April 25, 2015

Elie Mystal Says $250,000 Doesn’t Make Him “Rich”

Elie Mystal Says He Is Not Rich

If you earn more than $20,833 pre-tax per month and you live in a dump, you are doing something incredibly wrong. Image © iStockphoto/Thinkstock

Over at Above the Law, Elie Mystal wrote an article called Earning $250,000 Does Not Make You Rich, Not In My Town. Now, his site is a great resource.  He is clearly a very smart guy.  And he makes a terrific point about the nature of taxation in the United States – he and his wife have worked hard, endured years of intense schooling, and it is for that reason they have a higher than average income.  He should not be punished for succeeding.

All of that I totally agree with and applaud.  He’s correct.  But when it comes to money, I don’t think he “gets it” because of some of the stuff in his missive.  As he puts it in his post:

And at $250K, you simply can’t afford it. Take me. My wife and I are just under the $250K potential tax threshold … and if things break right for us, we’ll be over it next year … But if you think that affords me anything more than a paycheck-to-paycheck monthly scramble, you’re out of your freaking mind. [snip]

I own nothing … — not a stock, a bond — and the only market for my “assets” is the “Cash for Gold” shop in Atlantic City. I pay a ridiculous premium to live in my 2-1-2 area code, and I live in a hovel so embarrassing that when non-New Yorkers come to visit, they assume I’ve just been robbed. [snip]

And I don’t even have kids. And I didn’t even bring up my debts.

And then comes Mystal’s final denouement.  It is a masterpiece of financially delusional thinking:

Could we rework our expenses to pay new taxes or generally save more money? Of course. We’re middle-class. That’s what middle-class people do: live as far above their means as possible until it becomes impossible. And then we play the lotto like everyone else. Rich people don’t play the lotto, and they don’t live above their means. They worry about whether or not they can afford another plane, not whether they can afford to fly coach.

Middle Class Is a Scientific Descriptive Word, Not a Fuzzily-Applied Adjective

Middle Class vs. Rich

It amazes me that someone earning $20,833+ per month can actually believe they are "middle class" when the economic definition includes the point at which 2 out of 5 American households earn more than you and 2 out of 5 earn less (thus, putting you in "the middle"). The middle class is defined as a family earning between $2,894.83 and $4,335.75 per month. If you make more than that, you are upper class. If you make less than that, you are lower class. There is no getting around these numbers. Image © Andrea Chu/Digital Vision/Thinkstock

What Mystal fails to realize is that the term middle class means exactly what it says – it is an economic classification that describes the point at which your household income falls in a range where 2 out of 5 American households earn less than you and 2 out of 5 American households earn more than you.  As I detailed in Are You An Average American Worker?, you cannot call yourself middle class unless your monthly pre-tax income falls between $2,894.83 and $4,335.75.

I, for example, have middle class values.  But I am not middle class.  The only way for me to become middle class would be for my household income to fall to that range of $2,894.83 to $4,335.75 per month before taxes.

So, Elie, I am terribly sorry to break it to you, but with an income of roughly $250,000 per year – or $20,833.33 per month – you are the textbook definition of income rich because you generate more cash each month than 97 out of every 100 households in the United States of America.  To call yourself middle class is fudging the numbers to such a degree it would be like a 429 pound woman saying she is 110 pounds on her driver’s license and then insisting she isn’t fat because in her hometown, there are ladies that weigh 800 pounds.  (Those numbers aren’t random; 420 to 110 represents the same mathematical proportion to your income relative to the very highest middle class income.)

Balance Sheet Rich vs. Income Statement Rich

Elie, you don’t feel rich because you say you are balance sheet broke.  You sound like a classic case of someone who is only a handful of paychecks away from financial failure.

A few weeks ago, I talked about the retired family friend, I called her Rose, who has no debt, roughly $1,000,000 in assets, and earns $75,000 per year from passive sources so she can spend her weeks playing bingo, getting her hair done at the beauty salon, and visiting friends.  Rose never made a lot of money in her lifetime.  She just paid cash, avoided debt and saved for the things she wanted.  She always had good clothes and a good car.  She certainly wasn’t a miser, by any means.  At the end of each month, she is left with roughly $5,000 in spendable discretionary cash because of how she structured her assets.  She could have had much more but, the truth is, she didn’t want to work.

