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In the financial independence community, the difference between your monthly take-home pay and your monthly expenses is called the gap. The larger the gap, the more you have to save and invest.
The best way to grow the gap is to make more money while simultaneously lowering your expenses. In this post, I want to focus on the make-more-money side of the gap equation. Something has been bothering me about that side of the equation, and I’m hoping that writing about it will prove therapeutic. Here we go.
Of Gaps and Thresholds
It’s impossible to pay for current expenses, and save for future expenses (i.e., emergencies, closing costs on a house, retirement, etc.), if you’re unemployed. This same dreary calculation holds true if you’re making a low wage. There’s just no getting around it. In order to have a meaningful gap, you have to make above a certain threshold.
Just where that threshold rests is difficult to say. It all depends on your age, your address, and your fondness for birth control. I wrote a post a couple of years ago exploring the minimum income you would need in the Charlotte metropolitan area to provide for your basic necessities and produce a $500 gap every month. I concluded that an income of $20,800 would suffice—but only if you eschewed car ownership, college, and procreation, and lived in a single-wide trailer with a roommate. Is $500 a month a meaningful gap? It can be. According to the Dave Ramsey investment calculator, a 37 year old investing $500 a month until he turned 65 would wind up with a portfolio worth $512K (assuming a very reasonable average annual return of 7%). Not too shabby, especially when you consider that the median retirement savings for a 65-74 year old is only $126K. So if you’re 37 years old or younger, live in the Charlotte metropolitan area, and have managed to remain childless, you can theoretically do some damage with an income of $20,800.
But what if you’re 50, have a couple of kids, and live in San Francisco? It’s safe to say that an income of $20,800 wouldn’t be able to produce a meaningful gap.
Bottom line: Income is to a meaningful gap what oxygen is to fire. Don’t supply enough of it and the gap will wither or die.
Doing Poverty Right
Okay, I’ve done a wonderful job of playing Captain Obvious: income is extremely important, especially if you want to produce a meaningful gap. But here’s a question that has vexed me for a long time. What if you have no legitimate shot of making an income large enough to produce a meaningful gap? You’re not very bright, the well-paying factory jobs in your community were shipped overseas, or you started a family way too soon and now have neither the time nor money to attend college—for whatever reason, the rest of your life will entail humdrum jobs and the dull agony of living paycheck to paycheck. What advice do I have to offer you? Get a side-hustle? Live in a van? Vote for lower taxes and then wait for the bounty of trickle-down economics? Vote for higher taxes and then wait for the bounty of trickle-down government?
Well, like I said, this question has vexed me for an extremely long time. There is simply no tool in the standard FI toolbox to help those who will forever be plagued by meager incomes. But then yesterday, I stumbled upon a possible answer. While leafing through a design book by Vern Yip, I came across the following biographical paragraph.
It took particular courage for my parents to leave China and come to America, where my mother and father did not speak the language well or understand the culture. My father, a biochemist, took a job as a busboy at the Marriot in Virginia, and my mother washed floors in a bank. These sacrifices were worth it to them in order to give my sister and me a better life. [Emphasis mine.]
“That’s it,” I shouted. “Vern’s parents did poverty right.” They came to America knowing full-well that they would never be more than “menial” laborers. But that was okay. Menial laborers with menial incomes can build decidedly un-menial wealth if they think generationally. In other words, Vern’s parents were playing the long game. Their toil, perseverance, and faith wouldn’t pay off in their working lives, but it would pay off in their children’s working lives—providing, of course, their children embraced their values. And that’s exactly what happened. Vern inherited a culture that is just as conducive to building wealth as privilege is, and because of this, you can bet your sweet bippy that Vern’s current income is way more than enough to produce a meaningful gap.
Final Thoughts
There’s no shame in being part of the working poor. Things happen. The fickle finger of fate turns against you and you will never have enough income to produce a meaningful gap. But there is shame if your children suffer the same fate. Your job is to do poverty right; that is, your job is to make sure your children have the skills, habits, and attitudes to take full advantage of all the tools in the FI toolbox. You do that, and your children wind up financially successful, you can rightly lay claim to being a rich man or woman yourself.
Okay, groovy freedomist, that’s all I got. What say you? Is my concept of “doing poverty right” a satisfactory way for those with severe income limitations to find wealth? Or is it unmitigated flapdoodle? Let me know what you think when you get a chance. Peace.
Hi Mr. Groovy!
