Well this has been a fun week. It's not typical for me to have posts that generate over 100 comments on them, nor have my email box filled with hate mail about something I wrote. Lest I be accused of being a “Defender of the Rich” I decided to write a quick post about low income earners. You see, like many physicians, I have been both a high earner and a low earner. In fact, I never earned more than $15,000 a year in any of the first 28 years of my life, and was into my thirties before I ever had a six figure income. I've had the joy of learning to live on $5K, $20K, $40K. $100K, $200K, and higher. It's all the same game, but the rules do change a bit as you go along. At any rate, let's talk about….drumroll please….
Why It Sucks To be Poor…AKA Have A Low Income
1) You Can't Buy Expensive Stuff
Expensive stuff, like vacations and consumer items, can be a lot of fun. If you don't have the money to buy it, however, it isn't nearly as fun. Either you're smart and don't buy it, or you buy it on credit and never get out of debt. High earners don't have to worry about this because they can actually afford to buy expensive stuff and still meet reasonable financial goals.
2) You Pay a Higher Interest Rate On Your Mortgage
Sure, you may get the standard deduction even if you don't have enough deductions to really deserve it, but all that mortgage interest and property taxes you pay may not really be deductible. Only the amount higher than the standard deduction really benefits you. Thus, you're in effect paying higher rates to borrow money for a home. You might not qualify to buy the home and have a harder time coming up with a 20% down payment too. You are far more likely to have to pay PMI and there certainly aren't any doctor mortgage loans out there for you.
3) You Can't Max Out All Available Tax-protected Accounts
High earners don't have to worry about which accounts they should use. They just fill them all up and most likely can even save a little in a taxable account. However, the Roth IRA vs 401(k) vs 529 decision can be tough when you can't really do them all.
4) Your Kids Are Going To Have To Borrow To Go To College, Just Like You
It's not uncommon for low earners to still have student loans when their kids are taking out their own student loans. Sure, they may qualify for Pell grants and other need based aid, but actually saving up to pay a significant chunk of the cost of their education isn't even an option. You're doing well just to save enough for your retirement needs. My parents made slightly more than the average American household, but their total contribution to my education consisted of plane tickets home twice a year and 8 months of rent. My wife's parents and grandparents contributed more to her education, but she still worked every semester in college and grad school to pay her way. And an expensive liberal arts school or Ivy Leaguer? Forgettaboutit.
5) Social Security Tax Doesn't Go Away
Unlike a high earner, you pay 6.2% (12.4% if self-employed) on ALL your income. The effect of the payroll tax is a flattening of the tax curve. I experienced this while moonlighting in the military on a taxable income well under $100K. My moonlighting dollars were taxed at 25% federal + 6% state + 15.3% payroll for a total of a 46.3% marginal tax rate (technically slightly lower as half that payroll tax was deductible.) You don't have to have a six figure income to be paying nearly half of your marginal dollar in taxes.
6) The Stigma of Public Programs
Sure, a low earner gets the benefits of Social Security disability, unemployment, food stamps, Medicaid and even PPACA subsidies. But they also get the at times esteem-crushing knowledge of knowing they aren't completely self-sufficient. They have a constant battle of knowing they qualify for government programs even if they could figure out a way to get by without them.
7) Hard to Get Unbiased Financial Advice
Most good asset managers list a minimum amount of assets you must have before they will manage your money. $500K-$1M is typical. A low earner may retire with less than that and thus never benefit from good advice. The best they can find is often a commission-based salesman.
8) Biking In The Rain Sucks
There were 13 years between the time I left home and the time I started earning a six figure income. I owned a ($3-7K) car for just 8 of those years, but my wife had it most of the time. My primary mode of transportation was the trusty mountain bike I recently replaced. Even after I had a six figure income, I continued to commute from time to time on it. In case you are not aware, biking to school or work in the rain sucks, even if the bicycle is a money-printing fountain of youth. Standing on the corner waiting for your bus while people zip by in brand-new BMWs spraying water on you sucks too. Driving crappy cars because you have to choose between getting a newish economy car and funding your 401(k) gets old as well.
