Is $250,000 Really Not Enough to Live On?

We've discussed how $100,000 a year, $250,000 a year, and even $1 million a year is not enough to live on in the United States. Until now, the examples we had were simply individuals complaining that they didn't make enough to make ends meet -- even though they made much more than most Americans. But now there's a new "analysis" that attempts to see if any of this belly-aching is actually legitimate. A summary of the study:

The Fiscal Times asked BDO USA, a national tax accounting firm, to compute the total state, local and federal tax burden of a hypothetical two-career couple with two kids, earning $250,000. To factor in varying state and local taxes, as well as drastically different costs of living, BDO placed the couple in eight different locales around the country with top-notch public schools, using national data on spending.

The analysis assumes that this hypothetical couple -- let's call them Mr. and Mrs. Jones -- both have professional positions at their companies. They take advantage of all tax benefits available to them, such as pretax contributions to 401k plans and flexible spending accounts for medical care, child care and transportation. They have no credit card debt, but Mr. Jones racked up $40,208 in student loan debt in undergraduate and graduate school, and Mrs. Jones borrowed $22,650 to get her undergraduate degree (both amounts are equal to the national averages for their levels of education). They also have a car loan on one of two cars, and a mortgage for 80% of the value of a typical home in their communities for a family of four, which includes one toddler and one school-age child.

Here are the results:

The bottom line: It's not exactly Easy Street for our $250,000-a-year family, especially when they live in high-tax areas on either coast. Even with an additional $3,000 in investment income, they end up in the red -- after taxes, saving for retirement and their children's education, and a middle-of-the-road cost of living -- in seven out of the eight communities in the analysis. The worst: Huntington, N.Y., and Glendale, Calif., followed by Washington, D.C., Bethesda, Md., Alexandria, Va., Naperville, Ill., and Pinecrest, Fla. In Plano, Texas, the couple's balance sheet would end up positive, but only by $4,963.

Ok, so this is the headline finding -- that "$250,000 is not enough for people to live on in many cities." But come on. We all know this isn't true -- at least for someone that knows anything about managing money. After all, a $250,000 household income is six times the national average and just 2.9% of couples earn that much or more. If these people can't make it, then who can?

So I decided to dig into the numbers a bit. (You can too if you like -- they can be found here.) Overall, here's what's dragging them down: they are spending too much. Surprised? I'm not. After all, how else could someone making $250k not make it? They have enough income, right? So the problem has to be the spending. Here are some specifics:

• Let's start with the fact that they really aren't in the process of going bankrupt as the headlines imply. They are saving money -- $41,000 per year ($33k for retirement and $8k for college.) They are probably also getting an employer match on some of the retirement funds, so they're doing quite well here. That said, they should get their budget to balance and have a surplus even after these savings are accounted for. And there's plenty of room to do this...
• Taxes are a big killer, and mostly unavoidable. But why is there a separate line for sales tax? Sure, we all pay sales tax, but isn't it added into the cost of an item in another area? Of course it is. For instance, if I bought a basketball, I'd put the total cost (of the ball plus any sales tax) under "working out" or some similar category in Quicken. I wouldn't put the cost of the ball in one spot and the sales tax on the ball in another spot. Who would do this? Answer: no one. Therefore the costs for sales tax are included in the categories below, so this line can be eliminated completely, saving them a couple thousand dollars a year.
• Their homes are too expensive. The mortgages, property taxes, and associated costs are killing the couples in almost every city. What they should have done is buy a house they could easily afford. This move alone could balance the budget for many of them.
• They spend a lot on medical bills -- insurance, out of pocket, and dental. They spend $13,000 a year for a family of four. My family of four spends about $2,000 a year -- $5,000 in a "bad" year with braces for one of the kids. Even if they "only" spent $7,500 a year (still a good amount), they'd be almost $6,000 a year better off.
• Day care and after-school activities are $19k per year. These costs are hard to reduce if both parents are working. But they need to make sure that it's worth it for both of them to work. For instance, if each person earns $125,000 a year, then financially, it's good for both to work. But if one earns $200,000 a year and the other earns $50,000, it may not be worth them both working (at least financially.) They might be able to re-coup that $50,000 by eliminating work-related costs (including day care, taxes, etc.) if the parent making the lower amount quit working. For specifics on how to do this, see Real-Life Example of Going from Two Incomes to One and How to Become a One-Income Family.
• They have $10k per year set aside for maintenance and cleaning of their home. Really? Really? The $5k for cleaning can mostly disappear if one parent quits working. And I would have thought that the homes they purchased were good enough that they didn't suck up an extra $5k in maintenance each year. Perhaps this includes some services that the at-home parent could do (like mowing the lawn.)
• Don't get me started on the car loans. Over $7,000 a year. Ugh. They need to cut expenses, pay off the car loans, start saving for their next cars, and pay cash from here on out. They may need to sell one car and buy an older one for the second car. Again, pretty easy to do if one parent is at home.
• Parking is a killer in a few cities. More savings here if only one parent works.
• They are spending almost $14k on food and household supplies. This should be $10k at the most IMO (based on what we spend -- and we're way below this) and could easily be $7,000.
• Student loans are $6,000 per year. If both parents earn about the same amount, it looks like the loans were well worth the cost. If one makes the lion's share of the income, the lower-earner didn't do a great job of matching college debt with potential post-college income.
• They need to reduce the number of days they eat out at work. That $5,000 a year can be easily cut in half (and even more if they need it to be) by taking their lunches a few days a week.
• The family trip of $4,000 isn't excessive IMO, but if they are underwater, they'll need to cut it.
• Their gift budget is $3,000. It's a bit high, but not totally out of line. Then again, if they're struggling, this can be cut to $1,000 or so.
• Between eating out, entertaining, entertaining at home, and their dog, that's $8,000 per year. These people need to make some choices! Sure, they can enjoy themselves however they want, but they need to be more selective and set priorities. In other words, they can't have/do everything they want to have/do.
• Another thing this illustrates is the high costs of living in some cities. The swing is $30k per year from high to low. And as we've shown, you'll save much more in cost reductions than you'll lose in earning potential when you move to a less expensive city. Even better, keep your income high AND live in a low cost-of-living city. That's what I've done, and it's been great. ;-)

