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Could You Survive at the Poverty Line?

This article was written by Your Finances Simplified in Featured, Frugality. 78 comments.

This guest article is written by YFS, owner and author of Your Finances Simplified. YFS was born and raised in west Philadelphia and is now a financial adviser, IT contractor, landlord, and treasurer of a non-profit.

If you and your family of four received an annual income of $22,350, could you survive? You would be living at the 2011 poverty line for the 48 contiguous states. If you were to make less than this, you and your family would live in poverty. If you were to earn more than this, you and your family would be above the poverty line, though it might not feel like that. Here is a breakdown of the typical costs that everyone encounters on a day-to-day basis; you can see how quickly $22,350 can be spent for a family of four.

I’ll assume you’re in Charlottesville, Virginia, where the Cost of Living Index is 100, the national average.

The things we need

Thrift store Rent/Mortgage. We all have to pay something in order to keep a roof over our heads. This could be a mortgage payment for a house that we have bought or it could be rent for a house or an apartment. In Charlottesville, the average rent is just over $900, and the average house payment is nearly $1500. For the sake of this article, the calculation for rent or mortgage is the average of these numbers, $1,200. The yearly housing expenses are about $14,400. Subtracting this from the income leaves $7,950 to pay for everything else.

Many people at this level of income can qualify to live in subsidized housing, and many have to live in substandard conditions so that they can afford it. Those conditions could be a dilapidated apartment for low rent or sharing a house with another family. For purposes of this example, we are using average costs, which will often be much higher than what a family at this level would pay.

Bills. Even if you rent your home, you still probably have to pay some of the bills, like electricity or gas. Water, trash (sanitation), phone, cable, and internet are all some common bills to pay. Average energy costs in Charlottesville are $165 per month ($1,980 per year), which brings the total remaining down to $5,970.

At this level of income, could afford a phone or cable or internet?

If your cable and internet service costs $50 a month, that will be another $600 a year. Because it is hard to function without a telephone, for this example, we will include one cell phone for the family that costs $25 a month, which would be $300 a year, bringing the total down to $5,670.

Transportation. You can argue that a car is not necessary, and in some cases that is true. However, in some parts of the United States, you will not be able to hold a job unless you have your own transportation. This is due to the lack of extensive public transportation, especially true in suburban and rural areas of the country. Even if you have access to public transportation, how much will that cost for a year? Car payments vary depending on income, credit, and car choice. This example assumes a relatively inexpensive car payment of $300 per month ($3,600 per year), bringing the total down to $2,070.

Many people at this income level do not buy new cars or certified used ones. They find very inexpensive cars that are sold by the owner or they go without.

Insurance. If you own a car, you must have insurance. The average annual car insurance premium in Virginia is about $1,000, which we can also take off of our total. This leaves $1,070.

What about health insurance?

Do you think that you could afford health insurance at this income level? It’s unlikely that you could; however, people at this income level probably qualify for Medicaid. In most cases, at least the children in the family will qualify.

Food. The bare necessities for food are what it costs to keep a family of four fed. A family at this income level likely qualifies for food stamps, and many public schools have programs offering reduced-rate or free lunches to children who qualify. Food stamp benefits vary from state to state and situation to situation. For the purposes of this example, the family of four spends $50 a month of their own money on food (with the remaining $200 or so being provided by food stamps). Food stamps can only be used on consumable products, excluding alcohol, in most cases. As a result, the family still has to buy sundries like soap, toothpaste, toilet paper, and so on out of their own money. This results in about $600 a year in food costs, which brings our total remaining to $470.

Could you provide for a family of four with $200 to $250 a month on groceries?

Clothing. Consider not what the family wants, but items that the family needs to stay decently clothed and warm. In Charlottesville, the average men’s shirt in a department store costs about $25, while a pair of boy’s jeans costs about $20. We’ll say that the family spends about $10 a month on average for clothing. This would be a new item for one member of the family every two months or so. This would average out to about two new items per person per year, and it would bring the annual clothing budget to $120. Such a small clothing budget could be expanded by shopping at thrift stores and other organizations where needy families can receive free used clothing. The total is now down to $350.

When was the last time you bought an item of clothing? How much did it cost?

Debt. What about student loans or credit card payments? You might think that the adults in a family at this level didn’t earn a college degree, but that’s not always the case. Many college students, especially graduate students, are married, and many of them cannot or do not hold jobs while in school. This means that they might be unemployed or a part time employee. As a result, the family could be trying to survive off of one income or two small incomes. Fortunately, most student loan payments can be deferred if you are unemployed or earning below a certain level.

