Why a $100K Salary Can Still Have You Living Paycheck to Paycheck
Are you worse off financially than you ought to be at a higher income?
If you’re earning $100,000 a year, you’re probably doing well for yourself. However, just because you’re earning six figures doesn’t mean you’re automatically set. You might even find that your finances are tighter than expected.
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Here’s why a $100,000 salary could still have you living paycheck to paycheck, even if it doesn’t seem like it should.
Why People Earning $100K Live Paycheck to Paycheck
Living paycheck to paycheck isn't something only low earners do. As per the latest Census data, the median household income is $83,730. According to asset management firm Goldman Sachs, 36% of people who earn $50,001 to $100,000 live paycheck to paycheck. That percentage drops to 25% for those earning $100,001 to $200,000.
But why is that?
If you earn $100,000 a year, you’re likely paying 25% or so in taxes. That means your take-home pay (or net income) is around $75,000. That’s $6,250 a month.
Now, break this down into spending. If you’re living on your own, you’re probably paying for most things yourself. Here are some average monthly costs to consider:
Apartment rental: $1,750
Groceries for a single adult (moderate-cost food plan): $330 to $390
Health insurance: $456 (lowest-cost bronze plan)
Car payment: $532 (used car)
Assuming the averages, your total monthly spending would be around $3,600. That’s a little more than half of your take-home pay already. However, this amount doesn’t include things like utilities, gas or entertainment. It also doesn’t include savings or paying off debt.
According to the Bureau of Labor Statistics, the average American household spends $6,545 per month. That’s actually more than your take-home pay on a $100,000 salary, so if you're spending that much, you'd better be in a two-income household.
How Budgeting Rules Get in the Way
If you want to avoid living paycheck to paycheck, you could follow a budgeting rule — say the 50/30/20 rule. Since this rule uses take-home pay, you’d have to split your $75,000 into three categories. Based on the monthly $6,250 amount, that’d be:
Needs (50%) — $3,125
Wants (30%) — $1,875
Savings and other financial goals (20%) — $1,250
But with the cost of living being what it is, those amounts aren’t that realistic for most people. You’d have to find a way to reduce costs, such as by splitting them with a roommate or two. Otherwise, you’ll have to change up how you budget.
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Of course, the 50/30/20 rule isn’t your only option. For example, there’s the 70/20/10 rule. This one also works off your take-home pay. It looks like this:
Everyday expenses or needs (70%) — $4,375
Savings and investments (20%) — $1,250
Debt repayment or donations (10%) — $625
This method might work a little better, but it still won’t necessarily keep you from living month to month. For that, you’ll still need to cut costs where you can.
Other Expenses That Keep You Living Paycheck to Paycheck
Day-to-day bills aren’t the only things keeping people earning $100,000 living paycheck to paycheck. As per the Goldman Sachs survey, these factors could also lead to financial struggle:
Elevated expenses: When life’s little luxuries become necessities, the minimum amount needed just to live is suddenly much higher.
Debt burdens: The higher your credit card and loan balances, the less you have in discretionary funds. The average U.S. adult puts $1,237 toward their monthly debts. This includes auto loans and credit card payments, as well as mortgages.
Lifestyle inflation: As you earn more, you might be tempted to spend more — or upgrade your life as it were. You might get a more expensive car or move into a nicer, pricier neighborhood. Where you were once getting by on less money, suddenly that bigger paycheck isn’t cutting it.
You’d be surprised at how quickly your paycheck erodes when you factor these things in. Not only can it be harder to cover the essentials, but you might not be able to save or invest.
That’s why, if you want to avoid this issue, you need a financial plan. Try not to increase your costs with your paycheck. If you find that you are doing this, sit down with your budget and make some necessary changes. You’ll have a lot more wiggle room if you’re earning more but your expenses remain largely the same.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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