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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.
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