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My household income was never very versatile. I could never use it to look rich and actually become rich. Mrs. Groovy and I thus had to make a choice: Use our household income to live fabulously and save little or nothing. Or use our household income to live modestly and save a lot.
I suspect that most Americans are saddled with equally lamentable household incomes. I also suspect that most Americans are leaving a lot of wealth on the table. In other words, they have the incomes to build wealth and eventually become rich, but they don’t have the stomach or guts to live frugally and deny themselves all of the things that the advertising world tells them every “winner” should have.
Let’s suppose for the moment that you think you’re the typical American. You’ve convinced yourself that you’re leaving a lot of wealth on the table and you want to stop. And you’re perfectly willing to look poor in order to be kind to your future self. The only problem is that you don’t know how poor you have to be in order to become rich.
Here’s how you find out.
Assumptions and Definitions
Before we can know how poor you have to be in order to become rich, we need to make one assumption and provide two definitions.
The Assumption
For the purposes of this post, being rich will mean one thing: You have an investment portfolio worth at least a million dollars.
The Two Definitions
Now, in order to become rich, you have to save a lot of money. For the purposes of this post, then, you’ll be defined as potential rich if you either…
- Have enough disposable income right now to invest the monthly amount required to have a million-dollar investment portfolio at age 67.
- Or you can get that required disposable income by engaging in lifestyle deflation.
In the below table we see what disposable income you need by age to be considered potential rich. The younger you are, the less disposable income you’ll need.
| Age | Monthly Investment | Annual Investment | Income Needed to Make Annual Investment After Tax (Assuming Take-Home Pay Is 70% of Gross Pay) | Value of Investment Portfolio at Age 67 (Assuming an Annual Average Return of 7%) |
|---|---|---|---|---|
| 20 | $228 | $2,736 | $3,909 | $1,000,105 |
| 30 | $477 | $5,724 | $8,177 | $1,000,052 |
| 40 | $1,045 | $12,540 | $17,914 | $1,000,176 |
| 50 | $2,564 | $30,768 | $43,954 | $1,000,283 |
| 60 | $9,260 | $111,120 | $158,743 | $1,000,070 |
Since we have already concluded that you’re the typical American and your income isn’t large enough to satisfy two masters—looking rich and actually becoming rich—you have no choice but to engage in lifestyle deflation if you want to become rich. Lifestyle deflation, in turn, is the act of increasing your disposable income by taking a step back materially. You simply stop living a lie and humble yourself with less esteemed but more financially responsible comforts. An example of stepping back materially would be selling that jacked up F-150 you bought last year and substituting it with an embarrassing-but-lien-free POS car.
Answering the How-Poor-Do-You-Have-To-Be Question
Okay, knowing how poor you have to be to become rich is a simple three-step process:
Step One. Find your potential rich number—that is, find the amount of income you need to make the annual after-tax investments necessary to build a million-dollar portfolio by age 67. I used the Dave Ramsey Investment Calculator and an annual return of seven percent to produce the potential rich numbers in the above table. You can use any online investment calculator you want, of course, but I would caution you against using an annual return greater than seven percent. Underestimating your returns can’t possibly hurt you. Overestimating your returns, however, will mean investing too little and failing to have a million-dollar portfolio at age 67.
Step Two. Subtract your potential rich number from your household income. The resulting number—the poor number, if you will—is the amount of money you have to live on if you want to become rich.
Step Three. Determine what socioeconomic class your poor number would leave you. In the below table, I put together a crude estimate of your socioeconomic class based on your household income relative to the federal poverty level.
Let’s say, for instance, that you’re 30 years old and your potential rich number is $8,177. And let’s also say that you’re married with two kids and your household income is $52,000. To be rich by the time you’re 67, then, you’ll need to live like you only make $43,823 annually. Your poor number is thus $43,823 and this number puts you in the working class.
You now have the answer to our how-poor-do-you-have-to-be question. In order to become rich, you’ll have to satisfy yourself with working-class comforts. Your home will have to be smaller, your car will have to be older, and your vacations will have to be simpler (i.e., you’ll have far more camping vacations than Disney vacations). And you’ll probably have to forego cable, Xbox, and dining out. Now, granted, this isn’t a very glamorous existence. But it certainly isn’t hell on earth either. And as long as you approach life with a little verve and guile, there’s no reason why you—a “working-class” schlub—can’t create a very happy and fulfilling life for yourself and your loved ones.
