The Median household income in the United States is just over $50,000 a year, when compared to the rest of the world, a $50,000 household income would put you in the top 0.31% of earners (See it isn’t so hard to be part of the 1%!). Recently Sam at Financial Samurai posted an article on how people earning $500,000 a year can still be living paycheck to paycheck. This article was surprising to me, because it was so difficult to relate to, I have never lived in a a high cost city, nor does my household income come anywhere near this level. In fact for the U.S. as a whole a household earning $500,000 is safely in the top 1% of income earners, if these guys can struggle to get ahead, what’s it like for people earning a tenth of this amount? For multiple years Mrs. C. and I have earned around $50,000 a year in total income and still managed to get ahead. We still had some “fluff” in the budget and I am sure there are people who could have done far better than we did at the $50,000 mark.
Here is a breakdown of How Mrs. C and I got ahead while earning $50,000.
Living Large On A $50,000 Budget
The Top Costs In Our $50,000 Budget:
House Payment: We bought our house with a 20% down payment for $145,000. It’s a 5 bedroom 2 bath house on 3 Acres. We recently paid cash to expand our acreage to 8 Acres by purchasing the railroad bed behind our house. Our mortgage is $570 per month. Housing is the largest budget expense for most Americans. If you are making $50,000 a year it is imperative to keep your housing costs under control.
Groceries: We don’t eat out very often, maybe about once a month. We shop sales and stock up on items when they are on a good sale. Every two weeks we spend about $200 on a big grocery trip and on the odd weeks pick up fresh fruits, vegetables, and bread. This trip is usually around $50, putting our monthly total around $500.
Payroll Taxes: Payroll taxes make a large part of our list. Not much we can do about that.
Property Taxes: Our property taxes are around 1% of the value of the property.
Property and Car Insurance: We have our property and car insurance with the same carrier and have a high deductible. We pay it all at once, which gives us a decent discount as well. A big savings on car insurance is having state minimum coverage because we have no car payments and drive low cost vehicles.
Gasoline: This varies throughout the year, but $200 per month is about right. At $3 per gallon this works out to 33 gallons per vehicle per month. We drive a 2000 Toyota Corolla worth around $1,000 that gets 30 MPG and a 2004 Honda Odyssey worth around $5,000 that gets 20 MPG.
Health Insurance: Mrs. C. and I have a high deductible health care plan. The children are covered by the federal CHIP program, which costs $10 per month for insurance for kids. To qualify for CHIP, AGI needs to be between 133% and 212% of the Federal Poverty Level. An AGI of $51,410 for a family of four is the maximum earnings to qualify for CHIP.
The Lowest Cost Items:
Vacation: Last year on our family vacation we went to visit family in Ohio and Kentucky. As part of this vacation we visited some fun attractions like Dinosaur World and Lost River Cave. We do several small day trips to somewhat local attractions like Binder Park Zoo in Battle Creek, Bounceland in Kalamazoo, and Deep River Water Park in Merriville IN. These smaller trips are usually funded out of the Misc. budget item.
Vehicle Payments: We pay cash for vehicles and pay for maintenance out of the Misc. heading in our budget.
Child Care: We have always made our schedules work with child care to avoid needing daycare. I work mostly seasonally and Mrs. C. is able to adjust her work schedule around when I am working. When I travel for work she works only 1 shift a week to hold her job and the older kids are in school and the two younger kids we have now will be watched by family and friends for that one day. We have never paid for daycare. Years ago before I started working in this industry and we were earning closer to $30,000 a year Mrs. C. worked during the week and I worked double shifts on Friday, Saturday, and Sunday. This was certainly not fun and we didn’t get to see each other much but the sacrifices we made during this time period allowed us to get ahead.
Clothing: We save a ton on kid clothing through handing clothes down through the kids. This budget is based off when we had 2 kids, not all 4, but it is still accurate. In an average year we spend about $200 per person on new clothes.
Federal Income Tax: Contributing $12,000 to tax deferred accounts almost eliminates a tax liability at this income level. The retirement savers tax credit subtracts another $800 of taxes and the child tax credit allows for up to a $2,000 refundable tax credit. We minimize our federal income taxes by planning out our taxes using my tax planning spreadsheet. We use this to compare situations side by side, so we can get the most bang for our buck by maximizing our available credits and deductions.
Student Loans: Mrs. C. didn’t go to college, and my Bachelor’s degree was paid for by my parents. I went to community college for the first two years, and earned a small scholarship. I also took CLEP exams to keep the costs down. The total cost after tax credits, scholarships, and CLEP exam savings was around $20,000. I had no housing costs in college which was a huge savings. I also worked the entire time, which greatly lowered the opportunity cost of going to college.
Investment Expenses: While this doesn’t show up on our budget, it is a somewhat hidden cost in all budgets, since it is taken out of our savings and not directly out of our income. All mutual funds charge some short of fee in order to manage the fund. Actively managed funds can easily charge over 2%. On a $100,000 investment portfolio this is over $2,000! I use Vanguard index funds in my IRA accounts and recently opened up a Betterment taxable account which uses Vanguard ETFs. Both methods avoid transaction fees and the fees for the mutual funds range from .09% to .18%. Betterment has a fee for their service ranging from .15% to .35%. By using Vanguard and Betterment I save thousands of dollars per year in investment fees, allowing our money to grow faster.
