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By Dr. Tyler Scott, WCI Columnist
When content director Josh Katzowitz approached me on a pickleball court last December to be a columnist here at WCI, I was excited and confused. My excitement stemmed from being a fan of the site for over 12 years, and my confusion was concerning what I could possibly write about.
He said he wanted more dental voices on the blog, and he thought my career transition was interesting—as was my ongoing disability insurance journey. Furthermore, one of the perspectives he thought I would bring to the blog is that of a “moderate earner.” He and I agreed that the blog can occasionally tilt toward the very high-earning demographic that Dr. Jim Dahle inhabits (which is both understandable and legitimate), and Josh and Jim want to make sure the blog is also consistently speaking to those of us who will likely never have $250,000 to invest in a private equity real estate fund.
Now, before making you read through the entire post to find out what my wife, Megan, and I make as “moderate earners,” let’s get that out of the way early. Our combined 2023 income will likely be just under $300,000.
The notion that $300,000 is a “moderate income” is ludicrous by any reasonable standard. Based on recent data from the Economic Policy Institute from 2020, our income puts us in the top 8%-10% of earners in 2023 when adjusted for inflation. It is only in the context of this readership that such numbers could possibly be considered moderate.
According to the most recent US Census data, the median household income in 2021 was $70,784, and in a recent Gallup poll, Americans said they believe that a family of four needs $85,000 of annual income to “get by.”
Three years ago, Megan was working for no monetary compensation as a stay-at-home-do-everything-domestic-volunteer, and I did not yet have a disability claim. Our household income then was $203,000. All that income came from my work at a public health dental clinic. Our spending was similar at that time, and so, the primary difference now is the increase in our savings rate.
Whether you're a pediatrician, a plastic surgeon, or anywhere in between, we can agree that whether our income then or now is moderate—even in the context of this blog—is highly debatable. Though that debate may be worthwhile, it’s not the purpose of this post.
Our Salaries as Moderate Earners
I have two objectives for putting our personal cash flow out into the world:
1) I’d like to see our culture normalize talking about money: Americans are famously uncomfortable talking about money, and that is often to our detriment. While we occasionally offer up casual reference points regarding our personal finances to our friends/family in the abstract (i.e., “that restaurant is a little pricey for us” or “we have to pass on that vacation; it’s out of our budget right now”), we rarely put specific dollar amounts into the arena for discussion. Specificity seems to bring out the most unpleasant of human emotions in some of us: shame, guilt, resentment, jealousy, fear, and judgment. But that need not be. Being transparent about our salary, how much we paid for our house, or how much the kids’ private school costs can put our financial life into perspective and help us know if we are getting a reasonable deal. Consider this post my first attempt to “be the change I want to see.”
2) I just want people to be happy: After doing financial planning full-time for over a year now, primarily for readers of this blog, I have learned that basically everyone feels the same. Whether they make $120,000 or $1.5 million, almost everyone feels like things are going pretty much OK and they wish they had a little more money to do or buy a few extra things or retire a few years earlier. There is a ubiquitous sense of “near happiness” with a chaser of scarcity that I hope we can all shake over time. Happiness is ultimately a choice we make, not a math equation we solve. Let’s make that choice sooner rather than later.
With that context and those objectives in mind, let’s first look at our household income, estimated taxes, big-picture spending projections, and expected savings rate for 2023.
Here you see our various sources of income. While my pay is variable based on how many clients I serve in a given year, I expect to make ~$150,000 in 2023. Add in ~$3,000 for the few columns I write for WCI and a little work I do to help Andrew Paulson at StudentLoanAdvice.com (all you Kaiser docs in California that are suddenly eligible for PSLF are keeping SLA very busy right now), and, in total, I expect my income to be about $153,000 this year.
Megan’s salary as the WCI podcast producer is more predictable, though for reasons I’ll discuss later, her paychecks are $139 per month.
If you read my most recent column about how structural lower back problems and dentistry don’t play well together, you’ll know that I also receive $7,000 per month from my own occupation long-term disability insurance policy. If I hadn’t been cheap and short-sighted with my Future Benefit Increase rider, this amount could have been much higher. At the same time, we are very grateful for what we do receive.
