Wondered: What can I Afford Making 40k a Year? Let’s Budget for 40k a Year Salary

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Wondered: What can I Afford Making 40k a Year? Let’s Budget for 40k a Year Salary
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Possibly, never before had income mattered more than in these uncertain pandemic days. With increasing inflation, producer inflation soaring, and logistics problems that have skyrocketed the price of certain goods, making good money is a priority.

You know your wage is very important to secure a good standard of living, but if you make $40k a year or are offered this wage in a job opportunity, you might start wondering: is $40,000 a good salary?

To solve this question, let’s take a look at all the variables that come into play, and how you can manage to live comfortably with that amount.

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U.S. Median Personal Income

To see how you can live on $40,000 a year, you must take into account the annual median personal income in the U.S., as well as other references to put your income in perspective.

The federal minimum wage since 2010 is $7.25 per hour, which represents a gross monthly income of $1,256 or around $15,000 a year. However, the current government has promoted a reform to achieve $15 of hourly wage to go in effect as of March 2022.

It is quite evident that making $40,000 a year is well above the minimum wage, and you’d be surprised to know that it’s certainly above the U.S. median individual income of $35,000 a year according to the U.S. Census Bureau.

Also, the country’s median household income is $63,179 a year, so you can consider $40,000 a good salary after all.

Let’s Crunch Some Numbers

You shall do the math based on your net pay, which means that your take-home income per month should be $2,650.

One effective method to crunch the numbers is to follow the 50/30/20 rule, by which you should budget 50% of your gross income for needs –housing, utilities, food– 30% for wants, and 20% either for savings or to get rid of debt.

This means that $1,325 should go for necessities, $795 for things you want, and $530 for savings.

Then, get some pen and paper and put your detailed income on one side –take-home pay, freelance income, investment yields– and your expenses on the other –rent, car, utilities, groceries, debt– split by a line.

Separately, in another area of the paper, put your wants –eating out, clothing, travel– and somewhere near, your savings –always keeping in mind the 50/30/20 rule.

This is how it could look like, just to give you an idea:

Monthly Budget
Income Expenses
Take-home pay $2,300 Needs
Freelance income $250 Rent $700
Investment income $100 Car $125
TOTAL $2,650 Utilities $100
Gas $70
Debt $90
Groceries $200
Personal care $40
TOTAL $1,325
Wants
Eating out $350
Entertainment $295
New clothing $150
TOTAL $795
Savings $530
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Consider Your Marital Status

When living on $40k a year, your marital status is something very critical and could make things go either way, good or bad. With the average household income in the U.S., you’d need to have a partner whose contribution takes the home income the closest to $63k a year to be on par with the country’s median.

Still, there are some advantages and disadvantages you might want to weigh, and factors to add to the equation.

Financial Pros and Cons of Being Single vs. Married

One key financial advantage of being single when you make $40,000 a year, is that there are no old financial burdens. If your partner is in debt, it can be very stressful. On the other hand, being single, you have more financial freedom and don’t have to worry about the economic deficiencies of your other half.

Flexible housing options are another advantage of being single. You might think that sharing living expenses with a partner is a good thing, but you have to be careful as your financial decisions will be tied up to your emotional bond with this person.

On the other hand, living with your parents or sharing a flat with your friends is a good way to save money on accommodation. Perhaps, if you have your own house, you can rent rooms and one or two roommates can cover a large part of your expenses while you pay a corresponding part.

However, there are certain drawbacks of being single, such as state income tax –or federal income tax.

According to Lisa Greene-Lewis, tax expert for TurboTax, “In most cases, a married couple will come out ahead by filing jointly. You typically get lower tax rates when married filing jointly, and you have to file jointly to claim some tax benefits.”

Also, there is no underestimating the financial potential of two hard workers joining forces to work and achieve their own and couple goals. More money flowing into the household can bring benefits to their personal finance aspect and the ability to save money.

These circumstances make $40,000 a good salary, since both bringing home the same monthly income will take them closer to success –being able to pay student loans, to live debt free, and to pay less in income taxes.

What’s Your Living Situation Like?

The success of living off $40k a year depends on several factors of your current living situation. If you don’t have any outstanding debts and share a place with either your partner or a friend, you might be in a very good position.

You could perfectly move in alone to any home in the cheapest cities in the country, or could share a place in more costly cities like Rhode Island or New York.

It’s essential to keep your feet on the ground when choosing where to live if you’re making $40,000 a year. You will probably have to decide between moving in alone in a cheap area or living with roommates somewhere more metropolitan.

Take Cost of Living into Account

If you make $40,000 a year, you must compare the costs of living in certain states or cities as this salary might not be enough.

Mississippi, for instance, is the state with the cheapest cost of living in the U.S. with utilities costs up to 14% lower than the national average. The median home price hovers around $114,500, while, according to CNBC, the monthly cost of energy in the state is $143.

On the other hand, Hawaii and California are the most expensive ones as stated by the World Population Review.

In July, Forbes revealed a list of the cheapest cities to live in that included Cedar Park, Austin, and Midland in Texas; Ogden and Provo, in Utah; Raleigh in North, in Carolina; Des Moines, in Iowa, and Minneapolis, in Minnesota.

The most expensive cities include New York City, and San Francisco and San Jose, in California, as well as Boston, in Massachusetts, and Washington, DC.

