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 heart goes out to this couple. I cannot believe they are getting by on just $500,000 a year. A true American Success story.
This post is exploding in my Twitter feed today again!
A couple of points as someone acquainted with this market and the realities of the income level:
1) This couple will likely NOT pay AMT anymore under new tax rules and will be better off because they probably got little of their SALT deductions in the past because they almost certainly got nailed for AMT. I’d be the BMW they effectivelyonly got deductions for Mortgage and Charitable in past and now they will get lower tax rates, an extra $10k in deductions and escape AMT. Taxes should be $10k less.
2. In NYC you do not need 1 car let alone 2, unless you decide to live somewhere remote from transport (like Staten Island or deep into Brooklyn) in which case your housing will be cheaper. These folks are not living in these spots. Arguably, you might get a car when your kids are older and you have travel sports to contend with. But Zip Car will do the trick I gave observed.
3. You absolutely can use public school in NYC particularly if you live in Manhattan but also in many parts of outer boros. Until de Blasio destroys them, NYC is home to some of the most storied public high schools in the nation (Stuyvesant, Bronx Sci) and there are plenty of excellent zoned elementary schools. Middle school is tricky but can be done. That said, you still will have to pay-to-play in NYC for sports and lessons because it won’t come free as it often does is suburbs. And you will need to supplement math (which you should be doing anyway since US public schools generally weak math even in the fancy privates), which you can do yourself or pay for…
4. The housing costs are in-line to low for a family of 4, particularly if they need 3 beds (children of opposite gender). 3 beds sell and rent at a huge premium over 2 beds (think $10k in rent) particularly in good school zones.
5. I applaud these people for taking vacations. I wish we did. I’m sure they work close to 80-100 hour weeks. So, that is money well spent in my opinion.
My advice:
Ditch the cars
Bag private
Keep the mortgage and charitable because with that your taxes should be lower this year than last. START SAVING FOR COLLEGE because YOU WILL PAY FULL FREIGHT!!!
“Sure, 500k a year sounds like a lot, but after spending it, there’s much less!”
Wow!!! I make 16$ a Hour Busting My Damn Ass Like A Slave Then Harassed 5-6 Times a day By Nagging Managers to the point my stress Is Unbearable to Have A Third Of my Pay check Taken By Taxes Alone! Go Cry A river Some Where Else! Makes me Sick As Shit to Listen To a wealthy Person Bitch about How Its So Hard I Make 40 Grand a year not 500,00 Thousand Dollars!!! And Pay Over 500 $ a Month in Just Taxes!!! Do the Math!!! The Weathly Bitch With there Tax Cuts And Breaks they get While the Little Ppl Pay 40% of there income to make sure the government dont have a fucking melt down! And your roads are Paved! While you go on 3 vacations a year… Mean While I have to work To Jobs just to be able to eat and drive to work And Have a house
Do you happen to have any personal debt??
We lived in California for the last 20 years and knew plenty of families scraping by on $500k per year. Education expenses are much different than when my wife and I attended college back in the ’80s. We are currently paying about $170k per year for 2 in private college and one in a private high school. Luckily we knew that our children would likely attend private colleges so we started saving when they were born and have at least 85% of their college expenses in 529k’s.
If they want to retire well, sure they should cut expenses (lots of discussion on the difficulties/opportunities), but unless they make some serious sacrifices in standard of living now, it’s all about geoarbitrage. Saving $36K per year is plenty to get you to a retirement in the Midwest. Might be hard if they love NYC, but the costs there are huge. They could own a nice house with a yard outright in exchange for their equity in the house pretty soon, if they would relocate.
As for moving now, if their pay goes down to $150K per year, they could probably still live easier.
Missed this. I work in midtown Manhattan. Just bought eggs from a suburban Whole Foods and still don’t recall seeing any for $7+. Even if they are there, that is not the average price of eggs at Whole Foods.
Again, just because there are expensive things being sold, does not mean that one must buy them. That is the lesson for this couple.
