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Wealth and Affluence

6 Tips for Using New Disposable Income

This article was written by in Wealth and Affluence. 14 comments.


Recently, an Ask Metafilter reader announced he is earning enough money to feel rich, with disposable income for the first time in his life. He probably meant discretionary income. If you want to get technical, to have disposable income is everything you earn minus required tax payments. Everyone has disposable income. Discretionary income, however, is what you have left of your income after you subtract your taxes and your necessary expenses and obligations.

I remember having discretionary income for the first time. For a few years out of college, I worked for a non-profit organization. It was emotionally rewarding — occasionally — but it was a financial disaster. I lived a great distance from the job, and I worked constantly, including weekends. I was exhausted from work and travel, but sleep outside of work was not part of the organization’s philosophy. It’s no surprise that most employees lasted no more than a year or two. I beat the odds by lasting three, and my wallet paid the price.

Even after reducing my rent and living closer to the job, I wasn’t able to afford my necessities. The monthly student loan payments didn’t help. Eventually I left the job, spent some time rethinking my strategy for making a living, and began working at a large insurance company accessible by public transportation. It wasn’t a fulfilling job, but I got to work with some smart people, although for a short time.

With my housing costs low and a much better income, I could do more than just pay my taxes, rent, and debt payments. I could save money for retirement and for shorter-term goals, something I wasn’t able to consider while working for the non-profit, going deeper into credit card debt each month just for my necessities. I could use savings to enjoy my life outside of work, and though I still worked much more than 40 hours a week at the new job — overtime pay was wonderful — I could make time for myself.

When you finally have discretionary income, the world opens its options to you. With a growing balance sheet each month, like the growth I was able to show on Consumerism Commentary every month starting in 2003, you start to feel wealthy. After all, if you’re growing your savings, you are doing better than a good portion of the American public.

Here are some suggestions for what to think about once you have discretionary income.

1. Don’t increase your spending to meet your income.

There is going to be a strong desire to increase your spending on unnecessary things once you see that you have money left over each month. And if your goal is to “feel rich,” this increase in spending is tempting. You’ve worked hard, so you deserve some luxuries, that’s certain. Resist the temptation to spend more, and don’t allow your expenses to creep, at least not at first. You’ll need to make some choices first.

Although you might have done a good job of spending less than you earn, and there might be more headroom for doing the same even after increasing your spending to match your income, your goal should be financial independence, and the path to reach that goal is to use your income to build wealth faster. That can’t happen if you’re spending away your increased income.

Discretionary income opens an opportunity to create a new budget, but consider sticking with a budget even if it feels like you don’t need to. Look at the budget categories that might have been limited previously, like charitable giving. You might have more flexibility before you begin thinking about adjusting your outward appearance to match your feelings of new wealth.

2. Re-evaluate your savings.

It’s one thing to have income left over each month after paying your taxes, debt, and necessary expenses like housing, transportation to work, and food. It’s something much better to have income left over after the same as well as transferring enough into savings. You might find that your discretionary income disappears after putting away $400 a month into savings.

Once you find yourself with a growing net worth each month, determine how much you need to put aside for your different financial targets. If your employer offers a retirement plan, contribute as much as possible in order to take advantage of the full employer matching contribution. If the company offers a dollar-for-dollar match of the first six percent of your salary, for example, try to put aside six percent into your 401(k). You won’t miss the money as much as you think you will.

Put aside money for each shorter-term goal you have. If you want to buy a new house, put aside a healthy amount each month into a so-called high-yield savings account. If you’re aiming for financial independence earlier than the traditional retirement age, you’ll need to save and invest aggressively, and that can take a big portion of your discretionary income.

