Can you imagine scraping by on $500,000 a year? Well, believe it. Thousands of households living in expensive cities are running on this never-ending treadmill. It’s only when you can lock down expenses, save and invest aggressively, will you ever escape the rat race.
They’ve got big mortgages, private school tuition to pay, and fancy cars to drive. No matter how much they make, these households tend to spend all their income and not save as much as they should. Now with inflation running near 40-year highs, important costs are simply going up further.
I’ve highlighted in a previous article how living off $200,000 a year in an expensive city is really just an average lifestyle. In this article, I’ll discuss how one couple is living paycheck to paycheck while making a combined $500,000 a year. They are a real couple who shared with me their financial details to anonymously share with you. Judging others, after all, is an American pastime!
$500,000 a year or higher is a level which I think is considered rich. Anybody who thinks otherwise has no concept of financial reality. Even the government agrees after compromising by raising the income level for when the highest marginal tax bracket kicks in to ~$400,000 from $200,000 back in 2013.
But starting in 2018, things got even more painful for the upper middle class. The SALT tax cap capped mortgage interest deduction and limited property tax deduction to $10,000.
Now Joe Biden is looking at raising taxes for households making over $400,000. Can you imagine working 60+ hours a week, never seeing your family, and still paying more in taxes?
No wonder why more high-income households are looking to retire early and enjoy the YOLO Economy to the maximum. Life is short and this pandemic has really motivated millions to finally live it up!
Who Makes $500,000 A Year? Household Combinations
Although making $500,000 a year may sound like a Herculean task, you’ll be surprised to know there are plenty of regular folks who hit the half million mark every year. Here are some combinations.
1) A couple 30 year old lawyers in their fourth year at a big law firm
2) A couple 32 year old second year associates at an investment bank after business school
3) A single 31 year old VP at a private equity shop two years out of business school
4) A 35 year old senior project leader at a management consulting firm and her schoolteacher husband
5) A couple 35 year old doctors (cardiologist and anesthesiologist) three years after their fellowships
6) A 46 year old Chief Marketing Officer and her 52 year old police officer husband
7) A couple online marketing consultants in their mid-30s
8) A 41 year old super frugal personal finance blogger who preaches riding a bike, doing your own home construction, and living off $30,000 a year or less and his wife
9) An engineer at Google who has been there eight years and his partner at Salesforce
10) A 22 year old rookie professional basketball or football player and his product manager wife.
11) A junior partner at a law firm and her Silicon Alley engineer husband
12) A Bay Area janitor and his elevator technician spouse
As you can see from my examples above, plenty of professions make $500,000 a year or more in household income at a relatively young age (<40). Finances are much easier when you combine forces! Some are scraping by and some are doing just fine.
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How To Make $500,000 And Never Escape The Rat Race
People who consistently earn $500,000+ annually should not have any financial problems. If they are scraping by, they aren’t getting sympathy from anybody since they’re making roughly 6.7X the median household income of $75,000.
A very simple solution to growing rich is to simply track your finances for free online. The process is similar to how you’d track your weight by stepping on a scale at least once a week to keep yourself honest. The free tool I’ve used to manage my wealth since 2012 is Personal Capital.
Just beware. Money can be intoxicatingly evil once the big bucks start rolling in. As soon as you start making multiple six figures, you begin associating yourself with other people who make similar amounts or much more.
Remember, it’s nice making max money in the NBA. But it’s even nicer if you are the owner who can cut max money checks!
We’re Always Comparing Ourselves
There’s a never ending cycle of financial comparison. And with comparison comes envy, jealousy, depression, loneliness, and all sorts of feelings that would not be felt if you just took a step back and realized how fortunate you really are. If you try to keep up with your neighbors too much, scraping by may be inevitability, no matter how much you make.
This is why if you do want to beat the Joneses, you should compete on FREEDOM. After all, there will always one more dollar to be made. If you don’t compete on having the most freedom, scraping by might very well be your reality with a high income.
The below chart is an annual spending example of a couple who each make $250,000 a year as lawyers. They have two children ages three and five. They are both in their early 30s and live in New York City, the most expensive city in America! One could say they are scraping by with just $7,300 left a year in cash flow.
$500,000 INCOME ANALYSIS
Largest Expense: Taxes ($185,600, ~39% effective tax rate).
The number one reason why high six-figure income households are scraping by is due to taxes. It’s more efficient to earn investment income than W2 income due to lower tax rates.
The government doesn’t believe in two high-earning working spouses. They want one spouse to stay at home and take care of the kids. If they didn’t, why did President Obama campaign aggressively for $200,000 + $200,000 = $250,000 before taxes go up for the top? Equality would dictate that $200,000 + $200,000 = $400,000, which is the compromise our politicians made.
Living in NYC is expensive due to Federal (37% marginal tax bracket), State (10%+), City (4.25%+) taxes, and FICA tax of 6.4% for the first $142,800 you make for 2021. Unfortunately, NYC is where many of the jobs are.
At Least No More Marriage Penalty Tax!
This couple use to be paying roughly $8,000 – $10,000 extra a year due to the marriage penalty tax, which is now no more for individuals who turn into couples earning up to $300,000 each. Furthermore, they have AMT, an extra 0.9% Medicare tax they have to pay on income over $200,000, and net investment income tax (NIIT) of 3.8% on income over $250,000.
With tax reform in 2018, only $10,000 of State And Local Taxes (SALT) is deductible per person or per couple. This is a negative for residents in coastal cities like New York and San Francisco where property tax alone can be $18,000 a year based on the median home price of $1.5M.
Further, a taxable income of over $400,000 means a state income tax amount of over $26,000. This couple with $43,000+ in SALT deductions now loses $33,000. Then there is the cap on mortgage interest deduction on mortgages up to $750,000 from $1,000,000.
Further, President Biden is planning on raising taxes on single people making over $400,000 and married couples making over $450,000 if he gets his way.
Wise To Invest In Non-Coastal States
Given the high cost of living in big cities like NYC, is there any wonder why investing in the Heartland of America is becoming a more popular move by savvy investors? Instead of scraping by in New York City, you could live it up in Des Moines, Iowa, whoo hoo!
The Heartland is being rewarded and protected by the government. Further, property valuations are much cheaper and net interest yields are much higher. With technology and telecommuting now widely accepted post-pandemic, more people are migrating to lower cost of areas.
I’ve personally invested $810,000 in 18 different commercial real estate investments across the country.
My favorite real estate crowdfunding platform is Fundrise, which has diversified funds that invest in rental properties in the Sunbelt. I also like CrowdStreet for accredited investors, which offer individual real estate opportunities. Both are free to sign up and explore.
So far, my returns have averaged 12% a year and my capital is starting to really pay out. Below is my dashboard, which shows over $624,000 in distributions since I started investing in private real estate.
Mortgage Expense ($60,000)
$5,000 a month in mortgage expense bought this family a ~$1,500,000, 3/2, 1,700 sqft condo in Brooklyn a couple years ago. In other words, they are living comfortably, but not large.
Luckily, they bought their condo a couple years ago because similar condos are now going for $1.6 – $1.8 million. I would say a mortgage, property taxes, and maintenance expenses are main reasons for scraping by.
Further, mortgages rates for 30-year fixed, 15-year fixed, and a 5/1 ARM are now close to 6-year lows as the Fed has decided to step off the gas pedal. If you haven’t refinanced or check the latest mortgage rates, you can get a free mortgage rate quote to get the best rate possible.
Childcare Expense ($42,000)
Surprise! Children are expensive, especially in big cities. Without children, a $500,000 would likely never be scraping by.
They are actually getting a discount with two kids, given childcare for one kid costs closer to $30,000 a year. The $42,000 a year cost can be spent on daycare or a day nanny, although some contend that $42,000 is not enough.
If the couple wants to send their kids to private grade school after, then the cost of tuition is often even greater than child care. Here in San Francisco, private high school tuition is over $55,000 a year per child.
Student Loan Expense ($32,000)
Law school tuition runs $50,000 a year for three years. That’s $300,000 in law school tuition plus room and board spent. If they didn’t go to law school, they could have easily made $65,000 – $80,000 a year doing something else.
So many people conveniently forget that in order to get a high paying job, it often takes a lot of expensive education. It would be nice if the US education system was practically free as it is in Canada or Europe. Too bad it’s not.
