Over the past two years as I’ve engaged with clients, I’ve discerned two prevailing trends. Firstly, the majority have experienced a significant increase in income. Secondly, this uptick in earnings has been paralleled by a rise in the cost of their lifestyle, sometimes surpassing their income growth. Consequently, many families, despite earning well, find themselves feeling financially constrained.
To avoid misrepresentation, it’s important to note that almost every client I work with diligently saves for retirement, avoids accumulating unnecessary debt, and at the same has enough money left over to do the things they enjoy like vacation, home improvement projects, etc. However, even those who describe their lifestyle as “frugal” find there’s little surplus remaining.
So, what factors contribute to this financial squeeze? Is it lifestyle inflation – one’s own decision to live a more expensive lifestyle over time? Or is it inflation itself – the general increase in the price of goods and services? Most likely, it’s a combination of both.
Some individuals simply acquire more possessions, indulge in more frequent vacations, or have growing families that result in higher costs. Concurrently, inflation exerts its influence, especially impacting those with recent mortgages and loans.
In my conversations with clients, a recurring question is “How do my finances compare to others in similar circumstances?” To provide insight, I’ve analyzed data from the 130 clients I work directly with.
About half of my clients are still working and half are retired. For purposes of this post, we’ll look solely at the data of those who are still working, and we’ll focus on the retired clients in a later post.
Among my clients who are still working their incomes range from $75,000 to $1 million annually. The average is about $264,000 annually or $22,000 monthly.
Among those clients, their savings rate, or percentage of their income saved, ranges from 0% to 46%. The average savings is $38,000 or 14% of income.
About half of my working clients are still raising their family, while the other half never had kids or are empty nesters.
With this information, I’ve created a case study to illustrate how a typical client with solid financial habits may end up spending their income.
For illustrative purposes, let’s consider a married couple with three children who are all still in the home. One spouse works full-time earning $220,000 annually, while the other manages the household and works part-time, earning $44,000 annually. Together, their gross income totals $264,000.
At first glance, an annual gross income of $264,000 ($22,000 per month) seems more than adequate for a comfortable lifestyle, and it very well can be. However, it’s important to understand how substantial expenses that I would consider non-negotiable can significantly diminish discretionary spending.
Federal, State, and Payroll Tax
Assuming both spouses are W2 employees, they will incur federal and state income taxes, alongside payroll taxes (contributions to social security and Medicare). At this income level, federal income tax, with typical deductions, amounts to approximately $30,000 annually, with state income tax in Utah at around $8,000 per year, and payroll tax at approximately $17,000 annually. This translates to approximately $55,000 or just over 20% of income allocated to taxes.
Retirement Savings
Our average client saves about 14% of their income annually, which translates to roughly $37,000 per year. That’s about the equivalent of maxing out a 401(k) and a Roth IRA (through a backdoor Roth contribution). Preference on when to retire, desired retirement lifestyle, current assets, expected inheritances, estimated social security, state of residence, etc. factor into how much we recommend a client save towards retirement, but 14% or $37,000 is a good amount we can use for this case study.
Mortgage and Debt Payments
Home prices and interest rates as a combination are higher than ever before. We’ll assume this family bought their home 5+ years ago before both prices and rates started to rise. They live in a home they like that they expect to be in for the foreseeable future. Their total mortgage/escrow payment is $4,000/month ($48,000/annually). In addition, they have two auto loans that require $1,000 in monthly payments ($12,000/annually). Total mortgage and debt payments end up being $60,000 annually, about 23% of gross income.
Insurance
Health, vision, dental, life, disability, and auto insurance all further reduce discretionary spending. Premiums for health/vision/dental insurance vary greatly depending on the plan and how much an employer covers. A family of 5 with a good plan and the employer paying 70% of the cost would end up paying about $800/mo. Long-term disability and life insurance are also typically subsidized by the employer so we’ll assume $200/mo for those policies. Assuming none of the kids drive yet you could expect a monthly premium of about $400 for two cars. Therefore, total insurance costs are about $16,800 annually ($1,400/mo) or about 6% of gross income.
