Posted on 04/13/2010 6:59:30 AM PDT by SeekAndFind
While the market cheers on the fantastic job “growth” of March 2010, the more astute of us are concerned with a growing tide of personal bankruptcies. March 2010 saw 158,000 bankruptcy filings. David Rosenberg of Gluskin-Sheff notes that this is an astounding 6,900 filings per day.
This latest filing is up 19% from March 2009’s number which occurred at the absolute nadir of the economic decline, when everyone thought the world was ending. It’s also up 35% from last month’s (February 2010) number.
Given the significance of this, I thought today we’d spend some time delving into numbers for the “median” American’s experience in the US today. Regrettably, much of the data is not up to date so we’ve got to go by 2008 numbers.
In 2008, the median US household income was $50,300. Assuming that the person filing is the “head of household” and has two children (dependents), this means a 1040 tax bill of $4,100, which leaves about $45K in income after taxes (we’re not bothering with state taxes). I realize this is a simplistic calculation, but it’s a decent proxy for income in the US in 2008.
Now, $45K in income spread out over 26 pay periods (every two weeks), means a bi-weekly paycheck of $1,730 and monthly income of $3,460. This is the money “Joe America” and his family to live off of in 2008.
Now, in 2008, the median home value was roughly $225K. Assuming our “median” household put down 20% on their home (unlikely, but it used to be considered the norm), this means a $180K mortgage. Using a 5.5% fixed rate 30-year mortgage, this means Joe America’s 2008 monthly mortgage payments were roughly $1,022.
So, right off the bat, Joe’s monthly income is cut to $2,438.
According to the US Department of Agriculture, the average 2008 monthly food bill for a family of four ranged from $512-$986 depending on how “liberal” you are with your purchases. For simplicity’s sake we’ll take the mid-point of this range ($750) as a monthly food bill.
This brings Joe’s monthly income to $1,688.
Now, Joe needs light, energy, heat, and air conditioning to run his home. According to the Energy Information Administration, the average US household used about 920 kilowatt-hours per month in 2008. At a national average price of 11 cents per kilowatt-hour this comes to a monthly electrical bill of $101.20.
Joe’s now down to $1,587.
Now Joe needs to drive to work to make a living. Similarly, he needs to be able to drive to the grocery store, doctor, etc. According to AAA, the average cost per mile of driving a minivan (Joe’s a family man) in 2008 was 57 cents per mile. This cost is based on average fuel consumption, tires, maintenance, insurance, license and registration, and average loan finance charges.
Multiply this cost by 15,000 miles per year and you’ve got an annual driving bill of $8,550. Divide this into months (by 12) and you’ve got a monthly driving bill of $712.
Joe’s now down to $877 (I’m also assuming Joe’s family only has ONE car). Indeed, if Joe’s family has two cars (one minivan and one sedan) he’s already run out of money for the month.
Now, assuming Joe’s family is one of the lucky ones (depending on your perspective) they’ve got medical insurance. Trying to find an average monthly medical insurance premium for a family in the US is extremely difficult because insurance plans have a wide range in deductibles, premiums, and co-pays. But according to eHealth Insurance, the average monthly premium for family policies in February 2008 was $369.
So if Joe has medical insurance on his family, he’s now down to $508. Throw in cell phone bills, cable TV and Internet bills, and the like, and he’s maybe got $100-200 discretionary income left at the end of the month.
This analysis covers all of the basic necessities of the average American household: mortgage payments, food, energy, gas, driving expenses, and medical insurance. It also assumes that Joe:
1) Didn’t overpay for his house 2) Made a 20% down-payment of $45K on his home purchase 3) Has no debt aside from his mortgage (so no credit card debt, student loans, etc) 4) Only has one car in the family and drives 15,000 miles per year 5) Keeps his energy bill reasonable 6) Does not eat out at restaurants ever/ keeps food expenses moderate 7) Has no pets 8) Pays for health insurance but has no monthly medical expenses (unlikely with two kids) 9) Keeps his personal budget under control regarding cable TV, Internet, and the like 10) Doesn’t spoil his kids with toys, gadgets, trips to the movies, etc. 11) Doesn’t take vacations.
Suffice to say, I am assuming Joe maintains EXTREMELY conservative spending habits. Personally, I know NO ONE who meets all of the above criteria. However, even if the above assumptions applied to the average American, you’re still only looking at $100-200 in “wiggle” room for spending per month!
If Joe:
1) Overpaid on his house 2) Didn’t have a full 20% down payment 3) Owns two cars 4) Eats at restaurants 5) Splurges on heating & A/C bills 6) Has any medical expenses aside from monthly premiums…
… he is running into the red EVERY month.
I also wish to note that my analysis didn’t include real estate taxes and numerous other expenses that most folks have to pay. So even if you are extremely frugal and careful with your money, it is impossible to “get by” in the US without using credit cards, home equity lines of credit or burning through savings. The cost of living is simply TOO high relative to incomes.
This is why there simply cannot be a sustainable recovery in the US economy. Because we outsourced our jobs, incomes fell. Because incomes fell and savers were punished (thanks to abysmal returns on savings rates) we pulled future demand forward by splurging on credit. Because we splurged on credit, prices in every asset under the sun rose in value. Because prices rose while incomes fell, we had to use more credit to cover our costs, which in turn meant taking on more debt (a net drag on incomes).
And on and on.
