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.
I think 6 figures is pretty decent where I live (Midwest). However, my goal is for each of us to be making at least that.
I know a couple who each make just over 6 figures & they are saving one of their incomes. That’s in case the woman decides to stay home when they have kids. Since one of their jobs is not secure, it’s also a good emergency fund. A lot depends on the cost of living in your area also.
It may not be what it used to be….but a six figure income is still a lot of money. But, as you mention, it’s all about what you do with it. Any amount of income can seem like not enough if you’re spending is wasteful!
@Travis — Excellent point! If your spending is wasteful, then even a gazillion dollars won’t be “enough”!
Thanks for posting the inflation value from 1985.
Here is the Canadian value for 2010, using the CRA inflation calculator: $185,486.44
The mental target makes a lot of sense… clearly I need to change mine to $200,000
Hmmm… that means I have a ways to go!
I like your final statement of “Don’t work for six figures – make six figures work for you”. I have always felt that way, particularly when I only earned as little as $7,500 (1968). It isn’t how much you earn, but what you do with it.
Yes, I agree to a point. You can make six figures and make it work for you… but what if you only make five figures and struggle to make ends meet each month? You can do all you want with it, but sometimes it is just not enough. You do have to earn beyond a certain point to be able to ponder these questions.
My wife stopped working to take care of our soon to be new born. Six figures would be great, but we made the choice to have a parent at home and sacrifice some income for a normal child. We were both raised as latch key children and did not want that for our own.
I write this because even six figures would help our family a lot, we found the goals we set with whatever money we have is more important than hitting some arbitrary figure like 6 digits.
I rather have $1 with purpose than $1,000,000 without. Watch this amazing video to see what I mean: http://www.youtube.com/watch?v=9DXL9vIUbWg
The median annual household income in the U.S. is about $50K. The lowest six-figure income you can earn is double that. So yeah, I still think $100K is good money in most parts of the country–even in high cost of living areas. If you’re able to provide for your family’s needs, most of your wants, and still save money for retirement, then you’re in a pretty solid position. The extra toys you’d buy with more money probably won’t give you much more satisfaction anyway.
this post is such an important part of the concept of ‘enough’.
For myself, I’ve never been hung up on how much money I had/earned/needed/wanted. Because I believe that money = life energy, my ‘obsession’ has always been in obtaining the freedom that money gives in relation to free time. I’ve always wanted to work as little as possible to ‘afford’ the endless time I so desire.
Thanks for such a thoughtful and important post.
My wife and I make around $80,000 a year with both our incomes combined. If we have kids and she decides to stay home $100,000 on my own will not seem like anything different. In fact, money will probably be tight. So I agree the six figure income isn’t at all what it’s made to be.
Great point about not focusing on the number, but using it as a motivational tool! I think we naturally want more. If we do get there, like Len, we’ll probably feel the same way. Slight letdown and probably back to chasing the next goal.
You’re right, Paula; although $100k per year may not be financial nirvana, it is still a very inspiring goal to shoot for.
And no matter how you slice it, it’s still not chopped liver! At least not yet.
$100,000 can be a lot depending on your obligations. I do think that it is a psychology thing. Honestly, I make plenty to get by on what I make now. However, the more I may the faster I can get to a point of financial freedom which in my mind is the ultimate goal. There will be plenty of pit stops on the way though. Have to live life a little
It’s interesting. I used to make a significant amount more than $100k and was constantly chasing the next dollar. Since leaving that life, I’m far happier. That’s why I agree with KC. Your last statement “make it work for you” is a powerful one.
6 Figures is a lot of income compared to the average national income. So technically yes it’s a lot of money. More importantly, it’s what you do with it. Most people think making 6 figures is the goal.. nope it’s what you can do with that money.
It sure would feel like a lot to me! Although most of my friends have already hit that benchmark, and they’re not so different than I am. I don’t have income goals, I have # of customers goals, and they are related, but increasing business is the key.
I think it would depend on which city you lived in. Here, we’d be great with $5,000/month. We don’t really feel the need to live too lavishly, though. Would more be good? Always. But I think it would be nice to even make that much.
This post is a great reminder to me of two financial lessons:
1. It’s not what you make, but what you keep, that is important.
2. We can’t achieve dreams without goals.
The credit bureaus do NOT consider how much you make for your credit score. So, living below your means regardless of income is the key to a higher NET WORTH, which is the real deal, and to general happiness.
