Saving at all Income Levels

Marshall Rathmell |

You’ve probably read the article about the couple who make $500k to just “scrape by”. It describes a lifestyle of student debt, childcare and home maintenance expenses that we all face. From their half-a-million income every year, they contribute $18,000 each into their 401(k). That level of savings does not prepare them for the age and lifestyle to retire that they desire.

I’m going to go out on a limb to say these people are making average mistakes. They feel average because they are.

How Average Mistakes Affect Every Income Level

Many outside the situation can see right through this. With that kind of money, think of the choices! What we could do with that kind of money!

But there are some expenses that are not choices. Maybe all childcare is $42,000 a year in their area. For many (statistically average) families that would be enough to negate the earnings of one of the parents. So, someone stays home with the kids. But when you make $250,000 a year, $42,000 is a reasonable investment so you can go to work.

What are the “average mistakes” I’m talking about? It’s an attitude. It’s the attitude that says, “I make half-a-million dollars a year, so I deserve...”

Instead of starting with savings and then making their choices based on what is left, most people start by asking should I be able to have x with my income and after their choices they don’t have the appropriate savings.

  • You go to a bank and ask with $500,000 annual income can I spend $69,500 per month on a $1.5 million home. The bank will give you a resounding yes. The bank doesn’t ask how many kids you have and what you are paying for childcare.
  • You go to a car dealership and ask with $500,000 annual income can I spend $16,600 on cars per year. The car dealer is going to say of course. The car dealer doesn’t ask how much you have committed to charity.
  • You go out to lunch with a co-worker who tells you about their recent ski trip and ask if they think it is reasonable for two NY attorneys to spend $18,000 a year on vacations. Of course, they do, they spend more. They don’t ask if your parents paid your way through school for you or if you have $32,000 in student debt payments a year.

I am not proposing that the couple can’t afford these things, they just can’t afford all of them and save for the future they want.

To do it right, they would have started from the beginning by saying I am going to save x% (lets think in the ballpark of 20% at their ages) of our income so that I can meet my long-term financial goals. The next step is they reduce their budget by taxes, student debt, childcare etc. Only at that time do they start to make their choices on how much home can they afford, what kind of cars do they want to drive, how often do they want to go out on date nights.

By limiting themselves to the amount left over and considering the lifestyle choices at the same time, they can prioritize and sacrifice where they see fit. Otherwise they are sacrificing their future because they deserve all these things with their income.

Planning for a Better Future without Sacrificing the Present

By creating a realistic financial plan before any big spending decision, you can determine what you need to keep for your future. Having spoken to many in the same situation as this hypothetical couple, yes, they enjoy the spending in moments, but they know their path is not what they want and have unwanted stress to show for it.

No matter what your income level, if you start with savings based on a plan and then create your lifestyle you will be on a more stable path. Families with incomes significantly lower than $500k/year regularly manage it. I see it every day.

-Marshall Rathmell-

-Some of the material above was provided by