This disability income is tax-free, which is why a savvy reader may have noted that our tax burden is remarkably low for our income level. For those who are interested, our effective tax rate is 21.5% and our marginal tax rate is 27%. More on how that impacts our retirement savings decisions in a moment.
Not included here is compensation that our culture sometimes forgets to consider but is worth pointing out. WCI pays for 80% of our medical insurance premiums ($13,530) and gives Megan a $6,500 match in her 401(k). I also receive a 4% match (~$6,000) and a $100 per month work-from-home stipend. Not to mention the FICA taxes paid on our behalf by our employers or the value of when Jim and Katie Dahle take the WCI employees on a team-building trip and the WCI conferences.
Overall, our 34.5% savings rate is respectable and puts us on pace to be “work optional” around age 60.
More information here:
How We're Spending Our Salaries
Now, let’s look at how we sliced up our $297,000 in 2023.
Deciding how to prioritize cash flow can be a difficult decision for families of any income. Finding the balance between eliminating debt, saving for retirement, and living a joyful life in the present is a challenging and dynamic process for many.
We have four stops on our cash flow train that help us determine how to slice up our income:
- Pay ourselves first.
- Save for future expenses.
- Pay the bills.
- Spend the rest.
#1 Pay Yourself First
By first making sure we are saving enough to retire at the age we want and doing that through automated contributions to various accounts, we protect ourselves from overspending and make the most of what economists have won Nobel Prizes for discovering regarding behavioral economics. In short, automate savings wherever possible and make incremental increases over time.
You will note that Megan and I both make Roth contributions to our 401(k). This goes against the smart and well-established rule of thumb consistently proffered by Jim to “make pre-tax 401(k) contributions in your peak earnings years.” Because of our unusual situation with my tax-free disability income, we are in the 22% federal tax bracket and feel that is a reasonable price to pay in exchange for not owing tax on that money or its growth ever again.
Also, because the disability income does not count toward AGI, we stay below the $218,000 income limit in 2023 (in 2024, the income limit will be $230,000), and we can make direct Roth IRA contributions each month rather than saving up throughout the year for a one-time Backdoor Roth IRA contribution.
You will also notice that Megan contributes an amount well above the IRS employee contribution limit of $22,500 for 2023 ($23,000 for 2024). Is this because Jim is so impressed with her podcast-producing skills that he made her a partner in WCI and so she gets to make employer contributions as well? No, but it is because WCI offers the world’s best 401(k). The WCI 401(k) allows employees to redirect a portion of their take-home salary to their 401(k) each year. By the time Megan contributes the annual family maximum to her HSA, pays for her portion of our family’s health insurance, redirects the allowable amount to her 401(k), and pays her portion of payroll taxes, she ends up with a take-home pay of $139 per month. I love this and the efficiency it represents; she loves it slightly less.
Finally, you will observe that paying off student loans or other high-interest debt counts as paying yourself first. Having $110,000 of my $280,000 dental school debt paid for by the NHSC (National Health Service Corp) loan repayment program was a critical step to wealth-building as a moderate earner.
#2 Save for Future Expenses
Next, we save for expenses that we know will happen, but we don’t know when they will occur. For example, we know we will need to replace our cars, our home will need updating and repairs, we will go on vacations, we will have out-of-pocket healthcare expenses, and our kids will (probably) go to college.
To prepare for these episodic expenses, we set up what a mentor of mine calls “squirrel funds” where we squirrel away a little bit of cash every month into our high yield savings account. Our HYSA has different buckets within the account that we deposit specific dollar amounts to every month via automatic transfer from our checking account. We also think of our monthly contributions to the kids’ 529s as a type of squirrel fund.
You may be wondering how we pick the amounts to squirrel away each month.
For travel, we pick an amount that is some combination of currently true and reasonably aspirational. We have three young kids so traveling too often or too far is hard right now. We live in a state with five national parks and where an $80 America the Beautiful annual pass goes a long way, but we also try to mix in some expensive Hawaii and Disneyland trips throughout the years. Megan and I hope to travel much more in the coming years as the kids get older and now that she and I can almost always work from anywhere. We don’t spend $20,000 every year but squirrel funds “roll over” year to year and give us a guiding light for an average annual spending target.