Here's the tally of what they could save every year if they simply managed costs (even if both parents kept working):

Sales tax (already counted in other categories): $2,000
Downsizing to a reasonable house, lowering their mortgage (my estimate): $7,000
Medical costs (conservative savings): $4,000
Interest on car loans (estimate): $1,000
Food and household supplies: $4,000
Eating out at work: $2,000
Family vacation: $2,000
Eating out, entertaining, etc. : $2,000

Total: $24,000

This $24k more than balances their budget and gives them plenty to save (for new cars, for instance.) And it leaves plenty in their budgets to enjoy life IMO. If they wanted to go on my plan, I think I could squeeze out another $15,000 a year. ;-)

In addition, they could have one parent quit working (depending in the income split) and likely break even on that (the cost reductions would offset the loss of income), still saving the $24k per year and probably leading a much less hectic life to boot.

So in the end, the "answer" is that $250,000 is more than enough to live on (of course, what did you expect the answer to be?) But people need to control their spending. If they don't, then sure, they can spend all they make and then some no matter how much they make.

Really, this isn't new news to anyone here, is it? ;-)

Comments

[Ken Faulkenberry]

One of my families favorite sayings for years has been: "We all want just a little bit more". I think your article does a good job of pointing out no matter what we have we all want just a little more than we have. We should live within our means and that is good discipline. But it's not all bad to want "just a little bit more" because that gives us motivation to work hard,save, and invest for the future.

[Bogey]

My wife and I make about $120,000 combined and we are doing just fine. I couldn't even begin to say that we are just barely getting by, or depriving ourselves at all. We are thriving on this amount.

- We have a really nice home, in a brand new neighborhood, in the best school district in the area.
- We saving about 25% of our gross income for retirement.
- We are saving another 15% of our income for other longer term goals.
- We are memebers of a fairly prestigious country club becuase I love to play golf
- We have one car paid for, and the other car almost paif for (payments $3,600 per year)
- We spend about $6,000 for food/household supplies - $14k seems way too high
- $10k per year for home maintenance/cleaning - these people are smoking something

If we were making $250k per year, I'd probably be able to retire in about 10 years (age 36). I think our standards in America are way out of whack - pretty obvious by reading this.

[Texas Wahoo]

"We have a really nice home, in a brand new neighborhood, in the best school district in the area."

Somehow I don't think you live in one of the high cost areas being considered in the article. There are not many new neighborhoods around here, unless you're willing to commute for 1.5/2 hours each way. Even so, those are certainly not in the best school districts.

[Amanda]

I agree with you on many of your points.

But I have to say that I absolutely HATE the 'one parent should stay home' argument that you frequently advocate. Not everyone wants to stay home. Not everyone is happy staying home. It's an option that should be considered, but most people with kids know pretty quickly if staying home is an option for either spouse. I know you've found success and happiness with a stay-at-home spouse, but it's not a solution for every family.

And I think your medical costs are EXTREMELY low, I have no issue with their estimate. A lot of it depends on how much your employer covers of your premiums. A lot of employers are covering less and less, with higher deductibles and co-pays.

I also have no issue with their home maintenance estimate. Many years they won't spend that much, but it's pretty easy to spend 20k in a single year - new furnace, new windows, new roof, new siding...there are LOTS of expensive things to replace in a home. The most common rule of thumb I've seen is 2% of purchase price annually (so 5k would be a 250k house, not unreasonable in many areas of the country).

[FMF]

Amanda --

Just to be clear, my posts on that subject do not say (and it is not my intention to say) that every household SHOULD have one parent stay home. They are meant to show that if one parent does want to quit working, there are ways of doing it.

I've coached so many couples where one has said something like, "I wish I could stay home but we just can't afford it." I want those people to know that with the right financial choices, they actually probably can afford it.

In the case above, I brought up the issue simply because it could be a financial drain on the household. If someone makes $20k per year and it costs them $30k per year to work, that's a bad financial deal. Now a couple may still wish to have that person work, but when finances are tight (like in the case above), tough choices have to be made.

[Alotta Lettuce]

The REAL headline for this story should have been "$250,000/year isn't enough to live on if you're trying to live like you make $300,000/year."

I mean...DUH. This has got to be one of the most useless articles I've ever read, because it's hypothetical in literally every way, with no bearing whatsoever in the real world.

[Justin]

I think its funny when people talk about how hard it is to live stuff more than $100K.

Can you live the life of a rock star? Not really. But you can definitely live a very comfortable life.

You're making more than the majority of Americans, so you're probably fine as long as you don't buy a ridiculously expensive home or expensive cars.

Despite the fact that books like Rich Dad Poor Dad have taught for years that the rich get rich by spending money on things that put money in their pockets, the vast majority of Americans spend it on things that take money out (hence my parents buying a boat "for tax purposes"....)

I think the old phrase "live drink and be merry for tomorrow you may die" is definitely rampant in our economy.

[SLPK]

I don't think the health care expenses are out of line at all. My husband and I make $60,000 a year and our health expenses are crazy. We pay $580/mo for my husband's insurance through my work, plus we have a deductible of $6,000 a year. And we meet our deductible every year. I've recently quit taking one of my medications in an effort to not meet our deductible this year and am planning on do the same for other medications. Getting different insurance is not an option due to pre-existing conditions for both of us.

[Money Reasons]

It sounds like the study spend some time putting together the article. They had to know that it wasn't very realistic.

We made middle level income, and so far we seem to be getting by just fine. Even though my wife is mostly a SAHM (she does work 8 hours a week as a bookkeeper). Please note, she wanted to be a SAHM by her choice, not mine (I miss the money)...

I guess there will always be articles trying to get some additional traffic by making the preposterous sound like it's fact. At least we know the truth...

[Sarah]

The whole cleaning thing is what kills me. How do they think that two income families w/out a house keeper make ends meet. My husband and I talk about how we'd love to have someone clean the house every once in a while - but we do just fine w/out it.

They have a mortgage for 80% of their home. This tells me that they just bought it - so where were they living before? Was it necessary to upgrade so much?

