There are plenty of positives that have come out of the coronavirus pandemic: better health, less pollution, more time with family, an acceleration in the work from home trend, and the chance to buy stocks at large discounts, to name a few. The U.S. personal saving rate could be the most positive of them all.

Thanks to the lockdowns, the U.S. personal saving rate surged to an incredible 33% in April 2020! Although it has gradually faded throughout the year as confidence resumes, a 33% saving rate is still very impressive. It means that when Americans need to save, we will.

What Is A Personal Saving Rate?

The personal saving rate is defined as savings as a share of personal disposable income. Personal disposable income is defined as income less taxes.

If your income stays the same, the higher your personal saving rate, the stronger your household balance sheet. The stronger your household balance sheet, the more financially secure you will feel. The more you save, the quicker you will achieve financial independence. Love it!

Our household plan has been to cut our spending by 32%. The cut is to match the 32% decline in the stock market from peak to trough. If the stock market and our income rebounds, we will have increased our cash flow and our wealth. If the stock market and our income stay depressed, then we will have continued to protect our financial freedom.

As evidenced by the latest personal saving rate data, I’m pleased to see tens of millions of Americans do the same.

In order to comfortably raise a family in an expensive coastal city like San Francisco or New York, you’ve probably got to make at least $300,000 a year. Thanks to elevated inflation post pandemic, the middle class lifestyle is getting harder to obtain due to rising costs of gasoline, food, housing, travel, tuition, and healthcare.

You can certainly raise a family earning less. Statistically, most do. However, it won’t be easy if your goal is to save for retirement, save for your child’s education, own your own home instead of rent, and actually retire by a reasonable age.

Although $300,000 is a lot compared to the median household income in the United States of ~$76,000 in 2023, it’s not an outrageous sum of money. Once you pay taxes and look at the realistic income statement I’ve put together for this article you’ll see the income is reasonable.

After all, the cost of living is quite different across the United States. Almost half of the United States population lives in expensive coastal cities.

A Middle Class Lifestyle Is All We Really Want

All expenses in my example use current prices. I’ve also cross-checked the expenses with my family’s monthly expenses now that we have a son to make sure they are within reason. I’ve also cross-checked the expenses with over a dozen other households who make around $300,000 a year.

I use $300,000 in this post because I also believe it is close to the ideal income for up to a family of four to experience maximum happiness.

At $300,000, you aren’t paying an egregious amount in taxes. You probably aren’t killing yourself at work if both parents are working. At the same time, you’re still earning enough to live a comfortable lifestyle anywhere in the world. A middle-class lifestyle is all we really want.

About half the US population lives on the coasts. Therefore, this post is directly targeted at folks who need to live on the coasts because of their jobs, schools, or families. If you don’t live on the coasts, you might live in a city like Denver or Austin, where the cost of living is rising rapidly as well.

Finally, this post should also provide insights to non-coastal city residents on how good you’ve got it if you enjoy living where you are. $100,000 – $150,000 is a rough non-coastal city household income equivalent to $300,000.

Are you looking for some great things to buy with your massive investment gains? This article will provide some good ideas thanks to an extraordinary rebound in the stock market since its March 2020 sell-off.

With the NASDAQ and S&P 500 hitting new record-highs, despite a pandemic, many people are feeling richer and looking for great things to buy. Coming close to the edge and surviving does that to people!

We Should Spend More Of Our Money

After about 13 years of diligently saving 50% – 75% of my income, I started to lose steam. No longer was I obsessed with growing my wealth as large as possible. Instead, I wanted to find ways to start spending money for a better life. I was 35 years old in 2013 and tired of living so frugally.

It’s hard to spend money when you’re so used to saving and investing aggressively for so many years. In a big way, growing your money pot gets addicting, especially since the estate tax exclusion amount is now $11.58 million per person for 2020. But it’s important to consumption smooth, otherwise, you’ll likely die with way too much.

The main way I’ve forced myself to increase my spending is to review my investment gains for the year and take some profits on positions I think have limited upside potential. I then use these profits to pay for a better life.

One idea is to follow my 10X Investment Consumption Rule, which states that if you want the latest $1,000 iPhone, then you best make at least a $10,000 return on an investment to pay for that unnecessary item.

Another way to go about spending your money is to take 10% of your annual investment returns and blow it on whatever you want. This way, you’ve still got 90% of your investments hopefully working for you, you’re not paying a lot of taxes, you’re rebalancing your portfolio, and you’re actively using your money for a better life.

If you tether consumption to investment returns you will never go broke. You will also likely eradicate any money guilt you have for spending money. Finally, if you want to spend more money, you will be motivated to invest more money for hopefully greater returns.

Paying down debt is quite satisfying. Having no money can actually be quite addicting and thrilling. Let me explain.

When you have no money, your body’s survival instincts are triggered. Without money, your risk of starvation and being homeless increases. Therefore, you tend to do everything you can to make more money.

Debt puts you into this financial hole that makes you try to get out. With each debt payment, you get a little closer to the surface. The thrill of debt is partially why taking on a mortgage to buy a home is so rewarding.