The impression I get from your article, Elie, is that it sounds like you have no idea how to manage money.  Like, if managing money were art, you’d be finger painting.  You have more paint than 97% of the rest of the population but you just hurl it at a canvas, wasting the potential.  Maybe it’s not that bad but it certainly is how it sounded to me from the post you wrote.

You Willingly Chose to Live in One of the Most Expensive Places on the Planet

Apartment in Dallas Texas

If you lived somewhere like Dallas, Texas, the 9th largest city in the United States, and you put down a 20% down payment, your monthly mortgage payments for a 2,000 square foot apartment in a great part of town would only $2,050 per month, or 9.8% of your pre-tax income. In a few years, you could have it furnished, filled with the things you wanted, and then start buying up all of the cash generating assets in town - rental units, storage units, office buildings, dividend stocks, municipal bonds. By the time you were Michael Bloomberg's age, you would be rich. You could spend half of the year vacationing in the south of France and the other half on an island somewhere, living off the money generated by your holdings. But if you have zero assets, like you said, and creditors calling you, despite a $250,000 annual income, you have significant financial problems. Don't delude yourself because every day you waste is more compounding lost.

A big part of the problem is that you chose, and continue to choose, to live in one of the most expensive cities on the planet.  This is a free country.  You can do that.  But are the other 300,000,000 or so Americans who don’t live in Manhattan supposed to sympathize that the cost of living is too high at this point in your life?  Really?

I understand the New York cost complex intimately because, in fact, Aaron and I chose to move out of New York and New Jersey to Kansas City after graduating from college.  We calculated that the long-term compounding difference in our net worth based upon the cost savings alone would be sufficient that in our 30’s, if we wanted, we could buy a Park Avenue apartment and not think about it.  We’ve talked about someday returning to New York via a pied a tierre.  But that is because back here, renting a 700+ square foot office for a start-up in a nice building with Persian carpets, a great view, a fireplace, controlled access, and all utilities paid cost less than $1,000 per month (we know because that was our first office, which was dutifully dubbed “the pleasure palace”).

You see, like most rational people, we understood the power of compounding.  We are 52 years younger than Warren Buffett, so every $1 we earn, at 12% compounded (the average return for an American business on book value), we are really earning $365.52 by investing, rather than spending, it on an age-adjusted basis.  Every year that passes, money becomes less valuable to us because we have less time.  It sounds like you are shoveling your cash to landlords for rent, banks for student loans, and credit card companies for interest expense.

Short of a miracle, in 15 years, you will still be strapped and yet another batch of super-rich will move into New York, further driving up prices out of your range.  They will be people that built banks in the South, car washes in the North, hotels in the West, and tech start-ups in garages.  I mean, have you ever actually read the Forbes list and researched the people on it?  Even the New Yorkers mostly made their money from outside of New York!  They built their net worth and then, when they could afford it, lived in the city.

You Don’t Want to Be “Insulted” By Being Called Rich

You go on to say:

But don’t call me rich. Don’t insult me by putting my family and Michael Bloomberg’s family in the same freaking talking point. If you want to blow that “quarter of a million dollars a year” soundbite up the ass of a laid-off steelworker in Pittsburgh, fine. But you know damn well that $250K does not make one rich in this country.

Sorry, but on this one, I have to say it.  Bullsh*t, Elie.  Seriously.

Michael Bloomberg is almost 70 years old.  If your income is now $250,000, by structuring it with the right mix of retirement plans, SEP-IRA’s, etc., you could probably shove a good $80,000 per year aside, drastically lowering your tax bill.  If you lived somewhere more affordable, say Houston or Denver, you would still be able to afford an incredibly nice apartment or, if you preferred, a house in the suburbs.

I’m not sure how old you are, but let’s go with 35.  That gives you 35 years of compounding until you reach 70.  If you are perfectly mediocre in every way, you would earn 10% on your assets.  That means that you would have nearly $22 million in net worth by the time you were Bloomberg’s age.  You’d be earning $183,333 per month plus your existing salary – but let’s adjust it for 3% inflation – so you’d have the equivalent of $65,000 in monthly income today from your investments plus you’d still have the $20,833.33 income from your blog and your spouse’s paycheck (which would, presumably, be higher for inflation and promotions).

