Let me tell you a sad story.
In order to comfortably raise a family in an expensive coastal city like San Francisco or New York, you’ve got to make at least $300,000 a year. You can certainly raise a family earning less as many do, but 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 ~$62,000, it’s not an outrageous sum of money once you look at the realistic income statement I’ve put together for this article.
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 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, but you’re still earning enough to live a comfortable lifestyle anywhere in the world.
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.
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.
Who Makes $300,000 A Year?
Before we look at the income statement, I’d like to go through a list of various workers who will eventually make ~$300,000 on their own or in household income if they find someone who also works.
* A Bay Area Rapid Transit janitor who makes $234,000 + $36,000 in benefits who gets together with a Bay Area Rapid Transit elevator technician who makes $235,814 + $48,429 in benefits.
* Starting total compensation packages for 22 year old employees at Facebook, Google, Airnbnb and Apple range from $120,000 – $150,000. By the time they are 30 years old, they are making $300,000+ a year.
* 30-year-old first-year Associate in banking earns $150,000 in base salary + ($0 – $120,000) in bonus. In a couple years, she is making over $300,000 a year.
* A 26-year-old first year law associate at a big law firm like Cravath makes $180,000 base + $20,000 sign on bonus. By the end of his 6th year his is making over $300,000.
* A 29-year-old Director of Marketing at a startup makes between $120,000 – $180,000. If she marries a personal finance blogger with over 500,000 pageviews a month, their combined income is over $300,000 a year.
* A 42-year-old college professor at UC Berkeley makes $235,000 on average and $279,000 at Columbia and NYU. They’ll probably have some smart children.
* The average specialist doctor finishing his or her fellowship at 32 makes $300,000. The average salary for a primary care physician is $200,000.
* A 26-year-old middle school teacher making $60,000 a year plus her $250,000 a year VP of Marketing wife.
* A 56 year old high school athletic director making $120,000 a year plus his $200,000 a year management consultant husband.
* Thousands of employees at tech IPO companies like Uber, Lyft, Palantir, Pinterest, Slack and more once their RSUs are included. With many of them IPOing in 2019 and 2020, there’s going to be a nice multi-billion dollar windfall of liquidity.
The permutations of people making $300,000 goes on and on. For many professionals, if they aren’t there now, they will get to such a level of income eventually, especially if they team up.
Living A Middle Class Lifestyle On $300,000 A Year
Please study the budget chart below closely. Every expense has been carefully vetted by hundreds of people who live in expensive metropolitan areas like NYC, LA, and SF and who diligently track their cash flow to give you the most realistic budget possible.
I’ve tracked every line item with my own budget (family of 3 in SF), and they are pretty spot on.
Gross Income Review
This dual income household of three puts away $38,000 a year in their 401(k)s for 2019. This pre-tax retirement savings figure will likely go up about $500 every couple years or so to keep up with inflation.
With the passage of the Tax Cuts And Jobs Act, they’ve lost their ability to deduct more than $10,000 worth of state income, sales, and property taxes. As a result, I’ve used the new $24,000 standard deduction for married couples to keep things simple.
For 2019, the FICA tax rate for employers is 7.65% — 6.2% for OASDI and 1.45% for Medicare tax. For example, an employee will pay a 6.2% Social Security tax on the first $132,900 of wages (maximum tax is $8,240 [6.2% of $132,900]), plus 1.4% of all income earned. Since both parents work, both parents pay the tax. At least both parents eventually gain when they collect Social Security.
They have a marginal federal income tax rate of 24%, a marginal California income tax rate of 9%, and most of their income facing a 7.65% FICA tax since both work. Their combined effective tax rate is roughly 32%, for a tax bill of ~$76,160. In other words, their total tax bill is ~$15,000 more a year than today’s median household income, so hopefully folks who earn less can give them some slack.
What’s nice about 2019 and beyond is that this family now gets a $2,000 child tax credit.
In the past, the credit began to disappear for married couples who earned more than $110,000 and for single filers with AGI above $75,000. Now, singles and married couples can earn up to $200,000 and $400,000 respectively, before their child tax credit begins to disappear.
Bottom line: their $300,000 gross income gets reduced by roughly 38% after taxes and retirement contributions to $187,840.
Childcare ($24,000): There’s no getting around this expense if both parents are working. Babysitting and childcare for $20/hour is the standard rate I’ve found in San Francisco. Some prices go up to $35/hour.
If the parents decide to send their child to private school, this $24,000 annual expense will increase to $35,000 a year for K-8 and $45,000 a year for 9-12. It’s a shame that so many expensive coastal cities have troubled public school systems.
In San Francisco, there’s a lottery system for the sake of social engineering. In other words, even if you buy a $1.5M median home and pay $20,000 a year in property tax, you are not guaranteed to have your kid get into the public school down the street.
Of course, if you have a second kid, childcare expenses will increase, but probably not double due to synergies. That is unless you want find some 4th trimester childcare relief. Then we’re talking $40,000 and up for three months.
Food ($25,200): When you are a dual job household with a baby, there’s little time to cook. Further, given the family is living in a city like New York or San Francisco, food is world class, and on demand food delivery is ubiquitous. It makes little sense to spend hours cooking when you’re already tired and want to reserve your remaining energy for taking care of your baby. However, food is where this family can cut expenses if they start feeling a little tight.