Everything else is just superficial. Savings won’t make you feel rich unless you like to look at your balance sheet each month. While my income and wealth was growing, I liked that. You might like it, too. Having discretionary income after savings opens some opportunities for changing your appearance. It’s superficial, but that doesn’t mean that it’s bad. For most people, it’s more about confidence. If you want to project an air of success, society expects you to look the part. Unfortunately, people judge others on appearance, and while we shouldn’t worry about what other people think, there’s something to be said for the confidence some people gain when they feel that other people are judging them well. Confidence breeds more confidence, and that can lead to success. It’s a tenuous relationship, but feeling better about yourself — the psychology of identity — can be just as important as reality.

3. Enhance your environment.

When I started earning a consistent amount of money outside of my day job, I decided to move to a new location. I was sick of living in a tiny apartment, though if I were to compare it with a New York City apartment or dwellings in other parts of the world, it wouldn’t really be tiny. It was a noisy area, with neighbors who were not considerate of each other late at night. I moved somewhere where I was more comfortable and had more room. The rent was also about 40 percent more expensive.

Though not at first, I added things that made my life more comfortable:

  • A new, much more comfortable mattress.
  • A high-definition television — I was a late adopter with this technology, having dealt with an inherited television and a $20 low-quality DVD player.
  • Related to the above, I subscribed to cable after may years without the service. Many super-motivated, super-productive people despise television, but I seek out high quality entertainment. There have been a few good options over the years.

There are still changes I haven’t made since finding myself with discretionary income. Except for in the bedroom where I upgraded my furniture, I have mostly the same items I’ve had for a decade. That includes a cheap, uncomfortable couch from IKEA and a cheap coffee table for my living room. The desk I work on is a child’s desk, and I’m not even sure where I got it from or why I have it.

What you enhance is related to your interests. If you spend a lot of time cooking and enjoy it, upgrade your kitchen appliances and implements, as someone on the Ask Metafilter thread suggests.

4. Enhance your image.

There’s usually no need to spend money on designer clothing, but dressing well can help inspire the confidence you want. I’ve never been comfortable in suits, so I’m happy that type of wardrobe was never all that necessary for me. It wasn’t until recently I decided to visit a tailor and have a suit made for me that fits my body the way a suit is supposed to fit. Wearing the custom-made suit made a significant difference in the way I felt and in how I looked.

I still have my 2004 Honda Civic, purchased when I was beginning to be able to afford a car payment (which I eliminated as quickly as possible). It’s a fine car, but it doesn’t inspire an impression of wealth. Personally, I’m not concerned about that, but those for whom image is important or who have a love of driving, being able to afford a nicer car might help you feel successful. I could have spent the cost of the new Honda Civic, $16,000, on a used fancier car, but reliability was important to me at the time, as I could have no car-related excuses for getting to my job on time. I opted for reliability and long-term ownership. But when you have income to spare, more options are available.

5. Make life easier for yourself.

With discretionary income, I was able to solve another problem about my environment. My living space wasn’t always tidy, and I didn’t like dusting, vacuuming, and cleaning the apartment. The fact that I had a cat made these tasks necessary, but I was building a business, and I didn’t want to spend my time on household chores. I hired a maid service to visit every other week to take care of these tasks.

I’m much happier with my environment because of this change. There may be other tasks you can outsource to increase your quality of life. The purpose may be so you have time to work more or because you would just like to spend more of the time you do have outside of work on things that make you happy.

6. Explore your other interests.

For several years, I’ve been enjoying photography. That’s somewhat simple to do without discretionary income. You can buy an inexpensive digital camera, and even if you need to save money for a few months, it’s an accessible goal, and you don’t need to spend a lot of money. I would have been fine with this, but discretionary income has allowed me to take photography classes with an excellent local photographer and to upgrade my equipment to be similar to what professionals use (even if occasionally buying used equipment to save money).

Doing so has opened new opportunities for me. My work is currently on exhibition at the local arts council, and I may be able to sell limited edition prints of my work.

What new opportunities for increasing your feeling of wealth or your confidence has discretionary or disposable income opened for you? What are you looking to do once you do have discretionary income?

