Today’s post is from Daniel Shin of The Darwinian Doctor and a founding member of the PhREI network along with Ian Cook and myself! In this post, Daniel talks about why we, as high income earners, may not always feel rich despite our high incomes. Some of it is perspective and some of it are the circumstances of the process of becoming a physician.
But the most important thing to note is that we all have the power to overcome these obstacles to not only be rich, but to feel truly rich…which in the end, has very little to do with money.
Why the rich don’t feel rich
The Dr-ess and I had an interesting talk earlier this year after doing our taxes.
It went something like this:
To recap, I racked up $300,000 in student debt while in medical school and residency. Luckily, during that time my wife was dutifully working and saving money. Her parents also contributed a lot of money towards our first house, which we purchased near the bottom of the market in 2010.
Read more: How we amassed an investment portfolio of over $1 million
With the help of an unprecedented bull market, our stock investments in 2018 eclipsed over $1 million. Together, we also make a great income, allowing us to call ourselves part of the “1%”. We definitely feel lucky.
But we don’t feel rich. Especially in Los Angeles, we feel decidedly middle class and far from financially secure.
*cue the world’s tiniest violin*
Hate and scorn
If this scenario doesn’t elicit a lot of sympathy in the depths of your soul, you’re not alone. There have been a lot of people annoyed about the phenomenon of rich people claiming they’re middle class, or just not admitting that they’re rich.
These articles pop up with regularity in the press and media:
Check out this one from 2017 in the NY Times:
I readily admit that on paper, my financial situation look pretty peachy. But for many reasons, I don’t feel rich.
According to a new survey in USA Today from Ameriprise Financial, I know that I’m not alone in feeling this way.
This survey of over 3000 high net worth Americans found:
- Only 18% of millionaires felt wealthy
- 60% percent of the millionaires felt they were upper middle class
- 25% felt they were middle class
So not many millionaires actually feel rich! What could explain this phenomenon? I believe there are three main reasons:
- Paper wealth is different from financial independence
- Home equity doesn’t produce cash flow
- There are poor 1%-ers and rich 1%-ers
Paper wealth is different from financial independence
If you’re a high income professional, you may have plenty of money coming in via your paycheck each month. You might also have a lot of money stashed away in your retirement accounts.
But if your expenditures are massive, even a sizeable war chest can be rapidly depleted with a job loss.
I believe this is a primary factor that keeps high income professionals from feeling rich, even if they have plenty of money stashed away in their retirement accounts or investments. Without the constant stream of income from their day job, their lifestyle can quickly grind to a halt.
“Rich” people are supposed to have the financial means to live the life they choose, without having to rely on others. If you can’t support your lifestyle without the income from your job, you are not financially independent. This dependence on the job translates into a feeling of financial insecurity that the truly rich are not supposed to have.
I’d be in trouble if I were fired
If I were fired tomorrow, I’d be in trouble. Our cost of living currently is quite high, and unless I got another job lined up fairly quickly, we’d have to quickly dip into our savings to cover our costs.
I’m trying a grand experiment to keep our lifestyle intact while simultaneously working towards moFIRE, but it’s a work in progress. Only time will tell if we’ll be able to pull it off.
This is of course a great argument against having high living costs. It’s much easier to get through a job transition when your living costs are low.
Home equity doesn’t produce cash flow
Another factor why the rich don’t feel rich is the way their wealth is typically stored.
As I pointed out previously, the super rich do things a bit differently, with most of their wealth concentrated in business and real estate.
Check out this great chart again:
The mere mortals (net worth between $471k – 10.3M), still hold most of their money in:
- Equity in their primary home
- Retirement accounts
- Stocks, securities, mutual funds and trusts
The biggest chunk of money, even in this group, is still concentrated in the primary residence. But even if you own a 14 bedroom mansion in the middle of Beverly Hills, your equity in the home is not readily accessible when sh!t hits the fan.
Likewise, there are costs and penalties, both monetary and psychological, to accessing stocks and retirement accounts.
