Tuesday, September 2, 2014

Getting by on $100K a year

Last weekend, I came across a startling article in Money Talks News about the amount of money a family needs to maintain a "normal" lifestyle. (It's part of a series called "The Restless Project," which seeks to address the question of why so many middle-class Americans feel restless—that is, uneasy—about their financial situation.) The author, Bob Sullivan, crunched some numbers and concluded that to live "a normal, decent life" these days takes around $100,000 a year, minimum. That's the amount a family needs to spend, not the amount they need to earn; it doesn't include taxes (which can vary quite a bit depending on where and how you live) or retirement contributions.

Now, admittedly, $100K per year to maintain a middle-class lifestyle isn't nearly as large a sum as the $250K budget that I analyzed in this post last year. At that time, I seriously questioned the claims made on MSN Money that in many parts of the country, a family of four would actually find it hard to make ends meet on this income. Sullivan's figures, at first blush, look a bit more reasonable than the ones used in the MSN money article. His hypothetical family, he says, has two children under 10 (one school-age, one younger) and lives "near one of America’s largest cities — Washington, D.C., or Seattle, or Chicago." They're both employed, they rent a three-bedroom apartment (which makes it easier to calculate their living expenses without all the tax details surrounding a mortgage), and their only debt is a student loan (or two) with a $500 monthly payment. Here's what he estimates this family needs to spend each month just to "feel like it’s at least paying all the bills":
Rent: $2,200
Healthcare contribution: $600
Cell phone: $200
Utilities (including TV): $300
School tuition, supplies (for older child): $1,500
Day care (for younger child): $1,500
Food: $500
Car loan and insurance, or mass transit: $500
Student loan: $500
Clothing and other goods: $500
TOTAL: $8,300 per month, or $99,600 per year
I can't reasonably compare this family's monthly budget to ours, since our situation is so different from theirs. We own a house rather than renting an apartment, we don't live in a major city, and we have no kids to support. However, I can point out several points that struck me about this budget at first glance:
  1. First of all, Sullivan is assuming that this two-income family needs to pay, not only to keep their younger child in day care, but also to send their older one to a private school. He notes that the family could save $3,000 a month by arranging "for the older child to attend free public school and the younger child to stay home with a parent," but this would halve their income. However, the two expenses aren't really equivalent. A child under 6 needs to be supervised during the day, either by a parent or in day care, but a child over 6 doesn't need to be in a private school. One of the things that Sullivan says makes budgeting so hard for families is that they're "forced to pay too much money for decent housing near decent schools," yet his sample family seems to be paying a premium for housing and paying for private school tuition on top of that. Sending the older kid to public school, which should be a reasonable choice if the family lives in a good school district, would cut their annual expenses by $18,000.
  2. As many commenters on the post pointed out, the $500 a month budgeted for utilities plus a cell phone probably includes some fat that could be cut. For instance, they probably don't need to pay for both cell phones and a landline. They could save $50 a month or so by cutting the landline (or replacing it with a cheap VOIP service, such as Ooma), or, alternately, they could keep the landline and supplement it with cheap prepaid cell phones. Here's one area where our household budget does apply: we pay about $96 a month for basic cable, Internet, and a landline phone, plus $4 a month for a prepaid cell phone for emergency use only. If that's too basic, how about a pair of smartphones from Republic Wireless for $10 a month? That brings the total for phone, cable, and Internet service to just $106 per month, a little more than half what this family's currently paying for its cell phones alone. Add in another $121 a month for gas and electricity (the national average according to the White Fence Index), and you've cut this expense from $500 a month to $227, for an annual savings of $3,276.
  3. The health care cost is perhaps a little high as well. According to this NBC News article, an average family's share of its health care costs comes to $4,565 per year, or about $380 a month. That doesn't include copays or deductibles, which are typically at least $1,000, so add in $120 a month for that and you're up to $500 a month total, shaving another $1,200 a year off the budget. (Of course, this number depends a lot on where in the country you live. Many people who commented on the post said that for their area, Sullivan's $600 estimate was actually way too low. But since we're talking about a hypothetical average family, I'm just going with the national average.)
  4. His estimated cost for food, by contrast, appears to be on the low side. According to the USDA's latest figures, even on the "Thrifty" food plan, a family with two children aged 3 and 8 can expect to pay $603.40 per month for food. So fixing that estimate adds another $1,241 a year to the budget.
Tally that all up, and my estimate for a "normal" family's spending comes to $78,365 per year. That's still a pretty high number, given that the median income for a family of four is only around $65,000, but it's a lot closer to making ends meet than Sullivan's initial estimate of $100K. And there are still a lot more budget-cutting measures this hypothetical family of four could attempt that I haven't even looked at yet, like moving to a cheaper apartment, carpooling to save on transportation costs, and trimming that $500 a month for clothing and miscellaneous "other goods."

So in short, yes, it really is hard for families today to make ends meet. But there's no need to make it out to be harder than it actually is.


JD said...

I actually live in the Seattle metro area and bring home around US$52,000/yr. Our rent on an apartment is $1300/mo. My cell phone bill is half what others pay because it's a perk of my company to pay for half that service.

However, friends at work are paying right around $2200/mo in mortgage and insurance, and I assume their groceries/transportation/etc. are higher than mine due to the conversations we end up having.

So the housing number is probably accurate for a metropolitan area like ours, which is one of the spendier places to live.

Amy Livingston said...

You might want to send your numbers to the guy who wrote the original article, at https://bobsullivan.net/restless/. He says he's interested in hearing from people with all kinds of budgets (though he hasn't published mine).