It’s shocking and sad at the same time but making a six-figure salary is no longer enough to live a care-free life, especially if you live in an expensive city like London.
In some instances, well-paid professionals are worse off than those who make far less money. There are multiple reasons for this, which include longer time in education, expensive degrees pre-requisite for the well-remunerated jobs, higher taxes and stressful careers.
There is also inflation. Prices of some goods and services have outpaced inflation for a long time now. Housing and private schools are two prime examples.
Leaving aside the monetary inflation, there’s the lifestyle inflation. Perceptions have not kept pace with the reality that a six-figure income simply doesn’t go as far as it used to.
In the past, a six-figure income would allow you to comfortably raise a family while sending your children to private schools. These days it’s no longer the case – but many people still try. That, in turn, leads to some very unfortunate financial outcomes.
I have many friends and colleagues who fall into this category. They are smart, hard-working and successful in their chosen fields. At the same time, they live beyond their means and often have nothing to show for the years they spent toiling in high pressure, tiring jobs.
Today I am going to introduce you to one such family.
Meet The Family Making £250k A Year
Meet the Smith family. The parents, Adam and Melanie, are well-educated, successful professionals in their late 30s. They live and work in west London and have two lovely kids – a 10-year old daughter and a 7-year old son.
They both work in finance. Adam commutes to Canary Wharf while Melanie “enjoys” a slightly shorter commute to Mayfair.
The jobs are demanding and both Adam and Melanie typically put in 60-hour weeks. Because their nanny leaves at 7pm both Adam and Melanie try to finish up work at 6pm to make it home in time. Melanie also does the school run in the morning on account of her shorter commute.
Once home and the kids have had dinner and gone to sleep, Adam and Melanie log back on and work another 2-3 hours. The work is stressful and unpredictable, but they are well compensated.
Adam brings in £150k / year as a senior director in the audit department of a big bank. Melanie earns £100k in her job as a fund controller in a private equity firm.
While Melanie is just as well-educated and capable as Adam, her earnings lag Adam’s. Despite all the focus on equal pay for women, Melanie is in the same situation as most of her contemporaries – her career progression simply hasn’t been as quick on account of being a mother of two children.
Let’s look at the Smith’s family annual budget.
The Budget Of A £250k Per Year Household
Below is a snapshot of the Smith family’s monthly and annual budget.
Adam and Melanie’s combined annual gross income of £250k translates into take-home pay of £145k per year, which equals c.£12k per month.
Mortgage: Adam and Melanie live in a modest 3-bedroom terraced house in Chiswick. They bought it for £1.2m five years ago.
With some help from their parents, they managed to put down £200k and took out a £1m mortgage. Thankfully the interest rates remain close to historic lows – at a 2% AER the mortgage payment works out to £4,239/month.
Were rates to go up to 4% (still below long-term historical averages), the monthly payment would go up about £1k to £5,276/month.
As with any period property, there’s plenty of ongoing maintenance required. Over the past 5 years, the Smiths have had to replace the roof, install new carpets and renovate the kitchen. This cost them £20k in total.
Adam expects that further repairs will be required. In particular, the boiler is likely to need replacing. The Smiths are putting away £2k a year into their house emergency fund.
Total housing expenses: £57k/year or £4,700/month.
Groceries: Adam and Melanie try to eat healthy themselves and help their children develop healthy eating habits as well. They rarely eat out and so their monthly grocery spend adds up to £800.
Lunch: When you work 60+ hours a week, you don’t have time to cook lunch for yourself. Furthermore, people do look at you funny if you make £100k+/year yet still brown-bag your lunch.
Assuming a modest £6 salad and a £2 coffee (got to keep going through the long day) a day works out to about £313/month for two people.
Clothes: Adam and Melanie spend about £1,200 on work attire (a couple of suits and shirts) every year as they need to look the part. Combined with other clothes for them and their children, they spend about £7,200/year or £600/month on clothing.
Gym: A Virgin Active membership at their local club in Chiswick is about £100/month (higher now but Adam and Melanie are grandfathered on their lower legacy rate). Staying active and working out (though mostly on weekends) helps Adam and Melanie combat the stresses of their jobs.
Uber/taxi/car share: The Smiths are pretty frugal and therefore don’t own a car. An occasional Zipcar for a day trip or an Uber adds up to £200/month. It’s still cheaper and more flexible than buying their own vehicle.
Big-ticket purchases: There’s always something that needs to be bought or replace – a school laptop for their children, a computer for themselves, a phone or a microwave. Next year their daughter will need a new bed. On average the Smiths spend £2,000/year in this category.
Total living expenses: £37k/year or £3,068/month.
We are now coming onto the single biggest expense item on Adam and Melanie’s budget. They are both privately educated at the primary/secondary school level. Both of them have degrees from Russell Group universities and Melanie also has a CA designation.
With well-paid jobs and an innate desire to look after your offspring, it is only natural they would look to provide their children with the same experience. But can they really afford it?
