This post will be full of detailed numbers (money porn) and cool graphics (eye candy) — because it’s summer, and summer is fun and bright and cheery. July was a sunny month for you and for us as well. Clear skies, no turbulence. As you can see, my net worth jumped by a happy $10,559.
BUT … BUDGETARY WINTER IS COMING.
(SHUDDER. OMINOUS MUSIC. CLOSE UP OF NIGHT KING’S EYE.)
We’re moving back to the US in August, and our expenses will be going up faster than you can say “Littlefinger is a creepy douchebag.”
I’m not sure if you get these references to Game of Thrones, Penny. If you don’t watch it, you might consider it after your tech hiatus. You could binge during a free trial of HBO on Amazon Prime!
Anyway, before I dump the cold reality on you, here’s a recap of July.
Cash: We’re building cash to buy a car in August. We’ve been living on one car overseas but we’ll need two in the US. My philosophy on cars is to pay cash. I look for cars that are 3 years old (or so) with under 50,000 miles. The “new” car will be for Mrs. R, and I’ll keep driving my 2006 Rav4 with 120,000 miles on it and deep stains from kid snacks.
Debt: This is 0% debt. I’d like to pay it, but I want to wait until we get settled back in the US. We always pay our debts.
Investments: I didn’t add new money to taxable investments, but I adjusted the value of my LLC holdings upward by $1,730 after doing a detailed breakdown on the blog.
What I like about July’s report: A 5 figure net worth gain is nothing to sneeze at, even if you have allergies.
What I don’t like: If I were paying $4k in rent, my gain would only be $6,500, which is not quite enough to stay on pace for my goal.
THE COLD REALITY
When we move back to the US, we will start paying out the nose for rent and parking. As in $4,000 per month. I’m not complaining, we’re happy to spend more so we can live in a walkable city neighborhood rather than commuting from the burbs.
Additionally, we’re going to need some odds and ends like beds for our boys, a couple other pieces of furniture, work clothes, and that car.
Here’s my list of upcoming expenses; I might be estimating low.
By the end of August, I’ll have enough cash to cover most of this. Besides, we won’t buy everything at once. That said, I expect the budget to be tighter the rest of the year. I don’t follow a strict budget, but with such drastic changes coming up, I wanted a rough idea of what our spending should look like. This is what I came up with.
Get ready for a bunch of graphical eye candy:
Some of the items, like the HSA, won’t kick in until the new year. What do you think of this budget? I rather like it. So colorful and symmetrical. No idea yet if it’s realistic.
Here’s what it will look like for a complete year.
So what does this mean for my savings and my net worth goal?
Hey, guess what? I wasn’t even thinking about it, but when I totaled up my numbers for this month, I FINALLY made it under the $2,000 bar that I had set (kind of lukewarmly) set for ourselves. I guess that’s what happens when no major expenses come up. It won’t be that way for long though… big school bills coming up next month.
Before I get into all that, let’s talk about where the rest of our money is at. The last time I explored this was in April. In April, our student loans were at $147,037. We haven’t been able to put any extra money toward this since our tax refund, so it hasn’t moved much. It is now at $145,421, because we do pay a little bit more than the interest rate acquires every month in our automatic withdrawals.
One thing we are going to start doing, in response to advice from a reader, is instead of taking $1,000 out one time a month, we are going to have $500 withdrawn two times a month. This will help save since the interest is compounded daily on student loans. (My husband just has to make a phone call, which I keep reminding him to do…)
We have also built up more equity in our house since April. Back then, it was valued at $214,000. Now, it is valued at $229,460. (I come up with this figure by taking an average of the Zillow estimated value, $252,421, and the property tax estimated value, $206,500.) So, take that amount and subtract the amount we owe on the house ($88,670), and it looks like $140,790 is the current equity we have in the house.
Here’s a snapshot of our current net worth:
That’s up $25,318 from our net worth in April, but that’s basically because our home is valued $25,000 more than it was in April. If we took that out of the equation, our net worth would be basically the same.
Now I know how it feels to be publicly shamed, I guess.
I can’t say I wasn’t anticipating a bit of pushback from the article, that was to be expected. But the amount of vitriol behind some of the comments was kind of hurtful and surprising. A got a personal note from Michelle from the blog and she said: Thank you for responding to comments on the article. Some of them are not the kindest – which is not the norm for Making Sense of Cents readers. Sorry that you are experiencing that.
