Where do you stand?

In a recent post, I shared one view (not mine) on what it takes to be considered rich …

…it’s $5 million !

Now, here is an article by Bankrate that brings that number right down to the other end of the scale …

Check out this table showing the spread of annual income:

Source: Before-Tax Family Income, 2001 Federal Reserve Board Survey 

First, let’s see where you stand in relation to this table?

If you aren’t in the top brackets (although, many of our readers are), it might be comforting to note (according to the Bankrate article): “if you are bringing in $40,000 a year, you’re doing better than half the households in America. Or, as a Washington think tank recently pointed out: If you’re a teacher married to a policeman, your combined household income puts you in the top 25 percent of all households in the nation.”

What intersted me most, was the relatively low income that it takes to be at the absolute middle of the top 10% of all income earners in the USA … ‘only’ $170,000.

This amount seems to correlate with a New York Times survey that said the ‘rich’ were bringing in between $100,000 and $200,000 per year …

… and, if you are like most Americans - earning less than $40,000 – this sounds like a king’s ransom … but, it’s not.

You see, there’s a big difference between what you might bring in as income and what some people call sustainable retirement income .

Take a look at what the Bankrate article tells us how much these same people currently have as their Net Worth:

Source: Family Net Worth, 2001 Federal Reserve Board Survey 

Look at the top level, the same ‘rich’ people who earned $170,000 a year in the first table, only have a median net worth of $833,000 according to the second table.

Now, if you take this $833,000 and apply the ‘safe’ annual withdrawal rate of 4% as advocated by most misinformed financial advisors (for me, the safe withdrawal rate is more like 2.5% p.a.), it seems like these so-called ‘rich guys’ can only afford to spin off $33,000 a year.

Now, that’s less than the teacher and the fireman! So, what’s wrong?

Well, for a start there are actually very few really Rich people in this country - so few that there should be another category in BOTH of the above tables: the top 1% of the USA population by Net Worth and Annual Income. 

Secondly, the so-called ‘rich guys’ earning $170,000 are just like the rest of the working population working at a JOB … Just Over Broke.

When their job stops, they stop being ‘rich’ … period.

So, where do you stand?

How much should you take out of your business?

This is one of the most difficult questions if you are a business owner and, like most business owners, it is your primary source of income.

You might say, of course it’s your primary source of income .. that’s why I’m in business! But, that is the fallacy that we will be exploring in upcoming posts.

For now, let me tell you about a conversation that I had with a friend over dinner last night:

My friend said that he had a friend who owned a payday lending business – sounds a bit unsavoury to me, but generates mountains of cash for him.

My friend’s point was that this guy would admit that he’s not very smart, but has a very simple system for dealing with the $3 mill. that his business spins off every year:

1. He gives $1 mill. to Uncle Sam

2. He invests $1 mill. (my friend didn’t ask where or how)

3. He spends $1 mill.

Simple!

But, it’s also wrong …

What would happen if the business had to close down tomorrow (e.g. change in government regulation)?

Unless this guy had managed to save $20 mill. to $40 mill. he wouldn’t be able to keep up a $1 mill. lifestyle (common wisdom says that you should only withdraw 4% from your portfolio every year … I say about half that) …

I believe that it is 10 times HARDER to go backwards in your life (in the event of a financial disaster like if this guy’s business had to close down) than taking a slower run-up in lifestyle in the first place.

This is what I did:

I always drew a minimal salary and tried to live at the median level of the circles that I moved in (for me, this was upper-middle-class college educated professionals).

When my businesses started throwing off more money than that, I invested EVERY penny of the rest, in my case mainly into: (a) reinvesting in the business to expand it, and (b) opening new businesses (3 more), and (c) passive real estate investments.

As I built up equity in (c) – I ignored the ‘value’ of any business until I sold it - I used my ‘divide by 20 – 40 rule’ to decide how much I could spend each year.

Maybe my friend’s friend should have given $1 mill. to Uncle Sam, spent $250k a year to start off with, and invested the rest?

Maybe, after a few years, if financial disaster struck it wouldn’t matter any more what happens to his business …

Never buy a new car … really.

[pro-player width='530' height='253' type='video']http://www.youtube.com/watch?v=Pev892H_dCs[/pro-player]

A quick tip for you …

… never buy new, this is more true for cars and even more true the higher the price of the car.

For example, the sticker price on my car, was $120k, but I looked around (actually, I just did a quick google search or two) and found the exact make/model/year (2007) that I wanted at a specialist dealer.

I found a car, in my own city no less, that was just 6 months old with only 1,700 miles on the clock in perfect condition for less than $90k … $30k buys a lot of enchiladas in anybody’s book!

I don’t think that I just got lucky …

I have found that the higher in price you go, the more fickle the customer … they buy cars on a whim and churn them quickly when they find out they would have rather had a boring ol’ Merc!

This works at pretty much any price range, too. If you want a more standard car, check out the leasing company sales (maybe at auction) for executive vehicles … a downturn means executive redundancies … redundancies means near-new cars available cheap!

The effect is even more pronounced when you buy imports (except for top line Italian sports cars, and certain Mercedes and BMW’s) because they depreciate by as much as 20% the minute that you drive them out of the showroom!

[Hint: next time don't even go into the dealer's showroom to buy that new car, just wait for the 'other guy' to drive their's out, then offer him 85% of what he paid ... give the poor sap your card ... you just might get a call].

I once had a SAAB and every time I tried to sell it the price dropped more than I could accept: the first time I tried to sell it, I wanted $45,000 for it, but was only offered $35,000. So I waited a year …

Then when I tried to sell it for $35,000 I was only offered $25,000; the next year I got sick of waiting and just sold it for only $15,000!

I would rather have been the guy offering $15,000 than the guy selling.

Happy bargain hunting!