How to Barely Make It on $400k Per Year

Steps up on soapbox...

I found this piece to be very fascinating. It's about a couple in New York City that make $400k per year combined and yet are barely making it financially. Ok, so it's a bit better than "barely making it", but they are not living high on the hog by any means. Their mortgage is $100k a year for a small, one-bedroom apartment (though at an upscale address in NYC) and they're not sure they will both have jobs for long. Thus they are cutting back, trying to increase their savings in case one of them gets laid off.

The piece has an accompanying video where the husband talks about their situation. He mentions that they "don't have the money" for this or that a few times. The video also shows several rooms in the apartment. It's very, very small and cramped. Is this what $400k earners live like in New York? Yikes!

WARNING -- You know where I'm going with this, don't you???? Stop reading now if you're one of the people (mostly living in NY, SF, LA, etc.) that HATES this idea...(which, btw, is my most hated money saving tip ever.)

The example above is one reason I suggest moving to a lower cost-of-living city. After all, smaller cities are better at growing net worth. Why? Because despite the fact that you'll earn less in them, the cost-of-living is way, way lower, resulting in a net gain in disposable income (and thus net worth -- you have more to save, invest, etc.) Of course you don't get the "culture" you can get in larger cities, then again, if you can't afford the culture on $400k, then what's the point if you're living in New York or New Nowhere.

As many of you know, I live in a "dinky" city (200k city population, 540k urban population, and 1.3 million metro population.) We don't have a lot of things -- no professional sports teams, no world-famous museums, no Broadway-level productions. But we're about three hours from all of this (in Chicago). And we have our alternatives -- minor league baseball, botanical gardens, local/regional museums (ours has an actual piece of the Berlin Wall, BTW), traveling shows, etc. Besides, how many times do most people really take advantage of these things? It might be "nice" to have them available, but again, if you don't go to them (or can't afford them), what's the difference?

But here's what we do have: affordable, nice, roomy housing. Great schools. Nice, family environment. I know, not everyone's cup of tea for sure. And really, I can think of other places I've lived that I like better, but I'm trying to make the case that you don't fall off the end of the earth when you move to a city that has less than 5 million people in it (which seems to be the feeling of some people.)

Now let's talk financially. The couple above could move to my city and take a 50% cut in pay (down to $200k) and be RICH compared to the general living standard. In fact, they could be rich at $100k here. They can buy a 2,500 square foot house that has a bedroom for each child for $200,000. If they want some land, they can move to one of the "pricier" neighborhoods and get the same house on 10 acres for $350,000. Again, not everyone's cup of tea. But to me it beats living like a hamster cramped in a cage (which is the impression I get of their place looking at the video.)

I understand that many people prefer the "hustle and bustle" of a bigger city. I understand that many people have families that they want to live near that are in big cities. There are tons of solid reasons people want to live in big cities. Gee, even "it's my money and I want to live here and that's it" is a good enough reason.

But I'm just opening up the thought of the financial impact of living in a big city for those that have a choice -- that could move if they wanted. All I'm asking is that you think about what living in a big city is costing you. Furthermore, I want you to understand that while the lifestyle in a smaller city is different, that doesn't mean it isn't better. So if you get the chance to consider that $150k job in LA versus that $100k job in Cincinnati, maybe the $100k job is worth more than a passing consideration.

Ok, off my soapbox now...

Comments

[MissPinkKate]

Moving out of NYC is not the only option. Not buying an apartment you can't afford is another. It's not like there's a lack of apartments for rent, and with $400k at their disposal, I'm sure they could find something worthwhile, particularly if they're willing to move out of Manhattan into Brooklyn or Queens.

[Monevator]

Everything you say is true and correct. The trouble is that living in a big city is like a drug. The culture and so on isn't really for most reason why you stay. These days you can get all sorts of culture at the touch of a button, anyway. It's not like you need to be in a city to meet liked-minded people, or see different sorts of views, or whatever. Those things are really the reasons that you fool yourself with.

The reason you stay in a big city is because you get addicted to it. The hustle and bustle comment you make is the closest to it.

When I first moved to my little city of 10million people, I was amazed by the density of entertainment, the chance to be near real power and excitement, the thrill of seeing a movie star having a coffee at the table next to me, and most of all the chance to be anyone I wanted without raised eyebrows.

All of that is still true, but what keeps me here is it's in my system. Yes, lots of friends. Yes, art and theatre. Yes, shopping for weird foods at 1am. But mostly - addiction.

