Salty Elon Haters Teach Us About Lifestyle Cost

nealmcspadden (74)in LeoFinance • 3 years ago

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So our ole favorite crypto pump n dumper Elon Musk tweeted the other day about how he's paying more income tax than anybody else in history.

And then there were the haters with responses like the one clipped here. He only pays whatever percent of his net worth.

I'm not even going to get into the fact that income taxes are paid on income, not net worth. The hater in this case really has no idea what she's talking about. It's offensive to me as a tax pro, but whatever.

Instead, I want to take this opportunity to talk about why rich people get richer.

In a phrase: lifestyle drag.

Every adult has heard that they should spend less than they make. It's good advice. Almost nobody follows it, and for good reason: they can't afford to.

If you read financial self-help, you'll find charts like this one:

The yellow line is the investment portfolio growing over time. It tells a nice story. This person ends up with an portfolio worth 600k, which will generate enough yield to cover 28% of his lifestyle. The remaining 72% will be covered by social security and a reduction in lifestyle expense in retirement. I got these numbers from the St Louis FRED database.

It's a great story. It's too bad it isn't true.

The vast majority of retirement plans do not survive intact until retirement. Someone gets sick, loses a job, wants to buy a house, whatever. People cash in their savings and spend them. That yellow line drops back to zero.

Even when people leave their savings alone, it's not enough. Instead of covering 28% of their lifestyle, they cash in all their savings over 1 to 3 years and don't adjust their spending. Then those couple years go by and the have to adjust their spending because they are broke.

So, what is the problem in this scenario and what does Elon have to do with it?

It's all about, like, ratios man.

We have 3 variables in this scenario: earnings, lifestyle cost, and investment yields.

Door #1

The "normal" key to making the investments work for you and getting richer is for your lifestyle cost to not wipe our your investment capabilities. You simply can't afford to spend more than 80% of your income and invest for the future.

This is what an 80/20 split looks like:

Now the same earnings translate to a portfolio of 2m+ and covers 136% of the lifestyle cost. Spending problems solved.

Door #2

Or you can be a super-go-getter and outearn your spending. This is difficult but can work.

In this scenario, lifestyle spending remains the same as Mr. Broke 28%, but earnings are more than double to start and grow faster:

If you're good at earning money, totally works.

Door #3

Or you can do like Elon did. Have your investments explode in value way, way above the stock market 8% average rates.

This is also the crypto model so far (although I think future returns will be lower than historical returns).

If we go back to Mr. Broke 28% and change his returns from 8% to 25%, he hits that future date with almost 40 million.

Elon, and most very wealthy people, has seen his business equity skyrocket over the last few years to the tune of hundreds of percent per year.

For me personally, I've gone through both Door #2 and Door #3. My savings rate is huge and my investments have done phenomenally (but mostly in just the last year).

Lifestyle is a cost. It's a necessary cost though. The trick is finding the balance between what makes living today worthwhile and that future need for money. There's no "right" answer. I can tell you though that broke old people are pretty miserable.

And that's why salty Elon haters are salty. They are Mr. Broke 28% and they don't see any path out of their situations.