When you think of the word broke what comes to mind? For me, it’s college-student life with a beat-up car (if any at all), ramen for dinner every night, and basically no money for anything extra. But that’s not necessarily always the case. These days, as real estate costs skyrocket in some cities and college debt mounts, you can actually make a six-figure income and still live broke.
In these cases, broke might look like a beautiful home, food in the fridge, and a nice car–but no money left in the bank account at the end of the month. Or it might look like some fairly lavish spending, but a looming sense of never having enough to feel financially comfortable.
Lots of things can cause someone to be or feel broke on even a great salary. Here’s a rundown of some of them, and ways to prevent them:
Living in the Wrong Place
In some U.S. cities, like San Francisco, six-figure incomes for a family of four qualify as low-income. Income qualifications like these are based on the cost of living in an area. And in some cities, the cost of living is so high that you can have trouble making ends meet, even if you’re earning six figures.
Sometimes you can’t necessarily choose where you live. But if you’re feeling stretched thin financially in a city with an incredibly high cost of living, a move might be one good way to boost your quality of life. In some cases, you may take a pay cut with your move, as salaries are typically indexed to the area of the country where you’re employed. But $80,000 could stretch much further in many midwestern cities than $100,000 does in some coastal cities.
Read More: 10 Most Affordable U.S Cities for Renters
This factor may or may not have anything to do with the first section above. In some cities, owning a home is just cost-prohibitive unless you’re well into the six-figure or more income bracket. But you don’t necessarily have to live in a city with million-dollar one-bedroom homes to become house-poor.
Even after the mortgage crisis, lenders will still allow you to devote a huge portion of your monthly income to your mortgage payment. An FHA loan, one often preferred by first-time homebuyers, allows you to have up to 31% of your monthly income tied up in mortgage payments, and up to 43% tied up in total debt payments. And keep in mind that this is your monthly gross income, which is your before-tax income.
So if you make $100,000 a year on the nose, that’s about $8,333 per month before taxes and other deductions. So you could get an FHA loan with a monthly mortgage payment of up to $2,583 per month. It seems like that would leave you with $5,750 per month for your other expenses, which is still quite a lot.
Except, remember that 31% is based on your gross income. If we use a paycheck calculator to see what your take-home salary might be with one federal exemption and no additional withholding for things like medical care, you’re only bringing home $6,072 (in the state of Indiana, for our purposes). That leaves you with just $3,489 per month after your maximum mortgage, which starts to feel a lot more pinched.
More than $2,000 per month in a mortgage payment can get you quite a house in many areas of the country. And it can be tempting to set your sights on this kind of home once the mortgage company tells you what you can qualify for. But it’s almost never a good idea to tie up that high a percentage of your gross pay in a mortgage, and it’s a really quick way to feel broke even with a good income.
Instead, when you go to buy a house, look at your current income and budget, and set your target mortgage payment–and resulting total loan amount–based on what you’re actually comfortable paying. And don’t forget that you’ll have additional expenses with homeownership like home insurance. Factor those in, shoot for a more modest home, and your six figures will feel much more generous.
This is definitely something I’ve been guilty of, as have many of us. This is the concept that as you make more money, you spend more money. So you never really feel like you’re making that much more money because it’s all still going out each month.
Back before our daughter was born, my husband had an entry-level job at the YMCA, and I was freelance writing full-time. We had no money to spend, so we just didn’t spend money. It felt tight all the time, and it wasn’t a great place to be. But we made things work with well under $40,000 per year. As our income went up, though, so did our expenses. So some years in our married life, we’ve still felt pinched, even making $80,000+.
Granted, some of those expenses came about because we decided to have children, who come with some expenses of their own. But others were definitely lifestyle inflation. We went from a beat-up car to a nicer one. We started eating out more and getting less frugal with our groceries. And we moved from an apartment with few additional housing expenses to a house with a less-than-our-rent mortgage payment but a bunch of expenses of its own.
I’m not saying lifestyle inflation is always a bad thing. If you go from earning chump change and eating beans and rice right out of college, you should hope for a few lifestyle upgrades as you increase your earnings. But think ahead of time about what a reasonably-comfortable lifestyle looks like for you. Then freeze your salary at that level.