[Ellen]

I wholeheartedly agree with this advice. I lived in Los Angeles for 4 years while I went to USC and now live in Silicon Valley for work. I took my first job here because of my starting salary, but I knew that as soon as the chance came, I would try to move to a smaller city. Now my boyfriend and I are planning on moving to Austin, TX in June. There is no way we would ever be able to afford a house here, and frankly, we don't like the area. I can't wait to get to Austin and grow my net worth even more aggressively.

[Jim]

They could also probably cut their mortgage in half and save $50k a year by moving 5-10 blocks to the East.

Their problem isn't just that they live in NYC, but its specifically where they live in NYC. Not only are they in a very expensive city they live in the most expensive neighborhood of that very expensive city.
The couple in question has a $100k annual mortgage for an apartment on 5th avenue. $100k mortgage would mean an apartment probably in the $1M-$1.5M range. 5th avenue runs along central park. 5th avenue is about the most expensive real estate in NYC and probably the most expensive in the world.

So if they really want to stay in NYC they could just move to a different neighborhood and a lot better off financially.

Jim

[Steve]

With the Financial services bubble popped, I doubt housing will remain as costly in NYC.

[Everyday Finance]

A couple thoughts.

1) If they were making 400K per year and have a 100K mortgage, after taxes, they still have 6 figures disposable income. What are they doing with more disposable income (after mortgage payments) than 97% of Americans live on as a gross income? hmmm have to have that city lifestyle.

2) They could easily move to North jersey like what millions of other New York workers do and buy a decent house for 500K. I grew up there and keep tabs on real estate there. You can live 30 min from the city and get a half acre 4BR house for under 600. hmmm have to have that city lifestyle.

They could also send kids to public school (god forbid) instead of spending more on private school in the city than most people spend on a graduate college degree per year.

[Colin]

Just curious, have you ever seen this article:

http://www.meghandaum.com/articles_by/art_by_misspent_youth.html

It's a bit dated, but talks about the draw of a place like NYC so someone just starting out, and ends with the author leaving Manhattan for Lincoln, NE.

[FMF]

Colin --

No, I haven't. I'll check it out.

[D]

I agree there is no reason they "need" to live in the city and could find cheaper alternatives half an hour away. They are living in the city probably more for convenience than for any other reason--the time it takes them to go to work, shop, etc. is minimal compared to less urban areas--and therefore it is a lifesytle choice.

That said, many people who work in large cities within specific industries would not be able to find similar jobs (regardless of the pay) in suburban areas. So if I took my 20 years of Internet consumer marketing experience to small town suburban city X, I would find that there are no jobs for my skillset. Could I work doing similar things at another type of company? Sure, but they wouldn't hire me because they'd have 50 other candidates with more direct experience.

Now, if upon starting my career, I made the decision to live in an area with a lower cost of living this would make sense.

While I find FMF's advice about moving to a less expensive area an interesting intellectual exercise, the reality just isn't so black and white for a good percentage of people.

[Jim]

Everyday asked? "What are they doing with more disposable income"

The article has a pie chart in the details that breaks down their expenses as follows:

50% = taxes & healthcare
25% = mortgage & utilities
17% = childcare & education
8% = groceries & misc

So they are apparently taking home about $200k after taxes and healthcare.

Their housing total is $100k

Then the biggest other expense is childcare. The article says: "About one-third of the family's after-tax income goes to the cost of a nanny and preschool tuition for Alex, Fou and his wife's 3-year-old son." So that is around $66k they spend on a nanny & preschool. That seems ridiculous but a nanny in NYC is not cheap and the preschool is probably a high end one too.

I'm guessing the numbers are ballpark figures and I wouldn't be surprised if we're missing some major details. So I wouldn't read too much into it.

Property taxes in NYC are very high so that would be making their tax bill higher than it would normally be based on their income alone.

Jim

[Dave]

FMF, out of curiosity what is the approximate racial makeup of the 200k people in your city? I would imagine that it's mostly white. Nothing against white people, of course! But as a person of color, I've lived in small, mostly white communities in the past and while I can't place a dollar figure on it, I think there is value in living in a diverse community. Of course there are smaller cities that are racially diverse (Austin, TX, mentioned above, comes to mind). But many of the cities that have the greatest mix of people tend to also be the most expensive -- i.e., NY, LA, SF.

[Dave]

P.S. Peoria?