So, at Bloomberg’s age, you’d have monthly household income equivalent to $85,833 today – or more than $1,000,000 a year and the entire time you were building that net worth, you’d have still lived exponentially better than most of the United States, driving your Mercedes, working on your new iMac, attending concerts, eating at the best restaurants and supporting charities.

The problem is, you are like most classic “income statement affluent” people who are temporarily well off at one stage in their life but end up losing everything because you have no understanding of how money works.  You squander your seed corn rather than replanting it to harvest more in the future.

If someone who understood money took over your bank balance right now, within five years, you’d most likely be sleeping in silk, reviewing your portfolio, and cashing rental checks from the apartment buildings you own in Ohio.  You are clearly very smart.  I’m guessing your wife is very smart, too.  So the problem isn’t intelligence, it is knowledge.  You lack the data necessary to understand and process how capital, compounding, future value, present value and time value of money works.  If you learned the law, you can definitely learn those things, though, so it’s not a financial death sentence.

You know what makes me saddest (and most excited), though?  Based upon the future value compounding formulas, unless something changes in your life, it is mathematically probable that a middle class couple who saved and invested wisely for years will be able to write a check for the penthouse you always wanted, despite the fact that in the early years, when the compounding potential was greatest, you had far more raw capital than they could imagine.

P.S. On Taxes

Other than a flat-tax, which is my preferred mechanism, I would gladly give the biggest tax cut in history to the American population by slashing the payroll tax from 15.3% now to 2% and raising tax rates to 40% on income above $1,000,000 per year and to 45% on incomes above $3,000,000 per year, both of which should be pegged to inflation, or some comparable scheme.  I think the important thing is that the payroll tax has become the greatest hurdle for startups and small business owners to overcome.

If a small town worker decides to start a bakery to create local jobs, he or she will owe 15.3 cents for every $1 in profit before a single penny has been paid in income tax.  It is incredibly regressive.

  • Frat Man

    Went to Kroger this morning for a bagel. There was only one lane open, and the lady in front of me must have bought 200 items. When it was time to pay, she pulled out four or five cards, faced the cashier, and asked her to pick “the lucky one.”

    Ugh. At least she maintains a positive attitude I suppose…

    • http://www.joshuakennon.com Joshua Kennon

      Her response made me laugh – you’re right, at least she maintains a sense of humor. The only thing that upsets me is if she, like so many others, one day reaches a breaking point and insists that the free market capitalist system we have is what “enslaved her” when she herself willingly took those cards out of her purse.

  • Kwame

    I have only one thing to say , Elie Mystal seriuosly needs some financial eduaction.

  • Rexcfgbhhunyyhgf

    I like that you assume one’s salary would be the same in ( wherever) and NY (unlikely) and also ignoring the social and career impacts of not being in a major city for a professional career.

    • Joshua Kennon

      Since the post was tailored specifically to the legal field, many of the major law firms have offices in other major cities.  Working for the same firm, you would have the same salary and compensation benefits.  Texas was chosen due to its abundance of global corporations, billion-dollar fortunes, and the fact that half (50%) of the jobs created since the Great Recession ended have originated in the State.  It was appropriate for the specific scenario and I stand by it.

      As someone who lived in the New York City area for 5+ years, I still find it fairly amazing that people there don’t realize they are not, in fact, the center of the universe and represent a mere fraction of the American economy and population.  It’s a special sort of arrogance, I think.

    • Joshua Kennon

      Also, referring to cities such as Chicago, Houston, Dallas, Philadelphia, etc. as “not being a major city” when each of those metro areas have a population near or exceeding that of London, England is asinine.  The United States is more akin the entire European Union that it is a single nation.  For heaven’s sake, the population of St. Louis, Missouri exceeds that of Rome, Italy.  The population of Minneapolis-St.Paul is around that of Berlin, Germany.  The population of Seattle is equal to that of Madrid, Spain.  The population of Kansas City exceeds that of Zurich, Switzerland.  If you can’t become successful in an area like that, the problem isn’t the city, it’s your skills or temperament.