It’s typical for many doctors and lawyers to have over $100,000 in student debt to pay off over a 10-20 years period. If there’s one hack American parents should consider, it’s sending them to Canadian universities. Not only are they easier to get in, they are much cheaper as well. Take advantage of Canada as the Canadians take advantage of a more lucrative U.S. job market!
Food For Four ($23,000): A Debatable Expense
Spending $23,000 a year on food means spending roughly $1,916 a month, or $63 a day for four, or $15.75 per person for breakfast, lunch, and dinner. I challenge anybody living in a big city to consistently live off $15.75 a day for longer than three months.
Work lunch alone costs $10-$15 for a mediocre meal compared to $5-6, 10-15 years ago. Therefore, the solution is to buy in bulk and always bring food to work. Unfortunately, that gets old after a while, especially when you’re working 60+ hours a week.
Americans are clearly not scraping by on food given the majority of us are overweight or obese. But if we did start to cut down on food consumption, we might get closer to the ideal body weight and live longer.
Car Payments ($9,600): Also A Debatable Expense That Can Be Reduced
With two precious ones, the parents decided to lease two family-friendly vehicles: a BMW 5 series and a Toyota SUV with third row seating. $800 a month in lease payments means one less hassle when it’s time to get rid of the cars.
They like the convenience of covered maintenance and the peace of mind by having a warranty. They are busy professionals with kids. Car problems are the last things they want to deal with.
Three Vacations A Year ($18,000): Reasonable!
Let’s say each vacation is one week long and costs $6,000. Is that so unreasonable for four people? Seven nights at a 3-4 start hotel costs $300 a night ($2,300 including tax).
Roundtrip airfare for four to debt-laden Puerto Rico costs another $2,400. The family is left with $1,300 to spend on food and activities. It’s not like they are flying anywhere via a private jet or anything!
Charity And Alumni Giving ($18,000): Can Be Cut
$18,000 equals 3.6% of the family’s gross income, which is inline with the average donation percentage by income according to the National Center For Charitable statistics. They each give $7,000 to a charity they strongly believe in, and also give $2,000 a year each back to their respective undergraduate alma maters.
Children’s Lessons ($12,000): Raising Well-Rounded Students
It’s a competitive world out there and these parents want the best for their kids. The kids are taking violin lessons, Mandarin lessons, and tennis lessons throughout the year. At an average cost of $1,000 a month, they believe this money is well spent.
How else are they going to be able to get into private grade school that costs up to $50,000 a year? They’re feeling the pressure at work, so their kids might as will feel the pressure in school.
Miscellaneous Expenses ($10,000): Something Always Comes Up
Unless you track your finances like the CIA, which you should, something always comes up. If nothing ever came up, you wouldn’t have people with less than $5,000 in savings after 10+ years of work. If nothing ever came up, there wouldn’t be so many budget deficits. Sometime unanticipated is bound to happen.
All The Push-backs Addressed
I’m sure by now many of you are wondering what the heck is wrong with this couple? They aren’t scraping by. Instead, they are saving for retirement and living a pretty good lifestyle. But how could they earn so much money and be left with so little.
As someone who started his career working in Manhattan in 1999 with a $40,000 salary, and living in a studio with a high school buddy in order to save money, I’ve wondered the same thing. But let’s see if we can understand this couple’s point of view.
Here are your most common pushbacks and some further thoughts.
Pushback #1: A 40% effective tax rate is too high!
It does seem a little high given the charitable givings and mortgage interest expense. But due to AMT and mortgage interest deduction phaseouts, this couple isn’t getting as big of a deduction as you might think, especially now that SALT deduction is capped at $10,000.
There’s probably room to lower the couples effective tax rate by 5% with some aggressive accounting. It all depends on how much risk you want to take. Here’s some quick math from an astute reader. Do your own!
- NY State tax : (500K-18K-18K-15850)*0.0685= ~$30,700
- NY City tax: (500K-18K-18K-90K)*0.3648+3000= ~$16,700
- Social Security tax (FICA): 7347*2= ~$14,700
- Medicare: 500K*.0145 = $7,250
- Federal tax: Deductions: (47.4K state local), 20K real estate tax, 18K charity, 41K mortgage interest (This is the third year of the amortization as per your information). Child care tax credit: 1200 -> ~104K
- Obamacare tax: (500K-250K)*.009= $2,250
Total taxes of $175,600, which is not too far off from my $185,600 estimate. The child tax credit phases out after a married couple starts earning more than $110,000. Therefore, my ~40% effective tax rate is pretty darn close to reality. Run the numbers if you don’t believe me.
With Biden now as President, expect to see a federal marginal income tax rate go up to 39.7% from 37% for this $500,000 a year household.
Pushback #2: A $1,500,000 home is way too expensive! They should just move.
Yes, $1,500,000 is a lot for almost everywhere else in the world, but in Manhattan, the median home price is roughly $1,280,000 and $1,115,000 in Park Slope, Brooklyn.
Spending 20% more than the median home price when you have a family of four to house isn’t that egregious. With selling costs still stubbornly high at 5% – 6%, selling so quickly after buying isn’t an optimal move, especially because of the kids.
Real estate prices are a reflection of job growth and income levels. Yes, you can move to Idaho to save on housing costs, but you will have a much more difficult time finding multiple six figure jobs.
Invest in the heartland of America through real estate crowdfunding is a simpler, more efficient way to profit from higher yielding properties. Thanks to the pandemic, the spreading out of America is real.
Pushback #3: Who needs two cars in NYC?
Nobody, really. With an awesome subway system and cheap ride sharing, one car is enough for a family of four. If they cut down on one car, they can save $400/month or $4,800 a year. Not a huge amount, but something.
The chart is an example of an imperfectly optimized financial budget. It has room for improvement. Having a large car becomes important with kids because you want to get away from the city and take their friends too.
Personally, I do think driving a cheaper, older car is much better for your mental health. He won’t worry about it getting dinged or stolen as much.
Pushback #4: $12,000 in music and sports lessons?!
The pressure to get into a private school in cities like SF, NYC, and LA is immense because of public fund mismanagement and strange lottery systems that don’t allow students to attend their local public schools where they pay property taxes.
It’s sad to put kids through the wringer so soon, but I guess the cycle never ends if the parents went through the wringer themselves. The funny thing is, most parents don’t continue to play sports as adults. So why are we pushing our kids to play sports so much when only about 1% play sports in college
Pushback #5: Having $7,300 left over is still a lot!
It is, if you don’t live in a big city with two kids to support. One accident, and that money is gone. This is why having good health insurance, life insurance, and an umbrella policy is so vital. Even then, we hear horror stories about how insurance companies don’t fully pay out.
Remember, everything is relative in finance. You can’t compare your cost of living to their numbers if you don’t also live where they live.
Pushback #6: Three vacations a year? What a joke!
It’s sad that we view having three, one week long vacations a year in America as a difficult thing to do. Spend some time working in Europe or Asia and you’ll discover how little vacations Americans actually take.
Is there any wonder why countries in Europe, despite their high taxes, consistently rank as the happiest countries in the world? Let’s gain more perspective on work-life balance, money, and happiness by visiting other countries.
Pushback #7: At least they are building a 401k balance and home equity.
This is exactly right. When it’s time for them to leave the rat race, they’ll at least have a sizable 401k balance and a good amount of home equity if real estate continues to increase with inflation. Nothing is a guarantee as we saw during the financial crisis and in 2022, but chances are high their investments and home equity will continue to grow.
The reason why they might not feel rich is because they can’t touch their 401k money before 59.5, unless they want to incur a 10% penalty. Further, given they only own one property, they’re neutral the real estate market because they have to live somewhere.
Only if they own more than one property are they actually long. They could take out a home equity line of credit (HELOC) to fund their lifestyle, but that’s what caused many homeowners to get in trouble in the last downturn.
For 2023, the maximum 401(k) contribution per employee is $22,500.
Pushback #8: Where’s the line item for college savings?!
This is where all the cost savings we’ve conducted so far gets nullified. College tuition now ranges from $20,000 – $75,000 a year. When you add on room and board, we’re now talking $35,000 – $100,000 a year for four or five years.
Now imagine how much college costs a year in 10-20 years? Holy crap! Every couple who plans to send a child to college needs to start saving at least $20,000 a year from year one! And that’s if you don’t plan to send your kids to private grade school.
