red ferraris car showJulie Zeveloff/Business InsiderIf you can afford a Ferrari, buy a Ferrari.
One of the biggest struggles I had during my teen and early adult years was feeling jealous of people who had extreme amounts of wealth.
One particular memory that's seared into my mind comes from when I was about 17 years old. I was visiting the factory where my father worked on an open house day and we walked out of a back entrance through a parking lot.
There, in the middle of the lot, stood a gorgeous sports car. It was a bright red Ferrari 348.
I had never actually seen that kind of car up close before. My father was actually kind of wary of even getting very close to it at all, so we kind of stood back and eyeballed it. Then, a few minutes later, someone in a dress shirt came out, got in the car, and drove off.
To put it in perspective, a new Ferrari 348 at the time cost around $120,000, give or take. That was more money than my parents would ever make in a year by a mile.
After seeing that Ferrari fly out of the parking lot, we went over and got in our family car, which at the time was a 1987 Buick LeSabre. My parents had bought it as a used car for about $6,000 after a trade-in.
The stark differences in the cars stuck in my head. I never really wanted a Ferrari, to tell the truth, but it was hard not to see the differences between the two cars.
On the ride home, we talked about how beautiful that Ferrari was and I remember staring out the window for a while, thinking about how unfair things really were. My father picked up on it and he said something that I still remember. To paraphrase, he said, "That car sure was beautiful, but you know what? At the end of the day, it still just drives you home to your family, and this car does the same thing for a lot less money."
My father had a point. That Buick and that Ferrari both do nothing more than take you from one place to another place. They help you get to work and back. They carry you home to your loved ones. You're basically paying 20 times as much just so you can accelerate a little bit faster and have some prettier styling on the car.
wealthy men vintage cars 2Dan Kitwood / Getty ImagesThe way someone else spends probably isn't the same way you do.
When I look back on that experience, I can't help but mentally compare the salaries between the two men.
I don't know exactly what my father made in a year there, but let's say he earned $30,000 in a given year. He had a lot of seniority and had ample opportunity for overtime work, so that's probably a fair number.
He bought that Buick for $6,000 and drove it for about five years, so let's say his cost per year was $1,200 for that car. He made $30,000 that year, so 4% of his salary was devoted to his car.
Now, what about that Ferrari dude? Let's say he paid $120,000 for that car – he had to, given the time I saw him driving it. Let's also say that he kept it for… I don't know, how about three years? That means he paid about $40,000 per year for using that car. If that was 4% of his salary, he was making $1 million per year.
So, if that guy was actually bringing in $1 million a year, that car had roughly the same percentage impact on his income that my father's Buick had on his $30,000 a year salary.
What if that guy owned a Buick like my father had? If it only cost him $1,200 a year, that means his car would only eat up 0.12% of the rich man's salary. For comparison's sake, that would be the same as only $36 to my father at that time.
You see, so much of what seems like wasteful spending by a rich person is often just a trivial part of their income.
Let's take a look at how the average American spends their paycheck. In 2013, the average American household earned about $63,000 and thus had about $51,000 to spend after taxes, according to this data. They spent like this:
  • $9,004 was spent on transportation.
  • $6,602 was spent on food, of which $3,977 was spent on food at home and $2,625 was spent eating out.
  • $5,528 was spent on insurance and pensions.
  • $1,604 was spent on apparel.
  • $2,482 was spent on entertainment.
  • $17,148 was spent on housing.
  • $1,834 was spent on cash contributions.
  • $3,631 was spent on health care.
  • The remaining $3,267 was spent in other areas.
Now, let's look at that as a percentage.
  • 17.6% was spent on transportation.
  • 12.9% was spent on food, of which 7.8% was spent on food at home and 5.1% was spent eating out.
  • 10.8% was spent on insurance and pensions.
  • 3.1% was spent on apparel.
  • 4.9% was spent on entertainment.
  • 33.6% was spent on housing.
  • 3.6% was spent on cash contributions.
  • 7.1% was spent on healthcare.
  • The remaining 6.4% was spent in other areas.
croquet wealthyFlickr / Kevin HarberWhen you're earning $1 million a year, your budget looks a little different.
Now, let's assume that someone brings home $1 million per year lived by the exact same percentage budget as the average American. Here's how that person would spend their money.
  • $176,000 was spent on transportation.
  • $129,000 was spent on food, of which $78,000 was spent on food at home and $51,000 was spent eating out.
  • $108,000 was spent on insurance and pensions.
  • $31,000 was spent on apparel.
  • $49,000 was spent on entertainment.
  • $336,000 was spent on housing.
