There was a time when being a millionaire was a big deal. If you had a million dollars other people would bend a little in your presence. They were polite and deferential to you, perhaps hoping that you would buy them dinner, or leave them something in your will. Plus, they would think you an intelligent fellow – “If he’s that rich, he must be smart,” they would say to themselves.
Those days are gone, the cost of living has gone up. After the recent run-up in asset prices, if you have only a million dollars your friends and neighbours will probably take pity on you. “Poor Janet,” they’ll cluck at the bridge club. “She and Earl probably don’t have more than a million between them.” They might even take up a collection on your behalf.
One million doesn’t even get you much more than a house in a decent neighborhood. And you’ll have to cook for yourself. After you’ve bought the house, all you have are expenses – for maintenance, taxes, utilities…in addition to all the regular costs of living. Forget living it up. For that you need a lot more money.
Let’s say you have $2 million. You can buy the house and still put $1 million in the bank…or a mutual fund. If you were lucky enough to get a 7% return, you’d have a big $70,000 in annual income. Servants? Forget it. Forget posh holidays in Europe too. Forget expensive diamonds and works of art. Don’t even think about a beach house. That kind of money barely pays the expenses on the main house…it will never permit you to live a life of leisure and luxury.
Yes, the cost of living it up has gone up. The bar has been raised. If you want to live like a wealthy person, you either need a very good job – with enough after-tax income to pay the expenses – or you need capital, and a lot more than you needed a few years ago.
This is probably one reason why rich people are becoming desperate. While the poor and middle classes have tried to keep up with the Joneses by buying houses, the upper classes have been trying to keep up with the Joneses too – by reaching for higher investment returns. Hedge funds, derivatives, private capital, outrageous prices on works of art, Asian shares – why are so many people with money willing to risk it so recklessly?
The cost of living has them pinched. The status and luxury they crave is still beyond their means. While asset prices have gone up, their spendable cash flow has barely improved. Their house may be worth a lot more money, for example, but how can they spend it? They still have to live somewhere. Unless they have a very big pile, they have to stretch…to reach…and to take chances. In this respect, many of the people who appear ‘rich’ today are no different from the marginally poor. Instead of taking out subprime mortgages in order to live in houses they can’t afford, they take out more sizeable risks to try to get the money they need.
So far, taking chances has generally paid off. Property prices in the places the rich live – Manhattan, London, Aspen, Malibu – have soared. Even as the floor under the subprime market gives way, the housing market at the top end still appears fairly solid. Art prices, to give another example, are still going up.
“I feel sick,” said a friend this morning. “Back in 2000, I found a piece I really liked by an unknown artist. It was a light sculpture. I know you don’t like that sort of thing, but I found it really interesting. It was at a local gallery for $6,000. So I told them to hold it for me…I was just too busy to deal with it. And when I went back after a couple of weeks they had sold it to someone else.
“Well, this weekend that very same piece of art was sold. Can you guess how much?”
After a couple of vain attempts, the answer was given:
“353,000 pounds (Almost AUD $900,000). I have to go lie down.”
Seven years ago, a person of modest means might have owned that light sculpture. Now, only a rich person could have it.
Yes, the cost of living has gone up and being rich has become much more expensive. And staying rich is getting much harder.
Our advice: take the other side of the desperate rich person’s trade.
for The Daily Reckoning Australia