How a Couple Earning $500,000 Can Be Living Paycheck to Paycheck

Both couples are in their 30’s and earn $500,000 from two incomes before taxes. There might (or might not) be an annual bonus. Let us assume they see about 67% after taxes and deductions. This includes 401(k) plan contributions. This comes out to $335,000/year or $27,916 per month in after tax income. They each own a reasonably recently built 2,500 square foot house with a mortgage and two cars.

Note: The 67% is a rough estimate. Certain deductions get capped when you reach a threshold. Let’s stay with the 67% estimate for simplicity.

HOUSING:

Mortgages:

Household A: They purchased a $750,000 home with a 20% down payment. They have financed the remaining $600,000. Their interest rate is 7.10%. An estimate of their monthly carrying costs including mortgage payment, property taxes and home insurance is $ 4,552. (1)

Household B: They own a similar home with a similar mortgage. Their monthly cost is $ 4,552.

Home Equity Loan:

Household A: Their house might need updating, but they decide to live with it. No home equity interest.

Household B: They watch lots of HGTV and decided they want a new kitchen with top of the line everything. It cost them $74,000. (2) They wrote a check on their HELOC. The interest rate is variable and currently about 9%. (3) Their monthly interest cost is about $555.

House cleaning:

Household A: They do their own home cleaning. Monthly cost: 0.00

Household B: They have a cleaning service in weekly at the National average of $200/visit. (4) Monthly cost: $800.00

Appliance Repair Contract:

Household A: They call a local repair service when needed. The appliances are not that old and don’t require much maintenance anyway. The cost is negligible.

Household B: They opted for the appliance coverage you see advertised on TV. This runs about $600/year or $50/month. (5) The good news is they have peace of mind. Their cost is $50/month.

Lawn Mowing:

Household A: They mow their own grass and find it relaxing. Their mower is in no need of replacing. Cost is negligible.

Household B: They are too busy to mow their own grass. They spend the national average of $105 per mowing. (6) Assuming is gets done weekly, that is $420/month. There is no mowing in winter, so the mowing folks do snow plowing instead.

House maintenance:

Household A: They realize nothing lasts forever. Eventually the roof needs to be replaced or the exterior repainted. A good budgeting number is 1% to 2% of the purchase price. (7) Lets assume 1.5% of the $ 750,000 home value. That’s $11,250/year or $937/month.

Household B: They follow the same .logic. $937/month.

Power bills:

Household A: Both couples live in houses of McMansion size. The average power and gas bills is about $400. (8)

Household B: They have similar heating and cooling expenses, $400 a month.

CAR OWNERSHIP:

Car ownership: (leasing)

Household A: They held onto their two cars bought five years ago and keep them maintained at a local neighborhood garage. Maintenance cost is negligible.

Household B: They also lease two cars, but they are twin Corvettes. They hold them for a couple of years and turn them back in for new models. The average Corvette car leasing cost is $1,263/month. (The cost to lease a Porsche 911 is about $2,131/month. The Mercedes S class is $1,538/month.) For two identical Corvettes, their cost is $2,526/month. (9)

Car warranty program:

Household A: Since they deal with a local mechanic who takes good care of them, their costs are negligible. If they opted for a car warranty providing bumper to bumper coverage, it would run about $250/month. (10)

Household B: Since they lease new cars, most maintenance is covered under the warranty from the dealership.

Car insurance:

Household A: The average cost for coverage nationwide is $212/month. (11) That’s what this family pays on each car. Cost: $424/month.

Household B: They carry the same full coverage. Cost $438/month. (12)

Gasoline:

Household A: Americans spend about $2,200/year on gas. (13) Household A searches out the cheapest gas prices, at places like Costco. They save about 15%. Their gas cost for two vehicles is about $3,740/year or $212/month.

Household B: They choose the most convenient station regardless of price. They spend the average of $2,200 and have two cars. Their gas cost is about $367/month.

FOOD AND DINING:

Grocery shopping:

Household A: They visit discount supermarket chains like Aldi and Lidl. The statistics referenced estimate is based on a family of four, but let us assume they treat themselves. The average moderate monthly spend is $1,311/month. (14)

Household B: They shop in upscale grocery stores. Their average monthly spend is $1,582.00/month.

Meal kits:

Household A: They shop at the grocery store on weekends. They cannot understand why anyone would use a service that ships meals in kit form. Their monthly cost is zero.

Household B: They think of themselves as busy people who want meal prep to be easy. They have subscribed to at least one meal kit service. For one meal a week priced at $8.50 , this runs about $67/month. (15)

Takeout food:

Household A: They cook their own meals and make use of leftovers. Their monthly cost for takeout food is zero.

Household B: They follow the national average of $3,632/year on takeout food. (16) Their cost is $301/month.

Eating out:

Household A: They dine out at least once a week. They have favorite restaurants but know how to find weekly specials. A nice night out after tax and tip costs $150. Over four weeks, that is $600/month.