  • $36,000 was spent on cash contributions.
  • $71,000 was spent on healthcare.
  • The remaining $64,000 was spent in other areas.
That's how a person bringing home a million bucks a year would spend their money if they subscribed to the exact same budget as the average American. A person prioritizing their spending like that is prioritizing in the exact same way the average American is, just with a bigger income to spend.
So, that guy who strolled out of my father's factory and hopped into a Ferrari is doing exactly what a normal American would do if they earned a large income. That person wasn't being wasteful by the standards of the budget of the average American.
Wealthy People at Races HatsGetty Images / Alan CrowhurstRich people budget from a different starting point.
So, what's the point here? There are a few messages you can take home from this.
First, rich people only seem wasteful with their money if we apply different budget standards to them than we apply to ourselves. Let me show you what I mean as an example.
In an average year, it's probably reasonable to think that we spend 15% of our income on transportation, for example. We have a seven-year-old Prius and an 11-year-old Honda Pilot and neither one is getting replaced soon. On the other hand, a person with $1 million to spend that spends 15% of their income on transportation could own things like a brand new Escalade, a BMW, and a Tesla S-Series to boot, all at once.
Does that seem over the top? Probably. Is there some gut feeling that the rich person should be doing something else with their money? Sure. But in doing that, we are expecting that rich person to spend a lower percentage of their income on transportation than we do.
You can do the same thing with a rich person's housing expenses, their entertainment expenses, and so on. Their expenses seem over the top, but to expect that rich person to change things means that we're expecting that rich person to budget differently than us.
But let's flip that on its head. Let's look at a person making minimum wage, 40 hours a week, 50 weeks a year. That person is making $14,500 per year and, most likely, bringing home almost all of it. Let's look at that person's budget if they match up to the "average American's budget":
$2,552 was spent on transportation – about $200 a month to fill up a car, maintain it, repair it, and replace it, or to ride mass transit and go without a car.
$1,870 was spent on food – about $150 a month.
$1,566 was spent on insurance and pensions – honestly, they probably scavenge out of this portion out of necessity, but this would cover car insurance and renter's insurance.
$449 was spent on apparel – about $37 a month to keep shirts, shoes, socks, underwear, and pants on a person all year round.
$710 was spent on entertainment – about $60 a month.
$4,872 was spent on housing – about $400 a month. For housing.
$522 was spent on cash contributions, $1,029 was spent on healthcare, and the remaining $928 was spent in other areas.
That's extremely tight for most people, without much breathing room, right? Here's the thing – a lot of people make it on a budget like this. Those people who do look at the budget of the average American, and how they choose to spend their money, as simultaneously desirable and wasteful — much as the average American looks at the spending of the person bringing home $1 million a year.
Yet, underneath that, all of them are basically operating with the same percentages for their budgets. It's pretty much the same budget – the only difference is income.
Ferrari Race 2015Matthew DeBord/Business InsiderResponsible spending is a matter of scale.
That's why, looking back, that rich guy in that Ferrari outside of my father's factory makes complete sense to me. He was, in many ways, budgeting his money exactly like my parents did. He had a Ferrari because it was inside that 15% or so of his income that went to transportation.
That's why I'm not surprised when I read articles about how people with large incomes have a difficult time making ends meet. They're using effectively the same budget as everyone else, dividing up their money in the same way, and it just doesn't add up.
It doesn't matter how much you make. If you spend money like the average American, you're going to struggle. Period.
That's why, if you want to change your outcomes, if you want to have the kind of financial freedoms that everyone else has, you have to spend differently than the average American. You can't follow that recipe. That spending recipe for the average American won't get you there.
So, where and how are you going to step away from that average American budget? Are you going to spend less on transportation? Maybe you'll ride mass transit instead of having a car. Or, maybe you'll spend less on housing and live in a little apartment.
By stepping away from that average budget, you gain something that the average American doesn't have: freedom. You're planting a seed of freedom from all of the pressures and hard choices of your day-to-day life, and as you feed it by staying away from that average budget, you're watching that seed grow and grow until, one day, you don't need that job anymore. You can set your own rules.
Dave Ramsey really puts it well when he says, "You have to live like no one else so that you can live like no one else."
Choose differently today so that you can live differently tomorrow. It works whether you're the average American, the person earning a million a year, or the person barely making it. Choose differently than what you see in that average budget. Choose differently than what you see your neighbors choosing.
And, sooner than you think, you'll have options they can scarcely dream of.
Read the original article on The Simple Dollar. Copyright 2015. Follow The Simple Dollar on Twitter.