Private school now costs a fortune. It is also one of the main reasons why high-income earnings are scraping by. It’s a rat race to see who can over-educate their children the most!
Make sure to contribute to a 529 plan per child as soon as they are born. The gift tax exclusion amount is now $17,000 per person. You can also superfund a 529 plan now for $85,000. I suggest doing so if you can to get it out of the way.
High Income = Lots Of Stress
If you’re making $500,000 a year in household income as a worker bee, you’re probably going through a lot of stress due to the amount of hours you are working plus the amount of taxes you are paying.
You should check out the miserable work feedback from Goldman Sachs analysts. Sure, these analysts will likely make a top 1% income if they stick with finance for over 10 years. However, at what cost?
Making money as a W2 wage slave is the worst way to go. Society won’t acknowledge the sacrifices you made. Nobody will know the time and money you spent. Finally, your competitors won’t recognize the risks you took to get to your position today.
The Ideal Income For Maximum Happiness
Is there any wonder why money doesn’t buy happiness? Once you make about $100,000 per person in the Midwest, or $250,000 a person on the coast, there is no incremental increase and happiness as you make more money.
A better income strategy and a happier lifestyle may be awaiting just a notch below in the upper middle class. When you are middle class, you no longer become a target of society’s discontent.
Perhaps you can reduce earnings by dialing back work to a more leisurely 40 hours a week. Use the other time doing stuff you enjoy. Or maybe you can start a business so that some of your living expenses can be written off.
I started Financial Samurai in 2009 and it’s been my greatest professional pleasure! I also wrote an instant Wall Street Journal bestseller during the pandemic entitled, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. It was my way of making lemonade out of a difficult situation.
I highly recommend you pick up a copy if you want to escape the rat race.
It’s Hard To Break Free Without Controlling Expenses
With over $250,000 a year in after-tax expenses, this family must change their lifestyle quite drastically. Even after eliminating 100% of charitable givings, getting rid of both car lease payments, and no longer paying for children’s lessons, they’ve still got $200,000 in annual living expenses to cover!
This couple is saving $36,000 a year in pre tax retirement accounts plus $7,000 a year in after tax savings. With a monthly expense of $22,583 to maintain their lifestyle, can you guess how many more years they need to save at their pace to maintain a similar lifestyle in retirement?
At least another 63 years! The couple should have at least 10X their $271,000 annual expenses in net worth by age 60.
Here’s a handy net worth target chart I’ve put together for those looking for some wealth accumulation guidance. Due to inflation, low interest rates, and the desire to not outlive your money, try to shoot for 20X your average gross income over the past three years.
If you are part of a household making $500,000 a year, then aim to accumulate a net worth of $10 million dollars a year before you retire. With $10 million dollars, you should be set for life!
Make The Money And Escape!
For those of you who are super ambitious, it’s worth working your butt off to see how far you can go in your career. If you get to a multiple six-figure income level, shoot to last for 10 years while saving 50% or more of your after tax income. Eventually, you’ll accumulate a large enough financial nest egg where you can do whatever your heart desires.
Not a day goes by where I’m not thankful for working brutal hours in my 20s and early 30s. Being free is absolutely priceless the older you get because you no longer are willing to put up with the world’s bullshit.
After I left Corporate America in 2012 at the age of 34, all my chronic pain (TMJ, lower back pain, sciatica, tennis elbow, golfer’s elbow, etc) went away. The health benefits of early retirement are priceless! The time for working on a side-hustle before or after work is now. You never know what might become of it.
It’ll feel weird giving up so much money at first. Golden handcuffs are incredibly tough to break. But I bet the value of your new found freedom will far surpass any money you’ll forsake.
Always remember that money is simply a tool for happiness. If you aren’t happy then you must make a change. Either save more, change careers, or take some calculated risks. You don’t want to look back at life with regret.
Wealth Building Recommendation
Instead of scraping by on $500,000 a year, why not live life to the fullest? To do so, sign up for Personal Capital, the web’s best wealth management tool. It will help you get a better handle on your finances. You can use Personal Capital to track your net worth manage your cash flow. Fy favorite activity is x-raying my investment portfolios for excessive fees.
After you link all your accounts, run the Retirement Planner. It pulls your real data to give you as pure an estimation of your financial future as possible. Your goal should be to get to a 90% probability of achieving your goal.
There’s no rewind button in life. Make the most of things today so you can enjoy life tomorrow. Scraping by sucks.
Build Wealth Through Real Estate
If you want to get out of the rat race sooner, you’ve got to build passive income. Real estate is a core asset class that has proven to build long-term wealth for Americans. Real estate is a tangible asset that provides utility and a steady stream of income if you own rental properties.
Given interest rates have come way down, the value of rental income has gone way up. The reason why is because it now takes a lot more capital to generate the same amount of risk-adjusted income. Yet, real estate prices have not reflected this reality yet, hence the opportunity.
Take a look at my two favorite real estate crowdfunding platforms.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eREITs. 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 a great way to gain real estate 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 and enjoy buying individual investments, check out CrowdStreet.
Both platforms are free to sign up and explore.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects. My goal is to diversify, earn 100% passive income, and take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$380,000.
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My oldest did her undergraduate degree in Canada and got a great education. Never had to take loans and got better medical care that we have in the US.
Well done! One of the best life hacks for Americans is to take advantage of Canada!
Forgot to add–most people earning 400k and up are not sending their kids to private schools because taxes already take almost half of what they earn! My granddaughters, whose mom is a doctor and their sole support, have gone to public schools their entire lives!
My daughter is a doctor who earns 500k a year. She has to support a daughter who is schizophrenic & can’t work. It is difficult when she lives with them. So she lives separately in a $2000. a month plus she has to pay her energy bills, plus insurance and other assorted bills. When she divorced her 2 daughter’s father 14 years ago she had to pay him half of everything she had. To do this she had to take a second mortgage on her home, as we did ours.
All of you also neglected to mention that at a certain income level, a Medicare surcharge kicks in. It doesn’t give you any better Medicare treatment. You just pay more before the days comes when you qualify for it.
So my my daughter is stuck with a 1,400,000 house that, as is true of so many houses in this price range, hasn’t gone up much in price, but, as large houses do, has one thing after another that needs fixing. The larger a house is, the greater the number of things that can go wrong. Don’t envy people with large houses.
And her taxes? With Medicare surcharge, federal, state & local taxes she pays almost half of what she makes and she works weekends, nights, overtime. And now they’re increasing taxes on people who earn 400k and over? My daughter’s been talking about partially retiring. And guess what? There’s a shortage of doctors! Guess what? You all are going to find it more difficult to see your doctor when you want! But I won’t! Because my family has 4 of them in this country!
I live on about $3,000+ a month in the NJ suburbs. Nice, safe town with ample amenities. I get by on freelance and some other minor income. It’s a good life. Total = $3000 x 12 = $36000, (+- $4000). Make a lot of lentil stuff, dal–cheap! delicious! Still have enough for store-bought sushi, poultry, jumbo crab cakes, etc. Drive a modest car that gets 38 to the gallon. Bought it new. Do a lot of volunteer work – about 50% of my time. Give me $500k and I would gladly pay the taxes and bank/invest the remainder.
You have to earn $500k genius, something you’d be unable to do with you lazy lifestyle.
Alright Sam. Well done once again. Let me add a few comments. I like some of comments from individuals that clearly lack some experience with kids, etc. Okay. So here are my thoughts. 1. you can indeed get a well paying jobs without advanced degrees. Accounting, consulting and writing code are great examples. 2. I agree that vacation is nice and three weeks is not out of line. However, if you have kids most likely you are spending a week at home, one week visiting grandparents and one week having fun (Disney is expensive) so $18 K is mostly too high – these parents with little kids will probably vacation cheaper than $18K most years. 3. Many parents in NY start parenthood at later ages (ie. older first time parents) so they should have some savings 4. Child care is expensive, not doubt – spot on — lot so time people piece it together and may rely on family (even “rich couples”). 5. Cars in NY – probably because they might work in Manhattan and live outside 6. $12 K on sports and activities is probably a double count if the parents are paying for child care. Difficult to have kids doing all those neat activities that cost money because they are young and in day care. As they age day care costs go down. As for private school and colleges — day care goes away, school costs then start — so a wash as they age depending on schools. If the family has a house and lives outside the city (and they do because they have cars) then getting into a good public school makes sense. I would think that there are solid public schools. College debt, $32 k in payments is a great example (for many) of poor financial decisions. Yes I know many think their kids must go to the bests schools. So be it, for me, public in state is a successful formula.
