What if I told you that you could make several hundred thousand dollars a year and not be considered wealthy?
Many families wish that they had a household income of six figures. But wealth is very different from income. And having a large household income doesn’t automatically make you wealthy. That is, there isn’t one magical annual income number where you suddenly move from living comfortably to being wealthy.
Not only is wealth subjective—the idea of having $10,000 in your bank account is something viewed in many different ways, ranging from feeling rich to worrying you’re on the brink of bankruptcy—but its foundation is tied more to what you do with your money than how much you make.
To illustrate exactly how the circumstances of how you spend and invest your money change your financial picture, I’d like to introduce you to 3 fictional families: The “Splurging” Spellmans, the “Balanced” Bennetts, and the “Frugal” Franklins.
Coincidentally, the three families are, in many ways, living parallel lives with astonishing similarities in their situations.
Let’s take a look at how these three families compare financially:
Steve (30) & Sarah (30); Children: Sienna (3) and Simon (newborn)
Bill (30) & Brittany (30); Children: Bobby (3) and Briana (newborn)
Fred (30) & Francine (30); Children: Floyd (3) and Freida (newborn)
For the first several years, the Spellmans struggle to live comfortably given their large housing payments. They love their new, big house, but home maintenance and upkeep are expensive given the size of their home and they are also struggling to cover the costs of childcare. They end up taking on about $25,000 of debt in this first year of home ownership.
The Spellmans are confused and frustrated. They make a lot of money and readily qualified for their very large mortgage, yet money feels tight month to month. Steve and Sarah both work full-time, and they would love to hire a nanny rather than send their kids to daycare. They’d also like to buy nicer cars and take fancier vacations. Given their level of income they feel they should be able to accomplish all of these.
Fortunately, after a few years, their incomes increase with inflation while their large mortgage payment stays flat, actually decreasing relative to inflation. Eventually, they pay off all of their debt (aside from their mortgage) and are able to live within their means. They spend all of their after-tax income but don’t worry about that too much because of their job-based retirement accounts. They are setting aside 5% of their income into their 401(k) accounts, and their employers are contributing another 5%. So that gets them to the 10% target they’ve been hearing about.
As they’re saving for retirement through their jobs, the Spellmans are simultaneously building equity in their very expensive house, which is great, right? They’re no longer taking on debt, except to pay for their kids’ college—because they didn’t invest money for Sienna’s and Simon’s college expenses ahead of time. But that’s totally normal, isn’t it?
Once their kids graduate college, they end up having more and more money to spend each month. And that’s what they do – spend it! They’ve become accustomed to a very costly lifestyle. But all and all, they’re making more than they’re spending, living within their means, and even able to pay off all of that college debt (eventually). Sometimes, they wonder if they should be saving more, but they really enjoy their lifestyle and don’t want to cut back on their spending. They continue to brush off any doubts that arise from time to time about their financial situation and focus on living in the “now.”
The Bennetts feel they live very comfortably. For the first several years, they feel like they’re living paycheck to paycheck and not really saving because they are not able to accumulate much if any money outside of their retirement accounts (401ks and Roth IRAs) and the 529 plans. However, they actually are saving a lot when you add up all of the retirement and college savings and they are also building up equity in their home. As time goes on, their salaries increase in line with inflation, as does their savings and their living expenses. However, their mortgage payment stays flat and is actually decreasing relative to inflation. Because of this, they start accumulating assets outside of their retirement and college savings, which comes as a big relief to them.
Nevertheless, they worry. Are they saving enough? Or could they and should they be spending more? Are they doing all of the right things with their money? Are they taking advantage of all of the tax deductions they’re eligible for? Should they be investing in Cryptocurrency or real estate? They know the Spellmans and are pretty sure they make similar income, so why do they seem to have so much more money than them, so much more ability to spend?
The Franklins are living well within their means and rapidly growing their wealth with both taxable and tax-advantaged savings. Nevertheless, the Franklins worry. Are they saving enough? What if one of them loses their job? What if the market crashes? And like all couples, they argue. Francine would like to go on a family trip to Europe, but Fred tells her that would be too expensive and wasteful. She wonders if he’s right. Fred sometimes talks about retiring early, say in his late 50s, but Francine tells him that’s simply not possible. He figures she’s probably right and feels discouraged, because he really would like to retire early…or at least feel like he could if he wanted to. And like the Bennetts, they wonder if there are any other things they could or should be doing to save on taxes or to improve their investments.
All three families happen to have the same investment manager who manages their money primarily in low-cost index funds. While the investment manager does a great job, they do not offer any financial planning services to them.
None of these families, like many of their peers, even realize there are financial planning services in the marketplace that would be useful to them. They’re also unaware of what differentiates one financial advisor from another, that some financial advisors offer both financial planning and investment management services. In reality, they could be paying less for a financial advisor offering both services than the financial advisor who only manages their investments.
As we close out Part I of our "Tale of Three Families," we're positioned to dive further into each of the families in Parts II, III, and IV, and see how their current financial habits will impact them down the road.
While this is a fictional series, here are some of the main takeaways and questions you should examine as it relates to your own financial life.
If you're looking to continue on our journey right away, you can tap the link below to keep reading the series.
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About the author
Carla Adams is a CERTIFIED FINANCIAL PLANNER® practitioner who specializes in helping women build strong financial plans around their equity compensation, including Restricted Stock Units (RSUs) and company stock options. With over 15 years of experience in financial services, Carla has in-depth knowledge and expertise geared toward helping clients with complex financial situations. She enjoys boiling down complicated scenarios through practical examples and down-to-earth conversations.