How to craft a life on $250,000/yr

Fire-up the Facebook comments. It’s time to show you the right way to live on $250,000/yr. I know. I know. If you don’t have a household income of $250,000/yr or more, you undoubtedly think there aren’t challenges that come with earning $250,000/yr. You, in fact, are wrong. I don’t judge a person’s problems, and neither should you. If you’re only reading this post to mock people who can’t effortlessly live on $250,000/yr, fine. But there is a right way and a wrong way to live on $250,000/yr. This is the definitive guide for living the right way.

If you make $250,000/yr, you earn $1 million between the closing ceremony of one summer Olympics and the opening ceremony of the next. That’s crazy. Yet, when I look deep into the lives of people at this income level, the takeaway often becomes “um, where did all your money go?” And then I remember their cars, their house, their couch, the Instagram photos of their food, the Facebook pics of their vacation, and it instantly all makes sense.

I’m definitely not suggesting you shouldn’t enjoy the fruits of your labor, however your tree or bush or whatever fruit grows on will be fruitless if you don’t pay attention to your future needs. Whew. That metaphor felt like it was on the verge of falling apart. My hope for you is that you can enjoy your income now AND later. You know, like the mediocre candy.

A big part of what happens next depends on how many people in your household are contributing income. If you are a double income $250,000/yr household, your financial life will be more awesome than if you are a single income $250,000/yr household. Why? Tax evasion. Settle down. LEGAL tax evasion.

Where you live matters too. $250,000/yr in Manhattan makes Uber affordable, while $250,000/yr in Little Rock means you make fun of the people making $250,000/yr in Manhattan. Don’t forget state income taxes either. When I used to manage the financial lives of some professional athletes back in the day, state income tax rates were all the hotness. It could mean the difference between suiting-up as a Dolphin or a Colt. Not that the warm weather, amazing Cuban food, and the lack of 40 below winters had a say in the decision. Making $250,000/yr means you have to care about taxes. Sorry, but you do. Some people make this their primary issue and vote accordingly. While others create a legal tax avoidance plan and choose to make other issues their priority. Ignoring your tax reality at $250,000/yr is both ignorant and wasteful.

Additionally, it’s important to acknowledge the fact that you can afford or justify just about any purchase, at the $250,000/yr household income level. Want to go on a European vacation? You can go. Want to drive a Range? Or do people call it a Rover? I don’t know. Maybe they just call it a Range Rover. I don’t know, I drive a soccer mom car. Anyway, do you want to drive a Range Rover? You can pull that off. Do you want your home to look like Restoration Hardwood catalog without the postage and slaughter of an entire forest? You can afford it. That’s the strange part. You can afford many extravagant choices, but likely not all of them. Play this card too often, and you’ll be trying to convince your friends your newfound minimalistic approach to life is nouveau and not born from necessity.

I’m going to take a slightly different approach on this post. I’m going to run two different scenarios for the same hypothetical couple. One of the variations, both people work, while in the other scenario only one person is earning. I’m also taking a very hard line stance on 401k contributions. Once you crossover the $100,000/yr threshold, you should be maxing out your employer sponsored retirement plan at $18,000/yr (49 years old and younger) or $24,000/yr (50 years old and younger). At $250,000/yr, you are ruining your life by not maxing-out your retirement plan. That was possibly the most dramatic statement I have ever typed, next to a line from a college paper I wrote for a theater class.

If at a $250,000/yr income, your goal to fund your future is to make even more than $250,000/yr, you’re delusional. You are addicted to your income. You can only retire when you simultaneously break your dependency on your income and accumulate enough money to support your lifestyle without a work income. On top of that, the longer you proceed without storing copious amounts of nuts in the tree, the more time you waste. Once again, when you fail to invest, you waste time. That’s a mortal sin. You many earn more money, but you will never get that time back. Time is what grows money. Waste time, and you’ll waste your opportunity to create an amazing and sustainable life.

At this income level, you should have short-term stability, mid-term stability, and long-term stability. If you don’t, you’re doing it wrong. Honestly, if you can’t slap together $10,000 in about 10 minutes, you should be embarrassed. I know it feels like I’m judging you. I’m not. This is what honesty feels like. For the love of everything holy, please let me help you.

Here are our assumptions:

  • Someone in your household has a mustache
  • You’re both 38 years old
  • You spend about $4,500/yr on health insurance
  • You live in Maine
  • You watch America’s Test Kitchen every Saturday
  • You have no kids
  • You believe pets are animal slavery
  • You have plants

One income, max percent contributions to your 401k

  • $11,689.58 take-home pay
  • $1,500/month 401k contribution
  • Projected 401k balance from age 38-67 $2,046,967
  • Projected 401k balance of $3,056,730 at age 67, if you enter age 38 with $100,000 in retirement savings

Broken down, here’s how you’d spend your money:

  • $2,922 for Rent or Mortgage (includes principal, interest, property taxes, and taxes)
  • $1,753 for Transportation (includes car payment(s), fuel, insurance, maintenance
  • $1,402 for Groceries and Dining-out
  • $1,168 for Emergency Fund of Mid-Term Savings (includes college savings)
  • $1,168 for Utilities (includes EVERYTHING)
  • $584 for Community/Charity
  • $584 for Clothing
  • $584 for Entertainment
  • $584 for Medical
  • $584 for Holidays and Gifts
  • $380 for Miscellaneous

Let’s make something abundantly clear – if you spend $1,753/month on transportation, I’m going to pogo stick to your house and scream in your face. I based the spending breakdown on my Ideal Household Budget. It falls apart by the time you get to a $250,000/yr income. Spending $1,402/month on food is a waste of money. You won’t spend $1,168/month on utilities. If you’re not saving for retirement, college, or something else, you’re blowing money.

