When I was younger, I remember discussing with my parents how much money I thought I would need to earn to be financially stable. I thought that if I could just make $50,000, I would be able to live extremely comfortably with little financial worry. However, little did I know that after graduation, a stint in college culminating into a master’s degree in accounting, and a new career as a CPA in public accounting making above that $50,000 threshold, I’d still feel as though it was hard to get ahead financially.
I’m fully aware that making $80,000 a year is a wonderful income for my age which puts me in a very high percentile compared to others my age. In fact, my income alone is approximately 33% than the median household income in the US of $60,000, so I have little room to complain. However, while I am a fairly frugal person, the goal of this article is to share with you how my monthly paycheck is broken down in my monthly budget and actual spending.
Here’s how I spend my salary in a normal month:
Starting base monthly salary: $6,667
1. Taxes: $1,347 – 20% of gross income
As a single-filer, my overall effective tax rate which includes federal income tax, social security, and Medicare comes out to about 20% of my monthly gross income. Because I prefer to have the cashflow through the year and want to avoid loaning the government any of my money interest-free, I try to calculate the exact amount of taxes I owe in order to avoid receiving a refund or paying additional taxes come April. This works out to 20% of my income or around $1,350 per month.
While paying over $1,300 per month is a ton of money, since I live in a state that does not charge a state income tax, I am fortunate to pay a lower tax bill than many others who live in higher tax states that do tax income; however, this benefit is offset by both modestly higher property taxes and sales taxes which quickly add up throughout the year.
Since I am a fairly frugal person, I’m able to avoid a lot of the sales tax I would otherwise incur if I spent a larger percentage of my income on consumer goods. Additionally, I currently do not own a home, so I am able to avoid any direct property taxes in my monthly budget; however, property taxes are somewhat reflected in my monthly rent price.
Net Pay After Taxes: $5,320
2. Health Insurance: $56 – 1% of gross income
After taxes are withheld, the next automatic deduction out of my paycheck is for health insurance. I currently have a Consumer Driven Healthcare insurance plan which results in much lower monthly premiums. While I am fully responsible for any doctor’s visits and medication until my deductible of $1,500 is met, I have been fortunate to be fairly healthy and have had little need for recurring medical visits.
While CDHPs may not be the best choice for everyone who may not have the financial means to cash flow out of pocket medical needs, since I rarely go to the doctor, I save more than half on my monthly premium from my previous Preferred Provider Organization insurance plan. Over the course of the last few years, I have directed these savings into a Healthcare Savings Account (HSA) that I invest for future medical needs.
As an added benefit, my employer also contributes a substantial sum directly into my HSA account every year that I also invest in this tax-advantaged account.
In addition to my medical insurance, I also have dental coverage which is under $5 per month.
Net Pay After Taxes and Insurance: $5,264
3. Investments: $1,373 – 21% of gross income
Contributions to my Health Savings Account (HSA) associated with my high-deductible health plan, retirement accounts, and 529 Savings Plan make up the second largest line item in my budget behind housing at 21%.
In order to receive the maximum match in my employer-sponsored Roth 401(k) Plan through Fidelity, I contribute 10% of my base salary or $667 per month in a Large Capitalization Growth Stock index fund that is offered through my broker which has outperformed the S&P 500, Russell 3000, and other peer funds over the last 5 and 10 year periods.
After I have gotten the maximum match in my Roth 401(k), I also max out my Roth IRA at $6,000 per year or an average of $500 per month in an assortment of individual stocks that I have selected within my Fidelity account. I choose these stocks after careful research and when I believe they will outperform the market over the long-term.
Each time I make a purchase in my Roth IRA, I also make a note in my excel spreadsheet of the S&P 500 and then compare the hypothetical returns every month to ensure my money is not better invested in a broad-based index fund. Fortunately, while I do have losing stock picks, my overall portfolio of individual stocks has outperformed the market by 13% since I began tracking. My plan is to continue to monitor my previous picks and future stock purchases, and if it becomes apparent that I cannot beat the market over the long-run with my individual stocks or if I lose interest or the time necessary, I will revert to moving the money in my Roth IRA to index and mutual funds.
