Have you ever wondered how people can live in an expensive city on less than six figures? I wondered this all the time as someone who has lived in New York City and San Francisco for over 23 years.
I first started my career in New York City as a financial analyst from 1999-2001 at GS. My base salary was only $40,000 and I could only afford to share a studio with a friend! It was an amazing time, but boy was it hard to save money.
Thankfully our salaries were raised in the second year to $65,000 after Wall St. decided to pay new first year analysts $55,000 instead of $40,000. Still, a base salary of $65,000 wasn’t much to write home about when one-bedroom condos were selling for 5X.
In 2001, I moved to San Francisco for a raise and a promotion. Back then, San Francisco felt dirt cheap compared to Manhattan. I could either get 30% more space for the same money or buy the same place for 25% less. Therefore, in 2003, I decided to go long San Francisco real estate.
The key to living in an expensive city is to get your housing costs under control. Once you have your housing costs below 20% of your gross income, you should start to thrive.
New York City Is Fantastic, But Expensive
New York would be the greatest city in North America if it weren’t for three things: 1) Tough weather for half the year, 2) Never ending crowds, and 3) outrageous prices!
A decade later, I went to New York City to visit my buddy I shared a studio with for two years. He had been looking to upgrade to a two bedroom condo with his future wife. But he was taken aback by the then ~$1.5 million price tag. He said they just might move out of the city instead.
Back in 2001, my friend had bought a one-bedroom condo near the U.N. for only $325,000. The value of his condo is now over $750,000. If a condo owner who saw his property’s value grow by 130% can’t even afford to comfortably upgrade to a two bedroom, can you imagine what a renter during this same time period is thinking?
So it really got me thinking. How do people live a comfortable life in an expensive city like New York without making six-figures a year? Let’s find out.
Breaking Down How Little $100,000 Goes In An Expensive City
First of all, making $100,000 a year puts you in roughly the top 10-15% of nationwide income earners. $100,000 is a great achievement no matter where you live, but it’s not that great if you live in an international city such as New York, San Francisco, Hong Kong, London, Tokyo, or Paris.
It’s really important for those who make much less to recognize high salaries are generally earned in expensive locations.
Let’s break down what a typical $100,000 earner will get after funding their retirement savings and taxes. There is no excuse for anybody making $100,000 or more to not max out their 401(k) for a more financially sound retirement. Here is my 401(k) post by age for your reference.
$100,000 Income Budget In An Expensive City
Gross Income: $100,000
401(k) Contribution ($19,500 max for 2021): $17,500
Taxable Income: $82,500
Effective Tax Rate (includes city, state, federal, SS tax, health insurance): 30%
Net Income: $57,750
Monthly Net Income: $4,812
Expenses From A Frugal Friend Making $100K In An Expensive City
Rent: For One Bedroom On 71st and 2nd Avenue: $3,300
Food: $700. He eats out about 30 meals a month and cooks his remaining 60 meals at home (breakfast, lunch, dinner). Groceries are not cheap in Manhattan.
Beverages: $100. He only goes out for drinks with his friends once a week. Beers are $5-$15 and cocktails are $8-$15.
Cabs: $100. From the Upper East Side to Grand Central costs about $15 one way. It’s $20 to go all the way downtown. He tries not to take cabs, but it’s an inevitability.
Subway: $112. It’s $5 to commute round-trip. Back in 1998 one-way fairs were only $1. $112 is now the monthly all you can commute pass cost.
Cable / Internet: $100. Pretty standard package for basic cable and internet.
Entertainment: $200. This category includes movies, shows, and events. Movie tickets cost $15 and Broadway shows cost $50-$100 for the cheaper tickets.
Mobile phone: $50. Family plan i.e. subsidized.
Travel: $150. Cost to go see his family in New Jersey and the occasional fishing or skiing trip up north.
LEFT OVER INCOME: $0!