| Socioeconomic Class | Household Income as a Percentage of Federal Poverty Level | Family of Four Income Needed to Reach a Given Socioeconomic Class (Based on 2019 Federal Poverty Levels) |
|---|---|---|
| Poor | 100% or Less | $25,750 or Less |
| Working Class | Between 101% and 200% | Between $26,008 and $51,500 |
| Middle Class | Between 201% and 400% | Between $51,758 and $103,000 |
| Upper Class | Between 401% and 600% | Between $103,258 and $154,500 |
| Wealthy | 601% or More | $154,758 or More |
The Downsides to the Lifestyle Deflation Gambit
One obvious downside to pursuing wealth via lifestyle deflation is that you might not follow through with it or only do it briefly. Just because you know your potential rich number and have the income to handle the requisite lifestyle deflation doesn’t mean you’ll actually walk the walk. Pursuing wealth via lifestyle deflation still requires a crapload of discipline.
The more obvious reason why pursuing wealth via lifestyle deflation isn’t’ exactly a cure-all, however, is that your age and income could very well be working against you. Mrs. Groovy and I were very fortunate. We started pursuing wealth rather late in life (our potential rich number at age 45 was $27,446), but our income was large enough to handle the requisite lifestyle deflation and we lived in a low-cost state (North Carolina). In fact, we were able to invest double our potential rich number every year and still live a comfortable middle-class lifestyle. But if we still lived in New York and had a couple of kids, the amount of lifestyle deflation required to become rich would have been untenable. “Slumming it” would have really required slumming it (i.e., living in a high-crime neighborhood and sending our kids to lousy schools) and pursuing wealth under those conditions would have been unfair to ourselves and our children. Sometimes it’s better to be safe poor rather than unsafe pre-rich.
Final Thoughts
Okay, groovy freedomist, that’s all I got. What say you? Is seeing wealth-building as a function of your willingness to look poor a clever way of gamifying the wealth-building process and making it more palatable? Or is it an overly complicated way of saying “live below your means and invest the difference”? Let me know what you think when you get a chance. Peace.
Very unique and useful way to look at building wealth. Live rich or get rich. Love it!
“Live rich or get rich.”
A pithy five-word sentence that summed up my whole post. Outstanding, my friend.
Great post as usual! Thought provoking as well. One of the key components to ending up well off is to get someone to actually believe they can do it. So many people are so negative and hopeless about the whole process. Im not talking about the folks making two hundred grand a year but just a normal average salary.
So first step is to believe you can without that you are sunk. Then start thinking out of the box, level two thinking. The system will keep you down, it is designed to keep you in debt, if you dont believe that then just keep living like most people and you will find out.
Thanks for the article Mr Groovy, another good one
“One of the key components to ending up well off is to get someone to actually believe they can do it. So many people are so negative and hopeless about the whole process.”
Nailed it, Art. Too many elites push the notion that people, in general, are helpless and their only shot at material and spiritual comfort is more white-knight government and more welfare (i.e., free daycare, free college, free healthcare, etc.). And sadly, too many people believe our elites.
An Australian talking head suggested that Millenials should stop eating Avocado toast if they want to save for a house in Sydney. The commentator was hit with a massive amount of vitriol for suggesting people who are struggling financially practice better habits. Obviously it takes a little more than skipping an overpriced cafe breakfast to afford a house in one of the most overpriced housing markets in the world but the gist of what was suggested was something that could have benefited the very Millenials who were so outraged. If you are struggling financially do you really need to spend 20 dollars plus several times a week for a piece of toast and avocado with a cup of coffee? Saving 60 to 80 dollars a week might not get you a million dollar house but it adds up and can give you peace of mind to have a couple of thousand extra a year in the bank. Doing so though requires them to deprive themself of the inner city latte sipping lifestyle they are entitled to..the horror.
When i read this I thought, WUT? Avacados are only $0.33 at Daily Deals and a slice of bread can’t be all that expensive. Add a splash of balsamic vinegar and there’s nothing expensive enough to dent the food budget.
Then i realized you were talking about going to one of fru fru hipster restaurants. Seriously, when i first started budgeting I went through my prior year’s restaurant expenses and realized just how much money I’d wasted.
one thing about hedonic adaptation is that it works both ways. For me to live “rich” when accustomed to exclusive consumer choices requires the resources to buy into the next ring of exclusivity. And maintain it. But if I’m accustomed to Walmart shopping and camping vacations, to live “rich” means staying at a hotel in Florida.
“But if I’m accustomed to Walmart shopping and camping vacations, to live “rich” means staying at a hotel in Florida.”