For out-of-pocket healthcare expenses, we pick the amount of our HSA per person deductible. Again, some years we use less, and some years we use more. But this is a decent rubric for our healthy family.
For home-related costs, we save between 1%-1.5% of the value of our home each year. This is meant to cover big repairs (our water heaters and entire HVAC system recently went out), upgrades (we all get sick of the carpet or color of the cabinets eventually), and sizeable furnishings (think of buying a new $11,000 sectional sofa). Obviously, this doesn’t get used every year, but when I got a bid for $46,000 last week to replace our water heaters and HVAC, I was glad I had my squirrel fund.
For cars, we take the number of vehicles in the family, the number of years we intend to keep each car, and the expected cost to replace those cars to come up with an annual savings target. We have two cars, plan to keep them for 15 years, and plan to spend $25,000 to replace them (we have a very utilitarian view on cars). That math produces a monthly savings target of $278.
For college, we contribute up to our state’s allowable tax deduction each year. This projects to cover about one-third of the future costs for our state university. Helping our kids with college costs is a goal for us but not one we are willing to compromise our retirement goals for. There are many ways to pay for college, and 529s are just a part of our family plan. We expect our kids to cover the other two-thirds from their own savings, their own cash flow, scholarships, financial aid, and/or loans. Future grandparent contributions are also likely though not assured.
Other possible squirrel funds that I’ve seen be useful for clients include future Backdoor Roth IRA contributions, annual disability insurance premiums (often you get a discount if you pay annually instead of monthly), weddings, big/expensive cultural celebrations (i.e., Bar/Bat Mitzvahs and quinceañeras), and a down payment for a future home.
The way squirrel funds work mechanically is that we pay for the expense on our credit card to get the 2% cash back, then we “reimburse ourselves” from the squirrel fund to our checking account, and then we pay the credit card bill from the checking account. Then, the squirrel fund begins to fill up again because of our automated contributions.
Having these squirrel funds allows us to automate our financial life and to be reasonably assured that any future expense will not disrupt our normal monthly cash flow.
#3 Pay Your Bills
Next, we pay the bills, aka our fixed expenses. We put as many of these on autopay as possible (currently all of them). We use a credit card for any bills that don’t charge a fee for using a card.
We have a 15-year mortgage. There is proliferous debate online and over water coolers about whether a 15- or 30-year mortgage is optimal. I understand the arguments for the 30-year as it relates to inflation-adjusted, tax-adjusted, time value of money, etc. calculations. However, for us, knowing that we will save over $100,000 in interest over the life of the loan and increase our monthly cash flow substantially in half the time is compelling. The mortgage payment you see above includes taxes and insurance.
Ultimately, we aimed to keep our total housing costs (principal, interest, property taxes, utilities, repairs) at less than 20% of our annual gross income on a 15-year mortgage. This is not possible in all areas of the country—especially with today’s interest rates—and yet, I think it’s a worthy goal for the moderate-earning demographic.
#4 Spend the Rest
Finally, we spend the rest. These are our variable or discretionary expenses. We update these numbers each year based on a rolling three-year look back. We use online software to track our expenses and that’s where we get our data.
We used to have a monthly meeting where we would review this data to ensure we were fairly close to our targets. Now that we have established spending habits based around these numbers, we review our spending annually. If we get more than 5% beyond our target, we identify why we believe that area has increased and make adjustments to our budget or to our behavior as needed.
That’s it. That’s how much we made and where we allocated it.
We find tremendous value in spending time each year to account for every dollar and to give every dollar a job. This level of organization and intention helps us feel in control of our finances, and feeling in control of our money is the only consistent thing we’ve noticed that brings us happiness as it relates to money.
Further, having this four-piece cash flow prioritization system in place creates a joyful relationship with our spending. At first, it may feel like a bummer to have spending come last in your financial plan. However, when we follow this system, whatever is earmarked to be spent is spent freely and without regret. This is because we know that everything else upstream has been taken care of already. We believe we will retire at the age we want. We are saving for future expenses. All the bills are paid. Now, spend the rest joyfully!
