Can You Live Off of $40,000 a Year?

How much is $40,000 a year an hour? It is  $19.23 an hour. Is this a good salary in today’s economy?  Well, it is more than the $15.00 that is currently being demanded for the Minimum Wage.  Can you live off of $40,000 a year? Let’s look deeper into the economics of $40,000 a year Salary.  It certainly depends on your location, your current expenses, and your current spending habits. Based on these factors, it begs to ask should you make more than $40,000 a year or are you okay?

How does $40,000 a year compare to the national average?

The average wage in the U.S. in 2019 was $51,916.27 per PolicyAdvice. The median household income as of 2019 was $68,703.  The Median wage was $19.33 per hour.  The median is a statistical value that separates the higher half from the lower half of the data.  This is important when the range of data is so widely spread out.  In this case, where income ranges from less than $10,000 to over $200,000. 

The median number is a fair indicator of income in the U.S. However per The Census Bureau the real median personal income in the U.S. in 2019 was $35,977. Per PolicyAdvice as of 2020, the median average income in the U.S. was $51,168.  Therefore, any salary above $51,000 should be a salary you strive for. However, since we are talking about a salary of $40,000 let’s consider the tax ramifications.

How much will I bring home after Taxes with $40,000 a year to live off.

Taxes are about $6k to $9k, this is based on a few factors.  If you are married or if you are single. You have dependents to claim. You are taking any pre-tax deductions for investing or healthcare.  Finally, the state and local taxes of your location.  After, taking into consideration all of your taxes and pre-tax deductibles, can I live off a $40,000 salary after this amount is deducted?

Can You Live off of $40,000 a Year? – Depends on where you live?

A quick Google search for best places to live on a $40k salary gave me 35 Surprising Cities with low costs of living per gobankingrates.com. This article was based primarily on the 50/30/20 budgeting rule.  However, if you don’t already live at one of these locations or do not wish to relocate this may not be an option for you. 

Let’s take a look at how your state stacks up with the rest of the United States.  Let us take a look at the value of $100 by state from the Tax Foundation. For example, a state like California where the real value of $100 is a little over $86 compared to Arkansas where the value of $100 is over $117 shows you the significant difference of living in a different state.  Hence, location does matter.  Again, other factors besides money do matter.  Such as family and friends, job opportunities, and the overall quality of life.

However, if you desire to take the plunge and explorer other locations.  NerdWallet as a cost of living calculator to help you.

So, what to do if you want to stay put.  You will have to work with where you are and with what you have. Let’s start with housing affordability since this is will be the largest of your expenses. Can I afford a mortgage or the rent at my current location?

How much housing can I afford with a $40,000  a Year Salary?

Your housing cost should not exceed 28% of your pretax monthly income.  At $40,000 a year, your monthly pretax income is about $3,333.33. 28% of that would be  $933.33.  However, if your debt and/or other expenses are super low, then you can push this up to 30%.  This will bring the cost of housing to about $1000.00.  This is roughly an extra $67.  However, when on a tight budget this could be a deal-breaker. 

So, is $40,000 a year a good salary if I want to buy a house. For those looking to buy a home, a critical rule is the 28/36 rule which means that your mortgage payment should not exceed 28% of your monthly pre-tax income and be 36% of your total debt. Let’s unpack this.  Again, 28% of your pre-tax income would be $933.33. Therefore $933.33 is 36% of your total debt of $2592.58.  This leaves roughly $1,659 for other debt such as student loans, car notes, and credit cards. Use this handy tool from Bankrate to help you calculate how much house you can afford.

Let take a look at a sample Budget:

Income: $40,000

Gross Monthly Pay: $3,333

Est. Monthly Take-Home pay: $2,708

Savings: $333 (Pay yourself first – 10% Pre-Tax Income)

Housing: $933 (28% of Pre-Tax Income)

Utilities: $250 (10% or less of your After-Tax Income)

Debt: $250

Food: $400

Giving: $333

Personal Activities: $209 ( Is this enough?)

Summary

Take-Home Pay: $2708

Minus Expenses: $2708

Balance: $0

Every cent has been accounted for.  Your budget of course will not look like this but you get the picture.  Every dollar has been allocated to a budgeted category. Based on this budget it appears that a salary of $40,000 is good. However, can you live off of $40,000 a year based on your expenses?

Here are some budgeting tips:

1. Create a Budget based on your income and expenses
2. Save your first $1,000
3. Payoff debt
4. Create an Emergency Savings of 3 to 6 months of living expenses
5. Continue saving for the things you want with a Sinking Fund (Dedicated Savings Accounts i.e. vacation, holidays)
6. Invest up to 15% of your income for retirement
7. Work on increasing your income to or above the national average

$40,000 per year may be a good salary but…

However, if your current budget is tight and there will be a while before you can eliminate any debt you may have or reduce your current expenses. Then you should actively seek other employment.  Per Indeed these 25 Jobs pay $50K a year without a degree.

1. Property manager
2. Retail store manager
3. Law enforcement officer
4. Title examiner
5. Web developer
6. Fitness manager
7. Hotel manager
8. Pipe welder
9. Foodservice manager
10. Electrician
11. Aircraft mechanic
12. Insurance specialist
13. Commercial truck driver
14. Claims adjuster
15. Sales representative
16. X-ray technologist
17. Sanitation supervisor
18. Internal wholesaler
19. Train conductor
20. Firefighter EMT
21. Realtor associate
22. Land surveyor
23. Plumber
24. Commercial pilot
25. Dental hygienist

In summary, can you live off of $40,000 a year? $40,000 a year is about $3,330 per month pre-tax and about $2700 after-tax. I think it is but it depends on the expenses of your location, your debt, and spending habits.  Hence, your willingness to relocate or explore other employment opportunities may be beneficial to you financially.  I hope I gave you some helpful information on your journey to financial freedom.

Here are additional resources:

Living Below Your Means

What is the Purpose of a Budget

Wealth Accumulation

Let’s Budget, Spend, and Live!

Sabrina