When I posted Stop Acting Rich Overview and Thoughts on Wealth, Habits, and Happiness I promised that I would follow up with some thoughts from Stop Acting Rich: …And Start Living Like A Real Millionaire on jobs people have and how it impacts their net worth.
This post will cover those subjects.
There’s lots to cover, so let’s get started.
High Income Doesn’t Translate to High Net Worth
Most people assume that those with high income have high net worths. While it’s certainly true that people with higher incomes have a greater opportunity to become wealthy (after all, they are generating more income), most high income earners underperform when it comes to wealth generation. Why is this? The bottom line is that they spend at a much higher rate (including but not limited to pricey homes in pricey neighborhoods).
Here are some comparisons from Stop Acting Rich that highlight these details:
Occupational status is negatively correlated with net worth. How can this be possible, given the fact that people with high occupational status tend to generate high incomes? The reality is that income is not wealth. Often high occupational status dictates high consumption. What if you live in or even near a geographically defined high-consumption environment? It is where most people with high occupational status live. In such environments, it is easy to deplete even substantial income through consumption. It costs a great deal to live among those clusters of people who have high incomes and high status.
Approximately 4 in 10 physicians have an annual realized income of $200,000 or more. That equates to almost 13 times the percentage for the total household population in America. Yet in spite of this large percentage being in the high-income-producing group, only about 1 in 10 is a millionaire and has financial assets of $1 million or more.
Did you get that? High occupational status (which includes higher incomes) is negatively correlated with net worth.
So while it doesn’t so say my guess would be that low occupational status jobs that happen to have higher incomes lead to having net worths. That’s why you can get rich doing jobs no one else wants to do.
High Occupational Status Doesn’t Translate to High Net Worth
The book transitions to compare physicians (high occupational status and high income) to a lower status, lower income profession overall, farmers:
However, for every farmer with a high income, there are nearly 2 (1.9) having an investment portfolio worth at least $1 million. Overall, this figure grossly understates their total level of wealth since the calculations exclude equity holdings in farmland, homes, livestock, and equipment. It takes only 53 high-income-generating farmers to produce 100 who are millionaires (ESI note: the other 47 millionaires come from non-high-income-generating farmers). But it takes 383 high-income-generating physicians to produce just 100 millionaires.
They expand on this later in the book:
You have a better chance of becoming wealthy if you do not try to emulate the consumption habits of those with high occupational status. Consider two of the occupational groups: physicians and farmers. High-income-producing physicians are heavily concentrated in and around cities. They tend to live in fine homes situated in pricey neighborhoods, drive expensive motor vehicles, dress well, patronize expensive stores, and hyperconsume in a variety of other ways. Most farmers, irrespective of income level, live and work in rural areas. They do not demonstrate their socioeconomic status by living high on the consumption continuum. This applies to most farmers, even those who produce high incomes.
Then they get to the heart of the matter — what makes farmers wealthy despite earning less:
Many farmers are rich because they adhere to the basic rule for building wealth: Whatever your income is, live below your means. This is very difficult to do when you live in a high-occupational-status, hyperconsuming neighborhood that begets even more expenses. Move to Affluent Estates, live next to doctors, join country clubs. You will be mingling with hyperconsumers, but you won’t likely be mixing it up with actual millionaires. If you want to hang out with truly wealthy people, then attend trade shows and conferences put on for farmers, scrap metal dealers, dry cleaners, engineers, and the like. Isn’t it ironic that those who have the so-called highest status afforded by society, who live in the toniest neighborhoods, and who drive the nicest cars are ultimately not the richest?
Yes, it is ironic.
Occupations Better at Accumulating Net Worth
Attorneys and public corporation business people are as bad as physicians at accumulating wealth. Conversely, private company business managers, engineers, and educators are better at creating wealth than what their incomes might suggest. The details:
Highly compensated physicians, attorneys, and managers of public corporations tend to have low wealth indices; that is, they are highly concentrated in the [lower than expected] net worth levels. Managers of private corporations are not. They tend to be quite frugal and invest heavily in their own businesses.