The third largest investment I make each month is into my HSA Account with TD Ameritrade. As previously mentioned, because the premiums on high-deductible plans are substantially less than my former PPO Plan, I contribute $167 per month into this account that can also be invested. While my Roth contributions are after-tax, these contributions into my HSA have the benefit of reducing my taxable income and lowering my overall tax bill.
Additionally, since I have the financial means to pay for most medical expenses out of pocket, I am able to invest most of the balance into a growth stock fund that tracks the NASDAQ which allows the balance to compound. For future medical expenses, I could either continue to pay out of pocket and allow the balance to grow or I could sell the stock and reimburse myself without any taxes or penalties on either the contributions or the investment gains.
Therefore, my HSA is tax-efficient in three ways: contributions are tax-deductible, investments grow tax-deferred, and the balance that the investments grow to can be used with taxes or penalty when used for approved medical bills.
The last automatic contribution I make each month is into a 529 College Savings Plan through Fidelity. College savings plans are wonderful accounts as they allow you to contribute and invest for higher education without taxes on any of the dividends and capital gains when used for approved expenses.
While I have no current plans to go back to school, the main reason I opened the plan was to begin saving for any future childrens’ college expenses. Currently, the costs associated with attending a 4-year institution are around $100,000. In 20+ years, at the historic college inflation rate of 8%, this could result in college costing over $400,000 per child which would be unaffordable without proper planning or massive student loans. While I only contribute $40 per month, I plan to significantly ramp up savings and contribute lump sums whenever the time is more appropriate and allow the dividends and gains from investing pay for the majority of any future schooling needs.
Even if my spouse and I never have children, I will have the financial means to pursue my own interests as a lifelong learner.
Net disposable income per month: $3,891
4. Housing Costs: $1,535 – 23% of gross income
My housing costs are comprised of rent for a 2-bedroom, 2-bathroom apartment of $1,333 and utilities of $203 which includes cable, internet, and electricity.
While I used to have a roommate my first few years out of college which resulted in total housing costs of $900 per month, I decided it was time to get my own place and experience living solo prior to marriage. While I love the luxury of having my own space, being a lone renter comes with the disadvantages of the full cost of rent and utilities.
While the ratios of housing costs to income are not completely out of line, I do spend a few hundred dollars more per month than I would otherwise prefer; however, having the additional space in the heart of the city with the amenities of an upgraded apartment complex are hard to beat for the next couple of years.
Disposable Income after Housing Costs: $2,356
5. Transportation Costs: $961 – 14% of gross income
Perhaps the area I most struggle with is the amount that I spend on transportation costs each month as I recently purchased a new vehicle when my 11-year old vehicle experienced some serious mechanical issues.
While I had been saving and had the ability to pay for my new vehicle in cash, I elected to finance about 70% of the cost of the vehicle over 3 years at a 2.3% interest rate with my local credit union rather than selling my stock holdings.
Over the 3-year period, I will pay just under $1,000 in interest on the loan; however, financing the vehicle allowed me to continue investing and earning a much higher rate of return (especially considering employer matches in my 401(k) and associated tax benefits) over the 3-year period. However, my monthly car note is $720 per month, and sometimes I debate whether I should take the Dave Ramsey approach and clear out my non-retirement accounts and pay off the debt and free up cash flow or continue allowing my stocks to grow at a higher rate.
Since I like the idea of paying the note off sooner, I will probably begin devoting any extra cashflow or bonuses to the debt after my 401(k) match is fully met and my Roth IRA is fully funded.
I spend around $241 split evenly on gas and car insurance, resulting in total transportation expenses of $961.