      • nyc

        good blog.

        you talk about earning 10% annually via passive cash flow on assets as if it is easy and doable for several years. ok, fine my personal business gets excellent returns but this is active management. 

        i think that 10% annually is an unrealistic expectation for most individuals. have you generated 10% passive compound growth for the past 15 years? in fact after inflation, i would say vast majority lose money annually. again i’m talking only passive cash flow not active. 

        • nyc

          repost, ignore

        • Joshua Kennon

          That number isn’t an accident. It is the 200+ year average return for businesses in the United States in the form of marketable securities (if you founded the company, the figure is higher because you buy in at book value and the average book value rate is around 11% to 12%, though that has been increasing over the past few decades as a result of a move to less capital intensive industries; e.g., software development today instead of railroads a century ago).

          Put more directly: Any simpleton, regardless of class or education, could have bought America, Inc. in the form of a basket of stocks, dollar cost averaged into it, reinvested the dividends, and earned a 10% to 11% return over the past 200 years despite bubbles and crashes. People don’t believe it anymore because many financial journalists are terrible at their job – they look at, say, the height of the dot-com bubble in 1999 and 2000 and say, “Look! Stock prices haven’t moved for the past ten years!” when that isn’t how actual human-beings invest. People, regular folks with jobs and paychecks, tend to take money, put it into a fund or buy stocks, and keep doing that on a regular basis. Reversion to the mean results in periods like the dot-com bubble being offset by periods like the post-September 11th recessions when equities were stupidly cheap.

          That return seemed reasonable since it is based on a history almost as old as the United States itself with little to indicate the situation had changed. I wouldn’t have used a higher figure based upon my own experience. (In my case, the performance of the start-up operating companies we began in college have vastly outperformed any other allocation decision we made. We turned a few thousand dollars in savings into an economic engine that, in a few short years, pays for houses, cars, vacations, funds retirement plans, and provides dividends to members to invest in other projects. That is on top of the captialized value of the business and the wages it pays certain of the shareholders involved in the day-to-day activities. That kind of result simply isn’t possible for John Smith on main street.)

          If your time period is 20+ years, it’s a decent baseline given current inflation rates. I should point out that the real number – the “magic” return we’re targeting – is a 6% to 7% net-of-inflation return on capital. That seems to be what humans find necessary to part with their savings for long periods of time. The only reason we call it 10% to 11% returns is because inflation has averaged 4% for the past century. If inflation were running, say, 15%, we would expect returns of 22% thereabouts for a rational investor. Notice the nominal rate changed, but the real gain in purchasing power didn’t. That’s our focus: Purchasing power. All that counts is how many cars, vacations, cheeseburgers, or shirts you can buy.

          So, inverting your question: If an investor is incapable of earning 6% to 7% in real, inflation-adjusted terms on his or her money over a 20+ year timeframe, he or she is not competent enough to be managing his or her family’s finances. The task should be outsourced to someone more suited for the responsibility.

          For many people, this can be accomplished by buying a basket of high-quality, reasonably priced assets such as stocks or real estate, and letting compounding do the heavy lifting. Most failures in this department are due to an inability to “sit on your ass”. If I recall correctly, Morningstar once did a research study when they found the average investor earned only 3% on capital despite the funds in which they were invested earning 10% over the long-run because investors don’t stick to a plan and buy regularly. When prices are rising, they buy. When prices are falling, they sell. It’s asinine. It makes no sense whatsoever.

          So, yeah. If the average return for equities and real estate has been 6% to 7% in real, inflation-adjusted dollars, someone who can’t be perfectly average by purchasing average assets and keeping costs low … it’s their own fault. They deserve subpar returns. We aren’t talking about rocket science. This type of portfolio would have no excitement and sit unnoticed for decades.

          Successful investing is more about temperament and behavior than intelligence or risk-taking.

        • HaroldCallahan

           You need to take into account income taxes as well as inflation. At $250k per year of income, one is not eligible for tax shelters such as IRAs.

