Why Americans Earning $500K a Year Still Feel Broke

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1:25Money market matters. If money is evil, then that building is hell. The show goes on! The folks in there have watched the show, show! Welcome to Prof G Markets. I'm Ed Elson. It is May 6th. Let's check in on yesterday's market vitals. The major indices rose and the S &P 500 hit a fresh high after the U.S. said Iran had not broken the ceasefire. Despite Monday's direct hostilities, Brent crude fell as fears that the war would reignite eased, treasury yields fell, and finally Samsung stock rose 5%, while Intel stock jumped 13 % to an all-time high. Those rallies came on reports that Apple might enlist the companies to build chips for its devices in the US.

2:14Okay, what else is happening? Goldman Sachs just uncovered a concerning fact about America. In a survey, roughly 40 % of households earning more than half a million dollars a year, say they are living paycheck to paycheck. That is a higher share than households making between$50 ,000 and$100 ,000 a year. 36 % of those households say the same. Now, there is a debate about what this stat actually means, which we will get into, but it does raise a very important question, which is how much money do you actually need to feel economically secure? So to dig into this question, we're going to do something a little different today.

2:54We're not going to focus on the news per se, but we are going to focus on this survey. And we're going to speak with two really excellent guests to break this down. We are speaking with Ben Carlson, Director of Institutional Asset Management at Ritholtz Wealth Management, and also the author of the forthcoming book, Risk and Reward. And also our friend Ramit Sethi, host of Netflix's How to Get Rich, bestselling author and host of the Money for Couples podcast. Ben and Ramit, thank you so much for joining me on the show here. Ben, I'm going to start with you because I know you've written about this.

3:28You've talked about this on your own podcast. I mean, this data is just quite striking, the fact that you've got people making more than$500 ,000 a year. 40 % of them say they're living paycheck to paycheck. I'd also add people who are making$300 ,000 to$500 ,000 a year. They say the same thing. 41 % of them say they're living paycheck to paycheck. Really striking data. Let's just get your initial reactions.

3:53Ben Carlson:Where to begin? The personal finance people would look at this and say, see, I told you, lifestyle creep. These people, it doesn't matter what you make, it's what you keep and what you spend. But I also think that in a lot of ways, sentiment is completely broken these days. And you have to watch what people do and not what they say. And I think that the idea, the definition of what paycheck to paycheck actually means for people is totally distorted depending on how much money you have and how much money you earn. So I'll just go with the definition that they gave us in this survey. The definition of paycheck to paycheck, according to the Goldman survey, was, quote, I find it tough to make progress on any long-term financial goals.

4:35Ramit, what do you make of that definition and what do you make of the data? In personal finance, there are two things you should never trust Americans about. Number one, how much do you spend on groceries? They have no clue, but they really believe they know it. And number two, the question, are you living paycheck to paycheck? This question is completely absurd. Yes, I live paycheck to paycheck too. After I max out my 401k, I max out my HSA. I pay a$1 ,250 a month payment for my F-350 and put aside money for my upcoming three vacations. It's absurd. Nobody knows what that actually means. And so we have, as Ben put it, we have basically our sentiment is broken.

5:20We go by vibes. And once anybody of essentially any income level hears the word paycheck to the brain short circuits and they just go, yep, that's me too. Yeah. Just looking at the other options that you could have picked if you were polled in this survey, there were two other options. One of them was, so the question was, how would you describe a financial situation? One of them was I live paycheck to paycheck. The other was that it moderately improves each year. And the definition of that was I am able to make some saving progress each year. And then the other option was considerably better.

5:56And the definition of that was, quote, I am able to make progress on both short term and long term financial goals. So that word doesn't mean anything to Americans. The word financial goals, you might as well say how many photons are in your room right now. It's irrelevant. That's not how people operate. And the fact that the financial media continues to use words like goals. What are your goals? Again, the minute people hear that, they shift into this mode. Well, I probably should save more. That's not how people talk about money or think about money. The fact that we are still doing this really speaks to how out of touch the financial press and the financial industry is with the average American.

6:38Ben, would you agree?