[FMF]

Dave --

Just did a quick Google search and found the stats for my town in Michigan:

67% - White
20% - Black or African American
3.2% - Two or more races
1.6% - Asian
All the rest - "some other race"

[Monevator]

Great article Colin.

[Sarah]

Other folks have correctly noted that they live in one of the most expensive places you could possibly live in NYC (even within Manhattan). But, really, nannies and private school tuitions will kill you. Take out that expense (or cut it in half for a more modest day care/school combination) and they are way more comfortable.

Basically, these people have chosen the most expensive option in every major category of life and apparently haven't paused to save some money against emergencies. I would never dispute that it's significantly more expensive to live in NYC than elsewhere (I would not want to try it as a single on much less than $100K/year with student loans, maybe $85K without), but there's some thoughtlessness there.

[Jim]

Dave,

Off hand Las Vegas and Nashville are both pretty diverse yet relatively inexpensive.

Plus I found Mission Bend, Texas a suburb of Houston.

It was #11 on CNN Money list of 25 most affordable housing markets. Median houses $133k and median household income $75k

Demographics from Wikipedia:
46.32% White, 21.50% African American, 0.31% Native American, 16.96% Asian, 0.08% Pacific Islander, 10.63% from other races, and 4.20% from two or more races. Hispanic or Latino of any race were 27.06% of the population.

Jim

[SS]

FMF - Wow, I never realized you lived in such a populated area. You should really consider moving to a more rural area. It'll probably mean taking the $70K job instead of the $100K city job, but someone making $70K with a family doesn't hardly owe taxes, so in the end is much better off than the $100K job in your area, especially when factoring in the price of housing.

Sure you have all those minor league ball teams, botanical gardens, local/regional museums, traveling shows, but how often do you really use those things? Here what we do have in rural america: nice affordable roomy 50 acre lots with solid built, beautifully designed unique huge 100 year old victorian homes for under $100K. Sure living in a county with under 40K people isn't everyones cup of tea, but it beats living like a goat caged in on 2 acres. And trust me, with your $70K salary you are one of the richest people in the county.

Its your money and if you want to live in a built up area, thats a good enough reason, but as someone who says they are trying to live a financially fit life, consider what that overly populated place is costing you. Sure I guess some people like the coziness of being able to see their neighbors from their yard, but you'll always be fighting against the grain when it comes to accumulating wealth. And remember, just because rural life is different, it doesn't mean it isn't better.

Sorry for the preaching ;)

[Shaun Connell]

To prove your point, I live in rural Arkansas. Most of the jokes about this place are true. ;-) But I still plan on buying a spot of land and building a home here just because it's so danged cheap.

I have a friend who has a wife and kid -- they survive just fine on 15k a year. I know this area is an ... extreme example of geographic economic diversity in America, but still. ;-)

[SJ@6bubbles]

Im kind of confused by where you live now... 3 hrs from chicago but close to NYC? err??

I completely understand where you are coming from... I went to ugrad in UIUC, central IL... rent sub-300.
Now I've at grad school @ Berkeley rent 600+++. Ugh...

And thinking about it, there's no Cost of Living adjustment (for me anyways) for grad. school. Of course, here the other factors might when... (tho between the two schools it's abt a push lol)

[AdamCO]

The friends I have in NYC are mostly there because they work in a specific industry that hardly exists elsewhere.

Also, my friend who moved from Indianapolis to Brooklyn was able to ditch his car and between that and the higher salary is able to save more than he could in Indianapolis.

[Strick]

Fascinating ending to the article where they ask the guy what he's going to do with his one time $800 from the stimulus credit instead of asking him what he's going to do with the $2,000 he's gonna make at work tomorrow, and the next day, and the next day....

[Dave]

Grand Rapids, not Peoria.

[Brad Ford]

MissPinkate - while I understand where you are coming from, you do not understand their reality. In Manhattan, owning is often the better deal over the long run. The alternative is to become a "Bridge and Tunnel" worker who faces 2-4 hour daily commutes from CT, NJ, and Long Island. (I knew one guy who commuted from Philly)

I left Manhattan because the cost of living was killing me despite a good income. Looking at their pie chart, it does not surprise me.

[Sarah]

The funny thing is, the guy is almost certainly not eligible for the tax credit. IIRC, it phases out around $200K for couples.

[Emma]

Meh. That story is dramatic, but my sister in law and her husband make significantly less than that in NYC (take a zero off) and have a three bedroom house with a basement rental and parking. No debt but the mortgage. They also have all of the NYC amenities a short subway trip away, because they live in Forest Hills in Queens.