But alas, what can you do? Such is the nature of the internet.
The comments bothered me at first, but then the next day, I continued on with my technology fast, and got over it pretty quickly. When I checked back in on the comments several days later, there were several more hurtful comments, but by that time, it didn’t bother me that much. It was like, once I’d read one, I’d read them all, because they were all saying pretty much the same thing.
Thank you for all your help with the comments, by the way. You do a good job of addressing people fairly and kindly. I liked what you had to write.
So, anyway, because of all this, I want to break protocol for a moment and instead of addressing this post just to you, Rich, I would like to break through the fourth wall and directly address our readers and comment some of the issues that the Making Sense commenters had with me and the choices I’ve made. Because, if I’m making these choices, I might as well be able to stand behind them and defend them, right?
That’s kind of the point of this whole blog, isn’t it?
Let’s start here.
Here is are two actual comments that pretty much sum up what a dozen other commenters were saying:
WOW! JUST WOW! It’s one thing to do all of this but totally another to BRAG ABOUT STEALING FROM THE GOVT. I guess there is a first for everything and this is the first time I have seen someone with balls big enough to brag about ripping the govt. off in writing. THIS is why people do without because people like Penny “steal” and there isn’t enough for others who NEED IT.
I am very liberal and support the existence of social programs for people in need. But this is disgraceful – you don’t have “need.” Read what I am writing: you don’t have need, you have “want” and are gaming the system so that other people are paying for it. Other people’s tax dollars are funding your food stamps and earned income credit, while you deliberately under-earn and use the earnings of others to pay loans you voluntarily incurred, rightfully owe, and will reap the rewards of as your husband’s practice grows. Shame on you.
First of all, I think a lot of the commenters were mistaking my unbridled honesty for pride. Nobody is proud to be on food support. If anything, it is the opposite. It takes a bit of humility to accept that is offered.
I don’t think I’m stealing from anybody or lying about anything. As you’ve seen here, I’m honest almost to a fault. I mean, I’m laying out my monthly expenditures for everyone to see and critique, line by line.
As far as taking money from other people who really need it… here’s the thing: If my family, at our income level, is getting this kind of support, this means that other families are getting support too! Isn’t that a good thing? Just because we’re getting support doesn’t mean that we’re taking it from others who need it. We’re ALL getting help! Yeah!
Secondly, I don’t find anything ethically wrong with accepting benefits that I legally qualify for. As Rich pointed out in his response to one of the comments:
This idea that Penny should voluntarily give up assistance that she qualifies for, because some people think it’s unfair, is misleading. How many people out there qualify for tax breaks, refunds, mortgage interest deductions? Is anyone sending that money back to the Treasury because they don’t really need it? Should we all reject our standard deduction, because, well, we can afford a computer, so it would be immoral to accept the tax system the way it is? I don’t think so. The tax benefits that one qualifies for and how one spends their money are two quite different matters.
After my Retirement Plan post, Mr. O, specifically, asked about my LLC holdings. Happy to oblige. Here’s the story of how a $30,000 investment in farmland turned into more than $200,000. There are bunch of graphics and some stories from my neck of the woods.
Note: This page has affiliate links to good products we endorse. Full disclaimer.
I’m going to start this story at the end, and then talk about the beginning, and then return full circle to the very end, like one of those annoying historical fiction novels that jumps between the past and the present. I’ll try to do this without being annoying. Go read or watch Julie and Julia for a barometer of this approach. If you can stomach it.
Careful readers of my Retirement Plan, like Mr. Manifesto, noticed that around 30% of my Net Worth is currently tied up in what we will call Brothers LLC (Limited Liability Company). Here’s my net worth pie chart, updated:
Brothers LLC is like an investment club I’m in with my 2 brothers. More accurately, it’s me and Mrs. Rich and my brothers and their spouses. We all own our shares through our respective family living trusts (which I highly recommend for estate planning — more on this in a future post).
My brothers and I each bring unique contributions to our company.
Brother 1 is a former doc and a visionary. He can afford to be a visionary because he made huge money as a doc. He owns 55%. The LLC was his idea, and most of our holdings have come through his connections.
