• 03:35:20 am on July 26, 2008 | 5
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    Living off $250,000 a year …

    Now, I was really interested to read this section of Michael Masterson’s latest book, because this is the number that I aimed at in 1998, after attending a seminar by Peter Spann – a well known, well regarded Aussie Finance ‘guru’, self-made multi-millionaire (he started by working in a supermarket!), and all around great guy and very understated in appearance (he only gives his wealth away by the roar of his Ferraris!).

    But, we’re not here to talk about Peter, so let’s hear what Michael has to say:

    Again, assuming a … tax burden of 35%, you’d end up with disposable, after-tax income of about $160,000 a year.

    And, again, figuring that 25% of $160,000 will go into housing, ask yourself if you could be satisfied living in a house or apartment in your chosen neighborhood that would rent for about $40,000 a year or $3,300 a month.

    Figuring, again, that you’d spend 30 percent of your housing budget on associated living expenses, you’d budget about $12,000 a year for utilities, repairs, maintenance, and upkeep. Other associated expenses – food, clothing, and so on – might account for another $13,000 a year, for a total of $25,000.

    Subtract the cost of housing ($40,000 a year) and associated living expenses ($25,000 a year), and you are left with about $95,000 to spend on luxuries.

    Now, let me cut in here on a couple of points:

    1. As yesterday, Michael calls this a $2.5 Million Lifestyle, but I believe this to be a $5 Million to $10 Million lifestyle … you WILL go broke if you attempt this on anything less than $5,000,000 … I should know!

    2. Here is the weakness in the ‘rent as a proxy for the purchase’ estimate; you see, you may be able to rent a very nice place for $40,000 a year as Michael says:

    In my neck of the woods – near the ocean in southeast Florida – that would get you a nice, older, two- or three-bedroom house within walking distance of town. If you want to live in Minneapolis, you’ll do much better than that on the same budget. (Don’t laugh. It’s a great city.) On that kind of income, you can live there in a modern, spacious, six-bedroom house with all the bells and whistles.

    The problem is, when you get to the ‘luxury house range’ rents become a relative bargain compared to the purchase price.

    For example, my “modern, spacious, six-bedroom house with all the bells and whistles” may rent for $40,000 to $50,000 a year (that would give somebody who paid $1,000,000 for the house a reasonable 4% – 5% return) but, it is actually worth $1.8 million!

    So, in my estimation, your $250,000 a year lifestyle won’t buy you a home much north of $1,000,000.

    Now let’s look at what ‘mouth watering’ selection of luxuries Michael offers up to those who can free up $95,000 of after-tax, after-housing, after-living, after-everything-else disposable income:

    10-day Hawaaiian vacation for two    $11,000
    10-day London vacation for two    $11,000
    52 semi-fancy dinners at $200 each    $10,400
    52 dinners at the local place at $100 each    $5,200
    Lease upgrade on two Mercedes    $14,400
    Overboard holiday party for 50 friends    $7,500
    Extravagant Christmas gifts    $3,000
    Golf membership for two    $5,000
    “Spoil ’em” presents for eight grandchildren    $4,000
    52 spa treatments    $5,200
    10 percent charity/church tithing    $9,500
    “where did that money go?” money    $8,800
    TOTAL    $95,000

    Now before you get too excited, what about the children? They eat, they sleep, and at these income levels they go to expensive schools (speaking of which, when you own a house in a nice public school area, don’t forget about yearly Land Tax!) … if private, that will set you back $10,000 to $15,000 per child per year!

    Then there’s saving for college ….



  • Scott 7:02 am on July 26, 2008 | #

    All good points. Let me tell you, as my wife and I were struggling living off of 35k/year (before tax), while I was in college finishing my doctorate, we felt like superheros for about 5 seconds when I first got into practice and we were making about 100k/year together before tax. Then the realities of your previous post set in and after paying 30-40k in tax per year and raising our lifestyle even marginally, it was all gone in an instant and you wondered what happened to that magical “6 fig family income” at the end of the month.

    Now that we approach 200k/year, we have learned our lesson and have not increased our lifestyle above what it was when we were making 100k/year, so we now get some traction each month in growing financially, but it’s still not wealthy living by any stretch of the imagination. I can see where 250k per year living would not make it that much more extravagant, although I did figure that when we reach our number of 10 million and can have that 250k yearly lifestyle, we could be mortgage free (and student loan free of course!) and still not break the 20% primary residence rule with our home, so that would free up a decent chunk per month for travel and goodies as well…..

  • AJC 9:40 am on July 26, 2008 | #

    @ Scott – all good points, too 🙂 I was previously drawing a Making Money 201 ‘salary’ of $250k, but then again, we had cars, phones, technology all taken care of by my various businesses and no mortgage on the house. Now we are doing our second ever ‘no budget budget’ to see what we can afford to maintain now that we have transitioned to Making Money 301.

  • Scott 6:42 am on July 27, 2008 | #

    That’s interesting, our cell phones and one of our 2 cars is being covered by the business that I work for as well! (the other car we have, we paid off on our debt elimination plan and began our entrance into the “never finance a car again, ever, plan”) so we are now seeing the light at the end of the tunnel on having stupid consumer debt paid off and soon ready to invest. And thanks to your awakening logic, we have decided to forgo saving 6 months of emergency money to be eatin’ away by inflation, and just reduce it to maybe 2 months of expenses. Thanks!

  • AJC 11:33 am on July 27, 2008 | #

    @ Scott – make sure to factor any ‘business expenses’ into Your Number that will continue after you stop working. You MAY keep the business post ‘early retirement’ (so that you can get working on Your Life’s Dream), then again, you may not … and, one day, you certainly won’t 🙂

  • Ideal Budget Allocation? « How to Make 7 Million in 7 Years™ 12:34 pm on September 2, 2008 | #

    […] you to some typical personal budget allocations at varying income levels i.e. $100,000 p.a.; $250,000 p.a.; and $550,000 p.a. (before […]

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