When deciding if you should accept a new job or how to budget with your current income, it’s important to understand what you can do with the money you have. The average American earns a 5 figure salary, but is that enough to live on, save, and invest?
What is a 5 figure salary?
So, what is 5 figures anyway? Well, a 5 figure salary is an income that is at least $10,000 and less than $100,000. It can be from your work salary or include commissions and bonuses or any other types of earnings on top of your base income.
Is a 5 figure salary a good salary?
If you earn a five figure salary, you are earning an average income. How good of a salary it is depends on if you are in the low or high end.
A low 5 figure income would be from $10,000 to $40,000 while a high 5 figure salary is from $70,000 to $99,000. Anything in between is in the average range.
Whether this range is good or not for you also depends on a number of personal factors like:
Where you live
If you live in a big city like New York or San Francisco, you’ll have higher living costs than if you live in Arkansas or Georgia. So your 5 figure income won’t get you as much as it would in other parts of the country.
Your housing costs are also dependent on where you live and the type of place you have. For example, if you own your house, you will have to pay property tax. Or if you live outside the city center, you will need to pay for gas or public transport.
If you have debt
Having a lot of debt can have a big impact on your finances, including on whether or not you can live comfortably on a 5 figure income. If you have high-interest rates, you can end up in a cycle of debt, which can really impact you financially.
Paying off debt is essential because it frees up your income to spend on other things like your retirement or things you enjoy. If you have a lot of debt, especially credit card debt, it’s important to pay it off using a debt payoff strategy so you can eliminate it quickly.
Your spending habits
One of the biggest factors of whether or not a five figure salary is enough is your spending habits.
If you spend a lot of money, it might seem like your income is not enough. Spending outside your means and not budgeting well can make it seem like money just slips through your fingers.
When determining if a 5 figure income is enough, take a good look at your spending habits. Even if you are on the higher end of 5 figure salary, it’s important to have a good budget. Cook more at home and try to resist the urge to make splurge purchases.
Unsure how to create a budget? Check out our guide on budget categories and methods.
How much tax do you pay on a 5 figure salary?
How much tax you pay on a five figure salary depends a lot on your exact salary and whether you have any deductions or not.
For example, a married couple has more deductions than a single person. If you’re paying off your student loans, you can also get a deduction on the interest paid.
The tax brackets also change every year, so it’s best to check the IRS website. In general, you will pay less the lower your salary is. In 2023, the tax rate for income over $11,000 and under $44,725 for single filers is 12% (or between $22,000 and $89,450 if you are married filing jointly).
Keep the U.S. federal income tax is graduated; this means your income is broken into brackets. And the portion of your income that falls into a higher tax bracket is taxed at a higher amount.
Filing taxes can seem overwhelming, but it’s rather easy to do yourself, especially if you do not have a complicated tax status.
Can you become wealthy on a 5 figure salary?
If you save often and invest your money early on, you can become wealthy. However, it won’t happen overnight and requires careful planning and commitment.
The most important trick to becoming wealthy on a five figure salary is to start now and let compound interest do the work for you. For example, you start investing when you are 23; you just have to save $14 a day to be a millionaire by age 67.
You can also automate your investments so that you’re investing your money every month or even every day. There are plenty of investing apps and platforms that make it easy to invest your money in exchange traded funds or stocks.
How to invest on a 5 figure salary
If you want to invest on a five figure salary, there are a few things you can do:
Invest in an IRA
You can set up an independent retirement account regardless of your employer. It’s also tax-deferred, meaning you pay taxes when you retire and start withdrawing money. This means you have more money to start accumulating than if you paid taxes on the money upfront, growing your investments faster.
Invest in ETFs with a robo advisor
Exchange traded funds are an easy way to invest your money. An ETF is a security that tracks an index or sector. It’s a way to diversify your portfolio without having to do research on all of the individual stocks yourself.
Plus, they usually have low fees, which means you’ll pay a lot less than you would if you hired a fund manager to invest your money for you. You can use a Robo advisor like Acorns or Betterment to easily invest in ETFs and automate your investing.
Max out your 401(k) investment (or other employer retirement plan)
If your employer offers a 401(k), then take advantage by investing the max amount that you can. Some employers even offer matching programs, which means more money in your retirement account.
Like an IRA, a 401(k) and similar employer-sponsored accounts have tax advantages, which means less money to Uncle Sam and more money for your future.
You can build wealth on a 5 figure salary!
For the average American, a five figure income is enough. But whether or not that income is enough for you depends on a lot of personal factors, including where you live and how much you spend.
If you have a budget and start investing at an early age, you can not only live comfortably but also build up your investing and retirement accounts. You can also learn more about what a six figure income gets you, what the best 7 figure salary jobs are and what earning 10 figures really takes. Who says you have to limit your earning goals?!
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