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

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 smart guy.  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

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 who 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

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 might 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.  As I said, you are clearly smart.  I’m guessing your wife is 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)?  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, 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.

Update: Several years ago, I placed this article in the site’s private archives.  However, on 05/20/2019, it was requested that I bring it back as part of a project that I’m doing in my spare time in which I restore access to old posts that have some kind of educational, academic, or entertainment value.  This project is a gift to the community.  I’m doing it because of the fact that many of you have expressed how much some of these old articles and essays meant to you in your own journey.  I don’t want to take them away from you.

That said, reading this almost a decade after I wrote it, I once again find it interesting how much I, personally, have grown and changed in the intervening period.

I continue to believe that an income of $20,833 per month at the time – which, today, in inflation-adjusted terms is nearly $24,400 per month – cannot by any stretch of the imagination be called “middle class”.  If a person chooses to live in a place like New York City on such an income – and it has only grown more expensive in the past (almost) ten years – yes, they may find their budget tighter than it might have been in another city elsewhere in the United States.  However, they have chosen to buy, or rent, a luxury product.  It would be like someone leasing a Bentley and insisting they are poor because they don’t have much disposable cash remaining at the end of the month.  A person living in New York City has the ability to walk out their door and access world class art, music, culture, food, libraries, shopping, and a host of other enriching experiences that are not available to a vast percentage of the nation.  That level of disposable income exceeds, by a material degree, the income experienced by a vast majority of all humans who have ever existed since the dawn of mankind, including nearly all humans on planet Earth today.  Properly managed, over a long enough career, a person with that level of cash generating power should have no problem retiring debt-free and a multi-millionaire.  Absent some fairly remote-probability events, such as a catastrophic medical emergency during a period of non-coverage, if they don’t, it is a result of personal values and/or personal failure arising from a character flaw.  (For example, even in the case of remote-probability events such as a medical emergency, the asset protection mechanisms present in most tax-shelters, such as ERISA retirement plans, should provide certain bankruptcy protections that might still make it possible to throw oneself at the mercy of the courts while retaining quite a bit of personal capital to generate passive income post-reorganization; a discussion that would need to involve a highly-qualified attorney licensed to practice law in the jurisdiction in question and something that is far beyond the scope of our current discussion.)

At its core, a life well-lived requires taking responsibility for your choices, particularly regarding your two buckets.  Over time, as your decisions build upon themselves, your life begins to reflect those choices.  In a very real sense, you are a sculptor and each time you make a choice, you are setting, and hammering, your chisel to the block of marble that is your life.  This means that absent the aforementioned low-probability events, for most people, as the years and decades pass, your life begins to reflect what you deserve; your relationship with your friends and family, your investment portfolio, your career, your knowledge, your body, your experiences.  These things, generally speaking, are a function of causality.  This is one of the happiest and most empowering messages you can ever hear because it means if you don’t like where you are, start making different choices.  The power to choose is the power to shape your destiny.

Choices come with opportunity costs.  Trade-offs are nearly always required.  Deal with that reality as it is.  You have to look at your present reality as it is and stop making excuses for yourself.  Accept the past choices you’ve made.  If you don’t like them, don’t whine about it.  Forgive yourself.  Move on.  Make different choices.  Nobody is coming to save you.  Nobody else can do the work.  This is all you.  If you don’t fix it, the world will be perfectly content to let you squander your life and die in misery.  Suck it up.  Get over it.

I don’t say these things to be unkind.  I say them because there are a few of you who will read what I write, take it to heart, and realize you need to make different choices.  As your life, over the years, begins to reflect those better choices, it can mean greater happiness and freedom; dividends that far exceed the momentary cost of feeling bad about a message you don’t want to hear.  I want that for you.  I want you to love your life.  I want you to love how you spend your time and the people with whom you spend it.  I want you to love your career.  I don’t want you to have to worry about financial stress.  If you still aren’t managing your economic affairs well by the time you earn $24,400 per month in 2019-inflation-adjusted U.S. dollars, it’s time for a financial intervention because something has gone horribly wrong.  People have a habit of hearing what they want so it’s important to be forceful.  If it results in a course-correction, the windfall can be extraordinary.  I care more about you getting what you want, and being happy in the long-run, than you liking me.