Most people have that gremlin who sits on our shoulder telling us we should not order the appetizer at dinner, we shouldn’t buy those cute shoes in the store window, or we shouldn’t enter a winner-take-all fantasy football league. Almost all of us went through many years of austerity in training and then several more years living like a resident to pay off our student loans. That gremlin played an important role, but, in time, we can get to a place where we thank him for his service and take our leave of his scarcity-minded hauntings. Having this kind of cash flow system operational in our lives helps make that possible.
It is worth noting that American culture goes exactly the opposite direction with their cash flow train. They buy whatever they want, try to pay their bills on time, and stick $100 under their mattress in case something “goes wrong.” And an alarmingly small number of people save adequately for retirement if they even save at all. As of 2022, the median retirement savings for those 55-64 was $89,714!
It is therefore no surprise why we have so much anxiety around money in our country. Prioritization is largely backward, and there is a dearth of organization and a paucity of intention. Then, we wonder why we are so stressed.
As a self-identified WCI moderate earner, I’m here to say I believe it is possible for nearly all “six-figure professionals” to feel wealthy, abundant, and joyful as it relates to their income. Let’s talk about it more, let’s celebrate our riches, and let’s choose happiness whenever and wherever we find it.
More information here:
A Dental Career Reimagined — I Thought I’d Be Rich But I Found Wealth in Another Way
The Bottom Line
Possible takeaways for moderate earners from this attempt at financial transparency:
- A great deal of attention needs to be paid to the “three big rocks.” Those three big rocks are housing, cars, and education. We made sure we could afford a home on a 15-year mortgage. We prioritize the maintenance and longevity of our cars (I drive a 1997 Camry, Megan drives a 2008 Acura; both have 240,000+ miles). We had someone else pay for a big chunk of my student loans. We send our kids to public school, and we intend to pay for one-third of their public university costs.
- Lifestyle creep and recurring costs can be sources of insidious erosion of wealth-building over time at more modest income levels. We mow our own lawn, shovel our own snow, clean our own house, and go to a cheap gym. We are thoughtful about which activities we enroll our children in (a family member pays $25,000 per year for their daughter for dance class; that’s not sustainable for us).
- Tracking spending may be more important compared to our high-earning peers. Jim often says something to the effect that “a high income erases a lot of spending mistakes.” A moderate earner can benefit greatly from keeping some kind of monitoring in place for monthly or annual spending.
- Roth 401(k) contributions may make sense in some cases. Marital status, state of residence, the capricious political environment, risk tolerance, and many other factors go into this decision. It’s worth taking a close look at it, depending on which federal tax bracket you are in currently.
- While it’s true that even a blind squirrel finds a nut once in a while, don’t be blindsided by unpredictable expenses. Set up squirrel funds and you don’t have to rely on luck.
- Pickleball creates jobs. Go to the court and see what good fortune awaits you.
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If you're a moderate-income earner, what do you think about this example of earning, saving, and spending? Would you approach your finances in a different way? Comment below!
Quite inspiring. Your organization and financial self discipline is remarkable! Thank you for sharing your financial journey. In the abstract, financial planning may be simple but it isn’t easy to button down all the details in the way that you have.
Really enjoyed this post and the thinking behind it. I was curious about the very low payment ($168 annually) for umbrella insurance. How did you get this to be so low?
I am relentless (borderline obsessive) about keeping our insurance costs low. Every year I ask our independent agent to shop our bundled home, auto, and umbrella policy and then I shop myself online to corroborate his findings. 9 times out of 10 we find a lower rate with a different carrier and we make the switch. This year our homeowners got cut in half, auto went down 20%, and umbrella went down 15% from the previous year.
I am amazed at what you are paying. I believe I also have bundled policies based in the same state where you live and you are paying much less for car, umbrella and (I would guesstimate) home insurance. Our situations are different (we have teenage drivers for our very old cars) but our experience was that rates went up a lot last year. If you have any recommendations for independent insurance brokers (probably none better than Dr Tyler Scott!) I would be grateful.