Credit card debt, however, continues to grow. Assume the minimum payment is $15 a month, an annual payment of $180. A payment this low would likely be for a card with a low limit, around $500 or so. This brings our total down to $170.

How much do you rely on your credit card on a day to day basis? How much do you think you would use it if you were in this situation?

The things we want

Extraneous purchases. With some skimping, federal and state assistance, and swallowing of pride, the family at the poverty level has $170 left to spend on things that they want throughout the year. This might mean a new jacket or a new pair of shoes.

How much do you think you spend on Christmas gifts?

If the couple spends $100 on each other and their two children, the total is now down to $70. If the family goes to the movies just once during the whole year, they’ll pay about $50 just for the tickets, with the average movie ticket price in Charlottesville at $10. This brings the total down to $20, and it will be even lower if they buy popcorn.

Travel. The family might travel to see relatives at some point during the year. They could not afford a hotel room or plane tickets. If they do not have their own car, they might be able to afford bus tickets. For example, four bus tickets, two adults and two children under 11, from Charlottesville to Memphis would cost over $500 one way. This brings our total into the negative numbers. If they have a car that gets 30 miles to the gallon then it would cost about $75 one way to get to Memphis with the average cost of gas being $3 or so per gallon. This means about $150 to get just there and back, bringing the total down into negative numbers again. As a result, any type of travel for this family is unlikely.

Savings. If the family manages to stick to this budget, they can save about $20 a year. However, this budget did not include any unexpected expenses, such as an unplanned doctor’s visit or family emergency. As a result, it is unlikely that a family living at this income level would be able to save anything at all. In reality, it is nearly impossible for a family of four to live at this level without going into debt.

Minimum wage

The federal minimum wage is $7.25 an hour. Some states have a higher minimum wage, but Virginia, used in this example, uses the federal minimum wage. Assuming a full-time job, which isn’t often the case for minimum wage jobs, an individual would earn about $14,500 a year before taxes. In this situation, two people with full time jobs at minimum wage (with two weeks’ vacation or sick days) would have $29,000 before taxes. This level of income is quite a bit higher than the poverty level income. However, to put things in perspective a household of four could be a single parent with three kids on $14,500 a year, which is well below the poverty line. If one or both spouses cannot find work, full-time or part-time, a family can easily fall into poverty.

Federal and state taxes vary so much that they were not included in this example. In many cases someone who makes so little money and who has children will not have to pay much in taxes at the end of the year and, in some cases, particularly due to the Earned Income Tax Credit, will receive a refund.

Do you think that you would be thrifty enough to make this work? Have you ever lived at this level of income? How would you adjust the budget to survive on $22,350?

Photo: Orin Zebest

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Reverse Mortgages

This article was written by Flexo in Real Estate and Home. 24 comments.

Homeowners over the age of 62 have a unique option available for accessing cash. Reverse mortgages can help seniors access home equity without having to make monthly payments to repay a loan. When a qualifying homeowner has paid off a mortgage in full, or is very close to paying off a mortgage, a reverse mortgage (or home equity conversion mortgage) can turn the equity into cash through a payment plan. The reverse mortgage is repaid from the proceeds when the owner sells the house.

For seniors who have discovered their expenses are higher than what they’ve planned, a reverse mortgage can help pay the bills. Considering you can’t take your wealth with you when you die, there’s always a case for spending down your assets while you still have time to enjoy your life.

If those are two of the benefits to reverse mortgages, they may be easily overshadowed by the drawbacks.

Reverse mortgages are expensive. Just like regular mortgages, you’ll have closing fees and points to pay. They’ll be rolled into the loan amount, so when you or your estate pays back the mortgage when the home is sold or when you die, you’ll owe more than the converted equity plus interest.
You’ll be at the mercy of the market. Reverse mortgages have interest rates, just like regular mortgages. This interest will also add to the total you’ll need to repay the mortgage after the sale, and if this interest rate is higher than inflation, you’re losing more overall value.
You might not qualify for Medicaid. The proceeds from a reverse mortgage increase your income. If you’ve been relying on Medicaid, you may no longer qualify.

The first point above, the fact that reverse mortgages are expensive, is an important point to consider. Here are some of the expenses associated with reverse mortgages:

Mortgage insurance (2% of the appraised home value)
Origination fee (up to $6,000)
Title insurance
Title, attorney, and county recording fees
Real estate appraisal ($300–$500)
Survey ($300–$500)

In order to qualify for a reverse mortgage, the U.S. Department of Housing and Urban Development (HUD) requires you to receive counseling, which helps borrowers understand the concepts of reverse mortgages and identifies the best lenders.