By the way if this couple makes $500 K they are probably upwardly mobile and should expect higher earnings, more bonuses and perhaps even stock. Also if these two professionals racked up enough student debt to make $32 K in annual payments (assuming high end elite schools and high end advanced degrees) then definitely $500 k is just a level they be passing through. Okey, I could go on and on. but this is a hypothetical couple. I wouldn’t characterize them as scraping by but they could improve their savings a bit.
How are a $1,500,000 home, 3 vacations a year, a BMW and Land Cruiser, and maxed out 401K “average”? Am I supposed to feel sorry for these people that their life is so hard?
Nope. Just illustrating the point how quickly money can be spent, especially with higher tax rates, and inflation everywhere.
Great
That’s me
Do you really think that everyone who earns 400k and over has all of this? My daughter is a doctor, earns 500k a year, is the sole support of her family has a 1,400,000 home but has none of the other things and is up to her ears in debt. She pays almost half of what she makes in Medicare surcharge, federal, state and local taxes.
She has savings but they’re mostly for a mentally ill daughter who can not work & will probably never be able to. You guys are really eager to make her daughter either eventually destitute or a ward of the state, aren’t you? You all complain about welfare but you want to tax my daughter till she can’t save for hers! Or till she works herself to death! She’s been working overtime just to try to make some extra money and now you guys want to tax her MORE! SHAME!
WHY DON’T YOU TAX THE BILLIONAIRES INSTEAD OF TRYING TO DESTROY THE UPPER MIDDLE CLASS!?
I am a 25 year old male living in Vancouver, I have a small business of renting apartments long term and re-renting them out on Airbnb. In one year I brought in 600K in income. Since this income is passive and so easy to come by. I have been blowing all of it and not even leaving enough money to pay taxes. I am also well connected, and I broker deals in the city between public/private companies looking to bring investors and take a fee on it. This on average brings me 150K a year for past 3 years. This is the only time I have saving in my account until I spend all of that as well. I am having a very difficult time getting out of this rat race and constantly have anxiety about money. For example, I went on a skiing trip with my father and obviously during winter holidays its a very good time of the year for Airbnb. I ended up blowing about 20,000 euros on clothing that I did not need at all. This happens all the time, this summer I went on a trip with my friend who is a trust fund kid. I ended up spending 250,000 over the 3 month period. I decided that I am better off moving to Monaco where I don’t pay taxes, to help this. Please help me…
Hi Ivan,
Great income for your age! What about just saving more and investing your money so you can compound your money?
Sam
Strongly encourage you to get evaluated by a clinican for a mood disorder. If you ever feel energized or wired while dropping money like that, could be hypomanic episodes. This is not medical advice.
Money just compounds the problems that were always there. Do some soul searching better yet talk to a therapist. You gotta find out about yourself just like you figured how to make Ca$h. It will be a game changer for you.
This post’s all about how to escape the rat race- a goal that holds who have jobs that require them to work very hard in order to compete .So no, normal people don’t escape the rat race of steady cash flow, paying bills and feeding yourself becomes a little bit harder.
This should really be entitled “Scraping By On $500,000 A Year: How to Poorly Structure your Life and Spend Your Money Frivolously”.
Let’s see why:
– Undergraduate and graduate student loan debt: I have no clue how a couple could rack up $300,000-600,000 in student loan debt and interest payments. Many states offer full-ride undergraduate scholarships if you have a decent grade-point average, do some community service, and score well on standardized tests. You’re mostly limited to matriculating at in-state, public universities. However, you can pursue double Bachelors degrees and do an accelerated Bachelors-Masters program.
If you take an extra year to work as a paid research assistant, then you stand a good chance of transferring to a top-tier private university for either a professional degree or a doctorate. The latter is usually free if you work either as a research assistant or teaching assistant. Fellowships guarantee full-rides with stipends. The former can be free, in some cases, when combined with a doctorate. In the end, you can go from a high-school diploma to either a Ph.D., an M.D., or a J.D. with zero debt.
– Charity: Charity is for when you either need a tax write-off, want to attend events to network, or can afford to give generously without touching your investment principal. Keep it to under $1000 per year until your investments pay for your lifestyle. Spend locally so you can see to where your money goes.
Your alma mater is not going to miss the donation. They already got plenty from you when you were at university. Plus, they’ll probably end up spending it on stupid things anyway, not things that matter like more affordable dorms, more parking garages, merit-based scholarships, and so forth.
– Children’s lessons: The high cost must be a big-city thing. Where I’m at, parents have their kids join a school’s sports teams. The parents pay a very small seasonal fee, pay for equipment, shuttle kids to and from practice, and so forth.
Music lessons are not that much in my area. Granted, I’m considering only non-professional lessons. I would only pay for professional lessons if my kids had serious aptitude and wanted to pursue music heavily. If it was just a passing interest, then I’d get them a used instrument and have them either join band or get pay for a non-professional musician to teach them for a bit. I’d then instill some serious discipline in my kids, that way they could learn to learn on their own. YouTube is a great, free resource. They would likely get more out of that than actual paid lessons if they had the right attitude. I did.
I’d take this money and instead spend it on private-school tuition.
– Childcare: Is this figure legitimate? I must be out of touch. The only time I could see spending anywhere close to this amount would be when the kids are not at the age where they can attend primary school. It definitely wouldn’t last more than six years.
My parents had me join every after-school club and before-school and after-school sports team that I could. I was part of the science club and the technology club. For sports, I did swimming, that way I’d have something to do in the morning when they dropped me off early. In the afternoons, I did baseball in the spring. I did football training in the summer and then football in the fall. Some years, I’d do track. I did this from middle school on up through high school. Aside from equipment and some travel to events, these sports were entirely free. The point was to have fun and build athleticism, not necessarily compete to be the best.
In elementary school, I did Taekwondo, tennis, and basketball. I also did art club, drama club, and Cub Scouts.
All of those events were basically well-structured substitutes for child care. By the time they were done, my parents would come pick me up from school and take me home.
– Gas: Either get an electric car, ride the bus, take the metro, ride a bike, or walk.
At my last company, one of our VPs didn’t own a car. He either took the public bus everywhere or I picked him up when we wanted to go downtown or out of the city. He used the time on the bus to work. It beats sitting in traffic and not being productive. Our CEO lived about forty minutes away from the office. He drove himself and would schedule conference calls and meetings to be productive during that time.
I lived right across from work in a condo and walked. I drove to the grocery store and sometimes around town on the weekends.
The house I’m currently building is close enough to my company that I can bike to work a majority of the year. When it gets too hot, then I’ll drive. The public bus, sadly, doesn’t come back to the community in which I’ll be living. I’d lobby for it, but all of the well-to-do people would probably fuss.
– Car payment: Never pay for a car with cash. Never spend your salary on car payments, except for your first car. Buy a beater that’ll last years. Invest the money you would have spent on a car into an index fund or something with good annual returns and easy liquidity. Get to the point to where the investment principal is double or even quadruple the price of the car that you want to purchase. Use the tax-free long-term capital gains every year to pay for the monthly payments of a car if you actually do need a new car. Put the money from your salary that you would have spent on monthly car payments into the investment. The investment principal will continuously grow. You thus never waste the principal on a depreciating asset.
If you’re going to buy a new car, then follow the above advice and purchase one that’s electric. Get the cheapest model. Make sure that it’s a tiny fraction of your overall annual salary. Don’t bother with gasoline cars any more. They have too many points of failure. Plus, they are going to be phased out. You also get to skip yearly emissions testing for states that require it; it’s just one less hassle.
– Vacations: Take one nice vacation per year, if that. The rest of the time, just stay in the general area and explore. Museums are great. Going to the park and having a nice picnic is wonderful. Camping in the fall and spring is absolutely amazing. Same with hiking, canoeing, and so forth. Those are far more memorable than simply going to Disney World.