On average, private school tuition runs about £17k per child per year these days. That number, however, ignores the ancillary fees. There are sport clubs expenses, uniforms and sports kits to buy and an occasional school trip per year to pay for.
In total, Adam and Melanie spend about £20k per child on private school. In total, that works out to just about £3,300/month.
In addition, their children finish school around 3pm while Melanie doesn’t get home until 6:30pm earliest. The Smiths have hired a part-time nanny to pick their children up from school and look after them until the parents come home.
Nannies typically prefer full-time positions but through a good friend, Melanie found a very reliable nanny who lives nearby and is willing to work 4 hours a day. It costs Adam and Melanie £12 / hour and adds up to £940/month.
Adam contemplated the idea of getting an au pair for the added convenience of having someone with the children 24 hours a day. You could find an au pair for about £1,000/month but the house the Smiths live in only has three bedrooms.
Besides, having an au pair would inevitably lead to higher expenses on items like groceries since there would be an extra mouth to feed.
Total education expenses: £51k/year or £4,300/month
After working their backsides off throughout schools, universities and during their early careers, one can hardly fault Adam and Melanie for feeling like they deserve to go on holiday twice a year.
Their kids are diligent students and also deserve a break. They typically stay with their grandparents during the fall and spring half-term holidays, so the annual summer trip to Spain and a skiing holiday in Solden is a treat for the entire family.
The holidays are nothing fancy but a 10-day summer holiday for four sets the Smiths back £3,000 once you factor in flights. A 5-day skiing holiday? Add another £2,000.
Total holiday expenses: £5k/year or £400/month
Adding It All Up
When you tally it all up, the combined monthly income of the Smith family is just north of £12k. Their monthly expenses of £12.5k are about £500 higher than their income.
In other words, even after a very carefully constructed budget and a relatively frugal (in light of their income) lifestyle, the Smiths are short about £6k/year.
The way Adam and Melanie “balance the books” is by relying on Adam’s year-end bonus (typically about £10-15k pre-tax) to fund any big-ticket purchases or home repairs. However, they are just one step away from blowing a large hole in their family’s budget.
They may have a bad year at work and get no bonus. That boiler could break, the tuition fees could go up (this one is practically a certainty) or they could have an illness in the family and need to take unpaid time off.
Of course, it will not always be like that. In 8 years when their daughter goes to university, the tuition fee will go down by half. When their son graduates from school in 11 years, there will be no tuition fees at all.
The private school fees will, however, be replaced by uni fees of c.10k/year + living expenses, unless Adam and Melanie tell their children to take out a loan (which I doubt they will).
In 20 years the mortgage will be paid off, which will free up about £4k/month. However, both Adam and Melanie will be very close to retirement age by then and looking at a significant reduction in income.
Besides, while Adam and Melanie both contribute the minimum mandatory 5% of their income into their workplace pension, they haven’t got any other savings. They will need to rely on equity in their home to fund their living cexpenses in retirement.
Cost Of Private School Is The Problem
The situation would be very different if the Smiths opted for state school instead. Instead of looking at a £500 shortfall every month, Adam and Melanie would be able to put away roughly £3,800/month or about £46k/year.
They could afford to buy a car, take half-term holidays and perhaps stop being so stressed and thinking about money all the time. One of them could take a part-time job which would allow them to spend more time with the children – and save on the nanny.
Alternatively, they could continue living the way they do today, invest the money the would spend on private education today and set their children up with £2.7m each.
But they don’t.
While the Chiswick area of London has very decent state schools, both Adam and Melanie feel a lot of pressure to send their children to private schools. After all, if a couple on £250k/year cannot do that, then who can?
Unfortunately, with housing and education expenses outpacing inflation over the past 20 years, a quarter million per year just isn’t what it used to be.
To be able to afford the lifestyle they want in an expensive city like London, Adam and Melanie need to make at least £350k combined. Anything below that is a delusion – unless they are willing to pack up and move outside of London.
So What Should They Do?
Adam and Melanie are very fortunate and successful. Melanie’s income puts her in the top 3% of UK earners while Adam just about hits the top 1% once you factor in his bonus. Both of them recognize their privilege.
In a way, this situation is both beautiful and tragic at the same time. Beautiful because millions of people would trade places with the Smiths at a moment’s notice. Tragic because Adam and Melanie have let personal and societal expectations paint themselves into a financial corner.
Thankfully they have options. The most obvious one is to move their children to a state school. In Chiswick, this means they will still get a world-class education with great university and job prospects.
The second option is to move out of London and commute into the city for work. The Smiths would need to carefully consider the economics but it would likely allow them to save money on both housing and living expenses.
The third option is to move to another city (or country) with a lower cost of living. This would involve some disruption, but an energetic, professional couple like Adam and Melanie will certainly land on their feet.
Finally, the status quo is also an option, if the Smiths are willing to continue living their lifestyle for the next 20 years. I have a hunch that this may well be the outcome here. I also have a hunch that this is not the outcome that will result in an enjoyable, fulfilling life.
Readers, what would you do? Have you ever been in a situation where your high income just didn’t keep pace with expenses?