Can You Live Off of $40,000 a Year?

How much is $40,000 a year per hour? The hourly wage is $19.23 an hour. Is this a good salary in today’s economy?  Well, it is more than the $15.00 that is currently being demanded for the minimum wage.  Let’s look deeper into the economics of a $ 40,000-a-year salary.  Is it possible to live off of $40,000 a year? I believe it certainly depends on your location, your current expenses, and your current spending habits. Based on these factors, it begs to ask do you need to do better than $40,000 a year or are you okay?

Being okay may consist of having a robust emergency fund.  The ability to save for a rainy day depends on how much money you can set aside.  This is where the Old Adage states that you should pay yourself first. Setting aside at least 5-10% of your annual salary is very important until you have saved at least six months of living expenses.  A single person may need to set aside seven to twelve months of living expenses. An emergency fund should cover housing costs, food, utilities, and transportation. All other expenses can wait until you are back on your feet.

However, can you live off of $40,000 a year or do you need to find a better job? What other options are available to you?  Do you need to relocate, budget to cut expenses, or save more for the expensive things you want or need? Would a side hustle be necessary to supplement your income? Should you consider taking online courses to improve your job situation? Let’s explore all of these options, by delving into the economics of income, location, housing, budgeting, employment, and side hustle. All of these things will play into the affordability of a $40,000 income. 

How does $40,000 a year compare to the national average?

Per the U.S. Bureau of Labor, the average U.S. annual salary in Q4 of 2023 was $59,384. The United States Census Bureau has calculated the median household income as of 2022 was $74,580.  However, as of July 2024, the Median hourly rate is $18.12. The median is a statistical value that separates the higher half from the lower half of the data.  This is important when the range of data is so widely spread out.  In this case, the income ranges from less than $10,000 to over $200,000.  The median income number is a fair indicator of income in the U.S. Therefore, any salary above $75,000 should be a salary you strive for. However, since we are talking about a salary of $40,000 let’s continue to consider the federal and state income tax ramifications, location, and housing. 

How much will I bring home after Taxes and Deductions with $40,000 a year to live off?

Taxes and deductions can run between $6k to $9k, this is based on a few factors.  If you are married or if you are single. You have dependents to claim. You are taking any pre-tax deductions for investing or healthcare.  All of these factors will determine your federal tax burden. Second, state income taxes based on your location will also reduce your gross income significantly.   Next, any retirement deductions based on a financial advisor based on your financial goals will also reduce your net income.  Finally, social security, Medicare, additional health insurance, or a health savings plan will be the final deductions in reducing your net pay. After taking into consideration all of your taxes, pre-tax deductibles, and post-tax deductibles, can you live off of the amount that is left? Let’s check out some locations to see if this is doable.

Can You Live off of the Net Income of $40,000 a Year? – It depends on where you live.

A quick Google search for the best places to live on a $40k salary gave me 10 Great U.S. cities with low costs of living per AARP. The cities are as follows:

Sheboygan, Wisconsin

Abilene, Texas

Fort Walton Beach, Florida

Cleveland, Ohio

Eugene, Oregon

Bristol, VA./Tenn

Canon City, Colorado

Cheyenne, Wyoming

Rochester, New York

Sioux Falls, South Dakota

Click on the link above to explore these options.  Relocating is a great way to lower costs. However, if you don’t already live near one of these locations or do not wish to relocate this may not be an option for you.  If relocating is an option for you, however, these are not desirable locations. You can also do a quick Google search to find more real estate options with an equal or lower cost of living. The willingness to relocate can be a good thing. However, carefully consider that you may be leaving family and long-time friends behind.  Not many people can up and leave a support system and then have to recreate it somewhere else.

If you are an outgoing person this may not be an obstacle for you.  Therefore, jump in and explore this new experience. This will probably be a great new start and adventure. I enjoy going to new places and meeting people. I recently relocated to South Carolina from New York City to a less expensive place for my retirement years.  It has been the best experience for me and my husband.  The weather is great, and the cost of living is way cheaper than in New York.  Hence, relocation was the best choice for us. While we are at it let’s look at how far $100 will go per state.

How far will $100 go by state

Each state comes with its unique economy.  The cost of living in each state depends on the policies, resources, and services each state votes on.  This is most often dictated by the people we vote for in office. However, the main reasons may be due to the housing, transportation costs, food, utilities, and healthcare available in each state. Some major cities have a low supply of housing which drives up the cost of housing. Other cities or states may just have very expensive real estate to offer. Whatever the case, your city may be way too expensive for you to live in with just $40,000. 