Photo: euthman
Ask MetaFilter

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The Poverty Rate Remained Flat Last Year

This article was written by in Wealth and Affluence. 3 comments.

In 2011, the percentage of Americans living in poverty declined from 15.1 percent to 15.0 percent according to the census figures released within the last few days. According to the Census Bureau, this is not a statistically significant change, meaning the number of Americans in poverty, 46.2 million, is roughly the same as in 2010.

Whether you consider the 10 basis point decrease in the rate of poverty over one year an actual decrease or not significant enough to make a headline, the news that the poverty rate didn’t increase is a positive development. Poverty had been increasing each year until these latest results. Keep in mind, though, that the poverty threshold increased. A family of four including two children earning $22,800 in 2010 would not have been considered living in poverty, while in 2011 the same family with the same income would. Inflation plays a role, and in the middle class, wages might follow inflation, but in or close to poverty, they don’t.

So taking inflation into account, the rate of poverty should have increased, with a higher threshold to overcome and stagnant wages in the lowest working class, but the rate didn’t.

I wouldn’t get too excited about the potential eradication of poverty in the United States, however. We have a long way to go. Dr. Cornel West and Tavis Smiley, crusaders for the impoverished, want society to focus on 150 million people in the United States, the poor, new poor, or near poor. Those living middle-class-like lives, paycheck-to-paycheck, where one medical emergency or job loss could send them into financial despair are included in this larger number.

Even if you don’t accept the idea that poverty should be the major economic issue deserving policy attention moving forward, there is little doubt that middle-income jobs are disappearing, being replaced by low-income jobs, forcing a good portion of Americans who aren’t ignoring their situation to re-think their long-term plans for financial independence. The new report from the census shows the Gini index, designed to measure income inequality, showed a significant annual increase for the first time since 1993, but overall since 1993, the Gini index has increased 5.2 percent. This puts numbers behind the idea that the middle class is shrinking and the poor and the wealthy are further separated.

With this kind of separation, the rich and the poor might as well live on different planets. Neither rich presidential candidate can personally relate to the difficulties many in this country face every day, but modern American democracy is designed in such a way that the only way to reach the highest government office is to have a significant amount of wealth.

Comparing these statistics to other countries around the world, the United States is not the worst in terms of income equality, but it isn’t very good. The opposite of income inequality is not necessarily a lack of capitalistic opportunity; a country can have a strong entrepreneurial class without ignoring its impoverished.

How important is poverty and income inequality to you for this election and the next century?

United States Department of Commerce and Census Bureau [pdf]

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You Can’t Take It With You

This article was written by in Featured, Personal Development, Wealth and Affluence. 10 comments.

According to a recent study by the National Bureau for Economic Research, 46.1 percent of retirees die with a net worth of less than $10,000.

There are two ways to achieve this outcome. The first is for those with a comfortable level of wealth in retirement. Wealth does an individual no good after he or she is dead, and some people would feel content with distributing their wealth in their last few years. The second path is more common in the study’s findings. Most people simply have a low level of wealth going into retirement, and with a lack of strong income-generating opportunities, wealth continues at the same level or is further depleted.

That isn’t to say that everyone who dies with less than $10,000 to their names are struggling during retirement. Social securities, pensions, and proceeds from retirement savings can cover living expenses, and as one ages, there is less of a need to save for long-term personal goals. A low level of savings puts one at danger for financial trouble in the event of an emergency, however, and certain types of emergencies, like medical bills, might be more common past a certain age.

Retirees without families to pass on inheritances might not see any purpose to dying with wealth, and would therefore endeavor to give much of it away. From a tax perspective, it might be better to donate a significant amount to charity before death, taking advantage of an income tax break in addition to a reduction of the value of the estate, than to bequest the same amount. That depends on earning enough income during retirement for the tax break to have an effect, and it requires having enough assets in the estate for a reduction in value to make a tax difference. Estate taxes always seem to be in flux, but in 2012, the first $5,125,000 in an estate is exempt from tax.

