One of the biggest struggles I had during my teen and early adult years wasfeeling jealous of people who had extreme amounts of wealth.
One particular memory thats seared into my mind comes from when I was about 17 years old. I was visiting the factory where my father worked on an open house day and we walked out of a back entrance through a parking lot. There, in the middle of the lot, stood a gorgeous sports car. It was a bright red Ferrari 348.
I had never actually seen that kind of car up close before. My father was actually kind of wary of even getting very close to it at all, so we kind of stood back and eyeballed it. Then, a few minutes later, someone in a dress shirt came out, got in the car, and drove off.
To put it in perspective, a new Ferrari 348 at the time cost around $120,000, give or take. That was more money than my parents would ever make in a year by amile.
After seeing that Ferrari fly out of the parking lot, we went over and got in our family car, which at the time was a 1987 Buick LeSabre. My parents had bought it as a used car for about $6,000 after a trade-in.
The stark differences in the cars stuck in my head. I never really wanted a Ferrari, to tell the truth, but it was hard not to see the differences between the two cars.
On the ride home, we talked about how beautiful that Ferrari was and I remember staring out the window for a while, thinking about how unfair things really were. My father picked up on it and he said something that I still remember. To paraphrase, he said,That car sure was beautiful, but you know what? At the end of the day, it still just drives you home to your family, and this car does the same thing for a lot less money.
My father had a point. That Buick and that Ferrari both do nothing more than take you from one place to another place. They help you get to work and back. They carry you home to your loved ones. Youre basically paying 20 times as much just so you can accelerate a little bit faster and have some prettier styling on the car.
When I look back on that experience, I cant help but mentally compare the salaries between the two men.
I dont know exactly what my father made in a year there, but lets say he earned $30,000 in a given year. He had a lot of seniority and had ample opportunity for overtime work, so thats probably a fair number.
He bought that Buick for $6,000 and drove it for about five years, so lets say his cost per year was $1,200 for that car. He made $30,000 that year, so4% of his salary was devoted to his car.
Now, what about that Ferrari dude? Lets say he paid $120,000 for that car he had to, given the time I saw him driving it. Lets also say that he kept it for I dont know, how about three years? That means he paid about $40,000 per year for using that car.If that was 4% of his salary, he was making $1 million per year.
So, if that guy was actually bringing in $1 million a year, that car had roughly the same percentage impact on his income that my fathers Buick had on his $30,000 a year salary.
What if that guy owned a Buick like my father had? If it only cost him $1,200 a year, that means his car would only eat up 0.12% of the rich mans salary. For comparisons sake, that would be the same as only $36 to my father at that time.
You see,so much of what seems like wasteful spending by a rich person is often just a trivial part of their income.
Lets take a look at how the average American spends their paycheck. In 2013, the average American household earned about $63,000 and thus had about $51,000 to spend after taxes, according tothis data. They spent like this:
$6,602 was spent on food, of which $3,977 was spent on food at home and $2,625 was spent eating out.
The remaining $3,267 was spent in other areas.
Now, lets look at that as a percentage.
12.9% was spent on food, of which 7.8% was spent on food at home and 5.1% was spent eating out.
Now, lets assume that someone brings home $1 million per year lived by theexact same percentage budgetas the average American. Heres how that person would spend their money.
$129,000 was spent on food, of which $78,000 was spent on food at home and $51,000 was spent eating out.
The remaining $64,000 was spent in other areas.
Thats how a person bringing home a million bucks a year would spend their money if they subscribed to the exact same budget as the average American. A person prioritizing their spending like that is prioritizing in the exact same way the average American is, just with a bigger income to spend.
So, that guy who strolled out of my fathers factory and hopped into a Ferrari is doing exactly what a normal American would do if they earned a large income. That person wasnt being wasteful by the standards of the budget of the average American.
So, whats the point here? There are a few messages you can take home from this.
First,rich people only seem wasteful with their money if we apply different budget standards to them than we apply to ourselves.Let me show you what I mean as an example.
In an average year, its probably reasonable to think that we spend 15% of our income on transportation, for example. We have a seven-year-old Prius and an 11-year-old Honda Pilot and neither one is getting replaced soon. On the other hand, a person with $1 million to spend that spends 15% of their income on transportation could own things like a brand new Escalade, a BMW, and a Tesla S-Series to boot, all at once.
Does that seem over the top? Probably. Is there some gut feeling that the rich person should be doing something else with their money? Sure. But in doing that,we are expecting that rich person to spend a lower percentage of their income on transportation than we do.
You can do the same thing with a rich persons housing expenses, their entertainment expenses, and so on. Their expenses seem over the top, but to expect that rich person to change things means that were expecting that rich person to budget differently than us.
But lets flip that on its head. Lets look at a person making minimum wage, 40 hours a week, 50 weeks a year. That person is making $14,500 per year and, most likely, bringing home almost all of it. Lets look at that persons budget if they match up to the average Americans budget:
$2,552 was spent on transportation about $200 a month to fill up a car, maintain it, repair it, and replace it, or to ride mass transit and go without a car.
$1,870 was spent on food about $150 a month.
$1,566 was spent on insurance and pensions honestly, they probably scavenge out of this portion out of necessity, but this would cover car insurance and renters insurance.
$449 was spent on apparel about $37 a month to keep shirts, shoes, socks, underwear, and pants on a person all year round.
$710 was spent on entertainment about $60 a month.
$4,872 was spent on housing about $400 a month. For housing.
$522 was spent on cash contributions, $1,029 was spent on healthcare, and the remaining $928 was spent in other areas.
Thatsextremelytight for most people, without much breathing room, right? Heres the thing a lot of people make it on a budget like this. Those people who dolook at the budget of the average American, and how they choose to spend their money, as simultaneously desirable and wasteful much as the average American looks at the spending of the person bringing home $1 million a year.
Yet, underneath that, all of them are basically operating with the same percentages for their budgets.Its pretty much the same budget the only difference is income.
Thats why, looking back, that rich guy in that Ferrari outside of my fathers factory makes complete sense to me. He was, in many ways, budgeting his moneyexactly like my parents did. He had a Ferrari because it was inside that 15% or so of his income that went to transportation.
Thats why Im not surprised when I read articles about how people with large incomes have a difficult time making ends meet.Theyre using effectively the same budget as everyone else, dividing up their money in the same way, and it just doesnt add up.
It doesnt matter how much you make. If you spend moneylike the average American, youre going to struggle. Period.
Thats why, if you want to change your outcomes, if you want to have the kind of financial freedoms that everyone else has, youhave to spend differently than the average American.You cant follow that recipe. That spending recipe for the average American wont get you there.
So,where and how areyougoing to step away from that average American budget?Are you going to spend less on transportation? Maybe youllride mass transitinstead of having a car. Or, maybe youllspend less on housingand live in a little apartment.
By stepping away from that average budget, you gain something that the average American doesnt have: Freedom. Youreplanting a seedof freedom from all of the pressures and hard choices of your day-to-day life, and as you feed it by staying away from that average budget, youre watching that seed grow and grow until, one day,you dont need that job anymore. You can set your own rules.
Dave Ramsey really puts it well when he says, You have to live like no one else so that you can live like no one else.
Choose differently today so that you can live differently tomorrow. It works whether youre the average American, the person earning a million a year, or the person barely making it. Choose differently than what you see in that average budget. Choose differently than what you see your neighbors choosing.
And, sooner than you think, youll have options they can scarcely dream of.
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