Sam,
I think about this post quite often and what it really says about our society. What I take away from this, unless you are in the special 0.1% of Americans (call it a net worth of $25-$30mil), being rich is not all it’s cracked up to be.
When I look at the list of expenditures – $32k for student loans (the second biggest expenditure on the list!) & $10K Miscellaneous (I assume bulk of this for most people is healthcare – I question why we have done this to ourselves? We’re willing to strip everyone equal opportunity of a healthy life with universal health care coverage or the right to a good education because we think we can win the game of life.
There is a lot of division and resentment in this country, and the way many people can have polarized reactions to this post is a prime example of it. Currently zip code defines our style, announces our values, establishes our status, preserves our wealth, and allows us to pass it along to our children. It’s also slowly strangling our economy and killing our democracy. These $200-$500k earners are the ones who have the ability to lead us towards a better society, I just wonder when and what will cause them to say “this is enough.”
Financial Samurai
If one were to calculate their savings on a yearly basis more accurately, they need to include Housing Principal Payments as well:
I see that they pay around 60K per year towards P & I. Assuming a min of 30K in Principal payments, that would bring their total savings to 73K (30K + 36 K in 401k + 7k in left over savings).
That would be around a 14% savings rate. I think thats pretty decent given that they live in HCOL area.
That is without changing a single thing. Add to that the savings they can generate by trimming food expense, fuel expense and others, I believe they can easily hit 20% savings rate.
Fair point. They are definitely building their net worth by being down principal. Unfortunately for this family, it’s hard to type the equity in their house unless they take out a home-equity line of credit. With their level of burn, they need to be more diligent in savings and cutting on extraneous expenses.
Actually, even the student loan repayment builds their net worth and is also savings. It’s also likely that something like 60% of the mortgage payment amortized over the whole loan is principal. This brings their post-tax savings to 36k + 32k + 7k = 74k, plus the pre-tax savings of 36k. It’s also likely that their employers have some 401k match, which likely brings their pre-tax savings to 36k+18k = 54k, which is a total equivalent savings of around 74k + .6*54k = 106k.
I think this budget has been written/presented in a way that makes it look like they have very little savings, but once you dig into it, this family is quite far from living paycheck to paycheck.
Just came across this article through a link, and it seems there are already a ton of comments on here, so apologies if it was already pointed out, but it’s irresponsible to say they are only “saving” $7,300. You need to keep in mind the entire balance sheet, not just cash in a deposit account (why personal finance people think this is a proxy for savings blows my mind). Retirement accounts are savings. Employer matches are savings. Reduction in debt is savings.
First, the $36,000 in 401(k) contributions is savings.
If the employer matches 50%, that’s an additional $18,000 in savings.
Let’s assume their mortgage payment is 50% interest and 50% principal. The principal portion of the payment is just paying themselves back from when they borrowed against future earnings when they took out the mortgage. That’s an additional $30,000 in savings.
Let’s additionally assume those student loan payments are 50% interest / 50% principal. That’s an additional $16,000 in family equity each year.
Those coincidentally add up to $100,000, or 20% of gross income. 20% is a pretty healthy number to put aside, even without considering different ways to tighten the belt on some of the discretionary items.
Further, those charitable contributions and miscellaneous expenses are about as discretionary as you can get. That’s an additional $28,000 in “leftover” money they simply chose to spend on something. The $7,300 in actual “leftover” is simply money they didn’t know what to do with at the end of the year (vacation #4!?!?!). All told, even after saving that $100,000 from above, they still have extra cash flow of $35,000 per year, or nearly $3,000 extra each month.
Agree. The thing to focus on his cash flow. And their cash flow is very light for their expenses. That said, the quiddity is also overrated if you’re financially competent.
https://www.financialsamurai.com/the-need-for-liquidity-is-overrated-if-you-are-financially-competent/
I scoff when my college sends me donation requests. $4,000 a year to their old schools? No way. By the size of their student loans it looks like they already donated plenty.