9) Suffering Through Inconvenience
I missed a flight last week. So I bought a new one. No big deal. I can afford to pay for convenience. However, when I had a low income, that would have required a dip into the emergency fund. Even worse, I would have had to choose a much worse itinerary just to save $80. Instead, I bought the direct flight. Money gives you the ability to avoid many unpleasant things (like working on your own car or having to bring a cold brown bag lunch to the ski resort. Heck, many ski areas don't even let you eat inside unless you buy food.) Low earners just have to do unpleasant things a lot more than high earners. Cleaning your own house. Mowing your own lawn. Combining trips. Sharing a car. Having to bargain shop. Using coupons. Darning socks. Need I go on?
10) No Stealth IRA
Low earners can use an HSA just as well as high earners. However, they don't have money on the side somewhere to spend on their health care. They actually have to use the HSA money, which obviously can't then compound into a Stealth IRA down the road. Want to know what really stinks? Spending a quarter of your net income on health insurance premiums and then another quarter on co-insurance and deductibles.
11) Basic Living Expenses Eat Up A Higher Percentage of Income
High earners have a choice to live high on the hog, or to live like the middle class and retire early. Low earners don't have that choice. They have to live like the middle class and still have to work into their 60s. I suppose they could live like they're poor and retire early (and many Mustachians do) but that's not exactly the same thing. Everyone has to eat food, and you can only cheap out so much on it before it starts to affect your health. Yes, you can buy a smaller house in a less expensive part of town, but they only get so cheap. Low earners are simply going to spend a higher percentage of their net income on needs (versus wants) than high earners are.
12) Unsavory Financial Professionals Target You Too
Sure, you don't have the target on your back that “financial advisors” see on the backs of doctors, but don't kid yourself–many financial firms target low earners also. Payday loans and pawn shops anyone? They're not putting those businesses up in the high end neighborhoods. I'm also amazed at just how many people who can't afford adequate term life insurance have somehow been sold a whole life policy. And what about all those “get out of debt” schemes?
13) Having to Say “I Can't Afford That.”
Sometimes high earners feel obligated to treat lower-earning friends and families. However, there's something worse. Having to say, “No, I can't go out to eat” or “No, we can't drive three hours to go camping this weekend” or “No Junior, you can't play basketball this season” because you can't afford it. When all your friends and family are going to go do something fun you can't afford, it sucks to miss out. High earners rarely have that experience.
14) Poor Investing Choices
Being willing and able to put more money into an investment can often save you money/earn you more money. A $20,000 CD or savings account often pays a higher rate than a $1,000 one. Vanguard's Admiral shares require a $10,000 investment. If you only have $3,000, you can only invest in the more expensive investor shares. You may be forced to buy ETFs if you can't even scrape up $1-3,000. Ever tried to rebalance a four asset class, four figure portfolio? It's a pain. And investments that require you to be an accredited investor? Not even an option. You're also much more likely to be stuck with a crappy 401(k) loaded with higher expense ratio, loaded, actively managed mutual funds kicking money back to everyone but you.
15) Tax Deductions Aren't Nearly As Valuable
If you're in the 33% bracket, donating $10K to charity saves you $3,300. If you're in the 15% bracket, donating $1K to charity only save you $150, and that's assuming you somehow found enough other deductions to get above the standard deduction.
16) PSLF Results in Much Less Forgiveness
Yes, doctors and lawyers have to take out much bigger debts to go to school. But if they're willing to work for a 501(c)3 or government entity, they can also get those loans forgiven after just 10 years. Doctors can get even more forgiven if they spend 3-6 years in residency and fellowship. They might have hundreds of thousands forgiven by PSLF. How much might you get forgiven? Maybe a measly $10-20K. Sure, it's better than a kick in the teeth, but not exactly the same.
Well, I've had a low income and a high income. A low net worth and a high one. My sisters will tell you I whined just as much in both situations, but not nearly as much as when someone blocks my road while playing Settlers of Catan. I'm not going to lie, I definitely prefer the high income/net worth. I hope this website will help you to obtain a high income and manage it well so it will someday be a high net worth. But for those who criticize me for writing about the money issues faced by high-income professionals, trivial as they might be, you might want to read the banner at the top of the blog before reading the content. It's a financial blog for high-income professionals like doctors and their trainees.
What do you think? What sucks about having a low income? Did I miss anything? Comment below!