How Rich People Spend Their Time
washingtonpost.com
washingtonpost.com
The extra happiness that comes from being wealthy does not come from more leisure.
Being rich means you can give your kids:
a better education better healthcare, and a backup plan if they become disabled, among others.
All this without having to depend on the state.
There are some very compelling reasons to be rich.
http://news.ycombinator.com/item?id=231236
But surely isn't the point in having kids is make them productive adults who can fend for themselves and not have to rely on their parents wealth?
That's probably much of the reason that people report being happier: if you've made less than 10K so far in 2008, and don't know when your next check will come in, or from whom, your life is going to be pretty stressful. If you have a steady >50K job, any monetary problems are pretty optional.
I'd like to see a study done on people either who have a high net worth (like qaexl said) of say over $1,000,000 not including their primary residence. Then we could see what they do with the money they already have. Either that or people who have an income of over $250,000.
The issue with the study is that there are a ton of middle class people making over $100,000, but not many who can build it up, compared with the relatively few people with much higher actual net worths. The problem is that these two categories get counted together, and those barely breaking 6 figures vastly outweigh the others.
The other thing to consider is that those who are significantly well off may tend to enjoy pushing themselves (which is how they got their in the first place). PG doesn't have to do YCombinator. I'm sure Viaweb set him up for life. He probably just enjoys the industry and prefers to spend his time productively, just like many other wealthy people.
That's why your typical middle-class earning $100,000 or more have difficulty building up the net-worth; that income is earned income, it is taxed much higher than passive income, and there's not enough time. I find it ridiculous to go for a 2 hour commute -- that is 4 hours each day, 5 days a week, or 20 hours. 20 hours of time spent in a car -- that's a part time job. A part time job you spend money, waste time and get nothing. (Even if you like driving, do you really enjoy driving during rush hour?) It gets worse when both couples in the family work, as now you're adding in greater expenses for working (a second car, clothes, lunches, and so forth). But the wage earners of families commute because they want their kids in good, suburban schools. Without time, there are very few investment vehicles available.
Contrast that with someone who have income-generating assets (high net worth -- primary residence is not an income-generating asset, and neither is the car, the SUV, or the boat) that meets/exceed expenses. If you don't want to stop working, you can keep working. Until your boss pisses you off, or you're asked to do something unethical. You don't have to commute unless you want to. If you want to go into real-estate as a landlord, you can focus on that without having to worry about meeting the next month's living expenses. If you want to do a software startup, you don't have to worry as much as burn rate -- just start coding. This appears to reinforce the cliche, "it takes money to make money", but it isn't. As mentioned in the previous paragraph, having money but little time means you're not going to be able to build up your net-worth.
And if you're pursuing a life-long passion, it doesn't matter if it is "active" leisure or "passive" leisure. It doesn't matter if it is stressful or not. The basic living expenses are covered. The lower parts of Maslow's heirarchy of needs are covered. The fact is, you're pursuing a dream. That's wealth to my eyes. That's liberty and pursuit of happiness, right there.
Could you elaborate on this a little bit? The passive/active divide is a little fuzzy to me, especially since you apparently include "subscription fees from web apps" in the "passive" category. It seems to me that such fees will either be taxed as ordinary income (if they're coming into a pass-through entity such as an S-corp or some LLCs) or 'double-taxed', first at a corporate rate, and then at a 2nd personal rate when you transfer them from the company to yourself. (The combined effective tax rate generally seems higher than the pass-through rate.)
I can see the lower effective rate being justified a couple of ways: considering the effects of FICA/Medicare taxes, restricting consideration to cap gains (e.g. appreciation in publicly-traded stocks) or tax-free securities, etc. But I'd be interested in where you draw the line between "earned" and "passive" income, and how you conclude that "passive" is taxed at a "much" lower rate.
"Passive income" for me is defined in terms of how much time I have to spend for the income. If I have to spend a lot of time, that's active income.
My statement, "it is taxed much higher than passive income" is a broad generalization, something I shouldn't have written. I put in the internet subscription fee in there because I don't have to trade time for it, and I assumed it would flow through a sensible business entity. If so, legitimate business expenses are deducted before they hit the personal tax returns.