Wells Fargo and Bank of America have recently exited the reverse mortgage business. They say that HUD requirements go to far to limit lender’s profitability, but in all likelihood, lenders are having a harder time making money from reverse mortgages — which were very profitable during the height of the real estate market — now that home prices are low. Reverse mortgages, like traditional mortgages, are packaged and sold to investors, and if lenders are having a difficult time finding investors for these securities, they’ll stop doing business.

While Wells Fargo and Bank of America are no longer offering reverse mortgages, MetLife is increasing its reverse mortgage business.

Due to the high fees, most reverse mortgages are seen as predatory products. I can understand the appeal of getting access to cash locked away in home equity, but it comes at a high price. Many people argue that you can’t be buried with your wealth, but there are ways to make it work for you after your die if selling your house is not appealing while you’re still alive.

Photo: Warren Brown Photography

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Where Your Federal Tax Money Goes

This article was written by Flexo in Taxes. 16 comments.

Thanks to an organization called Third Way, American taxpayers can get a good, detailed look at how much of a typical tax bill is destined for any particular government program. Third Way is a progressive think-tank, and they studied the federal budget to provide an itemized tax receipt for the typical taxpayer.

Here is their methodology:

The total amount of federal spending is the denominator and the amount of money spent on a particular program is the numerator. The resulting quotient is the percentage of all federal spending that goes to that program. For example, the amount of money spent on Pell Grants in fiscal year 2009 was $19.38 billion, which is divided by total federal spending of $3.518 trillion. This means that 0.55% of all federal spending went to Pell Grants. Multiply this number by the amount a taxpayer paid in taxes (in this case $5,400) and that means this person contributed $29.75 to Pell Grants.

Based on their research, here is a calculator that will help you determine how much you are contributing to these programs. The calculator defaults to a total tax payment of $5,400, which was used by the study. You can enter your own total tax payment from line 60 on the 2009 version of the federal income tax return (1040) IRS tax form.

Enter your total tax bill (no dollar signs or commas):

Expense Category	Amount
Social Security	$1,040.70
Medicare	$625.51
Medicaid	$385.28
Interest on the National Debt	$287.03
Combat Operations in Iraq and Afghanistan	$229.17
Military Personnel	$192.79
Veteran’s Benefits	$74.65
Federal Highways	$63.89
Health care research (NIH)	$46.54
Foreign Aid	$46.08
Education Funding for Low Income K-12 Students	$38.17
Military Retirement Benefits	$32.60
Pell Grants for Low Income College Students	$29.75
NASA Space Program	$28.09
Internal Revenue Service	$17.69
Environmental Clean Up (EPA)	$11.67
The FBI	$11.21
Head Start	$10.91
Public Housing	$10.50
National Parks	$4.27
Drug Enforcement Agency	$3.14
Amtrak	$2.23
Smithsonian Museum	$1.12
Funding for the Arts	$0.24
Salaries and benefits for members of Congress	$0.19

Note that the amounts above do not add up to 100%. This is only a selection of some of the more interesting categories. The report from Third Way explains more.

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The New Health Insurance Law and Your Money

This article was written by Smithee in Featured, Health. 45 comments.

Aside from some procedural maneuvering in the Senate, the health insurance reform bill that Congress has been working on for the last year, now falling under the Reconciliation Act of 2010 (H.R. 4872) and the Senate health bill, will soon be signed into law. How is the new law going to affect your personal finances? Since there are so many different health and insurance situations in America, it’d be impossible to cover them all in one article.

Here’s a roundup of the more significant and wide-reaching parts, in a rough order of how likely each would impact you.

For everybody

If you itemize medical expenses on your taxes, the threshold will go up from 7.5% to 10% of your income (expenses will have to total above 10% before you can deduct them), though the threshold remains at 7.5% for the elderly through 2016.

Starting in 2014, individuals and small businesses will be able to shop around for state-based group health plans in addition to private plans. This is optional and should provide an ability to find lower premiums due to a large customer base and the natural effects of increased competition in the market. The Congressional Budget Office (CBO) expects the number of people getting insurance through the new marketplace to start around 8 million in 2014 and to grow to 24 million in 2019.

Health insurance premiums

Most working Americans get health insurance coverage through their employer or their spouse’s employer. Premiums will largely stay the same according to FactCheck.org, but you’ll get more “bang for your buck.” Insurance companies will be required to spend 85% of your premium on medical care in small markets and 80% in large markets, rather than spend it on other things like marketing, bonuses, lobbying, and other administrative expenses.