Does this mean the market is about to tank? Not necessarily, stocks have been disconnected from reality since November if not July. Bubbles (and we ARE in a bubble) take time to pop and this time around will be no different.
Best Regards,
Graham Summers
I think a solution to many problems can be found in repopulating the “heartland” towns across the US. More than anything else, this adjustment is psychological, and boils down to a simple question:
“Are people willing to live in a place that is boring, in exchange for economic stability and solvency?”
Since about WWII, the answer to that question has been “No!”, but we may be entering into a time when for many there will be little choice.
There are many variables to an idea like this, but they are based on State-driven incentive programs to rebuild rural towns for former city dwellers with no place left to go. Who cannot afford to live in the city, who cannot get work, who the government can no longer support directly, and have run through their personal and family resources.
Previously, small town models were reliant on agriculture, but this is no longer entirely possible, as their main source of income. So more likely, such towns would be “Internet based subcontractors”, working for corporations doing things like data processing, and mechanical assembly. Whatever brings in income. And the people who support these people, such as shopkeepers, and *some* local agriculture to provide less expensive food.
While there are some start up costs for the State, the end result is both cost savings, and even some tax revenues after a while.
ROFL You signed up just today to post THIS drivel??
So, if you add a realistic electric bill to the author's math...and the guy is really not getting by.
I know plenty of people who live very well on less than $1k/mo. They don’t have ANY mortgage, they bought a house they could afford. They don’t have cable tv, particularly if they have children, who are exposed to enough filth as it is without paying extra to bring it into their homes.
However, in one respect the writer is probably way off. $100/mo electric is really extraordinary. I know because I pay about that and I’m fanatical about keeping it low.
Avoid borrowing. Live within your means. Don’t pay for things that only pollute your kid’s brain, like cable tv and college tuition. Don’t live in an area with high crime and high taxes. Don’t smoke and you’ll save over $100/mo on cigs alone. (That will come in handy one day when Soc Sec has gone under, and you have to retire.)
Trouble is, nobody wants to change their habits.
I thought this might be of interest to the Dave Ramsey ping list perhaps.
My husband brings home about the amount they quote in this article, only we are raising four kids on that, and three of those are in Catholic school (one heads off to the Catholic junior high in fall of ‘11, so there goes more money, LOL). It is entirely doable.
It is especially easy when you have no car payments, no credit cards, no student loans or any other debt except the house. Do we eat out much? Rarely, but somehow we manage to put away money in savings every month for emergencies, car and home maintenance, pet care, and Christmas.
It makes me want to bang my head against a wall when I hear people—especially within my kids’ school families—complain they ‘have’ to have two incomes. Of course they do, they have several hundred dollars of car payments and give their kids too much stuff. My kids were thrilled to get the Wii for Christmas and we were proud to be able to give it to them after saving up for it. They may not get ‘stuff’ all the time, but they appreciate it more when they do. Our cars may be 10 and 13 years old, but they belong to us, not the bank.
My husband hasn’t seen a raise in over 2 years (something he’s fighting for right now—especially since he’s doing the work of two engineers right now), but right now I consider us lucky to be doing as well as we are.
The economy sucks, to be sure, but considering how we’ve altered our lifestyle in the last couple of years, we’ve learned about what it really takes to survive in tougher times.
This is why Joe’s wife has to work, too.
Oooh! A planned economy! They always work well!
Nope, median priced means median home buyer. The poor who don’t buy are included in the income statistic, but only home buyers are included in the price statistic.
Exactly. Even if they have 2 incomes, a couple should not need 2 cars. Last time I looked up the street, the bus was still running its usual route. Does everybody now think they’re too fine to hop a bus?
This time it will really work! Really!
They promised! ...and have so much hope, and all that.
Dunno. I have reached the point where “boring is good.”
School, Library, Church, 4th of July Picnic and fireworks, parks, public pool, Veterans Day parade, Labor Day cookout. That is the good life.
Income figures do not include the “poor” on welfare or those without incomes.
Yeah, starting with diving $180,000 into debt.
Right.
Mortgages are the biggest d@mn scam. Everyone has been conned into this mindset of "you've GOT to have a quarter-million-dollar house". BS. No you don't. Buy what you can afford, CASH, OUTRIGHT. Biggest mistake of my life was falling for that when I very nearly owned a home free-and-clear.
Mortgage is d@mn near indentured servitude. You MUST make that payment EVERY MONTH or you lose EVERYTHING. You MUST hand over a huge chunk of your paycheck - a chunk you could have a very good & comfortable time with - to pay 3x for something you didn't need that much of in the first place. You're STUCK in your job because you MUST pay, you CANNOT risk financial uncertainty.
And it's going to take decades, if not centuries, for this nation to figure it out - or die in ignorance.
Conservatism: the realization that right behavior was learned at great cost to generations, and that if we forget it now we'll take as long at as high a price learning it again.
Ditto everything! I wish more people thought like you.
“Rule #32: Enjoy the little things in life.”
Rents keep up with inflation. Your mortgage payment doesn’t.
A rich American was trying to explain to a poor fisherman he met in an island in Latin America, regarding the benefits of planning for retirement -— 401K, trust, deeds, etc.
The fisherman asked him -— you do all of this for what purpose ?
The rich American said — so that when I reach retirement age, I can relax, not have to worry about all the necessities of life and have all my needs taken care of.
The fisherman said — But senor, I am already enjoying what you want now.
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