The “ultra rich,” on the other hand, have 49% of their wealth concentrated in business and real estate, two areas which typically can generate significant cash flow.
This diversification of income and cash flow sources protects the ultra rich from financial risk.
Without cash flow producing investments, wealth as measured by home equity and stock investments can feel remarkably imaginary.
My wealth seems ephemeral
I feel this to some extent when I check my net worth on Personal Capital.
The pixels on the screen change from month-to-month but my wealth feels ephemeral as ever.
I’m trying to remedy this issue by moving more assets into real estate, but it’s also definitely in the experimental phase.
There are poor 1%-ers and rich 1%-ers
Finally, wealth stratification amongst the 1% is a real phenomenon. If you are just barely qualifying for membership into the 1% club, you’re like that frumpy high school kid trying to hang out with the better dressed cool kids. It’s not a comfortable position.
This article from 2015 from the Mic website explains this point:
There’s definitely evidence for this. An article from CNBC looked at the difference in the income required to be in the 1% in various cities around the US. It then compared this to the average 1%-er income in each of those cities.
Let’s look at California:
- Annual income required to be in the top 1 percent: $514,694
- Average annual income of the top 1 percent: $1.69 million
The 1% are not all alike
Even though the Darwinian Dr-ess and I are technically part of the 1% by virtue of our dual income, we are nowhere near the average income for the 1% in Los Angeles.
If I tried to lump myself into the same pot as all the other 1%-ers, I may feel that we should all go to the same schools, drive the same cars, and live in the same neighborhoods.
But if the average 1%-er is out earning me by a factor of three, it’s not so easy to keep up with the Joneses.
We ran into this issue recently when we considered moving our 5 year old from his current private school to a “better” one across town. The cost of his annual tuition is already about $25,000 / year. The other school is about $35,000 a year (yes, for kindergarten).
We didn’t make the move for a number of reasons, including cost. For your average Los Angeles 1%-er, the extra $10,000 wouldn’t have been an issue. It certainly was a consideration for us, though.
Perhaps like me, you make a good income and have socked away a respectable nest egg. But at the end of the day, you don’t feel rich and don’t know why. Perhaps now you know why.
I know that I’m never really going to feel rich until I achieve these 3 things:
- Financial independence
- Cash flow producing investments
- More comfortable membership in the 1% club
It’s going to be a long and bumpy road on my journey to get there.
I think Daniel brings up some great and realistic points in this post. I will feel truly rich when my time is my own to do as I please and chase my passions without worrying about how much my paycheck is.
But in many ways, I do already feel rich. I remember the past 11 years when Selenid and I would walk through the grocery store and be unable to buy what we wanted. Now, I can walk through a grocery store and comfortably buy whatever I want, forget about need. I know that is more than most people on this Earth.
So I try to never lose that perspective!
What do you think? Do you feel rich? How has your mindset around being “rich” changed? Let us know in the comments below!
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20 thoughts on “To Be Rich & To Feel Rich: Two Very, Very Different Things!”
This post is awesome and really outlines how geographical location and lifestyle inflation can significantly influence your financial security. Lauren and I had a similar experience around tax time a few years ago and have really worked to pay down debt and invest in real estate. Passive income really seems like the only way to reach financial independence. Paying down debt and decreasing expenses will help you reach FI but if you don’t develop multiple sources of passive income then you will always be dependent on that next paycheck.
I found this article ridiculously helpful. Thank you for sharing.
The key is not income since usually a significant percentage is already committed to recurring expenses. Having capital to invest that produces passive income is paramount. Fortunately, our profession allows us to accumulate capital over time but our labor usually benefits the next generation.
Spot on! I like to look at my income as seed money for my passive income producing assets
It’s not what you make but what you save! The earlier you start and the more you save, the quicker you will achieve financial independence. It comes down to discipline and balance, the same form of discipline that forces doctors to study instead of having too much fun in college and med school. Actually it goes back earlier in our lives, far before formal education. Unfortunately for many financially successful individuals, financial discipline happens too late. Being financially successful or getting paid allot doesn’t guarantee financial independence. Luckily, I figured this concept out early in my career. The best feeling is to practice medicine because you want to, not because you have to!