Sorry about being out of the loop lately – but this is an interesting and thought-provoking read to welcome me back.
I like the concept of embracing hard work to improve things for your children. But . . . as you point out, there are two sides to the equation, the income and the expenses. I believe anyone can find side hustles to make some extra money, no matter the situation. The other thing is that people need to be realistic about their expenses – not just for today, but for the future too. I may be an attorney, but I’m not dreaming about mansions. Paying off debt and buying a home with some land for homesteading activities during early semi-retirement is a realistic goal. It’s also a way for us to experience happiness in our own lives, on our terms.
It’s not always easy to see beyond “The American Dream.” But the key is figuring out what truly makes you happy and crafting a version of it that fits your unique economic circumstances.
Harmony@CreatingMyKaleidoscope recently posted…Sending Kids To Birthday Parties Without Breaking Your Budget
“… [P]eople need to be realistic about their expenses – not just for today, but for the future too. I may be an attorney, but I’m not dreaming about mansions. Paying off debt and buying a home with some land for homesteading activities during early semi-retirement is a realistic goal. It’s also a way for us to experience happiness in our own lives, on our terms.”
Wow, Harmony. I would ordinarily scold you for your long absence. But with this fantastic comment, how could I? You got a first-rate mind, my friend. And I never fail to learn something or think of things differently whenever you visit. Thanks, again, for sharing your insights. Very profound.
I agree. You might not make enough money to raise yourself out of poverty, but you can position your kids to do so. That’s why immigrants are essential to the US economy. They bring vitality and ambition with them.
The other path is to figure out how to work for yourself. Working for minimum wage is not enough.
“You might not make enough money to raise yourself out of poverty, but you can position your kids to do so.”
I love it, Joe. Message to the American parent: Don’t fret over material privilege; make sure your kids get cultural privilege.
I think there is a lot of good here, but I struggle with the idea of basically “giving up” your life to make things better for your children someday. Not that I don’t agree with trying to provide a better life for your kids, but that’s a pretty stark reality for the ones who are basically just stepping stones then.
Agreed. There has to be a balance. The good news is that the thing children need most, cultural privilege, doesn’t cost nearly as much to provide as material privilege.
put “cultural privilege” alongside “egotrage” as terms worth stealing
This was my grandma to a T. Born into poverty and died below the poverty line. She got my mom and her sisters out, though. I know she found great satisfaction in that.
The problem is my heart breaks thinking of someone struggling for 93 years for so little individual return. She found all of her joy in others, but that didn’t make it any easier to watch.
Hey, Penny. Here’s one for you. When my grandmother was in high school she used to care for a widow’s five children after school, five days a week. And for all that work, the widow gave her a dollar. Now here’s the kicker. When my grandmother returned home from babysitting on Friday, her drunken step-father used to take her dollar so he could buy more booze. The good news is that my grandfather was a good egg and my grandmother and him had a wonderful life. Your grandmother sounds like an amazing women. It breaks my heart too that she had such a hardscrabble life. Thanks for sharing, Penny. Your sobering comment really puts things into perspective.
Such a great post! Focusing on the next generation success was a way of life for almost all homesteaders out west. The idea that wealth can be built in one generation for most of the population is a rather new phenomenon.
So true, Jillian. When my great grandfather came over from Italy, he was a menial laborer who worked with a shovel six days a week. But his children and grandchildren grew up to be civil servants and entrepreneurs. And his great grandchildren grew up to be civil servants, entrepreneurs, and professionals. Wealth as you so cogently remarked isn’t always built in one generation. Sometimes it takes two or three generations to be built.
Very insightful. Part of me recoils from the idea that anyone in this country is doomed to permanent poverty or low income status because people disprove that notion every day. But it can be argued they are outliers, lottery winners in a sense and that achieving wealth may be out of reach for some in one generation. But it certainly can be in reach for anyone in the next generation. I’m not sure I agree but that is really thought provoking!
Agreed, Steveark. Maybe it’s because of my FIRE mentality, but I see opportunity everywhere, and I don’t see how people can’t improve their financial situations. Heck, one can double one’s household income overnight by simply getting married. But there are so many Americans out there who just seem lost in our global economy. Do they lack intelligence? Impulse control? Cultural capital? And how do we get them what they’re lacking? We’ve been waging a war on poverty for over 50 years now, and no one has an answer. Aaarrrggghhh! Who knew fixing man would be so hard. Thanks for stopping by, my friend.
