When I was a kid, I considered six figures a lot of money. I figured anyone who made $100,000 or more was rich (or at least solidly upper-middle-class).
But that was twenty years ago. Inflation has eroded a lot of purchasing power since then. One hundred grand just doesn’t buy what it used to.
Yet the mystique of a six-figure income persists. I’ve heard friends say, “I want to earn six figures before I turn …,” followed by whatever age they set as their goal.
While making six figures is a notable benchmark, it’s also a common one. About 1 in 5 households in the U.S. have an income north of $100,000, according to the Census Bureau. Among college-educated folks, that proportion is higher.
When an income level becomes common in our society, prices rise to match.
That’s partly why earning $100,000 in 1985 is the equivalent of making $199,893 in 2010. Meanwhile, the costs of tuition, gasoline, and medical care have skyrocketed beyond basic inflation levels.
Can You Live on $5,000 Per Month?
A household income of $100,000 per year, minus 30 percent for taxes and 10 percent for retirement, means the household is left with $5,000 per month to play with.
If “household” consists of a single person with no kids, $5,000 per month is probably more than they need. But add two or three munchkins into the mix, move them to a city with a steep cost-of-living, and toss in a few medical bills. Suddenly a six-figure income no longer seems so vast.
The notable financial blogger Len Penzo crossed the six-figure benchmark in 2004, working as an electrical engineer for a leisurely 50 hours a week or so.
“The funny thing is, once I finally had that coveted six-figure salary, it wasn’t all I had hoped it would be,” he says, “… especially after my paycheck deductions to cover taxes, the mortgage (and) the money I faithfully set aside for retirement.”
That Extra Decimal Point
So why all the excitement about six figures? Goals are easy to conceptualize when they involve an extra decimal point. That may be why hitting a six-figure payday is still a noteworthy benchmark, despite its eroded purchasing power.
This might also be why the idea of becoming a millionaire is so popular. A person’s life won’t change between the day their net worth is $995,500 and the day their net worth hits $1 million.
But their motivation might change. “Just another $4,500 and I’ll be a millionaire!” The extra decimal point represents a milestone.
When it comes to motivation and goal-setting, the fact that six figures only buys half of what it did in the 1980’s and 1990’s feels irrelevant. The mental benchmark is what matters.
That may not be logical, but wealth is more closely tied to emotion than logic.
The Bottom Line: Don’t work for six figures – make six figures work for you.
$100,000 may or may not be a substantial income, depending on your location and life circumstances. But for many people, it’s a psychologically powerful milestone that leads them in the direction they want to be heading.
Thanks to o5com for today’s photo.