When $100,000 makes you Go Broke: The Invisible Hand Forces Americans Into Debt.
Many people reading this blog from states with moderate housing prices have a very hard time understanding how a family earning $100,000 a year is having a challenging time staying in the middle class ranks. The idea of a six-figure income certainly doesn’t connote the same wealthy status as it did a decade ago. But where is all the money going then? Now that we are quickly approaching the great Wal-Mart voucher stimulus revolution and will see our accounts increase by $600 to $2,400 depending on our family situation, once we look at the cost of monthly items we realize that this money is a drop in the bucket for most Americans. In fact, there is so much debt out there that many are now saying they’ll use the money to pay off current debt or save; certainly not the intention of what the current government has in mind. They would love nothing more if you went and blew your stimulus check on a new laptop or stove and one month later, are back in the same spot.
This is the problem with deficit spending on many levels. At a certain point debt will crush an economy if it is not handled properly. We have done an abysmal job managing debt over the past few decades and now we are seeing the after effects of this. Today I want to put out a hypothetical budget for a family with 2 kids earning $100,000 a year and show you how easily it is to go into debt. This data is conservative and I will talk about a few of major line items later in the article. So now I present to you going broke on $100,000 a year:
We’ll go into detail on a few line items. First, I want to show you that the above family is running a deficit of $1,076 per month. Nothing unusual from the above profile. Family bought a modest home in Southern California, has 2 cars, and has many of the items we would associate with middle class living. They also save a modest amount for retirement in their 401(k) and pay taxes unlike Blade. They have additional expenses with healthcare, feel the pinch of higher gasoline, and are seeing their grocery bill increase.
We are assuming that the above family purchased a $385,000 home here in Southern California with a down payment of $35,000. As many of you may know, over the past decade many families bought with zero, 3, or 5 percent down so we are in fact being conservative with the above number. If we were to use a smaller down payment the actual monthly debt would increase. $385,000 does not buy much home in Southern California. In fact, only until 2008 and the ongoing correction in prices, was $385,000 considered chump change and you’d be lucky to get a condo for this price in a safe neighborhood with good schools, something a family with kids would be concerned about. Where did I get this $385,000 number? I simply pulled it out of data from March 2008 sales:
“The median price paid for a Southland home was $385,000 last month, the lowest since $380,000 in April 2004. Last month’s median was down 5.6 percent from February’s $408,000, and down a record 23.8 percent from $505,000 in February 2007. That peak median of $505,000 was reached several times last spring and summer.”
You’ll also notice that prices for Southern California are now back down to April 2004 levels. Of course prices at this point were in a bubble so assuming we are at a bottom is naïve and ignoring the actual foreclosures and trends that we will be seeing for another few years. California property taxes are capped at 1 percent of the assessed value of the home plus local area bonded indebtedness:
“In 1978, California voters passed Proposition 13, which substantially reduced property tax rates. As a result, the maximum levy cannot exceed 1% of a property’s assessed value (plus bonded indebtedness and direct assessment taxes). Increases in assessed value are limited to 2% annually.”
In the above we are using a 1.25% tax rate which includes local area bonds, again a somewhat conservative assessment. I want to point out that I’ve been hearing on the radio companies looking to help you reassess your property to lower your rate. Through Proposition 8 (not to be confused with Preparation H) you can do this on your own:
“· You must demonstrate that on January 1, the market value of your property was less than its current assessed value.
- You must file a claim form for a Decline-in-Value Reassessment Application (Prop.8)with the Assessor between January 1 and December 31 for the fiscal year beginning on July 1. If December 31 falls on a Saturday, Sunday, or a legal holiday, an application is valid if either filed or mailed and postmarked by the next business day.”
So save yourself some money and do it yourself. Just run the numbers, in the end you are probably saving a few hundred dollars to maybe a thousand a year. Why not use your rebate check to reassess your property! The ironic fact about this is you are still going to pay an appraiser to tell you your property is worth less which if you own a home in Southern California and bought in recent years, is probably the reality.
The next item we are looking at closely is fuel prices. People drive around a lot in Southern California especially in Los Angeles. The current Los Angeles average is $3.85 a gallon:
We’ll assume that you tack on 15,000 miles per year per car. I put on a bit over this and your numbers of course will vary. We’ll assume that both cars get 25 miles per gallon. So how much money are you spending a year on fuel?
(15,000/25mpg) = 600 gallons x $3.85 = $2,310 per car X 2 = $4,620 per year or $385 per month
I’ll leave the $300 per month fuel cost since you may have more economical vehicles and may also drive less but the above equation is simply to give you an idea that we are being extremely conservative here. Plus, how many mega gas guzzlers do you see on the freeway or streets in your neighborhood? Clearly the price can go much higher.
