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I'm not working and earning a salary yet, as I'm still in college, but I was wondering: where does most of a salary go? As a software engineer, I might earn around $70,000 a year. I find it hard to believe that I might only save $2,000 a month and $24,000 a year. Where does the rest go?

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    If you can start by putting even 20% of your gross income into savings each year, you will be ahead of most people. $24k is more than 1/3 of the projected $70K. If you can find reasonable rent, perhaps with room mates the first few years, you'll have a great start. – JoeTaxpayer Aug 12 '13 at 1:25
  • Shooting for 20% is a great goal. I just want to point out that typically $70k upon graduation is a touch high. Regardless, 20% or so is a great place to start regardless of income level. @JohnBensin – George Marian Aug 12 '13 at 3:44
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    Keep finding it hard to believe and save 75% of your income, like ERE or MMM. – mouviciel Aug 12 '13 at 13:31
  • I just saw a set of 12 plates at Macy's for $600. And that's Macy's. This question lacks imagination. There's always something to spend the money on, whether it's an NBA team, a better car, or just some nicer plates. Or, you know, whatever. – Wayne Burkett Aug 13 '13 at 16:59
  • Keeping up with the Joneses. If you can't resist that you can go broke on $70k. If you can resist it, you'll be most of the way towards being like ERE or MMM... – Brian Knoblauch Aug 13 '13 at 18:19
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I had a similar question when I graduated college a few months ago, and these are the estimates I first used, with a few tweaks.

  1. 35% of salary as a rough estimate of total taxes. For a salary of $70K, that's $24,500 a year.

  2. The current contribution limit to an IRA/Roth IRA is $5,500 a year. As a recent college grad, it's definitely smart to max this out.

  3. I estimated that my rent would cost $1,000 a month, which included rent, utilities, internet, etc. so that's another $12,000 a year. This can vary considerably depending on where you live and your style of living, however. Bankrate has a cost of living calculator that might be helpful in estimating your monthly housing expenses.

  4. Your employer will probably match your 401K contributions up to a certain percentage, e.g. 6%. If you contribute enough to get the entire match, but not more, this is another 6% of your salary, or 4,200 a year.

  5. If you purchase health insurance through your employer, your individual premiums may be a couple hundred a month. My employer has excellent benefits, and my premiums run $150 a month, or $1,800 a year. This doesn't even include copays, deductibles, possibly dental coverage, etc. Some people still use their parents' insurance until their 26, but this doesn't work for everyone.

  6. Transportation expenses. These may be around $100/month, or $1,200 a year, if you take public transportation, or considerably more if you have car payments, auto insurance, etc. I don't have a car, so I don't know rough estimates of these numbers off the top of my head.

  7. Other recurring expenses, like a cell phone, web hosting, etc. Some cell phone plans can be $100 a month, or $1,200 a year. Others can be much cheaper, but this depends on what type of phone and plan you need/want.

Even if you ignore the last two items, this leaves you with a grand total of 70 - 24.5 - 5.5 - 12 - 4.2 - 1.8 = $22,000 a year, or approximately $1,833.33 a month. Whether or not this is enough for you depends on a) how the expenses above vary based on where you live, b) how much you spend on food, clothing, entertainment, travel, etc. c) how much you choose to save/invest in addition to the savings mentioned above.

Some employers have better benefits than others, though, so some of the expenses mentioned above may be partially or completely subsidized. Also, as I said before, some or all of these expenses may vary considerably based on your lifestyle and location, but they're rough estimates.

And of course, it's wise to keep an emergency fund of at least six months of living expenses, in case you lose your job, have an unexpected medical situation, etc.


Keep in mind that I'm really answering the question "Where does a salary go for a recent college graduate?" I don't speak from experience, but once you start a family, you'll probably have higher medical insurance premiums, possibly a mortgage payment and the associated costs (maybe mortgage insurance, appliance repairs, etc.), savings for your childrens' education, and higher expenses in every other category (food, clothing, etc.) too.

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I find it hard to believe that I might only save $2,000 a month and $24,000 a year. Where does the rest go?

I have a saying... expenses will always rise to meet or exceed income, regardless how high the income is. In other words, you'll find ways to spend it. In the end, where it went will be the question indeed.

