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Going Broke With a $1M Income

Written by: Corey Janoff

Full disclosure on this one, the title is a little click-baity.  This isn’t a post about someone with an annual income of $1M literally going bankrupt.  You can read about plenty of celebrities and athletes who have earned considerably more and spent all of their money anytime you want.  This is going to be a blog post about a hypothetical yet realistic situation where a household earning $1,000,000 per year in income makes minimal progress towards financial goals.  

While most of you reading this don’t earn anywhere near $1M/year, it may seem crazy to think that you would find yourself in that situation if you earned that much.  However, I have seen enough people’s finances to tell you that there are people out there earning $1M/year living paycheck to paycheck.  

Financial woes don’t discriminate.  Doesn’t matter your age, race, religion, gender, educational background, family size, or career.  If you don’t make smart financial decisions, money problems will find you.  

One of the many perks to earning a high income is you have latitude to make plenty of poor financial decisions and still end up OK.  So, to those of you reading this who are living paycheck to paycheck on a high six or even seven figure income, don’t hang your head.  Some minor tweaks can get you on the right track and you will make up lost ground quickly.  

Some Assumptions on the $1M Household

I could come up with endless examples of ways to spend a $1M salary.  Houses, boats, cars, vacations, family support, gambling, drugs, you name it.  I’m going to make this as realistic as possible.   This isn’t Shaq spending $1M in a day.  This is someone living what seems to be a completely reasonable lifestyle given their income.  So, where to begin.

Let’s pretend this is a family of five – a husband, wife and three children.  Maybe the husband is a highly successful orthopedic surgeon in private practice and the wife is a stay at home mom.  Or could be the other way around (of the clients I have who earn over $1M, the primary breadwinner in most of those households is the woman).  Maybe both spouses work.  One could be a urologist making $600k and the other is an anesthesiologist making $400k.  Doesn’t matter.  They earn $1M per year as a household.  

I’m going to use round estimates for federal taxes.  State taxes will vary depending on what state they live in, but we will assume a 6% state income tax rate for the fun of it.  Property taxes can vary too, but I’ll go with a 1.5% property tax rate on the home’s value.  

I'll be generous and assume their employer(s) pay for 100% of their health insurance costs and any other employee benefits.  

We’ll assume only one spouse has access to a retirement account at work and contributes the maximum allowed in 2020 of $19,500.  Although I could find a way to spend that money, I want to make this hypothetical person feel like they are doing something to save for their future.  

The family has a nice home that they bought recently for $2.5M with 20% down, and financed it over 30 years at 3.75% interest.   Expensive, but within my rule of thumb of keeping your mortgage balance under two times income.  

They also have a modest vacation home at the beach/mountain/lake/insert-destination-here that cost $500k, with a $400k loan at 4.125% interest.  You may think $500k for a lake house is excessive.  Depends on what lake you go to.  Could be a bargain.  Also, do you really think someone earning $1M a year is going to tolerate a vacation home with one bathroom and no dishwasher?  C’mon people.  

Homes cost money to maintain.  Things need to be replaced and repaired.  The cost will vary over time and there isn’t a set rule of thumb for how much you can expect to spend on home maintenance.  

how much house can i afford

Both have student loans totaling $300,000 and are on a 10-year payment schedule.  

Their kids are in private school.  That tuition is $25,000 per child.  They also have a number of after school activities the kids participate in.   Music lessons.  Sports.  Tutoring.   It adds up.  

Kids have friends.   Friends have birthday parties.   That means you have to buy presents.   Also, your family and friends know you make a lot of money, so you can’t go cheap on birthdays and holidays.  

They lease one car and have a loan they are paying off on another.  Did you know a new Suburban could cost upwards of $70k?  A Range Rover or Escalade could both be over $90k?   Even a Toyota Sequoia costs over $60k!  

With three kids all in activities, a nanny is a must.  

Fortunately, these people are smart and purchased own-occupation disability insurance to protect the hard-earned income.  One policy maxed out at a $20,000 monthly benefit costs $1,400/month.  It’s not enough, but it’s better than nothing.  Between the two of them, they have a total of $8 million of 20 year term life insurance.  They’re in good health, so the rates are pretty low.    

They’re good people and realize they are more fortunate than some of their family members, so they help out family here and there with some expenses. Nothing too crazy.  

Their household expenses are detailed in the table below.  

spending $1 million

Let’s Analyze Their Spending Habits

You may be scoffing at the screen right now, but I’m telling you, living on $1M/year, before taxes I might add, is hard!  

It’s easy to sit back and point to areas where they could cut out.  However, if you’re in their position, what would you be willing to scale down on?  

The big ones are the homes and the kids.  We can't sell the kids, but we might be able to do something about the houses.  Are you going to tell a couple earning $1M a year to move out of their neighborhood and downsize?  Heck, in some cities, $2.5M doesn’t even get you that much!  If you work at Stanford University and want to live nearby in Palo Alto, Menlo Park, or Atherton, good luck finding a house for a family of five for under $2.5M!  On top of that, state income taxes would be 13% instead of 6% and private school would be $50k a kid instead of $25k.  

Good luck telling parents who loves their kids and value education to pull their kids out of private school and put them in the underfunded state public-school system.  

