopping because I can buy stuff online can be used for something that makes me happier or makes me more money.
Great advice.
And it works.
I did almost all of these and now, financially, I’m above average. Most others in the US could do the same.
I would also add that a detailed budgeting tool is crucial. I have many friends of lower income brackets, and I’m always trying to encourage them to try out apps/software like YNAB and Personal Capital. Real-time budgeting and knowing exactly what they have spent in real time is a very important step in getting spending under control, particularly for those who live paycheck to paycheck or have a much smaller margin of error.
Great post! #1 and #2 are pet peeves of mine for sure. Just the act of calculating it and comparing yourself to your peers can be life changing for many people, especially the passive-aggressive/competitive types.
Good point with #5, I keep trying to convince my father that he needs to stop giving the government a free loan every year. He seems to pride himself in getting a massive tax refund.
The over riding theme that needs emphasis here is that many Americans don’t realize how much government programs are actually helping them, from social security to medicare, to lower tax burdens, even our national parks system, etc. These days so many average Americans trash talk the government as if it’s their enemy when in fact they should be cherishing the fact that there are so many protections and advantages given to them. I especially find it hilarious when the average American trash talks the idea of democratic socialism, yet at the same time gladly accepts medicare benefits and social security checks each month. For any average American reading this…these are socialist programs! They were created back when our government was much more closely aligned with democratic socialism. Yet for some reason, people now believe that pure capitalism and a government run for and by oligarchs is somehow going to help them?
This is perfect advice for the majority of workers in the US but definitely applicable to anyone at any income level (with the exceptions of taking advantage of the tax arbitrage). Residency is pretty much the best opportunity for a physician to take advantage of Roth contributions, etcs before income level precludes direct investing in it or the tax hike makes it a lot more painful as an attending.
Geoarbitrage is one of my personal favorites. I get it that it is nice to live on the coast within an hour from the beach but you really do pay a “sunshine tax” for that privilege (that coupled with typically lower salaries as physicians because there is more competition).
JUST READ “IF YOU CAN HOW MILLENNIALS CAN GET RICH SLOWLY”
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15 pages to know enough to invest better than most
What a great article! I forwarded it to 2 of our 3 adult children, some nieces and nephews. Our son turned us on to your blog several years ago. He is a high earning MD that has excellent fiscal responsibility and is way ahead of the norm at 35. Yes, we were able to help him through medical school with room, board and incidentals but he has paid all of his medical school loans off. He reads many financial publications and is now “mentoring” some of his colleagues.
Thank you for a reasonable and attainable plan for the median.
I started a blog 6 months ago at 67 and am looking for blogs that I can learn from. This is certainly one. I know it is hard work and often frustrating.
This is a fantastic article that all Americans should read. I am a staunch believer that we need much less car than we’re initially inclined. Used cars are my favorite:)
Thank you for taking a break from your regularly scheduled programming to address the typical American family. You offer such great advice. Sharing on Twitter now. Thanks, again.
I feel like cars have become much more expensive and gadget-y than when I was growing up. It’s hard to find a regular work pickup truck outside of fleet sales. It’s hard to find a manual transmission or a lack of bluetooth in a new Honda Civic (not that you should buy a new car). It feels like much more than simple inflation, even if the numbers don’t quite agree.
$30,000+ (x2 ?) on a car, especially on payments, is financially crippling. You run out of maneuverability so quickly.
For sure. You’re not getting the same thing when you buy an economy car as you got when you bought one a decade or two decades ago. It’s a much fancier item.
I want my daughter’s regular driver to be a stick shift and I think I might have trouble finding one, especially one with 4WD if I don’t want to buy a Subaru.
Discover and document your core values then align your choices and activities to these.
So doing you will make better choices faster, you increase the chance of your success as well as an improved quality of life, experiences and opportunities along the way for you and others around you.
Re number 2 – with both kids having left home and my husband and I working at the same place, we downsized to one car three years ago which we paid for in cash. While it is at times inconvenient, we are regularly reminded how much this saves us. Recently I thought about applying for a new job but realized it would take way more than the salary increase to make up for the extra costs of going back to a two car family. Plus it helps us bond with all those shared car trips!