Financially Drowning on $300k a Year

Exorbitant Salaries don’t make for Exorbitant Lifestyles

Here is an interesting paradox: the world is experiencing the largest bull market in history, but fewer than one out of five Americans feel like they’re living the American Dream. Many of these people have incomes ranging well above six figures, in the vicinity of $200-400k, and still worry about making ends meet. 

In 2018, the Department of Housing found that a salary of $117,000 is considered low income in San Francisco. Effectively, making six figures puts one into poverty in SF (if you are taking care of a family). Sadly, this is not a trend isolated to the Bay Area. There is a financial disparity amongst people who are in the top 2% of earners in the U.S. who live in expensive areas, and not because they can’t afford a yacht.

All-together, these families are earning a tremendous salary by any standard (often more than $300k per year), attending the most prestigious graduate schools and coming from upper-middle-class backgrounds. The scariest part is that these are not people you’d expect to be struggling. In fact, if you took and average U.S. family of four and told them that a family who made $300k/yr – the top 2% of income in the U.S. – was struggling, they would laugh hysterically.  They would never believe you because the median US salary is $62k. It would be called fake news.

Unfortunately, this story is playing out across the country. Of course, it is not happening everywhere nor is it happening to everyone.  It is primarily happening to secular people that have kids and live in ultra-expensive places like New York City, DC suburbs, Bay Area, etc.  The inflation rate in those cities for core goods (housing, healthcare, and education) have been growing at a rate of more than 10% a year for the last 10 years. How do these elites manage to keep afloat? The short answer is that they’re not able to and the consequences could have a drastic impact on the future of our nation’s democracy.

Sisyphus’ Hedonic Treadmill

The Elite With No Savings (TEWNS)

A necessary piece of the puzzle requires imagining what these people look like; how fanciful are their lives that they feel like they are working class on $300k a year? People have a tough time believing this because on the surface, The Elite With No Savings (or TEWNS) are doing well. To paint the picture, these are families with two college educated parents, perhaps they met at an Ivy League school, with young kids.  They live in expensive cities, far from their parents, while paying off a mortgage. Daycare and expensive schools are a must for these families, eating into their bottom-line and leaving almost nothing for savings. 

For the top 2%, life should be different; they played the game well by delaying gratification and they went to a top school while knocking their academic careers out of the park. They passed the Marshmallow Test. Still, many are financially underwater after learning that there’s more to life than just academics.

Indeed, their lifestyles are designed to keep up with their better-off neighbors. They are social, connected, and influential. But, they are not financially well-off. Peering into other’s lives, we only see a glimpse of the iceberg at the top of the ocean. Yet, beneath the glacier, these elites are stealing from their 401k cookie jar to pay for their kids’ education; the next month, they might borrow $10k from their parents to cover a medical emergency or to help pay for an impromptu visit to check out universities. This doesn’t begin to address the fact that many of these TEWNS are still swimming in mountains of student loan and credit card debt that will likely go unpaid for decades. 

There are government workers – two earners making $150k each – that were forced to take loans during the federal shutdown: their savings were insufficient to last even a month. Despite one’s salary, if one’s savings can’t even last a few months, how is anyone supposed to feel rich? Case in point: there are TEWNS I know who AirBNB their home every time they vacate it (as short as a weekend), something one wouldn’t assume from a household making greater than $300k a year.

As a personal aside, when I was growing up my mom moved into the garage while renting out both the side room in our house and then the main bedroom. She was doing everything she could to get by — which makes sense because she was making an equivalent of $50k a year in today’s dollars. Renting out a spare bedroom is societally accepted when you’re living under the U.S. median income. 

If you are living under the median, money is always going to be an issue for your family. But when we read this about someone with an income at the 98th percentile renting out their spare bedroom just to get by, this story takes an entirely different (and highly depressing) turn … and this is becoming all the more common in today’s America. Today, even coastal elites can’t handle the rising costs and expectations.

