Millionaire income versus expenses
Welcome back. This is the fifth part of the series on building wealth and the new millionaires. Today we focus on millionaire income versus expenses. Before we get started, I would like to provide a quick recap of the series. Just so you don’t miss anything in learning how to become a millionaire.
SERIES RECAP
Part 1 explained the 5 key Dividends Diversify principles to Build Your Wealth. Part 2 introduced you to the research study. I call it the new millionaires. It provides the basis for the entire series.
Part 3 analyzed the millionaire demographics included in the study. And, compared the demographics to the famous book, The Millionaire Next Door. Finally, Part 4 analyzed their income, net worth and asset allocation.
What is the point of this series? It is to see what we can learn from the current millionaire class. And, compare them to the households studied in The Millionaire Next Door? In addition, are their practices similar to the wealth building principles in my article Build Your Wealth?
MILLIONAIRE INCOME
The wealthy group of people that I studied has a current annual income from active work efforts of $305,000. They are primarily Corporate professionals. And, get paid well for their management and specialized skills. We discussed their income and how they maximize it in the prior article.
MILLIONAIRE INCOME VERSUS EXPENSES
On average, the study participants had annual expenses of $86,000 excluding income taxes. Here are a few take away points on their spending:
- They spend less than one-third of their incomes on living expenses.
- In addition, they know their spending levels, but don’t obsess over them.
- Both spouses view spending in a similar light and work together to spend money intentionally; on what they value in life.
- Most like to travel and do not skimp or travel hack in this area.
- They recognize kids are expensive but have no regrets about having children.
- They enjoy their homes and realize they are more of an expense than an investment.
- As a group, they are healthy and have employer-sponsored health insurance to minimize health care out of pocket costs.
- Only a few specifically mention income taxes as a large expense (in reality it is their largest expense)
WHERE MILLIONAIRES SPEND MONEY
Here is a breakdown of how they spend their money.
| Spend Category | % of Total |
| Primary residence | 45% |
| Food | 11% |
| Autos/Transportation | 9% |
| Travel & Entertainment | 9% |
| Gifts | 4% |
| Health Care | 3% |
| All Other | 19% |
| Total | 100% |
The primary residence category is large. However, it includes many things related to their housing. Most relevant are utilities, home improvement projects, property taxes, mortgage payments to name the big ones.
Overall, it is no surprise to me that housing, food, and transportation make of the bulk of the spending. They are my largest spending categories too.
The all other category is a catch-all for clothes, household items and anything else that didn’t fit the major groups. This illustrates to me that the study group as a whole is not obsessed with spending. They don’t track every penny that goes out the door. In general, they are spending consciously, but not micromanaging it.
So remember Dividends Diversify build wealth rule number 3: Manage your spending. Track and maximize your free cash flow each month.
FREE CASH FLOW
Speaking of free cash flow, let’s apply the Dividends Diversify free cash flow model to the study group.
| Description | Amount |
| Income | $305,000 |
| Minus expenses | $86,000 |
| Minus income taxes | $83,000 |
| Equals free cash flow | $136,000 |
Income taxes represent payments for federal, state and local income taxes in addition to social security taxes. Clearly, income taxes are the largest expense for this group.
And, what do they do with their free cash flow? They become millionaires by investing. They have a plan for every extra dollar of free cash flow they create. It’s the blood running through the veins of their financial ecosystems.
Dividends Diversify build wealth rule number 4: Have a plan for every dollar of free cash flow you generate.
MILLIONAIRE INCOME VERSUS EXPENSE WRAP UP
What do you think of the millionaire income versus expenses? How does your spending compare to theirs? How about the amount of free cash flow they generate? What do you think? Leave a comment and let us all know!
And don’t forget to come back soon for Part 6 of this series on building your wealth and the new millionaires! We will wrap up and conclude the entire series.
Nice overview, Tom.
The breakdown of spending is interesting to see. I like working with percentages as well because things become relative and easier to compare.
That free cash flow number is also a nice benchmark. – Mike
Hello Mike. I like the percentages as well. Makes for an easy comparison to one’s own situation. Tom
I’m a bit surprised that the primary residence is making up almost half of their expenses. At the same time, the free cash flow is respectable and it’s very true that they have a plan to invest every dollar. I suppose that’s how they sustain the millionaire status and at the same time are not too different in terms of overall lifestyle. 🙂
Hi SMM. I think it’s just a fact of life. If you own a home, it can be pretty expensive when you throw in remodeling costs and property taxes. I know it’s my biggest expense aside from income taxes. Tom
Once again interesting analysis … it correlates with my situation. The comment, “Only a few specifically mention income taxes as a large expense” probably is in line with the mindset. Most probably minimize taxes, but when accomplished focus their energy on more productive endeavors (i.e., don’t sweat the stuff which is out of your control).