Feel free to email [email protected] and they will pass your email along to me. I’m happy to let you know which broker we use in Utah.
When I shop on my own go through thezebra.com
Great article Dr. Scott! I could not agree more with your bottom line on expense tracking. A multimillion-dollar yearly income might be able to outpace the carefree/impulse spending of even the biggest spendthrifts among us WCI readers, but almost all of us will never approach such a high income (and outside of financially conscious groups, I expect even such very high incomes would likely be depleted through careless spending). For everyone else “normal” it is almost impossible to evaluate spending decisions retrospectively (much less prospectively!) without knowing where your money has gone. This ties in with your observations about typical Americans too. I don’t know what portion of people have any sort of formal budget/spending plan, but I would bet that a minority engage in expense tracking, an even smaller minority use this information prospectively to make spending decisions, and proportionally almost none do so in a manner than accounts for expenses that are unpredictable in timing (but predictable in rough amounts and inevitable overall). In that regard I think allocation-type (vs. forecasting) budgets (which I suspect you use based on your language in this article) are invaluable in generating a mindset shift from reactive to proactive management of resources. On that note, saving for “unpredictable” expenses as you describe fulfills many of the purposes of a traditional emergency fund, the one obvious exception being income loss (which you’ve already experienced and accommodated via your disability insurance benefit). Can I ask, is there anything else you consider in terms of unpredictable expenses (e.g. current income loss) that isn’t explicitly reflected in your budget above? Thanks!
In my opinion, the single most overlooked piece of data in a financial plan is an ACCURATE annual spending projection. There is so much conversation and consternation about asset allocation, pre-tax vs Roth, real estate depreciation benefits, tax loss harvesting, etc., all of which are good and important considerations worthy of our time, but I’m stunned at how little time and effort those same people are willing to put in just to find out what they really spend, let alone take the time to budget in an intentional way.
It is a rare client that can estimate their average annual spending accurately within 25%. If they take my suggestion to start tracking their spending, 90%+ of the time they discover they are spending way more than they realized. That is not good or bad, it just leads to wildly inaccurate financial planning when someone says they spend $150,000 and in reality they spend $190,000. That $40,000 that otherwise would be invested, is often the difference between reaching their target retirement age or missing it by up to 10 years!
It’s astonishing to me that most AUM planners just take the clients stated annual spending number at face value and just move onto investment philosophy without examining spending and tracking it over time with accuracy. It’s critical to most financial plans and deserves more of our time and attention as a community.
To answer your question directly about other unpredictable expenses – We also keep one month’s of expenses as permanent cash cushion in our checking account and keep an emergency fund equal to 5 months of expenses in our high yield savings account.
This blog post is really great! The financial transparency here is so helpful as I am currently recommitting our household to a monthly budget after our eating out and Amazon deliveries are out of control.
I am curious regarding your 6 month EF…would that be fixed plus variable expenses? So around $50K?
Shawn, thanks for reading and the positive feedback. I’m excited for you to get a better understanding of your spending, I think that will have several positive impacts in your financial life.
I keep an emergency fund of ~4.5 months of all expenses; fixed, variable and episodic. That ends up being ~$54,000 for us.
Thanks for sharing Tyler!
Thanks for sharing. One thing stands out: Car fuel and normal maintenance $759 / month with car insurance not included. Quite a bit for a 1997 and 2008 cars. If you are driving a lot of miles perhaps buying a more fuel efficient or EV might be worthwhile. You wouldn’t get to use an old car as proof of frugality anymore, though. 🙂
That number will be dramatically lower when I update the numbers next year. I use a 3 year look back for all of these values and we used to live in Oregon and drive home to Utah quite a bit. Also my wife’s car needed some significant maintenance 2 years ago that all but assured us we will get another 10 years out of the car so that is inflating my average value quite a bit.