Not Living It Up On $100K A Year In Income In An Expensive City
As you can see from my example above, someone making $100,000 a year in New York City is NOT living it up. Going out once a week with friends is hardly excessive in a city that seriously never sleeps. He does his best to walk or utilize the subway and his entertainment budgets is pretty tiny for all the NYC has to offer.
At least he is contributing a good amount to his 401(k), which is crucial since he has nothing left in disposable income. Contributing to his 401(k) should result in over $200,000 in 10 years due to company match and conservative performance estimates. If he wasn’t contributing heavily to his 401(k), he’d have an extra $1,200 a month to spend.
Finding a decent one bedroom for under $3,000 is not particularly easy unless you know someone who has a rent controlled apartment. If you want to lead a less comfortable life, then you can find studios for around $2,000 a month.
But, are you really going to be happy still living like a college student making $100,000 a year? Probably not since you’re closer to 30 than 20. Where are your parents, girlfriend, boyfriend, and relatives going to sleep? One solution is to find a significant other who is willing to split your $3,300 a month one bedroom cost.
Going Out To Eat Costs A Fortune Too
Lunches in NYC cost on average $10-15 after tax and tip. You could eat a Shackburger at Shake Shack and drink free water every lunch for $5.01 like I did for two days, but you might die of heart failure at a young age. You might also turn so big that your armpits emanate massive odor and heat on the passenger next to you like I felt sitting in the middle sit on a red-eye flight over!
There’s a saying by New Yorkers to expect to burn $100 each evening you go out. After going out every evening I can see how this saying is true.
My dinner at Strip House cost $77 followed by $35 of drinks at Sparks Steakhouse where a family friend works. Then of course I had to pay another $15 cab ride back home because it was 1am. At least my buddy and I split the bill.
Of course we could have gone to a cheaper place to eat like Kunjip in Korea Town for a more reasonable $25 a person. We could have drank our alcohol at home and ordered water at the bar instead. But come on. It’s good to live it up once in a while.
The Ideal Income To Live In An Expensive City
I believe $200,000 a year per person is the ideal income for maximum happiness. To put things into perspective, a 30-year-old second year Associate makes anywhere from $170,000-$250,000 on average in finance as do second year lawyers. 32 year old doctors who don’t do fellowships make $150,000-$250,000 as well.
If two, $200,000 income-earning people can combine forces, then even better. Nowadays, a family earning $300,000 a year in an expensive city is considered middle class.
What’s also interesting is that two people making a combined $400,000 annual income is right at the limit for where President Biden wants to raise taxes.
$200,000 Income Breakdown
Gross Income: $200,000
401(k) Contribution: $17,500
Taxable Income: $182,500
Effective Tax Rate (includes city, state, federal, SS tax): 35%
Net Income: $118,625
Monthly Net Income: $9,885
$200,000 Budget Breakdown
Rent For Two Bedroom In Mid Town: $5,500
Food: $1,000. Now we can afford to eat four $100 dinners a month with $500 left over for lunch and breakfast.
Beverages: $500. You can go out twice a week now or feel more comfortable buying a couple rounds of drinks for three friends four times a month.
Cabs: $200. Instead of taking the subway when it’s super hot or really late, you get to take a $15 cab ride a little more often for convenience.
Subway ($2.5 one way): $114. Same old monthly commuter plan.
Cable / Internet: $100. Same old package.
Entertainment: $500. A little more breathing room here because now you can afford to take out a date!
Mobile phone: $100. Upgrade to a larger data package because you’re on the move more often.
Travel: $300. A couple more trips out of the city. This time, to the Hamptons.
Total Expenses: $8,300
LEFT OVER INCOME: $1,535
$200,000 A Year Is Good, But Not Great Income
We can argue the ideal income to live in an expensive city all day long. But as you can see from the example above, $200,000 will allow you to contribute to your 401(k), save $20,000 (10%) in after tax income and spend freely on much of what NYC has to offer.
