Jake Smith is a name I’ve made up for the person who sent me this email:
I’m a physician in my early forties. I make $450-500K. I read a lot about finance and I know that technically I am in the 1%, but I don’t feel rich at all. I don’t know if it was the way I was raised or because for a time I was living paycheck to paycheck or if it’s because I have three kids (and hence, eventually will have three tuitions to pay), but I don’t feel wealthy yet. Maybe it’s because I live in an affluent suburb of a big city and most of my neighbors seem to be doing really well. I don’t know. Have you run across other folks like this?
I had not, personally. So we arranged to speak on the phone.
LS: Tell me about your money. How much do you make?
JS: I just got my tax returns back a couple of weeks ago. My total income was higher than I thought it would be—$570K. And it was pretty good last year as well. And after reading other conversations with “rich people”—one in the $300Ks, one in $100Ks, I was surprised they thought of themselves as rich.
LS: Which is insane, to me. Of course they’re rich! How do you define rich?
JS: I think of rich as not having to worry about money, not having to worry about retirement, not having to worry about saving for your kids’ educations. I have three kids and I try to save up for their futures, and my retirement, and even with my salary I don’t feel secure.
LS: Did you grow up with money?
JS: My father was a physician. I think he made a decent amount of money, but my parents never talked about it. My mom also worked. We lived in an affluent area, but my parents were pretty cheap—we never went on expensive vacations or had expensive cars. We did okay but weren’t living a lavish lifestyle. My parents were so cheap that my sister, also a physician, has rebelled against that and has a hyper-consumptive lifestyle—high-end cars, high-end clothes. I took the opposite approach and am frugal.
LS: Did your parents give you money when you were growing up? What about for school?
JS: They paid for our undergraduate educations, but I didn’t want them to pay for my medical school so I took out loans for med school. Paying for college was obviously very helpful, though when I was in college, tuition rates were much lower than they are now. I think yearly tuition and room and board at my state school was $7K. Now I think it’s three times that. But other than that we didn’t get any money from them, and I didn’t expect it. I think that’s a good thing. It allowed us to find our own way and work hard, and my parents are enjoying their retirement now.
LS: Did you go straight into medical school?
JS: I spent a year after undergrad “finding myself”—I travelled around Europe and South America, just had a really good time enjoying meeting people, experiencing new things, not studying. My parents paid for my tickets, and I mostly stayed with friends and spent money that I’d saved. Then I came back here and spent a year doing research in a lab, and then I applied to medical school.
LS: Do you still have med school loans?
JS: I do. It’s down to about $90K, which is the original amount I took out, but during residency and training, I deferred them and it ballooned to about $150K.
I was lucky enough to make a private equity investment into a health care company, and after that initial loan was paid off for this investment, it’s doing quite well and I’m making a good amount of money from that, so a lot of my income comes from that. The ROI I get from this investment is significantly higher than the 6% interest rate on my student loans. It was a calculated risk to make this investment instead of paying down my student loans, but in the end, it paid off. So now that things are going pretty well, I’ll probably pay them off.
LS: Can you explain how that investment works? Where did the money come from?
JS: I took out a business loan that I got through my practice, but I had to guarantee it personally.
LS: Where did you learn about investing?
JS: I learned from reading a lot, talking to a lot of people. A lot of the investing luck I’ve had has been being in the right place at the right time. It could have turned out badly, but it didn’t. I’ve made some investment mistakes in the past—I invested in industries that were unfamiliar to me, and I lost a lot of money. I don’t know how much—maybe a few hundred thousand dollars. I put my family through some difficult times. During that time, we were living paycheck-to-paycheck, even with my salary. I was making $200K a year.
LS: Can you explain how that works? That is so much money. Where did it go?
JS: We lived in a townhome that cost in the low $300Ks. For my salary that wasn’t expensive, but it was the losses in this business that I’d invested in that caused the situation. I was putting up a lot of my own money and then the business failed, and we had to pay back some loans, and by the time the books were all cleaned up, I was out of money.
LS: Was your wife working?
JS: She was then, but after our second kid she started staying home.
LS: Does she share your same stress about money?
JS: She doesn’t stress quite as much as I do. I’m lucky in that she’s really frugal and she’s prevented me from making a lot of dumb purchasing mistakes in the past. It’s good for someone like me to have someone like her to keep me grounded. She does worry about the money—less so now, especially since the past couple years have been pretty good. But we do worry about our children’s futures. What if they want to be a teacher? (There are a lot of teachers in my family.) The middle class is not doing well in this country, I’m not sure how they’re going to do if they decide to go into teaching.
LS: It sounds like you come from a family of physicians. Is that something you’d encourage?
JS: It’s lot of work, a lot of headaches. I love being a physician, but every year it’s increasingly difficult to deal with the paper work and the red tape.