Brother 2 is a banker, he’s our numbers guy. He also makes big money, but he’s fairly conservative, as bankers can be. If he doesn’t like a deal, we usually pass. He owns 20%.
Brother 3 is me. I’m the youngest. I bring creativity and comic relief and the occasional flash of insight. I own 25%.
The foundation of Brothers LLC is farmland. None of us are farmers anymore, but we farmed growing up and we come from a long line of wheat farmers. My ancestors worked the land in France before immigrating to Canada and the northern Midwest, USA. It’s here that I must introduce a seedy character named Grandpa Jack. Get it? Seedy?
That’s not his real name, but people called him that. And now, we go back.
Grandpa Jack was a farmer who didn’t graduate from the 8th grade because, as he told the story, he was afraid of my grandmother. I didn’t get it, but I nodded when he told the story.
His whole life, he worked on the farm. Even in his 70s he would be fiddling around, fixing up old trucks, cussing about broken parts. His favorite was “Damnitalltohell” — properly said as one extended compound word. Honestly, I was afraid of the guy. Later on in high school, I told him I was going to start traveling to help people in other countries. His only question was, “When will you be back to the farm to work?” My grandma slipped me a card with $50 inside, and she wrote: “For your trip. Don’t tell Grandpa.”
Grandpa Jack had a falling out with my Dad, for various reasons, including the fact that when he retired he didn’t give Dad the land as he had promised. He made my Dad buy it in sections, full price.
In 2005, Grandpa Jack died, and true to form, he did not leave any land to my Dad, even though Dad had worked it for 40 years. Grandpa left land to his daughters (my aunts) and to a grandson (Brother 1). Other grandchildren received silver bars that Grandpa Jack had hidden in a woodpile in his backyard. I’m not kidding.
AUNTIE JUNE, NORTHERN MINNESOTA HILLBILLY
In 2008, my Auntie June, a chip off Jack’s block who had inherited 80 acres of land, was looking to sell. I have no idea why. Auntie June is a total mystery to me and I can’t believe we are related.
I just finished reading the excellent book Hillbilly Elegy (that you recommended, Penny). Grandpa Jack and Auntie June remind me of characters from that book. I’m not sure we have a good name for these people in Minnesota, rural folk who drink terrible beer and tell dirty jokes, and also shovel the sidewalk and wave to everyone they see. Imagine crossing a hillbilly with a character in the movie Fargo and stick them in Little House On The Prairie, and there you go.
Could we call them Prairie Dogs? I mean that with all respect.
Auntie June smokes like a chimney and carries dice in her purse, just in case anyone wants to gamble for quarters. And if you see Auntie June, you’re going to gamble for quarters. I’m guessing this habit has something to do with why she wanted to sell the land.
BROTHERLY VISION AND A DECISION
Like I said, Brother 1 is a visionary. After he inherited the farmland (151.5 acres), he immediately began pestering us to form a company and use the land as the basis for more investments. He could’ve done this himself, but he wanted the land to be a family asset and he also wanted to decrease his own risk. We ignored him at first.
But then he heard Auntie June was selling. So Brother 1 proposed that we pool our money to buy Auntie June’s land, and he would add it to his own land and give us a discount in the process. We would then have 231.5 acres to work with in an LLC.
The total cost to me would be $30,000 for a 20% share of the total. $30,000 was a lot of money to me in 2008. I was newly married, we were paying of Mrs. Rich’s student loans (totaling $30,000) and we were thinking of saving for a house.
We had to decide: house or LLC?
It was philosophical. Conventional wisdom says own a home. But we liked the idea of growing our investments and renting our residence. And I liked the idea of starting a family business with my brothers. So we scrapped together the money and BROTHERS LLC was born — from the ashes of Grandpa Jack’s grave and Auntie June’s cigarettes.
THE GREAT RECESSION AND THE FARMLAND BUBBLE
With my brother’s discount, our $30,000 was immediately worth $50,000. And much to our surprise, we had bought farmland just before land prices skyrocketed. In 2008, our land was worth around $1,150 per acre and rental prices were around $65 per acre, per year. A decent ROI of 5% or so. Then the Great Recession caused the Fed to lower interest rates, causing wheat and land prices to go nuts. Land prices tripled and rent prices doubled.