Thanks SR. I think you have a good point that taxes are mostly out of one’s control therefore not on these folks mind except around tax time. Being mostly W2 employees, I suspect they set their withholding and forget about it. Tom
Hi Tom, the percentages look pretty reasonable. Are the folks in your study located in your area (roughly) or are they sprinkled around the country? I can’t recall if you mentioned that before.
Looking forward to the next installment!
Hi Mr. DS, Sprinkled around the country in urban and suburban areas mostly. Tom
Hey Tom,
My primary categories are also housing, food, and transportation. I’ve become a big believer in travel hacking, which has saved me thousands over the years.
Also, $86,000 in expenses for a couple that makes $305,000 seems quite good! I don’t know if it’s just among people I know, but I think I’m starting to observe more and more people looking towards savings, investing, and FIRE, rather than conspicuous consumption.
Cheers,
Miguel
Hi Miguel, These folks are living a very comfortable life style while supporting their kids at $86k. It’s their excess earnings, savings and investments over 20+ years that have really allowed them to pile up the net worth and think about FIRE. Tom
Nice breakdown of spending,
I think for most people the top 3 expenditures are housing, food, and transportation at any income or net worth. I would have thought travel & entertainment would have been more with a higher income. Another good post Tom, looking forward to part 6.
You nailed the top 3 spend categories for most everyone Steve. Important to keep those in check whatever your income level. Tom
The spending percentages were in line with my expectations. However, what stood out to me was the low amount of spending relative to the income. Spending in the $80K range is awesome for over a $300K income. This certainly allows for lots of saving, and the opportunity to fund the future. As for not being focused on taxes, I can see that. Since taxes are essentially a fixed percentage, they get factored in and then set aside to focus on other aspects that they have more control over (like spending).
Hi ED, There is like this point of leverage where after you have all your expenses covered, the rest flows to savings and investment. And as you say they have a very large spread between income and expense. Tom
The $80,000+ taxes is not that bad! The 3% in healthcare spend is not that bad, I’m surprised it is on the low end, though these new millionaires probably have some good work benefits packages?
Hi GYM, Yes. Company sponsored health benefits keeping out of pocket costs low. I’m sure the actual cost is much higher, but it’s not coming out of their pockets directly. Tom
Hey Tom. Sorry (again) for the late comment. To quote the band America, “I been one poor correspondent.” Too busy with work this month! 😄
I echo the comments of a few of the other folks. This is a fascinating study, and it adds a lot to the discussion about what it means to be wealthy in 2018.
As other folks have said, the spending is lower than I would’ve thought for that income level. Our spending is higher, although we do live in a high-cost area, and our budget includes quite a bit of household help for our two small children. For us it makes more sense to hire household help and have Mrs. FIREman help me with my law practice and our real estate business, because the additional income outweighs the additional expenses. But even without those expenses, I am not sure we could live on $7000 a month in our current location.
Thanks very much for this excellent series.
Hey, no problem FIREman. Stop by whenever it’s convenient. Glad you like the series. Unlike you, seems like most the study group had a stay at home spouse. But, one common theme was that kids are expensive. It’s nice that you and your wife can work well together. Everyone has a slightly different formula for wealth, but the basic principles remain the same. Tom
Wow – you could have lifted that spending breakdown straight from my own spreadsheets Tom!
I tick all the millionaire income vs expenses bullet points, except the biggest one – spending less than 1/3 of income on expenses! All the other points are far more important for enjoying life in the long run anyway – the spending % will hopefully keep coming down over time by sticking with the basics and just focusing on what matters.
Great work with this series Tom.
Cheers, Frankie
Hey Frankie, It is tough to get expenses down to 1/3 of income. One has to be extremely frugal, making really good money or a combination of both. Tom
Really enjoyed reading your research results. I’d like to know how you collected the data. Covered in another post?
It would be interesting to explore this idea in the UK.
My immediate observations are thay the income levels are pretty high. Is this just basic annual income or does that include bonuses? Also, i presume it’s also the income of two people in a family.
The other observation is the high proportion of primary residence costs to total disposable income. Perhaps such people are overpaying on mortgages… or just live in highly mortgaged and expensive homes.
Great post!
Good observations and thank you Ken. It wasn’t a scientific study or anything like that. I mainly focused on current millionaires from the corporate world versus. This was to draw a contrast from The Millionaire Next Door where the focus was mainly on business owners from 25+ years ago. Tom