LS: Did you choose the kind of doctor you are based on salary at all?
JS: No I didn’t. I chose my specialty because I fell in love with it. If it paid much less, I would still have gone into it.
LS: Are you still living paycheck-to-paycheck?
JS: No we’re able to save a good amount now. Since the financial collapse, I’ve become much more conservative. I’ve built up a two- or three-year cushion. I think the world economy is unstable—the impending Eurozone implosion, the asset bubble in China.
LS: Where is that money?
JS: Just in a bank account, it’s earning hardly any interest. Whatever the rate is is hardly worth mentioning. Even our financial advisor advised putting that in mutual funds or whatever, but I’m not sure what is going to happen. This way, I might lose 1 or 2% due to inflation, but I’m not going to lose 30%. Having said that, I’m going to use the next couple years to deleverage, pay down student loans, I have a couple investment properties with mortgage, and one with a high rate, so I’ll probably pay that down.
LS: Properties! Another layer.
JS: I bought the first property during my residency. We fell in love with a condo, and during the years were there, the value increased, and then we bought another condo, then another house.
LS: So your $570K, break that down from me, where is it coming from.
JS: Most of the money is from work—$320K. I think probably $50K is from our properties, and then $200K from my investments.
LS: In addition to your fat bank account, where else is your money?
JS: I don’t have an online brokerage account yet—I plan on getting one soon. But I do have a retirement account that my financial advisor takes care of.
LS: You mentioned tuitions earlier.
JS: We started a 529 about a year ago. I should have started a lot earlier, but yeah, we have that 529 for them.
LS: Do you talk with your friends and peers about these things?
JS: Yes, not in quite the detail I’m talking to you, not hard numbers, but we do talk about it. Some are doing well, some are doing worse. Many of my friends are in the middle class.
LS: Does it feel silly to worry about money when you’re making so much more than even people you know?
JS: I’ve analyzed my worry, and I think a lot of my worry is not just for myself—we’re all in this together. Maybe I read a lot. Maybe I read too much. It’s just the way things are going for our country isn’t great. I just read a good book by Mark Blythe, Austerity: The History Behind the Dangerous Idea. It explains that in the run up to the crisis, there was a lot of private sector debt, and it became public sector debt because of the bailouts, and he calls it the great bait and switch because the middle and lower classes are now paying for it through budget cuts/spending cuts. It isn’t the bankers, who caused the crisis in the first place, that are paying for it. I worry about my kids having to pick an industry where they think about how much money they’re going to make instead of something they love. If I was on an island by myself, I would not be worried. But I’m worried for my family, for my kids.
LS: Do you feel like your lifestyle reflects your income bracket?
JS: We are proud owners of new Toyota minivan, sleek and sexy. My wife has been loving the minivan, and my friends are making fun of me, calling me a loser and a hypocrite. I said I’d never get a minivan! We also have a Subaru and I have a “entry level” Lexus (It was $32K). Average cars. We have a nice home in a good neighborhood in a good school district. I think our mortgage is in the low $700Ks, which is a lot, but it’s less than double my income. If you read The Millionaire Next Door, that’s what they recommend.
I will say, once we did move to this area, there is a palpable pressure to keep up with the Joneses. When I drop my kids of at school, every other car is a Range Rover or a high-end BMW, Mercedes, Lexus. For a while I began desiring a Range Rover—my next door neighbor has one. My wife nixed that idea but I kept pining for that. Then I was like, these cars are $80K, they get 17 mpg on the highway, I don’t need it. Especially since my car is seven years old and is not giving me any problems.
I was very stupid with the Lexus. I got it seven years ago and I leased it. I was under the impression that when you got a business car you had to lease it. Then I talked to an accountant, and found out that wasn’t true, and after the three-year lease ended, I ended up buying it through the business. That was nice because it’s a tax write-off. We got a 0% loan for the mini van.
LS: How are you teaching your kids about money?
JS: Our kids are both in grade school, and we started doing allowances this past summer. The older one has a bank account, and when she’s saved money, we go to the bank. I didn’t really have that. But I’ve read in books where they recommended doing it for kids, teaching them the value of money, the value of saving, the value of not taking on debt to pay for things. It’s mostly to teach them about money.
We had credit card debt for about a year when things were tight, but we were able to pay that off. I use a credit card for everything, and we pay it off every month. We do it for the points, for plane tickets.
LS: Do you ever feel like you are over cautious? I mean, you are making so much money. So much more that the vast majority of other American households.
JS: I think the years where I was wondering if I could make it until the end of the month—I think those years scarred me. If I were single, it wouldn’t have been as bad, but there were people that were depending on me, and I felt like i was letting them down. Now, even when there is a surplus, I feel like I’m letting them down. My income is certainly not guaranteed—you hear of NFL players who are bankrupt after five years. I know it’s very easy to squander what you have.