[Mule Skinner]

What is the optimum size city? New York is too big, so we know one parameter. What is too small? How do you characterize it? In my case the "city" has a population of 17,000; has two small colleges but limited employment opportunities otherwise. The colleges offer cultural events that -- dig this -- are free! There are rotating art exhibits; dance, music, and theater performances; lectures; two libraries in addition to the city one. Houses are not exactly dirt cheap but reasonable places can be found. If you're not a professor you'll probably have to commute 50 miles to find professional level employment. If you're happy doing food service, plumbing, or car sales, you can find it here.

[FMF]

SS --

You're right. I'm off to the countryside in Wyoming...

[FMF]

SJ --

When did I say I live close to NYC (I don't)? Maybe I wasn't clear?

[rwh]

Maybe they thought you were close to NYC in spirit.

[jj]

I'm Asian and I definitely think race is one of the reasons that I prefer a larger urban city. I live in L.A. which is very diverse and it's common to see mixed race couples and kids. Many of my white friends have fled the high cost cities but I don't really feel that a smaller, mostly white city is as much of an option for me.

[Foobarista]

FMF, this couple is a bad example. Living on 5th AVE in NYC would be the "status equivalent" of them living in a 7000 square foot McMansion in the Midwest. They could easily live in Queens or Brooklyn and have a better and vastly cheaper apartment - or a cash-generating multifamily at the same price - but they're clearly spending money for "status".

[MissPinkKate]

MissPinkate - while I understand where you are coming from, you do not understand their reality.

I absolutely do understand their reality, I'm here in NYC just like they are- as said by Foobarista above, they are spending for status, not for need. There are options, PLENTY of options- but they won't lower themselves to take them. I have little sympathy for that.

[mj]

I'm with JJ.

I grew up in a mostly white suburb in the PacNW. There were about 450+ in my senior class. Out of that, there were less than 10 other kids that shared my ethnic background. It wasn't a terrible way to grow up, but it certainly wasn't diverse. I now live in a southern east coast town. I'm not sure what the racial makeup is but it feels 45% white and 45% black. I've never lived in a city with this large of a black pop. I have young children now and I love that they have this exposure so maybe as adults they won't feel any uneasiness regarding people of different colors. Although I'm not white, while growing up nearly all my friends were white. So even though intellectually I know better, certain baises have been imprinted on my perspective so I have to actively work against that when meeting people sometimes. I wasn't even aware of how much it impacted me until we moved to this city. That was such a critical realization! It was like a lightening bolt! I told my spouse that when we pick a city to settle down in, it's essential that we live somewhere rich in ethnic diversity. I don't want my children being one of 5 colored faces in a class of 25+. It subconsciously draws attention to something completely inconsequential. In an environment where every other person is some color or another, it becomes moot.

That is the lifestyle I seek for my children and if it means I have to sacrifice my net worth, so be it.

[sara]

SS, the difference is that FMF isn't complaining about how far his money will go.

[Andy]

Gosh, I grew up in a town of 400 people where the nearest big city (pop. 50,000) was almost an hour away. Now I live in a HUGE city (Indianapolis, IN) where there are way more than 2 channels on the antenna and you can buy gas or food in the middle of the night! My cost of living went down when I moved here, too. (I think I'll stay away from NY since I'm happy not knowing what I'm missing.)

[Susan]

First of all, leaving a city where they have careers, families, and history isn't necessarily the best option. People who don't live in NY always jump on the "BUT YOU'D BE RICHER WHERE I LIVE!" scenario. We're not stupid, we realize this. If New Yorkers only cared about being rich, they'd sell their fancy condos and jump ship already. Enough, we've heard it all. Some of us like city living.

Also, to the poster who asked about their disposable income -- most of that is probably spent on private schools. So in addition to rent, they have tuition.

However, it's not like a fancy Manhattan address is the only option either. They could probably cash in for a 2 or 3 bedroom condo in Queens, or possibly Brooklyn for far less and essentially cut their bills in half. There's also perfectly lovely villages and pockets just off the Long Island Rail Road and Metro North that would give them access to quality public schools, cheaper mortgage, and not sacrifice too much time with commuting.

The point is, stop balking at people who enjoy NY and value the culture and opportunities here. At the same time, New Yorkers who complain about the city being expensive should give up thinking that Manhattan is the end all be all. If you desperately want to live here, then be more flexible and consider other boroughs. Especially when your kids are involved. Are they going to live in a one bedroom when these kids turn into teenagers?