Saving money is a state of mind... a philosophy. You can scrape-by with $20k salary or you can scrape-by with $100k salary. Or you can save a fortune by pinching pennies.

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You might owe more than $6K in Federal income tax, $5K in payroll taxes (SS and Medicare), $4K in California income tax (if that's where you live -- different States have different tax structures), so that's about $15K or more in total.

A 1-bedroom studio apartment in San Francisco may rent for over $2K a month -- another $25K or more (of course, many other places are cheaper to live in!).

With your intended $24K of savings, this leaves 70 - 15 - 25 - 24 -> $6K, $500 a month, for food, transportation, clothing, entertainment, and everything else -- not exactly a generous amount.

If you live in substantially-cheaper places, the picture will of course look different.

  • What about IRA/401K contributions, insurance premiums, an emergency fund, etc? – John Bensin Aug 11 '13 at 22:28
  • I'd expect IRA/401K contributions would be part of the (high) savings Jason intends to pursue, and so would be building up an emergency fund (Jason did not specify where exactly he plans to place those $2K/month). Insurance premiums are part of the and everything else...;-). – Alex Martelli Aug 11 '13 at 23:01
  • I assumed that, but I always feel it's important to break down savings, if only to prioritize them ahead of other expenses. At least for me, medical insurance premiums are my largest expense every month besides food and rent, so I break those out too (otherwise young people may forget about them when budgeting; I know many of my peers did because they assumed they would stay on their parents' plans). – John Bensin Aug 11 '13 at 23:05
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  • Taxes. One of the two universal constants, a single earner at this salary level can expect total effective income taxes to exceed 30% of gross salary, depending on your state. If you happen to have no income tax, then you typically have a property tax (and you don't avoid that by renting; the tax just gets rolled into your rent).

  • Housing Costs. The typical breadwinner will spend between 10% and 30% of their gross salary (which can represent as much as 50% of their take-home pay at the high end) on various housing-related costs, either rent and utilities for an apartment, or mortgage P&I, insurance, property taxes, utilities, HOA dues, home maintenance costs, etc for a condo, townhome or SFD.

  • Healthcare. Single guy with basic copay and major expenses insurance? Between $50 and $100 per paycheck depending on your deductible, copay, employer (larger pool == smaller premium) and state of residence. Get married, have a kid, and that quadruples at least. Then there's actually using it; besides office copays, spending enough for the insurance company to actually cover a serious medical expense will typically cost you thousands out of pocket (or else you're spending hundreds more a month in premiums for a low deductible and OOP maximum). Tax-deductible? Yes. Will you still feel it? Probably.

  • Food. Gotta eat to live. Average grocery budget is about $150 per person per month, depending on what you're eating and how you're buying it. Average cost of a dinner out is $20/plate plus tip. Basically, anything you could assemble yourself from raw ingredients but instead buy ready-to-cook is double the actual food cost, and anything you have served to you is five times the food cost. As an entry-level programmer you're gonna find yourself working some late nights and just ordering in.

  • Clothing. Gotta look like you're worth the money. Software engineers typically get away with showing up in polos and khakis, but other $70k types are expected to wear suits and ties every day, and even if you normally work in the back office, you'll be expected to keep a suit that fits and is in style handy for the odd customer meeting, interviews, etc.

  • Transportation. Gotta get to your job to make the money. Driving costs between a quarter and 35 cents a mile in total fuel and maintenance costs for the average commuter driving a typical $20k sedan, and that's if the car's paid for. Luxury cars and SUVs with lower mileage and higher maintenance costs only increase this per-mile figure. Again, you're typically not trying to impress anybody, but other guys who live on $70K are expected to keep their cars looking like they just drove off the showroom floor.

  • Debt. To get your degree that gets you your $70k salary, you may have that much or more in student debt. I was lucky; I had to cover one year of public university tuition and fees after my college fund ran out, and I was able to do so with one $5500 Stafford loan that will be paid back this year after 10 years of $60 payments. I know people who are over a hundred thousand dollars in debt to the government for their education, and the "discretionary" portion of their six-figure salary isn't going much of anywhere else but the government for the next ten years. Similarly, you may have a credit card you've racked up while in school or immediately after starting your new job, to cover all the initial expenses of getting set up. Furniture loans, car loans, etc. The monthly payments add up, and the less you pay the longer you pay.

