‘The Rich’ Are an Ever-Changing Group... Get Yours!

By: Roshawn Watson

Death is not the greatest loss in life. The greatest loss is what dies inside us while we live (Norman Cousins)

Most of us rejoice when someone hits the ball out of the park and the cover off of the ball. We know that extreme success, financial and otherwise, requires effort on our parts, sometimes considerable effort. While some appear to have the golden touch (i.e., Steve Jobs), a closer look often reveals their many struggles and costly setbacks too. Thus, just because one is rich today does not guarantee that he or she will be rich next year. The opposite is also true, or is it? There are divergent views on the longevity of wealth and whether inherited wealth (static) will eclipse newly-earned wealth (dynamic).  Lets delve into the data..

Who are the "Rich" Really?

There is much confusion over what qualifies for "rich."  It largely about perspective. For example, one could effectively make the case that the person on welfare in a rich country is far better off than many others in poverty-stricken lands. Thus, for the sake of this post (and this site in general), I submit to you that when I refer to "the rich," I do not mean your garden variety millionaires. Two-thirds of millionaires in America have a net worth of less than less than $2.5 million. Although that's enough for many to be comfortable,  from a technical (i.e., balance sheet) perspective, this level of wealth would make one affluent rather than rich. To qualify for rich, add a 0 to the aforementioned figure (or 3).

The only reason I stress the distinction is because such a small fraction (i.e. around 6%) of American millionaires have a net worth of $10 million or more. In other words, while millionaires are relatively "common," it's extremely rare to actually be rich because it is difficult for most to amass such a high concentration of wealth. The top 1% of earners make about 20% of the income in America, and the top 5% received about 40% of the recent gains in wealth.

Are The Rich Stationary or Dynamic?

Now, that we have defined who are the rich, there are some recent data that are relevant. According to the IRS, the number of filers with incomes of $1 million or more has declined by 39% between 2007 and 2009. In 2009, there were 237,000 million-plus earners, down from 390,000 in 2007. Thus, this decrease may indicate that the income affluent are shrinking in numbers due to: a) economic and market challenges and/or b) restructuring of their businesses  or investments (i.e., utilizing loss-carry forwards, taking less income in the form of cash, reinvesting in their businesses,  etc.). Interestingly, balance sheet affluent (someone with a high net worth) saw a  completely different phenomena. According to Merill Lynch and Capgemini report, not only does the U.S. now has a record number of millionaires,  but the number of people worth $30 million or more also increased substantially.Although the income versus net worth data may appear to contradict each other, what likely happened is that  those who sold in the panic market drop at the end of 2008 had lots of capital loss carry forwards to offset gains in 2009. Thus, investors made plenty of money, but their reported incomes simply didn’t reflect it all.

More importantly, both income and net worth data suggest that "the rich" change constantly. However, the IRS and Merill Lynch and Capgemmi aren't the only organizations tracking the rich: what about the Forbes 400 list? About 70% of the new Forbes 400 (400 Richest Americans) are purported to be self-made, which is encouraging, yet half of the top 10 inherited some or all of their wealth. If you combine the net worth the Walton family ($87 billion total), as other families on the list are combined, then 60% of the families have inherited their wealth. This begs the questions as to whether it is possible that preserved family wealth may eclipse newly-created wealth?

The implications of this scenario would be substantial. Already, hopelessness has crept into Americans according to a recent CNBC report. A whopping 79% of Americans indicated that it is unlikely they will even have $1 million or more in assets in over the next 10 years. Moreover, 61% said it is “extremely” or “very difficult” to become a millionaire in the U.S. today. Now of course, I don't highlight this data to be negative but rather to point out that if the prevailing attitude is one of despair (i.e., the only people who get ahead are those who hit the genetic lottery), then how likely is someone with this mindset to take the steps necessary attempt the impossible.

Closing Thoughts

In aggregate, while it is possible to get rich in today's economy if you desire, there are certainly some distinct challenges in the present climate (i.e., over a 20 year period [1987-2007], there was  strong economic growth, a 20-year-bull market, and huge technological changes and investments). Perhaps the biggest danger though is not the external obstacles one must over come but rather that internal drive may diminish, as dreams are discarded, in favor of reality.

Don't give up on your dream though. It may just be the most valuable thing that you possess.

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Parasite of Wealth

By: Roshawn Watson

Perhaps if you are a Kardashian or a Hilton and can somehow monetize your luxurious purchases through endorsements, appearance fees, products, licensing/merchandising deals,  and a myriad of other ways celebupreneurs (celebrity entrepreneurs) justify and/or pay for extravagant purchases, then at least there's potential for a financial upside of such expenses. Applying the "glittering rich" standard to see if one can truly afford the lush lifestyle is useful. Those who glitter should have a minimum net worth of $20 million, make at least $2 million a year, etc. (i.e., a very small fraction of the top 1% of households). Yes, they can afford to truly jet set, and the proportion of their wealth spent on looking the part amounts to the cost of a few pizzas to most people.

A Disturbing Trend
However, I have been noticing a disturbing trend for some time now. People will go broke trying to look rich. They may succeed in impressing others they don't know and don't really care about but generally at the expense of their family's financial solvency and preparedness WHEN the poop hits the proverbial fan.