You know many people forget to include the additional costs of owning a home. When plumbing goes bad you have to pay to get it fixed. If your roof needs to be replaced, that comes out of your wallet. What about lawn services? Garbage pickup? There are many other unforeseen costs associated with owning a home which many people simply do not factor into their budget. They simply assume the principal and interest is all they’ll need to worry about. Also, which impacts both homeowner and renter, is the rise in energy costs for homes. Again this eats away at your bottom line. That rebate check makes no impact for the average American because the above line items seem like they are here to stay for the foreseeable future.
What if you want to send your kids to college?
*Source: State Farm Insurance
Where are you going to save for that given that the above hypothetical family is already running a $1,076 deficit? If you pull back on say cable that will create job losses in certain areas connected to this field. Maybe you cut back on clothing. Retailers are already seeing this pain. And in fact, that is what we are seeing even with the recent announcement that Target is seeing an increase in their charge-off rate:
Calculated Risk: “Target Corp., the second-largest U.S. discount chain, said it wrote off 8.1 percent of its credit-card loans in March as consumers grappled with job losses and the biggest housing slump in a quarter century.
Defaults during the month totaled $55.5 million, the Minneapolis-based retailer said in a regulatory filing today. The charge-off rate was 6.8 percent in February.”
And there you have it. Going broke with a $100,000 income. And these people aren’t the folks leasing BMWs or Lexus cars but living a more modest middle class lifestyle. The fact of the matter is, life just got a whole lot more expensive because your green dollar in your wallet is magically disappearing and we don’t need David Blaine for that kind of magic. You can thank the true magicians on Wall Street and Washington D.C. for that.
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Related Posts:
■Real Estate Olympics: Cliff Diving Prices in California. Median Price Down 30 Percent Statewide.
■Living Large on $25,000 a Year in Southern California.
■The Credit Conundrum: The New Loan Shark is the Fed.
■Are you a Don Quixote or Hamlet of Housing?
■Massive Inventory Decrease in Southern California. Is This the Fabled Bottom?
April 25th, 2008 at 11:22 am
I think a few of your expences were pretty low too boot. $125 for electric? Perhaps, if they never turned the lights on. $50 for cell phone - maybe if the whole family has one - not likely.
$500 entertainment might be a bit high for a family that runs out of money each month, and I would expect that they would cut back on their 401K contribution to help make ends meet - though, of course that has its own long term consequences.
April 25th, 2008 at 12:04 pm
The reason your hypothetical family is running a deficit is because they’re making poor decisions. Buying a house more than 2.5x annual salary…not a good idea. Buying with less than 10% down…not a good idea. They could simply rent longer and save more. Also the 6% interest rate on the mortgage seems high. This would denote less than stellar credit.
Also, it’s ridiculous to have two car payments at the same time. Buy mom a nice late-model used car and let dad drive the beater. Lather, rinse, repeat. There should be one car payment at most and preferably no car payment.
Your budget also doesn’t show any savings other than the 401k. So they have no emergency fund? What happens when a car needs repairs? Goes on the credit card, I suppose. So living check to check or ‘going broke’ as you put it, because of not making wise decisions. I can’t say I’m too sympathetic.
April 25th, 2008 at 12:14 pm
Yeah, but the $600 voucher will help. Wait- waddya mean it’s not coming every month? Huh?
Considering that the average American’s credit card bill is $9k, the payment for that debt isn’t even factored in. Yikes…
April 25th, 2008 at 12:15 pm
This family is also only donating 1.2% of their income to charity.
April 25th, 2008 at 12:16 pm
It looks like this family has overstretched on what they can afford in a home. If they can’t get a decent home for less then this in California then they just need to realize that they are going to have to rent or move to the midwest. Also they are spending $250 a month on vacations. If they are operating in a deficit then they have no business going on a vacation. That’s tough but that’s life. Some people cannot afford vacations and this is clearly one. They will probably unfortunately have to cut back on thier 401k contributions also.
I think alot of these people making $100k a year getting into money trouble are overstretching thier budgets. My wife and I make about 80k a year and just recently bought a house. We follow a monthly budget and knew exactly what we could afford. Since we live in the midwest, buying a house was a possibility for us. If we lived where housing was more expensive we would unfortunately have to say goodbye to the dream of owning and keep renting.