Fun Money (well, almost): $1,395
6. Food: $726 – 11% of gross income
Obviously, the next necessity in my budget is food. In any given month, I spend on average about half of my food expenses on restaurants and dining out and the other half on groceries.
As anyone with a significant other knows, dining out is hard to avoid, so paying for two meals in a single setting quickly adds up – even if we limit dining out to one or two days on the weekends with friends. Since neither of us eats too much, we’ve started to do more happy hour specials and splitting meals which has been good for my wallet and our waste-lines!
Since dining out and getting drinks quickly can turn into $100 for two people each time, I try to eat breakfast, lunch, and dinner at home during the week to reduce my food spending. Currently, I average between $7 and $8 per meal, but my goal is to decrease this to an average of $5 per meal.
I have found that shopping for groceries for just one person can be difficult since fresh produce and prepared meals can quickly go bad before I have time to eat them. Instead of letting the produce spoil, I try to only buy what I can consume in around 5 days, and then just stop by the grocery a little more often rather than spending $150+ on just one or two runs. This allows me to buy the food I am craving at the time while also limiting the amount that is wasted.
Fun Money: $668
7. Other Recurring Expenses: $48 – 1% of gross income
While I used to have a ton of subscription services ranging from Netflix (now I’m on a family account), HBO, and Showtime to the Wall Street Journal, I recently started cutting out a lot of the recurring monthly expenses that I did not have time to use.
I do, however, get full use out of my gym membership at $33 per month since there are multiple locations as well as basketball courts, classes, and a pool.
Probably the most embarrassing line item in my budget to me is my charitable contributions. Currently, I donate around $15 per month to a non-profit that I care deeply about. However, the amount I give is pretty disheartening – especially compared to other line items in my budget.
While I currently do not give as much as I wish I did (or probably should), I do have an account set aside that is invested and earmarked for charity later. I see myself as a fiduciary of these funds which will compound and allow me to give even more generously later on and hopefully make a significant impact later on in life.
Net Savings after Recurring Expenses: $620
8. Other Expenses: $297 – 4% of gross income
Since it’s virtually impossible to plan for everything in a given month, I use my past expenses to estimate these other costs.
While I fly only 4 or 5 times per year, I typically pay out of pocket for an average of around two of those flights at an average of $400 each. Even though it’s an expense up front, the monthly cost works out to around $67 per month if I were to save for these flights – typically around the summer and year-end holidays.
The largest other expense relates to my passion for golf. While I love golf and frequently go to the driving range, I only average playing around twice per month. Typically, I’ll play much more spring through fall and rarely play in the winter, but it works out to an average of twice per month. At around $65 per round, I budget about $130 for my golfing hobby.
The last expense that I budget for relates to going out to concerts, bars, and other entertainment. Because of perks with my employer, I get free tickets to events; however, the associated costs of drinks can quickly add up. If we meet up with friends on the weekends, it’s typically over drinks at a local establishment or brewery.
However, because I try and limit my drinking out, I can typically limit my drinking budget to around $100 per month.
Total Net to Savings: $324 –5% of gross income
Overall, the largest percentage of my monthly budget goes to investments and savings at 25% of my gross salary. While this is a great start and well above the typical American, I would love to increase my savings in other investments outside of retirement in hopes of achieving financial independence earlier on.
Areas of Improvement:
The main two areas that I struggle with in my budget relate to the auto spending because of my truck loan as well as my negligible amount of giving.
Since vehicles are terrible investments as they depreciate in value, I know that this purchase is counterproductive to my longer-term goals; however, I also enjoy the truck and it is not out of line given my overall financial situation even though it does consume much of my disposable income.
Since giving $15 per month on my income is extremely measly, another area I hope to improve would be my overall generosity. Even if I am unable to give a significant amount of money, I would like to increase my contributions to causes I care about as well as volunteer my time until my car note is paid in full. Once this occurs, I will have $720 as well as any pay raises over the next 3 years that will fall to my bottom line and be available for other investments, spending, and giving.