As an aside, not that you are saying this, but one of my biggest financial pet peeves is when people justify buying a new car by saying, “Well, the repairs will cost more than the car is even worth.” It’s an almost completely nonsensical thing to say yet it is widely accepted as sound logic in our society. The evaluation is not whether the $5000 fix is worth more or less than your car’s value, it’s whether that $5000 is more or less than an alternative transportation option. To pass on a $5000 repair to buy a $65,000 car, a car that will still need ongoing maintenance BTW, is often mental justification to buy the $65,000. Perhaps that’s a topic for another post one day.
Also, we will never buy another internal combustion engine car. All of our future cars will be EVs.
“Also, we will never buy another internal combustion engine car. All of our future cars will be EVs.”
Yes! Join the EV bandwagon! Just make sure you pay cash for your vehicle or some people here will be mightily disappointed in you.
More power to him since he lives in my smog filled valley. I don’t think I’ll ever be able to have all our vehicles be electric. The technology just isn’t there yet for my needs. I saw a “study” done on an electric truck towing the other day and I think it only made it 100 miles before needing a charge. That’s not going to work for me. California is set to mandate all vehicles be electric in just a few more years but I just don’t see how that’s going to work for semis and other larger vehicles unless there is serious technological innovation soon.
I better qualify my position before we lose this entire comment section to the always combustible topic of cars.
Let me say that it is our intention to have all future cars be EVs. The mechanics that work on our cars tell us both vehicles have 10+ years left. My hope/belief is that 10 years from now the technology and infrastructure have come far enough to make having EVs plausible as our only cars. If political, technological, environmental, or any other factors prevent that plausibility, I am happy to purchase a gas powered/gas assisted car in order for our family to go skiing and on the long road trips we so enjoy.
Thanks for this article! It reenforces so much of my thinking/behavior (we’ve been tracking every dollar of expenses for 15+ years, clean our house ourselves, mow the grass, shovel the snow, drive reasonably-priced cars for 15+ years), but there’s still so much to discuss… I’m sure I could post 20 or more comments.
For now, I’ll start with the most pressing one: earthquake insurance in Utah? I need to know more about this–the risk there, if I’m overlooking it in Colorado, etc.
Thanks!
I’m glad to know the post resonated with you, thanks for reading and for the comment.
There is a major fault line that runs the length of the most populated areas of Utah including directly through Salt Lake City. “The big one” is believed to be long over due and given that major damage to our home would represent a financial catastrophe for us, we have elected to transfer the majority of that risk to a 3rd party.
You can look at your area’s risk profile here (it looks like Colorado is medium to low risk):
https://www.usgs.gov/media/images/2018-long-term-national-seismic-hazard-map
There’s definitely risk, but the insurance sucks. We’ve chosen to self insure that one after discussion with the general contractor who renovated our home.
dude, really, you were discovered on the pickleball court? your writing is so dominating, that’s kind of hard to believe. kudos to Josh for asking your to write.
question man have you found that your asset allocation has become more aggresive because of you budgeting for every dollar? in my own experience after doing a zero-based every dollar accounted for budget I felt that my cash flow accounted for my needs and wants, why not go 100% equities? at least for me there is some more willingness to take more risk given every dollar has been accounted for and has a job, eliminating a nebulous unknown of “what will I do if the stock market tanks and will I be able to afford my life” because, in the end, the budget shows it doesn’t matter.
then again, me and wife are pulling in a close to a million bucks in gross income, and that plays a role in increasing risk tolerance as well 🙂
Thanks for reading Rikki and thanks for the kind words. Yeah, Josh and I first talked walking off a pickleball court but I owe my discovery to my wife working for WCI which is what put me on that pickle ball court in the first place.
I do not connect the idea of accurate budgeting data to asset allocation but it makes sense to me why someone would. If one has a clear sense of discretionary vs non-discretionary spending and is comfortable dramatically reducing discretionary expenses in the event of poor equity performance, a more aggressive asset allocation is a rationale response.
As you mention, I think a high and fairly predictable annual income is also rational reason to take on more risk and to a later age than a target date fund’s glide path would otherwise “recommend”.
For our asset allocation, we follow the Vanguard target date fund glide path associated with our age (for us that is the 2050 target retirement fund).
I enjoyed the post and agree that we need to increase our financial transparency as a country. I also appreciate your post as a moderate earner as this population is often overlooked.