Measuring Elite Poverty

As is the case with privilege in any form, one cannot speak of it as it is essentially a heretical topic. 95% of Americans would slap you in the face if you told them you made $300k a year and were having money problems.  Most would gladly trade places with you in a heartbeat. Nevertheless, it helps to understand the history and metrics we use to we measure income disparity at the very top – how can we quantify who is struggling when people are making enormous sums of money?

The Gini Coefficient was first coined by Corrado Geni in 1913 after a prior encounter with the famous economist, Max Lorenz. Lorenz had done some work on trying to find a hypothetical graph behind total equality, essentially a diagonal line up and to the right. Gini’s contribution was that he placed the population’s real income alongside Lorenz’s platonic ideal. That difference between the two lines is what is now called the Gini coefficient.

The Gini coefficient works well under certain boundaries – the middle between the bottom 40% and the top 10% – at the extremes, however, it breaks down. Rising inequality, especially among the wealthy has made it necessary that another criteria be formed to keep track of income changes at the upper echelons of income. To this effect, researchers coined the palma ratio, dividing the richest top 10% of the population’s share of GNI (Gross national income) by that of the bottom-most 40%.

Indeed, there is a massive economic difference between the top .001% and the .01%. A narrative violation is that in these interesting times, the rich are also struggling financially, making it a pertinent threat to the fabric of America’s democracy. 

Keeping up with the Joneses is like trying to reach the speed of light; at some point, it’s a futile task. And as the palma ratio shows, the disparity between the top 1% and the top 2% are widening. Add to this the fact that it is incredibly difficult to save in California, New York, New Jersey, DC, etc.  The costs are rising and the income taxes are only getting higher. State taxes are also no longer deductible against federal taxes.  

How can we address this issue?

Stop keeping up with the Joneses – it’s possible.  If you feel everyone around you is richer than you, move to a new place. The relative income hypothesis says that no matter how much we make, we feel happier when our income is higher than those around us. Essentially, you want to be the richest person on your block, not the poorest.  

Tyler Cowen, an economist and best-selling author, makes the case that to increase family well-being, America’s poor should move around the country as “ultimately we wish to protect people, not places per se.” After saving as much as one can, it’s the best strategy to move to an area with low taxes and good schools.  In the U.S. some of the best places are Dallas, Raleigh, Atlanta, Denver, Tampa, Nashville, Houston, etc. Or move near your parents (the kids’ grandparents) so you can take advantage of additional childcare. As they say, it takes a village to raise a child.  

People are too nervous about moving; They are too skittish to uproot their family as we can see from the above graph. Therefore, America is at the lowest levels of interstate migration since the 1980s, foreboding a future where the wealthy only live with the wealthy and the poor live side by side with those in abject poverty. 

Recently, two people that work with me at SafeGraph independently moved from San Francisco to Denver.  These are both high-achieving people with families (or plans to start a family) and they know that if they stay in San Francisco (with all its allure) they have a high chance of becoming TEWNS.  They are proactively moving so they do not end up on the Sisyphean Hedonic Treadmill. 

They are moving from San Francisco but it is not like they are moving to a dump.  Denver happens to be one of the most beautiful cities in the world. It has access to some of the most beautiful nature. If you love the outdoors, Denver is world-class: the city has great restaurants, nightlife, and is a lot of fun.  The airport is one of the best and connects everywhere. And, of course, Denver is substantially more affordable than San Francisco. A comparable house costs half as much. There are areas of the city with terrific public schools (and you can guarantee that your kid will go to the school if you move to the area).  And the Colorado state income tax rate is 4.63% which is roughly 2/3 less than California’s top rate of 13.3%. So people living in Denver will save a lot more than those same people living in San Francisco (who might not be able to save at all).

The key thing is not how much one makes, but how much one saves (after taxes).  If the goal is to be worth more than $100 million, stay in San Francisco or New York City. Instead, if the dream is to have a net worth of a few million while living comfortably and taking care of your family, you should likely move.  

