What Level of Income Makes You “Rich”?
What Level of Income Makes You “Rich”?

What Level of Income Makes You “Rich”?

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Defining Wealth and Success.

In financial media I often see headlines in articles enticing readers with tips on earning a coveted 6-figure salary. “Rich” is often defined politically at the point of $400k of income, which was the cut-off for recently promoted tax hikes. With the country’s median household income just over $60k, it’s understandable that someone making more than 6x that should be living very comfortably.

As an advisor, I get to see behind the scenes of the income and expenditure for many families, and the surprising truth of the matter is that even people making $400k sometimes don’t feel rich or wealthy. A strong financial strategy is often required to make the most of a family’s growing income, so that they can still achieve their spending and saving goals to realize that feeling of wealth.  

So, what can sometimes stand in the way? While lifestyle creep (spending that grows with your income) is partly to blame, there are a few other factors to keep in mind that can sometimes make it difficult for these families to feel the full impact of their financial gains:

1. They move for opportunity, and increase their cost of living

Choices such as following a job for higher salary can have huge impacts on the kind of life we live and our ability to have more cashflow to do the things we want.

While the job opportunities are more prevalent in larger cities, the cost of living can go up 25% or more by making the move, and workers often fail to plan for that change in expenses. While some were able to hack the system in 2020 by working at home in a cheaper location, most workers find they’re still required to live close to their jobs to stay employed. In NYC, it takes $700k of income to be in the 1%. 

For example, a family may move from their hometown to a larger city for a $50,000 additional income. While that’s a hefty new boost to their buying power, they may also find they increase housing costs by $10k per year, add a daycare bill for $20k per year, experience increased taxes, and spend more on daily living expenses. What initially seemed like a no-brainer became a financial decision that didn’t significantly change their circumstances financially. 

2. Their goals grow with their income

It’s human nature to evolve as we grow, and creating new goals for ourselves is part of that process. It’s common for people who once just wanted to make it to 6-figures to create new goals once they get there. 

Our personal goals evolve as we experience new transitions, grow our families, or see new possibilities. The adage of always wanting your children to have a better life frequently appears. Once those new goals come into the picture, it’s easy to feel like you’re far from achieving them, and also to forget how far you’ve come.

3. They don’t have a good tax strategy

Families making more than 400k enter the 32% federal tax bracket or higher. Compounding the move to higher cost of living areas often brings higher tax rates. In New York City, where I am based, this Federal marginal rate combines with State and Local taxes to reach 42.726%. This means a larger portion of their income goes to taxes, and this can often become a family’s biggest expense. Long gone are the days of refund checks — they’ve now entered the era of tax bills. 

High-earners who allow their expenses to expand with their income can still find themselves living check-to-check and taking payment plans to pay their tax bills in arrears. This comes with a hefty penalty, plus interest, taking a toll on their financial confidence. 

So, what steps should you take to make the most of a growing income? 

While it may seem trite to profess that the rich don’t feel rich, it has implications for everyone seeking economic growth and success. Our perception of wealth is often synonymous with the ability to do what we want. At $100,000 you earn more than 92% of U.S. workers, which means your options are much more vast than the average person. The challenge is that our mindset around what that money means might be skewed.

People tend to feel rich when they have a high level of cash flow, which means that after expenses they still have money left over to save and spend. This means that no matter how much you make, a good financial strategy can give you the ingredients required to begin to actually feel rich. Knowing where all of your money is going, tracking the milestones you’ve already achieved, and monitoring your progress towards future goals are essential to finally feeling the richness you’ve worked so hard for.

About the writer:
Dann Ryan, CFP is a Managing Partner at Sincerus Advisory in New York. Dann has over a decade of experience in wealth management and was recently named one of the 2021 Top Financial Advisors by Investopedia.

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