Kids

Dependent children will be allowed to stay covered under their parents’ insurance until age 26. According to Reuters, “Many health plans currently drop dependents from coverage when they turn 19 or finish college.” This increased coverage is optional, and parents who decide to take advantage of this can always ask their adult kids to pay for their own co-pays and deductibles.

This will go into effect six months after the president signs the bill into law.

Seniors

There is currently a “doughnut hole” in Medicare Part D, the program that many Seniors use to purchase medication. If you’re spending between $2,700 and $6,154 a year on drugs, you have to pay for it all yourself. The new law gradually closes this gap over time, starting with a $250 rebate, 50% discount on brand names starting in 2011, and it will be eliminated by 2020.

About 22% of Medicare enrollees use Medicare Advantage. Some add-on benefits of popular Medicare Advantage plans will be dropped, and money flowing from the government toward these plans will decrease. Medicare Advantage plan providers will have to spend at least 85% of revenue on medical costs or activities that improve quality of care, rather than profit and overhead.

Starting in 2011, Medicare beneficiaries will be able to get a free annual wellness visit and personalized prevention plan service. New health plans will be required to cover preventive services with little or no cost to patients.

Poor people

From Reuters:

Medicaid, the government healthcare program for the poor, would be available to everyone with incomes up to 133 percent of the poverty level, which stood at $10,830 for an individual and $22,050, for a family of four.

Federal subsidies for purchasing insurance will be available for those beyond the Medicaid limit, Americans with incomes between 133% and 400% of the poverty line.

If you get sick

This is why most people get health insurance in the first place. It’s the same reason we get car insurance. There might be a terrible accident. Here’s how the new law will affect your finances if you get seriously ill:

You won’t be dropped from your health plan. In about six months, that will be illegal.
If you try to purchase health insurance with an existing illness, you will be able to. Insurance companies won’t turn you away. This is true for children six months after it’s signed into law, and by 2014 for adults.
There will be no limit to how much coverage you can receive in your lifetime.
Similarly, annual limits on benefits will be restricted within about six months, and will be illegal by 2014.

The “Cadillac Tax”

If you have a “high-cost” plan, currently defined as one costing more than $10,200 for an individual or $27,500 for a family per year, there will be a new 40% tax starting in 2018. According to FactCheck.org, this new tax “falls on insurers, but would be passed along to policyholders one way or another.”

However, according to Reuters, “A higher threshold is allowed for plans covering mostly women, older workers and retirees as well as those in high-risk professions.” The dollar thresholds are indexed to inflation and the dollar thresholds are automatically increased in 2018 if the CBO is wrong in its forecast of the premium inflation rate between now and 2018.

As a result of this tax, the CBO and the Joint Committee on Taxation believe people will start choosing less expensive plans, and because of higher cost benefits, employers will be able to raise salaries. Time will tell.

Wealthy people

From Reuters:

The Medicare payroll tax is raised to 2.35 percent from 1.45 percent for individuals earning more than $200,000 and married couples with incomes over $250,000. The tax is imposed on some investment income for that income group.

This refers to adjusted gross income (taxable income), not total annual income. This will go into effect in 2013. In 2008, about 2% of American households had adjusted gross incomes greater than $250,000.

Update:“Investor Junkie” in the comments pointed out something I missed in this section. The Medicare tax which comes out of our paychecks is being modified to include net investment income (interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property). As above, this does not apply if modified adjusted gross income is less than $250,000 in the case of a joint return, or $200,000 in the case of a single return.

Employers

Starting this year, there will be a new tax credit for some small businesses to help provide coverage for workers, but firms with more than 50 workers who do not offer medical coverage could face fines of $2,000 per full-time employee. The first 30 are exempted from the fine, so if the non-compliant business has 51 employees, the fine applies to 21 of them.

In addition, according to Reuters, “A temporary reinsurance program is created to help companies maintain health coverage for early retirees between the ages of 55 and 64. This also expires in 2014.”

People who can afford insurance but choose not to buy

If you’re not covered under your parents’ plan, and if your income is high enough to afford insurance, and if you choose not to sign up for it anyway, you will pay an annual penalty. The penalty will be either a flat dollar amount (for example, $325 in 2015 and $695 in 2016), or as a percentage of your income (for example, 1.0% in 2014, 2.0% in 2015 and 2.5% in 2016).

If you own a tanning salon

From Reuters, “A 10 percent tax on indoor tanning services that use ultraviolet lamps goes into effect on July 1.”

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Generation X Will Depend on Family and Government for Long-Term Care

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