In 2010 and 2011, I started seeing articles about farmland in the NYT, WSJ, and USA Today. Not normal. By 2012, I was pounding the table with my brothers, telling them that we may never see prices like this again. Even my Dad, who loves to say, “God ain’t making more farmland,” was convinced to sell a section of land. That said, we didn’t want to sell ALL of it — it’s our family heritage and a unique asset. So Brothers LLC decided to sell the 80 acres we bought from Auntie June. And that’s how my $30,000 investment jumped to $186,000 in a flash.
As you can see on this chart, the value of our land went up 220% in 4 years and my investment went up right with it. In rural Minnesota, you just don’t see moves like this. It’s not New York, it’s the Prairie!
There was a bidding war and we got a great price. I think my profit after taxes and fees from the land sale was around $39,500. Instead of pocketing all the cash, I used $30k to purchase an additional 5% in the LLC from Brother 1. So, now I own 25%
DIVERSIFICATION AND LEVERAGE
The story of BROTHERS LLC after that is mostly a story about diversification and leverage.
I just realized I have no idea what you think about retirement. You probably aren’t thinking about it very much, considering the student loans you still need to pay off. But when you hear the word “retirement,” what do you think of?
Growing up, I thought of retirement as for only the very old. You got old, you couldn’t work anymore, so you had to stop working. It wasn’t a choice so much as a stage of life. And in the northern Midwest, you had 2 options:
Become a snowbird. This was the usually preferred option for those who could afford it. Move someplace hot (like Arizona or Mexico) for the winter, and return to the Midwest in the summer (to a lake house).
Stay in the Midwest year round. This was the option for those who didn’t want to change their way of life. During the cold winters, they’d watch TV and play BINGO.
As you might guess, I’m not into these options. No gray haired communities in a brown desert. No BINGO. I want travel, adventure, and good food. Mostly, I want the freedom and flexibility to decide later. I can’t be sure what 65 year old Rich will want (or, more importantly, what 60 year old Mrs. Rich will want), but I want enough dough to do whatever our future selves want to do.
So how will I get there?
Recently, some personal finance bloggers started a series called the Retirement Drawdown, so I thought it’d be interesting to analyze my own retirement plan and join the series. Please refer to the end of this post for more information and links to all the bloggers who have contributed.
RICH’S RETIREMENT PLAN — WHAT WE’RE STARTING WITH
As you’ll see in the chart below, most of my net worth is in retirement accounts — 401k and IRAs. 63.4% of my net worth, to be exact.
Aside from retirement accounts,my biggest investment by far is in an LLC I own with my brothers. We started the business in 2010 and we invest in farmland, commercial real estate, and one small business. Every year it seems we find 1-2 new investment opportunities.
My share of the LLC is currently worth $198,370. I’ve contributed $69,000, so it has done well. We receive occasional distributions from the rental income and the sale of properties. I’ve pocketed $38,670 so far. In retirement, I’m hoping it will produce regular income — more on this later.
THE NEXT 15 YEARS — PREPARING FOR RETIREMENT
My working assumption is that Mrs. Rich and I will both be working 15 more years. She’s younger than me, so maybe she will work a few years longer. Our kids are 5 years old, so in 15 years they will be 20, and by then we’ll have a good idea if they are “launching” as they should. We’ll see.
There’s another reason 15 years is a good estimate for running our numbers. We are in the lucky position of having a company pension. In around 15 years, I’ll be able to receive the full pension benefit, more or less.
So, what’s the plan over the next 15 years? Get ready for an exciting, unprecedented, and innovative answer …
We’ll keep doing what we’re doing. Managing cash flow, investing opportunistically, and maxing out retirement accounts. It’s a low-risk ride.
Here’s what I expect from my various net worth categories over the next 15 years, in 5 year blocks:
Ok, so this will take some unpacking.
Cash: Easy, this is just a gradual build.
HSA: I’m going to start maxing out an HSA in 2018. Currently, one can contribute $6,750 per year. That number may go up over time, and there might be investment gains. Then again, I might spend some of it on health expenses. So, I’ll assume no increase in contributions and a 0% rate of return here. The calculation is just $6,750 x 15.
