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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.