What other occupational groups have significantly higher wealth indices than the norm? Two of the more revealing are engineers and educators, such as teachers and professors. The financial lifestyles of educators, often the lowest-income-generating professions actually have high wealth indices that epitomize the [higher than expected net worth] population in America. Thus, I think it is safe to say that the ways and means to secure wealth building apply to almost everyone who wants to become financially secure.
So what does this tell us about the keys to building wealth? Some thoughts:
- You need to earn a decent income — You don’t have to make $200k a year, but you do need some income, of course. And the good news is that there are steps you can take to maximize your career and earnings — steps that could generate an extra million or two for you over the course of your working lifetime.
- You need to save a good portion of what you earn — No matter what you earn, you have to spend less than that to be getting ahead. And the greater the gap between earning and spending, the better. Keys to success here include being frugal in areas that mean less to you, buying a house you can afford, saving on big purchases like cars, and controlling small spending so your wealth doesn’t trickle out here and there. And you can control several expenses by living in an area where your cost-of-living is low. You get bonus points for having a high income in a low-cost city.
- You need to invest — If you then take the amount you save and invest it in growth vehicles like stock index funds you will super-charge your net worth.
If you do these things for a couples decades or more, you will reach financial independence and be able to retire early.
And the good news is that this opportunity is open to a wide range of people. As the book says, “It is safe to say that the ways and means to secure wealth building apply to almost everyone who wants to become financially secure.”
photo credit: StevanBaird John Deere 9510 via photopin (license)
Mike H says
I work with a lot of doctors so can drop a quick comment related to my observations:
1. Doctors hang out with other doctors and tend to focus on status- that increases spending. Going out to eat, fancy vacations, expensive clothes and houses / condos tend to add up.
2. Doctors are very confident in their own abilities, and sometimes they think this applies to every facet of their life. I have seen quite a few doctors who earn a huge income make horrible investments and lose a lot of their principal in the process.
3. Divorce rates among doctors tend to run higher and that costs a lot of money, that usually enriches the attorney.
-Mike
ESI says
I’ve seen a couple of these in action as well.
#1 — I know doctors who have expensive hobbies like collecting collectibles with little value other than to “have” them. I also have a doctor friend who collects cars — and built a new house to keep them in (six-car garage).
#2 — Simply because you’re great at one thing doesn’t make you great at all things, but many doctors seem to think it does. I remember one doctor friend giving me investment advice and I was thinking all along, “This guy has no idea what he’s talking about…”
Toocold says
Great article. I’m one of the odd balls who is a high earner that works for a public company who loves to save, but I feel the pressure to keep up appearances.
For the longest time, I had an old beater of a car, and I’d purposely parked away from the front entrance. One day, as the head of sales and I were walking out of a restaurant and the valet brought out two cars. He commented how nice my E series was, only to be disappointed when I corrected him and said that my car was the one behind the E series – a 2003 toyota camry. I recently gave in and paid cash for a nice, reliable semi-luxury car, just so that I wouldn’t be embarrassed.
Despite this, I still manage to save between 75-85% of my gross income each year, and I feel great to know that if something happens at work, my family and I will be well off.
JayCeezy says
Awesome story! Reminds me of a great quote, “If you’re driving anything more expensive than a Camry, you’re just showing off!” – Todd Glass
Apex says
This article is correct about farmers net worth but not because they live below their means. It is because the business doesn’t give them the funds to live any other way if they want to survive. I grew up on a farm and am still surrounded by them.
Farming is in the same category as real estate investing when it comes to requirements for capital vs income/cash flow. Namely it is an extremely capital intensive business. A farmer today typically farms 1,000, 2,000, even 5,000 acres of land. Good farm land costs between 4,000 and 8,000 dollars per acre. In the best areas of the country in the middle of the corn belt it could be 15,000 per acre. Very few farmers can own anywhere near all their land but they usually own some. Lets say they own 500 acres. That would require 2 – 4 million dollars. Most of it was purchased over the years of their lifetime as a few funds became available at lower prices but is now worth multiple millions. However the price of rent is not high enough to leverage it and rent it out so that equity is tied up. There is no practical way to extract it as the interest payments would exceed the rent, but when they retire it is worth a mint (of course their kids will need that land to continue farming and they can’t afford to buy it so that creates a conundrum some times too).