$50,000 Budget Savings Rate:
While earning $50,000 a year between our IRAs, HSA, and extra on the house we were able to save over $14,400, a savings rate of almost 29%, and that’s if we don’t include the $2,035 left over. At this rate, we would pay off our home in a total of 15 years, at which point all money going to the house would then go to retirement savings. It would then only take another 10 years to reach a point where our investments earn more than our yearly expenses. Since we are working on increasing our income while keeping expenses in check, our goals will be reached much faster than this.
Our current goal is to reach financial independence in 16 short years. To stick to our goals and track all of these accounts I use Personal Capital. It’s a free app and makes keeping track of your progress a snap. We have multiple bank accounts and Personal Capital combines them all together to give a full picture of our cash flow. Currently you can get a free $20 Amazon gift card when you create a free Personal Capital account through this link and link an investment account. Here are a few screen shots from our account:
Personal Capital also gives a great net worth snapshot, which includes ALL of our accounts. Personal Capital talks directly to all your bank and investment accounts and you can input your holdings that are not trackable through online accounts, such as real estate, vehicles, and precious metals.
Best of all, Personal Capital is free. If I only had 1 bank account and 1 investment account, I might not need it, but with several accounts Personal Capital is a no brainer.
Where Could This $50,000 Budget Be Cut?
Sure a 29% rate is great and all, but it could be better. If we were willing to give up a bit more lifestyle I bet a family earning $50,000 a year could hit a 50% savings rate. One of the problems we all have is that we tend to view things as being necessary, that absolutely aren’t. One of my favorite books for putting these imaginary needs in perspective is The Minimalist Budget: A Practical Guide On How To Save Money, Spend Less And Live More With A Minimalist Lifestyle. I think all American’s could use a little bit more of a minimalist philosophy to help with determining the true difference between needs and wants.
1. Count the “extra”: The extra $2,000 left over in the budget can go towards savings, resulting in $16,400 in total yearly savings.
2. Housing: We moved up in housing shortly before we started earning around $50,000 a year. Our previous home was in a safe neighborhood and large enough for our family. The main downside was a small yard of only a quarter acre. Had we stayed in this home our house payment would be $330 a month on a 10 year mortgage. This would be saving us $240 a month on the house payment, $60 a month on property taxes, and $200 a month on extra principal. The house would also be paid off 5 years earlier. Saving that extra $300 on the payment gives us $3,600 more savings a year and redirects $2,400 of savings per year to retirement savings. This move brings total savings up to $20,000. Our current home cost $145,000 in southwest Michigan and our previous home cost around $50,000. Living in a $50,000 home with a $50,000 a year budget and you’re gonna be in great shape.
Refinancing is another major source of saving money on a house. Refinancing to a shorter term mortgage will help you pay off the house quicker without having to take action every month and you may end up actually spending less per month on your house from saving money due to a lower interest rate. Check out the current interest rates for a refinance at LendingTree.com. When we bought our first home over 10 years ago our interest rate was 7.37%! When we refinanced 3 years ago we were able to drop the payments by $100 per month and shorten the term.
3. Cut Cell Phones and Comcast: Cell phones and cable TV are optional. Cutting these expense down to a couple prepaid phones and dial up internet (Yikes!) would drop these expenses from $250 a month to $50 a month. This is another $2,400 a year, bringing the total savings to $22,400.
4. Vacations: Vacations are optional. We can take the kids to free parks and to the beach. Throw this $1,000 to savings and we hit $23,400.
5. Groceries: We buy some junk food and don’t plan meals well. We could cut this $6,000 to $5,000 and still eat well. This brings the total up to $24,400.
6. Gas: For a family of 4 a van is not necessary. We could sell the van and get a cheap car that gets 30 MPG instead of 20 MPG. This 10 MPG savings could take us from 400 gallons of gas to 266 gallons, saving $800 a year. This takes us over the 50% mark to $25,200!
7. The next option is to focus on increasing income. For a two earner household earning $50,000 per year equates to 2 people working full time earning $12 per hour. There is a lot of room in our economy to earn a higher rate of pay. Working 10 more hours per week, even if it is at a straight time rate will increase your income by 25% and spending a couple hours each week to look for a second job or a higher paying job can be extremely rewarding.
Just as it is possible for a family of four earnings $500,000 to feel strained to get by it is also possible for a family of four to earn $50,000 and feel little immediate financial pressure while saving 25% to 50% of their income. It all comes down to priorities and how we choose to set up our lives. My guess is it’s about the same percentage of $500,000 earners who struggle to get by as $50,000 earners who save 50% of their income ( A very small percentage for both). Not earning $50,000? Check out my new article Living Large on $30,000 A Year, How Moderate Earners Can Get Ahead.
What are your thoughts on this $50,000 budget? If this seems implausible to you, check out Dave Ramsey’s Total Money Makeover Book as a starting point to taking control of your money.