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We Make a Quarter Million and We're Broke! Print E-mail
(13 votes, average 4.77 out of 5)
Personal Finance - Credit Cards
Written by Omie Ismail   
Wednesday, 04 August 2010 03:11
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We Make a Quarter Million and We're Broke!
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"I don't get how one can ever save the money you recommend on LiveCheap. My husband and I are professionals and do very well income-wise. We make a little over $250,000 a year, have no kids, but we have very little savings. We want a home but it would take us years to get a 20% down payment for a house in suburban D.C. We both save about 10% of our income in 401ks but we barely have $10,000 in a savings account. Yes, we have newer cars and the payments are high, take good vacations, and we pay over $2,700 a month in rent, but shouldn't we be able to afford all that and still bank a lot of money? What are we doing wrong? Help" - Vanessa

Vanessa, thanks for your submission. I know its hard for many people out there to imagine that people making this much money have financial difficulties. The reality is that making $250,000 doesn't automatically make you rich and in some places (Manhattan or San Francisco) you would be making a salary that is more akin to $100,000 in much of the rest of the country. Let's go through the issues one by one and see if we can help Vanessa.

Taxes: You are in the 33% tax bracket and if you actually live in D.C. you would pay a marginal tax rate of about 8.5% above $40,000! So you'll fork over about $50,000 in Federal taxes and another $20,000 in local taxes when you account for your 401k contributions. Let us not forget that you have to pay FICA. All in you are looking at $15,000 for FICA for you and your husband. Add in health care costs and other fees such as parking and all told, income taxes and fees are weighing you down by approximately $90,000 a year. In addition, if you subtract out your 401(k)'s, you only have about $145,000 left over....slightly more than half!

Location: The Washington D.C. area is fairly expensive and the closer you are to the District, the more you can pay. Conversely, many people that live near D.C. rely on a fine system of public transportation. The fact is that at $2,700 a month, you are wiping out a good bit of your after tax income. If you add in your utilities you are looking at about $36,000 a year and none of it is tax deductible. Equivalently, you could buy a house with your income at $700,000 fully mortgaged and you would have the same after tax monthly payment. To be blunt, if you want to actually buy a house, your going to have to find cheaper quarters to live in. After all, you are only two people. Looking at our numbers, you are down to $109,000 to live on.

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haverwench  - That "remaining" $40,000 |2010-08-08 19:27:44
The part that cracked me up was the airy, "Where does the remaining $40,000 go?...There's a host of things that will rapidly devour the remainder and apparently they have." Oh, really? What with one thing and another, you can easily fritter away $40,000 before you know it? That "extra" $40,000 in this couple's budget would more than pay *all* our expenses, including our mortgage payment!

Taxes are one expense you can't do anything about, and the 10 percent going into their 401(k)'s should be kept. But the fact is that most of the expenses listed in this article are not absolute necessities. A childless couple can certainly find acceptable housing, even in the DC area, for well under $2700. They can survive with older cars, or perhaps one car for the two of them--or even, in a big city, none at all. They do not need to eat out four times a week--in fact, if they really *had* to, I'm sure they could find a way to survive without eating out at all. Yes, professional clothing is more expensive, but a well-made suit should last for years, and it certainly doesn't need to go to the dry cleaners after *every* wearing. A vacation needn't cost $5000 or anything close to it--and the popular modern "staycation" costs little more than your everyday expenses. $2000 a year for cable and Internet? You can get both, plus your phone service, for half that amount. $1500 for cell phones? Again, you can easily spend less than half that amount.

The bottom line is, this couple needs to *look* at where their money is going and then ask themselves which of these expenditures they would be willing to do without in order to save for a home. I think if this couple simply dumped that "extra" $40,000 a year into a savings account earmarked for a home purchase, and made up their minds that they *had* to live on what was left, they'd be amazed at all the things they could somehow manage to live without--and in two and a half years, they'd have enough saved up to put a 20 percent down payment on a half-a-million-dollar home.
Doug Warshauer  - You're Not Alone |2010-08-05 03:22:04
This is not an uncommon problem for people with seemingly high incomes. No matter what your income, you still can't afford everything you might want. That means you need to make choices and balance your priorities.

