Maybe Below Average (Gwen Moritz Editor’s Note)

It started in 2015 on a blog I’d never heard of and jumped to CNBC a year ago. But I didn’t see it until late last month, when CNBC updated its story, which then started making the rounds on Twitter. It was the supposed budget of a New York couple, both lawyers in their 30s, who “still feel average” despite combined annual income of $500,000.

See, the way these unidentified folks were handling all that income, they only had $7,300 of disposable income left after taxes and expenses. (They did save $18,000 each in their 401(k) plans.) The budget was such an utter mess — not just the financial priorities but the dollar amounts assigned — that I’m amazed neither the Financial Samurai blogger who originally published it nor CNBC questioned it.

A partial list:

• A 40% effective tax rate on $464,000 in income less retirement savings. But $18,000 in charitable donations, even before the standard deduction changed, was listed with after-tax expenses.

• Mortgage principal and interest of $60,000 a year on a $1.5 million house, which suggests quite a bit of equity. Their budget calls for $20,000 a year in property taxes — lower than average for New York — and $2,500 in homeowners’ insurance and $5,000 on home maintenance, which are irrationally low.

• $42,000 for child care for two children, plus another $12,000 a year for lessons — “sports, piano, violin, academics.” (They aren’t saving anything for college. I guess when you can spend that kind of money on child care, you don’t worry about things like that.)

• Three vacations a year, each averaging $6,000, while also paying $32,000 a year in student loan debt. Priorities, right?

• Monthly car payments totaling $800 for a BMW 5 Series and a Toyota Land Cruiser, and their car insurance is only $2,000 a year. Do any of those numbers seem right?

This budget was strangely detailed in some respects — $9,500 a year for “clothes for four people (no fancy bags, shoes, or threads)” and $23,000 for food “including date nights every two weeks.” But it is completely lacking any consideration of health care costs. Health insurance premiums and out-of-pocket medical expenses should be easily absorbed by a household grossing half a million every year — but not if they only have $7,300 left.

This sketchy budget got so much attention that Bloomberg columnist Noah Smith got in on the action. But even he didn’t question the actual numbers. Instead, he went for the obvious — “There’s no city in the world where a $500,000 income … wouldn’t be considered very high.” — and for the psychological — “Ultimately, living a happy life probably requires letting go of envy and appreciating what one has.”

When I tweeted about obvious gaps in this budget, Financial Samurai blogger Sam Dogen responded with a tweet that began, “We can’t all be above average in financial literacy like you.”

But getting by on Top 1% income doesn’t require above-average financial literacy. (These lawyers can and should pay a financial adviser.) Half of American households live on less than $61,000 a year, which requires exceptional financial decision-making. That’s where you’ll find above-average home economists, while these high-dollar New York lawyers (assuming they actually exist) can afford to be below average.

I recently encountered yet another person who believed she was “maxing out” her retirement savings because she puts in enough to capture all of her company’s match. It’s possible that employees in your company are similarly confused about this and saving less than they should.

A few companies, including Arkansas Business Publishing Group, match a portion of every dollar routed into one’s retirement account. But most companies that offer a match base their contribution on the percentage of salary that the employee saves.

A typical formula is a 50% match on up to 6% of salary saved, so that the company will deposit up to 3% of the employee’s salary. And setting aside 9% of income each year beats a poke in the eye with a sharp stick, but it is probably not going to be adequate retirement savings and certainly shouldn’t be confused with making a maximum effort.

Regardless of the matching formula, truly maxing out a 401(k) means saving $19,000 a year if you are under 50 and $25,000 in the year you turn 50 and after. Those are the limits set by the federal government for 2019 and are periodically adjusted upward. The New York couple was maxing out in 2015, but now they can save more — if they can find it in their budget.

Email Gwen Moritz, editor of Arkansas Business, at GMoritz@ABPG.com and follow her on Twitter at @gwenmoritz.