If your company pays for you to travel around the world, then schedule a vacation within those trips. I head to Europe and Asia at least once per year. My hotel and round-trip flight are free. I only need to pay for plane tickets for my wife and either my parents or hers, along with potentially extra hotel days. I travel so much that I can pay for their tickets by redeeming miles. If you’re going somewhere in the off-season, then hotel rooms are inexpensive. You only pay for their food and any sight-seeing tours. My per diem honestly covers most of the food budget anyway.
– Food for four: Two words: corporate cafeteria. If work is giving you free breakfast, lunch, and snacks, then take advantage of it. My wife and I only pay for meals on the weekends. We’d also be paying for food for the kids. We’ve learned to just eat two meals per day, plus a light snack. All of that is provided by our companies for free.
Before we got free meals, we’d take turns making food every week. We’d find recipes on the Internet and make something inexpensive, but very tasty, that would last for at least three or four days. It was a fun way to try new things on a budget. You should see the amount of spices that we’ve accumulated over the years. It’s enough to almost fill a pantry now. We sometimes cook during the week just for the enjoyment of it.
In all, you could easily save up around $120,000/yr on a $500,000/yr salary by not being foolish. Even with the new mortgage, I’ll be investing around $110,000/yr. My wife will be investing around $100,000/yr. It’ll probably go down a bit once we have kids. However, we’ll still be enjoying life and giving good opportunities to our kids.
Your viewpoint is limited to your experience. Some people opt to go to private college and probably do not qualify for scholarship due to parental income. Plus both of them have undergrad and law school debt. Not saying its impossible to get a job of this caliber if you don’t go to ivy league elite school, but 90% of time you don’t even get looked at unless you come from one of these institutions, it carries more weight than it should.
Unless you get in at the start, its almost impossible to work your way up to these more elite firms. I agree that donations are too much given they have not paid back student loans, but that’s a personal choice.
Childcare cost is real in NYC, I would say they are getting away easy with $42k for 2 children. Given they both work high pressure long hour jobs this is absolutely a necessity. Friend of mine looked high and low for a daycare program and lowest cost she could find was $25k.
The whole point of them enrolling their children in these programs is because its super competitive in NYC in terms of getting your children into top private schools (even pre-school). Because if you don’t get them into the best elementary school it impacts their chances for getting into the best middle/high school which impacts their college choices. Lots of these elite private school are feeder program into the ivy schools. Plus all extra curricular activities in the city cost $$$, not a small fee like other areas.
Can’t comment on cars, I think this is more of a luxury that they want and is unnecessary to have 2 in the city, didn’t see a cost for parking which can be more than car payment. On food, if you work 60-100 hours a week, the last thing you want to think of is how to scrimp and save on food. This figure is actually a reasonable amount and might even be low.
If they work at top law firms they probably get a lot of their meals comped and the amount probably only accounts for food for children and going out. Food in NYC is expensive, an average salad can cost ~$15 and I usually spend $15-$20 on lunch everyday.
In all I think this is a very accurate picture of what it cost to survive in NYC with children. It’s why a lot of people don’t have children until much later. The cost of schooling and cost of living eats up a good chunk of your income and savings.
Sure are there things they can cut out and save a bit extra yes, but to be honest they are choosing to balance work life with quality of life and pay for things that either save them time or give them joy and there is nothing wrong with that. The good news is if they stay at their jobs and make partner their income can significantly increase in the coming years.
Thanks for your thoughts and support of the budget!
And I would say getting into pre-school is the hardest! It was quite a journey for us in San Francisco.
Now that inflation is elevated, this budget is eve more real today.
I agree with A that this is generally accurate picture of household finances in high COL areas. But I agree with HyenaDad that there is frivolous spending. There are also things that don’t make sense to me.
1. I live in PA suburbs and can’t comment on low $5k maintenance costs. Landscaping alone is $10k annually here. Where’s cleaning cost, heating, cooling, water, electric, etc…
2. Why the need for 2 cars in NYC? Why is $10k payment so low on $150k worth of cars? I paid ~$13.5k annually for 3 years/50% downpay for my Land Cruiser. Is it because of leasing? Why lease a Land Cruiser when they’re built for longevity and robustness?
3. $32k in annual student loans yet they’re taking expensive vacations and donating to charity? Ok…
4. I only see 401k. My wife and I max out both 401ks and know that’s not enough.
5. Only $10k unexpected budget for their lifestyle and high COL?? I budget $24k annually…
If they have a mortgage, they live in a condo, not an apartment.
Part of the issue is the title which states “scraping by”. Having all basic needs, plus luxuries (3 vacations, private lessons, two nice cars), fully funding 401ks and still having some (if not a ton) of money left over is by definition NOT scraping by. Scraping by means only having enough for basic needs and hardly anything left over (at least to me). The family could save 10k more a year just by going on cheaper (not even eliminating) vacations and getting cheaper (but still nice) cars, and skipping private tennis lessons. That’s a pretty luxurious life in one of the most expensive cities in the country.
That doesn’t even get into the fact that being super rich (which 500k a year is) does not entitle you to all your desires IN THE MOST EXPENSIVE CITIES. The couple could live in a 1M dollar 2 bed 2 bath and have their kids share a bedroom which would save a ton of money. Having kids share a room isn’t what rich people do you say? Well in the most expensive cities it might be. The fact that you CAN afford that (plus a whole bunch of other things) even in a super expensive city’s is what makes you rich.
Can’t fathom having your kids share a bedroom? Not getting private tennis lessons? Having one of your 3 vacations be a camping trip? Then move or admit you’re obnoxiously entitled.
As mentioned …. people can get by very well with a lot less!
NO Sympathy at all. We live in NYC, and can chop down the expenses in about a half, IF careful. By the way, I never earned more than 60G/yr, yet was a voracious saver since age 7, and an investor since 17! Now have a large income stream thru frugal life decisions.
Everyone makes choices, if you want to be flashy, change clothes every season, drive luxury cars, spend on vacations top dollar, as opposed to on the lower end without sacrificing too much, then you are doomed to work, work, and work, and never have a large savings account, or investments.
We choose to live more frugally and save, and invest thus have a large portfolio of investments to boot.
Some want to live like the Jones’s some don’t. Personal choices…
God Bless America! USA! And capitalism to be able to make choices!
We own a 2019 Honda HR-V and a Toyota Scion xB 2006.
We don’t need to impress anyone:)
Maybe all should read The Millionaire Next Door:)
Frugal life decisions
That is fantastic how you started at a young age saving money & investing at age 17…… Smart Financial Moves from the beginning provide you a quantum Leap vs others that start much later!!
It is crazy how people want want to Keep Up With the Kardashians!
The couple in the annual expense example at the beginning of this link are making a combined gross income of around 500k a year and net over 250k after taxes. They claim to be “scraping by” after their poor budgeting skills leave them with only 7300 bucks left, which is still a lot a money and far more than most people have left of their yearly income, but the only reason they think they are actually struggling to get
by with that much income is because they are beyond stupid. Even when only counting their non-essential purchases, these financially ignorant people are still literally SPENDING more money than most people MAKE in a year and when you spend more money on stuff you don’t need than the amount most people make in a year, it makes you look extremely dumb when you run into money problems and/or cllaim you’re scraping by.
I don’t think they’re doing that bad. They’re on track to have millions of dollars in their retirement accounts and likely several million in home equity, all while living a top-notch lifestyle. Their biggest expenses are mortgage, loans, and education/child-related — all of those will go away and won’t need to be supported in retirement. They’ll likely be able to retire in NYC if they wanted to, or they could easily trade that home equity in for a cheap rural place and live out their lives in peace as modest multimillionaires.
They could certainly save/invest a lot more but you only live once and for some people they’d rather live a nice life while young/middle-aged.
Being a single earner of $75K, 5 kids and a spouse, and living check to check, many times getting overdraft charges a few times a year, I can relate on how painful it can be. However, I recently discovered how I can consistently make $500K a year in the stock market, with limited loss, if any. It’s all about risk management. I don’t plan on getting anything expensive other than just replacing some old broken things and such. I calculate net after tax (due to no FICA – Social Security/Medicare expenses from capital gains), I’ll have $320K+. Since I survived on about $60K after tax before, I should have well over $250K I can save PER YEAR. Money reveals who you are. If you’re a clown before, you’ll be an even bigger clown when you get rich.
