The Power Struggle of Saving: Choosing Modesty over Flashy

Americans are given a nauseating amount of information about personal finance everyday. When people find out that I worked in private wealth management, they often ask for personal finance advice about how to get ahead. Even I find myself reading articles online and listening to podcasts (I find watching the news to be annoyingly negative and time consuming, but everyone’s got their sources for information).

And for what? We’re all searching for some “secret sauce,” or magic to managing our finances when the truth is there is no short cut for those of us who abide by the law. From my work experience, I can say that there is a clear distinction between the affluent, the middle class, the working class, and the poor. High income earners have the opportunity to buy/borrow money with an ability to payback significantly more quickly than the other groups, who often scrap to make ends meet.

Recently, I got slapped in the face with my own socioeconomic privilege. I had to replace the tires on my car and a cell phone all in one week. I was so upset about these two unexpected expenses, as I’m still in business school and have a fairly tight budget for the remaining 3 months that I have left. But then I realized it could be worse and I felt better. But still complained about it.

During the break, it was absurdly cold outside with temperatures in the -30s when factoring in the wind chill. I was walking around one of the Cornell buildings, looking for the mailroom to drop off a package. As I approached the corridor, I noticed a woman mopping the steep staircase of the old building. She worked at Cornell in the facilities department. I smiled and said, “good morning,” and sympathetically asked her, “No day off today?” The rest of the campus was closed due to the College’s February Break and with the reported frostbite cases, I found it a bit outrageous that the facilities workers were expected to work. The woman responded, “Nope, but we got MLK day off. I was outside shoveling for over an hour early this morning. I could barely feel my fingers even though I had on gloves.” I thanked her for her work and smiled, uncomfortably, as I headed on the elevator.

I didn’t know what to say. In my mind, I was thinking to myself: you were just complaining about tires for a car that is not required in a town with solid public transit and an expensive cell phone that you chose to purchase.

I caught myself big time and decided to confess my sins (right now, in this post). Everyday, we have working class people making it work on annual incomes of less than $50,000/year for their 4-person families. They often take on jobs that don’t lead to fulfilling careers, nor do they always have the time to think about what a fulfilling career would look like. While some are completely content with their work, others sacrifice their happiness for the sake of building a legacy for their children (mostly by making their children first generation college students).

Then there’s the middle class, which sometimes can afford a new car or home, and sometimes can’t afford a new car or home, but fail to realize/accept this truth, in the latter. This group has challenges identifying what they can and cannot afford due to being the primary source of growth for the overall Economy. Advertising agencies target this group heavily, and the middle class makes up a significant portion of the purchases that help stimulate the country’s growth and stability. The middle class struggles with maintaining their lifestyle in challenging times, and has a hard time cutting “luxury expenses” given the persona and perception that they want peers to maintain about themselves. They have a “keeping up with the Joneses” mentality. College grads and Black Americans are notorious for this; in a recent poll, while $70,000 is all that is required to live a “standard, middle class life,” college grads believe that they need $80,000 and Black Americans feel that they need $75,000 — these are two major outliers in the data (see Pew Social Trends).

For the upper class, rich is just that – RICH. A great challenge for this group is identifying themselves (individuals in major cities often don’t realize that they’re in the top 5% because of lifestyle choices). But most importantly, the primary issue is in keeping their money from the government (I’m not arguing that they should do this at all – later, I will argue the opposite). Otherwise, this group has no problem with buying a new car, or home — nor do they have problems with random expenses that come up; they can almost always cash flow it.

As a reference, here’s how most sources “roughly” define classes ($/year for a 4-person family):

Poverty Line: less than $25,000

Working Class: $25,000-$50,000

Middle Class: $50,001-$150,000

Upper Class: greater than $150,000

In my opinion, salaries are limiting because they don’t consider special situations. The more accurate way to calculate class would be to measure wealth accumulation rates, assuming that people contribute the as much as they can based on their income. At present, for people under 50, a combined 401K ($18,000 max) and IRA ($5,500 max) allowed (before penalty) contribution maximum for 2015 is $23,500. 

Let’s walk through the first one together. Let’s say Sarah has an income of $22,000/year, and she contributes $235/year, which is 1% of the maximum allowed. Assuming that her annual contributions start at age 18 and remain constant, she will have ~$50,000 if she decides to retire at age 68 (50 years later). Note: Retirement estimate assumes 5% annual growth rate and 50 years of work from year contributions begin.

Poverty Line: less than 1%

Annual savings (AS): $235** & Estimated Retirement Savings (ERS): ~$50,000

Working Class: saving 1-6%

AS: $1,645 & ERS: ~$350,000

Middle Class: saving 6.1-20%

AS: $4,700 & ERS: ~$980,000

Upper Class: greater than 20%

AS: $23,500 (until hit govt limit salary of ~$400,000) & ERS: ~$5,000,000

**The same as a new pair of Jordans; hence, the photo for this post. In celebration of Michael Jordan’s 30th anniversary of his first sneaker, I decided to call out those who fail to realize that a $200+ pair of sneakers is rarely an actual “need,” although the shoes are often misconstrued to be essential to life (like the air that we breathe as someone once put it). Source: http://fivethirtyeight.com/features/you-see-sneakers-these-guys-see-hundreds-of-millions-in-resale-profit/