Second the equipment needed to farm is extremely expensive. $500K for a combine with all the heads. Similar amount for a large tractor. Planters, diggers, semi trucks, sprayers, more tractors, sheds, bins to hold grain. It is multiple millions for the equipment too. Some or much of it likely borrowed money until one is extremely well established.
Third is the cost to put in, manage, and harvest the crop. High technology seeds (GMO) with traits that allow for better weed control and higher yields, chemicals, fertilizers, fuel, labor, crop insurance, and interest charges. This can easily be another 7 figure amount, all likely borrowed again.
It’s a high risk endeavor and it requires an extremely strong balance sheet to be able to get the funds from the bank to operate. All of this results in meager cash flow as so much of the funds go to paying all the costs of operating and borrowing funds. Some years the end result is a negative for the year which simply gets added to the operating note in hopes of making it back in a better year.
Farmers do not live below their means because they are a frugal bunch or they get the income vs wealth thing. They do so because they don’t have the means to live any other way. (Those living large usually don’t survive the ups and downs long term: 2010-2013 was a good season for farming. Cash flow was large. Some farmers started living large, bought cabins, etc. Things good farmers know better than to do after only a few good years. Some of them that were not well enough established are now being sold out).
Farmers get a high net worth because as they continue to live like this for 50 years, over time, inflation does the job for them and they slowly pay down some debt and their assets increase in value (mostly the land, the equipment depreciates and is worth 20 cents on the dollar down the line).
Farming is really a real estate play and not a cash flow one but an equity appreciation play. When I grew up land was $500-$1000 per acre. Now 30 years later it is $4000-$8000. Every farmer I know who is wealthy is so 100% because of the appreciation of the land they hold.
So it is true they live frugal in their personal lives, but that is because the business requires every spare dollar they have to keep it alive. This is true for many beginning real estate investors who are not cash rich as well.
You feed the business and let it grow. When you live large you steal from the business and the business can’t survive.
The difference between the farmer and the doctor is the difference between a W2 employee and a business owner. You have to think differently or you will not survive. The lesson I see here is if you want to be wealthy don’t think like a W2 employee. Think like a business owner. A W2 employee sees all his income/cash flow as available to him to do with as he pleases. A business owner knows most of that money cannot be used by himself, because the business needs it, and that is how they accumulate wealth. It is all in the business because the business will die without it.
Mike H says
Apex,
That’s a great comment from someone who has been close to the farming business. I knew it was very capital intensive but your examples helped to make this more tangible.
Coopersmith says
Good perspective Apex…. Farming is a tough business and you give some good food for thought….( pun intended)
My brother is a plastic surgeon and his losses on “investments” probably equals the amount of what me and my wife have ” saved for and have actual tangible investments”. He always has been a dreamer and a pie in the sky looking for that next big thing around the corner. He has more failures that successes except for his practice. One hobby of his was restoring old muscle cars until his 1967 Chevelle with a 454 cu inch engine with matching numbers ( a rare find) was stolen. Truck trailer and car were never found and no insurance. Or another hobby was an art gallery that never worked because the prices were high and the subject matter was narrow. He always flys first class and will think of nothing of flying somewhere for the weekend.
His retirement plan is to work doing surgery until he can’t anymore and then start doing minor procedures in the office to keep an income stream. Probably botox injections and other less demanding procedures. But I think there is no thought of retiring due to his expensive lifestyle.
When we were first married my wife asked my “don’t you want to get involved with some of your brothers ventures”. I said no. Just sit back and watch. 26 years later she has seen a lot and she is glad that I am not like him or ever got involved in family ventures because we could never afford it.