The biggest thing I see missing from the post is the cost of children. We are moderate earners ($400k) but with 4 children, supplemental religious education, and overnight camps the money goes shockingly quickly. And that’s before saving for college, which we aren’t doing outside of regular saving.
Our monthly housing expenses are high because we recently did a major home renovation and now have a 15 year, $600k mortgage. We chose the 15 year term because it allowed us to lock in a 2.75% rate but other than that we don’t live extravagantly.
In addition to ~$25k of 401k savings (to get corporate matches) we can save ~$75k/year.
When I wrote it out it feels like we’re doing great but, to the point you make in your article, it doesn’t feel like we’re really getting ahead, especially with college payments for four children looming on the horizon.
Amazing how quickly the definitions stretch. Moderate is now $400K? I think a lot of WCIers in the $150-250K category may feel differently.
That said, I agree with you that it’s not all that hard to blow through $400K gross despite how impossible it seems to all of us when we’re students or residents.
Kids are really expensive. Depending on which resource you look at, raising a child through high school graduation costs on average $233,000 – $310,000 per child. If you add on college it increases the cost $80,000 – 100,000 on average.
We have 3 kids and all of their costs are shown in the charts in the post. I have outlined kids activities, childcare/tuition, 529 savings, entertainment/babysitting and miscellaneous spending; all of which are direct or indirect costs associated with our 3 kids. Without question, our largest expense related to having kids for us is the house. If we didn’t have children we would have a house a fraction of this size and our mortgage, insurance, taxes, utilities, repairs, etc on the house would be much lower.
Perhaps the most consistent increase in spending I see between high and moderate earners is the amount they spend on their kids. Private school K-12, saving for a private university, classes, camps, tutors, activities, Au Pairs, etc account for considerable spending that many high earners opt for that moderate earners can’t/shouldn’t afford in order to reach their retirement goals.
I can relate in terms of your housing expenses. I would really like to sell our current home and downsize a bit. With the equity in our home we could sell and probably pay cash for for a smaller home and be debt free which is a goal. That would free up our payment to increase our savings rate to help us catch up on retirement as we are behind from years of wasting tons of money on houses and cars. My wife is on board to sell in the future but I feel the time is now.
What is your opinion on early mortgage payoff? I didn’t see a line item in your analysis for that so I assume that is not a goal for you at this time?
We have a mortgage at less than 3% so paying that off early is not a goal for us as we expect our investments to perform better than 3% over the duration of the mortgage (heck, cash in a money market is getting above 5% right now).
The notion of selling our big family house and downsizing is absolutely in our long term plan. As soon as our youngest is off to college in ~11 years we intend to sell this place and buy a one bedroom townhouse in a major metro area with a great airport so we can live our “kid-free-travel-the-world-pseudo-early-retirement-dreams”.
Sounds like a great plan Tyler!
Wishing I had the 3% mortgage – I am stuck in a 6% ARM that adjusts next year so our past mistakes with housing are still haunting us.
Really nice article Tyler. Thanks for sharing (ps. Tim here… we were friends in dental school).
In my opinion, sharing a budget for a lower income would be even more helpful (like maybe your pre-disability/ Meghan-working income?) . It is interesting how each person’s view of what constitutes a “moderate income” can be so different.
Sounds like your savings rate may have followed a similar path to mine. I would save somewhat decent money early on in my career, but it wasn’t until my income was stronger (+200k and beyond) that I really ever hit +20% savings rate. A higher income sure makes it easier to save money.
Or like in your case… sounds like maybe you weren’t saving all that much money back when your income was ~200k and below, but now that your family got 100k raise you can pretty much save that entire 100k. That may be the tipping point. That’s been my experience anyway.
Sounds like justification to me. I can share a budget from when I was making less than Tyler.
https://www.whitecoatinvestor.com/wp-content/uploads/2023/09/BudgetMay08.xlsx
This is from May 2008. Gross income that month? $6,982. (Yes, I had been an attending for two years at that point). We put $45.46 in the TSP that month, $300 into our car fund, $500 into our vacation fund, and $915 into our emergency reserves that month.