The article keeps talking about them being "in the red" but they are putting more away in savings than the average household in America earns in a year. 8000/year for college?

Both parents go out to eat for lunch every day at $10 each? $350 a month on entertainment? I'm trying to imagine what the 1500/year "entertainment at home" number is, considering that it doesn't include their $200 (!) cable bill, or any of the takeout food that they eat at home.

And i think that has to be the worlds most expensive dog. I have a dog. We take him to the vet once a year for a check up and any booster shots he needs, and he has a monthly pill to take for fleas. He has never come close to costing us $1500/year.

I think the take-home from this article is you can make anything look like not enough money when you greatly exaggerate how much each line item costs.

[MC]

Besides everything else mentioned, the article fails to take into account the expected time-dependent decreases in expenses such as daycare and student loan payments. 10 years into the future, they won't have those costs anymore. All they'd have to do is wait a few years and they'd easily be able to live on their current income--so they don't even have to give up for their whole life the pricey lifestyle--just for the next 10 years or so.

For example, daycare costs for 2 working parents decrease when a child starts school, and they are almost completely gone when the eldest child reaches 11 or 12 years old (older children can babysit their siblings for a few hours after school). So daycare costs are only ever temporarily high, and therefore daycare should never be calculated as a "permanent annual expense" in anyone's budget (unless you have a special needs child of course).

On the other hand, if a parent stops working for 10 years in order to avoid paying daycare, they are likely to irreversibly damage their lifetime career earnings, social security, and other retirement savings calculated over the entire rest of their working life. It may be a lifestyle choice for many, but the real dollar cost of a stay at home parent should be calculated over their entire life including after retirement, not just against the current year.

[Amanda]

Daycare costs may go down, but the cost of children stays relatively flat for most middle-class families (with maybe a dip in early elementary).

Daycare is offset by activities(sports, piano lessons, etc), camps, school supplies, allowance, computers, birthday parties (attending classmates, not their own), etc. I know families who spend nearly as much on before/after school care + summer camps as they did on FT daycare.

As with anything discretionary, these can be mitigated, but very few families can eliminate them. Clothes/shoes get more expensive, and harder to find good-quality used. They start using more personal care goods (deodorant, hair products).

Kid costs are a fixed bill (daycare) when they are young, but seem to come in random $100 increments as they get older.

Family frugality is easier when they are little and parents dictate 100% of their choices. But as we raise children to be independent adults, many of their choices come at a financial cost.

[Strick]

Great study. Shows exactly how easy it is to waste a lot of money and have little to show for it.

[Ravi Gupta]

It's amazing how ridiculous their spending is. I wonder how BDO came up with their numbers. If people actually spend like this it's no wonder that we have so many financial problems as a country.

-Ravi Gupta

[Jonathan]

"They have a mortgage for 80% of their home. This tells me that they just bought it - so where were they living before? Was it necessary to upgrade so much?"

Sarah, I believe the reason it was pointed out that the mortgage was for 80% of their home was not to say they only have 20% equity today, but to state that the payments on the mortgage are based on financing 80% of the value of a typical house in that area. Whether they're 10 years in or 10 months in, the payments are the same.

And yes, this article is worthless. But good for its entertainment value, and the self-esteem of the people reading this site.

[Venkat]

I live in Plano Texas, I see "DEBT People" everywhere.

Interestingly, last night, I was watching CBS Nightly News Segment about High Gas Prices, in which they showed a Person, who is working as a security Person for a school District in California(he was driving what looked like a decked out Lexus Sedan). He told the person interviewing him that he feels pinched as the gas prices go up and had to tell/defer buying an icecream for his daughter(he could have bought a cheaper car and could have had the icecream too--Just an Observation).

FMF -- IMO, I did not know whether CBS or Media in America is out of whack with the reality or people in America have some weird Expectation about their living standards.
As Newton's Law says everything action has an equal and opposite reaction(spend less you will save more and viceversa).

[MC]

Amanda, I'm a mom myself of 2 kids. I used to spend over $10,000 per year for daycare. My kids are now teenagers and no way do their clothes, allowance, cell phones, computers, musical instruments, school activities, their own birthday parties, or attending their friends' birthday parties cost anywhere near as much as daycare used to. Yes, the kids eat more now than they did when they were little, and their clothes cost more. But not $10,000/year more!

Interestingly, my state's child support guidelines agree with me--once the children stopped needing daycare, the state cut in half the amount of child support my ex (the childrens' father) had to pay.

I agree that some participating in some sports and attending summer camps can be expensive, but these are optional activities that a family needing to save money could easily eliminate. Also, older teenagers could work at a job during the summer (mow lawns, babysit, be a camp counselor) instead of just playing video games or hanging out at the mall.

[Squirrelers]

$250,000 is a good income for most families in the US, but how far it takes you depends on whether you live in a small town rural area, or a place like Manhattan or San Francisco. There is very real geographic factor involved here, which I think is hard for many to grasp. Of course, on the other hand, people could also choose to move somewhere with a lower cost of living instead of being in an expensive locale.

For those who can't move for whatever reason, choices can be made, as there are often tradeoffs that can be made to make finances work where one lives. Maybe the home won't be as good, maybe there won't be any eating dinner out, or whatever. Maybe there won't be any new cars purchased. Bottom line is that if needs and wants are discerned, one can effectively live on that type of income, even with a family AND living in a higher cost of living area.

[jim]

In short : FMF saying "We all know this isn't true" captures it perfectly.

Long, rambling form :

This argument about how the top 3% are really poor cause they spend all their money are starting to annoy me. I am puzzled why reporters feel this is valid 'news' worthy of reporting.

Bluntly: The analysis is either grossly disingenuous propaganda or the authors are simply incompetent.

According to the Consumer Expenditure Survey in 2008 families in the >$150,000 group with average income of about $235k has expenditures of about $125k including social security. So in total families in that group SPENT $125k average. The analysis assumes spending for a family making $250k would be around $162k.

So they appear to be overstating spending by about 25-30% above average for what people in the top income bracket actually spend.

If you're saving $41k a year in retirement and college accounts then you are not "making ends meet" or "down and out".