Opportunity Fund–Opportunity Fund? Well, I don’t like the stock market very much right now, so I want a fund that will earn some interest and give me some dry powder for future investment opportunities. I’ll initially use my state’s Municipal Bonds for tax free 4% dividends. I plan investing $1,000 per month for 2018, and increasing this by $250 per month every year until I hit $3,000. At 4% compounding, it’ll add up fast. Finally, I’m assuming that I’ll use $200k of this on college for the kids, either by transferring it to a 529 or just withdrawing the money.
I should note that I’ll probably find other investments along the way, so this fund is a place holder.
Alternative Investments– I’m always looking for new and different investments. For example, I’ve earned a total of $30,000 investing over several years in marketplace lending via Prosper.com. I do this now primarily in a Roth IRA, for tax efficiency.
LLC– My assumption is that the LLC keeps growing at a decent pace. Even without appreciation, the land and properties are creating good cash flow. I assume $10k each year for the first 5 years, $12,500 each year for the next 5 years, and $15,000 each year for the final 5 years. These are actually fairly conservative numbers, around 5% return on investment.
There’s a bump in value to the LLC in the final year due to an expected farmland inheritance.
Retirement: These accounts are on autopilot, and my estimates are very conservative at 2-2.25% compounding, which is currently the rate on “risk free” treasuries.
Thus, at the end of 15 years, my pie chart will hopefully look something like this:
All well and good. A $3MM nest egg!
At first I thought my retirement plan was boring, but there’s nothing boring about a $3 Million nest egg. I try to remember this every month as I’m slowly but surely saving.
I think modern technology is mostly AMAZING — after all, I just received a new iPhone from T-mobile that I can use to text for free internationally! But I also know technology can suck away your time and your life if you don’t follow the 4 Commandments.
MAKING SENSE OF INTERNET COMMENTARY
You wrote your happiness report before July 14th (also French independence day, as it were), and I’m wondering how that day impacted your happiness level. It was the day your guest post aired on the widely read Making Sense Of Cents blog. You detailed your journey, which you’ve done before on this blog: in your origin story as well as in your posts on giving to charity and receiving food support. The Making Sense article was an amalgamation.
Some of the comments were nice and some were … well … pas sympathique. Not nice.
Mon dieu. I enjoy interacting with comments most of the time, but I don’t think anyone would say that the internet comment sections are a shining example of technology benefiting humanity.
I was thinking about why some commenters were unhappy with your article. Here are the two main charges, simplified:
They think it’s unfair that you receive government assistance, based on how you are spending your money.
They don’t like the way that you think about it: Thoreau and the Art of Asking and all that.
MAKING SENSE OF MY DEFENSE OF MY COUSIN’S CONTROVERSIAL BLOG POST
I find it funny that some commenters questioned me for defending you. Was I supposed to turn on my own cousin?? I felt like Mamaw in Hillbilly Elegy, ready to start kicking butt!
Here were my basic responses to their unhappiness.
Response to Charge #1: People get riled up about taxes. As you know, I pay LOADS of taxes. And the idea is that we want our tax money to go to exactly what we think are the highest priorities and best programs. When they see that you, Penny, receive government money, well then there’s anger. Unfair! You’re a regular ol’ blogger! You need to spend less and work harder!
Now I’m not an expert on taxes, but I can comfortably say that food assistance is not the big national tax scandal to be worried about. It’s peanuts (perhaps literally!) compared to the national debt and other such obligations that have little social benefit.
The fact is that you receive food support because you qualify for food support. We can argue about the system and how fair it is, but it makes no sense for you to turn down this support. It’s for food, and it’s completely separate from how you spend the rest of your money. It wouldn’t do an ounce of good to anyone for you to turn it down, which you’ve said you’re eager to do as your income grows.
People don’t normally consider the idea of rejecting government benefits when they do their own taxes. I’d venture that most people who receive the standard deduction are not refusing their refund checks for the good of the system, because they can afford to. I’d love to hear from someone who has done this.
As for how you spend your money …
This part is ironic for me to defend because, as you know, we don’t agree on how to spend money at all. You’re way TOO FRUGAL and TOO GENEROUS! One of your biggest line items every month is charity! Also, you are paying back your student loans at a ridiculously fast rate considering your income.
So, I wasn’t actually trying to defend every specific choice. Mostly I defended you because the attacks got personal, which leads me to the second complaint from commenters.