Debt enables you to buy a nicer home than you can afford with cash. Every time you pay your mortgage, you’re building more equity until you one day own the home outright. Further, the home has the potential to appreciate. No wonder why mortgage is considered the best type of debt to have.

The average saving rate by income increases the more you make. That’s logical since living expenses like housing and food tend to more relatively more fixed.

However, the average saving rate doesn’t always increase with more income due to a lack of discipline. We all know people who spend way too much and live paycheck-to-paycheck despite huge salaries.

Before the global pandemic began, Americans as a whole didn’t save a lot of money. Up until May 2020, the average saving rate was only around 7%. At least 7% was better than the average saving rate of only 2.4% in 2006.

In other words, it takes the average American 13 – 45 years to save just one year’s worth of living expenses. That is a disaster if you want to achieve financial independence sooner, rather than later.

When you’re 60-something years old and only have several years worth of living expenses to buttress your declining Social Security checks, life isn’t going to be very leisurely. You’ll probably be mad at the government for lying to you and mad at yourself for not saving more when you still had a chance.

Sometimes we all need a redo in life. About once every couple of years, a Financial Samurai post goes a little nuts on the internet. Recently, Twitter got a hold of “Scraping By On $500,000 A Year: Why High Income Earners Can’t Escape The Rat Race” and consumed it like a rabid dog shaking a rag doll.

I first started noticing Twitter activity one Friday morning. Overnight, it seemed, about 500 new tweets of the post had appeared. By Monday, the tweet count had risen to a whopping 40,000+! What the heck was going on?!

Apparently, the internet found the $500,000 a year couple’s budget so absurd it started poking fun at the post. Some say my chart has even reached meme status. Well pinch my nuts! I get to check off another bucket list item before I croak.

The budget I originally posted is actually a real life couple’s budget shared with me to share with you. Their budget has been corroborated by hundreds of other couples and individuals making similar incomes while living in an expensive city like NYC, SF, London, Paris, LA, and Hong Kong. Financial Samurai already gets over 1 million organic pageviews a month, so it’s easy to gather feedback. Just check the comments on the post to see for yourself.

Some points I wanted to make from the post:

1) It’s not what you make, it’s what you keep.

Without discipline, it’s easy to spend everything you earn. Lifestyle inflation is the biggest culprit for why folks never feel like they have enough. It’s not just the cars and houses that people compete on, it’s also the schools parents want their children to attend.

Hopefully, the post encourages everyone to take a hard look at their own finances or if they haven’t already done so, create and monitor their own budget. “If you can’t manage it, you can’t improve it.” – Peter Drucker.

2) High income comes with high costs.

Yes, it’d be nice to earn big bucks living in the heartland of America, where I’m bullish, but in the heartland, those high income jobs are harder to come by. If one shouldn’t spend any more than 3X – 5X their gross income on a home, how much does one have to make in order to afford the $1.2M median home price in SF or NYC?  

Answer: $240,000 – $400,000 AFTER coming up with a $240,000 downpayment. Unfortunately federal income taxes adjust based on income amounts and not on the costs for living.

3) Think about geo-arbitrage.

Technology and the internet are allowing people to untether themselves from an office. Find companies that allow you to work remotely in a lower cost area. You might not get to relocate to Bali, Indonesia, but there are plenty of fantastic cities that are much cheaper than NYC, SF, LA, Boston, and Washington DC.

I’ve interviewed several CEOs in SF and they all say that given SF’s tight labor market and high cost of living, they are hiring more remote workers. Better yet, have your own internet-based business. Take advantage of the best technological shift in history. Then again, not everybody wants to relocate. I don’t many Asian-Americans are clamoring to relocate to Atlanta after the shootings at the massage parlor.

4) Save and invest often over the long run.

There’s great value in maxing out your 401k and building home equity over time, even if you have very little left over. According to the Bureau of Labor Statistics, only about 55% of the American workforce has access to a 401(k) and only about 38% of the total workforce participate. Doing some low level math, that means roughly 31% of those who have access to a 401(k) are not participating.

I strongly believe that over time, home equity is one of the major reasons for a widening wealth gap between home owners and renters. Find a place you know you’ll be for the next 10 years and try and get neutral real estate by owning your own place. Of course, be responsible with your purchase.

5) Ask what it’s all for at the end of the day. 

I know plenty of high earning people who are not happy because they are stressed at work and can never spend as much time with the people they love. Not only that, they know the work they’re doing isn’t really helping society so they feel they’re selling their souls. They can’t leave due to an unhealthy desire for prestige, money, and power. Realize there’s a wonderful life beyond just making lots of money. Seek your happiness before you look back on life full of regret.

I realize it’s only human to judge others, even if we’ve never walked in their shoes. However, simply judging others does nothing to improve our own situations. Therefore, let’s do our best to approach things with open minds. With open minds, progress can be made.

Financial Samurai has always been about finding solutions to problems. I’d like to provide an optimized budget for this $500,000 couple. I’ll conclude by highlighting some interesting observations I’ve made about the public’s reaction to my original post as well.