They overstate several spending categories like FMF points out.

Their figures for gasoline tax and gasoline spending are all screwed up.

For example they have gas tax line of $2,679 and gas expense if $5,721 in New York and $1,555 tax and gas $7,085 in California. Yet CA and NY have pretty similar gasoline tax rates of $0.656 and $0.661 per gal. combined local, state, fed. If you pay $2,679 in gasoline tax in NY then at a $0.656 / gal tax that would be about 4083 gallons which should cost about $14,000 at $3.50 a gallon. But they have tax of $2679 and gas of 5721 for total of $8400. I can't make any sense of it and I assume they have their numbers wrong.

I'm also pretty sure that most people don't spend as much on parking as they claim. $2220 for parking a year in Glendale CA and $780 annually in Plano Texas? That just does not sound at all 'typical' to me.

[Matt]

After being San Diego for 10 days for work all I can say is $250k would not be enough. Things are WAY expensive there.

My house would be a million dollars, gas, food, everything is higher. Not sure how anyone can't afford to live there. Maybe that is why I saw all those street people.

The only way I could afford to have the same standard of living that I do now would be to make at least $250k or more.

[HollyEE]

Well, I'm going to be a dissenter: most people in this country think that if you're making $250k , you're wealthy. All this talk about how you can cut this cost and that cost to come out in the black is exactly the point: couples earning $250k and living on the coasts, have to watch their spending carefully! These are people who aren't going to get any financial aid for their kids college, who society expects to save for their own retirement, and, whose incomes are often volatile and/or come after years of slaving away in grad school/med school earning peanuts. If I earned $250k, I'd actually expect to be able to enjoy a yearly vacation. Or have a housekeeper.

[jim]

The study actually has an accurate average for family health insurance premiums. They claim premiums of $4,213. Average family health insurance total cost paid is about $14,000 per year and employee contribution is 30%. So that means an average worker pays $4,200 in insurance premiums. That is average. So the study is right there. BUT then they also claim out of pocket costs of $5,000 which isn't typical. High deductibles are not that common and 73% of employees have deductibles of under $1,000. You generally either have high deductible and out of pocket or high premiums. Not both.

They seem really off base on dental spending. They cite a dental spending of $4,069 which seems grossly inflated to me. National spending on dental care is about $100B which comes out to $325 per person or $1300 for a family of four average. Granted people may skimp on dental if they have a lower income so the $250k family may spend more on average. But $4k just seems too high to me. Of course you could have higher one time expenses on braces or major root canal but those are not typical or average.

[jim]

Holy, I don't think people here are saying that such a family making $250k even is "stinking rich" or living like a billionaire or anything. We are disputing the articles thesis that $250k is somehow "not enough". The article is titled "down and out". So they seem to be implying that such an income is struggling. In general people who make $250k do not struggle financially.

The article says that such a family is "down and out" and struggling to "make endds meet". That is what we are disagreeing with. That does not mean we all think $250k makes you "rich" per se.

[Sarah]

@Jim - don't forget often the deductible is per person though - for example, i will be hit with my $500 deductible, and since I am pregnant, when I have my next kid, that will be another $500, and this doesn't include any of the costs incurred by my husband or son. I do think $5000 is too high, but I don't think $2000 would be a stretch for a family of 4.

Another thing that struck me with the analysis was that the energy and water costs were the same for all locations, and this is something that varies considerably across the country. Also, I would think they would look at average house size for an area (I'm not sure if they did that, or if they looked for Xsf in each area). If the area of the house is different, than i would expect the energy costs to be different. The water bill that they list is close to mine, but the electric / gas bill is 440/month. That seems high to me unless they have a 5000SF house.

[Kit44]

@ Matt - Homeless people love San Diego because the weather is mild and they can live outdoors year round. Paradise!

As of March 2011, the median sales price for a house in San Diego is $330K. Of course, it is more or less dependent on the neighborhood. The median price is $1 million in La Jolla - the most desireable locale. However, that is just one small area.

My family lives happily in the San Diego suburbs on less than $250K per year. We will have our median priced home paid off in 6 years. I buy mostly organic food and brown bag every day. We eat out somewhere nice about once a month. Good, inexpensive health coverage, no consumer debt, nice vacation every other year. We live well, but more conservatively than the couple profiled in the BDO study.

[indio]

One of the problems with recommending that a spouse quit working to save on day care causes it to cascade to other areas. Yes, they will save on day care costs, but the long term effect is that they won't be able to save as much in a 401k and the lost years from working means the person will have to struggle to get back into the job market, with a likely pay cut.

[Alotta Lettuce]

Here's the thing: I know literally dozens of people who live in high-cost of living areas, and none of them earns anywhere near $250,000 as a couple, much less as a single.

In fact, I used to be one of them, having spent 4 years living in Washington, DC from 2001-2005, and during that time, I made literally one-tenth of $250,000 and you know what? I DID FINE.

Granted, I saved almost nothing, but I also borrowed almost nothing, never incurred any debt, and STILL ENJOYED MYSELF.

The truth is that it is entirely possible to live in a high-cost of living area without earning a high salary - it simply requires sacrifice.

[jim]

Sarah, Good point that deductibles can add up for multiple family members. The article is a family of 4. So if they among the minority with deductibles of $1000 or more then that would be at most 4 x $1000 if every member of the family hit their deductible. Thats not too likely that every family member would max the deductible in a given year. And on top of that over 70% of people have smaller deductibles.

You're also right to point out that the analysis was unrealistic to assume equal gas/electric bills across any location. Someone living in So. California certainly has lower gas/electric bills than someone living in most other parts of the country.

[ranch111]

It's hard to understand how a couple making that much combined could be so terrible with money, When did stupid people start making this kind of money?

[Mike]

"If one makes the lion's share of the income, the lower-earner didn't do a great job of matching college debt with potential post-college income."

Although $40K to have a solid backup plan in case your spouse dies isn't a bad investment though, even if you're not making bank in the mean time.

My wife got her MBA and does small projects, but doesn't bring home much percentagewise. It's there as a backup plan in case she HAS to work at some point.