Response to Charge #2: People want you to think and feel differently about receiving food support.
You wrote that at first you felt embarrassed about receiving food support. And then you talked about how your outlook has changed, how you want people to understand this process, and how in the future you’d like to give more and take less.
This is just my observation, but I don’t think some people want you to come to terms with receiving support. They would like you to keep feeling embarrassed for as long as it takes to support yourself. They want you to feel a certain way.
This, I thought, was rather unfair. People’s feelings are complex, and as we’ve discussed a lot on this blog, there isn’t a straight line between money and feelings.
This is just not how people work. We don’t have static emotions based on our income levels. Some days I feel incredibly lucky — I love my job and I’m healthy. Some days I’m irritated about traffic or annoying errands. Other days I’m overjoyed because I’m going on vacation. And this week I’ve been anxious about my kids’ behavior at summer camp.
The fact is, I don’t walk around thinking, “Wow, I’m so grateful to be earning six figures, I guess I shouldn’t worry about my boys starting a fight with other kids at camp.” Life doesn’t work that way.
MAKING SENSE OF KIDS, HAPPINESS, AND THE GOOD LIFE
All of this made me consider my happiness level for the past month. Initially I thought I’d rate it low, like 3.5 smileys out of 5, which is not good for me. The main reason: It’s summer camp season.
My twin boys are high energy. That’s an understatement. They make other high energy kids seem mild mannered. As twins, they don’t take many breaks because they always have a willing partner to egg them on. They run around and talk and yell and laugh and fight and play from 6am to 8pm every single day. Their favorite game, besides Uno, is to be chased. That’s the game — we chase them. There’s my cardio regimen right there.
Hello, again! I’m back online for today, and I have to tell you, I haven’t missed being online one bit. Granted, it’s only been 8 days, but not engaging with technology for those 8 days (aside from some essential and semi-essential text messages) has opened up spaces in my mind I never knew existed. It feels so freeing.
Catching back up online for the day has been a bit of a pain. I had 60 emails to sort through. In what would have taken minutes spread out over several days, has taken a chunk of time today.
Throughout the week, I had been keeping a list of things that I would need to check online when I got back to it (Sleep Styler tips, driving directions to various places, GoodReads, etc) and that took some time too, but overall I liked doing that better than checking the internet and using the computer everyday.
It created computer use with intention, rather than just random usage.
However, this week of limited technology did end up costing me $1.80. See, I usually get updates about when my library books are coming due through email. Since I didn’t check email, I didn’t realize that I had a library book that was overdue. It accrued fines, 30 cents a day, for 6 days. Oh, well, I guess that was the price I had to pay for this.
During the week I read this book called Amusing Ourselves to Death by Neil Postman, which was basically about numbing ourselves through TV. It was written 30 years ago, but couldn’t be more relevant today. I loved it.
So, all of that being said, my happiness rating for this month is:
We’ve been at this blog for around 6 months, so I thought it’d be a good time to go over some highlights. This article will contain numerous links to some of our best posts. Of course, a complete list can be found via the Posts tab.
For any new readers, I’ll quickly reiterate our premise. We’re cousins from a small Midwestern town. One summer, around age 10 or so, I think we played together every day for 80 straight days. Good times.
Our adult lives diverged but we kept in touch, often writing long emails to each other about life and happiness and money — which is essentially the genesis of this blog.
As for me, I went from the farm to theology school to French language study in Paris. Much to my own surprise, I landed a high income career, married a woman with similar career goals, and had twin boys. High income agrees with me. Why wouldn’t it?
I admit, since starting this blog, the goal has become less important than the journey, the process … life. As I’ve thought about my philosophy of life, it’s become clear that it’s really not about the money. It’s about relationships, growth, and freedom — these are the keys to happiness, incidentally.
So, I hope I can meet my goal the right way. Since we started the blog, I’ve been able to keep pace.
So far so good!
But, again, I’m much more concerned about happiness than money.
Now to your goals, Penny. You have enough student loan debt ($173,000 at the start of the blog) to make Dave Ramsey drop a dadgum mess in his britches. You’d love to pay it off, and you’re making good progress. I’m not sure how much you have left right now, but I think you’ve already lopped off $20k of debt in a few short months.