Mortgage ($46,800): Although the payment is $3,900 a month for a $900,000 mortgage at 3.25%, $2,000 of it goes towards paying down principal and building net worth. Therefore, you can add $24,000 a year in forced savings to their $37,000 a year in 401(k) savings.
Their $1.5M assessed house is a standard 1,750 sqft, three bedroom, two bathroom home on a 2,500 sqft lot. For new homebuyers, only interest on up to a $750,000 is taxable.
Here’s an example of a typical $1.855M home in Golden Gate Heights, one of San Francisco’s best kept secret neighborhoods. As you can see from the picture, the house only has 1,288 square feet of living space, two bedrooms and one bathroom. At least it has ocean views from the living room.
This buyer needs to spend another $50,000 – $80,000 remodeling the house because everything is about 25 years old.
The $10,000 SALT cap deduction for individuals and married couples really hurts homeowners in expensive real estate markets. Property tax on a $1.5M assessed house alone is roughly $19,200. Then the couple is paying ~$18,000 in state income taxes.
Further, this couple is lucky because they bought their home several years ago for $1.2M. Now imagine renting a house for $6,000 a month and trying to save up $300,000 for a downpayment on a median priced home. Difficult to do with less than a $300,000 household income. Probably impossible without living in a one bedroom for “only” $3,200 a month or getting help from their parents.
The good thing in 2020 is that mortgage rates have come down aggressively to 6-year lows. Homeowners can now refinance to a lower rates and save money as a result. I recommend checking out rates on Credible, one of the largest online lending platforms today for free. Qualified lenders compete for your business so you can get the lowest rate possible.
Vacation ($7,800): Some will say that spending three weeks of vacation is a luxury, but I say spending three weeks of vacation is normal for two working parents who want to keep their sanity.
By law, every country in the EU has at least four weeks of paid vacation days. Meanwhile, Brazil gets 41 paid vacations days a year. Yes, their respective economies might be a mess compared to ours, but at least they are enjoying life!
Car Payment ($7,400): When you have a baby, all you want to do is protect him or her from harm. Even if you are the best driver in the world, one reckless drunk driver might t-bone you one evening.
No longer do you feel comfortable driving a compact city car while transporting your family. Instead, you want a larger vehicle that has the highest safety rating.
Baby/Toddler Things ($6,000): You can spend as little or as much as you want on your baby. But this family buys disposable diapers, not washable diapers, tons of baby proofing material, lots of toys, the best car seat, and two strollers. It’s funny, but one of the best toys for our son is a tissue box.
Entertainment ($7,200): Date night can easily cost $200+ an outing for two once you include tickets to a ball game or a show and transportation. Entertainment also includes the cost of sporting equipment, memberships, Netflix, cable, internet, and more. If your friends invite you to a weekend getaway, a bachelor or bachelorette party, or a function or two, your entertainment budget will be blown to smithereens.
What’s Missing From The Budget? This couple is lucky in that they have no student loans. They paid their loans off by the time they were 35. They are 39 years old today. Final Cash Flow Review
Ending Cash Flow Analysis
The end result is annual cash flow of only ~$2,920, which could get spent in a hurry as things always pop up. But overall, this middle class family is building roughly $54,000 in net worth each year through principal pay down and 401(k) savings plus any appreciation in their investments and primary residence.
After 22 years of work with no change in income or expenses, this household will likely amass a net worth of over $2,000,000 and the ability for at least one spouse to retire since their son will have graduated college.
However, based on my recommended net worth goal for financial freedom equal to 20X annual gross income, this couple needs to accumulate closer to $3,500,000 to really feel comfortable for both to retire.
Earn Just A Little More
After analyzing all the numbers above, the ideal household income to raise a family is $315,000+ after deductions. At $321,450 you pay a 24% marginal income tax rate and avoid having to pay a whopping 8% more in federal income tax on each dollar over $321,450. This marginal federal income tax jump is large compared to the 2% jump from 22% to 24%.
Based on my experience, happiness did not increase for me when I began making over $200,000 as an individual. Happiness did not increase for us when we began making over $300,000 either. Therefore, due to the increase taxes and increase stress, it seems pointless to put yourself through the ringer simply to try and make more from a day job.
Save Aggressively Then Move
In order for this household to achieve financial independence, they’ve got to either up their 17% gross savings rate, figure out a way to reduce expenses, or boost income.
Since boosting income probably hurts their quality of life due to more work and stress, the best way is to reduce expenses and diligently keep track of their finances online for free in order to continuously optimize their net worth. After 10 years of aggressive saving and earning, moving to a lower cost area to work or retire could be the perfect final move.
There’s a moving truck shortage in places like San Francisco because so many people are moving out of this expensive city and other expensive coastal cities. The trend is towards relocating to the heartland, where valuations are cheaper and net rental yields are much higher.
If you live in an expensive metropolitan area, consider relocating to lower your cost of living or at least try and take advantage of the valuation differential by investing in Middle America.
The best way to do so is by investing in real estate through Fundrise and CrowdStreet. You can sign up for free and review their pre-vetted properties that were once only reserved for institutional investors or high net worth individuals.
Thanks to technology, there’s no need to grind so hard in cities where the median home price is over $1M. You can earn a similar amount of income working remotely while spending a fraction of big city living costs.
Life is so much easier when housing is affordable. The country is large. Go explore it!
Updated for 2020 and beyond