[Joe]

A lot of the original figures have more to do with keeping up with the Joneses than anything else. It kind of stinks that education is so expensive. Think how much farther ahead you could be without $60,000 in combined student loan debt.

[Greg]

@Jim, I'm interested in how you calculated your $162K average spending in the study referenced by FMF. Are you including their retirement and college savings ($41K) as spending? If so, then this study's spending would actually be lower than the Consumer Expenditure Study you cite.

And about being in the top 3% - that's income, not wealth - a big difference. And as this study points out, a top 3% income can be easily used up by normal spending in high-cost-of-living locations.

And as far as the discrepancy in gas taxes, it's hard to know. I googled "state gas taxes by state" and visited http://www.api.org/statistics/fueltaxes/ which cited the same CA and NY numbers you did, which "reflect a weighted average for each state, meaning that any taxes which can vary across a state's jurisdiction are averaged according to the population of the local areas subject to each particular tax rate". However, the link in the original article (http://www.thefiscaltimes.com/Articles/2010/12/07/Down-and-Out-on-250000-a-Year.aspx) points to http://www.gaspricewatch.com/usgastaxes.asp, which shows a difference, but seems less accurate than the one you cite. In my view, a small error.

Parking? $2220 a year is nothing - $8.88/day for 250 days (assuming 2 weeks vacation). I pay almost double that in SF and that would be cheap if I lived in NYC!

The bottom line is these estimates ARE accurate (enough) and indicative of the fact that making ends meet at this salary level in high-cost-of-living areas is tougher than many people seem to think (particularly those that don't live in these areas). I am not complaining (after all, I chose to live in this area), but merely stating the fact that the high cost of living eats up most of the $250K. Yes, one could make sacrifices, but these sacrifices might be more than a family making half that income in a cheap place to live would have to make.

I will agree with most here that the point of the article is made a bit sensationally - these people are not "down and out", but the meat of the argument is that people in these expensive cities are not spending money frivolously - this is the cost of living - and living normally results in a far tighter budget than most would expect.

[Greg]

Part I

Does anyone commenting actually have a family of 4 and own a house in a high-cost area? I can tell you that $250K sounds like a lot, but it is not. When I was young, I lived on $20K/year in NYC, but I had no children, lived in a studio not much bigger than a closet and drank beer for dinner. These places are WAY MORE EXPENSIVE to live than where everyone posting here seems to live. I'm not complaining - just stating a fact - it's my choice to live in the Bay Area.

@FMF - I believe the Sales Tax has it's own line because each city and state have different tax rates. You can't just ignore them.

You also claim the couple's housing expense is too much and they should just "buy a house they can easily afford". Not to get philosophical, but, one of the primary reasons they are able to make $250K is because they work in a high-cost area; I think the point is that most people want to live near where they work for quality of life - this is not unreasonable, and actually is a key assumption of the study (why not just telecommute from Kansas otherwise!).

My mortgage payment is just over $4K (includes property taxes) and I just refinanced in December for 30-years at a rock bottom rate of 4.875% (jumbo). My house cost $800K and is 1500 square feet in San Mateo, which is in the Bay Area and ranks in the middle of affluence here on the peninsula. How many of you folks have a family of 4 and live in this size living space on 1/8 of an acre? Believe it or not, this is a sacrifice I made to SAVE money.

[Greg]

My medical insurance is around $5K per year and we spend another $2-3K out of pocket, so their medical estimate seems high, but we are a relatively healthy family (knock on wood). My brother's family has 2 kids, one with ADHD and another with a speech problem - I'm sure they spend far more (3x?) than we do on medical. I'd agree with you the dental costs seem high, but we spend at least $2K/year and our kids are not old enough to have braces yet. Medical expenses vary based on where you live, so it's not surprising your expenses are lower, but again, this is the point of the study.

$7000 for 2 car loans sounds cheap to me! We own a 1995 Honda Civic outright and are paying $450/month ($5800/year) for a used 2007 Honda Odyssey we bought. I wish we could spend only $1K per year on maintenance. We just spent $900 on tires a few months ago!

$10K in home maintenance and cleaning is also cheap. Having my wife quit her $100K/year job to clean our house and save $80/week just isn't financially worthwhile. Honestly, I don't know many dual income families that make $250K+ where one person makes less than $50K - they've all figured out it's financially better to have one person stay home as you suggest.

Why would you assume that an $800K house in San Mateo is so good it doesn't need maintenance? $800K bought us a starter home. We just had to lay out $9K for a new fence that fell over in a storm this winter. We've postponed virtually all other work in the past because of cost (electricity - $15K, windows - $20K, furnace $5K, etc.) These aren't nice to haves - each person we've had estimate these jobs have laughed at what we have, it's so outdated. The temperature in our bedroom on one end of the house is literally 15 degrees colder than in the bedroom near the furnace. Our electrical situation is bordering on fire hazard.

$14K on food and household supplies...that's just $333 a week. This gets into values territory for me. I thought I read recently that America spends just 12 (or maybe it was 14%) of their income (I believe it was take-home) on food, while other countries spend 20%. If this couple takes home $120K ($250K less $30K 401K less taxes, less medical insurance, less day care provision, etc. - that's about our take home on $250K), then 12% would be $14,400. We buy too many cheap calories and it's killing us (literally) as a nation, but that's a topic for another debate. If you want to feed your family good, quality plants and animals and avoid processed crap, $14K is a LOW number, and might actually be tough to live on.

Your final paragraph is perplexing "Another thing this illustrates is the high costs of living in some cities." I believe that was basically the entire point of the article.

"And as we've shown, you'll save much more in cost reductions than you'll lose in earning potential when you move to a less expensive city." But what if you WANT to live relatively close to where you work (I commute 45 minutes)? Again, the point is not that a family could save more if they moved to a cheaper city, it's that they live in a particular city, make $250K/year and have more trouble making ends meet than most other people (like you and those commenting on this site) would imagine).

Your final point sums up your misunderstanding perfectly: "Even better, keep your income high AND live in a low cost-of-living city. That's what I've done, and it's been great. ;-)"

Of course that would be better from a financial perspective (again, maybe I should telecommute from Kansas!), but for those of us with families of 4 that choose to live in a high-cost of living city (obviously for non-financial reasons!) and make $250K/year, the study was right on - it is harder than one would think to make ends meet. Again, not complaining (I'd make the tradeoff any day), just explaining...