6:39Ben Carlson:Yes. I also think that there is something in the financial media that's figured out if we put a stat out like this, the rage bait, we're going to get people really angry about it. And I think that there's something to that where – They got us. Yes, yes, it's true. And I also think that there's just this idea that – I think social media has a big component of this. The funny thing is like wealth inequality obviously is a problem for people. The top 10 percent controls like 70 percent of the wealth in this country. If you go back to the Gilded Age, like the early 1900s, the top 5 % controlled like 90 % of the money.

7:13Ben Carlson:So it was – wealth and equality has always been a problem. But back then, you didn't have like Rockefeller and Vanderbilt tweeting all day and showing their houses and showing their private jets. And so I also think that the goalposts have shifted so much with people that they don't know how to answer these things correctly. because social media has like opened the kimono for so many people that they don't really understand what wealth means to them. Their relative basis of keeping up with the Joneses is so out of whack from what it was in the past. Right. I think this gets to something which I'm going to kind of push back on you both because in a lot of ways, I wonder if it doesn't matter what the definition is because what the survey is basically telling us is that it's how people feel.

7:58And that's what we're trying to get an understanding of. How do people actually feel about their financial situation? Whether or not they're doing okay, I can tell you, if you're making half a million dollars, I'm pretty sure you're doing okay. But the thing that strikes me, and it gets to your point about social media, Ben, is that it's the way people feel about that money. It's the fact that despite the fact that you are in the highest income bracket by a long shot, you still don't feel that good about it. When you're asked the question, no matter what the definition of the survey questions are, what the answers are, you're kind of just choosing the most negative one.

8:36And I guess that gets to this question of like, is there ever an amount of money that makes you feel good or at least not bad? And this seems to tell me that for 40 percent of people, the answer is kind of no. What do you make of that, Ben?

8:51Ben Carlson:I'm of the opinion that financial advisors love to say, like, just figure out what enough means for you and then you'll be happy for the rest of your days. And I don't think that that amount exists for any individual person or household because I think the goalposts can move and they probably should move for most people. If you make more money, like you shouldn't introduce lifestyle creep. Most personal finance experts tell you, no, don't ever spend any more money, never enjoy anything. But I think you should have some lifestyle creep. And it's funny because it's probably bad at the individual level, but better for society that no one is ever really content with what they have.

9:23Ben Carlson:It's like what pushes us towards progress and innovation in these things. But it also is what makes people never satisfied. And I think once people reach their goals, if they have a goal in mind, right, they get there and then they realize like, oh, man, I feel the same. I don't feel any different at all. I said, if I make half a million dollars, my life is going to be easy. I'm never going to have to worry again. But I still have all the same worries and nothing changed. Yeah, this seems to be the thing that, that's my takeaway at least from this survey. It's honestly a little concerning. Ramit, you've consulted with lots of different households across the entire spectrum of income.

9:59Does this reflect what you see among higher earning households? Yes. And I think it's I'm not particularly interested in asking people how they feel about money at large in America because the answers are always wrong. Why ask a question where the answer is only going to get you bad data? And think about it. We are the product of the media that we consume. As Ben pointed out, the media loves to rile people up, get them feeling worse, and then enact whatever policies they are trying to enact. So when it comes to actual mastering your money, there's two parts you need to do. Number one, you need to know your numbers.

10:35The average American does not know their numbers. 50 % of the people I speak to do not know their own household income. It's a running joke on my podcast. I will invite them on every week. We look at their income. I go, cool, did you know that number? They do not know. If they don't know their income, are we seriously expecting them to feel good about money, to do Monte Carlo calculations? Absurd. The second thing they need to do beyond knowing their core four numbers is they need to master their money psychology. Unfortunately, this is not taught. It's also highly undervalued by people. Money psychology, no one's going out there to pay to learn how to do it.

11:14They don't think it's that important. But that's also part of the reason they feel bad about money, mostly for their entire lives. Do you think that those people who are making half a million dollars a year and saying that they're paycheck to paycheck, do you think maybe they don't know what their income is? Do you think that could be it as well? That's part of it. Again, they're no different. If you earn money, doesn't mean you know your income. But in the same way that if we ask a toddler, do you think it's fair how much candy you're allowed to eat? And they're like, no. If you ask the average person, hey, do you feel you live paycheck to pay?

