How to Live on 50k a Year

How to Live on 50k a Year

How to Live on 50k a Year

A $50,000 salary may not be as much as it used to be, but it’s still a respectable salary. If you’re wondering what’s a good salary, check with the U.S. Census Bureau. For 2017, the median household income was $61,372, but that factors in two-income households as well, across both high- and low-cost states. The key to living on $50k a year is to make sure all your essentials are covered before you dip into your discretionary spending. One way to make sure you’re always in line is to make a budget.

What Is Budgeting?

Budgeting is a method to track your income and expenses. When you break down how much money actually ends up in your pocket and where you spend that money, it’s easier to make sure that your $50k salary covers everything you need.

Where you live is a huge component of how well you can live on a $50k-a-year salary, and it can impact your budget dramatically. In some states, you might have to push and pull a $50,000 salary to cover all your expenses and still have some left over. In other states, you can live pretty comfortably on $50k per year. Costs such as housing, food, utilities and other goods and services factor into the overall affordability of a state and should be key parts of your budget.

To make an accurate budget, list all your expenditures in the following categories:

Taxes

The first step in making an accurate budget is to determine exactly how much money you keep after taxes. Uncle Sam will always get his cut of your money, so taxes are a part of your budget that you simply can’t avoid. Before you can begin parceling out your income to your expenses, first back out your taxes, as only your after-tax income is available for spending.

When calculating your take-home pay, remember that your gross salary is not the same as your taxable income. For example, in 2018, the standard deduction for an individual is $12,000. This means your taxable income on a $50,000 gross salary drops to $38,000, without factoring in additional deductions. For 2018, this puts you in the 12-percent tax bracket, regardless of whether you are single or married and filing jointly. Keeping the calculation simple, if you have a $50,000 salary that drops to $38,000 in taxable income, you’ll owe $4,560 in tax. Throughout the year, your employer will also withhold Social Security and Medicare taxes, which will be about $3,825 on a $50,000 salary. So, you’re left with an after-tax income of about $41,615, all else being equal.

Another factor to consider is state taxation. Although you’ll pay the same federal tax rate on your $50,000 income no matter where you live, your state tax rate can vary considerably. As of 2018, there are nine states that have no state income tax at all: Alaska, Washington, Wyoming, Nevada, Texas, Florida, New Hampshire, South Dakota and Tennessee. Although state income tax might not be enough to tip the scales in and of itself, it’s something to consider when trying to stretch the value of your $50,000 salary. If your state tax is 3 percent, that's a cost of about $1,140 per year.

Emergency Fund

Many financial experts suggest that you should keep anywhere from three-to-six months of your take-home pay in an emergency fund. In the above example, your net take-home pay after all federal and state taxes is likely to be around $40,000. This means you should have at least $10,000 in your emergency fund. If you want to build this up over two years, that amounts to a little over $400 per month. This drops your monthly pocket money over those two years to about $2,975.

Long-Term Savings

In addition to an emergency fund, you should put some money away towards your retirement. If you can do this via an employer-sponsored 401(k) plan, great; you’ll enjoy tax-deferred growth and get a tax deduction on your contributions. The same is true if you can make qualifying contributions to an individual retirement account. Not factoring in any tax benefit you may receive on your contributions, saving 10 percent of your after-tax pay amounts to about $333 per month, leaving you with about $2,642.

Housing

According to financial experts, your housing budget shouldn’t top more than about 28 percent of your gross salary. In this example, that means about $1,167 per month. You obviously don’t have to spend all of this, but if you do, that drops your available monthly cash to about $1,475.

Transportation

No matter where you live, you’ll need some form of transportation to get around. In a sprawling metropolis like Los Angeles, that likely means a car. In cities with extensive transportation infrastructure, such as New York City, you can probably get around taking public transportation or rideshare services. Either way, there’s a cost involved. According to the Bureau of Labor Statistics, in 2017, the average American household spent about 13 percent of their gross income on transportation costs. That would put your transportation budget at about $542 per month, dropping your funds to $933.

Food

The average American spent just over 10 percent of their gross pay in 2017 on food, including dining out. If you have an average food budget, this amounts to about $420 per month. At this point, you’ll have about $513 left over per month.

Other Expenses

Congratulations! You made it to month-end with $513 in your pocket based on a $50,000 annual salary. However, you’re not quite out of the woods yet. You haven’t allocated any money to entertainment, personal care, clothing, insurance, education or other expenses. The final step in the budgeting process is to cover all of these line items with your remaining $513.

Options to Help Your Budget

If it’s seemingly not possible to cover all of your expenses on your $50,000 salary, you’ll have to make cuts in some of your budget items. For example, maybe you eat all your meals at home and can reduce that $420 monthly food cost. Or, perhaps you live in or can move to a low-rent area and can pay less than $1,433 per month.

Sometimes, a change of scenery is what you’ll need to make your budget work. For 2017, here were the most and least expensive states in which to live:

Most Expensive

  1. Hawaii
  2. California
  3. Massachusetts
  4. New York
  5. Alaska

Least Expensive

  1. Mississippi
  2. Arkansas
  3. Oklahoma
  4. Michigan
  5. Tennessee

Of course, most people can’t just up and leave a job paying $50,000 to try their luck in a new state. But if that’s an option for you, know that lowering your expenses is an easy way to make a budget work.

A budget is a personal financial plan, and yours is unique to you. By going through the exercise of budgeting, you can have a good idea of how you can live on a $50k-a-year budget, wherever you are.

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About the Author

John Csiszar served as a financial adviser for over 18 years, both for a global wirehouse and at his own investment advisory firm, earning a Certified Financial Planner designation along the way. He now works as a writing and editing contractor for private clients, with thousands of online articles to his credit, along with five educational books written for young adults.