Regarding your statement about the lawyer couple’s charitable contributions, “..which is inline with the average donation percentage by income according to the National Center For Charitable statistics.” That reads like a Brokerage site retirement calculator after you plug in your portfolio numbers. I.e. “You’re only 20% close to your retirement goal.” Oh, so “I really should be transferring more money into your bank to get that number to a higher amount.” Basically, it reads like a evolved bait & switch tactic similar to retail stores throwing a guilt trip at the cashier line to get another dollar or two from your total grocery bill (look this up – these corporate grocers/retailers use this to get a huge tax credit).
I donate to charity every year, volunteer locally when I can, and mentor younger colleagues and friends. I certainly encourage anyone who have the means to help people and causes everywhere that could use our help. But be careful on not becoming a charitable case yourself to your community, family, or government when you no longer can earn money reasonably. Pay yourself first. Go volunteer — it’s free, you’ll learn new skills, meet like-minded altruistic people, and have given back in ways that are immeasurable.
This is SUCH a great article and I am glad to see it still get’s picked up and circulated. I also think the author has been *pretty amazing* in responding to the comments.
Over and over again I see people go into attack mode when they hear a *salary* and hand wave away *cost of living*.
Newsflash… COST OF LIVING MATTERS.
Also very interesting to note is the fact that this couple pays *nearly $200K per year in taxes*. Thanks to the blue state screwing that came with the tax reform bill, they will be paying *more* next year.
This means they pay the equivalent of about ELEVEN median income households (2 people working, $80k total) in North Carolina. Yet they have *nowhere near* 11x the income. In addition, housing in NYC is *at least* 10x NC.
Now one can say “well dont live in NYC then!”, but this is a ridiculous and specious point.
The point is that “$500k/year family income” is *not* created equal. A $500k/yr small biz owner hiding half of it b/c it is all cash and living in a no tax red state looks *nothing like* these two.
In NYC $500k/year could easily be a nurse who puts in big OT married to a senior IT person. These are not “rich” people.
Thanks for sharing your thoughts. The new tax reform is going to hurt coastal city residents more at the margin indeed with the SALT cap deduction and mortgage interest cap.
I like your example of the nurse working overtime. You’re in San Francisco, we have janitors and elevator technicians making $250,000+. https://www.financialsamurai.com/abolish-welfare-mentality-six-figure-bart-janitor/
The tax calculation is wrong – every heard of progressive tax system? Also with deductions such as standard deduction, house interest deduction etc. it will come down further.
As other folks are saying, lot of other expenses can be cut down; for example: 3 vacations a year doesn’t have to be of $18K
Never heard of a progressive tax system. I think it’s clear you don’t make over $500,000 year and live in New York or San Francisco. If you did, you would understand better instead of pontificate the tax liability.
Further, with the salt cap limit and $750K Mortgage interest cap, Texas for such income earners and expense of coastal cities will go up this year.
“Judging others, after all, is an American pastime!” i wish you could track changes like in word, so i could add Comment: #truedatboo
Do you want guillotines in Zuccotti Park? Because this is how you get guillotines in Zuccotti Park.
If you’re scraping by on $500K a year, then you’re simply spending too much. Stop buying your kids brand new clothes, buy your groceries at Walmart and use coupons as well as shopping the sales. Get rid of your luxury vehicles (boats, jet skis, quad runners, antique cars etc.) Don’t pay for services you don’t need or use like gym membership–work out at home, land lines and cable/satellite service. Take mini- vacations close to home instead of going abroad. When the economy tanked in 2009 my husband and I earned close to $200k a year. We lost our jobs on the same day and now we live on a fraction of that. I had to sit down and take a long hard look at what I was spending and why. I constantly asked myself, “can I live without that?” “what things am I paying someone else to do for me that I could do myself?” We also had to move to a smaller home in a less desirable neighborhood. If you are honest with yourself you’ll be amazed at the fat you can trim from your budget.
Agreed. Being broke on $500k a year gets a rating of BS. I understand a person can get into a painful situation, but low on money is not the real problem only a symptom.
