Hey everyone! This week I was planning on writing about the benefits (and requirements, really) of critical fats in your diet, but something more important caught my eye on Apple News. That something was this [Buzzfeed article] that talks about how difficult it is to live on $100,000 per year. The article takes eight real-world examples from people living on $100k/year and how difficult it is for them. According to most of them, you can’t live comfortably on 100k per year.
Today I want to take one of these examples and break down how easily they could make adjustments to stretch that salary much further. Let’s get into it!
What Is The Ideal Household Income To Maximize Happiness?
Anyone that’s been to college (perhaps senior high as well?) has heard of the $75,000 study. For those that aren’t familiar, this study claims that a household income of $75k per year is the ideal amount for the average household. Specifically, this is the amount that people should shoot for to be as happy as possible.
According to the study, anything above this amount has diminishing returns. It identifies that making more money mans more time working, and more time away from the reasons you’re working. This could be family, friends, travel, video games, reading…whatever your passions are.
This study was conducted in 2010 and, adjusted for inflation, that $75k from 2010 is equal to around $100k in 2022. Based on the experiences of 8 households, the article gives you some perspective on whether it’s still “enough”. Two things to keep in mind:
- The median household income (including single parents) was $91,000 per year in 2021, according to the Census Bureau.
- Cost of living varies greatly depending on where you live. Someone living in a major city like Chicago, IL will have a very different experience when compared to someone living in the more rural Byron, IL
The Example
Before getting to Allison’s case, here’s the format that I’ll be following. To start, I’ll outline the household expenses. From there I’ll break down how and why this should be cut down and how much it would save each year, helping that salary go a lot further.
Allison: 32 Years Old, Lives With Husband and 2 Children in Birmingham, Alabama
Let’s start off with the expenses that are pretty good. Allison lives in a 4-person household and has a very reasonable mortgage of $1,300 per month. She pays $750 per month for childcare, which is also very reasonable. That’s about where the “reasonable” aspect of her monthly expenses cuts off, though.
How Much Does Allison Have Left?
Allison makes $100,000 on her own, and though she says her husband works part-time she doesn’t provide his income in the example, so we aren’t including that. After taxes she should be taking home somewhere around $78,000, assuming she doesn’t put any money into retirement accounts (401k, IRA, brokerage accounts) that aren’t listed here.
Totaling her expenses annually, Allison’s household is spending $54,456 per year. That leaves their family with $23,544 per year, or $1,962 per month, for discretionary spending. I’m not sure how this qualifies as “tight”, but let’s still look at where we can find some savings.
Groceries
WHO spends nearly the cost of their house on groceries every month?! Just to put this into perspective, that’s $300 per week on groceries. This one is really, really easy: stop buying so much. Focus on private label options over name brand, stop shopping at expensive grocers like Whole Foods or Mariano’s and shop at a normal grocer. Or better, shop at a discount grocer like ALDI to push that even further.
My house has 2.5 kids (one is only with us part time), one of whom is a gigantic 6’3” 18-year-old man. I don’t push past $200 per week and focus on healthy meals with fresh meat, fruits, vegetables, and some of the typical kid foods like freezer chicken nuggets. With the exception of select items that are more cost-efficient in bulk from Costco, I shop exclusively at ALDI for my groceries. We also treat restaurants as a very special family treat. We don’t really eat out more than once every 2 months or so, and we’re healthier (and happier) for it.
Eating Out
Allison also mentions that she eats out often due to being tired and not wanting to prepare food. What you eat impacts your energy levels, though, so if you’re eating Panda Express every day and not exercising you’re the cause of your own exhaustion. Food prep is also a great way to get around this. Pick a day to prep for several days or the week, buy some food storage containers, and just throw it in the microwave when it’s mealtime. You’ll save a boatload of money and be healthier.
Car Payment
$540 is a lot of money for a car payment, bar none. If you got a great deal with, let’s say…2% interest on a new vehicle, that payment means you purchased a vehicle for about $36,000 if you put $5,000 down. That’s crazy! You could buy a very decent used vehicle for $15,000-$20,000 dollars (most or all in cash would be best) and save a $16k-$20k while also cutting down or eliminating the monthly loan. My assumption is that Allison bought a new car as a reward for her work, which is a very common mistake that Americans make. Take advantage of the used market whenever possible.
Credit Card Debt
Allison tells us that she has around $5,000 in revolving credit card debt. Considering the average interest rate of 19.2% on credit cards, Allison will take another 17 months to pay this off while paying an additional $750 in interest. Let’s say it together: Credit cards shouldn’t be used unless you can pay off the balance in full every month.. That $750 could be used for much better things than paying the credit card company!
Student Loan Payment
We don’t get much detail here, but considering that the average student loan interest rate is right around 5%, this should be paid off as quickly as possible as well. Considering that the average college tuition for an in-state school in Alabama is $10,323 ($41,292 for all four years), that interest is also a heavy burden that every person should be working to eliminate.
Conclusion
Allison has a lot of flexibility here. Let’s see how much she would save if she cut out the unnecessary expenses:
- Groceries: Reducing to $800-$900 per month ($200-$225 per week) would save Allison around $500-$600 per month
- Car Payment: Paying off that car would save her $540 per month. Alternatively, she could sell the car and buy a perfectly-serviceable alternative to save a big portion or all of that $540 today.
- Credit Card Debt: Paying off her credit card would not only save her $350 per month, it would also save her a LOT in interest! That $750 that’s going to the bank could be used for better things. Like fun travel activities once she makes use of credit card point bonuses to travel for free as she pays off her cards in full every month!
- Student Loan Payment: Knowing that this is lingering over your head would be an awful feeling, regardless of whether it’s in forbearance. Student loans should be paid off as soon as possible once a person graduates to make sure they can capture ALL of their hard-earned money as quickly as they can.
My Recommendation to Allison
There are some pretty easy changes that Allison can make that she can benefit from today and in the future. Let’s lay out my recommended priorities step by step.
- Focus on finding out where that missing $23,544 is going every year.
- Sign up for a service like PersonalCapital to pull all your financial information into one place
- Create and stick to a budget to make sure you’re being intentional with your spending
- Review your spending on a monthly basis and make sure it’s going where you want it to
- Cut your food expenses down to a much more reasonable spend of $200-$225 per week (this can be pushed much further down though)
- Save money by shopping at a discount grocer like ALDI
- Buy private label items instead of name brand whenever you can
- **Stop eating out! ** This is the most wasteful expense when you’re wanting to optimize your spending
- Prep food to make sure it’s there when you need it and you’ll start to enjoy the process of making food for your family while saving a TON of money
- Pay off your debts ASAP using as much extra money as you can. Start with the highest interest rate first, then go down from there
- Credit card first, then student loans, then auto loan (unless interest rate is higher than student loans)
- Enjoy the extra money to put toward savings, investments, travel…whatever you want. Oh, and enjoy the advantages of credit card churning to travel the world with your family for free once all of the above are fully cleared out.
Allison can take home an extra $500-600 per month today just by cutting down food spending.
Once the credit card is paid off that will jump to $850-$950 per month. Then after the car payment is out of the picture, Allison and her family will have an extra $1,440 every month, for a total budget of around $3,400 per month for discretionary spending.
It all starts with spending intentionally and being aware of where the money is going. Make a plan, hold yourself accountable, and that seemingly inadequate salary is suddenly much more reasonable. Stop keeping up with the Kardashians and be happier as you’re counting your riches on a bed like this guy.