        • Joshua Kennon

          There are a myriad of ways around that, like using equity indexed deferred variable annuities. If you can’t get it to $80k per year, you are doing it wrong.

        • HaroldCallahan

          I have a genuine question about this (not trying to argue or anything). I looked into setting one of these up at one point but decided it wasn’t worth it. Basically my understanding is that you deposit after-tax money, and your gains are tax-deferred until such time as you withdraw. The tax deferral is nice in some cases, but it’s nowhere near as nice as an IRA (where you can deduct contributions) or a Roth (where gains are tax-free). There are some complications arising from the insurance wrapper but that’s basically what I got from my accountant.

          In other words you’re still going to pay income tax on your gains, it’s just that you’ll pay them when you retire instead of right now. Crucially, all gains are (eventually) taxed as ordinary income instead of the potentially more favorable capital gains. The capital gains is the real killer: I’d rather pay 15% now than pay my marginal rate in 30 years.

          So I just don’t see how normal people can avoid taxes to the extent that you claim. Maybe I’m doing it wrong (and my accountant is too) in which case I’d really like to know.

        • Joshua Kennon

          I keep meaning to respond to this but I’ve been swamped this week.  It’s a really good question – the technical kind, which I love – and I haven’t forgotten about it … sorry for the delay.

  • Joshua Kennon

    You are correct in believing that I think a vast majority of people would benefit from John Bogle’s method.  If they didn’t want to own an index fund, I think most people could pick a handful of high quality companies – say General Electric, Procter & Gamble, Johnson & Johnson, The Coca-Cola Company, and Exxon Mobil – sign up for the direct stock purchase plan / dividend reinvestment plan, and have the same amount of money taken out of their checking account each month to buy shares, reinvest their dividends, and forget about it for 40 or 50 years and crush the returns most folks experience now by simply being and remaining “dumb money”.  

    In our case, blue chip stocks are always going to return less than the operating businesses.  But they are a nice augment; a way to inventory profits and earn a good return on capital with our excess cash flow that can’t be reinvested in the core activity.  

  • Joshua Kennon

    Agh!  I just realized I didn’t point you to the source data.  Here it is: The Ibbotson SBBI Classic Yearbook, now published by Morningstar Research.  FANTASTIC resource.  It tracks asset classes and other factors for much of the past century.  Inflation rates, Treasury bill rates, bond yields, earnings yields … it’s all there.  You can get it for only $175.00 per copy.  http://corporate.morningstar.com/ib/asp/subject.aspx?xmlfile=1414.xml

  • William

    Your definition of middle class is ridiculous. You may assert it means the exact middle quintile of annual income, but your definition is hardly going to be universally accepted. Middle class is a term that assumes a society broken into classes in which there are not only a lower and upper class but also one between them. The upper class could be 1% of the population, the lower class could be 97% and the middle class could be the remaining 2%. The middle class could also be the largest class and be constituted of those from the 20th percentile to the 95th. Middle class is a statement not of where one’s income falls in relation to the median income found in society or which arbitrary band of quintiles one falls into, but rather what lifestyle one has based on one’s income and wealth. An income of $250,000 is going to be middle class (admittedly upper middle class most, but not all, places) virtually anywhere in the US unless it is the income being received by someone who also enjoys a fair amount of wealth. The truth is that the upper class in this country is pretty much restricted to only a portion of the top 1%, below that is the upper echelon of the middle class.

    • http://www.joshuakennon.com/ Joshua Kennon

      You are exhibiting an interesting psychological belief that economists and academics have struggled with for decades in the United States: Nearly everyone, regardless of net worth, insists, despite all contrary evidence, that they are the middle class.

      There are a wide range of reasons, from deep seated anxiety at discovering one’s position is of privilege to denial about the state of the general economy, but the situation has been a thorn in the side of policy makers for a long time.

      Every reputable academic model, including the “big three” – Gilbert (2002), Beeghley (2004), and Thompson & Hickey (2005) define the upper class as beginning with monthly income of $35,000 to $42,500 and a college degree. The amount of opportunity and privilege at that level of household income are wildly disproportionate to those available to those available to virtually all other Americans.

