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The Poorest $500K Couple in New York?

Why making a lot of money doesn’t guarantee you’ll be rich

How could it be that a couple could make $500,000 a year and still feel poor?

That is the question a recent article on CNBC tried to answer. Taking a close look at the budget of a power-couple in New York, both high-paid attorneys, we see that though they make a lot of money, they have only $7,300 left over at the end of the year after all their expenses.

Here is the budget chart that is shared in the article:

The financial statement of a high income, low wealth person

This is clearly the budget of a middle-class mindset, which I’ve written about before:

Those in the middle class often have more income than expenses (as long they have that high paying job!). They might have a few investments, but they are not a daily focus. Instead, they contribute to a 401(k) they rarely pay attention to and maybe own a house.

The middle class use a budget as a tool to understand how much money they will have left over each month. They then reward themselves for having extra money, which they often use as “discretionary spending”. More often than not, they splurge on vacations, cars, electronics, or something that brings them pleasure—what I call doodads. In the process, they create liabilities but don’t invest in assets.

For those with a middle-class mindset, a budget serves as a tool to make sure you spend less than you make, but also know how much “fun” money can be spent. Yet the source of that money is always earned income from a salary rather than passive income from investments.

High income does not equal rich

Taking a look at the budget of this high-income couple reiterates what I’ve said for many years, making a lot of money does not make you rich. This couple loses their money to many of the traps those who do not have a rich mindset fall into.

The first thing you’ll notice is that they max out their 401k, sending $36,000 to what is probably a mutual fund that provides meager gains, if any at all—especially after the brokerage fees are paid.

The second thing you’ll notice is that they lose 40% of their income to taxes. Only poor and middle class people lose so much money to taxes. The rich know how to prevent taxes from stealing their wealth (see: “Why I Hope Donald Trump Paid $0 in Taxes”).

The third thing you’ll notice is that what is left is eaten up by a lot of liabilities: three vacations a year, a BMW 5 series and a Land Cruiser, a very large house payment, and a hefty food budget.

Finally, they live in one of the most expensive cities in the world, which doesn’t help either.

They make a lot of money, but they are far from rich.

Rich is not about what you make

Rich dad said, “Anyone can make a lot of money, but only the rich person keeps it.”

By this rich dad meant that being rich was more about mindset than about what you made. Being rich is about understanding how money works and how to make it work for you.

Rich dad was adamant that if you wanted to be rich you had to have both a plan to make a lot of money and a plan on how to keep that money. Because when you make a lot of money, you experience new problems that you may not be equipped to tackle unless you take it upon yourself to understand them. You have much higher taxes, have to manage money in multiple accounts, lose wealth to inflation, and face a lot more temptation to buy liabilities, thinking you deserve to treat yourself.

The simple starting point for being rich

Being rich is not rocket science. There are some simple rules you must follow though. The primary rule is to invest your money in cash-flowing assets, like real estate or business.

There are many advantages to investing in cash-flowing assets.

One, they protect you from the wealth-stealing forces of taxes and inflation. This is because the income made from assets is passive income, which is the lowest taxed income.

Two, you can use expenses and phantom income like depreciation to lower your tax bill. In many cases I pay nothing in taxes at all through my investments.

Three, assets can act as hedges against inflation, rising in value as prices rise in the economy—something savings can’t do.

Four, you can use the continual income from your cash-flowing assets to invest in even more assets, as well as to fund your liabilities, like new cars and vacations.

Five, you’re in control a lot more than if you rely on a paycheck every month.

The rich mindset makes all the difference

Looking back at the power-couple from New York, you can easily imagine how different their lives would look if they took the $36,000 a year they invested in 401k’s and instead used that money over the years to invest in cash-flowing assets that provided these benefits.

They would severely reduce their $185,600 tax bill. They would create additional income on top of their large salaries. They could write off their vacations if they used them to also look for more investments. And that’s just the beginning.

In short, their lives would be completely transformed. A rich mindset makes all the difference.

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