And that’s not the retiree this study is referring to. The study is focusing on those with $10,000 or less, ruling out this particular path of reducing wealth — perhaps. It doesn’t rule out the possibility, however, of individuals, perhaps those who are comfortable but do not consider themselves wealthy, spending down or giving away their wealth in order to avoid the rest of the world’s hassles with dealing with an estate.

Perhaps an indicator that most of the study participants are in fact not in this category — that those dying with $10,000 or less in net worth are those who did not have wealth and choose to give it away in their last days, weeks, months or years — is the finding that health is the poorest among these individuals. Conversely, wealth at the end of retirement has high correlations to other aspects of living. Those with higher levels of net worth live longer. That should be strong enough motivation to build wealth throughout one’s lifetime.

People who were never married have a higher probability of dying with less than $10,000. The same is true for those who are divorced. The study doesn’t claim there is a cause and effect relationships between marriage and wealth, but the correlation is important. The same factors might produce both results — such as a confident personality.

The study goes on to evaluate retirees at death based on three pathways. One-person households are identified as those who were never married, two-person to one-person households are retirees whose spouse had previous died, and two-person households are those where the spouse survives past the person in the study. The results show that the spouse who dies first generally dies with more wealth and better health, and for the surviving spouse, income, wealth, and health drop off quickly.

While this new study looks at wealth at the end of retirement (that is, death), most prior studies evaluated a retiree’s wealth at the beginning of this period. There’s a good reason for the ex ante analysis. A retiree’s financial condition at the onset of retirement, the choices made based on that condition, and the situations that affect that starting position determine how one lives one’s life in retirement.

The ex post analysis, where the quality of life in retirement is determined by the final outcome — wealth at the time of death — doesn’t reveal as much without context that reveals more information about the path to $10,000 or less. That isn’t to say the study isn’t relevant or interesting; it is, if just by virtue of being a different way to look at the overall picture of retirement in the United States.

There may be a few things to take away from this study pertaining to the correlation between wealth at the end of retirement and quality of life, but it also reminds me of my core philosophy of building wealth. A high net worth is not a real goal. Money is meaningless in life except for what it can be used for. Accumulating wealth is important so you have a better chance of meeting real life goals without interference.

People, but not everyone, whom I’ve asked about their personal life goals have said to me that their primary purpose in life is to die with $1 million (or $10 million, or $100 million). This isn’t a line of thinking that I would recomment. Sure, you can do a lot of good with a large sum of money in your estate, if that money goes to worthy causes or even to your relatives, but those activities — what you do with the money, not the collection of the money itself — should be defined as goals.

What this study says to me is that there are not enough people making lofty goals that require money, perhaps focusing on nothing more than the comfortability of their own selves and families, that they are unfortunately not reaching their goals, or, possibly in a few cases, are reaching their goals and no longer see a need for the accumulation of wealth.

Photo: HooLengSiong
National Bureau for Economic Research, via MarketWatch/Yahoo

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Should Rich Families Leave Their Wealth to Their Children?

This article was written by in Featured, Wealth and Affluence. 26 comments.

One of the great promises of the United States of America is economic mobility. In the Land of Opportunity, in theory, you can design your life’s economic fate. Immigrants from Europe looked forward to leaving economic and religious oppression in their past, as they came to the land that is or would become the United States of America. No longer would you need to be a first-born male in a wealthy family, in many cases descended from nobility, it order to inherit property and financial security.

Putting one caste system behind, however, simply made room for a new system. Mobility upwards through socioeconomic classes is not as simple was holding down a good job for a lifetime, it requires education, ingenuity, and the ability to break generational economic cycles that keep families from achieving financial independence over the long-term. These can be tough lessons, and some people who have succeeded in their efforts to build wealth on their own want their children to learn the same lessons.