The poorest tenants I ever rented to were more impoverished in terms of character and life-skills than in money.
Profound thinking Mr Groovy and glad you took the time to compose this post. As Father’s Day is coming up, I will give extra thanks to both my parents for all they have sacrificed. Thank you for making me reflect on all they have done for the sake of the next generation.
Here are a couple of dad stories for you. I remember back in high school when I had my first date. As I was just about to leave the house, my father pulled me aside and said, “Remember: Your date tonight is somebody’s daughter. Treat her with respect.” The other thing I remember about my dad while I was growing up is this: I don’t ever recall him missing a day of work. In fact, for many years, he always worked the second or third shift in order to get the night differential and take home a little extra pay. Like you, RocDoc, was blessed with awesome parents. Thank you for giving my the opportunity to say it. And happy Father’s Day, my friend.
Although I personally hold to the school of thought that “i’ll eat catfood before I’ll be a burden on my children,” there is something to be said about sacrificially making life better your kids and not sharing some of the prosperity you helped create. Though my son won’t be a pro video gamer with million-dollar endorsements any time soon, both kids are well off and if my wife & I were in dire straits (we’d have money for nothin’? — sorry, i digress), we could tap them for a few tins of Little Frisky’s to get by.
This can only happen if you’ve modeled a frugal lifestyle in front of them growing up. If you’re a UAC (under-accumulator of wealth) all show and no go, don’t be surprised if your kids will do likewise and end up without any means to help. It’s sort of a vicious circle. Or a virtuous one if you are frugal, raise your kids right, need little, and have saved much.
Nice, Steve. I couldn’t have said it better myself. I moved from Charlotte to Wake Forest to be closer to my parents. They’re getting up there in age and will be needing more and more help as they years go by. And while Mrs. Groovy and I don’t believe they’ll ever run out of money, we’re not worried about the possibility. My sister, brother, and I are all successful, and we’ll do whatever we have to do to make sure they’re always comfortable. Mrs. Groovy and I are already thinking about a Groovy Guest House for Groovy Mom on Groovy Ranch. As you so eloquently put it, Steve, “be frugal, raise your kids right, and save much.” Do that and you’ll be fine.
This is definitely something I’ve been grappling with for a bit now. This whole FI thing is really dependant on your income being substantially higher than your expenses, but what if that’s just not possible?
I think the thing is that the principles are extremely important. Max value, save what you can so you get a little breathing room. So while you might be working and not amassing huge amounts of wealth. You can still be comfortable and allow for your offspring or what ever to prosper.
Thought provoking!!
Habits are destiny. Bad financial habits bring misery. Good financial habits bring wealth. And we do an injustice to those on the bottom by telling them they have no control. Hey, I get it. Life is rarely fair. And I’m the first one to admit that our country has a crap-load of problems. But for every example of systemic racism in this country, there’s a thousand examples of systemic kindness. And for every hate crime that takes place in this country, there are a thousand love legalities. In other words, America is not a gulag, and the vast majority of Americans are thoroughly decent people. No one is stopping anyone from using his or her time constructively. No one is stopping anyone from pursuing any ethical activity that might improve his or her financial well-being. Love the way your mind works, Mr. WoW. You got me thinking too. Is a Groovy Guide to Breaking the Cycle of Poverty in the works? The plot thickens.
A biochemist becoming a busboy. Now that is real sacrifice to the next generation. But I’d be willing to bet (yeah, my bippy!) that he ended up with a more successful job over the years. Not just because he had that education, which no one can take from you, but because of his work ethic. I like to say “Don’t be poor, be broke”. Broke is temporary, poor is a lifestyle.
But yeah, if you are poor and stuck, for whatever reason, it is noble to work the long game on behalf of your kids. That’s honorable.
“Don’t be poor, be broke.”
I’m stealing that from you, Susan. Great freakin’ adage.
Generational wealth is what most foreigners aim for. My parents were wealthy in Iran and now are back on solid footing but there was a long period where they hustled to ensure my brother and I would succeed. we are both doctors so I guess it worked and I am ever gratelf for that.
I knew there was a reason why I liked you, DDD. Nothing like a hustling immigrant to prove to everyday Americans that opportunity is alive and well in this country. I remember when I was back on Long Island. I used to stop in a gas station every few days for a snack and I got friendly with the clerk. He was Iranian and left Iran because of religious persecution (he practiced a religion I never heard of). Anyway, he worked 12 hours a day for six days a week, and he only ate one meal a day. The man was a true hero. I don’t know what became of him, of course, but I would not be surprised if all of his kids ended up being professionals. Thanks for stopping by, my friend. Made my day.
