Gen-Z Says $74,000 Per Year Is No Longer Middle Class

What's up, you guys? It's Graham here, and we got to have a serious talk. To some people, this probably won't come as a surprise, and to others, this could be something you've never even considered. But regardless, here's what we're currently dealing with: Gen Z doesn't agree that $774,000 is middle class. No kidding, it's not even close.

Check this out. If you take $774,000 for a Gen Z, or let's say they have a bachelor's degree and they're 25 years old, the take-home after taxes, 401k, and health insurance is $4,300. The average college monthly payment on a loan is about 500 bucks. You're down to $3,800. Split a two-bedroom apartment in a medium-sized city like Orlando, so that their payment is $1,200 a piece, 200 for utility, so you're at $400. Their groceries are going to cost about 600 bucks, a $400 car payment, $200 insurance, $150 for gas, and $100 for a cell phone leaves you with $950 bucks.

This is no savings investment, no emergency fund. Let's give them at least $300 to go on a couple of dates or hang out with their friends. They're left with only $650. It would take you years to save up the $30,000 that you would need for a down payment on a house with the closing cost. But even if you could get that down payment saved, you would still need to make $120,000 a year to be considered for a $400,000 loan.

The middle class goalpost has been moved from $70k to $120,000 in just the past two years. So, given the unbelievably massive outcry this video received, which is over 10 million views, 1 million likes, and over 35,000 comments, let's break down exactly what's going on. Why do people believe that even $100,000 a year is no longer middle class, and then what you could do about it to immediately put yourself in the best position possible to come out ahead?

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All right, so to start, all of this began from a survey of 1,500 American voters who weighed in their thoughts on earning $74,000 a year. From this group, only 41% of Gen Z believed that this would qualify as middle class. So what exactly is happening?

For some context, since 1970, middle-class wealth has shrunk by nearly 50% during the same time that upper-income wealth increased by almost 30%. Now, as far as why this is happening, when you really get down to it, low interest rates and high inflation push asset values and prices higher while simultaneously devaluing wages. Hence why, if you're just starting out, it seems impossible to be able to buy a house.

Just for a little more context, consider that back in the 1950s, the middle-class income was just $3,300 a year. The average home was barely double that at $7,350, and the average car was only $1,510. This meant that with just a few years, you could theoretically set yourself up with a pretty good life on a single income, but today that's not the case.

In 2012, the median income was reported to just over $40,000. The median home cost $417,000, or 10 times higher than that median income, and the average car had a list price of $26,500. So yes, everything is getting dramatically more expensive, lower-class incomes are increasingly more common, and it's seemingly only getting worse.

As Freddy points out, here are the numbers that we're looking at today, and I'll make sure to break down each and every item. To begin, he explains that a $74,000 salary is reduced to $4,300 a month after taxes, health insurance, and 401k contributions. And to be honest, he's not exactly wrong depending on where you live, but he is rounding down.

For example, if you live in one of the highest income tax cities in the country, like Los Angeles, you're left with $4,695 a month after tax, giving you an extra $395 a month to put towards your health insurance and 401k contributions. But if you live in a zero income tax state, you're going to be left with $683 a month towards these items, so you're either going to have a lot of excess, or you're going to be stashing away a decent amount for retirement, which is good.

Second, he assumes that $500 a month is going toward student loans. I believe he got this number from the BLS education report, which adjusted the average student loan payment in 2016 to inflation, coming in at $53 a month. However, it was found that the average federal student loan debt is currently sitting at $30,000, which requires just $300 a month to pay off over 10 years. So we have some potential savings here for the typical Gen Z-er if they went to college.

Third, we have $1,400 to split a two-bedroom in a medium-sized city like Orlando, Florida, with utilities. Again, this doesn't seem unreasonable, but I did find plenty of really nice homes that were renting for $2,000 a month, or $1,000 each, and with the average Orlando utility cost coming in at $179 a month, realistically your $1,400 expense could be reduced to $1,100 a month.

Fourth, we have $600 a month for groceries, which works out to be $20 a day. Again, this is highly variable depending on a person's diet and how much food they eat. But Sofi found that the average cost of groceries for a single person was $102 a week, and to me, that seems a lot more reasonable for a person in their 20s as long as they make it a regular habit to cook food at home.

Fifth, he calculates $400 for a car payment, $200 for insurance, and $150 for gas. Now, to me, this seems pretty high. Like for a 25-year-old, it would be perfectly acceptable to drive a $15,000 used car, and there are plenty of them. Even with no money down, that car payment would be $316 a month, and then you would owe nothing when the car is fully paid off after 5 years.

For example, all of these cars cost less than $15,000, and this is just the list that's in my area. The gas and insurance costs are also highly dependent on your driving history, type of car, mileage, and gas usage, so I'll just assume these are accurate.

Sixth, $100 a month for a phone plan, which I think is pretty high when Mint Mobile is just $30 a month, and I'm currently paying $50 a month for unlimited everything with Boost. But finally, seventh, he says this leaves you with $950 a month left over, with absolutely no savings, investment, or emergency fund. This from an investment standpoint is incorrect because he already calculated a 401k contribution from the beginning of the video.

But whatever. After subtracting another $300 a month for fun expenses, that leaves you with $650 a month left over, which to his math would take you about 3 and 2 years to save up the average down payment of $30,000. But wait, not so fast. He says you need an income of $120,000 a year just to be able to qualify for the median home of $417,000.

So is this actually true, and what could you do about this to put yourself in the best position possible to come out ahead beginning today? Although before we go into that, I have to say this is exactly why you should always prepare for the unexpected. Just as employment or income could change in a moment's notice, it's equally as important to make sure you put yourself in the best position possible to protect yourself and your loved ones with life insurance, no matter what happens.

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All right, now in terms of my thoughts on a $74,000 middle class and what you can realistically do to come out ahead, I have to say these numbers do seem like a bit of a stretch. Now, I will give him the benefit of the doubt because, in a way, he's not exactly wrong. For most people, this is the reality, and he's not adding in a whole bunch of other expenses that many people have to pay for, like children, lifestyle creep, shopping, car repairs, maintenance, gym membership, discretionary expenses, and all the other little things that just seem to add up over time.

Or I guess as Dave Ramsey would say, how to waste $55,000 a year: spend $13.70 a day on things you don't need. That's why when I'm looking at these numbers, I see things from a slightly different perspective.

One, in most cases, a $74,000 salary would equate to $454 after state and federal taxes a month, and since employers will typically pay 78% of medical premiums, I'll assume that on average you'd have about $150 a month to be able to contribute to a 401k. If you continue doing just this over 40 years, your 401k balance would be $542,000 by the time you're 65.

Two, USA Today found that 46% of bachelor degree students graduated with no student debt whatsoever, which would equate to a $500 a month savings. But even for the other 54%, like I mentioned earlier, the average federal student loan debt was $30,000, and this would require just $300 a month to be able to pay off in full after 10 years. Again, that would be savings of another $200.

Third, splitting a two-bedroom apartment or house is a fantastic way to save money on rent, especially if you're living with a friend, spouse, or someone you just really get along with. But with my example, it's still possible to save an extra $200 a month in this category depending on the type of house that you pick.

Fourth, $600 a month in groceries is a lot. Shopping in bulk, getting a Costco membership, cooking food at home, and then freezing the leftovers could be a very easy way to save an additional $150 a month. Our freaking budget even did an incredible breakdown in the types of foods they ate for $450 a month, and it was phenomenal. I'll link to it down below in the description.

Fifth, $750 a month all-in for a car is just way too high. Realistically, there are plenty of used cars under $12,000 that would be fantastic to be able to drive around. Like, I just did one quick search on AutoTrader and found almost 1,000 options between $6,000 to $12,000 within 100 miles of me. That means even if you got a $12,000 car with no money down and financed the entire amount, your payment would only be $226 a month. Added another $250 for gas and insurance, and that saves you $275 extra from the previous amount.

Sixth, $100 a month is just way too much for a cell phone. Go and spend half of that at Boost or Mint Mobile, and you'll be able to save an extra $50.

This means under this scenario, if you have student loan debt, you would be able to save an average of $1,925 every single month. This also doesn't count that you'll have an extra $225 left over every single month once your car is paid off in full after 5 years, and you'll have an extra $300 a month left over once your student loans are paid off after 10 years.

Now, of course, to be fair, I acknowledge that $74,000 a year is probably on the high end of where people start their career, so he's right—the starting salary is probably going to be somewhere between $50,000 to $60,000 a year, and that'll affect these numbers.

The second since this is the average, statistically half of the population will have expenses that exceed this depending on their location. And third, I did not include things like entertainment, car repairs, or other things that just randomly come up, which we could probably assume is going to be another $500 a month.

Although, even with all of that, I know what the comments are going to say, and let's finally address it. How does this compare with buying the average house here in the United States, and would you even be able to qualify for it?

Well, here's the truth. When it comes to home affordability, as of now, the median home in the United States costs $417,000, and the median down payment is $31,500. This suggests that you need to qualify for a loan of $385,000. And to do that, here's how much money you need to make.

When it comes to home loans, lenders really only care about two things: income and debt. The income part is fairly straightforward. It's simply how much money do you make every year? Do you have stable employment? And do you have 1 to 2 years of tax returns? If you do, you're going to pass. However, the debt part is a bit more complicated.

In this case, most banks want a maximum debt-to-income ratio of 45%. This means no more than 45% of your gross income is eaten away by all of your expenses including housing. So as a quick example, if you make $6,000 a month before taxes, multiply that by .45, and you could have a monthly payment of no more than $2,700. But then let's assume you have a $300 student loan payment, a $250 car payment, and a $100 credit card payment. That'll leave you with $2,050 a month left over to go towards all things housing, and this will buy you something with a mortgage of approximately $270,000.