CashBank of America’s private wealth division, U.S. Trust, recently reported the results of a survey showing that 32% of Americans whose wealth categorizes them as “high net worth” or above — usually those with investable assets of $1 million or more — consider it unimportant for wealthy parents to leave inheritances for their children. Keep in mind that this particular survey doesn’t measure whether wealthy individuals do leave an inheritance, just people’s opinions about the relative importance of doing so or their plans. Plans may change. To illustrate the former point, I might think that watching television carries a low level of relative importance in my life, but I do it anyway.

Perhaps parents want life to be easy for their children, but not too easy. I would like for my (future, hypothetical) children to have every opportunity available for them to succeed on their own, and I’m willing to support them financially to make that possible, but the goal should be for them to live a life of their own without falling back on their parents (that is, me) as an adult unless in an emergency. Teaching someone to be independent is one of the best lessons you can give.

For those not leaving money to children, a majority of those surveyed believe that each generation should build their own wealth. This brings to mind there may be two interpretations of the American Dream for prosperity. On one hand, the opportunities provided to all citizens of this country relatively equally provide a chance for people with a variety of economic backgrounds to thrive. One benefit of thriving is to move from the class in which poverty was an inherited trait to the class in which wealth would be an inherited trait. Those who interpret the American Dream as a post-class ideal are comfortable with a reset button for each generation in the family, giving a fresh chance for each child to economically thrive or wither.

The latter philosophy seems to be followed by the majority of survey respondents who say it is up to each generation to build its own financial independence, but I am willing to argue that those who have the capability will give that generation as much of an advantage as possible while they are still impressionable children.

A quarter of the respondents plan to donate wealth to charity. Whether altruism exists or not is a question for another day, but I am certain that tax advantages for charitable donations play a significant role in this decision. When it comes to estate taxes, the heirs pay tax on the money they receive, so this is an advantage that isn’t borne while the progenitor is alive. The wealthy individual, though, who contributes charity during his or her lifetime, certainly benefits from the tax advantages.

Another quarter of respondents simply want to use the money themselves.

How is it important for your children to succeed financially as adults without help from your estate — whether small or large? Does your opinion change as your children grow older and begin to build their own wealth before you make decisions surrounding your (real or potential) estate? Given two children, one who has succeeded on his or her own and another who may have succeeded but chose a less lucrative life path, would you treat each child differently in terms of your estate plan?

Photo: JMR_Photography
CNN Money

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Family Net Worth Down Significantly After Recession

by Luke Landes
Family Net Worth

The Federal Reserve’s survey of family finances in 2010, released recently, provides a picture of how devastating the recession has been to families’ financial conditions. Family income and net worth both declined from 2007 to 2010 across all slices of demographics, but the decline in net worth was much sharper. The Federal Reserve’s report on ... Continue reading this article…

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One Million Dollars Isn’t What It Used to Be

by Luke Landes
Scrooge McDuck

There was a time the word “millionaire” carried cachet. According to the Oxford English Dictionary, the word was first used in French in the early eighteenth century and in English nearly a century later. Regardless of your station in French society in 1719, you would recognize a net worth of one million livres being notable. ... Continue reading this article…

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Get to Work If You Want to Be Rich

by Luke Landes
Movie marquee

How much time do you spend in front of the television, socializing with friends, or watching movies? I freely admit that I spend too much time watching television. There are certain television programs that entertain me, and particularly during stressful times in my life, I need some type of outlet that makes me laugh, raising ... Continue reading this article…

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The Rich and the Rest of Us

by Luke Landes
Cornel West and Tavis Smiley

Dr. Cornel West is a Princeton University professor and author. Tavis Smiley is a television and radio talk show host and author as well. The two have known each other for a long time, and last year they toured the country to hear from citizens and talk about the issue of poverty in America. After ... Continue reading this article…

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Most Wealthy Individuals Earned, Not Inherited, Their Wealth

by Luke Landes

When I first read The Millionaire Next Door by Thomas Stanley and William Danko, it didn’t inspire me. It’s not that I disagreed with the authors, but I found the book uninteresting. It was one of the first financial books I read after beginning Consumerism Commentary, and it came highly recommended from readers here and ... Continue reading this article…