Anything more than $200,000 is nice, but higher tax rates are really going to eat into your earnings. It also usually takes more effort to earn in the $250,000+ range so that’s a negative.
Here’s another example of a single mother with a child. It’s clear she’s not living it up on a $200,000 income. Thanks to taxes and childcare expenses, her six-figure income gets gobbled up quickly.
Examples Of Everyday Expensive Things You Can Buy In NYC
Let me now share some pictures of things you may want to buy in NYC that costs a lot of money.
Share How You Live Comfortably In An Expensive City On Less!
Given only 13% of Americans make more than $100,000 a year, it’s clearly possible to have a good life living in an expensive city making less. This goes for folks living in other expensive international cities as well. Some of the things I’ve thought of that allow people to live and save are:
- Co-habitating with a girlfriend, boyfriend, spouse, or roommate.
- Living in a rent controlled apartment.
- Working two or more jobs.
- Residing farther away from downtown
- Living off the generosity of one’s parents.
- Having a wealthy spouse.
- Working in the food industry so you don’t have to pay for your meals.
- Working as a property manager or hospitality industry to save on rent costs.
- Living for free in your parent’s apartment.
- Living off a trust fund.
Housing Is The Biggest Issue
If you can take care of your housing situation everything else can be overcome with cheaper options. For example, you can eat McDonald’s for dinner rather than go to Le Bernardin. Entertainment-wise, you can play frisbee in the park instead of paying $100 for a Broadway show.
I do wonder how parents afford to send their kids to private schools given public school systems in big cities are often in need of improvement. There’s the Citywide Gifted & Talented programs and Anderson, Hunter, Lowerlab, and Nest are all great elementary public schools.
Then there’s Stuyvesant and Bronx Science for public high schools. I’m not sure what parents do if their kids aren’t smart, but I’m sure there are scholarships for everyone.
If you live in an expensive city and make less than $100,000 a year, I’d love to hear how you manage to live a comfortable life! Please also mention your savings rate as well. I guess it all depends on what your definition of “comfortable” is and your age.
Expensive Big Cities Outlook Post-Pandemic
Post-pandemic, I believe thousands of people will be flocking back to big cities again for the job opportunities, network effects, and more. Therefore, I’m looking to buy Manhattan property to catch the wave.
Rents and rental property prices will rebound, just like everything else has so far. If you’ve been sitting on the sidelines for a while, I believe now is the time to invest before the herd comes back.
All my financially savvy friends are scooping up rental properties in San Francisco and New York City right now. If you are renter, your goal should be to lock in as long of a lease as possible at current rates.
The reality is, people can afford to live in expensive cities due to high incomes. If incomes weren’t high enough expensive cities wouldn’t be as expensive. The pandemic has made the most expensive cities cheaper for the time being. But I’m confident prices will revert back to the mean.
Achieve Financial Freedom Through Real Estate
Real estate is my favorite way to achieving financial freedom. It is a tangible asset that is less volatile, provides utility, and generates income. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate a significant amount of mostly passive income.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.
Take a look at my two favorite real estate crowdfunding platforms. They are free to sign up and explore.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the easiest way to gain exposure.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
Manage Your Finances In One Place
If you currently live in an expensive city or plan to move to an expensive city, I recommend signing up with Personal Capital, a free online wealth management tool to keep track of your income and expenses.
Money drains out like water if you don’t keep a tight lid on your cash. I live in San Francisco and Personal Capital keeps my budget in check by providing me clear snapshots of my finances. They even send me a weekly overview of my net worth progress over email which I highly appreciate.
My favorite feature is Personal Capital’s Investment Analyzer tools that assess your portfolio’s risk and fees. I discovered I was paying $1,700+ in annual 401(k) fees I had no idea I was paying!
How Do People Live On Less Than Six Figures In An Expensive City is a Financial Samurai original post. Due to inflation, the cost of living in big cities keeps going up. Hence, we need to earn more, save more, and get our housing under control. I’ve been writing about achieving financial freedom since 2009.
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