      Despite this, the most recent studies coming out on the topic – in this case, by mutual fund giant Fidelity – show that people don’t being to “feel” rich until they have at least $7 to $8 million sitting around, despite the fact that at that point, they have at least one order of magnitude more money than the typical family. It’s a quirk of evolutionary biology. The people most likely to amass money do so because they misjudge the amount of money that is necessary or “normal”.

      Household income in the United States, and its resulting implications on class, are universally standard across most economic and academic disciplines. The data is quantifiable, like height or weight, not subjective, like beauty. If you’re making $21,000 per month in a world where the typical household is making 1/10th that amount, calling yourself middle class is self-deception. It’s a foolish way to behave.

      • William

        I’m not really questioning the psychology of self reporting. I agree contrary to all evidence the vast majority of Americans will self identify as middle class which may not be accurate (including those who are above and below it). I actually think you and I are not in disagreement on the upper class by very much. A monthly income of what you suggest gives one an annual income around the top 1%. I would have somewhat arbitrarily picked an annual income of $500K, but that’s close enough for gov’ment work. Where we disagree is in what the middle class is. You used the middle income quintile as your definition. But the question is one of class, not income quintiles. Look at another society, for instance. The middle income quintile in Mexico is not middle class, it is more in the middle of the poor. That country has a very small upper class, very small middle class and vast lower class(es). Its middle class is located quite high on the income scale if measured by percentile from median, but that is only because of the large number of lower class, not because they are not the middle class. This country has a much larger middle class than Mexico, but it is not magically fitted within the exact middle of income distribution. If you want to break the middle class into subgroups then no doubt the upper middle class where Elie Mystal is, but that doesn’t mean it isn’t middle class. For what it’s worth I stopped referring to myself as middle class a couple years ago, and that was probably a couple years after others would have found it believable. (I like this site by the way. I just happened upon it yesterday, but have bookmarked it to remember to come back.)

        • DD

          While I agree with most of your comments, this post suffers, not from a lack of data, but a basic flaw in assumptions – mainly, that skills are easily transferable in terms of geography. Living in a high-expense city is not necessarily an irrational choice. The fact is that some jobs simply do not exist (or are extremely limited) outside of those cities. As an attorney who practices in a particularly specialized area of tax law, I can tell you that the only places my job exists are DC, New York, and to a much much smaller extent Chicago. Neither of these cities are cheap. Working in a large firm, with offices in smaller cities, does not solve the issue because the majority of the work is done out of the offices in the major cities. I bet many attorneys who have sophisticated practices face the same problems. Additionally, your assumption that you would get the same salary/benefits firm-wide is wrong. Salaries, in fact, vary by geographic location (but you are generally right that smaller cities have higher salaries when accounting for cost of living).

          Given the fact major cities generally have more specialized jobs, the assumption that someone can start off in a smaller city and then move to a more expensive city later in life does not appear realistic – at least if you have to work. If you have been running a mom and pop legal practice in nowheresville, moving to New York to do the same is out of the question because that work simply won’t pay the bills. Not to mention the fact that not all legal licenses are readily transferable (i.e. you would have to take the bar again, etc.)

          You also ignore the effect of educational debt on people’s choices. Debt is not cost of living adjusted, and all but unavoidable for most people with JDs. So, for example, it may be more prudent to take a 160K job in a more expensive city than a $90K job in a less expensive city (a choice I was faced with) even though you would be better off in terms of life-style in the latter city. This is because, if you live a frugal life-style in the more expensive city, you will have more cash on hand on an after tax basis and you can use that cash to service your debt. In my case, taking the higher salary allowed me to pay several thousand dollars per month more than the minimum on my debt, while the alternative would have left me making only the minimum payments. I suspect a great number of lawyers, many of whom have debt in excess of $100K, have made similar choices.

          Finally, a major component of what you really seem to be saying is that people should chose their jobs based on cost of living more than desire, interest, ability, etc. That seems to be a bad case of the tail wagging the dog. Especially since the people who perform specialized and sophisticated jobs probably contribute more society on average.