Political implications of the rise of TEWNS

As the number of TEWNS proliferates, they will be open to ideas at the long tail. The people who were in the top 2% of income were formally the bulwark against populism. These people were formally the next tier of leaders.  

As TEWNS are becoming more left-out, they are more and more open to radical ideas. Political ideas (both on the left and on the right) that seem completely radical just a few years ago are now extremely appealing to TEWNS. 

And remember, TWENS are connected.  They went to college with Ivanka Trump, Cory Booker, Jared Kushner, and Pete Buttigieg.  They took classes from Elizabeth Warren in college. The have friends that worked in the last three White Houses. They know many influential people. Effectively, they have sway and power working at technology companies, within important government positions, or even writing for the New York Times.

These are people that are rarely radicalized in societies.  Traditionally, the top 2% has had too much to lose in most societies.  They don’t want to blow up the system á la Fight Club, rather they prefer gradual change. All of that is changing however. The foundation has shifted from beneath our feet. Today, TEWNS are open to more and more ideas that are out of the mainstream, pushing our political systems to their very limits.  

Summation: try to avoid being a member of the TEWNS.  Move if you can. Try to avoid keeping up with the billionaire Joneses. 

Special thank you to Anirudh Pai for his help and edits.

12 thoughts on “Financially Drowning on $300k a Year

  1. Elizabeth L Michiels

    Interesting post Auren. I write this from Seattle where I moved to from SF almost 10 years ago. It rings very true for me and all of the other Californians (tons of Berkeley grads) up here.

  2. Steve

    Where did you find the inflation rate for core goods that metioned (10%)? I’ve always felt this living in the Bay Area but couldn’t find any good sources to measure it. Whenever I watch bloomberg and they go on about inflation being at an all time low it completely clashes with my day to day reality.

  3. amalia hoffman

    Auren, I think that the main problem these people who earn over 300 K a year & can’t save is that they do feel like they have to keep up with the Johnson’s. Even in NY & SF, it’s a matter of choice how big a house to buy, what car to drive, what restaurant to eat in & how ofter, how to furnish your house & what sunglasses to wear. The choice is theirs- so be wise how you spend. Doesn’t make any difference to your kids if the dining room set is less than posh or if they’re driven around in a second-hand car.

    1. Misha Kazekin (@mikaza)

      Unfortunately it’s worse than that, as the quality of education is not really good in most of the American cities. Also, most of the Bay area, Seattle and NYC companies are far from being open to truly remote positions. People are driven by opportunities and, usually, they are concentrated in certain locations. But then you have to constantly advance your career as it is the only efficient way to keep up with real estate bubbles. If you are an IC and want to stay such, simply forget it.

  4. Scott Allen

    Even if you are living in a less expensive area, driving an older car, and saving, all it takes is to have one financial stretch, like a house down payment, followed by a couple of unexpected things, e.g., a layoff, medical expenses, legal expenses, a major market downturn, etc., to completely wipe your savings and decimate your cash flow.

  5. oded korczyn

    Thanks Auren for writing this thought provoking piece. I can very much identify with much of it.

  6. Rebecca Greene

    One small point – agree that people at $300k in a major city don’t have excess cash in savings for an emergency if they are living a full life, but technically in the example above the family actually put $50k+ away in savings between the 509, 401k and what they are likely building in home equity every year. And in the event an emergency happens, it’s ok in that year to not pay the $4k in charity or the $7k in discretionary vacations or even a portion of the $7k in entertainment. Additionally many people generate a healthy portion of their overall savings pre children or when children move out of the house.

  7. Lana Kumar

    Many “billionaire Jones” (what we see from the outside) may also be TEWNS! Don’t be fooled by what you see. The best advice I received in my 20’s was to life well below my means – keep my monthly fixed costs as low as possible without sacrificing safety or too much comfort (may have to sacrifice some convenience). This strategy allows for flexibility to save, invest and spend more of your variable income.

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