Earning a $50K vs. $80K Paycheck: Where the Real Money Gap Shows
According to a recent survey from Empower, 32% of Americans don’t have money set aside for an emergency, and half of respondents said they were stressed about their current level of emergency savings.
With the cost of living going up, it can be tough to stay afloat financially when your income hasn’t matched the rise. However, it’s worth pointing out that there are also lifestyle gaps that come with an increased income that no one talks about.
Here's a realistic look at what life actually looks like at a $50,000 income versus $80,000, from financial accounts to spending habits and purchases.
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Financial Emergencies Aren’t Crippling
Ralph Estep Jr., licensed public accountant (LPA) and the founder of Saggio Management Group, noted that people expect the income gap to show up with a nicer vacation or a new car, but that isn’t the case. In his experience, the income gap shows up when the transmission goes.
He elaborated, “At $50,000, a $1,400 car repair goes on a credit card at 24% and takes eleven months to clear. At $80,000, it comes out of savings, and the person is mildly annoyed for a weekend.”
The same repair can be a completely different financial event depending on your income level. The harsh reality is that households with a higher income can use those funds to build up their emergency reserves, focus on long-term investing, and pay for better insurance that will cover them so that a setback doesn't turn into a catastrophe.
When you can handle minor setbacks, you can enjoy a lifestyle where you’re not constantly stressing about trying to stay afloat or worrying about paying off a credit card balance. The extra funds and peace of mind could lead to a higher quality of life overall.
The Higher Income May Not Feel Significant
According to Estep, the other thing that surprises people is how small the take-home monthly gap really is. He continued, “Thirty thousand of gross difference is closer to $1,800 or $1,900 a month after federal, state, FICA, and a bigger benefits deduction.”
This is real money, but you’re not in a totally different world or financial class. He finds this can translate to a mortgage payment on a house that's $180,000 bigger. However, at the end of the month, you may not feel a major lifestyle change since the higher income doesn’t come with resources to afford a life of luxury.
Retirement Savings Are Higher
Where the $80,000 household usually pulls ahead is the 401(k) match, per Estep. He elaborated, “I've had dozens of clients in the $45,000 to $55,000 range who skip the match entirely because they can't spare 4%. They're not being irresponsible. They're solvent this month instead.”
It’s worth noting that over 25 years, that skipped match is the whole gap, and the person with the higher income can either retire earlier or enjoy themselves more in their golden years.
Higher Income Can Lead to Lifestyle Inflation
Estep brought up that he has $80,000 clients whose checking account looks identical to his $50,000 clients every month because the raise came with a bigger apartment and a $640 car payment. He had a client go from $52,000 to $81,000 over four years and end up with less cash on hand than when he started. While the client kept saying they were doing better financially, the truth was that the account balance didn’t agree.
Despite the increased savings that comes with making more money, there is also a false sense of financial security, where you end up overspending and living an unrealistic lifestyle.
Estep concluded, “The real dividing line isn't income; it's whether the household has a buffer, and whether raises get spent before they get seen.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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