No matter how many times I see, I’m still in awe when I look at how impoverished a person can be on $80,000/yr, when they live in the wrong city. Yeah, I know that’s a ridiculous statement. But do you want to know what’s even more ridiculous? Impoverishing yourself based on terrible financial decisions. I’ve seen it every single day of my career, and it became the reason I started Pete the Planner® in 2005.
At the $80,000/yr household income level, you have access to some serious money. No, not the $80,000, although that’s pretty nice too, but the hundreds of thousands of dollars you’re able to borrow when you have annual repeatable income of $80.000. Look no further than one of the top home loan websites on the intergoogles. According to LendingTree.com, you’ve got good credit, have $10,000 for a down payment, and you have no other debt, you can afford a $442,902 mortgage.
You have got to be kidding me. This ginger is angry. How do you feel about it? I hope you’re somewhat salty, as opposed to a feeling that makes you want to leave my site right now to begin the process of buying a $450,000 home. Your life will be an absolute disaster if you were to follow through on this “offer.” Seriously, it would be over. Game, set, match, suck. It would suck. Forever.
I feel like quoting Spider-man’s uncle – “with great power comes great responsibility.” Has anyone ever really researched whether Spider-man’s uncle was the originator of that quote? Shouldn’t it have been Socrates or Winston Churchill or someone else whose nephew isn’t a mutant arachnid person thing? Oh well. If you make $80,000/yr, you can do ALL SORTS of stupid stuff. Don’t it.
Time to craft a life on $80,000/yr. Here are our assumptions:
- You’re 45 years old
- You’re married
- You have 4 children
- You go to the restroom to try and get 10-15 minutes to yourself
- Your monthly health insurance premium is $900
- You live in St Louis, which means your effective state income tax rate is 4.7 percent
- You still listen to Rappin’ 4-Tay, but we all know you left the Playaz Club years ago
Like the rest of our “Craft a life on $X/yr” series, we’re going to look at different versions of an $80,000/yr life. First, we’ll examine an acceptable retirement-focused approach, then a college-focused approach, and finally a “create memories” approach.
When you have four kids, life comes at you fast. You don’t have a financial strategy as much as you have a family motto. Some families focus on launching kids successfully, some focus on cherishing every moment, and some families refuse to let money dampen the desire to create Instagram clickbait. Either way, let’s dig into these difference scenarios using the Ideal Household Budget.
Ten percent contributions to your 401k
- $3,307.96 take-home pay
- $666/month 401k contribution
- Projected 401k balance from age 45-67 $447,861
- Projected 401k balance of $1,055,719 at age 67, if you enter age 45 with $100,000 in retirement savings
Broken down, here’s how you’d spend your money:
- $826 for Rent or Mortgage (includes principal, interest, property taxes, and taxes)
- $496 for Transportation (includes car payment(s), fuel, insurance, maintenance
- $396 for Groceries and Dining-out
- $330 for Emergency Fund of Mid-Term Savings (includes college savings)
- $330 for Utilities (includes EVERYTHING)
- $100 for Community/Charity
- $165 for Clothing
- $165 for Entertainment
- $165 for Medical
- $165 for Holidays and Gifts
- $99 for Miscellaneous
Be honest, that looks impossible, doesn’t it? If I’m being honest, it doesn’t look great. The extenuating circumstances in this case are worth noting. Missouri isn’t exactly the lowest state income tax locale at a 4.7 effective. Throw-in monthly health insurance premiums at $900, and you’ll find yourself in a pickle. What happens next is exactly where people mess-up. I’ve found people either cut back on their retirement contributions, or they don’t, and instead spend money as though money doesn’t matter. This scenario really does illustrate how challenging your financial life can be, even if you prioritize creating a sustainable income stream from age 67 to some indeterminable age.
I think the ugliest part of this example is what happens if all the kids end-up going to college. Sure, I’m guessing some need-based financial aid will be extended, but not as much as you might think. Depending on where the kids go to college, the parents may end-up with hundreds of thousands of Parent PLUS loans, which essentially decimates their financial life.
It feels a bit damned if you do, damned if you don’t, if you ask me. Well, until you look at the other scenarios.
Five percent contributions to your 401k
- $3,621.29 take-home pay
- $333/month 401k contribution
- Projected 401k balance from age 45-67 $238,690
- Projected 401k balance of $816,549 at age 67, if you enter age 45 with $100,000 in retirement savings
Broken down, here’s how you’d spend your money:
- $905 for Rent or Mortgage (includes principal, interest, property taxes, and taxes)
- $543 for Transportation (includes car payment(s), fuel, insurance, maintenance
- $434 for Groceries and Dining-out
- $362 for Emergency Fund of Mid-Term Savings (includes college savings)
- $362 for Utilities (includes EVERYTHING)
- $181 for Community/Charity
- $181 for Clothing
- $181 for Entertainment
- $181 for Medical
- $181 for Holidays and Gifts
- $108 for Miscellaneous
There’s no doubt this approach pumps more money into present lifestyle. And if you happen to have a $100,000 set aside in retirement already, the next 22 years aren’t that wildly different than the previous example. A person may even plan so increase retirement savings, once the kids get out of the house, but unfortunately that plan falls apart if Parent PLUS loans are involved.
Zero percent contributions to your 401k
- $3,934.63 take-home pay
- $0/month 401k contribution
- Projected 401k balance from age 45-67: Not a damn thing
- Projected 401k balance of $577,858 at age 67, if you enter age 45 with $100,000 in retirement savings…but be honest, if you’re putting in 0% now, you don’t have $100k already in there
Broken down, here’s how you’d spend your money:
- $983 for Rent or Mortgage (includes principal, interest, property taxes, and taxes)
- $590 for Transportation (includes car payment(s), fuel, insurance, maintenance
- $472 for Groceries and Dining-out
- $393 for Emergency Fund of Mid-Term Savings (includes college savings)
- $393 for Utilities (includes EVERYTHING)
- $196 for Community/Charity
- $196 for Clothing
- $196 for Entertainment
- $196 for Medical
- $196 for Holidays and Gifts
- $118 for Miscellaneous
I see this move more than I wish I did. “We have to create memories,” people yelp at me. To be fair, doesn’t a college kid use that same logic when trying to polish-off a fifth of $7 vodka? I don’t think people realize how bad the consequences are when they consciously choose to pump money into lifestyle instead of stability. When you’re in your 50s, you have no stability, and your financial potential peeked a decade ago, you will be absolutely miserable. Your memories aren’t going to be enough to get you through your days.
All three of the examples are made so much worse if you take the major purchase bait, and let someone lending you money guide the conversation on how much money you should borrow. Stick within the confines of the Ideal Household Budget, and you will give yourself a fighting chance.
A weird reality
Sometimes a financial life doesn’t feel bad. But after you put it on paper, that same financial life can look awful. There are several reasons as to why this is, but one of the more peculiar reasons has to do with tax refunds. If you live the life I described above, you undoubtedly experience financial stress. Yet every spring you may experience a great wave of relief in the form of a tax refund. The problem is the tax refund is a byproduct of inefficient tax planning, not a gift from the money gods. It gets worse if the money isn’t used for debt pay-down or to increase savings.
In other words, your tax refund has a way of making your situation seem more tolerable than it really is.
If this isn’t you
What are the chances you’re a 45 year old parent of four who lives in The Lou? I don’t know. I’m out of math. I just did a bunch for you. The picture I just painted may not be of you. But don’t dismiss it too quickly. The health insurance cost and your age are the main factors which make your situation different, from a cash flow and retirement planning perspective.
Look, if you’re 26 years old, single, and making $80,000/yr, your life may not be as difficult as the 45 year old with four kids, but that doesn’t mean your margin of error is tremendously different. The key to making $80,000/yr, or any other amount for that matter, work, is leveraging time. When you don’t defer the proper amount of money toward your future, you are wasting time. You think you’re simply using your money differently, but you aren’t. You are destroying your chances at financial stability.
I can help you with this. It’s what I do. I will walk you through the process of fixing your future, right now. For $100 off, use coupon code: Spider-man.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.