As a society, we are somewhat intrigued with the anecdotal Joneses, and not only how to keep up with them, but in some cases, how to outdo them. Having a nicer car, a nicer home, and nicer belongings than our peers makes us feel like we are successful, like we’ve done well for ourselves. In spite of all of the old cliche sayings that tell us money doesn’t buy happiness, and that what truly matters are our life experiences, as opposed to our possessions, many of us still strive for wealth.
Why? Perhaps because having extra money provides a cushion, leading to increased comfort, stability, and security. This in turn makes us feel as though we do not have to worry about being deprived of any necessities. For many, a six-figure ($100,000) salary would be enough earnings to provide such a cushion. With the median household income being just over $50,000, many view a six-figure salary, which is nearly double the median, as a point of success.
Perhaps the allure of the $100,000 income results from the fact that only around one out of five American households have hit the six-figure salary mark, according to the most recent Census Bureau data. Or maybe it’s an idealized lifestyle people envision that comes along with such a salary. Whatever the reason, many people don’t realize just how easy it is to go broke, even with such a salary. A recent My Budget 360 publication examines this very topic, explaining real life data from California households. Based on this data and other supplemental information, here are a few ways to go broke on a six-figure salary.
1. Lower take-home pay
Some common jobs that earn over $100,000 are of course doctors, dentists, and lawyers. But according to Forbes, even some more unexpected jobs like theatrical make-up artists, technical writers, gaming managers, post-secondary home economics teachers, and ship captains earn these types of salaries, as well.
Although some of these jobs earn a $100,000 salary, by no means are they taking home this type of cash. Federal taxes on certain portions of their earnings are as high as 28% (33% for any earnings over $186,350). The budget estimates from My Budget 360 say someone at this level is paying around 20% of their income in federal, state, and local taxes, instantly dropping their pay down by around $20,000.
Taxes, combined with any contributions to a retirement plan, end up reducing a $100,000 take-home pay to a generous $75,000 annually. This in turn results in a monthly take-home salary of around $6,250. Doesn’t sound like that much anymore, does it? Although this is still certainly enough money to get by, the average annual expenditures for this upper income group were $85,293, according to the most recent BLS consumer expenditure survey. This would then equate to $7,108 per month and result in a deficit of $858 per month.
2. House rich
Most of us have heard the saying “house rich and cash poor.” Purchasing houses we can’t afford has become such a problem, “one child in every classroom in America is at risk of losing his/her home because their parents are unable to pay their mortgage,” according to an FDIC publication.
We have front-end and back-end ratios that provide an idea of how much house we can afford, we also have mortgage calculators, and other tools that try and help prevent us from spending too much on a mortgage payment. However, consumers nationwide still spend around 34% of their budgets on housing and in some areas of the country, spending on housing is closer to 40%.
Many mortgage calculators use pretax earnings to determine how much you can afford. With a $100,000 per year salary, the calculator will say you can afford around $2,340 (28% of your monthly pretax salary), in spite of what your tax situation is. Depending on your down payment, this could place you in a half-million dollar home that you cannot afford.
3. High cost of living
A salary of $100,000 in South Carolina or Tennessee is a whole lot different than such a salary in California or New York. For instance, your $100,000 salary in Manhattan, New York, has the same purchasing power as a $42,481 salary in Chattanooga, Tennessee. In Manhattan, your $100,000 is not going to go nearly as far as it would in Tennessee.
If you earn $100,000 in San Francisco, that salary has the same purchasing power as around $60,000 in Beaufort, South Carolina, or Dallas, Texas. Those in San Fran need to earn a lot more than most southerners to achieve the same standard of living.
If you combine high taxes, an expensive mortgage, and a high cost of living in a city like New York, it would be relatively easy to have money problems with a $100,000 per year salary. No matter how much we earn, we have to track every purchase, budget, plan, and save. Without caution, anyone can go broke.