April 25th, 2008 at 12:20 pm
I agree with Savvy. They have made poor decisions. Also to Jon, this family should be donating 0% to charity. They don’t have the money to give away. I know you want to be nice and donate but if you don’t have the money then you don’t have the money. If you are going broke and possibly going to get forclosed on but you still are giving money to charity then I don’t feel bad for you.
April 25th, 2008 at 12:31 pm
For those of you who say The Hypotheticals are spending too much on housing: that’s the POINT OF THIS WEBSITE.
The Hypotheticals earning $100k puts them in the top 15% or so of households (as this site points out). Given the Real Homes of Genius (900 sq ft in crime-ridden Compton for $500k), $385k in Southern California is hardly lavish, but rather about half of a “starter home.”
And to those who say “put down a bigger down payment,” where would they magically get that money? People with the education to earn $100k are almost certain to have graduated with student loans. Before the children, The Hypotheticals were working entry-level recent-grad type jobs and making significantly less money: even if they were renting, they still had rent, food, utilities, and transportation.
April 25th, 2008 at 12:34 pm
Remember this is a hypothetical family, but one who’s decisions are probably not to different than a large number of Americans, and probably better than some. Most likely of course to make things meet the family would get rid of 401k savings. But then would go out and buy a boat or add an addition to the house and still not be able to make things work. Finally of course they would blame it all on someone else and then wait for the government to bail them out.
April 25th, 2008 at 12:48 pm
Long time reader, first time poster. Excellent post. It really conveys a sense of how precarious many people’s lives are.
There’s no point in being a scold with fictional characters, it’s just a description of conditions.
When these super-consumers stop buying their share (i.e. >100%) it’s going to affect some of the more prudent as well. If every family like this drops the cable, and the cell phones, and cuts out the vacations, and gets more wear out of their clothes, and go out less often and bring their lunch to work, and many families will make all these adjustments and more, it just might have a little impact on the rest of us. Sure, the way the economy values certain “services”, like cell phone ring tones, is ridiculous; it does need to adjust to more sober minded consumers. Still, it looks like there will be plenty of pain for more than just the spendthrift.
April 25th, 2008 at 1:03 pm
The problem isn’t the salary; it’s where it’s being earned. It costs about 30% less to live in Minneapolis compared to Los Angeles, so that 100,000 only needs to be about 70,000 in Minneapolis. I don’t know how salaries work in your neck of the woods, but it took me about 12-13 years in the work world to earn that kind of cash, and I was a frickin’ English major.
April 25th, 2008 at 1:05 pm
“what we associate with middle class living”
This is the crux of the problem. Things that in bygone days were luxuries are considered entitlements. Cell phones and Landline (pick one), Digital Cable vs Basic, highspeed internet vs. dialup, 2 FINANCED cars, 30 YR mortgage on a (relatively) expensive house for this family without substantial down payment-not to mention the monthly carrying costs at $2824 are roughly half (49%) of take home pay!
NOTE: These are generally the same people that want a federal bail out for home borrowers that will keep housing overpriced for the foreseeable future and make mortgages more expensive for those that have been saving for a down payment.
We all make choices in this world and this hypothetical rundown is a good exapmle of a family making very poor ones.
The sooner we realize that it is not acceptable to live beyond our means and blame the ’system’ for the consequences, the better off we’ll all be.
Sadly that will not come until some start to actually repay their accumulated debts.
April 25th, 2008 at 1:07 pm
“Balance budget for Dummies”
Items I have experience with:
- Phone - discontinue service completely - you have cell after all. +40$ savings
- Cable - get “rabbit ears” and discontinue cable service +65$ savings
- Entertainment - 500$ - get a netflix or blockbuster unlimited plans, play monopoly (free), get out to play - 50$ - +450$ savings
- Charity - whaa??? - +100$ savings
- Vacations - look at charity - +250$ savings
Items I’m not sure about:
- Disability Insurance - 60$ seems to high, considering some of the Life Insurance Plans include this, plus you probably will have SSDI. I’d say 25$ or nothing at all - +35$ savings
Everything else is hard to argue about, it depends heavy on personal circumstances. So, we’re at +940$ at overall savings, rest of the balance act (1076-940 = 136$) should come from 401K savings.
People should learn to live by their means!
April 25th, 2008 at 1:19 pm
These people could be living within there means. EASY.
First off $500 for entertaimement. Gone. There are lots of free things to do with a family.
Charity $100. Gone. If you are broke, don’t give to charity.
Vacation locally, Free. Camping is a good one. $250 Gone.
So thats $850 a month right there saved.