Household B: They dine out twice a week. They want to try all the best places with celebrity chefs. They think $39 for pasta and $25/glass for champagne is what you should expect to pay today. Meals run just under $300/couple after drinks and expensive wine is added in. Over four weeks, this costs $2,400/month.

ENTERTAINMENT:

Subscription Services:

Household A: They stick with cable TV’s basic package. They get their internet service either through them or their wireless provider. Their cost is $134/month. (17)

Household B: They have a more inclusive cable plan plus internet. This runs $253/month. (17) They also subscribe to streaming services. They are spending an additional $75/month. (18)

Wireless bills:

Household A: Everyone has smart phones. This includes Household A. They use a provider like T-Mobile for two or three devices. Their average bill is $130/month. (19)

Household B. They have a comprehensive plan from Verizon. It runs about the same as household A, at $140/month. (20)

HOLIDAYS:

Vacations:

Household A: They enjoy exploring on their own. They find good airfares and reasonably priced hotels in Europe. They make plenty of use of hotel and airline points. They average $2,000 per person, per week They get two weeks vacation. Spreading the cost over a year, the cost is $667/month.

Household B: They are into vacations they can brag about. They stay in the best places. On cruises, they book the best suites. This runs them about $1,000 per person, per day. Their cost for two weeks of vacation is $28,000. This comes to $2,300/month.

Vacation home ownership.

Household A: They take vacations, but do not own a beach house. They like where they live and tend to spend their summers entertaining in their backyard. Their vacation home cost is zero.

Household B: They decided they needed a beach house. They bought on the Jersey Shore, in the Hamptons or a similar prestigious location. It did not come cheap. They did not go for the best locations, but chose a location like Wildwood, where houses go for about $492,000. (21) Their monthly cost to finance 80% of the cost through a mortgage plus pay property taxes, etc. is about $3,400/month.

Vacation home upkeep:

Household A: They don’t own a second home, so there is no expense.

Household B: They follow the 1% to 2% rule for upkeep expenses. Using 1.5% as a rate, that’s about $615/month.

LIFESTYLE EXPENSES:

Pet insurance:

Household A: They own a young dog and bring it to vet for periodic checkups. They don’t have any problems at the moment.

Household B: They also own a young dog. They purchased pet insurance averaging $640/year. (22) They are paying an average of $50/month.

Pet grooming:

Household A: They like their dog just the way he is. They don’t pay for grooming. They cut nails when necessary.

Household B: They take their dog to the groomers regularly. This happens once a month. The average cost is $50/visit.(23)

Country club membership:

Household A: If they play golf, they visit a public course. They do not play much golf. Their monthly cost is negligible.

Household B: They belong to a private country club because that is what all the best people do. They have an image to maintain. The average monthly cost of country club membership including minimum spends at the restaurant might be $882/month. (24)

Hobbies:

Household A: They are wine collectors. It can be an expensive hobby, but they add to their collection at a budgeted rate of $500/month. They shop at their local wine store.

Household B: They are wine collectors too, but at a deeper level. They spend about $1,000/month buying at auction. They also attend a big weekend wine conference in New York which runs about $6,000 including the conference and hotel accommodation. Their cost is $1,500/month.

Charitable contributions:

Household A: They are involved in the community, attend galas and contribute to the annual fund drive for various nonprofits. They contribute an average of $1,000/month.

Household B: They are also generous, giving at the same level. $1,000/month.

Everyday expenses:

Household A: Lets use an identical number for both household of $400/week or $1,600/month.

Household B: Both couples do dry cleaning, make charitable contributions, shop for birthday and anniversary presents and buy liquor. It adds up. $ 1,600/month. (25)

CREDIT CARDS:

Credit card debt:

Household A: They pay their credit cards off every month. They have no monthly interest charge.

Household B: They have heavy spending months, meaning to pay it down but don’t. They carry about $50,000 in credit card debt. At an average interest rate of 27.91% (26) they run up about $1,163 in interest every month.

What Have We Learned?

Both households start each month with $27,916 in after tax income.

Household A might be described as frugal or low profile, but their primary overhead costs are about $ 12,467. Although they still have out of pocket costs we haven’t listed, they might have about $15,449 per month they can allocate towards savings, investments, discretionary expenses, disposable income and charitable contributions.

Household B is struggling just to stay afloat. If they have $ 27,916 coming in and they have $28,623 going out, they have a deficit of 707/month. This shortfall plus the unexpected expenses of regular life push them into debt. That’s one reason why they have a large credit card balance. The hole keeps getting deeper. That is why people making what appears to be a good income are really living paycheck to paycheck. They are in serious trouble if one partner loses their job, because the expenses keep coming in.

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HOUSING:

CAR OWNERSHIP:

FOOD AND DINING:

ENTERTAINMENT:

HOLIDAYS:

LIFESTYLE EXPENSES:

CREDIT CARDS:

How a Couple Earning $500,000 Can Be Living Paycheck to Paycheck

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HOUSING:

CAR OWNERSHIP:

FOOD AND DINING:

ENTERTAINMENT:

HOLIDAYS:

LIFESTYLE EXPENSES:

CREDIT CARDS: