A good question, and thanks for starting this new thread. I am interested to see what others say, and also want to take my own crack at providing some thought starters.
About 30% of that increased income will go to taxes (25-28% federal tax bracket, plus lost deduction/credits and extra taxes like healthcare tax that lower income families don’t have to pay, 1.45% Medicare Tax, and 6.2%Social Security tax on the first $27K over $100K, state and local income taxes). So that $100K becomes about $70K…still a nice raise! Most save for retirement somewhere from 5-10% of income --if you were just breaking even at $100K, then you might contribute even more to catch up as retirement approaches. This is technically saving, not spending, but it does remove that money from any consideration for college spend or traditional savings. If you are a tither, then another $10K would immediately go to church/synagogue/charity. Of course that extra giving to charity and saving for retirement will lower your tax burden. Worst case, you probably still have about 60% of the extra money to spend or save, but effectively your spending has already increased by $40K without changing your luxuries, house, cars, or standard of living. So the answer is that a significant portion (30-40%) of the new income is consumed for most people with no actual change to their spending habits.
Probably the next biggest expense is housing. For my family, we have relocated once “by choice” (moved to a larger home while we were living/working in the same area) and that was because we became a family of four and wanted another bedroom, so that was not necessarily income related. However, when the time came to move, we did buy a home that was more expensive than what we were living in. If I wasn’t earning more, we wouldn’t have moved…baby would have slept in a crib in our bedroom, older child in their own bedroom, and visiting inlaws would have to stay on an airbed in the family room. But since we did have extra income, the expense to have the baby in a bedroom and still have a guest room for the in-laws was worth the expense to us. Of course the federal government makes it even easier, because I can either save $720 and give $280 in taxes, or spend the whole $1000 on more expensive housing (assuming a mortgage). For others, a safer neighborhood, shorter commute, more privacy from neighbors, etc. might well drive them to choose to spend a portion of the extra money they are now making on housing. On the other side, a couple that owns there home outright, and loves their neighborhood, and no longer has kids at home may feel no reason to move, but they may spend that money on long put-off repairs, or modernizing a 30 year old kitchen, etc… The answer from my experience, therefore, is that discretionary spending on housing is very likely to increase with an increased income. And that is not necessarily an unwise choice.
Travel is another expense that often increases with income. Again, many people have wanted to see the volcanoes in Hawaii, or the Great Wall of China, or just spend a week with their kids at Disney, but have come to terms with the fact that their income won’t allow that. But when the income does allow it – when you can spend that money without relying on credit care debt or jeopardizing savings and other priorities – traveling becomes worth it to that individual because the relative costs are lowered. So for those that enjoy travelling, or want certain special experiences with their kids while they are growing up, then I think the answer is yes, discretionary spending will increase on travel.
In some cases, the increase in income itself drives expenses. You may be commuting longer distances, paying for parking, need child care, etc. A parent who used to prepare family meals from scratch and is now working to make that family income double may no longer be available to do that, and may spend more on eating out and pre-made meals. For these situations, spending will definitely
The last major discretionary expense that I will go into is near and dear to our hearts on CC: education. This could be spending on college tuition, or for a private school for younger kids, of for all the ECs – music lessons, tutoring, sports teams, etc. Again, a family that can’t afford to hire a private tutor for their child at one income level, and accepts that because they just can’t afford it, may find that spending that money to help their child succeed and improve their chances for college acceptance (and scholarships) is well worth it now that they have access to the money. Depending on the quality of their public school, or the unique needs/gifts of their child, private school may also be an expense they are glad to add when they have the extra money, and one that will pay off many times over in that child’s future. For families without children, education may not be a factor, but for those with children it may be a very unwise decision for parents to save all of this new extra income for the future and not invest any of it to help their kids out with where they are today.
Bottom line: Yes, a family making $200K will very likely spend more than a family making $100K. 25-40% of that “spending” is not really spending (taxes, retirement savings, charity). They will probably spend more on housing, travel, and education/ECs. These can easily add up to another $20-$30K year. If private school is chosen, sometimes for very good reasons, then that by itself will be $20K. The key, however, is that many of these choices may be good, responsible, choices that are not frivolous luxuries, but wise choices of where to spend their extra income on their families. They could have saved up all that money, but it could be argued that whatever they were saving it for would never be as important/impactful as the things they could spend that money on now.
All this would leave $20K-$40 left to be saved, or spent on luxuries/lifestyle, or some combination between the two. Or, as we all know, with a kid in college that amount could be spent to begin to make up the difference between what the expected family contribution was at $100K, and what it now is a $200K. That’s exactly what the EFC is designed to be…to make sure that the family making $200K makes no fewer financial sacrifices to send a child to a school as one making $100K.
There is no doubt that a family making $200K/year should be able to save significantly more money/year and/or have significantly more to spend out of pocket on college. But that number will likely be less than half of the $100K, and the majority of the change is not due to frivolous or unwise spending on the part of the earner.