Heidi Montag was interviewed recently and basically declared that she and her husband are broke now  post The Hills. She stated that their money was largely spent maintaining a facade of wealth and trying to launch her music career. They created an illusion of prosperity in hopes of gaining riches. She stated that she wishes she was more like Kim Kardashian (reportedly has net worth $65 million; income about $5.5 million annually). She mentioned that when Kim K spends, it is an "investment" in herself (with Kim's earning power being closely connected to her successes at selling her "fabulous" lifestyle, I would say Heidi has a point). However, for every one "lucky" starlet who successfully manages to sell the illusion of her fabulous self, there are countless others who fail miserably. Additionally, even big celebrities can get into trouble living the good life if they are not careful. For example, Nicholas Cage (I'm a fan of several of his movies, so don't hate) got into recent financial hardship, and an ever-increasing number of Bravo's Housewives go bust. I don't glory in their despair; however, their stories need to be told, so that our visions of the palpable risks associated with their lifestyles won't be grossly distorted.

$40,000 Car
Of course, looking rich is not the main motivation for everyone who overspends: some people spend excessively because they either think they are already rich or know they aren't but don't care about the consequences. The following story is a case of the latter A few weeks ago, a friend grilled me for about an hour about her personal finances. I assured her that I wasn't against her living the lifestyle she desires as long as she can afford it (i.e., pay cash for it without sacrificing retirement). Although I tried to encourage her that it got easier with time and discipline, she was very disheartened to hear me outline the risks of borrowing $40,000 for her next vehicle. She lamented that she likes the "nice things." I assured her that many of us do and that she should then make it her goal to AFFORD the nice things. I said otherwise, the things that she buys will be parasites to her wealth.

Saving and Investing
The real problem is NOT the car but her attitude towards her money. The typical millionaire saves at least 15% of his or her income, and his or her income accounts for a mere 7% of his or her wealth. This explains why the average millionaire would survive for over 10 years without working; many could survive for much longer since they are used to living on significantly less than they make and have access to. Also, before you say that millionaires can save because they have more money, let me assure you that one of the reasons millionaires have money in the first place is because they save and invest. Let me explain. Regardless, of whether you make $40,000 a year or $400,000, you can still be broke if you spend all that you make. Thus, for most people to accumulate and maintain significant wealth, some restraint is generally involved and usually prominent.

I'll make this short and sweet: "the true mark of financial intelligence is not how much you make but how much you can keep."

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Should You Pay-off the House?

By: Roshawn Watson

Housing is one of the biggest expenses most of us have. Making the quality decision to greatly diminish one's living expenses through owning a home outright can have reverberations throughout your entire financial world. It could be the single choice that determines whether you will retire with dignity, be able to adequately fund Junior's college fund, give like never before, and live comfortably into perpetuity. Here are some of the reasons you should consider eliminating your mortgage IF you have one.


Liquidity

You should maintain adequate liquidity, especially in today's challenging economic times. Since the Spring of 2008, I have AGREED with Suze Orman: keeping at least an 8 month emergency fund (more on this in an upcoming post) seems reasonable to me AFTER you are debt-free excluding the house.

I submit to you that this IS risk-adverse and also a NECESSARY precaution. Consider the following as the rationale: 1) job-security is an illusion, 2) most real estate values have seen significantly better days, 3) it's hard to convince yourself to sell equities in an emergency (especially if the market happens to be down), and 4) it may be hard to obtain loans from banks when you need it the most (instead they may close your line if they aren't certain they will be paid back).

Paying $10,000 to Save $2500

Perhaps the most absurd reason to keep mortgage debt is to take advantage of the tax deduction. Now, I'm not denying that the tax deduction is beneficial, but I will submit to you that it may not be financially wise to pay the bank $10,000 per year (i.e., your mortgage) in order to avoid paying the IRS $2,500 per year (i.e., the extra amount you would pay in taxes if you didn't have the mortgage). If you really want a tax deduction without wasting money, consider giving some money away to a charity and itemize. Of course, you would have the added benefit of doing some good in the process while increasing your bottom line. I suspect that is a lot better than merely making your lender richer for the privilege of keeping a mortgage around for longer than necessary.

Everyone is in Debt... oh Really

First, to assume that everyone has a mortgage is faulty. According to the US Census Bureau, about 30% of homes are owned free and clear, with the housing expenses of those with mortgages being approximately 3.5 times that of nonmortgage homeowners. Of course, many people rent as well. What I find more interesting is not the fact that people operate without debt but rather who operates without debt. Sometimes there is the presumption that if you don't use debt, you are not financially sophisticated. However, this is an unsubstantiated claim. Consider that, since debt is typically your second greatest expense, eliminating debt often liberates one to build wealth. That's because your income is your most powerful wealth-building tool. Accordingly, it should not surprise you that 75% of the Forbes 400, the 400 richest Americans, say that the best way to build wealth is to become and remain "debt-free." In other words, keep the debt at your family's own financial peril.

But They Approved Me

Some people confuse making enough to obtain a loan with financially winning. All the former means is that the lenders deem you a worthy enough risk to make them rich. Congratulations ...I guess! However, who is making you rich? Just because you can obtain a property doesn't necessarily mean that the cost of maintaining that property won't BURY YOU. Do you know with certainty that your housing costs do not exceed what's reasonable given your income level. Despite more stringent lending standards, some people are still getting taken for a ride. It's simply a fact.


Parting Thoughts


The sooner you get rid of your housing debt the sooner your living expenses shrink and the real fun can begin. Again, your most powerful wealth-building tool is your income, so it would serve you well to not burden your income with loans, especially long-term loans. My fellow savers and investors know what it is like to be able to bank a mortgage a payment or two on a regular basis; if you do this consistently, you will be in a position to GIVE away a mortgage payment! (If you find that statement shocking, this is where the increased liquidity associated with reducing one's housing expenses may come into play)


No house is worth your financial security, nor is that house a badge of honor. It's the paid-for house that is the true badge of honor! Are you going to be (or are you already) a part of the 30% who will make this YOUR reality?

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