What Does Earning a Six-Figure Salary Mean and Do You Need One To Build Wealth?
Most everyone understands that earning a six-figure salary means earning at least $100,000 and up to $999,999 per year. In the latter part of the 20th century, such a pay rate could open most Americans to the so-called American dream. This was the ticket to not only accumulating wealth but living at least an upper-middle-class lifestyle.
While making $100,000 per year might keep one above the poverty level, rising costs have significantly eroded the value of this milestone. Let’s take a closer look to see what earning six figures means today.
What Six Figures Means Today
As of 2019, the Bureau of Labor Statistics announced that the average salary in the U.S. was $53,490 per year. This means that one has to earn just slightly less than double the national average to make six figures. For this reason, the $100,000 per year salary is not such an unusual feat.
Today, one does not need to become a doctor or lawyer to attain job skills that pay six-figure salaries. Even finding blue-collar jobs that pay six figures is an achievable goal.
Good To Know
One indicator of where a $100,000 yearly salary leaves Americans today is in home costs. According to the St. Louis Fed, the average home in the U.S. now costs more than $393,000. Freddie Mac estimates that it would require close to $100,000 per year to afford such a home, and that is after including a 10% down payment on a 30-year fixed mortgage.
The reason for the declining importance of earnings six figures comes down to inflation. Inflation is the increase in the cost of goods and services over time.
One example of inflation comes from studying home prices and salaries from past decades. Six figures held more cache in 1985, the year the average home price climbed above $100,000. However, that year, the median U.S. salary was just under $24,000. Hence, not only has $100,000 become less significant, but it looks more like a starting point for home affordability than a milestone of financial success.
The Role of Location
However, living comfortably could hinge on where one lives in the U.S. In many of the more expensive parts of the U.S., six figures is not unusual, and in some cases, will do little to bolster the ability to afford a home.
In Los Angeles, the average wage comes to $59,770 per year. However, in the City of Angels, the slightly higher pay does little to bolster home affordability. With the average home price in Los Angeles exceeding $778,000, $100,000 per year does not necessarily cover a house payment.
Logan Allec, CPA and founder of the personal finance blog Money Done Right, can attest to this. Despite earning six figures by his mid-20s, he initially could not afford his own home in the L.A. area. “I hit a six-figure salary pretty early on in my career, and I still shared a bedroom with four other guys,” said Allec.
Poolonomics founder Rick Patterson and his wife struggled to cover expenses in the Los Angeles area while earning a combined $140,000. Patterson later moved to Tulsa, Oklahoma, a low-cost-of-living area where his six-figure pay became more meaningful.
Last year, Patterson earned $109,000. Despite less pay, he has achieved the financial security he sought in Tulsa. “It (a $100,000 income) means my wife is not forced to take up a second job just to make our utility payments. It means we can save and diligently plan for our future,” said Patterson.
Admittedly, six figures may mean more in a place like Tulsa despite average earnings of $47,910 per year. With the average home in Tulsa costing around $188,200, residents will find affordable real estate more easily than in many other parts of the country.
Rightsizing Financial Goals
The $100,000 per year milestone has not entirely lost its luster. However, it clearly does not carry the same meaning it did in 1985, and it falls below the minimum salary needed to be happy in most parts of the U.S. Even for those who live in low-cost-of-living areas such as Tulsa, people should rethink earning $100,000 or more per year. Instead of merely attaining the goal, they should look at how far into the six figures they can raise their income.
What is a six-figure salary?
Earning six figures means earning between $100,000 and $999,999 per year.
Can the average American afford the American dream on a six-figure salary?
In a higher-priced metropolitan area such as Los Angeles, some may struggle just to pay the bills on six figures. In a lower-cost metro such as Tulsa or a rural area, the $100,000 per year income can cover a house payment while allowing families to save money.
Why has earning six figures lost much of its meaning?
In a word, inflation. With the declining value of the dollar, $100,000 per year could leave a family living paycheck to paycheck without any ability to save. Although $100,000 per year will allow people to build savings in lower-cost areas, workers should not necessarily view six figures as a ticket to wealth.
What salary level replaces six figures?
Answering that question depends on one’s location, costs, and what period one uses to compare. Even though six figures seemed like a milestone in both 1955 and 1985, one dollar would buy four times as much in 1955 as it did 30 years later. Hence, consumers should remember that the meaning of the six-figure salary has declined continuously for decades.
One possible measure could define such a milestone as joining the top 5% of earners. The IRS describes the top 5% of earners as making more than $208,000 per year.
However, even if one looks at just over $200,000 as the new “six figures,” they would want to consider raising that figure periodically to keep up with rising costs.
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- Bureau of Labor Statistics. 2020. "May 2019 National Occupational Employment and Wage Estimates."
- St. Louis Fed. "Average Sales Price of Houses Sold for the United States."
- IRS. 2020. "SOI Tax Stats - Individual Statistical Tables by Tax Rate and Income."
- My Home by Freddie Mac. "How much house can I afford?"