Brilliant! I think you’ve discovered a sibling of hedonic adaptation: spardonic adaptation–the ability to live with less and still be happy.
Recently I stopped and thought about what I enjoyed in life and why I was worried about having a high income in retirement when my favourite food is BBQ, I prefer cheap scotch to expensive scotch, I like camping and hiking and I hate city living and am not interested in travelling the world like so many FI advocates. I would need to work at spending more money and unless I develop a cocaine and hooker habit I am not sure what I could spend it on.
Wait a minute, I thought being wealthy meant driving a new BMW and living in a huge house. Deflationary Lifestyle?? Wealth means saving, not spending? You’re such a revolutionary. Wink.
Great post, per usual. Let’s hope the folks who need to read it, read it.
Haha! I love it, Fritz. But I’ll let Brooks and Dunn articulate our revolutionary worldview from here.
It’s where I drank my first beer
It’s where I found Jesus
Where I wrecked my first car,
I tore it all to pieces
I learned the path to heaven
Is full of sinners and believers
Learned that happiness on earth
Ain’t just for high achievers
I’ve learned,
I’ve come to know
There’s life at both ends
Of that red dirt road
We never were consciously frugal, but naturally lived within our means and maxed out every retirement vehicle legally available while putting another 10-15% above that into taxable accounts. Our life style inflated as our income grew but it stayed frugal in relation to our income. Even now in early retirement we spend way less than half of what we’re funded for because spending more wouldn’t add a thing to our lives. It only worked because I was lucky to be a high earner compared to other engineers, so this would not be easy for most people. I think they do face a fairly stark choice in balancing life style and potential wealth that we never had to.
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“Even now in early retirement we spend way less than half of what we’re funded for because spending more wouldn’t add a thing to our lives.”
Amen! Knowing what “enough” is for you is true wisdom. We’re exactly the same. We can safely spend $60,000 a year, but we only spend $38,000 to $43,000 a year. And the reason we don’t spend more is because there’s no need to. Our $38,000 to $43,000 of yearly spending is more than enough to leave us happy and fulfilled.
Nice breakdown of the necessity of living below one’s means in order to achieve wealth.
The only precautionary advice I would give is that you should do this in moderation as well. If you truly are living a bare bones live in order to save for your future self you could be miserable for years and not even be guaranteed you enjoy the fruits of your sacrifice as time is not promised to anyone.
There are countless sad stories of people dying soon after they retire.
The balancing act of live for today and save for tomorrow is one that is vital
Xrayvsn recently posted…Protecting My Sanity: Combating Burnout One Bite At A Time
“The only precautionary advice I would give is that you should do this in moderation as well. If you truly are living a bare bones live in order to save for your future self you could be miserable for years and not even be guaranteed you enjoy the fruits of your sacrifice as time is not promised to anyone.”
Absolutely! Great point, my friend. Everything in moderation, especially in regards to frugality. A drastically spartan existence isn’t necessary. Just a little strategic lifestyle deflation will do wonders over the course of several years.
Live today and save for tomorrow is not a balancing act. It is a required reality since the moment our lifespan is double from 40 to 80.
On the average, most of us will have about 30 years of working life.
Within this 30 years window, it is logical to have a mindset “eat 1 dollar and save 1 dollar for tomorrow” – 50-50.
You will need the accumulation of every single dollars in the productive 30 years to pay for the last 30 years of your life.
Hence the first grader math clearly showed balancing act just meant you have not accept the current and future reality.
Hmmmm! I love it, TE. Very astute. Now you got me thinking. Is moderation on the lifestyle deflation front enough for most Americans? Or is a little extremism on the lifestyle deflation front more appropriate? The plot thickens.
It is low, moderation and extreme depend on the person’s age.
From the age of 25 to 35 – it is 10 to 15 percents after tax saving and invest in the American’s prosperity.
From the age of 35 to 45 – it is 15 to 40 percents.
From the age of 45 to 55 – it is 40 to 60 percents.
The problem for most of our fellow citizens is that they are wired to use only their 5 senses to understand the world around them.
The 5 senses are easily duped by the capitalistic nature of our economy – paid and built by science.
Hence, most of our fellow citizens will burn the first 20 years of their productive working life.
FIRE is not a solution for our country. Less than 10% of FIRE followers succeeded in crossing the Financial Independence mile marker – yet most if not all financial websites sell it with the same distorted and enticing strategies.
Here is a brain teaser for you Mr. Groove – if you can brainstorm a strategy to slide the simple math by age above into the population, you will be hailed as the savior of our country long after your existence comes to an end.