I also have $150K in 401K (which I doubled during the pandemic by shorting the market and then riding it back up) I’m going to convert into an IRA and put into leveraged ETF funds to get 20-40% annual returns. I’ve already done the math.
BTW, I plan on starting a foundation to help the underpriviledged plan and retire early. I’m only 43 years old.
Post like this never fail to give me a good chuckle.
Gee..you are maxing out your 401k, driving both a $55k+ BMW and a $85k+ Toyota (wow!), paying your student loans with ease, taking several vacations each year, getting your kids the very best lessons (mandarin and tennis at age 3!), eating like kings, “go slumming” at Banana Republic, own an apartment (not rent) in NYC and still have $7400 left? Cry me a river. Move to Jersey and stop complaining you pricks!
Late 20s, make ~400k in tech (SEA area, so no income tax). Split rent with a sibling, so not really any more expensive than living as a single in most places in the country.
Result: Living expenses ~30k/yr, save the rest (~250k).
I did lose ~100k in the market this year though, so that hurts a bit.
How can you consider 500K a year rich when Jeff Bezos makes 300 million a day? Seriously, if you think 500K a year is a lot, you wouldn’t even be able to fathom a multi-billionaires salary. 500K a year is statistically above average, but to me, it’s about the lowest you can get.
500K a year puts your family in the top 5% of Americans. $531k would be top 1%. For the vast VAST majority of US households its an unfathomably large amount of money.
Becoming the next Jeff Bezos is like winning the lottery.
“ The odds of winning that jackpot are one in 302.5 million, according to Mega Millions.”
Anybody on this planet making $500k is wealthy, but a certain percentage of them are ((wise)) with spending & investing.
Less than 1% of the USA population makes more than $500k.
Feel average? Cut those vacation (3 times a year to ZERO) you put $18k back in your pocket. Put a tent in the back yard, tell the kids go play in the back yard and sleep outside. Get electric cars, save on gas. Stop saving for your future with those 401k. More money in your pocket. Now you can say your not like the average person and yell I’m rich bitch…
When calculating annual savings, should you include employer 401(k) match? What about principal payment on a mortgage?
Yes, definitely. It’s really money and savings that adds to your net worth.
I disagree 100% with the figures above and I can speak from personal experience. The below chart is my family’s annual spending example. We are also a couple who each make $250,000 per year as lawyers. We have one child around the same age as in FS’s example. We are both in our 30s and both commute to New York City daily for work, the most expensive city in America! We also travel more and live better than many of our peers. We just don’t WASTE money on small trivial items or a new LV bag or TB shoes every week over lunch.
Gross 500k
401k wife 19k
401k husband 19k
Backdoor ROTH IRA wife 6k
Backdoor ROTH IRA husband 6k
RSUs 15k
ESPP 25k
24% effective tax rate (due to tax planning) 122k
Net salaries 288k
Childcare free with grandparents
Food and miscellaneous (we go out to eat every week) 20k
Gas 4k
Public transit 12k
Medical (companies pay for employees but not children) 1,500
Mortgage (800k above average home) paid off
Property Taxes 10k
Homeowner’s Insurance 1,400
Utilities 3,500
Cable/internet 1k
Maintenance 5k
Student Loans paid off 210k of loans
Car lease (Honda) 2,400 (second car is owned)
Car insurance (2 Hondas) 1,400
Life insurance (3mm) 2,500
Vacations (2 per year of Europe, South America, or Africa, etc.) 15k
Charity 500
Clothing 1,500
Lessons (little gym) 1,000
Total costs 82,700
What’s left 205,300 plus 38k 401ks, 12k IRAs, 15k stock, and 25k ESPP = $295,300 savings (78% of net income including tax deferred accounts)
It can be done. My wife and I are proof.
I love your story. Please extrapolate on how you were able to pay off your house and student loans (>$1 million) while paying all the other expenses and dealing with recessions.
Very late reply. Some people just making up stories or concealing intentionally the most important parts. I have a few people around who are barging about paid off student loans or properly managing income by buying the property. After knowing them a little bit closer turned out one person’s parents paid off 4 year BA college including accomodation, another, has wealthy parents and lived in their basement, and third person inherited passed away parent SSC and IRA.
I understand why you feel like this. Many (if not most) of our family and friends have gotten alot of handouts. We have gotten none. We do have my inlaws watching the baby but we have done alot for them financially as well. They lost their home several years ago in a foreclosure. Long story. Lets just summarize by saying they were on the hedonistic treadmill and refused to listen to our advice and we ended up paying part of the price for their poor decisions (e.g., helping them buy a car and some rent). I paid for 100% of my college and law school. I got some college scholarships and $0 off for law school. The total was over $200,000 of loans. I also got $0 help for home purchases, etc. I started in BigLaw out of law school in 2007 and had a $160,000 starting salary plus a modest year-end bonus. I lived very modestly, had no car, and took a $1,000 vacation max per year for the first 5-6 years. During this time, I paid off all of my student loans and put a down payment on a condo. I brought in a roommate to pay half of my mortgage as well. I was 100% focused on paying off debt and building wealth. Some people do not want to believe this because they made different choices that led to sub-optimal results so they don’t want to believe others could have done better on their own. They want to believe they got help because that helps them justify their poor decisions. Anyway, now I am 13 years into my career and my wife isn’t too far behind me. We traded our larger salaries for more 9-5 in house gigs several years ago and are still doing fine. By far, our biggest mistake was paying off the house. Looking back, that was a 500k-1mm mistake given how the market performed over that period. I don’t even want to do the math. We are still inching closer to 3.5mm now. If I can do it, anyone can. It’s all about choices. We know alot of people who get alot of help and others who likely earn less but spend more. It’s about the little impulse purchases, luxury car leases for $1,000/month, and Nordstroms to buy new clothes all of the time. We have friends who have a 100% Burberry wardrobe and use a personal shopper. My sister in law and brother in law earn $200,000 combined max and they bought a $3,000 LV baby bag and drive a $100,000 leased SUV because they insist they need it for safety for the baby. We looked around alot before we bought our home and picked a house in a great school district on a less than perfect lot that saved us alot of money. We drive 2 economy cars (Honda Pilot and Honda Accord). We buy all designer clothes but we get them at TJX or other discount stores. Noone knows the difference. Everyone thinks we spend a fortune on clothing. My wife and I honestly do not know how everyone at our income level and higher aren’t in our situation or even much much better. Lately, now that we are comfortably over 3mm and will be 40 in a couple of years, we are starting to relax the savings rate a little and splurge a little here and there, but frugality is kinda ingrained in us. We do not live a spartan lifestyle though. We travel alot and go to dinner and do alot and enjoy our lives.
Dont worry man, some of us believe you. I make nowhere near as much as you do (like, NOWHERE near) but finding a good apartment at a nice price and be willing to rent the spare bedrooms do wonders for your economy in your 20´s. living in a cheaper city helps. The extra income is then used to buy land or another property which in about 5 years will have 5x value which you use to buy yet more property and on and on. The key is planning for the future and not spending in stupid things save for women and booze.
Umm, free childcare is a pretty nice perk! It’s the biggest line item for many dual income families…wouldn’t be so full of myself about how clever I am with finances when someone is gifting me approx $50k/year…
Not everyone is able to have free child care which is big chunk of expense that can be invested. As an immigrant who came to USA, I have to support my aging parents who still love back home and also my young children who have to attend daycare.
I also am curious about how the mortgage got paid off.
Our “Mortgage+Prop Tax+HOA” is 50% of our monthly expense (we live in San Francisco). We are putting on 15% every month and we opted for bi-weekly payments. That lowered the duration from 30 years to about 20 years. We have 15 years left.
It was very easy. We have both been working for 13 years. The mortgage was paid off about 4-5 years ago. Like I said, we saved over 70% of our income after taxes each year and plowed much of that into our mortgage. Given we only have an 800k house, that only took a couple of years. Then we moved to other investments.
If you look above, we said the house is only worth 800k now and we paid a little less than that. We put down around 20% when we bought it (around 160k). We said we saved 205k/yr after all retirement accounts were maxed out and RSUs and ESPP were deducted from savings. If you do the math, it took just over 3 years to pay off the whole house in full at this rate. We paid slightly less though and put down slightly over 20% so we actually paid it off in less that 3 years. We kept 15k in our checking account at all times during that period and paid whatever we had above that amount each month toward the mortgage in principal only payments until it was paid. That’s like another $17,000 per month (although it wasn’t exactly that amount per month because it was more in Dec with bonuses and less other months).