Packing your own lunch for work can save another 100, Cheaper gifts per month, another 100 Then switch internet to bacis DSL. There you go, no more deficite each month……
April 25th, 2008 at 1:24 pm
Can you imagine what the budget of a family who bought the same house with a 60K yearly salary. I guess you would have to add sling shots to that budget because they will be hunting pigeons for dinner. So if the middle class is the new lower class, what do you call the current lower class?
April 25th, 2008 at 1:27 pm
Where Dreamer and Savvy see somebody who made poor choices, I see somebody in pursuit of the “American Dream” who is being forced to make choices betweeen a series of bad options by a shrinking real income, a regressive tax system and skyrocketing inflation.
Sure. They could rent. But isn’t the middle class “American Dream” a modest 3 bed, 2 bath house in a safe neighborhood, two kids, a a dog? Since when was the American dream to make a six-figure income, but still have to share a duplex with the college students next door?
Sure. They could move to the Midwest. To … what job exactly?
Sure. They could save less for retirement. And a real life family in this situation probably would. But that’s a risky proposition in a world where very few people earn pensions, and social security may not exist in any meaningful form in 40 years. So much for the golden years.
Also, don’t depend on Suzy and Jimmy to take care of you when you’re old. They probably won’t have very good jobs, since this budget doesn’t even take into account saving for college.
And god forbid this family have an expensive medical crisis. Better hope all that health insurance you’ve been paying for actually pays. Even the better plans only pay about 90%. Don’t get sick!
And god forbid this family still have elderly parents that need care for. Hurry up and die Grandma!
Honestly, the point wasn’t to show a familiy making good or bad choices. The point was to show how easily a $100,000 salary get’s eaten up very quickly in the pursuit of the modest “American Dream.”
What would have been considered a solidly upper middle class income 15 years ago, is now barely hanging on, in a lot of places.
Wages have not kept pace with inflation, nor with housing prices. And that is creating a dilemna for a lot of families. Get a heart, why don’t you?
April 25th, 2008 at 1:28 pm
This budget is basically right on the money for a family with 2 kids, although I’d definitely up the gas and electric bill costs. Also, clothing for 150 dollars a month? My kids outgrow clothing and shoes very fast and even with hand-me-downs we still spend more than 150 a month on clothes for all four of us. I have a job which requires professional attire and that can be pricey. 525 a month for groceries also means that they aren’t eating steak or even chicken every night.
Oh, and savvy clearly does not have children. When buying a home, you HAVE to factor in school district. If you buy a cheaper home with a bad school district, plan on factoring in the cost of private school. When we bought a home, we wanted a place our kids could play outside without getting shot. Sometimes a cheaper home is NOT a good idea. And two car payments totalling 525? Again, given the current high cost of cars, they are not driving anything super-nice. With kids, TWO reliable cars are an absolute necessity or your schedule turns into chaos.
This family hasn’t made bad choices overall, their financial fate is being dictated by the current ridiculousness of the economy.
April 25th, 2008 at 1:29 pm
Why would a family with a deficit donate any money to charity? I’m all for being charitable, but if that money started coming out of my savings every month, I’d have to stop giving.
I agree with some of the other posters on the cell phone being too low.
I’m in New York - Specifically Long Island and I’d just about kill to only pay $400/month in property taxes. On a $415,000 home, I pay $8400/year and that is before we vote on the school budget which adds at least 3% every year.
Good article otherwise.
April 25th, 2008 at 1:38 pm
Re: Dreamer:
Moving to the Midwest would lower their expenses, it’s true, but then they wouldn’t be making $100k per year either, so they’d probably still be doing the same dance. I mean, sure, you can buy a nice house in Michigan for under $100,000, but the unemployment rate is half again the national average. It’s hard to make even a small mortgage payment if you don’t have a job.
April 25th, 2008 at 1:50 pm
Saving $850 a month still leaves them in a deficit situation. Cutting out the fun stuff doesn’t cut it. Serious changes have to be made.
April 25th, 2008 at 1:51 pm
No state or local income tax here, so that’s a help. That’s a little over $400 more to play with.
$75 in gas? Are you kidding? I’m spending twice that, and I’m a stay at home dad. Wife isn’t around TO drive.
$150 in cell phone bill. 4 phones. With texting for all an absolute necessity (the daughter could not get it in her head that texting US cust US even if t was free from her point of view)
$300 in electricity here average. That’s a little high for last year, but I know better. You have to have AC here.
$100/mo Real Estate taxes. Yeah, that’s a bargain. Maybe.
Car insurance is about right, but I’ve got not one but two new drivers soon.
So I find some of those categories actually light.
