Yahoo Finance Why You Need To Earn $300K a Year To Take Home $100K in These 3 Cities — and How To Keep More of Your Paycheck
A six-figure income has long been the benchmark of success. However, in the country’s priciest cities, $300,000 is the new $100,000.
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According to research from SmartAsset, taxes and living costs are so steep in New York, San Francisco and Honolulu that high earners need to earn three dollars for every one they take home. Here’s how some cities can gobble up two-thirds of your income — and how you might be able to keep more of your paycheck if you’re tempted to move.
Is Any City Worth That Much?
High earners sacrifice two dollars out of every three they earn for the privilege of living in the country’s most cost-prohibitive cities. But they do it willingly, and it’s not hard to understand why.
Big, buzzing coastal cities like New York and San Francisco offer indulgences that are often — but certainly not always — lacking in smaller, more affordable cities. They’re internationally renowned hubs of arts, entertainment, fashion, society and cuisine with unrivaled cultural diversity, 24-hour access, high-paying jobs and complex economies, all of which have drawn generations of educated professionals and young dreamers alike.
And if you’re curious about the allure of Honolulu, just search Google Images. Of course, you have to pay to play in global destination cities and tropical island paradises where nearly everything is imported from thousands of miles away.
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Where Do the Other Two Dollars Go?
Most average earners know they can’t afford to live in the country’s most expensive and exclusive cities, but once your income surpasses a quarter-million a year, you might feel like nothing is off limits.
Those three cities have a way of shrinking big salaries, though.
“Cities like Honolulu, New York, and San Francisco tend to consume more of your paycheck due to a combination of a high cost of living and high taxation,” said Rory Donadio, CEO of Tribeca Capital Group. “This includes costs for necessities like housing, food, and healthcare but also extends to the cost of amenities and entertainment that are part of the allure of these cities. High taxation rates are often a result of the public services provided, which enhance the quality of life and attract high-earning residents.”
There’s Income, Then There’s Spending Power
The SmartAsset report found that those who earn $300,000 salaries are taxed at a rate of 40.5% or higher in the three most expensive cities, which have living costs over 82% above the national average.
Honolulu: You’d need to earn $312,400 pre-tax to take home $100,000 in Hawaii’s capital city because your net pay is $185,999 — about 60% less than your gross — plus living costs are 86% higher than the national average.
New York: You’d need $312,000 to feel like you’re earning six figures in America’s biggest city because combined federal, state and local taxes top 41% and living costs are 83.6% higher than the national average.
San Francisco: A $300,000 salary gives you $100,000 in purchasing power in San Francisco because daily life costs 82.8% more there than in the nation as a whole.
The Things That Make Big Cities Attractive Also Make Them Expensive
According to Zumper, the average rent for a one-bedroom in Manhattan is $4,220 a month, but the whole point of living there is to enjoy the amenities you can’t get anywhere else — and that piles onto the high cost of housing.
“Most people who move or live in high-cost-of-living places enjoy all of the offerings of the big city,” said Aja Evans, a New York City-based licensed mental health counselor specializing in financial therapy. “Whether it is art, dining out, concerts, etc., there is always something to do and potentially always someone to do it with. Regular hangouts with friends can easily add up without meaning to. Meeting someone halfway between your homes or the convenience of grab-and-go presents a never-ending opportunity for spending.”
And super-inflated prices apply even to the mundane.
“Getting a quick coffee or breakfast and then getting a desk salad can easily run you $40 if you aren’t paying attention,” said Evans. “Going to work three times a week and repeating that cycle adds up to hundreds. We forget that in our effort to make things convenient and quick.”
Thinking of Moving? Do the Math First
Greg Wilson is a chartered financial analyst from St. Louis, where the cost of living is 15% below the national average. He worked at a major financial services company where promotions often came with a commitment to relocate. Shortly after they got married, he and his wife Erin discussed what offer would make them willing to move, just in case.
“Erin said, ‘We aren’t moving,'” said Wilson, founder of the personal finance sites ChaChingQueen and Dad Is Fire. “So, there was some back and forth.”
Hypothetically, Greg asked if she’d change her mind for the astronomical sum of $2 million a year. She said she would.
“Then we kept ratcheting it down and agreed on a number that was four or five times what I was making at the time,” said Wilson.
A ‘High’ Salary Is a Subjective Concept
Soon after, Wilson did get an offer to relocate for a significant salary increase. But, what seemed like a lot on paper would have given them less purchasing power than his current salary gave them in St. Louis.
“It fit our number — but it was in San Francisco!” said Wilson “We totally overlooked the cost of living and we had to go back to the drawing board.”
Many people fall into the trap that Wilson avoided — chasing what sounds like a huge salary to a city where the higher pay gives you less purchasing power.
“Residing in such cities requires a clear understanding of the trade-offs involved,” said R.J. Weiss, a CFP and founder of the personal finance site The Ways To Wealth. “High salaries may seem attractive, but the cost of living may significantly erode the disposable income one has available.”
Are You and Your Six-Figure Salary Ready for Your Dream City?
The experts GOBankingRates consulted agreed with SmartAsset that — even if you earn six figures — you’re not ready to move to a high-priced city if:
You’ll spend more than 30% of your income on housing.
You won’t be able to max out your retirement accounts.
You don’t have three to six months of expenses saved in an emergency fund.
If not, consider sparing your paycheck by commuting from a bedroom community outside the city until you save enough to make it feasible. Then, of course, there’s the option of moving to a cheaper city where a lower salary gives you more real-world purchasing power.
“Individuals should evaluate the opportunity cost of living in high-cost cities versus potentially saving more in cities with a lower cost,” said Weiss.
For example, SmartAsset reports that Memphis, Tennessee, Oklahoma City and the Texas cities of El Paso, Corpus Christi, Lubbock and Houston all give you six-figure buying power with just $125,000 per year or less.
“There’s no right or wrong answer,” said Weiss. “While staying in a high-cost-of-living area is more expensive, there are benefits. And if you’re willing to understand the trade-offs, it can make sense both in terms of finances and with your overall life satisfaction.”
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This article originally appeared on GOBankingRates.com: Why You Need To Earn $300K a Year To Take Home $100K in These 3 Cities — and How To Keep More of Your Paycheck