LS: What do you feel like you splurge on?
JS: After the baby was born, our house became a center of chaos, with the older kids and school and homework and the baby requiring a lot of attention, and we decided to hire a personal chef to save us time, and it’s been great. She’s worth her weight in gold. She comes once a week and cooks three meals for us. Because she makes a lot of food, it ends up being about five dinners. So most weekday evenings, we don’t have to think about dinner, it’s prepared. It’s a little bit expensive, I’m not sure how long we’ll keep it up.
LS: How much does it cost?
JS: It costs around $300 a week. Which is a lot. I know it’s a lot. Even before the baby came, dinner was always stressful; we knew when the baby came it’d be doubly so. We don’t have a nanny or an au pair and our parents don’t help out that much—we’re mostly by ourselves. So we did some research and happened upon this personal chef. She also does the shopping. It’s only been a couple of months.
LS: What do your friends think?
JS: I think I’ve mentioned it to one or two of them, but it’s not something I would advertise. I look like an average guy and the things I do with my hobbies are not congruent with the lifestyles of the rich and famous. It’s almost out of character. But this is one thing that is a luxury, and I think it’s okay for now.
LS: When did you start reading books about personal finance?
JS: I read Mortgages for Dummies and Personal Finance for Dummies in the mid-’90s prior to buying my first condo. Because we did not talk about money in my family, I was ill-prepared to start thinking about money and investing and buying homes. So I did my homework and learned about the whole process. In grad school, I had delusions of grandeur until I read the Millionaire Next Door. That book and other books like it are great for teaching us how to live under our means and for reminding us that material things are often meaningless and that a life pursuing status symbols can often lead to a debt filled existence.
Two years ago I read The Two-Income Trap by Elizabeth Warren (now senator from Mass.), which really rocked my world. She shows empiric, convincing data on how the middle class is becoming increasingly hollowed out by the rising costs of health care, education and houses. This is the primary reason that the middle class is falling behind and not because they are overspenders. I agree with her that overspending is not the primary reason for our country’s current situation. However, I think that she does dismiss the fact that we do live in a consumeristic culture. I mean, I have known lots of people stretching to buy big homes/cars, things that they could not easily afford. (You don’t have to buy the Range Rover SUV when a Hyundai SUV will do just fine).
LS: Do you have a plan to make more money? More properties, different investments?
JS: One of the reasons I have a lot of liquid reserve is so that I can make investments. I’m doing my homework right now as another opportunity to make a private equity investment has presented itself. It will take some time to research this thoroughly enough for me to be comfortable in making the investment. The returns should be higher than the interest I’m currently paying on my debts.
This is why I’m not going to pay off my student loans in one fell swoop (though I plan to be more aggressive about paying it off this year). I will eventually open an online brokerage account so that I can start buying public equities. It will mostly be in the form of ETFs, index funds. I’m not an expert in stock picking, and so will likely pick funds that follow the broad market and buy more shares in these funds every few months or so (dollar cost averaging). I’m going to start small and slowly build this up as this is the area of investing I have the least amount of experience in. But, with all these investments, I still do not want to drop below at least a two-year cushion of living expenses.
LS: What would it take for you to feel like you were rich?
JS: I don’t know the answer to that. In college, before I had a job, before I was working, the six-figure mark was a goal for everyone. And now I’ve hit the half-million dollar mark. I don’t know if I’d feel rich if I ever met the seven-figure mark. I think the important question is, can you still be happy, regardless of your income? Maybe it’s not so important to feel rich. It’s more important to feel happy and content.
LS: But still, you’re worried. What are your feelings about the economy right now—when did you start feeling so worried for the future? What initially inspired that?
JS: Well, we’ve had quite a turbulent start to the millennium haven’t we? At least in a geopolitical and macroeconomic sense we certainly have. Look at what’s happened. We had 9/11, two boom/bust cycles, two wars, a prolonged recession that nobody saw coming, and now a growing student debt bubble. What’s going to happen next? Yes, the stock market is booming and housing is making a comeback, and there is certainly a layer of calmness at the moment. What belies all of this however is still an ocean of latent instability. We live in such a globally interconnected world that it is frightening. I’ve read Freefall and The Price of Inequality by Joseph Stiglitz. Both were very eye opening, you should read them.
On more of a personal level, this past decade has been a turbulent one as well. My best friend passed away, other friends have been laid off, I’ve had physician colleagues go bankrupt, and the recession has not been kind to some of my extended family.
Nothing is certain, nothing is guaranteed and your life and your fortunes can turn in a heartbeat. I think that’s why I’m worried—not just for me, but for my family, friends, and for all of us really. (Or maybe I’m just a closeted doomsday prepper!?)