We earn combined wages of $350k which sounds like a lot, but after mortgage, cars (2, both over 10 years old), taxes (30% effective rate), private school (local schools are so-so), and nanny (because we’re both working ~60 hour weeks, in finance for a big tech company in Seattle), we end up with barely any savings. That’s with 2 kids, and a third on the way. Our children occasionally get new clothes from relatives, but mostly we use the local buy nothing community to get used clothes and toys (and then return them to that community to pass along to other kids). We eat healthily, but often it’s beans and rice or lentil soup, with veggies. My point is, we’re definitely not flashy. The only new clothing we bought was a pair of running trousers for my husband, who runs to and from work. Our lifestyle is very frugal, other than private school and nanny which we view as an investment and necessity, respectively. They also go to activities (gym, swimming, piano, soccer) when they are old enough. I really don’t know how people get by on a lower income, and have no idea how we’ll cope when the third arrives. For now, we’re going to take Sam’s advice to start a home business…would love to learn how blogs generate income. Like I said, we work in finance so I’d probably blog about business or finance, but not personal finance as we are clearly not great at that!
You clearly don’t live in NYC. You cannot buy groceries at Walmart here. And, in fact, if you want to do Costco you need a car, which is the first expense they should ditch. These people likely work 7 days a week and their value to their employer is measured in billable hours. Meaning every hour they are working instead of tooling around Costco or hunting down cheapest milk is worth $1000 to their employer. They need to maximize the amount of hours they can bill and still function as parents. So they have to pay to save time…on commute, on groceries, childcare and vacations. I get why it shocks you but I guarantee if you walked 10 blocks in their shoes it would make a lot more sense.
Frankly we should all be grateful that people are willing to sacrifice their health and well being to pay $170k in taxes! A lot of which is redistributed to less wealthy parts of the country.
That said, they should ditch the cars and forget private. They cannot afford private for 2 kids on that salary.
“$500,000 a year or higher is a level which I think is considered rich”
$500k is a measure of income. “Rich” is an adjective that describes wealth, i.e. level of assets, not income. Conflating the two is a huge mistake, and something that policy makers need to stop doing if they are going to actually address these issues.
Of course there is a high correlation to people earning $500k/year and those who have a large asset base (the wealthy). But mixing the concepts of income and wealth is problematic because it prevents us from addressing many of the important nuances between the two.
For one, by and large we are taxed on income but not on wealth. Also, a person’s/family’s level of wealth is a big determinant of choices that are made regarding income. Take a family with two professional earners at the upper end, say $250k each, which pays for childcare 5 days a week. If this family had assets of $3 million versus say $250k, do you really think both parents would continue to pursue their careers nonstop while not seeing their children most of the week? Maybe, but from my experience, probably not.
The list goes on. Bottom line, can we please stop using income as a means by which we refer to “the rich” etc.?
Agree for the most part, especially if you are a $500,000/year W2 earner.
See: Focus On Net Worth More Than Income
Just gonna poke some holes in this.
1. 3 vacations a year? And you only feel “average”? Do themselves a favor, cut out those 3 vacations, they’ll have an extra 18k every year. But then what would they do with it? Oh right, probably go on vacation a few times…which isn’t “average”.
2. Not one, but TWO luxury cars? In NY? I’m guessing its in NYC. Yes, a Land Cruiser is a luxury car, its an $83k car. Save some money, save some time, get a Camry or Avalon and an Explorer. I just cut your car payment into 1/4 of what it was before. And gas would be lower, as both of those cars are more fuel efficient (well, maybe not an Avalon, but an I4 camry would definitely be better than an I6 or V8 5 series)
My husband and I make 550k a year ( both physicians ). Live on 80-100k per year. Maxing out our 401ks and the rest goes to med school debt which is approx 250k combined. We wanted to pay our loans in 2 -3 years after graduation/residency. We are expecting our first child soon. No cc debt no car loan/ debt, paid off in residency. Home with about 500k mortgage. We are content with what we have and where we are in life. Money doesn’t equal happiness. No matter how much you make, you have to learn to appreciate and cherish what you have, otherwise you’ll never be happy.
My friend sent me this article, asked what I thought, so figured I’d post.
