If there’s one thing I’ve learnt in the 6 years I’ve been writing articles, connecting with my readers and sharing experiences, its that everyone’s financial journey is different. No two financial plans are ever alike and what is achievable comes down to one’s unique situation. In this article, I hope to cover some of the basics one must be aware of in their working careers to achieve financial peace and independence with a $100K income.
Income levels and tax buckets
Just over 12% of the American households make $75K – $100K a year and considering the 2024 tax brackets published by the IRS,
- 35% for incomes over $243,725 ($487,450 for married couples filing jointly)
- 32% for incomes over $191,950 ($383,900 for married couples filing jointly)
- 24% for incomes over $100,525 ($201,050 for married couples filing jointly)
- 22% for incomes over $47,150 ($94,300 for married couples filing jointly)
- 12% for incomes over $11,600 ($23,200 for married couples filing jointly)
Find more statistics at Statista
Single and married couples will mostly cap out at the 22% federal tax level. As mentioned in prior articles, the US has a step up tax system which can be very valuable when planning for the long term – as it helps you from a tax optimization perspective.
Investing Bucket strategy
There are many ways to build wealth for those who are early career, mid career or late career. Some focus for the long term, some short-term and some medium term goals. Goals can be different with each timeline approach but each play a significant part in your life whether that be paying off loans, building emergency funds, saving for a wedding, house, education or retirement planning.
For the purposes of this article, I will focus on early career professionals and investment decisions they can take to start their wealth building journey.
First Bucket
The first investment vehicle anyone should consider should be one that is so powerful, it grows tax free for the long run and compounds greater the longer you stay invested for. It does have rules surrounding early withdrawals without penalties but the intent is to maximize this bucket every year from year 1 and given income restrictions, at $100K/year, you can contribute to this tension free.
Its the Roth IRA ofcourse! The limit is low, $7K/year as of 2024 which if just invested regularly starting at the age of 20, has the potential to make you a tax-free millionaire (even after adjusting for inflation).
I urge you to make the Roth IRA your first investment bucket because when compare the same annual contributions to a taxable account, after taxes (which will most likely be higher than 22% we currently have in the future), you’re left with a much smaller piece of the pie – atleast $1.23M lost to taxes.
Second Bucket
The first bucket is universal to everyone as Roth IRAs are self managed. For the second bucket, we rely more on benefits offered by employers or investment vehicles you can consider if you are an entrepreneur or business owner/self employed. This bucket can look different for different people and that is okay. The purpose is to optimize for your unique situation.
In my opinion, the second bucket includes both 401Ks and HSAs. I have covered benefits of each in prior articles that can be found here but for the purpose of this article and these income + tax rate levels, I urge one consider Roth 401K as an option (if available) to contribute to.
While I am not a certified tax or financial professional, it is my opinion that the current low tax rates the US has are unsustainable for the long run and that rates are more likely to go up in the future. That creates a unique opportunity for people to choose how they want to be taxed on their contributions.
If one contributes to a traditional 401k (the 23K limit for 2024), that lowers their taxable income by 23K. For single tax filers, you will still be in the 22% bracket while married tax filers (filing jointly) will be in the 12% bracket. In my opinion, optimizing for your lifetime tax situation, it might potentially better to contribute to a Roth 401k if you’re able to at the 12% and 22% rate rates as chances are, at retirement, you’ll probably be in a higher bracket and face RMDs if your account sizes are significantly large (a few $M).
Third Bucket
When considering a $100K/yr gross income, that’s roughly $78K after federal taxes and FICA. After contributing $23K to the Roth 401K and $7K to the Roth IRA, that’s $48K left in hand for the year or $4K per month left over to spend. With $30K in contributions to Roth assets, you’ve already invested 30% of your gross income and that’s awesome! However, consider based on your geography, if you could do a bit more.
Of course there are living expenses like rent, groceries and other miscellaneous travel, restaurant, guilty pleasure purchases to consider but you can control how much that is. If you live in an expensive city like Seattle, you can budget $3K in total expenses incl rent (yes, it is possible). If you live in a cheaper city like Houston, you can budget $2K in total expenses incl rent (yes, it is possible – I did it with $1.5K/mo when I started working my first job an analyst).
So that leaves anywhere from $1-2K to contribute to your third bucket and that brings me to the taxable brokerage account. This is the account you open to invest your stock, ETF or index fund pics and realized gains are taxed while realized losses can help offset gains as well as $3000 in earned income per year (learn more about how here).
This should be your last bucket because it isn’t as tax advantaged as the first three types of accounts I mentioned across the two buckets. A mistake I have seen people make all too often is to contribute and start making risky bets in this type of account first in their early careers – a time when they will be at their lowest income levels and subsequently, tax brackets. This should be the last bucket as your goal should be to take advantage of perks the IRS and congress offer you. Whatever you have left goes here.
If you are working to buy a car, save up for a down payment or a vacation or large purchase, you can vary your contributions accordingly but you should always try to maximize this bucket even if it is only 5% of your gross pay (you’ve already hit 30% in buckets 1 and 2).
As your income increases past $100K, don’t let lifestyle inflation creep in and stay true to your financial investing and saving goals and while keeping your fixed/variables costs relatively constant. You will see the reward of investing little by little as that creates purpose. Purpose creates discipline. Discipline creates results. Results create drive.
Conclusion
As I mentioned in the start, each person’s financial situation is different and so are their goals. Your goal could be to pay off student loans as quickly as possible and I encourage you to prioritize those before you start the three bucket approach. Being debt free early career is the best thing you could do for yourself. Taking on some debt to enable you to advance ahead is okay as long as you are financially responsible and actively work to pay it off. I have covered examples where debt made sense for me when I bought my second car (my first one was paid for in cash) but I only did it AFTER I had assets built up to fully pay off the loan in full and that gave me financial peace of mind.
My journey has been different and so will yours but I hope this helps you navigate financial planning making $100K/year.
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