A six-figure salary of $100,000 a year may sound impressive to many people, but for American families who need housing, transportation, food, healthcare, child care, and retirement savings, this amount may not be enough to cover all expenses.
According to a report by MarketWatch on September 15th, they did the math for a family with an annual income of $100,000 and a young child. The common rule for household expenses is that housing should not exceed 30% of income, transportation 10%, food 10%, child care 7%, and healthcare-related expenses around 10%. When you add these up, it exceeds 60% of the income.
However, following these rules now, while none of the individual expenses may seem high, when combined, $100,000 quickly becomes inadequate. Let’s break down the basic cost of living.
Taking into account an estimated tax burden of around 26% for a median-income household – the actual tax paid varies depending on family circumstances, tax deductions, and retirement account contributions – taxes along with the aforementioned expenses already consume about 90% of the $100,000 income.
This leaves only about $10,000 per year, approximately $833 per month. And this doesn’t even account for retirement savings, student loans, other debts, clothing, gifts, travel, subscriptions, and emergency savings.
Real-life expenses may even surpass the old rules. While child care costs may seem affordable at 7% of income, the average monthly child care cost per child in the US was about $1,100 in 2024, totaling $13,200 per year, which is roughly 13% of the $100,000 income.
Maintaining a reasonable budget for car expenses is also challenging. Trying to keep car loans, insurance, gasoline, etc. within 10% of income is not easy.
Therefore, a $100,000 income, without splurging on luxury items, still leaves families feeling financially tight at the end of the month. It’s not necessarily due to overspending, but rather because a significant portion goes towards housing, transportation, children, food, healthcare, and taxes.
The suggestion given in the article is to reverse the order of financial priorities: instead of spending first and saving whatever’s left at the end of the month, prioritize saving for retirement and then budget for daily expenses.
Following the general recommendation of investing around 15% of income in retirement savings by financial service company Fidelity Investments, putting aside $15,000 from the $100,000 into a retirement account. After subtracting this and taxes, the remaining amount for living expenses is roughly equivalent to 60% of pre-tax annual income.
Housing expenses can no longer be at the 30% limit. The article demonstrates adjusting housing costs to around 22%. If local rent or housing prices are too high, options might include downsizing, moving to a cheaper neighborhood, or considering a location with lower living costs.
Transportation costs also need to be reduced. Financial planners suggest trying to reduce the number of cars owned if possible, using public transportation when feasible, opting for cheaper used cars, increasing down payments, or considering paying in cash if able.
Cutting back on a few $5 cups of coffee may not make a significant difference in a family budget; however, eliminating a monthly car loan payment of several hundred dollars can result in significant savings.
Child care expenses pose a challenge. In the early years of a child’s life, if funds are tight, some families may temporarily reduce contributions to their 401(k) retirement accounts. The advice from planners is to contribute at least enough to receive full employer matching funds, and when the child begins school and child care costs decrease, then reconsider increasing retirement contributions.
Even following this approach of saving 15% for retirement first and then covering basic living expenses, leaving a portion for debt repayment, clothing, subscriptions, gifts, and travel, families may only have around $417 per month. If there are high-interest debts, the article suggests prioritizing those for repayment.
Financial planners also stated that at this income level, there may be limited areas left to cut back on daily expenses. To truly ease the budget, sometimes salary increases, part-time work, or a job change may be necessary.
Finally, the article presents another scenario. If a family’s income increases to around $130,000 – which is roughly the median income for families with children in the US in 2024 – and they continue saving 15% for retirement without immediately upgrading to a larger house or better car, while maintaining basic living expenses, they could potentially save around $1,700 per month.
Therefore, the solution isn’t to adopt a new set of percentages but rather to change the perspective: save before spending, try to keep significant expenses like housing and cars under control, and when income increases, resist the urge to inflate lifestyle expenses accordingly. A family’s income is 100%, and each individual expense category may seem reasonable on its own – housing 30%, child care 7%, retirement savings 15% – but if each category maxes out the “affordable limit”, $100,000 will quickly be spent.