To do that effectively, you need to understand what you're spending your money on. It's worth the time to go through your credit card statements and bank statements for the past 12 months and identify exactly where all your money is going. That's the first step to starting to make better decisions.
uceredirect  - Easy answer to Vanessa's question |2010-08-04 16:29:11
"What are we doing wrong?"

Simple. You're living at your means. Live below your means. Pretend you *only* make 200,000 a year, and you'll bank my family's annual gross.
Mike |2010-08-04 15:39:45
I also live in the DC area in Virginia. We make about $100k than this person. When we were saving for a house a few years ago, we cleared $30k in 5 months ($4k was my annual bonus).

I think if you rent a huge place in Dupont or similar, you'll waste all of your money paying someone else's mortgage. With 5% down, we pay less than this person per month including utilities, HOA fees, taxes, and insurance. That is the first budget item they should tackle, especially in a depressed housing market.
JerseyMomof2 |2010-08-04 14:18:39
Wow is right. I'm having a very hard time feeling sorry for a family of 3 making a quarter of a million dollars a year. I don't care where you live, that is a lot of money. $100,000 is a very nice salary. I can see, however, that as your income goes up so go your expenses. To a point. Don't spend what you don't have. It's worked for us for 23 years of marriage. We've paid off student loans, purchased homes, bought cars, took vacations. Based on what we could afford. I think a big part of what is wrong with this country-no one really wants to live within their means.
Kate |2010-08-04 14:07:51
My husband and I make almost that much money and we have a daughter - we don't take vacations except for the odd weekend to someplace within driving range. I don't think we have ever felt like we could afford vacations. There was one year when I got a big bonus - and I schemed for months on how to find a cheap rental in Florida and it still overwhelmed me how much it all added up to. Could have bought a cheap car for that much.

We outright bought a cheap new car for our daughter, we only have one car payment. We own a country acreage (live in California in an urban area). I have no doubt my home payments are far less than a DC rental. About 1400 a month. We save some, but not nearly enough.
Kevin@InvestItWisely  - Looks like lifestyle creep |2010-08-04 09:45:05
Looks like this couple has fallen victim to lifestyle creep. They should set a goal of at least 25% of savings, consider that a salary cut, and then wrap their expenses around that. They will benefit greatly from the additional savings down the road.
Nathaniel |2010-08-04 07:59:35
The easiest way to save is to do it before you get paid. You have a 401k. Have your company direct deposit another 10-25% of your paycheck into an IRA. have them direct deposit another 10% in a savings account that isn't tied to your checking. The remainder (50-75% of your salary) goes in checking for actual spending on bills, etc. If you never see the money, you won't miss it.

You should be able to save at least 50k a year without even feeling it, assuming you do this and then trim big expenses a bit so they fit within your checking account budget.

Any time you get a raise, send half of it to savings and only keep half. If you don't get used to having it, you'll never miss it.
amp  - Priorities |2010-08-04 07:45:10
Great response! Unfortunately, our priorities sometimes get a little out of whack - especially when we seemingly have the funds to cover the life we are leading. It is easier to just give up and never make a change, than to look at your situation and take a stand that will impact your future. A little less now may make the difference in your ability to tackle what life throws at you down the road.
Do we really need all the bells and whistles that life says we must have?
Candace  - All the same |2010-08-04 05:40:55
Whether you make $250,000 or $25,000, the big problem is the same - human nature! In order to save you need to be disciplined, focused, and responsible. Think before you spend - is this really worth it? is this choice moving me toward my goals? And let's face it, for most of us that's a daily struggle to achieve. With two expensive car payments and nice vacations every year, obviously this person isn't with the program. Come on now, an income of $250,000 is a huge advantage and should make even a little bit of effort pay off handsomely.
Sluggo |2010-08-06 06:24:28
No, the problem is not the same if you are making $25k or $250k. If you are making $25k, the problem is that you are making $25k...Seriously, do you think that food and shelter are 'living beyond your means'.

If you are making $250k, and don't have you act together enough to squirrel a couple of bucks away each month, then you probably don't have your act together enough to adequately perform your $250k job.
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