The recipe for being rich doesn't quite apply to The City 

Begin with a pinch of disposable income. Add a cup of real estate, stir in retirement savings, and add a dash of stocks, bonds and money-market funds.

Though the formula for being rich is not an exact science, the federal government has created a cookie-cutter definition: an income of more than $250,000 for couples or $200,000 for individuals.

Economists and businesspeople in San Francisco and the Bay Area, however, say the new standard, which forces people to pay higher taxes, should not be applied to the region.

“I was always interested during the [2008] election campaign the benchmark the Obama administration put out there of $200,000 for individuals and $250,000 for a couple,” said Sean Randolph, president of the Bay Area Council Economic Institute. “I was never quite clear on what the basis of that number was.”

The problem with drawing the line for being rich based solely upon income is that the cost of living varies across the nation, decreasing the amount that is left to save or invest, which eventually adds to long-term wealth.

That’s because a $250,000 salary can take you much farther in say, Des Moines, Iowa, than it can in The City, said Jim Lazarus, senior vice president of the San Francisco Chamber of Commerce.

“You could probably afford a house in San Francisco, but you’re using a lot of that income for mortgage payments,” Lazarus said.

Add on top of the housing costs the other expenses related to living in an expensive region, and soon the higher income levels out, economists say.

“You’re making $200,000 and you have a couple of kids, you don’t have money for fancy European vacations,” said James Forcier, assistant professor for applied economics at the University of San Francisco.

Despite our higher salaries, “disposable income in the Bay Area is comparable with the rest of the country,” Forcier said.

And even though incomes in the Bay Area are higher on average than the rest of the nation, a person’s paycheck is just one piece of the pie.

“Not many people here are going to be rich-rich based on their paycheck,” Randolph said.

The recipe for rich, Forcier said, includes a diversified portfolio of stocks, bonds and the like; a retirement account of some kind; a home or two that was either bequeathed or purchased and is providing rent money; or possibly a home that can be fixed up and resold for a profit.

It’s surprising how many folks moving to San Francisco will go for the already-done-up $750,000 condo that won’t increase in value in the same fashion as a $750,000 home that needs a serious kitchen remodel, he said.

It is also surprising how many people, even high-income earners, will not invest, Forcier said.

“I’m surprised at how sort of non-economically strategic people are,” he said. “It’s absolutely critical.”

Lavish spending can also be seen as a sign that a person is rich — or that they are neglecting the fiscal responsibility it takes to be so.

As an example, Randolph pointed to a hypothetical person driving around town in a high-end convertible, visiting lavish restaurants and taking regular vacations to luxury resorts. Randolph said that if the person is living hand to mouth because of the spending, then they are not rich because the funds are not going into investments or retirement accounts.

Frugality instead of spending can be seen as a trait among the rich, according to Forcier.

The professor said some of the more notably rich people in The City — folks he would not name — will argue with cashiers over change.

“This one guy literally washed paper plates after a party,” Forcier said.

So with the definition about what it means to be rich far from being settled, the idea of  taxing people at varying levels is a much-debated topic.

The line by the government of $200,000 for a person and $250,000 for a couple is still in effect, and it will be used to help fund a large portion of the health care mandates that were recently passed in Washington, D.C.

“When a person talks about taxing the rich, the definition of ‘rich’ usually is ‘anybody who makes more than I do,’” said David Kline, vice president of communications and research for the California Taxpayers’ Association.


Take the slow path toward riches, reap the rewards

The road to riches can be started early, but advice from financial experts is as obvious as it is difficult for many to follow.

If the path to wealth is started immediately after college, the basic formula is to create a realistic long-term financial plan that you will adhere to and that’s big on savings and low on spending, said Jim Titus, a Charles Schwab financial consultant.

The recipe seems simple, but very few people actually create a plan for financial success, he said.

“We tend to spend what we make,” Titus said, adding that 20 years ago people did not need a $2,000 flat-screen television in their living rooms.

First and foremost, folks need to start an emergency savings account, he said.

“We usually advise clients they should have three to six months of savings on hand,” said Titus, noting it should be at least three times your monthly expenses.

The emergency funds should be placed in a high-interest savings account, something that offers interest and is FDIC insured, he said.

Once the emergency account is secured, your next dollar should head toward a retirement account, such as your employer’s
401(k) plan.

“Fund that as much as you are capable,” Titus said. “Not only will it enable to save for retirement, it will reduce your income taxes.”

Or you can participate in another type of retirement account outside of your employer, such as a Roth account, he said.

Now that you’ve established emergency and retirement savings, if you have extra income left over — or room to cut more unnecessary expenses — you might consider setting up an investment account toward purchasing a home.

If you’re going to invest in the stock market, think long term, Titus said. While the stock market might be a scary beast during a recession, it should not scare off young people. It presents an opportunity for young people to buy low and watch their investments grow over time, he said.

Bottom line: Without winning the lottery or a large inheritance, becoming wealthy takes time.

“There’s a great saying that there’s nothing wrong with getting rich slowly,” Titus said.

Being a ‘Millionaire’ is not what it used to be

The show “Who Wants to be A Millionaire” sets the highest bar for wealth at $1 million, an amount that some say used to be a line that identified the rich.

“When I was growing up … you could take $1 million and put it in tax-free bonds and make $40,000 to $50,000 a year.” said Jim Lazarus of the San Francisco Chamber of Commerce. “That’s all you needed.”

The idea of living off the investment of the $1 million alone today, however, would be different, he said.

You’d be hard-pressed to live on $50,000 in the Bay Area today, particularly when you’re supporting a family, he said.

Instead, Lazarus said, the bar might need to be raised.

“How about $10 million, which gives you $500,000-a-year income?” he said.


How The City rates

If you make $250,000 a year in San Francisco, here is what you would have to make in other cities to live the same lifestyle:

City Salary
Manhattan, N.Y. $333,333
Los Angeles
Philadelphia $190,147
Seattle $189,226
Baltimore $186,464
Sacramento $178,023
Chicago $173,726
Miami $168,508
Reno, Nev. $162,523
Phoenix $151,012
Dallas $141,344


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