Monday, May 3, 2010

Intentionally Making Less Money

Everyone wants to make more money, right?
Suppose you could have more by making less?

One of the interesting aspects of working for a living is that at a certain point, you end up making less and less money, the harder you work.  Our tax system is structured largely to increase your tax burden as you make more and more money.   Rates go up as your income increases.

But lest you feel too sorry for the rich, bear in mind that the 50% and 75% brackets of the past are now history.  The highest rates today are around 38%. And bear in mind that once you make over $100,000 a year or so, your Social Security and Medicare deductions drop to zilch - effectively LOWERING your tax rate.

And bear in mind too, that once you are making $250,000 or more a year, a lot of tax shelters start to be cost-effective.  Buying investment Real Estate is one of them - and a neat way to convert ordinary income in to capital gains.

But we know how that Real Estate thing worked out, don't we?

The problem for many of these near-rich is that in addition to taxes, their lives become exponentially more expensive as they make more money.  Your typical Doctor or Lawyer, as his career starts to take off, buys more and more expensive cars, usually leasing them to "avoid the hassle" of buying and selling. They move into a tacky mini-mansion in the suburbs with staggering mortgage payments, tax bills, and insurance.  And likely, they are "upside-down" on that mini-mansion as we speak.

And then there are other expensive luxuries, such as divorce and re-marriage - essentially supporting two families on the income of one.

And of course, you don't become a successful doctor or lawyer these days by working 40 hours a week. Chances are, you are at the office 60 hours or more.   So you hire a maid to clean your house, a gardener to do your lawn, and even someone to walk your dog (I kid you not, I know lawyers who do this).

And you shop and Whole Foods, because that's where people of your caliber shop, right?  And you buy expensive clothes and eat out 4 or 5 nights a week, possibly due to business.

The net result, for many high-earners is that while the have a lavish lifestyle, they are really no wealthier than the plumber down the street who makes half as much, works half as many hours, but puts more into savings and spends less.

So no wonder these "High Earners" are upset about the economy.  They spend all day chasing their tails, trying to earn more and more, only to see it flow through their hands that much quicker.  You might as well try shoveling water.

I started to fall into this trap myself.   My career as a Patent Attorney was doing well and I was making well into the six figures with promise of much more.   But I was not really creating real wealth, even through I was working long hours.  The amount of money I was putting away was not nearly enough, and my debt load kept increasing.

And the only way out of this mess seemed to me to be to earn yet more money, which would have meant yet more hours at the office, becoming estranged from my spouse, and eventually ending up in a bitter break-up.  You see, to get that incremental extra dollar, in any line of work, often means working much harder than you did for that first dollar. You want to double your income?   Better work three times as hard!

Then one day, I decided that there had to be another way to live.  Could I work half as hard, perhaps, and earn three-quarters as much money - but spend even less?  By cutting spending and living frugally, could I sock away MORE money, enjoy life more, and have more real wealth?

Well, I started this experiment about five years ago.  And so far, it seems to be working.   It has taken a lot of re-thinking of everything I do, from my business model to even the most trivial expense (or what seemed to be a trivial expense!).

When I was a "big-shot" with the corner office in the office park, I would have laughed if you had told me that perhaps spending $20-$50 on lunch was excessive and foolish.  Hey, I'm making good money, right? I can afford it!

But cumulatively, these "I'm making good money I can afford it!" decisions add up to an expensive lifestyle that sucks the life out of your income and leaves you feeling broke and frustrated.  After all, you are making the six-figure income, you should feel wealthy, right?   But you aren't.

The secret is really simple: Learn to live like someone earning half to three-quarters what you are presently making.  Impossible, you say?  Well, tell that to the legion of people in this country who get by one half to three-quarters of what you make.  They'd be surprised to hear that.

Once you can do that, you can use the excess income to pay down debt, invest in your 401(k) and create real wealth.  Within a few years, you'll find that you have enough money in the bank to not have to work at all.

And when you can do that - that is REAL wealth.  Not having to labor to pay the bills or dance to someone else's tune.

Because, let's face it - no matter how much money you make, so long as you are beholden to a boss, a partnership, a client, or whatever, you are not really wealthy and never will be.

True wealth is being financially independent.