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
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.
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
Updated June 23, 2016 and originally published December 8, 2011.