THE IMPORTANCE OF HAVING CONVERSATIONS ACROSS THE DIVIDE OF INCOME INEQUALITY
Penny, sometimes I think we agree on a whole bunch of topics and sometimes I think we couldn’t be more different. But what I really appreciate is that no matter the topic, we can have an honest conversation, even if there are points of disagreement.
On Father’s Day weekend I spent a lot of time thinking about income inequality. We’ve touched on this topic in the past, and I’d like to spell out some thoughts a little more extensively. You and I are income inequal, as it happens, so this could be an interesting forum to have this conversation, even if you may be delayed in responding due to your technology hiatus.
The upper middle class in the US, defined as the top 20% by income, is pulling away from the middle class and increasingly preventing upward social mobility for others. We all know about the top 1% — the ultra-rich — but the rest of the top 20% wields just as much influence, to the detriment of everyone else. You could even say they are rigging the system. They live in exclusive communities that middle class people can’t afford, and they are helped by deducting the interest on their huge mortgages; they send their kids to the best schools and colleges, the latter being paid for by tax exempt 529 plans; the kids then get the best internships (and jobs) due to the family’s affluent social network.
From start to finish, people in the upper middle class have the advantage, and they delude themselves in thinking they’ve earned it by merit. They don’t see their own luck and privilege, nor do they admit they’re rich. What’s worse, they support policies that will keep them elevated and oppose policies that might create a more even playing field for the lower classes. It’s time to raise awareness and rethink policies that only favor the rich. Most of all, it’s time for the rich to admit that they are the problem.
This thesis seems to be pointed directly at me. Am I really a problem within society? Am I a Dream Hoarder?
Before disputing this, there are certain facts that I’m happy to grant.
POINTS OF AGREEMENT: I’M RICH AND I’M LUCKY AND I’D LIKE TO KEEP IT THAT WAY
Fact 1: I’m in the upper middle class, and the US upper middle class is rich.
Here’s where my household ranks in the US.
Income: $260,000. Within top 2%.
Net Worth: $630,000 (and growing). Within top 15%.
By the measure of income, the top 20% starts at $112,000. One could argue that six figures goes further in Fargo than in Chicago, but by and large I won’t dispute that a person should be comfortable with this salary. I’ll also grant the more controversial claim that this makes a person RICH. One won’t “feel” rich on $112K in Chicago (or NYC, etc), but feeling rich is subject to lifestyle choices. Objectively speaking, to make more than $112K is to have one of the highest incomes in the richest country with the highest standard of living in the history of the world. It’s silly to deny that, so I won’t.
Fact 2: It takes some luck to get into the upper middle class.
I recently got into a virtual tussle with ThinkSaveRetire about luck. He was arguing that if a person doesn’t meet his/her goals (like early retirement), it’s all their fault. I disagree. Practically speaking, I don’t live my life as if it depends on luck. But, I acknowledge that everyone is lucky (or unlucky) to some degree by being born with a genetic inheritance in a particular time and place with a family / culture / society that supports (or doesn’t support) their ability to make choices. The reality is that anyone who is reading this blog has had an incredible amount of luck — living in the West in 2017 with internet access puts them almost automatically in the top 1% of human history in terms of wealth (hat tip to Make Wealth Simple’s article: “You are richer than you think.”)
My own luck can be seen in my origin story. I wasn’t born as rich as Ivanka Trump or as genetically gifted as Einstein or Michael Jordan, but there wasn’t anything holding me back, per se.
Fact 3: Mortgage interest deductions and 529 plans disproportionately favor the rich.
Agree. This is simple math. The rich take on bigger mortgages and have extra money to save for college, so these policies lean toward the wealthy. Also, it goes without saying that if one pays more taxes in a higher tax bracket, then any tax break will result in a bigger benefit. The progressive tax system by definition incentivizes the rich to be cognizant of tax breaks. This is easy to see when comparing our tax bills, Penny.
I should note there’s strange sort of circular reasoning for one to quibble with the upper middle class about taxes. According to Forbes, those who make over $100k pay 80% of all income taxes. So complaining about tax breaks for the people who pay most of the taxes is like complaining about frequent flyer miles for those who frequently fly. You can’t have one without the other.