But first, let’s look at how your state stacks up with the rest of the United States. If we look at the value of $100 by state from the Tax Foundation we can determine affordability. For example, a state like California where the real value of $100 is a little over $86 compared to Arkansas where the value of $100 is over $117 shows you the significant difference between living in a different state.  Hence, location does matter when determining a far a $1 can be stretched.

Again, other factors besides money do matter.  Such as family and friends, job opportunities, and the overall quality of life. Just being a great place to live is just not enough. Especially if you enjoy the beach and find the best place to live near the mountains. If you prefer city life, then a great life cannot be found in a very rural area for you. 

Handy Cost of Living Calculator

However, if you desire to take the plunge and explore other locations, then NerdWallet.com has a cost-of-living calculator to help you. It will let you compare cities like San Francisco, Miami-Dade County, Chicago, Boston, and more locations. This is a very handy tool, so play around with it to help you move to a less expensive city.

So, what to do if you want to have a comfortable lifestyle right where you are? How can you stay put?  You will have to find the best way to work with what you have right where you are. Let’s start with housing affordability since this will be the largest of your expenses. Can I afford a mortgage or the rent at my current location?

How much housing can I afford with a 40,000-a-year salary?

Your housing cost should not exceed 28% of your pretax monthly income.  At $40,000 a year, your monthly pretax income is about $3,333.33. 28% of that would be $933.33.   However, if your debt and/or other expenses are super low, then you can push this up to 30%.  This will bring the cost of housing to about $1000.00.  This is roughly an extra $67.  However, when on a tight budget where there is very little money left this could be a deal-breaker.  So, is $40,000 a year a good salary if I want to buy a house?

For those looking to buy a home, a critical rule is the 28/36 rule which means that your mortgage payment should not exceed 28% of your monthly pre-tax income and be 36% of your total debt. Let’s unpack this.  Again, 28% of your pre-tax income would be $933.33. Therefore $933.33 is 36% of your total debt of $2592.58.  This leaves roughly $1,659 for other debt such as student loans, car notes, and credit cards. Use this handy tool from Bankrate to help you calculate how much house you can afford.

Let’s take a look at a sample of a Monthly Budget:

Income: $40,000

Gross Monthly Pay: $3,333

Est. Monthly Take-Home pay: $2,708

Savings: $333 (Pay yourself first – 10% Pre-Tax Income)

Housing: $933 (28% of Pre-Tax Income)

Utilities: $250 (10% or less of your After-Tax Income)

Credit Card Debt: $100

Student Loan Debt: $150

Food: $400

Giving: $333

Personal Activities: $209 (Is this enough?)

Summary

Take-Home Pay: $2708

Minus Expenses: $2708

Balance: $0

Every cent has been accounted for.  Your budget of course will not look like this, but you get the picture.  Every dollar has been allocated to a budgeted category. Based on this budget it appears that a salary of $40,000 is good.  

Home Purchase Budget

With the current state of the homeowner market, this financial situation may not make homeownership possible. However, there are still some deals to be found but again it may require you to relocate. Based on the current average cost of a monthly mortgage payment of $2,317 per the National Association of Realtors (NAR) it may be very difficult. First, you should factor in all the costs involved in purchasing a home.  You will need a home purchase budget. This will include savings for the down payment and closing costs. Saving an emergency fund for future repairs or maintenance of the home will be required. There is also the added cost of property taxes, escrow increases, and the cost of home insurance to factor into your budget.

You will need to adopt a very frugal living style which will require no new debt from credit cards, a new car, or loans. Your ability to afford the monthly payment of a mortgage may not be enough.  Many hidden costs of homeownership are not often discussed. Read my blog the Hidden Costs of Owning a Home. Hence, you are going to have to learn how to budget for all of these additional costs.  After you read that blog post you will be very prepared for any unexpected expenses. 

Can You live off of $40,000 a year? Yes!

No one can prepare for every variable that could happen.  However, if you have a plan and an idea of how to spend your money and why you spend your money you will be better prepared. Whether your yearly salary is $40,000 or $400,000 you can live paycheck to paycheck if you live above your means. There is nothing wrong with wanting to live a good life. However, you do not have to spend all your extra income to obtain that lifestyle. Remember just because you can afford the minimum payment does not mean you can afford to buy it.

Hence, budgets are a guardrail to prevent you from overspending. It keeps you on track to achieve your financial goals. It lets you know when ends meet or not. Budgets help you save for a rainy day, a special item, a vacation, or a special event. It prevents your world from spiraling out of control because of unexpected bills and loss of income. It will make it easy to say yes, I can live off of $40,000 a year. 