@EFF — I never mentioned the credit bureau. Are you thinking of my mention of the Census Bureau?
Hi Paula,
My point was that 6-figure income is nice but it should not the ultimate goal. I think financial independence should be the goal. I also believe there is no secret formula to financial independence but only ONE which is C=B-A where C= cash flow, B= inflow and A= outflow. As long as C is positive, you are good. The higher the C value is the better.
That’s true. I think the best way to get C higher is by increasing B.
There’s a limit to how small you can make A. There’s no limit to how high you can increase B.
It is to me! I would love to make $100,000 a year.. Shoot.. I would be happy to make $60,000. I would definitely be able to live on $5,000 a month. That would be a dream.
I’d take a large net worth over a massive salary everyday. One of my relatives earns well into the six figures, but is bad with his finances. I’m better off with half his salary than he is with all that he makes.
@JP – There’s an old adage that says “it’s not what you earn, it’s what you save.” I’d say that adage is half-true. If you earn $20,000 a year, you won’t get too far, even if you save half your income. On the other hand, if you earn $100,000 but don’t save a penny, well ….
I’m one of those people. My whole blog is about my journey to earn 6 figures by 35. And, yes, it is a psychological thing for me. To be honest, my husband has more money than he knows what to do with because his family is a bunch of oil ranchers in Texas. I have my needs met, but I have no rights to any of the money. Nor do I want any. I need to do this for ME – earn my own way – so I know that I have the means to stand on my own two feet. That I’m not powerless. That I can make investments and create my own wealth. That’s very important to me.
@Housewife Empire — I think that’s one of the best goals I’ve ever heard, and I love how much self-awareness and self-confidence you have. Money that we earn — ourselves — boosts our confidence in the way that money that feels unearned never could. In fact, researchers have found that “earned” money lights up the areas of the brain associated with reward, while “unearned” money does not. So good for you for striving, everyday, to make six figures by age 35. That’s an important goal, for reasons that go far beyond finance.
This is an interesting discussion. I live in Vancouver, one of the most expensive cities in the world in which to live. I’m in my early 20′s and my boyfriend and I make, together, over $100K/year. We live in a small apartment. While we are able to save money, it can still get tight when emergencies pop up. When we buy a house, we’ll be making $20K more (about $125K/year) together and we’ll have to wait to have kids because once again, with average home prices in my area being over $1M, $125k/year is hardly sustainable.
$100,000 per person is pretty good living, even with one or two kids imo. Even with a place as expensive as SF, $100,000 is a good life.
A lot of good stuff is free! PArks, hiking, ocean.
When I was in college many years ago, I thought I’d be happy earning $40K annually and that I’d live very comfortably off that. Now, our household brings in more than double that and it’s still not enough. Inflation has definitely taken a bite out of what money can buy these days.
@Little House — My boyfriend once said that when he entered college and chose his major (engineering), he was motivated in part by the fact that he heard he could earn $40,000 a year. Now that seems like such a pittance …
The census bureau may find 1 in 5 households clear 100k/yr, but dollars to donuts the heavy majority of those households depend on two incomes to achieve the mark. Now consider the *median* household income in the US and the fact that most of *those* households are also two-income ones. Then ask, what was the point of this article, again?
Most households in this country live with an income of $50-60K, so it’s a bit eye-roll inducing to read that $100K ain’t what she used to be. People would do well to wake up to the fact that the banks are responsible for the inflated the cost of housing in this country by offering sub-prime loans to borrowers who could otherwise not afford inflated asking prices. The market price is what you can sell something for, and by manipulating terms with ARMs and loans loaded with balloon payments, the banks have engineered that increase, screwing it up for anyone too sensible not to play along.
@Robbo — You seem to be discussing two issues. Your first paragraph refers to dual-income households. Your second paragraph refers to the relationship between banks and housing prices. I’m not sure why either of those topics cause you to “roll your eyes” at discussions that compare the purchasing power of $100K in the 1990′s vs. its relative purchasing power today?
Six figures in a median cost of living location still buys a lot. The average family makes about half that, so ignoring differences in tax rates you can afford 2x as much stuff (or retire markedly earlier with the same stuff) on $100,000K. I made about $130,000 in a pretty median location last year, and it certainly seemed like a lot. I’m not worried about money certainly.