Stop drafting hate email to me. That title’s mean to be provocative because it’s in response to the general conclusion that this bankrate.com article draws:
One hundred thousand dollars. Since the 1980s, the magical “six-figure” salary has been a benchmark for financial success. Not too long ago, that income often meant two nice cars in the garage of a large house, fun family vacations and plenty of money left over to save for retirement and college tuition.
But times have changed. Not only has standard inflation steadily eroded the real value of a $100,000 income, but the costs of housing, health insurance and college tuition have risen dramatically in recent years. Consider the rising costs of food, energy and the necessities of a middle class life, and that six-figure luxury quickly turns to six-figure mediocrity.
I came across this article awhile ago, but I didn’t have the right opportunity to talk about it until today when I was at happy hour with my buddies and the topic of salaries came up. There I was, sitting at the bar, tipping back a cold one after a run at Gold’s Gym, looking pretty classy in my running shoes and sweaty shirt and shorts, when my buddy, Navneet, remarked how he feels like it’s going to take forever to save up for retirement. I put my beer down and replied that I was envious that his wife and he, who are both making about $125k each and have no kids (classic DINKs) were able to share a lot of their living expenses, like a mortgage, whereas I was not, and that they’d be there in no time if they lived frugally. And then I said something he took exception to: “After all, you’re upper-middle class.”
His reply: “Are you sure? I really I don’t feel like it! I feel like I’m just barely making ends meet. And then when kids come, it’s game over–there goes all my money for retirement. We’re going to need a bigger house and we’re going to have to save for college–it’s going to be expensive for those guys!”
I think my jaw dropped. After the momentary shock, I blurted out, “Dude, you drive a BMW 335i! What are you talking about, ‘barely making ends meet?’” And not only that, Navneet also has a good-sized three-bedroom house in Round Rock, dresses well, and travels on the regular. Barely making ends meet? My buddy Sunil and I exchange glances, and Sunil brought up the fact that a household income of $250k is the 3% of household incomes. 3%! “If that’s not upper-middle class,” Sunil said, “then I don’t know what is.” Navneet didn’t believe it, so I had to Google it and present him with the entire table for his edification.
Amen, Sunil. Amen. A household earning $250k is a prosperous household indeed. And Navneet has even less to complain about given that he’s living in Austin where the cost of living index is a low 90.6 out of 100. If he feels like money’s tight here in Austin, homeboy would never survive on the coasts where the cost of living index is greatly inflated.
The Bankrate article says that the effective value of $100k today is $381k in 1976, and that’s just looking at inflation–it doesn’t take into account expenses that have grown at a greater rate than many things found in the Consumer Price Index such as student loans, housing, healthcare. Fair enough. Peace. A $100k salary doesn’t make you a baller. But barely making ends meet? I mean, if that’s the case, then what about the 50% of households that are making $50k per year? If a $250k household feels like they’re not making ends meet, then how on Earth do the guys making $50k survive, to say nothing of the people at the lower end of the spectrum?
It comes down to how we spend the money. Travel and BMWs are expensive. If Navneet traveled less and had a cheaper car, he wouldn’t feel so stretched, and he might be a little more excited about welcoming some little ones into this world. And how is a 3-bedroom house not sufficient for a small family?
I’m not saying anything brilliant here–I’m basically echoing what the article says much more eloquently than I:
[B]uying too much house, spending too much on automobiles and having too much debt is commonplace with families in the $100,000 income level and largely responsible for the six-figure pinch. [A typical $100k household] owns a $375,000 home, leases 2 vehicles for $450 each per month and pays $250 per month on credit cards. After that household pays the mortgage, car notes, debt and takes out Social Security and federal income taxes, it has spent 75 percent of its income.
Here’s where the real concern lies: The table depicting household income percentile above hasn’t changed much over the years, but the purchasing power of a $100k salary has definitely eroded since 1976. This is cause for concern because as inflation and expenses like housing, education, and healthcare continue to rise, but the percentage of people earning above a certain dollar amount doesn’t, then we’re all effectively getting poorer. And that’s a problem.
Saving for Corvettes over College
I participated in a filmed segment for the Huffington Post this morning regarding student loans that you can watch here. The discussion was rich. 12:27-12:30 is BEGGING to be auto-tuned–absolutely begging for it. Also, I let my dogs off the leash at 13:30 when one of the guests doesn’t let me get a word in edge-wise. I guess I get a little cranky with only four or five hours of sleep under my belt.
Anyway, the parents of one of the guests, Lauren, decided to buy a lake house instead of paying for her undergrad degree. I ask her what she did to tick them off so badly. I mean, seriously, her parents are definitely selfish if not downright irresponsible. It’s one thing if her parents couldn’t afford to pay for college, but to buy a lake house instead of setting their daughter up for success in such a brutal economy is just cruel. During the interview, you can actually sense the trepidation she has about paying off her loans. And it only gets worse: Lauren remarks that she’s lucky her parents co-signed for her–they have so many loans out right now that they can’t even co-sign for her two siblings. Outrageous!