Working a career 9 to 5 will rarely put us in a position to follow our true calling as an individual. In most cases we begin to feel trapped in a never-ending cycle that pays us just enough to never leave; striving for something that is not in our best interest.
We must start by removing the preconceived notion that the “American dream” is the ultimate version of success, or even success at all.
Let us define the “American dream” as a college educated married couple, with 2 kids, 1 dog, a single family home with 5 bedrooms valued at $600,000 and an occupied 2 car garage in Maryland.
If we take a look under the hood of the “American dream”, what we will find may be surprising.
The average tuition cost at a public out of state college or university is about $25,000 per year. Since we are calculating the “American dream”, we can rightly assume the careers they want to pursue will require a master’s degree, costing a further $40,000. Which brings the total tuition cost to $280,000.
However, to avoid confirmation bias, we will say half of the tuition was covered by their parents who invested in a 529 plan (college fund) during the first 18 years of their life. Therefore, we can conclude that upon graduating, each person enters the relationship with $70,000 in student loan debt.
Starting out the couple is $140,000 in student loan debt.
They were both fortunate enough to secure jobs with a starting salary of $105,000, but fast forward 6 years (to the “American dream”) and they are now making $123,900 each due to an annual salary increase of 3%.
Now let’s begin to breakdown the monthly costs of the “American dream” based on the above model.
Income tax for the state of Maryland based on their salaries is 29%, which means their net pay is $87,819, bringing their take home combined income to $175,638.
With a monthly income of $14,636 ($175,638 / 12) we can now go deeper into what the reality of the “American dream” looks like with real numbers.
The average student loan repayment term is 10 years, so based on their $140,000 student debt, a 10 year payment plan works out to $1,166 per month. They would have 4 years remaining, (based on us moving 6 years ahead) where they will then put the same amount towards their kids college fund.
($14,636 — $1,166 = $13,470)
With 2 newborn twins they wanted to secure a family home their kids can grow up in without needing to move.
Using their FHA loan, they were able to put down just 5% ($30,000) as first time home buyers bringing the monthly mortgage on their $600,000 home to $2,888 per month.
($13,470 — $2,888 = $10,582)
They like to get new cars every 2 years, so they lease two family vehicles at $600 per month each.
($10,582 — $1,200 = $9,382)
Homeowners insurance $210 per month.
Car insurance $150 each per month.
Family health insurance $475 per month. (remaining amount after company pays a premium)
Pet insurance $50 per month.
Life Insurance (2) for $250,000 policy $300 per month.
($9,382 — $1,185 = $8,197)
Utility bills (gas, water, electric, internet/cable, phone) $430 per month
Gas (2 cars with 1 fill per week @ $62.50) $500 per month
Food per month $1,200
Daycare (2 kids) $2,200 per month
($8,197 — $4,330 = $3,867)
Grooming (hair, nails) $300 per month
Clothing $300 per month
Birthday gifts $100 per month
Subscriptions $100 per month
Car Wash (2 cars) $100 per month
Other (house/work supplies, family night out) $200 per month
($3,867 — $1,100 = $2,767)
Savings of 5% of monthly income $732 per month
Long term investing 5% of monthly income $732 per month
529 Plan (college fund) for two kids for public out of state college $260 per month
($2,767 — $1,724 = $1,043)
After calculating the real-life expenses, the family is left with $1,043 in disposable income. This is the amount left to cover all remaining costs of life, including: taxes, car maintenance, house maintenance, family vacation, passion project, gym/country club membership, new electronic device, babysitter, date night, dry cleaning etc.
$1,043 is all that is left to enjoy the “American dream”. It only takes an economic downturn such as 2008 or the current crisis we are facing with Covid-19 to turn this dream into a nightmare.
I hope this reality illustrates the danger of keeping up with the Joneses. Most people will spend their entire lives trying to reach the salaries mentioned above, yet they will still come short of the comforts they believe it affords.
The reason people boast about their salaries is because the amount they take home after taxes/expenses would paint another picture entirely.
Next time you hear “I make over 6 figures per year”, do the math in your head to realize it sounds better than it really is.
The “American dream” is paid for by credit, not debit.