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Wednesday, March 29, 2017

The Six Figure Income Myth

Posted by Tim Stobbs on August 25, 2011

As I was looking back at an older post over at Give Me Back My Five Bucks about making over $100,000/year would mean you are successful, it occurred to me that idea is more common that I would give it credit for.  If you do a few Google searches you can see that idea is still somewhat common from its start in the 1980’s, but some people are questioning how far that money will take you now (for example see here).

The reality is $100,000 in savings to me is much more impressive than $100,000/year income as the latter doesn’t tell me a damn thing about your spending habits.  Income levels only really matter when you compare it back to expenses, without that second piece of information telling me how you earn is a useless bit of data.  I’m much more impressed if you earn only $50,000/year and save half of that, than someone who saves half of their $100,000/year income, since I understand how at higher incomes it is easier to save more.

Also speaking from experience my combined income (from all my jobs) is currently kissing that threshold and frankly it is more of a pain in the ass than anything.  Why? In a word: taxes.  In a progressive tax system like Canada’s you end up paying more tax when you make more income so by earning $100,000/year you’ve put a big target on your back that says to the government: bleed me dry of my money.  So while earning more does have the potential to help you reach your goals faster you do spend a lot more time considering the tax implications of your decisions.  For example, maxing out my RRSP contributions gets a lot more important when you are at a 40% marginal tax rate.

This isn’t to say that earning more is a bad thing, it just complicates matters, at least in my experience.  A more useful measure of success depends largely on what you want to do with your life.  Money is all well and good, but you don’t need to define your success in life by it.  I would rather know that I’m happy most of the time at a job I like than a large income.  Does that mean your success is any less because you use a subjective measure?  No, it doesn’t change the feeling of pride that comes from meeting a goal.

In the end, don’t fall for the six figure income myth as being success unless you want it to mean something to you.  Pick your own measures of success regardless of how odd they may be and strive towards those.  Life is too short to chase other people’s dreams.

So have you ever made six figure income? If so, did it change anything or not?  If you have never made that income, do you want to earn that much and why?

Comments

11 Responses to “The Six Figure Income Myth”
  1. deegee says:

    If I were to add to my wage income my investment income and pretax 401k contributions, then I barely exceeded $100k in 2000, my last full year of working full-time (and the last year of the 1990s boom market). [I exceeded $100k by a lot in 2008 when I left my company and took a lump sum distribution from the company stock in my savings plan, but I don’t count that.]

    But it wasn’t so much the income that year which boosted my net worth but the fact that it was my second calendar year of being debt-free (I paid off my mortgage in mid-1998) which enabled me to add nearly $31k to my savings (taxable accounts plus 401k contributions excluding company match) for the second straight year.

    It’s not what you earn, it is what you save.

  2. Kief says:

    My modo is similar; It’s not how much you make, but how you spend it. Saving is a manner of spending which is more closely akin to investing than flat out expending. (in my mind)

    Our family takes in $200,000 before taxes with a savings rate of 15%, and an investment rate of 20% on that gross income. Taxes + pension & benefits eats away another 35% and our expenditure rate is 28%. We live very comfortably and will have the option of retiring at 50 without a change in our lifestyles, even after a big hit to our pensions. I’d imagine if we’re able to keep up our current rate of wealth building that we’ll be able to retire even sooner if that was something which was interesting to us.

    To you folks here, our expenditure rate probably seems a bit excessive, but we like to enjoy balance in our lives and we do have two children.

    In comparison, I look at some good friends of mine who work so hard to make extra money and just throw it away. They aren’t all that crazy though. I find that many of them consciously spend today feeling that they will not have the health to spend later. A reasonable perspective. Conversely, I have friends who are afraid to spend a dime, and yet never seem to get themselves further ahead. The latter stresses me more than the former because there is no apparent strategy other than a fear of spending.

    To each their own! My grandmother was a lot like the latter, and died with literally $1M cash in her bank account.

    On that, I find that kids have really changed my own perspective, as my goal is to teach my children a balanced lifestyle while also working my life to leave them a small empire to carry forward. I am no longer one of those who is afraid to leave money on the table.

  3. Kief says:

    correct 28% to 25%.

  4. We also make in the $200K+ range when all cylinders are firing, but we live a lifestyle that we could support on probably $75K. We have 3, almost 4 children and my wife currently doesn’t work. We also don’t pay that much in taxes because we try to make our money as deductible as possible. We only make about $100 to $150K from employment, with up to another of that amount from investments and business ventures. I wrote about it in All-In: How I Made $800,000 in a Lifetime and $15,000 Last Week.

    We plan to retire from our employment within a couple of years.

  5. Maybe Later says:

    I think a big difference for those that have or are approaching the six figure mark is the long-term savings capacity, especially when you include RRSPs. Someone making $100,000 a year still doesn’t hit the allowable annual contribution limit – and because of the prgressive tax system that person has a very real incentive to save for retirement/defer taxes compared to someone whose annual earned income is lower.

    I agree that it is what people choose to do with their income that determines “financial success.” Beyond the size of your paycheque, some of the individuals I would consider role models have lower incomes than many of their contemporaries and friends at the same stage in life, but have built a family life and lifestyle within their means that is the envy of many of their peers.

  6. Pat says:

    “I think a big difference for those that have or are approaching the six figure mark is the long-term savings capacity”
    Maybe Later – is absolutely right! Its a whole lot easier to achieve financial independence when your making $200K+ per year. In my humble opinion “Free at 45″ major shortcoming is spending little time reviewing ways to substantially boost your income and instead focusing on topics such as making your own Thai food to save money. I have had hobbies that blossom into paydays that exceed my annual wage earnings. My pathway to achieving financial independence (necessary for early retirement) is to simply make more money without a co-responding increase in spending. In this great land of opportunity (Canada of course) $100K is a modest and easily achieve objective for the majority.

  7. I do disagree with Pat that $100K is easily achievable. Maybe it is for those who are there, but I was totally surprised at the people who make $35K, which I talk to sometimes. They don’t have a clue about what goes on when someone makes $75K or $100K just like we in those $100-$200K range (probably) have little idea how to get into the $1M range.

  8. Pat says:

    I am not saying that $100K is achievable for everyone and I realize that the majority of Canadians make less. What I am saying is that for the majority of Canadians who are willing to put in some real time and effort $100K is an easily achievable objective. Let me simply add (again only IMHO) that if you believe with some time and effort you can easily make $100K+ here in Canada you are correct but if you believe that making $100K per year is not an achievable objective for you then you will also be correct.

  9. Echo says:

    We are a single income family and our goal is to stay that way. We take a blended approach of living frugally while also trying to earn additional income on the side. I’ve never thought that making six figures was a way to measure success. I can’t just look at my friends, who are all in two-income households, and try to compare our situations. Success to us is to live well, but live within our means while raising our family.

    I guess it also depends on the cost of living in your area. $100k in Lethbridge, AB goes a lot further than in Vancouver.

    I’ve yet to earn 6 figures in a year…but I’m potentially on track to get there in a year or two.

  10. Tara C says:

    I have never earned six figures and don’t expect to ever do it, since my profession just doesn’t pay that kind of money. I wouldn’t know how to go about earning that much money… but I realize that is probably more a factor of my personal level of laziness and a suspicion that any job/business that paid that much would be too unpleasant and/or time-consuming for me to find appealing.

    So, I prefer to have a high savings rate of the (quite respectable and adequate for me) salary that I do earn.

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