11:43Just like, yes, I treat it the same. Blah, blah, blah. You want more candy? Okay, say what you need to say. That doesn't mean we're going to give you more candy. We need to, yes, take more responsibility for our own money, of course. but the average person is now being fed this machine of information that is designed to make them feel bad and keep clicking. What do we expect? I guess the question then becomes like, what are we supposed to do about it? I mean, if we're living in a society where even if you make 300 to 400 to 500 plus thousand dollars a year and you still feel kind of shitty about the situation, then I feel like this society doesn't really work anymore.

12:27At least it doesn't work in the way it was supposed to. I mean, this is, we're supposed to be looking at the surveys and learning life gets better. You improve the more money you make. And I guess I'm starting to think like, what are we supposed to do about this? I mean, is it, is this a social media problem? Do we need to stop looking at social media? Do we need to stop reading these surveys? I mean, Ben, And what are we supposed to, I guess, take away from this data?

12:55Ben Carlson:So in the wealth management industry, the biggest question everyone wants answered, regardless of how much money they have saved, how big their portfolio is, am I going to be okay? If I make this decision, am I going to be okay? If I buy this second home, if I buy this new convertible, if I take my family on a trip around the world, whatever it is, am I going to be okay? And that's the one that's hardest to answer because everyone's dealing with the same unknown future. All the variables, what's going to happen in the stock market, what's going to happen with the next election and inflation and all these things, no one knows.

13:25Ben Carlson:And that's the hardest part is finding someone else out there to make you feel comfortable enough. And I don't know if that's a spouse or a friend. For some people, it's a financial advisor. But that's the thing that people have the hardest time with is – and the hard part is the more money you make, the more rich people you hang out with. So you stop feeling rich anymore. Even though by any objective measure, you're in the top 1 % of the 1 % or whatever, you still might not feel rich because, well, geez, I fly first class, but the person down the street flies private. I'm not rich. And so that's the hard part is trying to figure out how to just move your goalposts a little instead of moving them a lot.

14:03Yeah, it's interesting just looking at the chart. There is a sweet spot based on this data, which is$200 ,000 to$300 ,000 a year. only 16 % of those households or those people say that they are living paycheck to paycheck, which is the lowest of any group. And it makes me wonder, like, maybe there is a sweet spot. Maybe there is an amount of money where you're not really on this hedonic treadmill. You don't feel that you're so much in the rat race, but also you're comfortable enough to feel good about your situation, maybe? I mean, is there a sweet spot? No, no. I mean, how many hugs do you need to give your partner in order to let them know that you love them?

14:46Is it two? Is it 20? Is it 32 per day? I mean, come on. Quantifying this is totally absurd. And actually talking about these surveys is also absurd. We might as well throw out a survey that says Ramit Sethi is too handsome for the internet. 72 % of people agree. Let's discuss that. We might as well. It's actually more relevant than this. But when it comes to what are you supposed to do? Yeah, you do need to work on improving your relationship. Just today, I have an episode on my podcast of a couple. They, he won't buy a new office chair. He's had his chair for like 15 years. It's aching his back.

15:20She has holes in her pants and they are so struck by ultra frugality, by scarcity. I work with them. I talk to them. There's lots of reasons they feel that way. Eventually, I show them if they stop investing today, never add another cent. At retirement, they'll have$9 million. This is quite common. Common in the sense that almost nobody knows what they're going to have, even at age 65, which is a very simple math calculation. And it was shocking. That insight alone, that all of us spend our entire lives worrying about money, but never run a couple of basic calculations that's just the first step you got to know your numbers then you got to stop trying to quantify your feelings it doesn't work working on your feelings directly and your relationship with money that's the only way to actually heal it yeah it is funny ed your your question about

16:14Ben Carlson:quantifying it so we have like these different break points for our firm in terms of the clients we work with so there's the people who make who have less than a million dollars up to five million and then there's the people who have five to ten million ten million and up and then like 20 million it up as, you know, ultra high net worth. And I've talked to our advisors about this. And I say, who are the clients who have like the least amount of stress? Because at a certain point, money becomes more of a responsibility than a stress. And they say the sweet spot is somewhere in like the five to$10 million range for wealth management clients, because it's enough money where you know you're going to be okay.