First, I think the numbers are illustrative, but realistic in the NY area. 2 cars is too much, but food is right – a half pint a blueberries at a grocery store is $5-6. Student loan debt for this family is prob $2500-3k a month, home maintenance at $5k is too low, private schools weren’t even mentioned (most schools in NYC suck), the tax rates are about right for this income. Given the foreign investors, $1.5mm doesn’t buy much in the NY… But people tweaking this specific budget are missing the point…
In my view, those at $500 should seek to save $50k per year excluding Pension/401k. And ultimately $100k as income rise. So lifestyle needs to adjust to that. It may not happen every year – the year after buying a house, or having a kid. But again, this saving is a path to create LT wealth and get off the treadmill.
Plus, understand, many of these types of jobs can disappear quickly (’01, ’08, + coming tech disruption) and people should have at least 12 months of liquidity. There aren’t a ton of these high paying jobs and they take time to find. This isn’t retail. So,$7500 a year won’t achieve liquidity / safety needs in this example. These #s may sound like a lot to those making < $300k but $50k+ (ex 401k) should be the base case for $500k gross, in my opinion.
Those commenting are right, there isn't a decision between gas and milk for this family. Thy aren't roughing it compared to most. Though if we are taking this argument, look globally, and be thankful you have water, electricity and education in a safe country.
But the point of the post, I think, is $500k is not "rich" on the coasts and these people aren't really "keeping up with the Jones" and living a lavish lifestyle. Taxes crush $500k incomes for families on the coasts and the perception of high incomes is off for people living in Ny, SF, LA, Boston (the places were they are $500k jobs)
Ps:
not brought up is how ugly these numbers look for divorced couples with kids.
Not sure if anyone else mentioned the $42k childcare (which is reasonable for 2 kids for NYC). This goes away when they start school and can be redirected to 529 accounts, and when those are full, they can be redirected to retirement savings. Staying at home with the children may save these costs (especially for those earning less than these earners), but there is no guarantee that there will be a job at the end, especially at equivalent earnings, plus the stay-at-home parent loses out on SS and 401k contributions and match. We felt squeezed, too, when the children were young, but our cash flow improved significantly when they reached school age because they went to public school. The $12k for kids’ activities is overkill given their age but not unreasonable once they are school age.
I disagree. Childcare does not go away when kids start school unless your job starts at 8:30 and ends at 1:30 PM. In fact it becomes profoundly more complicated and stressful. My kids are in public school 2miles from our house. And yet there are sick days, school closures, teacher in-service days, late openings, travel to practices/games/after school activities, parent teacher conferences…. Oh and of course summer, winter and spring break. And if you have a terrific nanny who has been working 40hrs a week for you and you suddenly chop her hours to 15-20 she starts looking for another job to fill in the gap.
I don’t see anything that indicates they are struggling. In my opinion they are living a great life. Families that are struggling cannot afford to donate or go on vacation, they spend $36k each year on this. If they were really struggling they would be living in NJ or Staten Island where housing costs less than Brooklyn.
For all their education, they lack financial savvy.
There’s nothing wrong with how much this couple is saving annually, and the whole thing is a little misleading.
They’re saving $36,000/year in retirement accounts. They’re also paying off a mortgage, paying off student loans, and paying off car debt. They include these debts in their budget but in reality paying down debts is explicitly saving to build your net worth, it’s just taking down the negatives instead of building up the positives. They then have $7,300 left over on top of that. They’re not “just” saving $7,300 on an income of $500,000. In reality I would guess it’s more like $85,000, not counting interest on the debts.
Adding all that together, and they have a fairly reasonable savings rate for their income. 20% or so leaves a little to be desired for a lot of us, but if they’re happy with that then it’s fine. It’s their money to spend as wisely or foolishly as they choose, and if push comes to shove, 85 grand is a lot of money to be saving anyway.
Kate,
Good observation. I hope nothing is misleading because the chart shows exactly how much they are saving in the retirement accounts each year. But you do bring up a good point about paying down the mortgage and paying down student loans, which does add to the couples’ net worth.