[FMF]

Greg --

Your comment: "Not to get philosophical, but, one of the primary reasons they are able to make $250K is because they work in a high-cost area."

1. You can make good money in low cost of living areas. I know it for a fact. Especially as telecommuting is becoming more common.

2. We've talked several times about the fact that the drop in salaries in low cost of living areas (as compared to high cost of living areas) is not as great as the cost decrease. In other words, it's a better financial deal to move to a lower cost of living area.

Your comment: "Your final paragraph is perplexing 'Another thing this illustrates is the high costs of living in some cities.' I believe that was basically the entire point of the article."

I think their point is actually that "most people can't make it on $250k", but I get your point.

[FMF]

Greg --

I don't have a misunderstanding -- I have a point of view proven out by actual experience.

Oh, and I have a reader who is attempting to justify how it's so hard to make it on $250k. I'm not buying it.

Of course you can live anywhere you want to (and spend whatever you want to). But you need to realize that some of those choices are VERY expensive.

[Sarah]

@Greg - I think the point is just that no matter how you put it - yes it is more expensive to live in those areas, but the family profiled is by no means hurting, or "barely making it". They can clean their own house. They have enough in excess to max out their 401k, as well as save 8k/year for their children's college fund. With how much they spend on gas, they are each driving around 18k miles/year (being conservative @ $4/gallon, 25mpg) so it doesn't sound like they live close to where they work either. Or the analysis is just wrong. They are spending 430/week on food & household supplies when you include their eating out and takeout. That's more than what my family spends in a month, and we get takeout and don't clip coupons. The household supplies should be fairly minimal, because I'm assuming they don't have to buy cleaning supplies.

I think the overall point is just that this study is very flawed, and is skewed to make us think that 250k is hard to make work in high cost areas, but none of the actual costs hold up to scrutiny.

[Greg]

@FMF,

You say you don't have a misunderstanding. But let's be clear about what I think the article is saying, and why I think you are missing the point.

First, though, I will agree with you that the headline of the article is meant to be sensational - that people are "down and out" or "(can't) even make ends meet" on $250K/year. I can't defend this tactic, but will say the title also includes "But is a family with that income really rich?", because many people (I know not you) equate top 3% income with wealth, as if only needing to look at one side of the equation.

What I take from the content of the article, however, is that expenses are significantly higher in high-cost areas, to the point where it makes it more difficult than most would expect for a family of 4 to make ends meet on $250K/year. The costs provided are not out of whack. I live in San Mateo, CA and experience them every day. That these people might go into debt is a failure in financial management, but can happen more easily than one would expect.

This is what I mean by "you're missing the point"...

1) No one is arguing you can't make a "good" living in lower cost-of-living areas, and that telecommuting is getting more common. I'm sure you can even make $250K a year, but I'm sure a far higher percentage families make $250K/year in the Bay Area and New York than the rest of the country.

2) No one is arguing that it's a better financial deal to move to a lower cost of living area - in fact, one could argue that that is part of what the article is illustrating (by showing high-cost-of-living locations).

3) No one is arguing that living in a high cost of living location is not (VERY) expensive.

Your points are all valid, but have nothing to do with the article. You go through and compare your expenses to theirs, but you underestimate the cost of living. You suggest that they can have one parent stay home, but I don't know of any couples that can afford to do that - they already understand that it's not worth it for someone to stay home if they make $100K/year. You suggest telecommuting, but not everyone has that option.

At the end of the day, a family making $250K does have more leeway to reduce expenses of course. They can make ends meet. The point is that it's harder than one would think - that it may even be harder than if they earned less money and lived in a lower cost of living location. Your arguments actually help prove MY point.

[Greg]

@Sarah,

You said:
The family profiled is by no means hurting, or "barely making it".

I say:
Agreed - I mention that in the reply I just posted to FMF.

You said:
With how much they spend on gas, they are each driving around 18k miles/year (being conservative @ $4/gallon, 25mpg) so it doesn't sound like they live close to where they work either.

I say:
The Glendale family spends $7,772/year on Gas and Gas Tax. At $4/gallon (it's now $4.25 here), that's 18.5 gallons per week for each car or only 2.65/day. That's somewhere between 53 and 66 (20-25 mpg) a day (or 27-33 miles each way to work). I've got news for you. That IS close to where they work. If I lived in San Francisco, my house would be twice as expensive. When we're talking about the Bay Area or NYC (or perhaps Glendale, I don't know), these cities are spread out so that these commutes are the norm. If you want to save money and move to a lower-cost-of-living area, your commute jacks up to 2 hours - that lowers your quality of life faster than your expenses (in my opinion).

You said:
They are spending 430/week on food & household supplies when you include their eating out and takeout. That's more than what my family spends in a month, and we get takeout and don't clip coupons. The household supplies should be fairly minimal, because I'm assuming they don't have to buy cleaning supplies.

I say:
I've got more news for you. My $80 cleaning lady (every 2 weeks, not every 1 week as I mistakenly represented before) does not bring her own cleaning supplies. I'm not sure what you're eating, but this is a sticking point for me. We don't really buy processed food. As a nation, we spend far less on food than most other countries. The reason is that our government has chosen to subsidize processed food (corn, soy, wheat). We get cheap calories that lack nutritious value. The result is obesity and disease. I refuse to buy processed food. Spending $430 a week with one meal out is no problem.

You said:
I think the overall point is just that this study is very flawed, and is skewed to make us think that 250k is hard to make work in high cost areas, but none of the actual costs hold up to scrutiny.

I say:
Other than the gas tax error I pointed out earlier, I think everything is accurate (and I live in a high-cost area). I spend less on medical expenses too, but as I mentioned, we are a relatively healthy family. Move here for a year and let me know what you think.

[FMF]

Greg --

You said:

"What I take from the content of the article, however, is that expenses are significantly higher in high-cost areas, to the point where it makes it more difficult than most would expect for a family of 4 to make ends meet on $250K/year."

