Wealth Creation: Part 1
Most Americans are playing a losing game when it comes to wealth building.
What on earth am I going on about?
I think we can all agree that at one point in our upbringings, someone taught us something similar to this:
“Work hard, save your money and one day…..”
One day what? You’ll be wealthy? I call bullshit on this!
While the work hard part is good advice, you will not save your way to wealth. Allow me to prove it.
Most believe that if they can just increase their income, they will become wealthy some day. So, we chase promotions, switch jobs or careers, ignore our dream careers, and do whatever it takes to earn more income.
But here’s the thing about income. When I ask most people to name a salary, that if they earned it for ten consecutive years, they would be wealthy, what do they say?
On average, most say they would be very happy with a salary of $350k. Who wouldn’t right? That’s pretty Baller!
Let’s take a look at whether putting in the work to earn this much a year is indeed, a good wealth strategy.
Between 1959-2022, the average U.S. savings rate has been 8.96%. This is the amount of net income most Americans save.
For sake of argument, let’s go ahead and agree that you are better than average and say that you save 10% per year.
But remember! We are talking net pay. So first, we need to subtract our taxes.
How much Federal Tax should you pay on $350,000 in income? Without deductions you will pay $89,547.00 in Federal Tax on a $350,000.00 salary in 2023.
As for State taxes, not all states have income tax but rates very between 0% and 13%. Let’s use the taxable rate of 5% for this example. That equals another $17,500 to your State.
So, after taxes you are left with $242,953.
Congratulations! The $250,000-plus income bracket roughly represents the top 5% of earners in the country. With a deduction or two you’ll be in the top 5%.
The next part is not so fun. We need to deduct your living expenses.
According to a new survey that made major headlines, 36% of people making $250k a year -- earning four times the median US salary -- are living paycheck-to-paycheck. Translation - there is no savings going on.
But, surely you are not one of these high rollers spending every penny your earn so we will use the aforementioned 10% figure.
Cool, based on your income, if you are socking away 10% of your net income after taxes, you are saving $24,295. Let’s pretend you don’t buy your coffee at Starbucks five days per week and round that number up to $25,000.
If you save $25,000 per year, every year, for ten years you would have $250,000 in total savings.
Does anyone reading this think that this amount translates to being wealthy in America?
Hey, $250k in savings is nothing to sneeze at. In fact, honk if you have that much in cash in your bank account right now! I’m happy for those of you that do.
But, according to Schwab's 2022 Modern Wealth Survey, Americans believe it takes an average net worth of $2.2 million to qualify a person as being wealthy.
Now, don’t get me wrong. If you have a salary of $350,000 you are undoubtedly living rich. You can afford a nice place to live, one or two good cars, decent schools for your kids, great vacations and all kinds of other perks.
But, living rich is not the same as being wealthy is it?
In a series of posts, I’m gonna share more thoughts on playing a different game. Don’t worry, I’m not selling anything at the end. Just sharing knowledge that took me decades to figure out, and as always in this group, hoping to inspire!