        • derkaiser

          First of all, Elie Mystal (as he says in his blog) is a professional blogger. He doesn’t practice law anymore. As such, he can perform that profession anywhere in the world that has electricity and an internet connection. His wife is an attorney making something under $250,000. Again, those jobs can be had in any mid-size or smaller firm (or even solo) in literally any major or mid-size city in America. So Mr. Kennon is quite rightly calling Mystal to task for complaining about his ‘middle class’ status, when the only conceivable thing making him middle class is the fact that he’s chosen to live in one of the most expensive cities in the world.

          And the poster is not saying that people should chose their jobs based upon cost of living rather than desire. What he’s saying is if the job you choose is located in one of the most expensive places on the planet, don’t complain about living paycheck to paycheck even though your salary is greater than 90% of your countrymen. Mystal is not mere “middle class.” His family are upper middle-class earners who have chosen to spend a good portion of their (considerable) salary to live in a very desirable location like NYC. They could live in Omaha and have a large house, nice cars, and a healthy portfolio, or they can live in NYC in a small apartment. It’s their choice.

        • DD

          derkaiser, you are wrong for numerous reasons, the first being that you cannot make a $100,000 salary anywhere practicing as a lawyer. Even the government pay scale is COL adjusted, so that premise in plainly false on its face. And if you actually read above the law, for which Elie blogs, you would know that he does frequent work-related appearances in the NY/DC area, and he is the managing editor. So it would, in fact, be very difficult to do that job from “anywhere with electricity and internet.” You refute my point by side-stepping it. Certain high-paying jobs only exist in certain cities. There are very few people who could “choose” to be an international tax lawyer in in Boise, Idaho while making the same or higher cost-adjusted salary.

          And while we are on it, I can quibble with living in a high-cost city, by choice or not. The fact is that we living in a country that believes in progressive taxes, based on income. It is widely understood that a dollar has different purchasing power across the US. Thus, the quibble is that taxes should be inflation adjusted. That would bring some parity into this whole discussion.

        • Zaphod

          You can be a well to do lawyer anywhere. If, on the other hand you are in a very niche practice (and these exist outside of manhattan to be sure) then you better be being compensated for that niche expertise, or once again, it makes no sense whatsoever. If you justify your location due to a particular opportunity it presents you, that opportunity cost/value should be able to be demonstrated in your paycheck.

          The subject of the post doesnt seem to be doing anything so specialized that it cant be done anywhere, it is a choice. This is true 99% of the time. People can rationalize it all they want, but thats all it is, an exercise in self delusion. That doesnt mean you cant live in NYC if you want, but choices have consequences.

          They only make around 250k (just above an important tax break point), if they were smart they would make sure they could classify themselves as self employed, and if they werent paying all of their money for housing they could put 104k away in SEP-IRAs (52k each this year), you only have to get rich once right? Further, they could still do a backdoor roth, and use an hsa as a triple tax advantaged stealth IRA. This doesnt take into account write offs for his blog, insurance, and a lofty mortgage if they own.

  • zicococonut123445

    I think this is very well written, and also very true. Particularly the part about balance sheet v. income statement — there are many very wealthy people who live above their means, and that is an important take away.

    However, I disagree with the entire paragraph on location choices. Not everyone can just pick up and move out of their location for the sole purpose of spending less money on rent. Some people work in specialized fields and moving to Kansas City may not be an option. Additionally, in many areas, housing crisis are regional – not specific to a particular city. Therefore, it’s not as simple as suggesting that they move. Additionally, in those areas, the salaries have not increased in a manner that properly reflects the drastic increase in cost of living so even those people who are “balance sheet rich” may still not afford a basic standard of living. This has become drastic in certain areas of the country — just look up news about the Bay Area where protests, discrimination and physical assaults have become a daily activity for many. I would argue that the burden falls upon corporations, community leaders and politicians to support efforts so that employees make proper wages — rather than blame the employees themselves. For instance, the mayor of SF now has a program that provides loans of up to $200,000 for those who qualify simply to pay a down payment for a home. That is a lot of money, but unfortunately, that is what is required for even a basic one bedroom in that area today. This is particularly true for the areas of the country that have the highest places of job growth. For those who are looking for employment, they may have not have the option to move to a low-cost community because once they get there, they will not be able to find work. Just some thoughts to say that the author may not be looking at the whole picture either.