Where this family saves it’s money is only paying less than $1000 for it’s mortgage. We refi’ed 5 years ago, and only took out $5k in equity to get a new roof. We’ve been here 16 years too. Houses are trying to go for about $250,0000 around us, I don’t think they’re getting it. Also, we only carry one car payment ever. And we’ve cut the length of our car payment from the original 60 months to 48 months by making bigger payments. And we own three vehicles (two are actually in joint names and belong to our kids, and another is currently under pursuit)
$500 in entertainment is probably a little high too.
Work lunches and dry cleaning are expensed.
The wife works out of country 3 weeks every month, so we don’t need two cars. And that also explains why we don’t have some of the above expenses.
So yes, my family is living within it’s means.
April 25th, 2008 at 2:06 pm
About the charity, it’s only $100/month. Removing it wouldn’t drastically change the picture.
And I have no children, but I saw nothing in the budget for:
Piano / music lessons
Soccer uniforms
Soccer shoes
Roller Blades
Bicycles
Summer Science Camp
Basketball Clinic
Karate Lessons
Etc.
And to those who pick on “luxuries” like high speed Internet: I personally get all my DVD’s from the Public Library and watch them on the computer I need for my job, but is your arithmetic so poor that you put more attention to the the $10 Netflix bill than the $400,000 house?*
Healthcare and education are also not cheap.
The same hyperinflated housing costs that the government is dedicated to preserving.are what’s killing them. If they could get a decent 3 bedroom house in a low-crime neighborhood with good schools, then they could probably afford as many overpriced coffees as they want.
*Having said that, I do agree that many people significantly overspend on gadgets, eating out, and entertainment. Unlike market-driven things like housing, this really is a “keeping up with the Jones” aspect where going to the movies 1x/month makes you look like John the Baptist.
But run the numbers for the median California family at about $60k and nothing is left even with entertainment at $0.
April 25th, 2008 at 2:11 pm
That $100 a month amounts to about $20 a week in the collection plate.
That’s too much for a family making $100,000 a year?
We live in a f-ed up country.
Dr. HB didn’t say that they family finances were perfect - he said they were typical. This hypothetical family could cut somewhere (entertainment), but somewhere else would take the money (anybody got a gas bill in Southern California over the past month?? Didn’t look like $40 I betcha.)
The point is - THE EXORBINANTLY HIGH COST OF HOUSING - can make the most modest of budgets look like wide overspending. It is not. This is a $350K mortgage, folks, unheard of for a livable residence in SoCal until very recently.
This is the country/state we live in. This IS reality.
April 25th, 2008 at 2:31 pm
Lets look at the biggest expense in this hypothetical families income. TAXES. OK, they have a 21% tax rate at the payroll deduction level but it doesn’t end there. They are nickel and dimed to death at every expense along the way. They Gore tax on their land line telephone? $5 per month every month to wire schools for the internet. Hasn’t that been accomplished yet? Look at your cell phone bill. I don’t. Its auto debited and I throw mine away but its loaded with this that and the other tax. Cable or satellite TV? Ditto. Sales taxes, utility taxes, gasoline taxes. At the end of the day this family is probably being stripped of 1/3 or more of their income and this is a family with two kids. If you are single and at this income level you are not only stripped, you are bent over and sodomized and your ‘rebate’ check will not buy you dinner for two at anyplace that doesn’t have formica tables! This country has created an enormous parasite class that leaches off the middle class. Native born parasites. Immigrant parasites, transgender parasites, they are everywhere and they are crushing the middle class. Any wonder why the birth rate is so low amongst the productive citizens in this country and so high amongst those along for the ride?
April 25th, 2008 at 2:53 pm
GREAT article.
April 25th, 2008 at 3:14 pm
amen scott. funny enough though, i was licking my chops at their 21% eff tax rate. i had to check my paystub, as they net 1700 more than me a month when i make almost the same gross income, and that doesnt include the fact that i pay an extra 3-5k come aprils.
we should celebrate the tax free day a couple days ago, where we’ve been working for the man from jan1-apr23! not.
i agree with others though, entertainment much too high. charity, no. car payments are not permanent.
no sympathy here, they’re living above their means
also didnt even notice a dining out expense, maybe that is part of entertainment..
April 25th, 2008 at 3:15 pm
I live in So Cal, I have a $310,000 mortage, two kids, and I make $110,000 a year with a stay at home wife, so this is basically my scenario, except I save about $1500 to $2000 a month. I have a few items of clarification:
First, taxes are not 21% if you have that mortgage. It would be around 12%-15% with deductions. There is no need for a car payment, I’m only 30, but I’ve never had one. My wife drives a new 2008 Toyota Minivan, I drive a 2007 Ford truck. We pay cash. Life insurance runs only $50 a month for both of us, which gives us a little over $1 million in combined coverage. Our grocery bill rarely tops $300 a month. Entertainment expenses are at $60 a month. Vacations are a two week camping trip for $250 every year, so about $20 a month. Auto gas is only $100 a month, but then my wife doesn’t work. I don’t know of anyone that pays parking fees in So Cal, there is plenty of land here. I bring my own lunch to work. Clothing is $50 a month.