Now, of course, since lenders use debt as a way of qualifying payments, anything like student loans, personal loans, credit cards, and car payments are going to be reduced from what a lender is willing to give. So if you have absolutely no debt and you make that same $6,000 a month, a lender would be able to give you the full $2,700 a month to be used towards housing, and in that case, that’ll equate to a mortgage of approximately $360,000.

Now, does that mean it's a good idea to go and spend five times your annual income to buy a house and max out what you're able to qualify for? Probably not, but a lender will give it to you. And if you want to buy the median house of $417,000, that's going to require a down payment of $40,000 and an income of $6,400 a month before taxes to be able to qualify.

However, if you do want to be a bit more conservative with this approach, you can also follow the safer 28% rule. Under this scenario, if you make $6,000 a month before taxes, multiply that by .28, and that means your housing cost shouldn't exceed $1,680 a month, which is enough to buy a home in the $240,000 range with 10% down at a 6.5% interest rate.

Now, to be able to buy the median home of $417,000 using the 28% rule, you need an income of $10,000 a month before tax, or $120,000 a year in order to be able to conservatively make this purchase.

However, I do want to share some other aspects of this that most people miss, and here's a few other things to consider.

First, very few people can qualify to buy a $417,000 house at 25 years old, even with a $74,000 salary. It's just the reality. Even if you're disciplined and live very frugally, it's probably going to take 3 to 10 years to be able to pay off all debts and save up enough money to be considered a down payment, depending on where you live. That's why the average millennial buys their first home at age 34 compared to baby boomers at age 33.

Second, this doesn't take into account the combined income of couples. Just consider that 2021 census data found that 46% of people buying a home were married couples compared to 22% of single men and 30% of single women. That's because lenders combine the income of couples to determine how much money they'll need, and $120,000 is the threshold. Two people earning $60,000 is enough to get there.

Third, it also just really depends on where you live. For example, the median income in Newton, Massachusetts, is $122,000, while the median income in Flint, Michigan, is $25,000. This means there's going to be a lot of variance between average incomes values and what middle class is in your area.

And finally, even a savings rate of $500 a month could lead to a substantial amount of money later in life. If you start at age 25, this is well within the threshold of a Roth IRA, and if you just invest this amount compounded over 40 years in a 7% return, you would have $1.8 million by the time you're 65, completely tax-free.

If you then increase this number to $1,000 a month, which is a 20% savings rate on a $5,000 take-home pay after tax, over 40 years of investing that amount could turn into a $3.4 million nest egg, not including the $542,000 with the 401k contributions that we calculated earlier.

If you don't believe these numbers, I'll link to every single one of my sources that cite average expenses down below in the description and in the pinned comments, so you can see exactly where I'm coming from with these amounts and how this is extremely possible for someone making $74,000 a year, especially if they're just starting their career.

Honestly, the way I see it, I understand why Gen Z is frustrated and why $74,000 a year no longer feels like a middle-class salary. I mean, even Dave Ramsey's team responded to this, and here's what they had to say: if you're just starting out, you’re in your 20s, I'm like, yeah, that's that. If you're 22 years old and you have $650 left over, come on somebody, that's a lot of money.

Like, that ain't bad. But what if you decided to get an extra job and pay off this debt? You would free up a car payment and free up $500 student loans, so that's $900 you will be making more money over your lifetime.

That is true. I think this is an expectation conversation, yes, but the problem I have with it is that it's honest. It's kind of his attitude of like, "Oh my God," versus saying, "Well, I have $650, what can I do now with that?"

Of course, Freddy also posted his reply to this, and if you're curious what he said, here's what he reiterated: if $74,000 is middle class, if a 27-year-old with a bachelor's degree splitting a two-bedroom apartment is middle class, how come they can't buy a house? Now you need almost $120,000.

So what's your advice to someone who is making $74,000 and in 85% of the country can no longer buy a home? So with all of that said, yes, housing is insanely expensive. To make matters worse, according to the Bureau of Labor Statistics, you would have to make $129,000 today to have the same purchasing power that a salary of $100,000 had just a decade ago.

But in fairness, there are very few jobs out there that have ever existed that would allow you to buy a home in your 20s by yourself during a time that you're also paying down student loan debt. It's also statistically most likely that you would be sharing this cost with a partner, which would dramatically reduce the amount of money you'd have to make.

And if you would like to buy a home on your own making $75,000 a year, then yes, it's technically possible based on a lender's 45% debt-to-income ratio. But first, you have to pay off all debts. Second, you need to save up enough money for a 10% down payment, and third, you better save more money beyond that because having almost half of your income toward housing is pretty dangerous.

No, this is not going to happen as soon as you land a job, and life is expensive, especially when you're just starting out your career. But I do believe it's possible you will be able to buy a home if you're disciplined in your career and save money.

And I will do my best to read and respond to as many comments as possible because I have a feeling this is going to be quite juicy. So with that said, thank you so much for watching. As always, feel free to hit the like button and subscribe, and don't forget that you can get some free fractional shares down below in the description. With a paid affiliate link, I'll get a commission if you sign up, but you also get some free stocks, so it's a win-win!

Enjoy! Thank you so much, and until next time.