We’ve now got most of the large, non-discretionary expenses out of the way. We started with a gross income of $264,000 ($22,000/mo) and are now down to $95,200 ($8,000/mo) to be spent on everything else.
Remaining Expenses
The remaining income caters to various expenses -groceries, vacations, children’s activities, donations, home improvements, utilities, phone bills, streaming services, dining out, general shopping, medical expenses, personal care, entertainment, clothing, auto/home maintenance, etc.
With approximately $8,000 per month available, allocation depends on individual priorities and lifestyle choices.
For instance, a family with three children might allocate a significant portion, say $1,000 per month to extracurricular activities and sports like soccer, gymnastics, swimming, theatre, and art classes.
Similarly, family experiences like camping, travel, and vacations might take up a large chunk of that.
Below, I’ve detailed a line-by-line budget reflecting all the categories we’ve already gone through (tax, savings, debt, and insurance) and included all the remaining expenses this hypothetical family may have.
It’s evident that despite having a good income, careful financial management and aligning spending with values are paramount.
| Item | Annually | Monthly | % of Income |
| Gross Income | $264,000 | $22,000 | |
| Federal Income Tax | $30,000 | $2,500 | 11% |
| State Income Tax | $8,000 | $667 | 3% |
| Payroll Tax | $17,000 | $1,417 | 6% |
| Health/Vision/Dental Insurance | $9,600 | $800 | 4% |
| Life/Disability Insurance | $2,400 | $200 | 1% |
| Auto Insurance | $4,800 | $400 | 2% |
| Retirement Savings | $37,000 | $3,084 | 14% |
| Mortgage/Escrow | $48,000 | $4,000 | 18% |
| Car Payments/Savings | $12,000 | $1,000 | 5% |
| Car Gas | $2,400 | $200 | 1% |
| Car Maintenance | $1,200 | $100 | 1% |
| Groceries | $12,000 | $1,000 | 5% |
| General Shopping | $2,400 | $200 | 1% |
| Gas/Electric | $3,600 | $300 | 2% |
| Garbage/Water | $600 | $100 | 1% |
| Internet/Streaming Services | $1,800 | $150 | 1% |
| Phone | $2,400 | $200 | 1% |
| Vacations | $10,000 | $833 | 4% |
| Kids Sports/Activities | $12,000 | $1,000 | 5% |
| College Savings | $6,000 | $500 | 2% |
| Home Improvement/Maintenance | $10,000 | $833 | 4% |
| Eating Out | $2,400 | $200 | 1% |
| Medical | $2,400 | $200 | 1% |
| Personal Care | $1,200 | $100 | 1% |
| Gifts/Donations | $5,000 | $416 | 2% |
| Entertainment | $2,400 | $200 | 1% |
| Clothing | $2,400 | $200 | 1% |
| Gym Membership | 1,200 | $100 | 1% |
| Total Expenses | $250,200 | $20,850 | 95% |
This budget leaves about a 5% cushion or a little over $1,000/mo for extra expenses incurred not listed in the budget. And if there is one thing you can count on, it’s unforeseen expenses coming up every month.
I’ll end with this – typically when speaking with a client about their budget and how tight things can feel, most everyone defaults to figuring out how they can cut back on things like eating out, groceries, or utility bills. In reality, and as evidenced by this hypothetical budget, those categories only account for a very small portion of a person’s budget. In this case only about 7% of total income.
Where I believe people should focus are those big expenses: taxes, mortgage payments, and car payments. Proper tax planning and preparation, living in a home that comfortably fits your budget, and driving a car that doesn’t require a huge monthly payment can make a significant impact in releasing pressure on your cash flow.
When it comes down to it, it’s all about aligning your spending with your values. Ask yourselves these two questions:
- Where do you and your family derive the most happiness?
- Does the allocation and spending of your income reflect that?