Really, this seems like a very over inflated budget. I’ve been living with this salary and mortgage for 4 years now, and I’ve got $45,000 sitting in an online savings account. When I bought the house I only had $5,000. (You might notice that my per month savings doesn’t add up to $45,000 after 4 years. We bought an RV and other “luxuries” that could have been passed on if things were tight.)
April 25th, 2008 at 3:28 pm
For those saying that this family should rent rather than live in a house they can’t afford, consider that their mortgage+property taxes+insurance are about $1,874 after considering tax advantages. So they would have to find a 2 or 3 bedroom place for $1,875/month or so to match the housing costs, as the $699 cost difference would show up as additional taxes. In all but the sketchiest places in Southern California, that’s not particularly realistic. And 6% mortgage? That’s a great rate…current 30-year fixed conforming mortgages are hovering around 5.875%…if their house cost more than $470K (actually a more realistic amount), the going rate is 7%+.
As for internet, for many jobs (especially those that pay $100,000/year), this is a necessity. And the two cars? To make $100,000, both parents often have to work. If they work in different places, you need two cars to get there.
For those waving the “public transportation” flag, that’s only practical if your office is near a bus stop or train station. As an example, it would take me two hours to get to my office on public transportation, when the drive takes 12 minutes. That 4 hours of transit time translates to hundreds of dollars a month of my time.
So sure, cut the vacations and entertainment, but that leaves you $300 short. Cut charity? Well, then those charities will need more money from elsewhere to operate, which will end up costing the government more and lead to higher taxes in the long run. Cut 401k? Well, with social security predicted to implode long before these new homeowners retire, it’s not an optional expense. And remember that each dollar pulled out of the 401k only saves $0.75 after taxes.
I wish I had a solution, but hopefully this adds some perspective…
April 25th, 2008 at 3:29 pm
poor family
April 25th, 2008 at 3:30 pm
So, the Basic American Lifestyle costs $100,000/yr. Raise your hand if you make less.
April 25th, 2008 at 3:35 pm
Really, it’s the area. 100,000 and change will not get you far with kids, student loans and daycare (1800 a month for two.) Even if you cut out all extraneous expenditures and pack a lunch each day. That is why buying a home for many is simply out of the question.
April 25th, 2008 at 3:38 pm
Interesting article. For years my wife and I were living on about $50k (or less–when we were in the Midwest I think one year we had about $25k), and this was in Portland, OR, with 1 kid and then later 2. I was always frustrated with books telling me places I could cut expenses because they were things I wasn’t buying anyway: broadband, cell phone, coffee, lunch out … We lived within our means AND contributed to our IRAs and gave to charity.
Just last fall we moved to the Midwest and had an income jump–my wife just started her doctoring job and so now our gross is around $170k, a huge jump. I finally decided we could afford broadband Internet for the first time in our married life, though we still don’t have cable. We figured with the decreased cost of living here and increased income, we could just about afford to pay cash for a house in a couple years if we continued the same standard of living.
But somehow, as I sat down and started looking at our budget, I noticed that we were saving much much less than I thought we would be. Worse, when I looked for things to cut, I wasn’t finding a lot of easy stuff to remove.
I’m not looking for sympathy here–I’m just pointing out that I finally have at least a little sympathy for people who make more money not meeting their expenses. I’ve always been frugal and I thought we could finally be a little less careful, but apparently not–even with a much bigger income, I have to keep a pretty tight rein on things if we want to stay within our means.
And one other note: I’ve noticed a lot of people scoffing at the idea of giving to charity; as a Christian I try really hard to tithe–that’s 10%–even when we were making $25k a year (and that’s just to church, not other charities). Sure, if you’re not living within your means you shouldn’t be spending $500 a month on entertainment. But if charity is one of the first things you cut when things are tight, you’re never going to give at all. And let’s face it–1.2% is tiny.
April 25th, 2008 at 4:09 pm
Oh yea I can see a 100k family in Los Angeles struggling (and yes it’s either a house in a decent school district or private schooling (which is thousands a year!)). If they live in a bad school district this family is likely to end up with kids who graduate high school and can’t read or do basic math! What family wants that for their kids?