Rental Industry
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How to Live Comfortably on $40k a Year

Keep Track of Your Budget

If you want to live on $40,000 a year, keeping track of your spending on a regular basis can give you an accurate picture of where your money is going and where you really want it to go.

To do this, you should often check your account statements –all your accounts including credit cards– and see how much money you spend on bills, credit card debt, etc.

You should also create a budget of your annual salary to classify your expenses and see how much money you’re spending on fixed expenses and discretionary things. You might find that you actually spend money on more wants than needs.

Budgeting apps come handy by allowing you to allocate a certain amount of spendable income each month, depending on what you are entering and paying for.

To successfully live on $40,000 a year, it’s important to be ready to adjust your budget once you’ve monitored how your personal finances pan out. This will give you a lot of insight on e.g. how much rent you could pay, or what expenses are not necessary.

As mentioned above, applying the 50/30/20 rule could be very effective.

Live Frugally

Often, when talking about living frugally, people can’t differentiate between frugal vs cheap. Truth is, when you’re making $40,000 a year, you have to have an abundance mindset.

Frugality is a behavioral alternative to consumerism with the purpose of improving people’s lifestyles. When you are frugal, you optimize your money in a way that you can live comfortably and control your mind to avoid wasting those resources unnecessarily.

Frugality in itself allows us to reduce the possible impact of the crisis and significantly increase our knowledge about money –because it improves our decision making skills. A good salary can be multiplied if you take care of your finances and identify what is necessary and what is not.

Steer Clear of Bad Debts

Bad debt is “an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible and is thus recorded as a charge off.”

Some examples include credit card debt, auto loans, personal loans, and loan shark deals. Still, there are several actions you can take to steer away from bad debt.

A golden rule is “if you can’t afford it without a credit card, don’t buy it.” Credit cards are useful for emergencies and justifiable situations, but if you can’t pay off your credit card balance in full, you’ll be juggling with knives.

Fallback emergency funds are also very useful to avoid bad debt, and the idea is to have savings of 3 to 6 months of your salary, to deal with the unexpected side of life –this can be done by budgeting on your annual salary.

Prioritize Your Savings

As already mentioned, saving money is of the utmost priority when you’re making $40k a year. Prioritizing an emergency fund worth 3 to 6 months of gross income will help you be prepared.

Further you can open an interest bearing account and let your fund grow at a good interest rate. When you withdraw your fund money you’ll see how it has increased.

Invest if You Can

We say, invest “if you can” because savings is your priority. But any extra money that falls into your lap can be used wisely to generate passive income and grant you another revenue stream with little effort.

Investing in real estate could be a possibility in the right conditions. You would have to evaluate the market and decide whether either housing or commercial property is the way to go.

Build More Income Streams

It might be off your radar, but there are so many options you can grab to start making money off side hustles. If you love writing, for instance, you can explore how to make money reading books; if you’re into photography, you can make money doing stock photography.

For instance, people sell art in many ways. Search your city for organizations and associations that promote art and join to learn more about this world and have access to art exhibitions. Bring your proposals.

From dancing to blogging, there are several hobbies or special talents you can monetize to supplement your $40,000 a year.

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FAQs

How much rent can I afford on a $40k salary?

Within your 50/30/20 budgeting rule –if indeed you set out to stick by it– you shall spend up to 30% of your income on rent, which accounts for anything below $1,000 a month. And this is where choosing an affordable city or state to live in is essential.

In this regard, other connecting aspects of housing become extremely relevant to succeed with $40k a year. You should consider how long you would need to commute when choosing a specific home –can you take advantage of proximity?

Also, bear in mind what other payments you must deal with –utilities, student loans, debt repayment, property tax– besides rent alone. Perhaps moving in with your partner or sharing a place with friends is an option.

The idea is that rent –household expenses– allow you to save money to build your emergency fund, get rid of debt, or achieve your financial goals.

Can a single person live on minimum wage?

The hourly rate hasn’t caught up with the cost of living since the late 1960s. According to a report by the National Low Income Housing Coalition, housing has become so expensive in the U.S. that a worker earning the minimum wage cannot pay the rent.

No state, county or city in the country allows a full-time minimum wage worker to pay for a two-bedroom home.

“A full-time minimum wage worker can only pay rent for a room in 7% of US counties – 218 counties out of a total of more than 3,000 nationwide.”

In fact, the income of a minimum wage worker with a family of four is well below the poverty line. While many states and some cities have minimum wage rates well above $7.25, those who earn the minimum wage still struggle to pay bills, find housing, and support a family.

Many states and cities have higher minimum wages, in some cases more than double, but it is still difficult for workers to go to extremes.

Proponents of raising the minimum wage argue that this helps incomes catch up with the rising costs of living and lift millions out of poverty. So, as things evolve, sure, you can live on minimum wage albeit without much dignity.

Final Words

By creating a budget, living frugally, and avoiding debt, you’re more than halfway to living comfortably with $40k a year. The rest can be done by prioritizing your savings, securing additional revenue streams, and investing wisely if you can.

There are millions of people who make ends meet doing a lot of juggling. They are the clear example that living with little money is not only possible, but it can be done without giving up many things that we enjoy in our day-to-day life.

Just follow the previous tips and you will be able to get to the end of the month comfortably!

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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