  • Life. Working your $70k job, then going home, eating, sleeping, rinsing and repeating is unsustainable; you will burn yourself out very quickly. You need to use some of that $70 to live. Movies, TV, Internet, video games (and the consoles and computers to play them on), etc are just the tip of the iceberg; try cover charges, bar tabs, expenses for various sports you play, ticket prices and paraphernalia for professional sports you watch in person, etc etc etc.

  • Donations. If you're a religious person, the expected tithe is 10%, and then "offerings" are on top of that. Tax-deductible? Yes. Will you still feel it? Yes.

  • Problems. From time to time we all get pulled over by a cop who's not in the mood to be lenient. We'll wreck our car and our insurance will triple. We'll get sick or hurt and have to cover urgent care or hospital co-pays (and that's if you have health insurance). In short, unexpected whoopsies that always seem to happen at just the wrong time.

In fact, at $70k as a single earner, the $2000 a month you expect to sock away represents fully half of your monthly take-home pay, leaving you only the other $2000 paycheck to live on. Apartment? Depends on where you live, but let's say $750. Utilities? $150/mo for an apartment that size (power/water/allocated trash/wastewater). Food? Another $150/mo plus meals out at $20 apiece. Student Loans? Let's say you have $20k in Stafford loans, half-subsidized, a quick back-of-the-envelope calculation says that's $213/mo. Car loan? $20k loan amount at 8.9% for 5 years is $414.20/mo. You're at $1677.20 monthly expenses, your apartment is furnished with whatever you managed to accrue through your childhood and college years, and you haven't even spent any money actually living yet. Throw in a bed (nice queen innerspring, $1000), frame ($400), nice couch ($1000), TV ($500), PC ($1500 - gotta have the clocks for your games, right?), all on your credit card (which they're happy to extend you a credit limit this high), at 0% APR for one year, and whoops, you just blew your budget if you have to pay all that back in a year.

That said, if you can sock away that much at the beginning of your career, and not touch it for any unforeseen hurdles (down payment on your first house is a huge hit to your savings, and depending on the housing market you can easily lose a lot of money relocating for a new job or bigger house), then you are on pace for a pretty rockin' retirement.

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OK, let's say you make $70,000/year. If you are paying 25% taxes on that (borrowing the figure from John Bensin's answer; I don't know first hand what it might be in the US), that leaves you $52,500 per year after taxes but before all other expenses. If you are saving another $24,000 per year and we assume for simplicity's sake that the savings are not tax deductible, that leaves you with $28,500 per year or $2,375 per month. If the savings were 100% tax deductible, you'd have $2,875/month, which isn't that big a difference.

Those approximately $2,400/month then pays for everything else and basically is the money you have to live on. Start with living quarters (rent, homeowners association fees, mortgage payments or whatever applies to your particular situation) and continue with food, transportation or maybe car payments, student loan payments, an Internet connection, insurance, maybe eating out once in a while, and you can see that it all adds up really fast.

In addition, saving 35% of your gross income (which depending on taxes in your locale can easily come out to around 50% of your net income) is a really high target. I agree with JoeTaxpayer's comment, even saving 20% will put you way ahead of many, and if you get into the habit right from the beginning, shouldn't be much of a problem because you'll still have plenty more money than you have been used to. In addition, consider deciding on only allowing yourself to spend some given percentage of any pay rises you receive (say for example, 60% of any raise goes into increasing your savings, which still leaves you with a 40% raise plus a larger financial cushion in the future).

  • Good answer, although I would argue that $2,875 vs $2,375 is a sizable difference. That's an additional $6,000 a year. – John Bensin Aug 12 '13 at 14:32
  • @JohnBensin You're right, but in comparison with the gross income, it's less than 10% difference. It can also fairly easily be the difference between two different homes in terms of total living costs, especially if you throw in the cost of the commute to and from work. – a CVn Aug 12 '13 at 17:06
  • Oh, absolutely. It's still 8.5% of gross income, though, which to me (especially as someone just starting out), still seems like a big deal. – John Bensin Aug 12 '13 at 17:38

protected by John Bensin Aug 18 '13 at 14:48

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