And yes most housing in decent school districts are still costing more than the hypothetical family paid. So those housing costs are still low for current reality.
I have entertainment income and save and live in L.A., but no kids, higher than 50k income, no debt, and of course, it goes without saying: RENTING!!!!! Oh and taxes, taxes are outrageous, and I don’t see them going down with the state being bankrupt!
April 25th, 2008 at 4:23 pm
Hello,
Very interesting and spot on.
I think the one thing that people can’t grasp, or dont’ want to grasp is the magnitude of what is going on. The numbers are so large that they almost start losing meaning, because we have no reference point to compare this too.
The scale of what is going on is off the chart, there is no infrastructure to deal with this size of economic disaster. Katrina and the Tsunami sort of come to mind, compare it to a economic nuclear bomb going off in Florida and California. One can argue that this economic disaster is going to have the same end result as if a Nuclear weapon went off in LA county, etc. I would also argue that this may be even more difficult to deal with because this is happening over 18 plus month period vs. a nanosecond. Sure, what I am saying can be dismissed as so much hyperbole… but when you begin to think of what is happening now, and try to plot possible event futures you begin to see that the future is very scary. We are in a “System of a Down”, or a negative spiral…. the energy needed to pull us out of this is so massive that it is beyond comprehension, and most likely beyond possibility. One almost can come to the logical conclusion, “well I better get mine, before the whole @@@@house goes up in flames”… thank you Jim Morrison…
Doubt me.. Just look at the chart…. then think of possible scenarios of what could pull us out… $600 rebate check… Bear Stearns bail out… The chinese gov’t buying every foreclosed upon house, and creating the worlds largest property management company… a small investment of 1 to 2 trillion dollars would do that…
April 25th, 2008 at 4:35 pm
Good article
Dutchtraders first solution
F the 401k plan and keep your standard of living. Take a cheaper vacation
Dutchtraders second solution
Work more hours, second job, grow your own vegetables, ride a bike to work etc etc.
Dutchtraders conclusion
Life sucks and then you die
April 25th, 2008 at 5:40 pm
Lose the following:
Cell phone $50
Work Lunch $125
Take it from home
Entertainment $500
Use the library and read a book
Go on a picnic
Go for a hike (most Americans could use the exercise)
Vacations $250
Learn to love camping with a tent
Gifts $125
Bake cookies and bread for gifts
Cable $65
Go rent movies at the library or read a book. TV is mindless dreck that poluutes the soul. Haven’t had it in the house in 17 years.
There - I just saved them $1115 a month or $13,380 a year.
And food can go down some. I only spend $220 a month on food AND all the household supplies (cleaning stuff, shampoo etc) for 2 people. We eat very well. (If anyone wants the recipe for Wild Mushroom and Dill Soufflé with Mousseline Sauce or Potatoes with Dill and Mushrooms Poached in Wine let me know.)You give them $550 for food and $225 for household items or $775 a month. They can do it on $450-500 if they cut out the frou-frou specialty shampoos, bath oils and similar stuff AND learn to cook and stop eating meat. Just saved another $275-325 a month.
Clothes at $150 is nuts. They can learn to shop on Ebay (Brooks Bro men’s shirts New Without Tag for $5-10 plus $5-7 to ship instead of $80.) I dress very well – just bought a New With Tags Lilly Pulitzer sundress I have been coveting since the fabric design came out 2 years ago – retail was $320 and I paid $40 including shipping on Ebay. It is particularly good for kids who outgrow everything. They can get acquainted with resale shops. Cut the clothes budget down to $75-100. Now they have saved $300 on food and household plus $75 on clothes. That is another $375 a month saved on food, household and clothes or $4,500 a year.
Annual total savings thus far = $13,380 + $4,500. That is a grand total of $17,880 ($1490 a month.)
Such spending is inexplicable. My parents had an income comparable to 2008 $100,000 – and I grew up spending all summer onboard the 38 ft boat at the yacht club, a car for my 16th birthday and my parents were self-employed and retired at the age of 55. Of course I had to mow the yard and clean the house when I got home from school; they did their own home repairs (unless you are thick as two bricks, you can learn how. I just finished painting every room in the house) and I heard the word ‘no’ a lot as in ‘no you want it, you do not need it.’
BTW, my electric is $65. Open the windows and turn on a fan and/or add a swamp cooler (and I have lived in the humid swamp of DC without AC.) Propane is $100 (hot water and heat here in the far north) Hot water is supplied by the tankless Bosch hot water heater that cut the hot water bill by 68% and the overall gas bill by 33%. No car payments – and I just love our his ‘n her matching little Escort wagons that get 32 mpg city and 36 mpg hwy and both handle 800 mile road trips.