$500.00 to charity, nice
I think they refer to that as a “Centi-Tithe”.
right! cheapo!
$122,000 per year in income taxes + $10,000 property taxes + $20,000 property taxes on investment properties + $5,000 in sales taxes = 31.4% of our hard earned income. That’s 3x what the average household earns in America, so we are supporting 3 families somewhere and none of them even sent me a Christmas card. If that makes me “el cheapo” to support govt programs I do not even agree with for people I do not even know, what would make me generous?
No, those don’t support “families somewhere.” Less than 10% of your taxes go to social support. The rest goes to the military which defends you; the roads you drive on; the schools that educate your children; the police that protect you; etc. So yes, you’re cheap, and you should be donating more to charity.
‘Military that defends you’
What’s the last time American civilians were in any actual danger?
What a great question! Maybe we should ask the billionaires and lobbyists who make dang sure that the military budget goes up year after year, no questions asked. I think Erik Prince and Dick Cheney would be a good start for your questions.
Would you elaborate on how your effective tax rate is so low? I would like to learn to do the same. Thank you
We max out all retirement tax-deferred accounts (401k and Backdoor Roth IRAs) and part of the income is from RE rentals where we depreciate the property so the income is tax free (for now). This lowers our effective tax rate.
Very nice!! Your yearly spend is 85K. Social security will cover 60K, so you essentially need (25 * 25K) 525K in savings you maintain your current lifestyle during retirement (which I assume you already have). May I ask you what your medium/long-term financial goals are?
We would like to know ourselves! We assume SS won’t be around when we retire, so that is not a factor for us. We assume it will be “means tested” or cut before we retire. If not, that will be a welcomed surprised. We have about $1mm in a taxable account and well over $1mm in retirement accounts plus a few rental properties that are cash flowing. Our plan is to just keep going. We both love our jobs and hope to be promoted, which means we will earn even more. We both work 9-5 and have 5-6 weeks vacation each and travel all over so we find little reason to stop working anytime soon. Now that we have passed a particular financial milestone, we are beginning to think about inflating our lifestyle a bit but haven’t really thought of anything we would want to do. We just don’t know what and don’t want to spend more just for the purpose of spending more. We may get a more luxurious car and may upgrade our home in a few years. We just don’t know.
Your giving is quite stingy for your income and with free childcare too! We give much more on a $90,000/year income.
I’m all for saving money… but it’s kind of messed up to use your parents for childcare everyday and not pay them a dime.
There’s something off/misleading about this. As others have mentioned, you’ve omitted many of the biggest expenses faced by the couple in the original post. You also have a significantly lower effective tax rate of 24% versus their 40%. You also padded your annual savings number by including 401k balances, etc. — the couple in the original analysis wasn’t including this in their final number.
Let’s add those extra expenses back in and use their tax rate and see how well you’re really doing in comparison.
$42k childcare
$60k mortgage
$32k student loans
$12k lessons for the kids to get them into private schools
$74k in additional taxes
—
$220k
Note that this figure exceeds the $205k you’re saving.
By this account, you’re really not doing much better than the original couple. In fact, you might even be doing worse. You just have already paid off your house and student debt, don’t have any child-related costs, and somehow pay far less in taxes than you probably should. You also give far less to charity than the original couple — they donate over $17,000 more per year than you do.
These people are spendthrifts.
* They’re paying almost twice as much for daycare as they need to for starters. An online search turned up Brooklyn daycare rates of $11,xxx annually per toddler and $9,xxx per school age child. They could get away with spending just $21k/yr instead of $42k.
* They should be able to make do on $18k/year in grocery costs – $300 in weekly groceries and, given NYC prices, $150 per bi-weekly date nights. Admittedly their job means a lot of hours at the office, but alternate which days each one gets out of work at 5 (M-W-F & T/Th) on a revolving basis, grab the kids from daycare, and get home to cook. You’ll be surprised at how much you can do with a $300/wk grocery budget – just go for a regular store like Hannaford’s instead of posh & pricey Whole Foods. And yes, bring in leftovers or homemade sandwiches to work is a *must. $20-30 minimum per at-work meal (x2) is simply ruinous.
* They literally bought twice as much house as they needed. They did not *need a fancy neighborhood. Realtor.com shows Brooklyn housing – houses, co-ops, condos, or townhouses: all rated at a minimum 3 br, 2 ba, not less than 1,250 sq ft, and *with off street parking of whatever type – starts at about $550K and they could have easily bought something decent in the $750k range. Starting smaller means that their property taxes would be cut in half as well. I see one showy duplex condo unit on the site right now: 3 br, 2.5 ba, 2,764 sq ft, garage space, backyard space, two blocks from a park, listed for $749K. That breaks down to $3,288 per month, including tax, home insurance, and maintenance fee. Their current home is costing them about $87.5k (almost $7.3k monthly) annually. Savvy buying could have had them paying that $3.3K/mo. for an annual total of $39.6K – less than half of their current situation.
* OMG, the vacations! What are they doing, flying to Maui or the Bahamas and staying at 5 star hotels?! They could visit family or drive up to the Catskills and cut down the expenses to $1,500-2,000 per vacation week, easily a 65%+ savings!
* Car payments – unrealistic for a start. $9.6k annually is *far too low for two vehicles when a Toyota Land Cruiser (MSRP over $80k) is involved. What we *do know is that leased cars always start off new at a dealership, and leases typically run for 3 years a pop. I checked the online dealerships in a Brooklyn zip code and non-glammed models of the vehicles listed actually came out to about $22.8k annually. If they hadn’t been trying to show off their wealth they could have leased a Ford Taurus (SE?) for $430/mo. ($5,160/yr) and a Ford Edge SEL for $407/mo. ($4,884/yr) for an annual price $10,044, less than half of the adjusted total for the cars they currently have.
* Clothes – they’re splurging again. I’ve raised two children and know how to shop for them. You can get them good clothes at Sears or Penney’s for around $600-800/yr., so let’s say $1,600 max. Kid’s shoes – they grow quickly, so let’s say up to 4 pairs a year (x2) will be needed. Again, shopping at an average store like Sears that should be $60 per pair x 8 = $480. Total kid’s outfits being just under $2.1K. That means the parents are spending a good $7.4k PER YEAR on their clothing and shoes. That’s not being clever with their money. Yes, they have appearances to uphold, but they aren’t growing and, with careful laundering, can make clothing easily last for up to 3 years. They can have 2-3 power suits each and the rest can be done with careful selection of mix-n-match separates and a basic set of accessories. Shoes can last for a year each pair so long as you aren’t dinging and scuffing them. Adding a few pieces carefully chosen pieces each year can enhance and extend the life of their wardrobe, and for barely $1k/yr.
* Kid’s lessons. More a luxury item than a necessity, it should be capped at 2 activities per kid per year.
* Charity spending. If you’re crying poverty, you don’t spend on non-essentials. Save it until you’ve actually made it, not while you’re still strapped.
* Don’t spend on what you could get for free. Put them in public school and save $5k/yr per kid for their college, and send them into SUNY schools so they can start off life relatively debt-free – it’s the greatest gift you can give your child.
The point of the article is that a family making $500k isn’t necessarily rich and you recommendation that they live in the hood and buy all their clothes at kohl’s kind of proves that point…. I think I’m reality the food and clothing would be much higher you know those fancy lawyers are going to need to have some expensive suits plus they probably both working 60+ hours a week which means no time to cook.
Re: Ian $500k is a very well-to-do income, they could and should have a *lot of disposable income with it. Because they’re being stupid with their spending they don’t. Better a $10 wallet with $290 in it than a $290 wallet with $10 in it. Didn’t you see where I did the break down of what the parents could and should do for clothing? Power suits were included.
And I clearly laid out *how they can get that time to cook each week, they just have to remember that they *have a family instead of choosing to neglect it all.
You really don’t understand NYC real estate or costs. There is no Hannafords in NYC. Groceries are double what they cost in the rest of the country easily. Whole Foods is actually the cheapest thing in my neighborhood. 1.5 mil on an apartment in Brooklyn is actually quite reasonable. The only outrageous expense here is clothing. Everything else seems super typical of NYC.
pay off the debt, house seems a little high for income.
