An often-forgotten tenet of personal finance is that it’s, well, personal. Because your financial situation isn’t the same as your friends’ or neighbors’, the advice you follow will generally be different too.
Still, some recommendations make sense for a lot of people, such as gravitating toward funds with low fees or prioritizing your emergency savings.
But even advice thought to be tried and true is worth revisiting, especially when financial conditions change. Take the classic 50-30-20 budgeting rule, which recommends that you allocate 50% of your taxable income to living expenses, such as housing and transportation; 20% to savings goals, such as investing for retirement and paying down debt; and 30% to everything else.
Budgets are getting stretched these days, making the 50-30-20 rule harder to follow. Over the past two years, thanks to rampant inflation, the consumer price index, which measures the price growth in a basket of consumer goods, has bumped up by 13%. And with wages failing to keep up, it’s worth questioning whether a classic budgeting model still applies to the average American.
Calculating the average American net income
Let’s crunch some numbers. For a single American, the median annual income is $57,200, according to the Bureau of Labor Statistics. But as anyone who has ever collected a paycheck knows, a few line items are removed before that money makes its way to you.
First, federal taxes. A single filer earning a $57,200 salary and claiming the standard deduction would owe an obligation of $4,985, according to the IRS’s Tax Withholding Estimator tool.
If you live in one of 41 states or the District of Columbia, you’ll also owe state income tax. All told, state and local taxes amount to 11.6% on average, according to the Tax Foundation. On a median salary, you’re paying $6,635.
Assuming you’re not self-employed, you and your firm split the bill on Social Security and Medicare tax. Your share is 6.2% for Social Security and 1.45% for Medicare….
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