“I have enough money to last me the rest of my life, unless I buy something.”” – Jackie Mason

In Message #193, I said the following:

* If you have a family income of less than $50,000, you are poor in America.

* If you earn between $50,000 and $150,000, you pay the bills but not much else.

* When your family income exceeds $150,000, you are comfortably middle class.

* When you start making more than a million bucks a year, there is a big change. You will be able to save most, if not all, of your after-tax income above the million.

This caused a little stir on our ETR Message Board (www.earlytorise.com). And looking back at what I wrote, I can see why. As TH pointed out, “If you make a household income of more than $80,000, you are in the top 20% of all households. . . . Over $142,000 puts you in the top 5% (but, according to you . . . ‘just barely middle class’). . . . So my guess is that to live a middle-class lifestyle, you have to make more money than 93% of your fellow Americans.”

And DF wrote to say, simply, “Thanks! Now I know why my life sucks!”

I’ve been thinking about these numbers since then, and I’ve come to the conclusion that I was wrong about some of the details but right on the major points I was trying to make.

You can live a comfortably middle-class lifestyle with an income of less than $150,000 if you are frugal and clever. RF is a good example. He and his wife make a combined household income of about $80,000 – but because they are very smart consumers, they live very well. (They buy almost everything used – but they buy only the best quality, so that long after new, cheaper stuff would be worn out or out of style, theirs is still good.) Their home is large and impressive. (RF does the remodeling and landscaping himself.) They drive luxury cars. They have nice furniture and neat electronic gadgets.

So, I’m adding another category to my arbitrary wealth scale – families whose incomes fall between $50,000 and $150,000. We’ll call these people middle class – which means we need a new term for that next level – the $150,000 to over-one-million category. Let’s call them “income affluent.” Making a lot of money allows them to do things most middle-class people cannot – such as going out to dinner whenever they want or taking luxury vacations and driving luxury cars.

I remember when my income first exceeded $100,000. My accountant at the time welcomed me into the “world of the affluent.” I remember very well what he said. He said, “Congratulations, you’ve made it. You now make enough money that you can live the American dream. You can have all the toys.”

“All the toys?” I asked.

“All of them. Making more money won’t change your lifestyle in any essential way. It will just be a matter of bigger toys.”

That was the first big point I was trying to make in Message #193. And I’m glad for this chance to make it again.

If you are struggling financially and wondering how much is enough, this is my suggestion: $150,000. (I’ve moved it up to account for 20 years of inflation – maybe it’s a bit high.) If your household income gets into this category, you can have it all. Well, almost all. There’s one thing you probably won’t have that does make a difference – and that difference separates high-income earners from the truly wealthy.

If your income is between roughly $150,000 and a million dollars, you will live well – with larger and larger toys depending on how high on the income scale you go. But what you will probably NOT do is save money. At least you won’t save enough to make a difference.

And that’s my second big point. Earning a big income (more than $150,000 a year) will give you the lifestyle of the wealthy, but it won’t give you wealth. You’ll have the fun, enjoy the toys, wear and drive and carry the status symbols, but you won’t have a ton of money in the bank.

To acquire substantial wealth – enough to provide you with a passive income sufficient to support a modestly affluent lifestyle – you need to have an investable net worth of at least a million dollars (two million is really more like it). Building a $1 million to $2 million nest egg is no easy matter. To get that much socked away, you would need to be able to save at least $50,000 a year for a long, long time. And you would think that if you earned $250,000 or $350,000 or even $750,000 that would be easy, right?

But it just ain’t so.

First, the government is going to have its way with your money. (Don’t even talk to me about tax shelters. Since 1986, they haven’t existed.) After taking care of Uncle Sam, plusstate and local taxes (including property tax, sales tax, etc.), you are very lucky to keep half of what you make.

Let’s say you are making what most would consider a giant income – $750,000 a year. After all the taxes, you are left with about $375,000. That should be plenty – considering it’s more than $200,000 over the $150,000 threshold. You’d think so. But that’s not the way it usually works.

What normally happens is this:

You move into a bigger house in a nicer neighborhood. You tell yourself it’s the only thing you are going to do. You feel that you deserve it. And since you lived in a $190,000 house when you were earning half that much, you figure you can afford a $1.5 million house now. And many of the experts tell you that you can.

But since you are conservative, you shop around for a $750,000 house and end up buying one that costs just under a million. And that’s where the bottom falls out.

You bring in your old furniture, and it looks like shit in the new, palatial setting. You throw it all out and go shopping. Finding anything that looks like it belongs is next to impossible, so you hire someone to help. (Someone your new neighbor’s wife used.)

A month later, you’ve spent $350,000 on furniture. You think I’m crazy? Just wait.

But that’s only the beginning. To keep from totally embarrassing yourself in front of the neighbors, you upgrade your car collection. Now you are driving a BMW 740I at a thousand bucks a month and your spouse is driving a Landcruiser at $700.

Next year, your kids will be in private school (despite all your carrying on about “public school was good enough for me!”) – and that will cost you about $15,000 apiece. Then there will also be summer camp, European vacations, and expensive clothing. You just don’t look good in $150 suits anymore, and why should you?

It goes on and on. Landscapers, haircuts, shoes, and doctors. Everything is much, much more expensive. You discover an interesting truth: In America, the costs of goods and services rise in direct proportion to your income.

Yes, it’s obnoxious and unforgivable, but the Lament of the Affluent is “I can’t save a dime.” As EP, my good friend and a real-estate lawyer in smarmy Boca Raton, once told me, “You have no idea how leveraged out all these doctors and lawyers are. They have cash flow, but they have nothing that sticks.”

The point is this: If you want to get wealthy before you are too old to enjoy it, you must either earn more than you can easily spend (and that, I’m arguing, is a million a year) or learn to live frugally and creatively and yet earn enough to sock away 50 Gs a year.

I’ll tell you the secret to living frugally. It’s very simple. Don’t buy that new house. Everything you do and buy in America is dependent, in terms of pricing, on the neighborhood you live in. If you can stay in that $190,000 house and make $750,000 a year, you’ll be able to save all you need in 10 years or less.

But if you are like most of us, you’ll find that you won’t save a lot of money unless you can get your income into that hyperspace range of a million plus. And that’s when you’ll need a wealth-building strategy that works in spite of your spending habits.

I am working on such a strategy right now. My good friend and protégé, PH, has challenged me to make him a millionaire. He’s making very good money now – over $200,000 a year – but he’s discovered how tough it is to save much of it.

I’m going to be working with PH to create a strategy that will work for anyone in his position. Eventually, I’ll charge for this service – maybe a lot of money. But for the time being at least, I’m going to make it available free to any ETR who is ready for it.

If you’d like to follow my work with PH, you will be able to check it out on our ETR website (www.earlytorise.com).