BH says
Great post. I’ve seen this paradox in my life, as my parents have a “low status” but profitable business, and I watch my peers in the legal profession who make quite a bit less money than them spend significantly more. I’m so grateful I learned from my “low status” parents to save a big portion of my income starting at a young age, as I now have a level of financial security that I’m not sure some of my peers will ever have, at least at their current spending levels.
Full Time Finance says
Great post. The problem with a high paying job is it can have additional costs and push to fit in. Spending on those things can lead to you spending even further. That imho is why certain high income individuals do poorly in the net worth department. Really it doesn’t take that much to get ahead financially, if you can shutoff all the stuff you don’t need.
DS says
This is one of the lessons that really stands out from Stanley’s book. It’s very counter-intuitive, as marketers train us to believe that consumption = success.
happy1 says
In this country, competency is unfortunately measured by appearances. A competent manager, lawyer or doctor is viewed as financially successful. If a doctor has the trappings of success, drives a luxury car, wears designer clothes and lives in an upper class neighborhood he is viewed as successful and competent. Competency for a farmer is not measured by his appearance or material possessions.
The United States spends $25 billion a year on farms to subsidize a farmer’s income. This money is used to control cost and the supply of commodities. Most managers, lawyers and doctors do not receive income subsidies from the government. In fact, doctors and lawyers create debt in the thousands for training. This debt is usually paid in after tax dollars. More than 1/3 of physicians are employed by a medical organization. They receive a W2. Just as Apex explained the high cost of the farming business there is a high cost in a medical practice. Many doctors do not have a private practice business.
Expectations can be outcome measurements. The job expectations of a manager, lawyer and doctor are different than a farmer. A lawyer and doctor are expected to have perfect outcomes. If an Obstetrician has a bad delivery outcome, he will probably be sued for malpractice. If a lawyer does not win the majority of his cases he will have no clients. A farmer can have a bad year with crops and will not be totally penalized financially.
Education in this county has been linked to financial success. Individuals with MBAs, lawyers and doctors are viewed as highly educated. The years of education and training give the appearance that they are more intelligent than the general population ergo potentially more financially successful.
I agree that a high income does not mean high net worth. I also agree that is important to live below one’s means to create wealth.
JayCeezy says
What country doesn’t measure competency by appearances?;-)
happy1 says
Possibly many countries measure competency by appearances but I have lived and worked only in the United States. I can only comment of my experiences living in the United States.
jc2 says
Some professions have steadier income than others (think doctors vs. sales reps for example). My thought is steady income vs. highly variable income also influences spending decisions. There is a reason why there are specific “Doctor Mortgages” with looser guidelines with respect to debt and LTV. Doctors have steady and high incomes that offsets those higher risk factors for banks. I know squat about farmers, but my guess is their income is less than steady and maybe that is why they are more conservative.
I know when I worked in mortgage banking during the crisis, with companies going under left and right and business highly dependent on interest rates, I spent very little for fear I would not have another paycheck. Looking back, that fear drove me to accumulate wealth. Even if you work in a profession with a steady paycheck, don’t make spending decisions as if your paycheck will continue forever.
CM says
I’m a physician who saves over 50% of gross income.
I posted a question on Sermo.com (a social media site for doctors), “Are you a saver or a spender?” The overwhelming majority replied that they were big-time savers.
There are many of us: http://www.physicianonfire.com/blogroll/.
Perhaps the majority are foolish with money, but I’m skeptical that anyone has reliable statistics on this.
ESI says
A few things (and this from someone who spent almost three decades fielding, interpreting, and acting on market research):
1. The research from the book is just that — research. With stats, professional analysis, and all.
2. How many people readily admit negative things about themselves on social media?
3. Ok, so there are 50 doctor blogs. Out of the ga-zillion doctors out there, that’s a very small fraction.
I’m trying to say that the book is based on actual, commissioned research by people who do that sort of thing for a living. It’s certainly true that research can be wrong (didn’t we just go through an election where almost all polls were wrong?), but IMO it’s better than “gut feel” or personal opinion based on very limited experience.
As with anything, I could be wrong…