Fact 4: Upper middle class advantages can be self-reinforcing across generations.
If a family’s income is high, it’s quite likely that the next generation in that family will have a financial advantage and be able to maintain higher levels of wealth. They are starting from a more secure place, more inoculated to tragedy or bad luck. Many rich families have financial security as a goal. I admit this. I want to build a family legacy through financial security, education, and smart estate planning.
I’ve ceded a lot of ground here. There are some basic facts that the Dream Hoarding thesis points to, even if I disagree with the implications. So where, exactly, do I disagree with this idea of Dream Hoarding?
IS THE AMERICAN DREAM AN OUTCOME OR AN OPPORTUNITY?
If I had to describe the American Dream to an alien life form, basically I would say that it’s about opportunity. Not exactly equal opportunity (ref. Michael Jordan — I don’t have the opportunity to dunk a basketball, I’m too short), but the opportunity for basic improvement. A person in America should have the opportunity to work toward a better situation in life. But opportunity doesn’t guarantee a particular outcome in a particular timeframe. It will always take a bit of luck to attain a favorable outcome. That’s life.
The system can’t control luck or genetics, but it should strive to be fair to most people most of the time. Over time, perhaps over generations, a person’s family should be able to increase their standard of living to a “middle class” existence, which, as I’ve mentioned, is pretty darn good in the richest country in the history of the world. A place to live, a job, food, and the freedom to pursue happiness. That’s the desired outcome. It’s not guaranteed, but as you’ve shown, Penny, you don’t need to make a lot of money to achieve this in the US. (And good news — your family income has been on an upward trajectory.)
But what shall we make of our inequality? Using rough data from our origin stories, check out our respective household incomes.
I know this is only a specific case of 2 cousins, but it’s worth asking: Was there some dream hoarding going on here? Is our inequality due to luck or choices or both?
The way I see it, a person is born with a certain amount of luck. You can’t change the circumstances of your birth or your genetic makeup. After that, your life outcome will be determined by 2 factors:
More luck (health, key life events, etc).
Choices (education, career choice, who you marry, etc).
Before I begin this monthly money check, I want to briefly revisit why I’m writing these updates. Quite simply, my purpose is to track my financial progress and think through how I’m doing with regard to my goals, perhaps clarifying my goals along the way. My purpose is not to brag about finances or elevate money to supreme importance. Human happiness isn’t about money (although money well spent, arguably, can help). I’m also not trying to be an example for anyone. Everyone’s situation is different. This blog is mostly for me, and secondarily for you.
As you know, my goal is to reach a $1 Million Net Worth sometime during my 45th year of life. I gave myself the whole year for the margin of error. I didn’t set this goal for my 45th birthday because, frankly, I didn’t think I’d make it. I’ll be 45 in 39 months, approximately, and I still have nearly $400k to go. It’s a tall order.
However, I’m starting to think it’ll be close. The month of June is an example of why I think this.
From May 31 to June 30, our net worth jumped by $14,885. This is encouraging because there was nothing incredibly unusual about the month. Income was normal, with a little extra for overtime.
What’s more, there were no abnormal investment returns or risky market returns inflating my results. My largest investment — ownership of an LLC along with my brothers that primarily holds farmland and commercial real estate — was flat on the month.
It may sound strange to say that I’m encouraged by a lack of returns, but to me this shows that my financial goals are not dependent on any short term risks. As I’ve noted, I hate the broad stock market right now. I think it’s a bubble and I refuse to buy shares at these valuations. (Actually, I might buy some individual stocks opportunistically, like Nintendo before Christmas season, but I’m not buying the broad S&P 500 index here and now). The beauty of it is, I don’t need stocks. Investing, to me, is about risk and reward and meeting goals. If I can meet my goals without undue risk, I will.
Anyway, financially speaking this was a normal month, and it was a good month. When we move back to the US, we’ll need to pay a whopping $4,000 per month in rent, but even with that expense this would still have been a good month.
Widening the lens, I can’t believe half the year is gone! Let’s see how 2017 is going, with some observations by category.
Net worth is up by $72,837 in 2017. More than half of this is in retirement, so it’s not money we’ll be touching anytime soon. The next largest portion is from debt destruction. It’ll be nice to get that completely out of the way. After that, a bit of cash and investment gains.