Is a six figure income ever enough?
Sometimes it seems that no matter how much money you have, it's never quite enough. You always think that if you just had a little bit more then you would be able to get out of debt --then you get that little bit more and somehow you wind up spending it, too. It is unfortunately common for a two-income family to be earning $200,000 or more (with each parent earning a six figure income) and yet to still be struggling with debt. This article explains where the money goes and how to make realistic changes to help you live within your budget.
Where Does the Money Go?
If you are living off of a single income that is below six figures then it might seem impossible that a family living off of $200,000 annually would be struggling like you. But it can happen. Let's look at where the money is probably going:
Income tax
Earning $200,000 doesn't actually mean that you are taking home that money. Chances are that about $70,000 per year is going to your income taxes.
Mortgage or rent
Let's say that the average mortgage payment is $1300 monthly (based on this explanation of average rates). That means that $15,600 is going to pay for your house each year.
Utility bills and other monthly bills
You probably have two smartphone bills, a cable bill, a broadband Internet bill, plus your gas, electric and water bills. You may also have a landline bill or mobile phone bills for your older kids. Let's just estimate an average of $600 per month on these bills in total.
2 cars, car insurance, gas, auto maintenance, etc
Total car costs for the average family is more than $7000 per year. (This was the 2006 statistic from the Bureau of Labor Statistics as reported by the New York Times.)
Health insurance for the whole family
The Kaiser Family Foundation reports that the average annual family healthcare premium cost exceeded $13,000 in 2010.
Other insurance (house, pet, life, etc.)
How much are you spending each year on house insurance, life insurance and the various other types of insurance that you use to protect your family? Forbes reports that you are spending at least $500 annually on home insurance alone so a conservative estimate for all insurance types (excluding health and car insurance) is $1000 annually.
Daycare costs and afterschool activities
A family in which both parents work must pay for daycare. BabyCenter reports that an average annual daycare cost is $8000. Once the kids are in school your costs may be less but you'll still have to pay for afterschool care and / or the fees for afterschool activities.
Annual family vacation
The Orange County Register reports that the average family of four will spend $4000 on an annual family vacation.
Groceries and dining out
One MSN report says that approximately $13.5% of your annual household income is spent on either groceries or dining out. For a family earning $200,000 that's more than $25,000! Sound unreasonable? Between groceries, kids' lunches, parents' lunches (often eaten out of the office), regular meals at home for the family, snacks and special occasion meals such as Thanksgiving it's actually not that uncommon.
School loan payments
Two parents who are earning six figure incomes each are probably people who went to college, which more likely than not means that they are paying off school loans of their own. FinAid reports that the average monthly payment on a $15,000 school loan is approximately $170. It is safe to assume that both parents took out at least that much in loan money (perhaps considerably more if they attended a private college and / or got an advanced degree.) That's a minimum of $340 per month or approximately $4000 per year.
Credit card payments
And if you're in debt then you probably have to make minimum payments to credit cards as well. DebtGuru explains that the average American has $10000 in credit card debt and the minimum payment is 4% or $400 monthly, resulting in a total monthly household bill of $800 and an annual expense of $9600.
When we crunch these numbers we find that the average family earning $200,000 has spent about $163,200 on regular expenses. That leaves about $3000 per month for everything else. Now that might still sound like a lot but consider that we still haven't factored in any of the following:
Other normal expenses
- Clothing: Remember that working parents in professional jobs may require higher-end clothing depending on their positions.
- Haircuts, trips to the nail salon and other personal upkeep costs.
- Medication, emergency medical costs, dental costs, therapy and alternative medicine.
- Cost of pet ownership: Many families have pets and the cost of owning a pet can be very high.
- Children's ongoing expenses: School supplies, fundraiser costs, etc. Also consider diapers and other expenses for small children.
- Entertainment: Movies, crafts, museums and other forms of entertainment all add up over the course of a year. Don't forget the additional expense of holiday decorating and entertaining.
- Property taxes.
If you aren't careful about budgeting your money and you engage in any impulse spending (especially on high end items) then it can be easy to extend yourself beyond even a $200,000 / year household income, leaving little or nothing to invest in the future for yourself and your kids.
Solutions to Sticking within Your Budget
The point here is really that you have to learn to live within your means, regardless of what size your means may be. A family such as this can easily be in as much debt as a family earning half this amount without vigilant attention to maintaining a family budget. The following tips would help this example family save money and could be useful for creating your own budget as well:
Downsize Your Home
This family may be living in a home that is larger than what they really need. A smaller home would reduce housing costs as well as ongoing utility costs. Alternatively the family could rent out a room to a boarder or relocate to a less expensive neighborhood.
Bundle bills
One smart way to reduce the cost of ongoing monthly bills is to bundle them all together. Get a family cell phone plan that bundles your phone with your Internet and TV to reduce costs in this area.
Invest in renewable resource energy
Energy and water bills can be significantly reduced in the average home by making small changes that allow you to use solar power, wind energy and greywater in the home.
Give up one family car
This family can cut costs considerably if the parents are willing to give up one car and to share the remaining family car. Carpooling to work and using public transportation would assist with making this work.
Review insurance options
Many Americans have the wrong insurance. Are you paying for pet insurance and other types of insurance that you don't really need? Could you change which employer plan you are using for family insurance to reduce costs? Take the time to review the options available to you for reducing this pricey part of life.
Barter for daycare
Perhaps you can offer to take care of another family's kids on the weekends in exchange for afterschool care during the week. Alternatively, perhaps you can provide another needed service to a parent in exchange for daycare.
Put your vacation budget towards paying off debt
Take a year or two off of the annual family vacation. Put that money towards paying off credit cards and outstanding school loans. Eliminating debt frees up income to be put towards other things in the future.
Invest time in reducing grocery costs
Since the grocery bill is often a huge percentage of a family's spending it is worth it to learn how to reduce spending in this area. Make Sundays a family day in which you prepare inexpensive fresh meals that can be frozen and used by everyone throughout the week!
Implement frugal living tips into everyday life
No matter how much income you have it is always wise to do what you can to live frugally. Using discount codes for every purchase is one example of an easy-to-implement money-saving action!
The Lesson
The takeaway lesson here is that you can live within your budget, whatever that budget may be. Identify where your money is going. Look at significant actions that will reduce ongoing expenses. The answer is rarely to make more money but rather to learn to live with what you have.