Within 30 years, they will have a fully paid off multi million dollar property. If they had rented, they would have nothing to live in for free or pass on to their children. This is why I strongly believe everybody should get neutral information by at least owning their primary residence. Save like mad and get neutral!
Sam
I cannot feel any sympathy for these people. There ‘keeping up with the Joneses’ lifestyle is just abhorrent. I live in Maine. Make $60k a year. Have a beautiful house on 2 acres. It’s paid off. 1/2 hour to the coast, 1/2 hour to the mountains.
My daughter just graduated high school and will be attending Northeastern University in the fall. I’m pleased that I have been able to spend so much time with her throughout the years. I could of chosen a high pressure, try to be big wheel career. I chose not to. Life is not about things. It’s about making memories.
Let me correct my initial statement I do feel sorry for these people. While obviously school smart, they are stupid on another level. Money will not buy you happiness.
Your response to the push-back regarding vacations ignores how unreasonably expensive those vacations are. I’m someone who loves taking time off, but there is no way I am spending $18,000 a year on vacations. There are cheap adventures one can take in their own state, not to mention their own city, and traveling out of state or out of country can be done in a way that doesn’t result in an annual expense of $18,000.
I wouldn’t spend $18,000 on myself either. But if I had a family of four, and took several vacations, I can easily see how it adds up. How big is your family?
I’m stuck on this going out to lunch every day, or ordering every day. I get that you may not want to bring lunch every day, but it’s really not that hard to do, and it’s way healthier. If you have to eat lunch out, why can’t people grab a slice of pizza or an egg roll or two? There is almost always a cheap place to eat near work. Koreatown, Chinatown, your local pizzeria- they are all cheap!
I grew up in NYC- no one expected luxuries like this!
Charity expenses should be brought down to a max of 5k annually. Gas – 5k pa? Kidding me? Should be much less or just get a Tesla, and you clearly do not need 2 cars.
On the other hand, 18k for three vacations is far from enough – you should easily double this.
On the “real estate neutral” comment: one must more so consider the leverage on the single largest asset in most personal portfolios. I cannot argue against the neutrality of their real estate postion as much as it cannot be argued that 2x800k pieces of real estate – one personal and one investment, represent an effectively equivalent non-neutral position. Real estate is a builder of wealth, family wealth, whether it be bequethed or just simply an asset cornerstone.
It is not just simply that they have chosen to live a $1.6m housing lifestyle and they must live it somehow, even as similar alternative homes (or rents) rise, or even fall, in value. Their wealth accumulation, leveraged and tax subsidized, continues regardless the number of parcels.
Using the argument of neutrality is too dismissive to the more pertinent fact at hand – likely about $300k was deployed to control $1.6m, to be used in any way shape or form when it is all said and done… retiring abroad, funding their kids college, starting their tube meat meat truck business after they get tired of the lawyering rat race, etc etc. It is all like saying they are 401(k) neutral because ,well, they just have to have and fund one.
There are a number of holes here. Not accusing anyone of making stuff up but some of this does not add up and suggests this was some sort of chimera of a number of different lives rolled into one.
First, 529 plans provide discipline in saving for college and give a nice tax break, which they apparently need. This is a no-brainer that any educated person should do. My wife and I saved $180K for our daughter’s college in this manner, saving $10K/year maximum from DAY 1.
Children ages 3 and 5 do not need nor necessarily appreciate elaborate vacations. In fact, they may find flying, going through security, seemingly endless walking through airports stressful. Taking kids to faraway places and then having to watch them like hawks is not so relaxing for the parents either.
In a city as rich with possibilities as NYC, the parents could simply take days off from work for a big visit to the American Museum of Natural History, the Statue of Liberty, the Aquarium at Coney Island, Bronx Zoo, etc. There are plenty of fun day trips to LI or NJ that could include an overnight stay someplace just to get out of the house. Since they supposedly care about their children’s learning, these are great places to start building a foundation at a young age with many opportunities for further and more advanced learning as they grow older. The AMNH in particular has a very robust commitment to science education.
