Let's Talk Money!

One topic that will continuously be a source of debate on social media (especially twitter) is money. I have some thoughts on some of these debates which I will explore below in some detail. I think the main question is really, "How much money is enough?"

The answer is, "It depends." 

If you prefer to watch a video instead of reading, I do discuss this topic in my latest "Get Ready With Me".

I think a lot of people have misguided opinions on how much money is enough because they are living paycheck to paycheck and they feel like all their problems would be solved if they made 20k more or whatever the number is. They see people making more than what they think their "magic number" is and decide that those other people must be hoarding money and make statements like "nobody needs that much money." There is even more pushback if the person making more is saying they want to make even more. 

To some extent, this makes sense because there are definitely amounts of money that you couldn't spend even if you wanted to. People who have tens or hundreds of *billions* of dollars literally couldn't spend that much money if they tried. It's just not possible. Plus, they likely only made that much money by underpaying employees or some other questionable practices. However, this same logic doesn't really apply to the doctors, lawyers, engineers, etc who make 100k-500k.

Taxes

When thinking about what your life would look like if you made x amount more, you also have to factor in that your tax rate gets higher as you make more money. Now you might say, "but rich people don't pay taxes." This is true to some extent. There are certain tax advantages that rich people are able to take advantage of, but generally the prominent people who aren't paying taxes have gotten to a point where they have enough stock accumulated to take loans against it and they don't take an actual salary from their company. Since they are taking loans against the stock instead of selling it, they don't have to pay capital gains taxes. Even if they did sell, the capital gains tax rates are still lower than the regular tax rates, so there is a lot of savings there. 

However, what I think many people miss is that you have to pay taxes on the stock when it's initially granted to you. People making low to mid six-figures have likely not accumulated enough stock to take advantage of these loopholes in any meaningful way. What happens is that it's a relatively small percentage of people who don't pay their fair share of taxes and people who don't really know how this works think that the same applies to anybody who is making 100k plus which isn't accurate at all. 

Planning for the future

I think another major gap is that when you're struggling to get by, you're not really able to think about the future. People living paycheck to paycheck are often not able to really think about retirement or saving for their kids college expenses or even a vacation that they may want to take in a few months. These things are simply out of the question. Because they can't afford to properly prepare for these things, they often have no idea what they actually *should* be setting aside for these future expenses. When they see someone else say, "100k isn't enough for me, I need to be making 200k", they are in shock because they have no idea how fast 100k goes once you pay bills, eat out every once in a while, take a vacation once a year and actually save at least 20% for retirement. The sad part is that this life should be the norm for everyone. Everyone should be able to afford necessities as well as some fun things and still be able to properly prepare for the future, but in this current day, you pretty much need to be making 6 figures to do all of these things without struggling.

Should people be millionaires?

A statement that I often see on twitter is something along the lines of, "Well nobody needs to be a millionaire or billionaire." There is a common trend of lumping millionaires and billionaires together and it's not even comparable. One billion = one thousand million. That's a big difference.

If someone is a millionaire, that doesn't mean that they earn one million per year. It simply means that their total net worth is at least one million dollars. This includes home equity and retirement funds as well as any other savings or investment accounts.

There is a general rule of thumb that you should withdraw no more than 4% of your retirement fund per year for expenses. This means that in order to have a retirement income of $40k, you need a retirement fund of $1 million (4% of 1 million = 40k). I think we can all agree that 40k per year is not enough to live a lavish lifestyle. It is likely enough to get by but you would need to be very careful with that especially once you factor in higher medical costs as we age. There is actually a "safe withdrawal rate" of 3% which means our required fund actually increases to ~1.3 million. If we want to have more than 40k of income in retirement, this means that we need to accumulate even more.

Looking at these numbers, I don't think anyone should question if people should be millionaires. We all should be aspiring to be millionaires.

So how much money is enough?

When you ask yourself, how much is enough for *you*, remember to factor in the necessities as well as the fun things and any future plans. Think about the life that *you* want to live and go from there. Then ask yourself what steps can you take to get there. Also, maybe think twice before commenting on other people's financial goals. Your life is not their life.