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Millennials Want to Be Rich More Than Anything

by Luke Landes
Dollar

Since 1966, the Higher Education Research Institute has been conducting a study of first-year college students to determine personal goals and values. This collection of data has offered research a chance to see how priorities change over the years, and there are striking generational differences in the results. Recent research at San Diego State University ... Continue reading this article…

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How Rich Are the Presidential Candidates?

by Luke Landes
Mitt Romney

When politicians are campaigning, some try to reinforce the idea that they are similar to most Americans. Candidates for President of the United States try to avoid being labeled as elitist, because some sort of connection and kinship with their constituency is important for winning the favor of voters who aren’t already entrenched with a ... Continue reading this article…

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Wealth Gap: Young Vs. Old

by Luke Landes
First Base

The wealth gap is growing, and if the Occupy Wall Street and its satellite protests are any indication, those not within the top one percent of income earners are not happy with their circumstances or the policies that help foster the wealth of those at the top. It’s been called class warfare, but there are ... Continue reading this article…

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Steve Jobs: The Billionaire Next Door

by Luke Landes
Steve Jobs

Steve Jobs may not have been as wealthy as his arch-nemesis Bill Gates, but after his successes with Apple and Pixar, he was one of the world’s richest men. Forbes recently listed Jobs as 39th on the Forbes 400, a list of the richest people in America, with a net worth of $7 billion. The ... Continue reading this article…

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When People Get Rich Quickly: Lessons from Michael Vick’s Bankruptcy

by Luke Landes

A typical professional athlete may be a prime example of the situation in which an individual might find himself suddenly wealthy. The idea that a person could consider himself middle class or lower one day and wealthy the next is a recipe for financial disaster. It’s easy to look at athletes because their trials and ... Continue reading this article…

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Get Rich By Thinking About Being Rich

by Luke Landes

In her new book, Delusions of Gender: How Our Minds, Society, and Neurosexism Create Difference, the author, Cordelia Fine cites studies that show how our lives are affected directly by the labels we give ourselves. I’m not interested in the strictly gender-related aspects of this discussion, at least not for Consumerism Commentary, but I am ... Continue reading this article…

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Last Year: Return of the Millionaires

by Luke Landes
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According to the latest World Wealth Report, a study designed by Merrill Lynch Wealth Management, last year was a good year for high net-worth individuals (HNWIs), people with more than $1 million in investable assets. After a few years of lagging due to the global recession, the number of millionaires worldwide has climbed past the ... Continue reading this article…

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How Much Money Do You Need to Feel Wealthy?

by Luke Landes
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Last week, I wrote about a study that evaluates the most important issues for wealthy people, and a new study released recently, sponsored by Fidelity, also takes a look at the attitudes of the super-rich. If I were to have $1 million in investible assets — the value of what I have available to invest ... Continue reading this article…

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The Worries and Concerns of the Super Rich

by Luke Landes

A Boston College study recently looked at the community of the “super rich,” defined in this case as households with a net worth above $25 million. The purpose was to determine whether wealth, or more specifically, absolute financial security, resulted in fulfillment. There have been numerous studies on wealth and happiness, and often, the results ... Continue reading this article…

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When Did I Become a Millionaire?

by Luke Landes
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At some point within the past couple of years, I became a millionaire. There was no party, no celebration. In fact, it was clearly a non-event, considering I have no idea when it might have happened. If you’ve been tracking my financial progress monthly with me, you may be a little confused. After all, my ... Continue reading this article…

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How To Lose $10 Million Fast

by Luke Landes
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On Thanksgiving, the New York Times published a story about a man who had a check for $14 million ten years ago — $10 million after taxes — and who now has little to his name (Nick Martin). It’s not the sort of uplifting, family-focused feature article you usually see around the holidays, but people ... Continue reading this article…

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