How to Tell If You’re Rich

How to Tell If You’re Rich

Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes

I got this article from the Apartment Owners Association. I thought it was informative so I want to share with others.

IRS figures show that the top 10% of income earners make 43% of all the income and pay 70% of all the taxes. The 2% of income earners pay approximately half of all income taxes.

If your annual household income is $108k, you are in the top 20% of income earners. If your income exceeds $150k, you are in the top 10%. If your income exceeds $210k, you are in the top 5%. If your household income is $520k, you are in the top 1%.

According to the Federal Reserve Survey of Consumer Finances, a net worth of $416k puts you in the top 20% of American households. You are in the top 10% if your net worth is $952k. This jives with the findings of Dr. Thomas Stanley – author of The Millionaire Next Door – that 1 in 8 American households has a net worth of $1M or more. If your nest egg totals $1.86M, you are in the top 5%. If you have a household net worth of $6.82M, you are in the top 1%.

How do you get rich if you aren’t currently? The basic formula is pretty simple:

-Maximize your income by upgrading your education or job skills

-Minimize your outgo by living beneath your means

-Religiously save the difference, and

-Follow proven investment principles

Most millionaires are not big spenders. According to Dr. Stanley, the vast majority of millionaires in the U.S……

-Live in a house that costs less than $400k

-Are more likely to wear a Timex than a Rolex

-Generally pay $15 or less for a bottle of wine

-Have never paid more than $400 for a suit

-Are more likely to drive a Nissan than a BMW

-Spend very little on prestige brands and luxury items.

Yes, they’re frugal, but they’re also happy, not to mention financially free. They are not dependent on their families, their employers, or the federal government. If you want to be rich, you have to stop acting rich and start living like a real millionaire.

Good investing

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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
13y

There are two ways to increase your net worth:

1. Earn more

2. Spend less

But, keep in mind that you're limited in how much you affect #2, while the impact you can have on #1 is effectively infinite. In other words, the ability to increase your net worth by spending less is limited while the ability to increase your net worth by earning more is effectively unlimited.

For that reason, I consider #1 to be much, much more important to focus on when it comes to the net worth equation.

Just my $.02...

See this reply in the discussion

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  • Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    13y
    Originally posted by Bill W:
    Absolutely silly to take early withdrawal from retirement account!

    @Bill W ,

    I beg to differ. It's a case by case basis. For the right investment, it makes total sense to do an early distribution. Like stocks, you can defer the gain on real estate; you can pull the equity out tax deferred; with the right estate planning, all of your gain and equity could be tax-free, not deferred, when you passed it onto your heirs. Real estate has more tax benefits than stocks hands down in my opinion.

  • Real Estate Investor · Louisville, KY · Member since 2008 · 49 posts · 3 votes
    13y

    Absolutely silly to take early withdrawal from retirement account! With penalty you are effectively borrowing money at 40-50% interest. I invest money in low turnover mutual funds this way most of the money grows tax defered. If I hold investment for 1 yr I pay capitail gains instead

  • Real Estate Investor · Louisville, KY · Member since 2008 · 49 posts · 3 votes
    13y

    Would you borrow money at 40% to invest in real estate? That is what you are doing if you take early withdrawal from tax deferred retirement accounts. I love re investing which is why I do it.

  • Real Estate Investor · Louisville, KY · Member since 2008 · 49 posts · 3 votes
    13y

    401 k loans are due as soon as you leave your job.

  • Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    13y

    The income gap between the richest 1% of Americans and the other 99% widened to a record margin in 2012, according to an analysis of tax filings.

    The top 1% of US earners collected 19.3% of household income. Wow, that means the next 9% top earners collect 24%. That's a pretty good size gap between the 1% and the next 9% earners.

    http://www.bbc.co.uk/news/world-us-canada-24039202

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    13y
    Originally posted by Bill W:
    With penalty you are effectively borrowing money at 40-50% interest.

    Incorrect. Borrowing at 40-50% interest would imply an annual interest payment of 40-50%, not a one-time penalty. If you're taking money out of a tax-deferred account at the age of 30, you effectively have 30+ years to make up the 40-50% tax/penalty hit.

    I'm not say I recommend taking early withdrawls (I generally don't), but it's important that the math isn't misrepresented.

  • Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    13y

    @J Scott

    Did you move?

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    13y
    Originally posted by Minh L.:
    @J Scott

    Did you move?

    I'm in the process of moving...will be settled in Maryland in the next couple months...

  • Real Estate Investor · Louisville, KY · Member since 2008 · 49 posts · 3 votes
    13y

    J Scott I am talking about the total income tax you are paying on the withdrawal. This is why I generally invest in Low turnover mutual funds in a taxable account then take my long term gains taxed at 15% and purchase re investments.

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    13y
    Originally posted by Bill W:
    J Scott I am talking about the total income tax you are paying on the withdrawal.

    Understood. Which is why your analogy to borrowing money at 40% didn't make any sense...mathematically, taking a one time 40% penalty is not anywhere near the same as borrowing money at 40%.

  • Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    13y

    Good luck with your move. Wish everything will work out better than you had hoped.

    @Bill W ,

    My calculations show that one needs to earn a 17% annual returns on the distribution money to match the S&P average annual returns of 10% if one decides to take a 40% tax hit on the early distribution. 20% returns on a 50% tax hit.

    Marty Boardman was correct. J Scott is very thorough and detailed oriented. Yeah, Joshua Dorkin is correct too that he's a trouble maker.

  • Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    10y

    Saw one of my old posts and thought it's still applicable and want to share.  The link to the article is below.  21 ways rich people think differently.

    1. Average people believe you need money to make money. Rich people use other people's money.

    2. Average people earn money doing things they don't love. Rich people follow their passion.

    3. Average people long for the good old days. Rich people dream of the future.

    4. Average people teach their children how to survive. Rich people teach their kids to get rich.

    5. Average people focus on saving. Rich people focus on earning.

    6. Average people let money stress them out. Rich people find peace of mind in wealth.

    7. Average people play it safe with money. Rich people know when to take risks.

    http://www.businessinsider.com/how-rich-people-think-differently-from-the-poor-2012-8?op=1

  • Mark S.Pro Member
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 539 votes
    10y

    I got an alert that someone voted on one of my posts, so I visited and read this thread again.  A couple of points:

    1.) Whether or not you can set up automated 401(k) loan payments when you leave employment depends on the plan itself.  As was stated, definitely do your homework beforehand.  

    2.) Also, it was mentioned that you can take principal out of a Roth IRA tax-free after 5 years. You can actually take out CONTRIBUTIONS at any time, for any reason, tax and penalty free. It's your EARNINGS that could potentially come out tax-free after 5 years, but you must also be 59.5 to have this be considered a qualifying distribution, otherwise the 10% early withdrawal penalty would still apply.

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