You have to make some pretty big decisions. To start, I’d rather you have a 15 year mortgage. “But I can’t afford the house I want when you factor in the 15 year payment, Pete,” you bleat. Shhhhh. This is me touching your lips, shushing you. When you make $250,000/yr, a 30 year mortgage is a sucker’s move, unless you are investing a great deal of your take-home income. Don’t believe me? Then…wait. Why don’t you believe me? Fine. Spend $12.99 then. I’m not even going to give you a discount code. A 30 year mortgage is a math disaster.

I’m angry that I’m about to write this, but if you’ve earned $250,000/yr for the majority of your career, and you’ve only accumulated $2 million,  you’re screwed. Yes, $2 million won’t be of any use for you. It will generate about $70,000/yr in retirement income if you were to retire on $2 million today, and the equivalent of about $38,000/yr some 25 years from now, due to inflation.

Yes, I did ask that you commit over $500/month to your community. Why, you ask? Because if you’re not giving to your community, you’re taking from your community. You shouldn’t expect the folks making $28,000/yr to be a community leader, via checkbook. No, that’s your role. Sorry.

And another thing, while I’m reading you the riot act, if you have access to a Health Savings Account (HSA), max that sucker out. Oddly enough, it is THE MOST tax efficient financial product in the world. That is not a subjective opinion. It’s the truth, the way, the light. That’s a bit much. But max it out anyway.

You have a decision to make – you can either look like a person who makes an incredible amount of money or you can act like a person should act when they make an incredible amount of money. Please, for your own future, don’t live the life I just described above.

Two incomes, max percent contributions to your 401ks

  • $10,308.83 take-home pay
  • $3,000/month 401k contribution
  • Projected 401k balance from age 38-67: $4,093,934
  • Projected 401k balance of  $5,103,697 at age 67, if you enter age 38 with $100,000 in retirement savings

Broken down, here’s how you’d spend your money:

  • $2,577 for Rent or Mortgage (includes principal, interest, property taxes, and taxes)
  • $1,546 for Transportation (includes car payment(s), fuel, insurance, maintenance
  • $1,236 for Groceries and Dining-out
  • $1,030 for Emergency Fund of Mid-Term Savings (includes college savings)
  • $1,030 for Utilities (includes EVERYTHING)
  • $515 for Community/Charity
  • $515 for Clothing
  • $515 for Entertainment
  • $515 for Medical
  • $515 for Holidays and Gifts
  • $309 for Miscellaneous

This is so much better, although my same thoughts still apply for transportation and utilities. A second earner makes a $2 million difference! I don’t know how your family unit works, and very frankly, it’s none of my damn business. But if at some point in the future you get the chance to differ yet another person’s income to the tune of $18,000/yr, do it. Do it fast.

Now what?

If what I just explained to you is a brutal departure from your current existence, let me fix it. You’ve held the wheel for this long, and look where that’s gotten you. I’ve changed thousands of situations just like yours, and you should be next. For $100 discount, use coupon code: rover. You don’t even need the discount, but I’m drinking wine while I’m writing this, and I’m feeling generous.

8 thoughts on “How to craft a life on $250,000/yr

  1. I agree with your HSA comment. It’s basically a never taxed Roth with no income limitations. I max HSA contributions and don’t pay or reimburse current medical expenses. I do save medical receipts in case I need cash in an emergency situation. I’m assuming I’ll need everything I save in the HSA to cover retirement medical expenses.

    Do you recommend backdoor Roth conversions once you max out pre-tax 401k assuming you don’t hold other pre-tax IRA’s that would cause current taxable income?

  2. I work for a midsize, private company. Because of a law, I’m only allowed to contribute on average 9K a year to my 401K, with the company putting an additional 3K in. Essentially, the HCE’s can only contribute a certain percentage more than the non HCE’s. And with this size of a company, there aren’t enough non HCE’s contributing, or moreover, contributing enough. With that, and the fact that our dual income exceeds $194K, I’m ineligible to get an IRA. I’m contributing to 529’s for both of my daughters. Any thoughts on the best way to “max out my 401K” when I technically can’t? As of now, I’ve just been putting money in the markets. Thank you.

    1. You’re not ineligible for an IRA. You may be ineligible for a Roth IRA based on your income, and the IRA won’t be deductible. You still need to save even though you don’t get a break on the contribution. Consider the fact that you don’t pay taxes on the earnings on your non-deductible IRA until they are withdrawn as your tax break. You can also do a back-door Roth IRA. Contribute to the traditional and then do a Roth conversion. You won’t even owe any taxes because you contributed dollars that have already been taxed.

    1. At this income level, it’s a major no-no to do a Roth. The tax benefits for high-earners (25 or 28% income bracket) is a no-brainer. Roth would only make sense if you plan on earning even more money every year once you’re retired.

  3. Hi Pete,
    I love your podcast and your show! Just curious, where does the childcare line item/cost fit into the breakdown for 2 income households? What percentage of pay should that equate to?

    Thanks!

    1. I don’t have Pete’s answer, but I have our family’s experience.

      We are a two income family at $250k. We have two toddlers in childcare. We spend $2000/month. We are transitioning both kids to an independent preschool will spend $2800/month. This is an average that includes all summer camp/childcare costs.

      We know it is expensive, but we shift money away from clothing/groceries/transportation to make it work. This is a very temporary cost, just the first 5-6 years of their life. We plan to enroll them in public school or the less expensive parochial school in kindergarten. At that time, the childcare costs will drop by 60-70%.

  4. I’d love an answer from Pete on the Roth vs. pretax 401k question. I’m always torn on that one (and I’m this income level).

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