Here are some budgeting tips for making your financial decisions:

1. Create a Budget based on your income and expenses
2. Save your first $1k
3. Payoff high-interest debt
4. Maintain a good credit score as it can affect your ability to obtain housing.
5. Create an Emergency Savings of 3 to 6 months of living expenses in a high-yield savings account.
6. Continue saving for the things you want with Sinking Funds (Dedicated Savings Accounts i.e. vacation, holidays)
7. Invest up to 15% of your income for retirement
8. Consult a financial advisor for ways to invest in the stock market.
9. Work on increasing your income to the national average.
10. Review bills such as car insurance, cable bills, and mobile services for possible reductions.

$40,000 per year may be a good salary

If your current budget is tight, it will be a while before you can eliminate any debt you may have or reduce your current expenses. Then you should actively seek other employment.  Per Indeed these 25 jobs pay $50K a year without a degree. Hence, there is no need to attend college, you can start many of these jobs right after high school.  Many have on-the-job training that will teach you all you need to know. If I am being honest, I attended college, but I learned all about marketing on my job. I was fortunate to have bosses and co-workers to teach me everything I needed to become a marketing professional.

As a result of their training, I went on to train others. I found that most people loved talking about and sharing what they did.  No one was afraid that I would take their job by telling me what they had learned.  My on-the-job training was one of the most positive experiences I had. Therefore, do not be afraid to explore some of these opportunities. If you are young enough, try a few of them out to find your calling. The first year in any job is like a honeymoon phase.  Use that first year to determine if this is where you should be.  Do not hesitate to move on.

1. Property Manager
2. Retail store manager
3. Law enforcement officer
4. Title examiner
5. Web developer
6. Fitness manager
7. Hotel manager
8. Pipe welder
9. Foodservice manager
10. Electrician
11. Aircraft Mechanic
12. Insurance Specialist
13. Commercial truck driver
14. Claims adjuster
15. Sales representative
16. X-ray technologist
17. Sanitation supervisor
18. Internal wholesaler
19. Train conductor
20. Firefighter EMT
21. Realtor Associate
22. Land surveyor
23. Plumber
24. Commercial pilot
25. Dental hygienist

Side Hustle 

To improve your salary to an above-average salary, you may want to consider a side hustle to help you. Even if you manage to achieve a very low cost of living a side hustle can give you some breathing room. Forbes has a list of Thirty Side Hustle Ideas to Make Extra Money. Side hustles are a great opportunity to explore something that you are passionate about. Or you may want to explore a more creative side of your personality. Maybe you just like the thrill of doing your own thing.

Whatever the case, if you need extra cash why not explore a way to make that happen? Have some fun with this.  After all, it is not your main source of income.  At least at first. One never knows, it could be your actual dream job that becomes a money-maker as well. Here is a list of the top ten side hustles to increase your $40,000 income. I am sure you will find something that interests you. 

1. Freelancing

2. Pet Sitting and Doggie Day Care

3. Dog Walking

4. Tech Setup Services

5. Blogging

6. Senior Sitting and Companion

7. Babysitting and Child Care

8. Personal Assistant

9. Mobile Car Washing and Detailing

10. Local Handyman

Click the link above to review the additional 20 opportunities for extra income. This could be the first step to achieving your dreams. Who knows, maybe your side hustle income may outpace your current job and provide an income above and beyond your $ 40,000-a-year salary. Who knows what this could lead to?  It has happened on more than one occasion that I have witnessed. However, with or without a side hustle you may be able to live on a $40,000 income if your location and your expenses allow it.

Recap of Can You Live Off of $40,000 a Year?

In summary, can you live off of $40,000 a year? $40,000 a year is about $3,330 per month pre-tax and about $2700 after-tax. I think you can, but it depends on the expenses of your location, your debt, and your spending habits.  Hence, your willingness to relocate, explore other employment opportunities, or side hustles may be beneficial to you financially.  Creating and maintaining a budget, living below means, and eliminating debt can go so far.  You may also need to obtain a side hustle. However, in this vast country with many opportunities anything is possible.  You just have to be motivated enough to make the necessary changes to achieve your financial goals. I wish you all the luck. 

I hope I have provided you with some helpful information on your journey to financial freedom.

Now to the one who works, his wages are not counted as a gift but as his due. Romans 4:4 ESV

The content in this personal finance blog is for information purposes only.  Please consult a financial advisor, a real estate agent, and an insurance agent. I do not endorse any of the companies mentioned. Please research and do your due diligence. I do not get paid if you click any of the links in this post.

Here are additional resources:

Living Below Your Means

What is the Purpose of a Budget

Wealth Accumulation