FREAKING LOVE THIS!!!
I have often found that those around me who are the most successful financially, didn’t grow up with a lot of financial resources. There parents were never high earners, and worked laborious jobs that didn’t pay well. The benefit of that though is that it forces the children to grow up quickly, and develop the mentality to want to be better.
My parents also played the long game with myself and my 3 sisters. Neither of my parents went to college, nor had high paying jobs, yet they somehow raised 4 kids who all graduated from college (6 degrees total) and are all succeeding with their finances.
Nice, Sean. I love it. Not every parent can pass along material privilege to his or her children. But every parent can pass along cultural privilege. That’s what your parents did, and that’s what Vern Yip’s parents did.
Focusing on the long game and generational wealth is spot on advice.
Even if you make a larger salary, this still should be the goal and is something that is in human’s genes: make life better for you and your family over time because your bloodline is all you have at the end of the day.
Even if you don’t have kids, still, the goal should be to improve your situation over time through savings and wealth building.
Great post
Erik @ The Mastermind Within recently posted…Applying Pascal’s Wager to Personal Finance
Love the way your mind works, Erik. Earn, learn, or show concern–do things to improve your life every day and great things will happen. And if it doesn’t happen for you, it will happen for your children. Well, it worked for me, anyway. Up until my late 30s, I was financial moron. And I blamed my financial woes on others. But as soon as I got my financial act together, nothing could stop me from powering toward financial independence–not even the dreaded One Percent. Thanks for stopping by, Erik. Great comment.
Interesting stuff. I think that’s a very common theme among many if not most of our immigrant heritage in this country. People come here to work hard and escape really bad situations. It’s often up to the kids to rise up in the ranks.
Even for those of us white privileged types, we often come from lower middle class status and with a degree in hand, go make some hay. Nice read, Cap’n!
Nailed it, Cubert. Good financial habits usually win out over the long haul. Sometimes that long haul reaches into the next generation, but it can’t be denied. Immigrants prove this every day.
It takes a special type of person to realize they’ll never “make it”, yet be willing to give their all for the next generation. Unfortunately, often folks in severe low income situations seem to get trapped in a generational whirpool, and struggle to break free. I like your concept, and can see how it applies to immigrants who hustle, but wish there were a way we could better reach the working poor (inner city comes to mind) with the same message. Thanks for making us think today.
“It takes a special type of person to realize they’ll never ‘make it’, yet be willing to give their all for the next generation. Unfortunately, often folks in severe low income situations seem to get trapped in a generational whirlpool, and struggle to break free.”
Great comment, Fritz. The second sentence made me cringe because it’s so true. While we’d all like to pass on material privilege to our children, that isn’t always feasible. We all can pass on cultural privilege, though. Culture is free. No one is stopping anyone from adopting sound financial habits. We got to do better and start teaching wealth studies in school. I got to explore this idea further. Thanks for making me think, my friend.
P.S. Read a great article today in the Washington Post. It had two of my favorite retirement gurus: Gilbert and Pfau. Talk about an amazing CMLT. You’re the best, my friend.
I agree, Mr. G. I always tell the kids “there’s no shame in working, no matter what the job”. Your post reminded me of the guy who’s doing some landscaping work for me right now. He mentioned off-handedly that he wasn’t very smart in school, so his dad told him “Then you’d better grab a shovel”. The guy owns his own business now, and based on what I’m paying him, I’m assuming he’s doing pretty damn well. I’m going to ask him today how a “not very smart” guy learned how to manage a successful business. I’ll let you know what he says. Or maybe I’ll write a guest post so I can get my PF blogging fix in. 🙂
I love it, Laurie. Had a friend from high school who wasn’t “book smart.” But he was sure business smart. While I and the other fellows in our gang went to college, he started a humble bread delivery business. By the time I graduated college five years later, he was making around $200K a year. If you’re not afraid of work, there’s gold in dirty work. Thanks for stopping by, Laurie. Always a pleasure.
This is Egotrage Mr. Groovy! I think Webster’s is considering putting it in the next edition, thanks to you.
A great example of how so many immigrants come to this country and work their butts off to make it. And many do, it’s such a great thing
Wow! This is egotrage to the tee. What was I thinking? Thank you for making the connection, AF. I’m not on my game this week.
I’m here at your service 😉