As you can see from the retirement contributions, the accumulation of wealth is pretty significant when you you hit the 20% mark, which is about $5,000/year. It’s important to save as much as you can as early as you can. It’s never to late to revise your budgets to add an extra few bucks. The second point is perceptions of class and what is “needed” to live is often too liberal amongst the middle and upper classes. Going back to my story (yeah, when I got slapped by my own entitled attitude), I don’t need a car or fancy phone to survive – these are luxury goods that I’ve chosen to purchase. For the working and middle classes, wealth accumulation is about sacrifice. The next time you think about spending $500 on a new phone, you should ask yourself: can I cut $500 from somewhere else in my budget to add to back to my savings? In 50 years, with conservative investing, that $500 could turn into over $100,000 for someone’s college, savings, or healthcare costs.

For the lower percentile-earners (includes the working class and those below the poverty line), it is our responsibility as citizens and/or contributors of this Country to support these people. Help entails: 1) funding schooling for more lucrative trades, 2) covering certain crucial expenses (AKA entitlement spending), 3) helping with healthcare costs, and/or 4) reevaluating of the role of these folks have in our economy as a whole. In my mind, everyone has some value to this country and I think if we can optimize the contributions, as workers, consumers, etc., then we will all be much better off.

What Exactly Does It Take?

My last two posts have been about recent events that have occurred in my life. I find myself in these discussions around inclusivity and intersectionality often, and I’m fairly comfortable addressing people’s ignorances on a regular basis. However, I’ve had conversations with friends, particularly those within the business school (where the culture is representative of corporate America: incredibly pretentious about anything social and extremely comfy with all things economic), around respectful disagreement.

I also had a class last semester in the Industrial and Labor Relations school called “Values, Rights, and Justice,” which focused on individual and collective values, the rights that we claim are important, and the just/unjust methods that actually exist. In a nutshell, we spent time reading fictitious works (essays, poems, short stories, and books) to pull out the truth: America is one big contradiction, or MindFuck (we read this book in class too). We spent a large amount of time, not only identifying the institutions that informally allow unjust values to exist (with their cultures), but also on what our roles, as responsible citizens and/or contributors to America (and the World), should be. The conclusion was to discuss the issues as they come up, particularly those that occur at everyone’s kitchen table.

The infamous “kitchen table talk” is when people talk about race, gender, religion, politics, and a slew of other “untouchables” with close friends and family members; the conversation is often understood not to be shared outside of the group. An example might be when you’re racist, white uncle mocks black people through tragic stereotypes, or validates his preference for “a real American,” or “a devout Christian” when asked for his assessment of President Barack Obama’s tenure. A second example is when your black grandma calls all white people the ugly devil, all of whom will burn in hell for their behaviors on Earth. Another example is when your close friend asks you if you really think that women can perform as well as men in business, in general (this one really stung).

I’ve been confronted with “kitchen table talk” both at the kitchen table, but also at school and work. People show their true, ignorant colors in these moments. At school and work, the delivery is often softened, but still very transparent. I’m interested in what motivates people to actually do the right thing? I believe that people have some sense of the “right” thing, but refuse to accept it as truth for fear of loss of their own privileges. The cover story of last week’s The Economist, my favorite magazine, “America’s new aristocracy” focused on how the elite, upper/upper-middle class, through legacy is taking all of the opportunity unfairly. For example, let’s say you have two kids: 1) a kid from Little Rock, Arkansas who grew up in a single-parent home where the parent has an Associate’s degree and 2) a kid from Washington, D.C. who has two parents in the home, both of whom have master’s degrees. The Little Rock kid will be disadvantaged throughout life (college search, college admission, job prospects, career decisions, etc.), while the D.C. kid can perform better with less diligence; the D.C. kid is in an elite circle, regardless of whether or not they attend public/private school, because of her parents. In the book, Freakonomics, a similar argument is made: “Intellectual capital is heritable,” (The Economist, week of 01/24/15). At one point, the article highlights the importance of privileged individuals to recognize their privilege and the negative, unfair impact their privilege has on, arguably, harder working individuals with limited resources; the article isn’t suggesting that I make my future kid give up her spot to Bowdoin in 2040, for example, but that I look for ways “to level the playing field.” Perhaps, I participate in Admissions work to create formulas/metrics that weave in more kids with limited resources, making my kid’s chances of getting into the College harder, but fairer. The article argues for systemic change agents from America’s elite.

So what exactly does it take to get more courageous, honest people? I’ve never had a problem with calling people out, respectfully, of course, or being called out for my own flawed perceptions (I’m also of the belief that bigoted people aren’t the problem, but your/my reactions to them are). Do people actually have to see a net benefit for themselves and their businesses in order to act in the interest of the whole? This has been a recurring metric within several of my business school courses, and I’m not totally sure that I buy it. I also think that I can show a net benefit for acting in the interest of the whole country, company, or whatever over oneself. But why do I have to? Do we?

With an degree in Economics, I’m happy to prove through cost-benefit analysis that diversity and values rooted in equality are going to benefit entities more than individual prerogatives. I’m still perplexed by this issue, maybe it’s purely a human trait that people only care about themselves. I welcome additional thoughts or comments on this issue.