Being the 1%

I was reading through an interesting post over on Making Sense of Cents, called “I’ll Never Be a Frugal Blogger.”  In many ways it expresses the standard American philosophy of “I can afford it so why shouldn’t I have it.”  The new cars, the big houses, and the fancy vacations.

The blogger claims to never spend more than 50% of their wealth.  If this is accurate, it is really a phenomenal savings rate, meaning either they make a huge amount of money or her lavish lifestyle really isn’t that lavish.  Of course, does “spending” mean just the monthly payments they are making or the actual amount spent each month, including taking on future obligations (loans)?

I think she misses the point though of why some people make choices outside the mainstream.  They do strange things like pay cash for cars and maybe even save up and pay cash for homes.  Maybe they bring in lunch each day and drive an older car.  (There is a guy in my office who eats a can of beans for lunch every day.  I’m betting he’s a multi-millionaire, but you wouldn’t know it.)

It isn’t because they want to save every dime and die with millions in the bank (ok, some do, but that is not the norm).  It is because they want to make every dollar work rather than working for every dollar.  They also want the sense of security that they feel when they are living far away from the edge, and the freedom it brings.

If you are making $300,000 per year in a midwestern city and your thing is to buy a new car for cash every three years, more power to you.  But too many people are bringing home the new car with a new car payment before they even pay off the old car payment on the old car.  They may make $100,000 per year but they are living a $110,000 lifestyle.  (There are others who are making $50,0000 living a $60,000 lifestyle or making $500,000 and living a $600,000 lifestyle).

The fact is that if you can’t buy that new car without taking out a loan, or you can’t go on that vacation without running up the credit cards, you are living beyond your means and you will never be able to out earn your spending (just look at the national debt of $16T).  You may be a layoff away from having the creditors calling and the tow truck in your driveway.  You might end up stuck in a job that you hate because you can’t go without the income or lose the health insurance.

You also might be saddling your children with student loan debt or be setting them up to pay for you in your old age.  In some cases that is unavoidable, but in many others it is totally avoidable.  It is all about the choices we make, more often than not.

The other thing that happens when you are running up debt to pay for a lifestyle is that you end up spending a lot more for everything.  That $5000 vacation may cost you $15,000 by the time you pay off the credit cards, then pay off the mortgage you rolled the credit cards into.  That $300,000 house may cost well over $600,000 by the time you pay off the 30-year mortgage that was extended a couple of times for kitchen remodels.

If instead you wait just a little while – maybe a few years – until you can pay cash, you will be able to spend that money you would have spent on interest on other things.  You will be able to pay cash for that vacation or pay cash for that new car because you will have cash.  When the air conditioner breaks, you write a check.  When you want to buy that beach house, you write a check.  When you have that emergency room visit, you swear a couple of times at the fees the doctor charges for a ten minute visit, and write a check.

If you can invest, it gets even better.  If you can save up a million dollars and then invest it, you will have an extra $50,000 in income each year.  Every year.  You can buy a nice new Camaro, every year, for cash.  You can buy a new condo every two years for cash until you have a string of them across the country.   You can send your children to Harvard and just write a check, or go on a $20,000 vacation each year and not even think about it.

If you let some of that million dollars compound for a few years, you can quickly find yourself with $2 million, then $4 million, then $8 million, then $16 million.  At that point you find yourself one of the evil 1 percenters (actually, I think this term is meant for those with the top 1% of income, but close enough).  You could then do things like build a new dorm at your alma matter.  Every few years.  You can find someone who lost their home in a fire and buy them a new one without even thinking about it.  You can change lives.

CNN Money bemoans the drop in wealth for the median household and the increase in wealth of the wealthiest households, but a lot of the reason for the disparity isn’t due to some secret society or political connections.  It is that wealthy people are saving and investing, while many middle-class families are borrowing and spending.  The article says that wealthier people tend to invest, which is true, but there is no reason that middle-class families can’t also, albeit on a smaller scale.  The reason wealthy people are wealthy is that they do invest.

Unseen in those statistics of middle-class decline are the weird people in the middle-class who have risen into the ranks of the wealthy.  The weird people who fight the norms.    The ones who wait to buy cars until they can pay cash and buy used to reduce the loss due to depreciation.  The ones who eat in more often than eat out.  The ones who put a 20% down-payment down for a house on a 15 year mortgage and then pay it off in 10.

The possibility is open to virtually everyone who is willing to act a little weird.  Are you ready to be the 1%?

Anyone out there who started out in the middle who is now in the 1% – would you like to share your story?

Please contact me via or leave a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.


  1. If you look at the tax brackets, Investment income for people in the 10 to 15% income tax brakcets is ZERO. I believe that includes married couples making up to $70k per year total which is most of middle class families. Why not invest when its free, right?

    Good article on the problems with America. You’ve always said being wealthy is a choice, its not about how much you make, its what you spend. Its sad seeing so many people work their whole lives, often into their 60’s which simply didn’t have to happen if they made better decisions when they were in their 20s and 30s.

    • I’ll need to look into investment income taxes for those in the 10-15% bracket. I don’t think this has always been the case since the attitude it that only rich people invest, so sock it to them. Of course in either case, you can invest tax deferred or tax free in an IRA or a Roth IRA.
      Thanks for reading and commenting.

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