Over lunch, a friend mentioned to me that she and her husband—both full-time professionals—still feel like they’re living paycheck to paycheck, despite pulling in more than $200,000 in combined annual income.
A little digging revealed why: My friend and her husband are doing an excellent job saving money, planning for the future, building wealth—and they have zero debt. Once they’ve covered the big bills (rent, child care, food, car), and socked away their savings (emergency, retirement, a down payment on a house) they are, in fact, living paycheck-to-paycheck.
So why aren’t they celebrating their economic success? Building stability in a down economy while living in an overpriced urban area isn’t a snooze in a hammock, after all.
How the 1% really live
Wealth is suffering from a case of mistaken identity. Despite the popularity of books like “The Millionaire Next Door” and “The Middle Class Millionaire,” which portray the thrifty, hard-working habits of the wealthy, most people want to believe that being rich means having a lot of money to throw around. (At one point my friend even said, “I can’t believe I still don’t get to buy whatever I want.”)
That’s because “living paycheck-to-paycheck” has become the designated phrase for folks who are broke, who can’t manage their money. Just a few months ago, a survey on how little most Americans have saved was featured with the headline: “76% of Americans are living paycheck-to-paycheck.” To be sure, there has been a very real recession that has knocked out the savings of millions of American families. But there is a also a perception problem happening.
Words fail us
Many people do live paycheck-to-paycheck—not because they’re flat-out broke, but because they’ve wisely allocated their income into all the necessary buckets.
Yet we don’t have a word or a phrase that means: “Hey, I’m living within my means, I don’t live high on the hog, but I’m super secure, I enjoy life, and boy, do I sleep well at night.”
Rich has become code for “I’ve got bling, and I’m headed for the cover of Fortune.”
Wealthy is the stodgier, old-money version of rich: “I’ve got megabucks and can spend whatever I want.”
Upper middle-class has come to represent white-collar professionals who struggle to live on big salaries in big houses or in expensive housing markets.
Middle-class implies you’re on a budget, feeding your kids tuna casserole.
Dare to not compare
In reality, living within your means (and living well, within your means), should feel a lot more successful than it does, but unfortunately we’re creatures of comparisons.
As we wrote about in a recent blog post, happiness is not related to a set level of spending, but rather positive changes upward every year. It is about feeling better off relative to the year before. And also feeling a little better off compared to your neighbors.
Economist John Maynard Keynes believed that people viewed their income in absolute terms: $100,000 in income provides X amount in consumption and savings. But James Duesenberry introduced the relative income hypothesis: that people view consumption and saving relative to others around them. Here’s a good summary of the two theories.
In short, because you compare your standard of living to those around you, those comparisons can make you anxious (like my friend) or envious—or sometimes foolish, if you try to keep up with the Joneses, and put yourself behind.
It’s about finding the right things to compare your own finances against. You can’t avoid the Joneses, or Fortune, but you can benchmark yourself against peers who share your habits and values.
There’s no question that my friend is a wealthy woman. She only has to see it that way.