Amen! Totally agree. Once we learn the principles, which is often the most unnecessarily intimidating step.
It is a great analysis of success and happiness.
“Happiness”. This like the center of gravity and is with in us and and not in our possessions or wealth.
I fully agree regarding achieving financial success to be comfortable, help your family , educate your children and be generous to your friends and those in need and indulge in a few things we may love.
Therefore, for those fortunate to be the in the upper income brackets it is more important to be thankful and appreciate the value of our relationships.
No one I know of has left this world with a million dollars.
Not sure how I stumbled onto this website. This is new territory for me as an 80 year old physician.
I have had the opposite problem most of my adult life as a doctor: I am not rich, but I feel rich.
Specialty withheld to protect the innocent…
If this is the Ron Pust I remember, then you truly are rich, my brother, and so am I! We’ve been given so many human relationship privileges in being able to get to know and care for people, that the financial security is just a bonus. I did a very conservative calculation of the number of patient care encounters I had over the years of my career and it topped 100,000. My heart is filled with riches. All we need to do is leave money mode and move into gratitude mode.
Right on. Like the author depicted our ability to innovate，and grow a company
w handful equity is the golden path
wealth and enrichment. Definitely more fulfilling
a pay stub for 30 yrs.
Not my original idea, but a great one:
Being rich has 3 tiers.
1. Can pay all one’s bills w/o worrying about failing to cover one.
2. Can go out to eat anywhere in town and not sweat about paying the check.
3. Can take a vacation most anywhere and not sweat about the costs.
Is more nice? Sure, but by remembering this simple advice it is much easier to be content and “feel” rich.
It is not how much you make, but it’s how much you keep. I was 29 years old when one of my professors pulled me aside and spoke to be about wealth building. This, I believe, came way too late for such vital knowledge. As an FP and one who chose to serve his country, high income earner is not the way I would describe myself. But despite a late start, a divorce and joining the military, I was still able to secure a 7-figure nest egg…I still don’t feel rich. I will retire this year and will receive a military Pension coupled with a new position as a staff physician. But average millionaire enjoys seven steams of income…I still don’t feel rich. So there is more work to be done…a work in progress. The same discipline and commitment valued in our medical career (enhanced through military training in my case), are the very ingredients needed to achieve FI. Stay the course! And remember, choosing the right spouse is as important as the financial tools you choose to augment your portfolio. Choosing a spouse who shares a joint vision of a robust financial future is absolutely key! Or you may be chanting that familiar refrain-“it is cheaper to keep her/him”!
YES!!! BUT “damn it Jim, I’m a doctor, not a real estate investor!!!”
I tried, early in my career, to make some wise investments…..and lost a TON of money!!! I do not have a good head for money and stock option, short sells, etc. boggle my medical mind. So then I need to find a financial counselor I trust……hmmmm…….seriously, how do I find a financial counselor/stock broker/etc. who is trust worthy and will help me to leverage my excellent income into a passive income stream for my retirement?
The best way to be rich is to not be an hourly wage-earner like a doctor (even a plastic surgeon) or a bus driver. We make more money per hour than the bus driver, but the first day either of us is unable to show up for work, our income stops. It’s better to own a McDonald’s franchise. Even if you are home sick, or in the Bahamas vacationing, your income stream from the business continues. It’s even better to own a whole chain of McDonald’s franchises.
Such a great article, really puts things into perspective, thank you!