You can do this by automatically stashing away bonuses and raises once you hit that comfortable salary level. You may need to re-evaluate this every few years or with major life events. But not automatically adding more money to your take-home pay is a great way to avoid the problem of lifestyle inflation.
Not Saving for Emergencies
Having no emergency fund, whether you make $30,000 or $100,000, is a surefire way to feel even more broke than you are. Whether the emergency is a small one, like needing to replace a flat tire on your car, or a big one like losing your job, if you’re living right to the edge of your paycheck, it’ll feel like a disaster.
Those on modest incomes who are good at saving will feel more comfortable financially than those making six figures who don’t have an emergency fund. Even if you have a huge income, you can start small with this type of fund. Set aside a few hundred dollars per month. As that padding grows, so will your sense that you’re not actually broke.
If you are just starting to build your emergency fund, I’d stick with a high interest savings account. Once you’ve built up a cushion, you can look to get some higher rates with CDs.
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It may seem like a good idea to take on high-interest debt like credit card debt or personal loans to solve right-now problems. But chances are that this type of debt, which typically either has a high monthly payment or takes decades to pay off, will just snowball your current financial issues.
My family has run into this before. In order to avoid becoming house-poor, we bought a fixer-upper. And it’s generally been an excellent investment. But when the gutters needed to be replaced ASAP, we had to finance that job with a personal loan. That high-interest loan has been difficult to get out from under. Other expenses always seem to crop up in the months when we could pay extra on the loan. And the hefty interest makes the payments quite high, which squeezes other areas of our budget.
Generally, your best bet is to avoid high-interest debt like this if at all possible. If something does come up and you need to use a personal loan or credit card to cover it, then get the debt paid off as soon as you can. Trust me, it’s worth your while to restrict your budget down to the bone in other areas so that you can pay off this debt more quickly. Getting those debt payments off of your monthly budget is a huge way to free up resources for saving.
Massive Student Loan Payments
Finally, we come to a problem plaguing many twenty and thirty-somethings with great jobs and high salaries: student loan debt. In fact, you might partially have that high salary because you have high student loan debt. On average, students have about $30,000 of student loan debt, but medical and legal students, who often have higher earnings, also have a much higher level of debt.
A $30,000 student loan can have a monthly payment of anywhere from $50 to $200+ per month, depending on the repayment plan you qualify for and choose. So if you have a lot more student loans than that, your student loan payments can easily outpace mortgage payments. And that can really put a strain on your budget, even with an excellent income.
Dealing with student loans on the front end means making sure you always know how much they’ll cost each month once you graduate and enter repayment. And then you can use that information to make the best possible choice about the debt you take on.
On the back end, you have a few options. One is to refinance your student loan debt, if you qualify. Right now, you can cut your interest rate from around 7% to around 3% or less, depending on your job and income level. And that can translate into lower payments and a shorter payoff time.
But if you can’t qualify for refinancing at this point, then you can check out different repayment options that can let you lower your payment until you take care of other parts of your budget. Even on a $100,000 income, you may be able to cut your payments down with an income-based or income-dependent repayment plan, depending on your family size, the amount of your debt, and other factors.
Then, try knocking down your student debt over time with extra payments. Again, it’s worth controlling your budget in other areas tightly so that you can get rid of student payments and eventually feel a lot less broke.
Tip: Compare student loan refinancing options with Credible
Broke is a Mindset
Picture two people who both make the same salary and have similar lifestyles. They drive modest cars and live in modest homes. They are both frugal about grocery shopping and don’t eat out a ton. But one is forced into these decisions by loads of debt brought on by lifestyle inflation and a lack of emergency resources. The other makes these choices freely and has plenty of savings in the bank.
To the outside world, they may both look pretty broke despite their big salaries. But only one of them actually feels broke. So in part, being broke is a mindset. But it’s also reliant on other factors like your overall spending choices and how you control your budget.
By staying disciplined, even on a six-figure salary, you can free up money to save, which helps you have more peace of mind. And you can also be very conscious about where to splurge, whether that’s on travel and great experiences, services that make your life easier, or just saving more money so you have better options in the future.