Bottom line is that house is killing them - way too much house on their income so all the ’stuff’ and ‘gotta haves since the nieghbors have it’ have gotta go.
April 25th, 2008 at 5:40 pm
Fascinating article. I’d like to add that all those economies people are talking about could work for this family right now. But with medical costs going up every year, they’ll be just as screwed next year. The really essential stuff - food, energy, education, health care - is going through the roof. You can’t save enough on DSL and cell phones to make it up any more.
April 25th, 2008 at 6:06 pm
The vacation budget, I agree with. That may not even be Disney World or something that can be replaced by “going camping for free”. That could be vacations to see relatives for holidays. $2500 would probably get us one holiday with each family if we caught ridiculous airfare sales and used our credit card reward miles to boot. And yeah, we could slash our cable and cell phones and broadband back, but I at least need the broadband & MY phone for work (I tax-deduct non-reimbursed expenses)…and cable isn’t all THAT much.
And it’d be GREAT to move someplace with cheaper housing, but our jobs are HERE. People with long-term experience and a vested interest in the companies they work for are not easily able to pack up and move to the Midwest. We could probably pack up and move to a slightly cheaper city with decent public schools, and STILL pay $385K for a nice house in a good school district that wasn’t going to require us to spend two hours each way commuting to work. Where the hell do you even get a $385K house in Los Angeles that doesn’t require you to waste hours a day in a car if you work in the city?
I don’t think these people have made bad decisions. I think they’ve done what they can to provide a decent life for their kids, one in which the kids have the creature comforts and access to pop culture, without spoiling them or being excessive. They’re not doing badly. They could certainly slash some things like entertainment, but if we pretend “entertainment” includes lessons and organizations and things like that, then maybe not. I think it’s a great look at how difficult things are for people who are doing well. All the more reason to keep giving to charity for the sakes of those people who are NOT.
April 25th, 2008 at 6:08 pm
I see few big problems with this budget. First of all if you care for your children there is no place with desent schools in LA metro where house cost lest than $500K ( which will add some $700 for morgage). In the cities where is the borderline between the “big money” and the gheto like Torrance, Glendale, Huntington Beach there is still no house less than $500K. (there is cities much worse deals if you look schools) Second if both parents work there is usually tuituion for after school - YMCA/Salvation Army - $300 ( so $600 for 2), if one of the children is at child care - minimum $600. Expences for 2 children run at min $600 to max $1200. The other option is single salary income, which rearly makes $100K.
My case is both working and making $130K still renting at least till next sping.
Mi Primavera, mi primavera blanca,
let me see your prices…
April 25th, 2008 at 6:58 pm
Yes, this hypothetical family needs to cut back and yes, it will be hard. And no, neither they nor anyone else should get a single dime from any other taxpayer.
April 25th, 2008 at 7:31 pm
Under which category in this budget of expenses would I include the $179.70 I spend monthly for the cheap Gallo Chardonnay at Albertson’s? Cause really, the hooch is only thing keeping me from a total nervous breakdown at this point.
Great blog, as always.
April 25th, 2008 at 7:47 pm
I have to admit, I don’t see how anyone can possibly feed a family of four on $550 a month without eating Hamburger Helper four days a week and dog food the other three. The two of us can barely get by on $500 a month, and that doesn’t include expensive food or restaurant food, which we don’t eat. (I’d also like to see where anyone can get one haircut for $60, let alone two a month for the working adults who (admittedly) need to look professional and one every two or three months for the kids. I have a feeling some things are remarkably more expensive in Alberta than in California.) I also know that in some cities dial-up internet isn’t available - it isn’t in mine, and if you have school-aged kids internet service may be essential. The utilities are unavoidable. But the rest?
Are these hypothetical people insane? I own a house. In no year has my maintenance cost me $3,000. The average is about $350 per year! And what consecrated idiot spends $6,000 a year on entertainment?!?
Argh. If you find yourself falling behind, stop paying money for entertainment. Stop buying all but the most necessary gifts (which should only be to the kids and could be under $200 a year total). Stop buying lunches and going to restaurants - completely! Sell your expensive cars and buy cheaper used ones. Stop wasting and wasting and wasting on ‘essentials’ that are in reality extreme luxuries.
Also, why is this family in SOUTHERN CALIFORNIA paying $75 a month for gas? I don’t pay that much, and I live in an actual cold climate.
April 25th, 2008 at 8:31 pm
I agree with the article as I feel this in my life. I earn approximately 80000 with just