I disagree. I think their point is that it's hard to make it on $250k living almost anywhere (only in the cheapest areas do you have hope of this.) I believe that is incorrect.

You said:

"The costs provided are not out of whack."

So how can someone making "only" $200k afford to live? Or someone making $150k? Or only $100k? Heaven forbid that someone earning $50,000 try to live in Plano, Texas! IT CAN'T BE DONE!!!!!!

You said:

"At the end of the day, a family making $250K does have more leeway to reduce expenses of course."

My point exactly.

[Sarah]

I guess the easiest way to see if these costs are overinflated is to just look at the median household incomes for the cities.

Huntington NY: $102,712
Pinecrest FL: 104,155
Plano, TX: $77,140
Naperville, IL: $98,488
Glendale, CA: $50,804
Bethesda, MD: $129,440
Alexandria, VA: $77,095
Washington, DC: $59,290

Basically, the family profiled isn't just doing well nation-wide. They are doing very well for every single one of those cities. That tells me that its a spending problem, not an income problem, and not a high-cost-area problem.

[jim]

Greg asked: "I'm interested in how you calculated your $162K average spending in the study referenced by FMF. Are you including their retirement and college savings ($41K) as spending?"

I did the math using their data. The 162k figure excludes their savings and the taxes. They figured 162k spending on stuff and living expenses.

Keep in mind we're not really talking about San Francsico or Manhattan. We all know those are expensive cities. Thats not news. Its also not a reason to think $250k ain't a lot of money. Nobody is debating that housing in expensive cities is in fact expensive. The figures cited for mortgages seem realistic to me. $36k for mortgage in Glendale would not be a mansion.

But the article is not about SF or NYC. One of the cities they discuss is PLANO TEXAS which has below average cost of living. To argue that $250k ain't enough for a family of 4 in a lower cost city is not realistic, its frankly just BS.

"If you want to feed your family good, quality plants and animals and avoid processed crap, $14K is a LOW number, and might actually be tough to live on."

No. $14k is far above average spending. If you insistent on nature, free range, organic everything then you can spend tons of money on food. That is not a requirement, its a luxury for well off people.

[jim]

By the way, the amount of money they figure for mortgage cost in Plano Texas would buy you a 4000 sqft McMansion.

[Greg]

FMF-

First let's get two things out of the way:

1) I disagree (and I think I’ve read that you do too) with the equation of income to wealth – while it often correlates, it is not equal. But nonetheless, this is the tack the article takes, and I believe it is the right tack since the vast majority of the public seem to think income equals wealth (otherwise we wouldn’t be having this debate!). And more importantly, policymakers are viewing $250K as the dividing line for raising taxes on “the wealthy”.

2) The article title is sensational and meant to stir up controversy and bring in traffic. What the article actually concludes is less polarizing than the title.

Now, I will debate your argument.

I am not arguing that a $250K income family residing in a high-cost-of-living location is poor and can't make ends meet, only that it's harder than most people (particularly those that don't live in these areas) might imagine. I would argue that these families might need to make greater sacrifices than families earning far less in lower-cost-of-living areas just to make ends meet. And I would argue this matters because our government seems to believe that $250K income earners can afford to pay more taxes than lower-income earners in lower-cost-of-living areas. I believe this is a mistaken perception because affluence depends so heavily on location.

From the article: "$250,000 will be etched in the minds of policymakers and pundits as the number that separates the middle class from the wealthy." and later "But just how flush is a family of four with a $250,000 income? Are they really "rich"?" The first statement indicates that a $250K income indicates wealth, and implies that policymakers will use this figure as a dividing line for raising taxes on the wealthy (this has been all over the news). The second statement is questioning whether $250K income earners really are rich (implied: deserve to pay more taxes than they currently do). To me these statements focus the article on arguing whether $250K income earners are wealthy enough (implied: have enough extra income after normal expenses) to warrant paying more taxes (laying aside political arguments over what a "fair share" of taxes should mean). The rest of the article goes on to show how normal expenses in high-cost-of-living areas actually eat up most, if not all (and then some) of these families’ incomes, leaving them with not a lot of extra money to pay the increased taxes policymakers are proposing.

While some may disagree with the expenses, I can tell you this is the cost of living in these areas. It seems to me like everyone disputing this does not live in one of these areas. The article even brings out a specific example of how (day-to-day) expenses (and also housing, but everyone knows that) could differ: “Consider, for example, the tab for the same assortment of ground beef, tuna, milk, eggs, margarine, potatoes, bananas, bread, orange juice, coffee, sugar and cereal. In Twin Falls, Idaho, the cost would be $23.41. In New York City, you would have to shell out 72% more, $40.29, according to The Council for Community and Economic Research. That higher percentage carries across all expenditures, from child care to haircuts.”

The conclusion stated directly from the first page of the article: "The bottom line: It's not exactly Easy Street for our $250,000-a-year family, especially when they live in high-tax areas on either coast." A similar conclusion is repeated at the end of the article (don’t make me defend the author’s writing style…): “The bottom line: For folks like the Joneses -- who live in high-tax, high-cost areas, who save for retirement and college, who pay for child care to enable them to earn two incomes and who pay higher prices for housing in top school districts -- $250,000 does not a rich family make.” Both statements mention the condition that the argument applies to families living in HIGH-TAX, HIGH-COST areas, not ANYWHERE as you say. Neither conclusion repeats the sensational title (clearly written to stir things up and bring in traffic) – that the family is “down and out”. The first conclusion is “it’s not exactly ‘Easy Street’” and the second “$250K does not a rich family make”. Both statements imply that $250K does not put a family in the “wealthy” category that policymakers have focused on as the dividing line for raising taxes. Ultimately, as the article quotes Policy Tax Center analyst Roberton Williams, “Whether or not $250,000 represents affluence "depends a great deal upon where you live." THAT is the point of the article.

[FMF]

Greg --

I'm not sure we're going to agree on this issue.

FYI, I think jim is spot on.