We did better that July. I must have gotten one of the annual bonuses for military docs because income was $22,000. We saved $17,000 of it.
I’m not going to argue that one can save on any income, but certainly one can save on any physician income, including a resident one. It’s about controlling spending.
You guys are great to share your info. And the length and detail in your responses is just really impressive. Thanks Jim and Tyler.
Similar to you, I am naturally quite frugal. I made 100k/yr out of dental school in 2010, and for me, a savings rate took real effort early on (many of us during this time are maybe the sole earner of the family, multiple kids born, there’s urgency to buy a home and pay off student loans). My family and I lived pretty lean, and we were able to put away decent money… but I bet retirement savings was maybe 10k/yr during those first few years of “low/moderate income.”
But since entering the next phase of my career and the income has ballooned, I find it really easy now to save money. I mean, hasn’t it been the same way for you? For me, something like a 5x increase in income resulted in about 10-20x increase in savings… and the savings now just happen without really having to work at it.
For me, maintaining a frugal lifestyle, while working to increase income over time has been the trick. You’re right, a meta analysis would sure be interesting.
Yes, it’s been that way for me.
You guys are great to share your info. And the length and detail in your responses is just really impressive. Thanks Jim and Tyler.
Similar to you, I am naturally quite frugal. I made 100k/yr out of dental school in 2010, and for me, a savings rate took real effort early on (many of us during this time are maybe the sole earner of the family, multiple kids born, there’s urgency to buy a home and pay off student loans). My family and I lived pretty lean, and we were able to put away decent money… but I bet retirement savings was maybe 10k/yr during those first few years of “low/moderate income.”
But since entering the next phase of my career and the income has ballooned, I find it really easy now to save money. I mean, hasn’t it been the same way for you? For me, something like a 5x increase in income resulted in about 10-20x increase in savings… and the saving just happens now without really having to work at it.
For me, maintaining a frugal lifestyle, while working to increase income over time has been the trick. You’re right, a meta analysis would sure be interesting.
Yea, when income goes up but spending doesn’t, magical things can happen.
Hi Tim, great to hear from you! I hope you and the family are well and that you are still enjoying tennis from time to time!
I’d be interested in a meta analysis of posts like this one where cash flow, budgeting, savings rate, etc were aggregated for incomes from $100,000 – $1,000,000 and finding areas of commonality, trends based on income, etc. Getting into that data would be fascinating.
I can tell you that when I was the sole earner making ~$200,000, our savings rate was 20%. We were putting ~$40,000/year into my 401k, our Roth IRAs, and the HSA. Now that Megan works and we have this untaxed disability income, we were able to increase our savings rate through her 401k and have started contributing to a taxable brokerage account each month.
And ps. my tennis game has likewise crossed over to pickleball 😁. Best of luck with all your new happenings Tyler
Thank you for this column, really great!
I really like the idea of saving for future expenses and categorizing these predictable future expenses. I have generally just paid myself first (401K, IRA, 457), paid the bills and spent the rest. I also have a 3 month emergency fund. I do not have a taxable account, having chosen to invest in real estate instead. I could definitely improve my financial picture by creating these squirrel funds and tracking my expenses better. I agree that most people underestimate their spending.
Thank you for such a well written an transparent article. I am also a moderate earner.
Technically you’re investing in real estate “in a taxable account” even if there is no formal brokerage account associated with it.
Thank you for your diligent and detailed article! I’ve wondered, has anyone ever thought to budget for parental help? A lot of boomers have no retirement or little, many don’t own their home as is the case in my family, and due to no other involved family members the burden will fall entirely on my husband and I. How do we best budget for these situations and how have others dealt with this?
Lots of docs deal with this issue before and after retirement. It’s like anything else. Decide what you can afford, count it as one of your expenses, and save up enough additional amount to cover it.
You’ll also want to make sure you understand things like Medicaid eligibility rules in your state.
If you foresee this being an expense in your life and/or just want to be prepared in case it comes to pass, building a squirrel fund is completely reasonable. I have a few clients who keep a “surprises and demises” squirrel fund for these types of possible events.