Sure, they could drive less expensive cars, but their cars aren’t that fancy.  I priced in a Suburban and maybe a $70k leased Audi.  It’s not like they’re driving a Ferrari.  

Cut off family support?   I’m sure that will go over well when you have tell mom and dad they have to pay for their own medical bills now because your personal finances are more important than their health and wellbeing.   

Don’t give money to charity?   Is giving 1.2% of their income to charity each year what’s hurting them?  Some people tithe a mandatory 10% of their income.  To each their own.  

The nanny is expensive, but if you have three kids, you need all the help you can get!  Especially if both parents work!  Even if one parent stays at home it’s darn near impossible to take care of the house and schlep the kids to and from school, soccer practice, piano lessons, dentist appointments, and not eat McDonald’s drive-thru for every meal.  

$1M income

$2,500 a month for groceries!?  This isn’t crazy at all.  For one, I’m including household essentials in the grocery column too (toilet paper, soap, etc.).  Most of the readers of this blog earn healthy six figure incomes.  For those of you with multiple kids, go through your credit card statements and add up all your purchases at the grocery store, Costco, and Target.  How close are you to $2,500/month?  Some of you are probably over that number.  If you’re under $2,500, go through your Amazon purchases too and get back to me.   

$1,000 a month for restaurants!?  I was in Los Angeles recently and had lunch with some friends at a casual Italian restaurant.  We had pasta, pizza, and drank water and I spent $60.  Take a family of five to a nicer restaurant, get a bottle of wine, and you could easily be at $500 with tax & tip.  Mix in lunches during the work week or the occasional drinks after work with colleagues and you’re at $1,000 or more for the month.

Traveling.  They could save $24k/year and not go on any vacations.   For a family of five, $24k/year is not a crazy amount.  Spring break alone will cost $12k between flights, hotel, activities, food, etc.  Take another trip to visit out of town family and maybe go somewhere during a summer or winter break.  Three trips a year.  Domestic.  It adds up.   

But they have the vacation home!  I’m aware.   Going to the vacation home for every vacation gets old fast.  Besides, would you want to be cooped up in the lake house in December with three kids?   Didn’t think so.  

So, tell me, without nuking the entire picture and rebuilding from scratch, what are these people supposed to do?  

This couple is going to have a really tough time reaching financial independence and getting to the point where they don’t have to work full time to pay for all of their bills and expenses.  There might be some opportunity to play catch-up after student loans are paid off and when the kids are older, and the nanny is no longer needed and music lessons are done with.  At that point though, it will probably be too little too late.  Especially if they plan on paying for their kids to go to college.   

They might be able to invest around $100k/year for the last 15 years of their career.  Assuming they invest $100k/year for 15 years, that could grow to over $2M.  

This couple isn’t destitute.   After 30 years, the mortgage is paid off and the house is probably worth $5M.  If they keep maxing out the 401k (with increasing contributing limits) and get a small match from the employer, they’ll likely have over $2M in the 401k account 30 years from now.  

After the houses are paid off and kids are out of the house, they may only be spending $20k/month.   30 years from now, inflation will drive that $20k number up to $40k/month.  In order to support that lifestyle in retirement, and retire in their early/mid-60's, they would need about $10-12M saved up.  

If they “only” have $4-5M, budget cuts are looming.  They’re not going to end up homeless, but it’s going to be a big adjustment.  

This is why it is important to prioritize your financial goals before adopting the lifestyle you want to live.  

financial goals

Pay Yourself First

The most important thing you can do on your quest for financial independence is to prioritize your financial goals first and foremost.  If you first allocate necessary funds towards those goals and then live on what’s left, you will likely end up achieving your goals.  If you spend first and then try to allocate what’s left towards your financial goals, you are going to have a tough time reaching your goals.  

You have heard it before: pay yourself first.  Put money away for retirement.  Fund college accounts for your kids (if that is a goal of yours).  Put extra money towards your student loans and mortgage.  Whatever your goals are, implement a strategy to achieve them.  What’s leftover is what you have to structure your current lifestyle with.  

No matter where you live in the country, you should be able to make ends meet on a $1M annual income and be able to reach your financial goals.  It’s all about prioritizing what’s important to you and executing a strategy to do it.  

You may not be able to have everything you want.  Some of the luxuries may need to be less frequent.  You may need to drive used cars instead of new.  Live in a less desirable neighborhood, but still adequate.   Rent a cabin at the lake several weekends in the summer instead of owning a vacation home.  Is private school imperative?  It all depends on what’s important to you.  You can’t have it all, so you have to prioritize.  

The point I’m trying to make should be clear.  It’s easy to get carried away with spending and justify the expenses as necessities for the lifestyle you have built.  Eliminating something you have been accustomed to is a lot harder than never getting used to it to begin with.  So, prioritize your goals first, set aside enough money to achieve those goals, and then live comfortably on what’s leftover.  

 financial planning for doctors

Disclosures:

All examples are hypothetical and for illustrative purposes only.  Investments involve the possibility of loss, including total loss of principal.  Consult with a financial advisor before making any investment decisions.  Consult with a tax professional for specific tax information and advice pertaining to your circumstances.  

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