My co-worker and I always joke about the uber-rich–they are “captains of industry.” Probably with few exceptions (and I can’t think of any off hand), anyone W-2 dependent will have a hard time making the ascent up to the next ‘financial caste’ since a good portion of our paycheck goes to taxes. Uber rich gets their pay in non-taxable items such as stock options etc…, then cash it out when they need to, say, buy a yacht or a plane…
IMHO, if your goal is to feel rich, I think you may have the wrong goal. The financial goal for me was to feel content with my lifestyle, to feel reasonably comfortable with my reserves during my working years so that I never felt at risk if I had to change positions, and to accumulate enough retirement funds so that I could live a comfortable life when I did retire- which is where I am now. At the time I was working, I always had a wide choice of options for a new position when needed or wanted. But the key is that I always felt content with living a life that allowed me to, at a minimum, let me meet current expenses and cover black swan expenses without worry, at most times to live a comfortable middle-class lifestyle, and during the years when I had a truly large income, enjoy a higher-class lifestyle while still putting away at least 20% or more into retirement or after-tax savings. It was great when I had it, but I never missed going back to a more middle-class existence. I think a big part of this was that my PRIMARY goal was to find a wife who loved me as much as I could love her, and who had mostly the same outlook on life issues as did I. I waited until 35 to get married to the right person, never regretted my choice, and have lived happily ever since as a result.
What if I suddenly got truly rich- won the lottery, hit a 1,000% bagger in an investment, etc.? First, I’d set up a charitable foundation with 60% to both avoid giving the feds over a third of that amount, and to support causes that truly matter to me. Second, I’d buy a dual citizenship in a second country that allows you to do this. Third, I’d buy and furnish an in-country bug-out location and buy the means to reach it in less-than-ideal conditions- hurricanes being the main risk to my primary residence. Fourth, I’d fix-up all the little and not-so-little improvements in my primary residence immediately, rather than spreading it out over several years. Then, after doing these “first things first” activities, I’d put the rest into sound investments that had good potential for growth and/or income- again, feeding 60% of the realized income from these, and probably all of my retirement RMD’s, back into the foundation, or other charitable endeavors.This would more thoroughly feed the “helping others” goals I fed by being in active practice, prior to retirement, and which given my current physical limitations, I can now mostly feed only by monetary contributions.
Happiness and feeling rich has a lot to do with your state of mind also. If you are always looking up to those who have more than you, you will never be happy. Look down and you will appreciate how privileged we all are.
The key to it is to cover all your liabilities and plateau your life style which you can afford without stress.
Mahmood Hai, M.D.
Agree with Mahmood – like it or not it’s from within and the answer is absolutely simple and timeless
According to the Talmud;
“Who is considered to be rich? one who is happy with what they have”.
If you have a beautiful home, amazing cars , smart kids , great backhand , member at Augusta National,and your net worth is 17 million but you are grappling with the fact that it’s not 20, well…..
you are not as wealthy as the colleague truly content with his / her life and a 700k portfolio
It is an interesting article, but I have to say, as someone whose assets recently went above 2 million, I really do feel rich. Not only do I feel rich, I am rich. But I felt that way ten years ago when I was starting as an assistant professor of surgery, and felt the same way 20 years ago while finishing my fellowship while drawing a military salary.
The key I think, beyond simple perspective, is avoidance of debt (My army scholarship sure helped with that), controlling expenditures so you done spend as much as you make, and yes, having income producing investments. I have a bone to pick with the writer: It is not clear to me what the difference is between owning a business, and owning stock, which is ownership shares…in a business! Similarly I can own real estate and spend my midnights sticking my head down garbage disposals, or I can own REITS and collect my dividend and payouts and let someone else do that while I have my annual vacation with my daughter. Hmm, maybe I’ll go for those garbage disposals after all….
Anyway, you all get the point. If you wanna feel rich, then feel that way.
Another thought: My philosophy of assuring long-term comfort (and avoiding long-term stress) was the concept of decreasing liabilities. When I was in my 40’s, with a successful practice and at the peak of my earning capability, I paid off everything that I could, mortgage, revolving loans, life insurance, etc. I funded trusts for my kids’ college education. That way, by the time I retired, the only things I had to pay for on a regular basis were the phone bill and the car lease. It doesn’t matter that my income is way down. My Social Security payments and IRA withdrawals are adequate to maintain my lifestyle, and I have not had to tap my asset reserves, so they just keep growing.