I find the part about extracurricular enrichment expenses relative to a 3 and 5 year-old absurd. In the first place, subjecting a 3 year-old to so many structured activities is counter-productive. Young children need time to just play, not spend the whole day developing specific skills. Second, Mandarin study does not need to be expensive. There are lots of Chinese-related resources in NYC and not just in Manhattan. My daughter is half Chinese so I know. Spending large sums on tennis lessons for a 3 and even a 5 year-old sounds bogus at best and a waste of money at worse. It is far smarter to send them to an intensive summer program when they are ready for first exposure. More cost effective and a better chance to retain something useful. If one of the kids is a prodigy that is different, but that was not the description provided above.
Other observations from readers about cars have merit. If the parents have flexible working schedules, having a car is a great time-saver for running errands, but it is still a luxury. With alternatives like car services, Uber, and when convenient public transportation–and assuming the parents work long hours–there is no way car ownership is as economical as using the above services and renting a car on the weekend. With their schedules it is unlikely they have time to fool with parking two cars on the street. Garaging two cars in NYC costs a fortune–could easily be $1K/month or more even in Brooklyn, and I doubt if that was even included in the calculations.
Regarding the cost of education, NYC has a number of very strong elementary schools. There are also strong public middle and high schools that require testing to get into. I would argue that at 3 and 5 years old sending kids to expensive private schools is a waste of money and more likely motivated by racial, religious, or social biases than anything else (caveat: unless one or both parents went to a given private school themselves, loved it, and strongly believes it is worth the expense for their kids).
I personally know of a dozens of children that have started out in a strong public schools and switched to private school somewhere between 6-9th grade, unless they successfully tested into one of NYC’s top merit-based high schools. I can’t remember every college they got into, plus I am not a starry-eyed Ivy League worshiper, but I don’t remember any getting into obviously weak schools, and do remember a couple of Ivies, strong liberal arts schools, and prestigious public universities such as Berkeley.
The savings in putting off the move to private schools for 6 years with 2 kids could easily exceed $600-$700K right there. This expense is why so many New Yorkers with kids end up moving to NJ. Even with high property taxes, if the schools are good the savings vs two kids in NYC private schools is huge, even with commuting expense, plus you usually get more home for your money.
In the parents defense, the calculation of what they spend a month currently and extrapolating that to their old age is a straw man. Children are the most expensive luxury they have by far. Eventually the kids grow up and take on their own responsibilities. With kids gone the parents can downsize their apartment and potentially make a lot off the sale if they can move or retire to a less expensive locale. They will not need to carry 2 cars. Vacations, food, clothing and all the rest will decline in cost. And if they have continued to fully fund their 401Ks and invested them conservatively, they should not be eating cat food at retirement time.
Finally, and this may not be possible for these and many other people, I strongly agree with this website’s implication that time is the most valuable commodity we have and spending it with your children is far more important than seeing bigger numbers in the bank account. While I live in Manhattan and am much closer to institutions like the AMNH, the MET, and others with strong educational offerings, Brooklyn is not a wasteland, plus it isn’t that far from Manhattan if one provides the time to the effort. I purposely worked less hours when my daughter was age 4-12 to spend more time with her education outside of the schoolhouse. My wife did the same. What emerged was a kid who did well academically, is going to a famous college with a nice merit scholarship, and we maintain a close relationship. As I am now looking back a bit from the descending curve of life I realize even more than I did in the process that this was fulfilling time incredibly well spent.
Wonderful feedback about spending time with your daughter especially. That must be so gratifying to see her do so well.
That’s all I really want now. To be a good father who is always there for my kids.
Thanks. I proud of her and relieved for myself. Had a great kid and did not entirely blow it.
What I said about time with children is very much specific to one’s situation. Wife and I were lucky enough to have flexibility and we were not driven to have an extravagant life style. We were far more interested in helping daughter develop her potential. Not because we were such awesome people but because we truly found it fun! And still do.
I think any parent that finds their children interesting and can summon up all the patience they can muster from time to time will do a great job in parenting.