I’m in the Upper Middle Class but Still Can’t Afford Some Basics — Here’s Why

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Earning a high income might seem like it makes personal finance easy, but especially in areas with a high cost of living, being in the upper middle class can still make it difficult to afford basics such as buying a home and child care.

Take Sarah Wang, a young professional who lives in the Los Angeles area with her husband. As a dual-income couple with no kids, their $170,000 combined pre-tax income puts them above the technical middle class in the L.A. area, according to Pew Research Center data.

While their situation leaves them with plenty of money for day-to-day expenses and fun spending, long-term planning is more difficult, Wang said.

For one, high real estate costs can make homebuying prohibitive. In Los Angeles, you need a minimum annual household income of $235,200 to afford a median-priced home that has a monthly payment of $5,880, according to the California Association of Realtors.

That’s roughly twice what Wang and her husband pay in rent. Meanwhile, she’s worried about future costs for important — but arguably ordinary — expenses, like child care and college, let alone supporting her parents as they age.

What an Upper-Middle-Class Budget Looks Like in L.A.

To get a sense of what Wang’s upper-middle-class financial situation looks like, take a look at her and her husband’s budget breakdown below. While they have the ability to save for retirement and build up other savings and investments now, that’s largely due to renting and not having kids.

• Annual Pre-Tax Income: $170,000
• Annual Pre-Tax Retirement Investments: $30,000
• Post-Tax Household Monthly Income: $7,900
• Housing: $3,100
• Transportation: $400
• Food (50/50 Groceries and Restaurants): $800
• Donations: $200
• Pets (Two Cats): $150
• Furniture and Home Supplies: $100
• Gifts: $100
• Clothing and Personal Care: $150
• Entertainment/Hobbies: $150
• Travel: $600
• Post-Tax Investments and Savings: $2,150

While Wang has flexibility in her budget now, it’s easy to see how discretionary and savings categories could quickly shrink. Last year, for example, she shifted $150 per month extra into entertainment to afford Taylor Swift tickets, but shifting that money back into post-tax investments and savings doesn’t change much when looking at possible future expenses.

“Adding child care or switching to paying for a mortgage instead of renting would take up such a large portion of our take-home pay,” Wang said. “Child care in the area is expensive — probably close to $2,000 a month.”

Adding a mortgage for an $800,000, two-bedroom condo in her area — a little less than the median home in L.A. overall — would lead to a similar increase.

And while technically there could be enough room in their budget for at least one of these if they nearly eliminated post-tax savings and investments, that underscores how an upper-middle-class income can still leave you living paycheck to paycheck.

“Either decision would result in more than 50% of our take-home pay being spent on very fixed costs,” she said. “I feel uncomfortable with decreasing our cash flow so drastically. I also don’t like the idea of committing to lifestyle changes that require a two-income household to maintain.”

Then, if you add in future costs like helping aging parents, the math gets even harder. And costs that are discretionary to some, like travel, feel less flexible to Wang, based on her situation.

“I’m also accounting for paying for my parents’ expenses at some point, which is partly why our post-tax savings is so high,” she said. “We don’t have family nearby, which means that we don’t have the option for family help with child care and that means our travel budget isn’t really discretionary. Our family members are less able to travel than we are due to financial and physical limitations, so my husband and I end up flying cross-country a lot.”

Due to her husband’s job being location dependent, “we plan to stay in this area to accommodate that,” she added.

Overcoming Budgeting Challenges

Although her upper-middle-class income would make it tough to afford all of these future scenarios — buying a home, paying for child care and supporting aging parents — Wang is trying not to get too ahead of herself.

“I’m planning on focusing on one goal at a time vs. trying to do everything simultaneously,” she said.

Meanwhile, she’s taking advantage of her relatively high income to save and invest as much as possible while she still can.

“My husband and I are choosing to really frontload our investments — in taxable and tax-advantaged accounts — right now,” she said. “If we need to pay for child care, I anticipate shifting a significant portion of our retirement contributions over to that. If we end up buying a property, we would do so after the kid(s) have moved into kindergarten and we’re no longer paying for really expensive child care.”

While reducing investments isn’t necessarily ideal, their situation highlights the importance of saving for retirement early, as giving your investments time to compound can help you still reach your goals, even if future contributions drop.

“Making these decisions is possible because we put so much into retirement investments early on, such that dialing back later will still allow us to retire at 65 with what we need,” she said.

She’s also trying to be practical about buying a home.

“I’m not sold on home ownership in this area,” she said. “Most calculators suggest we’d at best break even with renting, so it’s possible that we’ll just choose to rent in our desired school districts and forgo the mortgage entirely, which would definitely give us more breathing room.”

For others trying to make their budgets work in a high-cost-of-living area, even with a relatively high income, Wang similarly suggests focusing on one goal at a time and trying to be flexible.

“Consider prioritizing which goals to focus on,” she said. “It’s hard to afford everything you want at the same time in a high-cost-of-living area. It’ll be easier if you can have some flexibility in any of these dimensions, whether that’s eliminating some things you want, moving around the timeline, or moving to a different location.”

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