Published in: Banks | July 20, 2020
It may feel like a struggle, but it doesn't have to be.
The median income for individuals in the United States is $33,706 as of 2018. This means that at $40,000, you're making more money than over half of Americans, which might suggest that $40,000 is plenty to live comfortably.
If you live alone or in a single-income household, though, you might feel like you're struggling financially -- and for good reason. The median household income in the United States is $63,179 as of 2018, more than 50% higher than your income. In other words, without someone to help you with the cost of living, $40,000 per year might not seem like enough.
Financial stability is certainly possible while making $40,000 per year, but it will require some sacrifices. If you're trying to live in a spacious home and drive a new car, you're likely to get stuck in a paycheck-to-paycheck cycle, or worse, in debt.
In order to go beyond simply making ends meet, you'll need to minimize your fixed costs, stick to a budget, and avoid debt. Here's how to adjust your lifestyle and finances so that you can survive on $40,000 per year.
The personal finance rule of thumb for housing costs is that they should equal no more than 30% of your gross income (that's what you make before you pay taxes). Your gross income is $3,333 per month, so housing should stay below $1,000 per month.
This will be harder to achieve in some places than others, but it is possible. If you live in a state like Iowa, Louisiana, or Montana, where average monthly rent for a one-bedroom is below $800, you can comfortably afford to live alone. That's as long as you don't splurge on the fanciest or largest housing options. If you live in a high cost-of-living state, (think California, New York, or Rhode Island, where the average rent for a one-bedroom ranges from around $1,500 to $1,750), it might be wiser to live in a multi-bedroom apartment or house and split the cost of living with roommates. This is even more necessary if you live in a metropolitan area.
It's crucial to be realistic about where you can afford to live when you're making $40,000. You will probably need to decide between living alone in a low-cost area or living with roommates in a more metropolitan area.
While housing is an obvious budget behemoth, transportation costs might take up more of your income than you think. In addition to making monthly car payments, you'll need to cover gas, repairs, and car insurance. All said, the average cost of owning a new car tops out at $706 per month, according to a AAA study.
This is not a reasonable monthly cost for people making $40,000 per year unless you have another source of income. Consider that your take-home pay is probably around $2,400 per month. If you're pushing up against that $1,000 limit for housing, that leaves you with $1,400 to cover everything else and, ideally, set 20% aside for savings. Opting for a new car will funnel over half of your disposable income into transportation alone.
Rather than buying a new car, look for a more affordable transportation option. Given how rapidly cars lose their value, it's generally smarter to buy a used car regardless of what you earn. You could potentially cut that monthly transportation cost in half if you go for an older but still-reliable model. If you live in a convenient location, going car-free, and relying on public transportation, walking, or a bicycle instead is good for both the environment and your wallet.
Getting your housing and transportation costs under control is the first step to getting your finances in order, and doing so will likely offer you a lot of financial breathing room. However, without a solid budget, you can easily end up blowing the money you saved in those areas on other things.
No matter how much you earn, you should do your best to put a little money from every paycheck into a savings account. As difficult as it might be, if you live paycheck to paycheck, it's even more important to have an emergency fund to cover unexpected expenses. Otherwise, you could end up resorting to high-interest debt -- and paying off debt could add an additional monthly expense you may not be able to afford.
The goal is to deposit 20% of your take-home pay into savings. However, this might not be realistic for where you're at. Start with what you can -- even if that's only 10% -- and work your way up to 20% gradually. Set up automatic transfers to your savings account to keep yourself accountable.
Subtract fixed costs like housing, transportation, groceries, and any other bills from your take-home pay along with the money you're putting into savings. Whatever is left is your spending money. This should be divided up into categories, such as dining out, entertainment, and clothing, and a cap should be placed on each category to help you stick to your budget. You can connect your bank accounts to a popular budgeting app to get a real-time picture of where you're at with your budgeting goals. Some will even send you notifications when you get close to your spending limits.
Ultimately, increasing your income by negotiating raises and learning new skills will help you achieve your lifestyle goals while staying on budget. For now, though, use these tips to make sure you stay financially stable on $40,000 per year.
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