How do you measure financial privilege? Is it how much you make? How much you save? How much you spend? Some combination of the three?
Culturally and bureaucratically, income is the most common measure of privilege. Income thresholds determine social safety net eligibility, tax rates, college aid, and even class identity.
Opinions on the income privilege line are constantly in flux, but there are indicators we can observe. Duke University, for example, recently announced free or reduced tuition and expenses for students whose families make less than $150K. Is this the magic number?
Thirty three states in fact have some form of free or reduced tuition based on income, most with an income thresholds far lower than Duke’s. But none of these threshholds are a good objective measures of privilege.
Income alone does not buy privilege
Privilege is a nuanced topic, for sure, but at a basic level, its easy to see why an income-centric view is flawed.
A $300k salary family, for example, will not get much further ahead than a $150K family if both families’ high consumption lifestyle is fueled by debt, like most Americans. The $300K may also not stretch as far in a high cost coastal city, as $150K may buy in the American Heartland.
“Rich” people with high incomes today can just as easily end up broke tomorrow. The size of the rich guy’s check may look privileged, but he can be just as freedom-poor as the middle-income earner.
Both are still slaves to the work desk, caught in a vicious cycle of hyper-consumption. Both will be employment dependent until they are too old and broken down to work. Does that sound like privilege?
A tale of two brothers
I recently discussed income and privilege in a rarely candid conversation with my older brother, and I was astounded at how opposite our views are.
On the surface, his view (that I’m well off and he is middle-class) is relatable class politics. After all, my wife and I are “privileged” with 4 college degrees, corporate salaries, and a $2M net worth. My brother and his girlfriend, conversely, have no college degrees, work factory jobs, and have a net worth of 0 (their debts roughly equal their assets).
Case closed. I’m privileged; he’s not. Right?
I wouldn’t blame you if you made the same assumption. Only one problem: its dead wrong.
My brother’s $150K salary is in fact much higher than mine. He has also been working since he was 18 and entered the workforce with no debt. On top of that, he started with stellar union pay and benefits, before he transitioned to a corporate role (albeit, still factory work).
My wife and I, on the other hand, didn’t enter the full time work force until we were 25, after amassing $100K in debt between us (inflation adjusted) to fund 4 worthless English degrees. Our starting salaries and benefits were market bottom and below the median salary line. Does a $37K “corporate” salary in 2011 sound like privilege to you?
And while we did earn our way up to entry-level level corporate jobs and median salaries by our early/mid 30s (think $55K a year in 2014), we didn’t progress to respectable mid-career salaries until our late 30s, just a few years before hitting FI.
Comparing lifetime earnings
Our lifetime earnings tell a similar story. My lifetime earnings (not inflation-adjusted) clocks in at $1.4M, or about $57K a year; whereas my brother’s lifetime earnings are close to $1.9M, or about $70K a year (based on his estimates). Thats a half million dollar difference.
Despite this, my brother can’t shake his belief that the mere existence of my college degrees and office job means I’m automatically privileged. He was shocked to learn I make less than him. He was even more astounded (and slightly offended) when I pointed out that his two earner family’s $275K annual income is near the top 5%.
I am sure its a tough pill to have a top 5% income, ~$2M in lifetime earnings (for just him), but a net worth of zero. Imagine working for 27 years and having no more than you started with: zero. How is such a thing possible?
Why income can’t buy privilege
Its simple. The $2M net worth difference between my brother and me is related to lifestyle, not income. I’ve lived below my means and avoided debt like the plague my whole adult life. My brother is the opposite. His family not only spends nearly everything they earn – they take on debt to fund their excesses now.
Three brand new automobiles, 20 concert trips a year, exotic bourbons, designer jeans with pre-ripped holes, and buying 80% of your meals from a restaurant is f*cking expensive. Even a top 5% income is not enough to fund such excess.
All the while, my brother’s family naively believes their top 5% salary is barely-scraping-by middle-class. I’m not convinced more income would change their trajectory either.
More money for most Americans is just more means to blow it. There is always a nicer house, a shinier car, a rarer bottle of Bourbon, and a more exotic vacation.
Forego these luxuries and live below your means, and a top 5% income can drive a high savings rate that is likely enough to FIRE in just 7 years.
This is the path my family followed and with an average lifetime income that is pedestrian at best. And we still afforded decent cars, a nice house, college funding for 2 children, and yearly vacations, while still managing to achieve FI by 40.
My brother on the other hand will likely have to work until social security kicks in 25 years from now.
Redefining the Privilege Paradigm
On this blog, I often rail against American maxims that use job type, income, and class perception as markers of privilege.
I remain convinced that the best indicator of privilege is freedom from employment dependence. This is measured by dividing your assets by your living expenses. The lower this number, the higher your privilege.
In other words, if you have $2M and spend $40K a year, your living expenses are 2% of your assets. That equals sustainable wealth and is a tremendous privilege. However, if you have $2M, and spend $2M, your living expenses are 100% of your assets. You are broke.
Certainly, there is an argument that a high income still provides “some” privilege. After all, a low income worker probably can’t afford the monthly payments on 3 brand new cars, including a $100K Lincoln Navigator. A higher income can (looking at you bro).
Sure, that’s a form of privilege, but not a terribly insightful one. Regardless of income, I’m just not convinced that I see much privilege when I see an American lifestyle fueled by runaway consumption and funded by runaway debt. I see white-collar, blue-collar, and (yes) even affluent-class work slaves.
Lifestyle buys privilege
Its sad how many American are caught in this hyper-consumption lifestyle. We live in the most affluent country in the world with one of the lowest tax rates. Privilege is available to the vast majority of us, but few seize the opportunity.
If we borrow from our future selves to fund our excesses now, we live in bondage. If we pay our future selves by living on less now, we live in freedom. That is privilege.
My brother chases a higher salary. I chase a higher savings rate. My brother spends his money on rare Bourbon and pickup truck chrome. I spend mine on my 401K, my Roth, and my brokerage.
By income, my brother is a remarkable success story. He rose near a top 5% income with no college education and in an economically-blighted city no less. I’m a case study in the opposite; my college degrees had a negative ROI.
But despite our income differences, I will retire in my early 40s, and my brother will work until he is 67.
Which of us have privilege? Your answer to that question is instructive. It will answer what you value more: time or money, minimalism or consumption, freedom or obligation.
You only have one life to live. You can’t trade 20 year of work back in and get your time back. Once its gone, its gone. Choose wisely FIRE investors.