[Venkat]

Greg--
I am from Plano Texas, here are some numbers(some of the numbers are similar to my own living expenses):
Income 50000
401(k) @ 10% -5000
Tax +ssi -6500
Medical Insurance -7500
Yearly Gross 31000
MonthlyIncome 2583.333333
Monthly Expenses
Rent(Average) -750
Groceries(Vegetarian) -300
Utilities -175
CarPayment -250
Phone/Internet -80
Gas -250
Insurance(2 Cars) -100
Gifts -20
Misc. -50
Toll -50
CellPhone -50
EatingOut -100



Savings 408.3333333

[Greg]

Getting it from all sides :)

@sarah,
I Googled Glendale, CA data.

While the median household income may be around $50K, the median household is 3.27 people, not 4. Also, the average cost of a mortgage in Glendale was $1,936 (http://www.americantowns.com/ca/glendale-information). My guess is that the households who have mortgage payments of almost $24K per year are grossing way more than $50K.

You will (rightly) point out that this $24K in mortgage payments is less than the $36K in mortgage payments the study cites. I can only point to their stated methodology “To factor in varying state and local taxes, as well as drastically different costs of living, BDO placed the couple in eight different locales around the country with top-notch public schools, using national data on spending.” I don’t know about Glendale, but can say that in San Mateo, there is a wide variance in the cost of housing. If I want to live in an area with “top-notch public schools”, then I will spend more than the median cost of housing (it is a well-known fact that public school quality correlates with housing costs).

Yes, I could choose to live in an area with “mid- or bottom-notch public schools”, but again, this is an irrelevant argument with what the authors are saying in this study. They are talking about families making $250K income and living in high-tax, high-cost areas (and specifically, areas within the cities listed that have top-notch public schools).

[Greg]

@Jim
I still do not understand your math. Let me lay out what I see:
Income: $253K for each city
Taxes: $61,621-$78,276 range, $67,300 average.
Savings: $41K for each city
Spending: $133,724-$150,379 range, $144,700 average.
This is not $162K. It is still greater than $125, so I looked further into the 2008 Consumer Expenditure Study you cite. A couple of things.
1) Income before taxes = $235K (less than $250K, as you state)
2) It does not represent the hypothetical family of 4 the authors use as an example
a. There are only 3.2 people in the average family of this sub-group (implication, the extra 0.8 of a person costs more)
b. Daycare is not listed as an expense (hard to see where it would be included, if it is). The $15K the author cites in the article seems very reasonable for 2 kids (at the time, I paid $30K for my 2 kids from September-mid June and more for summer camps, but that was my choice).
3) The other difference I see is with Medical expenses. I pay $4,318 a year pre-tax in medical premiums. That is for Kaiser HMO (PPO is way more expensive) and a dental plan for my family. My employer is enormous, and I think gets very good rates, though I don’t know this for a fact. I still pay considerable amount in co-pays for numerous kid and adult visits, plus a lot of out-of-pocket fees for dental in particular. While it’s not as much as the author claims, it’s a couple of thousand more than what the CES claims – perhaps this is because I have 0.8 more people in my family and/or my experience that children seem to go to the doctor/dentist more than adults.
I think these 3 items account for the remaining differences. The extra $20K the author includes comes off pretty quickly when you factor in the extra 0.8 person and the daycare. The health expenses are quibbling.

With regards to your statement “But this article is not about SF or NYC”, I’m not sure what to make of that. Does that mean you agree that a $250K earner in these cities could have a really tough time making ends meet? Does it mean that you think SF and NYC residents who earn $250K+ should have a higher limit ($300K, $400K, etc.?) than the rest of the country before a tax hike kicks in? The argument policymakers are making is that these people are “rich” and implies that they can afford to pay extra tax. The article is pointing out that this is not always the case, particularly in high-tax, high-cost areas. While not explicitly included, I’m pretty sure the author would agree SF and NYC fall into this category. And I’d bet he didn’t include these cities because he figured most people (like you) would already know they are expensive cities. But guess what, I haven’t heard any policymaker mention that the $250K tax rate hike being considered would be indexed to location (can you imagine?). The issue is that while anyone making $250K in a mid- or low-cost area would (rightly) be considered affluent, this is not the case in the places where MOST people are making $250K. The reason given (or at least implied) for a tax hike on $250K+ earners is that the rich can afford to pay more taxes (which I agree with). The problem is that $250K is not rich in high-cost areas. And unfortunately, I can’t see our government ever indexing tax rates by location-specific cost of living. Thus, my only suggestion is to raise the tax rate for earners that would even be considered wealthy in areas that are high-cost. I don’t know what that number is, but in San Francisco, it’s significantly higher than $250K.

[Greg]

@Jim,

Forgot to mention I somewhat agree with your comment on the food. If you believed what I do - that processed foods will bring about disease (lower quality of life and earlier death) - it's not unreasonable to say that eating healthy should be a requirement. I will agree that it is unfortunate that most people cannot afford this requirement and so it is considered a luxury. But I will also say that it's the first thing I would spend money on as I advanced up the financial earning ladder.

[Tyler]

Every budget can be picked apart and cuts can be made.

They separated out sales tax so they could accurately compare different cities/regions with different sales tax levels. FMF- you cant cut this out.

If the family buys their own insurance that isnt subsidized by their employer, $13k is spot on.

They live in expensive locations- you cant size down to a 200k home without moving, so again your analysis is wrong.

Of course they could make decisions to cut their spending but the point is the say "their lifestyle is X and the cost of that lifestyle is Y"

Does anyone think their lifestyle is "rich"?
Are these people on track, even with your 24k of savings on the path to be "rich"?

Nothing in their lifestyle seems "rich" to me. Above average maybe, but not rich.

They couldnt go on a week long ski vacation to Aspen for under $10,000. They couldnt travel internationally every year for $10,000. They couldnt fly first class. Their children attend public schools- 20k per student is private schools. Rich people don’t send their kids to public schools!

People who dont make $250k claim they could live on that much and that people are rich. People who make $250k realize it doesnt get you into a "rich" lifestyle.

FMF- I think you should realize that you live in a cheap location where cutting has very little sacrifice. I bet the most expensive home within 25 miles of yours is under $2mm. From Naperville its $15mm+.

Their lifestyle is not rich or luxurious and they make $250k per year. Maybe our level for calling people rich should be a little higher.