In today\u2019s America, there are quite a few cities where even a six-figure salary can leave you feeling broke.<\/p>\n
According to a recent study from LendingTree, in 25 of America\u2019s 100 largest metros, a family of three would need more than a combined $100,000 income to meet basic expenses each month [1]. For example, a family in San Jose with a household income of $100,000 a year would still face a shortfall of $2,207 every month after covering their basic expenses.<\/p>\n
Katie and Brad are just two of the many Americans who find themselves in this tough situation. The couple, both 32 years old, earn a combined $170,000 per year while raising their two children in San Francisco \u2014 where a family of three that earns more than $100,000 per year is likely to face a $1,804 shortfall every month.<\/p>\n
Between their rent ($2,500 per month), childcare costs and about $30,000 in combined student loan and credit card debt, Katie and Brad are finding it hard to see beyond the monthly expenses and put money away for their future.<\/p>\n
Right now they have about $50,000 saved for retirement, but in order to get ahead of their debt, they\u2019ve stopped contributing regularly to their 401(k)s. Meanwhile, the spiralling costs of essentials have also wiped out their emergency fund<\/a>.<\/p>\n Despite these financial challenges, their goal is to save for a down payment on a home and contribute at least 15% of their income each month to their retirement accounts. With this in mind, here are some tips for Katie and Brad \u2014 or anyone else who is paid well yet still struggles to get ahead.<\/p>\n Despite the fact that they\u2019ve chosen to focus on their debt, couples that are in Katie and Brad\u2019s shoes often wonder about what to work on first: paying down the debt, or prioritizing retirement savings.<\/p>\n Turns out Katie and Brad wisely chose debt.<\/p>\n While there are multiple schools of thought on which approach is best, one effective way that Katie and Brad could tackle their financial predicament is with Dave Ramsey\u2019s 7 Baby Steps [2]. According to this approach, Katie and Brad should do the following, in order:<\/p>\n Save $1,000 in an emergency fund, which they can build on later<\/p>\n<\/li>\n Use the debt snowball method<\/a> to pay down their $30,000 student loan and credit card debt<\/p>\n<\/li>\n Try to add at least three months\u2019 worth of expenses to their emergency fund<\/p>\n<\/li>\n Begin investing at least 15% of their household income in retirement savings<\/p>\n<\/li>\n Set aside funds for their children\u2019s education<\/p>\n<\/li>\n Start saving for a down payment \u2014 for existing homeowners, Ramsey recommends paying off the mortgage early<\/p>\n<\/li>\n Build wealth and give back: Debt-free and living in their own home, Katie and Brad can then look to build wealth and\/or give back to charitable causes<\/p>\n<\/li>\n<\/ul>\n Story Continues <\/p>\n With this approach, Katie and Brad can get an emergency fund established while chipping away at their debt. Once the debt is settled, the couple can then turn their attention to beefing up their emergency fund and allocating a portion of their monthly income to retirement savings. After that, they can focus on setting money aside for a downpayment.<\/p>\n Here\u2019s how Katie and Brad can put their first few baby steps into action.<\/p>\n Read more: Rich, young Americans are ditching stocks \u2014 here are the alternative assets they’re banking on instead<\/a><\/strong><\/p>\n Before Katie and Brad start working on the first of their baby steps, it\u2019s important for the couple to understand where their money goes each month and create a budget<\/a> that leaves money for savings or paying off debt.<\/p>\n To establish a solid budget, Katie and Brad can start by gathering a year\u2019s worth of bank statements \u2014 including credit cards and any investment accounts \u2014 so that they can understand how they spend their money.<\/p>\n This can help them to create a budget that\u2019s based in reality, rather than vague notions of how they think they spend, or where they think they can cut down on spending.<\/p>\n While advice on how much to save in an emergency fund largely depends on your personal situation, most personal finance experts suggest anywhere from three to six months\u2019 worth of expenses.<\/p>\n According to Ramsey [4], you should opt to save three months\u2019 worth of expenses if:<\/p>\n On the other hand, six months\u2019 worth of expenses is safer if:<\/p>\n You\u2019re married and live on one spouse\u2019s income<\/p>\n<\/li>\n You\u2019re in a seasonal job, self-employed, work on commission or in a volatile industry<\/p>\n<\/li>\n You\u2019re a single parent<\/p>\n<\/li>\n You have dependents who are chronically ill<\/p>\n<\/li>\n<\/ul>\n Once their debts are paid off, Katie and Brad can use the momentum from the debt snowball method to find the funds to stash away in their retirement accounts.<\/p>\n The debt snowball method requires you to first tackle your smallest debt, while making minimum payments on all other debt. Once the first debt is fully paid, the money used for that monthly payment is applied to the next largest debt, and so on, until all debts are cleared.<\/p>\n That money can then be used to beef up Katie and Brad\u2019s emergency fund. Once they have cleared their debts and fully replenished their emergency savings, they can then redirect that money to their 401(k)s or any other retirement accounts they may have.<\/p>\n Thankfully, Katie and Brad are still young and may both work for another 35 to 40 years before they retire. With this in mind, they have a long time to save and get back on track with their retirement savings targets. However, to take advantage of the benefits of compound interest<\/a>, Katie and Brad should strive to pay down the debts and beef up their savings as soon as they can.<\/p>\n Stay in the know. Join 200,000+ readers and get the best of Moneywise sent straight to your inbox every week for free. Subscribe now.<\/a><\/strong><\/p>\n At Moneywise, we consider it our responsibility to produce accurate and trustworthy content people can rely on to inform their financial decisions. We rely on vetted sources such as government data, financial records and expert interviews and highlight credible third-party reporting when appropriate.<\/p>\n We are committed to transparency and accountability, correcting errors openly and adhering to the best practices of the journalism industry. For more details, see our editorial ethics and guidelines<\/a>.<\/p>\n [1]. LendingTree<\/a>. \u201cThe 25 US Metros Where a Family of 3 Can Make 6 Figures and Still Be Broke\u201d<\/p>\n [2]. Ramsey Solutions<\/a>. \u201cThe Seven Baby Steps\u201d<\/p>\n [3]. Credit Counselling Society<\/a>. \u201cBudget Breakdown for Monthly Costs\u201d<\/p>\n\n
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