16:46Ben Carlson:But you don't have enough money where people are constantly trying to reach into your pockets and make you do something and give money away or help them out. And so we've actually talked about this is like, what is the least stress value? But if you talk to those people, they're not going to think that. That's the hard part. They're going to say, no, no, no, no, I want to be on that next level. I want to have more responsibility. So that's like the really tricky part is like you think you have this narrowed down, like this is the perfect number. And then you get there and you go, no way, that's not, no, I need more.

17:15Ben Carlson:It's got to be more. Right. It sort of brings up the question of like, what is even the ultimate goal when it comes to money because, I mean, you know, we know that how we rank different countries based on GDP and, you know, US is number one, but then we also have happiness rankings. And of course, America continues to fall in those rankings. But you also bring up an interesting one, Ben, which is like, maybe your metric is your level of stress. Maybe that's the thing that we're trying to gauge. I guess for both of you, I'll start with you, Rami, like, what is the ultimate goal when we're talking about money?

17:51What are we even trying to achieve when we talk about money? This is the question, because the goal of money is not to save it. It's certainly not to hoard it. I believe the goal of money is to use it to live a rich life. The reason that so many people are living in a spreadsheet, comparing themselves to their neighbors, is that they don't actually have a vision of a rich life, I ask them. 85 % plus of people who I ask that question to say the same answer to me. I want to do what I want, when I want. I go, cool, what do you want? They just blink. They've never thought about it. Working 40, 50 hours a week, listening to all podcasts, never thought about what they want.

18:34And I push them. I really push them. I never accept them just saying travel. I want to know what airline seat, what are they going to be seeing? What's it going to smell like? What hotel? Who are they taking? When you start to have a beautiful, crisp vision that is perfectly unique for you, then you start to use your money in a way that lets you live it. It can be luxurious. It can be simple. That's up to you. But if you don't have that and you're not actually using your money for certain specific money dials, it's just a theoretical abstract number. And of course, you never have enough. Ben, do you find that with your clients?

19:09I mean, do you find this sort of dynamic of that kind of hoarding and saving, waiting for the thing, and then it's not even clear what that thing actually is?

19:17Ben Carlson:That is a problem that I never expected to happen, that you have to force people with money to spend it. One of our advisors, when I first joined the firm 10 years ago, said, we have to have conversations with our clients and give them permission to spend their money and enjoy it. Take that vacation, give that money to your child so they can be better off. and you have to tell them you're going to be okay if you spend this money because people develop habits over 30 or 40 years and it's save save save get the nest egg bigger and bigger and bigger when it's time to turn it off and they have no more income left and to spend it down they see the portfolio value go down and money like they see their principal eroding they can't handle it and they so that's actually a huge problem which i mean you know first world problems obviously but there are a lot of baby boomers out there right now like that who can't force themselves to spend the money and they need permission to do it because they think, what if I outlive the money?

20:11Ben Carlson:What if something really bad happens and there's a market crash or whatever it is, and they need permission? And that's the hard part is you spend all your life saving and saving and saving. What's the point of delaying the gratification if you're not going to be gratified at some point? Right. Yeah. I wonder if, I mean, underspending might even be a larger problem in America than overspending. Maybe not based on savings rates, but it is a problem nonetheless. I agree with Ben. It is a big problem. And it's largely intractable, in my opinion. The people who I speak to who are hardcore, frugal, will not spend, you know, they have a number that they will not exceed.

20:54They almost never change. It is really, really difficult. The math does not affect them. It's an identity.

21:01Ben Carlson:Yeah, you're fighting decades of habits, right? Yeah. Even generations, their grandma may have said something that their mom repeated 25 ,000 times and then they grew up. So they have millions sometimes or just more than they need. They don't, they can't internalize that. So I think, Ed, it is a serious problem. I do think overspending is a humongous problem in America in general. But underspending is under-discussed. Stay tuned for more of this panel after the break. And by the way, we are heading out on tour at the end of the month. So for more info and to get tickets to a show near you, head to ProfGMarketstour.com.

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