Going to a job and taking a salary on a W-2, the costs for earning the salary includes a car (usually car payments), automobile insurance, car maintenaince, fuel, toll fees (if applicable), parking fees (if applicable), lunches, daycare (sometimes), business-appropriate attire, grooming supplies, etc. Few employers will reimburse an employee for those expenses, so all of that it is coming out of pocket, money after earned income taxes.
In contrast, the costs for obtaining the internet subscription fees includes server hosting, development equipment, office supplies, books, sometimes travel/commute ... and just to make sure this isn't merely a rosy picture -- accounting fees, legal fees, state fees, state taxes, county taxes, health care, amortized office furniture, office leases ... you get the idea. A number of these expenses can be paid straight out of the income generated from internet subscription fees. You're taxed on what's left over, meaning that your personal income from the business is lower, you're taxed on a lower tax-bracket than you otherwise would have, even though you can do a lot more with the money. As a disclaimer, I'm not describing or encouraging a "tax shelter"; it isn't sensible to sacrifice profits just to be able to cut the amount of taxes you have to pay.
You're right about the corporate double-tax. If you're not actively involved in the corporation, then a dividend is not bad considering the time spend in it, even if it is double-taxed. I'm sure you're also aware that if the corporation compensates you through a W-2, say as a director or as a consultant, then there isn't a double-tax. You just have to spend more time.
So to conclude this, I shouldn't have said that earned income is taxed much higher than passive income. Instead, I should've said that bigger chunks of your earned income gets taken away than from your passive income. But my guess is that you already know this. The important thing about passive income is the time you free up, not the taxes you may or may not save.
Another investment vehicle is owning a share in a LP/LLLP -- limited liability limited partnership. They're usually formed to own real estate or a chunk of infrastructure, such as a cell phone tower, or an offshore oil rig. As a limited power, you have no say in the active management of the company ... but you're also protected from liability. A general partner, usually a corporation, manages the asset and sends you money every so often. You get a K-1 and you report the income alongside with your LLCs and other passive income. And if the asset generates a loss, you apply the loss to your other passive income http://www.wwwebtax.com/deductions_z_other/passive_activity_...
As far as I know, venture funds are often structured this way, but don't quote me on that. I didn't really investigate it to thoroughly.
"Would You Be Happier If You Were Richer?" [http://www.princeton.edu/~ceps/workingpapers/125krueger.pdf]
The rich people I know work incredibly hard when they have to.
There's plenty of anecdotal evidence about these folks, but I'd be interested to hear the statistics.
Gee, people who make under $20K a year spend a lot of time watching TV? Who'd have thunk it?
Yeah, so, turns out that's not how it happens. And yet, that would seem to be the cause of many popular misunderstandings of wealth and the rich.
Once said by an interesting Danish millionaire.
Once you eliminate low outlying cases (people who can't afford the basics), I have witnessed little correlation between money and happiness. I know lots of people of ordinary means who are thrilled with life and are a pleasure to be with. OTOH, I dread spending time with many people I know that do have more money than most. They seem like they've lost focus on what really is important. (I don't want to hear you complain about people who work for you and I certainly don't care who you're suing; did you call your mother today?)
Just my experience. I suspect others have witnessed the same.
"Money can't buy happiness, but neither can poverty" - Leo Rosten
Also, the amount of time that someone spends in "compulsory" activity does not necessarily indicate poor fortune. A good job is infinitely more rewarding and fun than watching TV. People are happiest when they're busy, but have a great deal of autonomy in what they are busy with and how they do it.
I'm not one of "the rich", but I live in New York and can offer my perspective on their lifestyles. I've noticed that sons and daughters of wealth tend to be shiftless, unhappy people. They lack discipline on account of never having had to learn it, and the absence of structure characteristic of their lives, as well as those of most of the underemployed <$20k people, leads them to low-utility activities (goofy hipster parties for the trust-fund kids, TV for the poor) and a collapsed sense of purpose.