So, I’m from Queens and I just checked you can get a 4 bedroom 3 bath house for less than $600K. They can definitely get a more affordable home. They will have to commute like everyone else.
How about they should have delayed having children until one of them could and would have stayed home and raised them. Or just remember living like kings means no children. They spend way too much compared to what I did, and therefore won’t be retiring any time soon.
If you’re making 250k a year it doesn’t make sense financially to stay home with no income when you can pay 40k for someone to do it while you’re still making 250k. If you make less than ~60k then yes it will be worth to actually take a year off to raise your kids.
I skimmed through the comments, but I saw the majority of the comments were about how they feel like even the rich can feel like their struggling. So I’m going to give a reality check here. Those who say even this couple can feel the straits of financial hardship is an idiot and so is the couple. All you guys’ perception of struggle is warped beyond recognition. I do the uber, make about $80K+/yr and live in NYC and YET still save more than these bozos. I know peoplewho make less nd still SCRAPE by. SO they get no sympathy points for that.
They’re lawyers and yet are so ignorant that they still pay 40% income tax? WTF? Any smart wealthy person would tax advantage of as many tax breaks as they can. If you’re not trying to get an investment property or some sort of big wig loan, take advantage of tax breaks, they help the super rich, they can help the average Joe.
3: has NOBODY seen that they have literally checked off all their financial boxes every 9-5 american wishes they can check off. They comfortably can take care of basic life necessities, they invested in their 401Ks (they’re not exactly intelligent because they didn’t expand their investment porfolio options, but investing in something is better than nothing), they invested in their children’s academics, luxury dates and vacations and over the top mortgage house bills etc, no problem. AND according to the graph one can guess they’re socking away money for their child’s college tuition. PLUS charity, come on guys. You’re doing more than the average bear. CRAZY part of all this is they STILL have $7.5K left over AFTER TAXES. That’s not struggling, especially for all the other investment advantages they missed, they’re doing better than expected. This is even AFTER their “misc. expenses because something always break”. THAT’S INCREDIBLE!
Sure they can only put in $7,500 in their savings account, but put it in an account with outstanding APY, they can beat the market of inflation and watch their money grow passively. Or invest it in stocks, bonds, ETFs, small side hustles, whatever. Or literally burn it as a fun pass time. They just sound like their greedy and want more. ANd hey, I’m all about that garnering more, but don’t go and pretend, and folks here don’t pretend this is a struggle, because it is FAR from not.
Moral of the story/TL:DR: if you can HIT ALL your checkboxes comfortably and STILL have spillover money, you’re not struggling, you’re just greedy.
You have no idea what you are talking about if you think you can pay less than 40% income tax on 500k. The actual tax rate in NYC for that income is actually 44% of your post 401(k) income.
…and why Sam needs a thumbs up thingy on his comments
Cmon Sam, I bought two of your books!
“how many more years they need to save at their pace to maintain a similar lifestyle in retirement? At least another 63 years if we believe the couple should have at least 10X their $271,000 annual expenses in net worth by age 60.”
Within about 25 years they won’t have childcare expenses or a mortgage. That’s over $100,000 they don’t have to spend.
Would you agree that this family is living “comfortably” in one of the most expensive cities in the world while building their net worth by over 100k per year?
Yes, relatively comfortably and feeling like they are keeping up with the Joneses. But one day they will get burnt out, and if they stop making the money they do, they will need to face a big lifestyle adjustment.
Financial Samurai is all about growing the gap between income and expenses.
I dunno.
There are clear ways for this family to cut (although you defend each category of their spending), but even with zero changes to their budget (or salary bumps), I see them being able to retire at 55 with around 5 million in savings and a multi-million dollar home in NYC that is almost paid off. Am I supposed to feel bad that they are “scraping by?”
Please enlighten me where the 5M in savings is going to come from? Because I am saving 250K a year and still haven’t gotten there.
13 years at 21k/month at 6% return = 4.94M. Taxes would add a little friction even with tax efficient investing, so ether call it 15 years or bump the IRR slightly.
30 years at 3k / month (18k x 2) at 6% = 3M. The 6% is a real rate of return, with inflation removed. The prior poster may not have done so. 8.5% return would = 4.95M in current dollars.
The author has done a masterful job of creating headline to get attention. According to him, 500k household income feels average, 100k jobs are dime a dozen for just about anyone in SF bay area, and SF is an inexpensive international city. None of these are true for a large segment of the population, but the headline is what creates the reaction. Someone can write an article about how great black people are doing in America by providing examples of all the successful pro athletes and celebrities and it would be just as tone deaf.
I would call this blog post a joke, except Financial Samurai has done a masterful job of creating a clickbait title and then fabricating financial expenses that drive the controversy further. When one reads the article, it is not clear that this post is based on an imaginary family … in fact, he deliberately misleads the reader in the second paragraph (“They are a real couple who shared with me their financial details to anonymously share with you.).
It’s only when one reads deeply into the comments section that you realize FS has concocted this “real couple’s” budget based on an “amalgamation” of other couples’ expenses. In the comments, he admits I “may be underestimating expenses.” If this is a real couple sharing their financial details, he shouldn’t have to estimate at all!
He mentions that he “forgot about parking” which would be an exorbitant expense in NYC. Also questionable is that 2 NYC lawyers living in Brooklyn would be driving 2 cars and spending $5k a year on gas – estimating $4/gallon and 17 mph for their cars, we get 21k mi driven. Again, that’s nonsense for people likely using public transportation.
The cars: a BMW 5 series and Toyota Landcruiser. Current costs on leasing are $1200/month for the Landcruiser and $540/month for the BMW. That doesn’t even include the down payments or fees to lease which will have to be paid every 3 years. Also not included are maintenance costs on these vehicles, which isn’t going to be cheap. All told, the cost of leasing these cars is way underestimated. But, hey, throw in a BMW and $90k SUV into a budget where the couple is “barely making ends meet” and you definitely stoke some incredulity and anger.
Food: $15 a day, really? In Brooklyn? There is no way that that is their food costs when they also have 2 date nights every month. Even if they are getting lunches for free at work. This budget means they can’t buy food or coffee at work or they blow their budget. Hard to believe that a couple that wants to save time by leasing a car is willing to spend the time brown-bagging their lunch.
Health Care expenses are absent from the budget but this is explained in the comments that they have total coverage by their employer. Maybe they don’t pay any monthly premiums but that doesn’t mean they don’t have co-pays for office visits to the pediatrician, their doctor, for prescriptions, or to urgent care when their kid has an ear infection.
Speaking of kids, $1k per month for violin, academic and sports lessons for 2 kids that are 3 and 5 years old? Did FS even think this through when he came up with the expense for this family? Sure, I can see that for a family with kids *actually in school*, but these kids are 3 and 5.
In the end, what you have read is a well crafted blog piece with a title designed as click bait: “who are these rich fools barely making it on an income some number X my own?” Then the article lists their budget with items designed to provoke either stupefaction (who donates to the College Alumni fund when they are burdened by student debt?) or outrage (leasing luxury car/SUV when far more economical options exist and yet seeking financial advice about how to save money).
I’m sure there are $500k family incomes who have some of the expenses of this budget – it is after all, an amalgamation as he says. But there are too many holes in plausibility not to mention his own admission that he made up the expenses for this couple/family. In the comments, he states “This budget is a very real reflection of many $500K income earners in expensive cities. I’ve spoken to dozens to come up with this article.” And yet, he has to estimate what their expense are rather than just listing what said family’s expenses *actually* are. And it’s too bad, because there are important lessons to be learned here … but when you learn that you’ve been taken for a ride by a blog writer trying to increase clicks, views and comments to increase their revenue stream, the “lessons” become a little biased, unfounded and not based on the reality one requires to arrive at knowledge or wisdom (kind of the whole point of “lessons”).
Did I miss healthcare costs somewhere? Do their employers pay 100% of their premiums?
No matter how you slice it, what they’re doing isn’t average. They’re choosing to live in a high demand area and that’s worth the stress to them. In an LCOL area, they’d still live easier on much smaller salaries.
Yes, the employer pays for 100% of health premiums as part of their benefits.
Related: How To Get Healthcare Subsidies As A Multi-millionaire