It's Impossible To "Get By" In The US

[Xue]

April 12, 2010

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.

Source:
Zerohedge.com (Graham Summers of Phoenix Capital Research)

http://www.zerohedge.com/article/guest-post-its-impossible-get-us

[keepinitreal]

Very sobering. Can't disagree with anything here.

[frogger]

So how's that hope and change working out for everyone?

Nothing is going to improve until we can get rid of that bunch of ba$tards in the house and the senate. Really doesn't matter who the president is, for he does not control the money.

We need a big broom to sweep our house with, then perhaps our country and its people can start getting back on track.

[Jackdog]

I get made fun of at work because I'm a registered independent voter. They tell me my vote is wasted every election. To me, picking between a democrat or a republican has gotten to the point where it's picking between Tweedledum or Tweedledee. I'm not sure a president that wasn't affiliated with either party would do better. But how much worse could they do?

[MD69107]

Dead on analysis there.....All I try to do is survive.

[MD69107]

Dead on analysis there.....All you can do is try to survive.

[Mi Bankruptcy]

Wow,those are some of the most realistic numbers I have read when it comes to me.

[MD69107]

Sorry for the double post....Couldn't figure how to delete.
Yeah, those numbers are pretty accurate........And just pray that nothing breaks down or a medical bill comes up.

[oldhack]

Besides missing a 'biggy' expediture off the top -- the 7.65% SSI/Medicare tax is almost as much as the income tax due, $3,800+ -- the biggest point here is DON'T GO INTO DEBT! Are we deliberately missing it, or is it somehow anathema to modern culture? (That question, I realize, may be a redundancy.)
It used to be a truism: you know, "Neither a borrow nor a lender be", (Shakespeare) c. 400 years ago!
Drugs are available almost anywhere, yet not everyone is a drug user. Alcohol can be had in every state, yet not everyone drinks. Just because credit is available doesn't make it a necessity, or our use of it mandatory.
My income is almost the same as the example in the OP -- and, yet, if I don't overspend, I can pay for my mortgage, car, utilities, et al, and have almost $1,000 left in 'discretionary' income monthly. I don't have kids, but I also don't have the tax deductions associated with kids (I pay about $7,500 annually in federal income tax). I buy medicines regularly, and visit my doctor at least quarterly, and my dentist at least semi-annually.
"Gotta have it now" will get you down the road. Count on it.

[banca rotta]

There is no question the stock market is another bubble. It's been a bubble for over 20 years that the fed just keeps on inflating.

The Chinese economy also is just a bubble and that will pop sooner then ours. They are building high end homes and buildings where the "average Chow" doesn't have the Yuan for this.

Once it pops and they buy even less US debt then they already are, then our biggest bubbles of them all, our national debt and dollar denominated assets will finally pop.

[tigergem]

Wow. That is quite a sobering post. Frogger, pass that bottle over here. This Xue guy just wasted my bedtime buzz. Oh. Can we afford it or is this luxury putting us in the red?

[bobbyquefour]

ANYTHING that I have left over post-bankruptcy, which will be VERY little, is still better than before BK......I will feel rich even though I will financially still be poor.

[BobMango]

ANYTHING that I have left over post-bankruptcy, which will be VERY little, is still better than before BK......I will feel rich even though I will financially still be poor.

This is too true, but doesn't include the whole picture. In my case I was paying more than $40K in income taxes every year and now after taking a lower paying job (post company merger), my taxes are under $10K. So while my annual income has dropped more than $70K, my tax bill has dropped by more than $30K. Factor in that I am no longer carrying the debt load I had before, with a raise or two I'll be in much better financial shape in fairly short order.

I was effectively paying a 50% tax rate on that last $70K. Given the level of stress pre and post, it definitely wasn't worth it.

[blankslate]

My road to bk started long before the current Administration. During the Bush years as a single parent, I lost EVERYTHING. Everyone was living on credit which drove prices for everything up - gas prices, housing prices, food, etc. I had no credit and no credit cards and my single income was considered "Middle Class" so my taxes went up. I had to give up my nice townhouse after being laid off for the 3rd time in 1 year and move us into a tiny one bedroom trailer. Had to give up the car that I could no longer afford payments on. I was working two jobs, making twice the money I had before and paying twice the taxes. Many weeks went by that we lived on rice and beans and I had to borrow $20 from a co-worker just to put gas in my car. This went on for 6 years.

Dec. 2008 I filed bankruptcy. No more wage garnishments. Taxes are slightly down. Since credit is so hard to get, prices are coming down. My fridge and cupboards have been full of food for over a year. It feels fantastic. We have a two bedroom apartment that costs almost twice as much as the one bedroom did and I can actually afford it easily. I make about the same salary as I did before. Now housing prices are coming down too and while I wait out the 2 year mark to buy my first home, rents are going down. We're moving to a bigger, newer apartment with way more amenities in a nicer area for $100 less a month in rent!

I'm not wealthy by any means, but the fact that I can "get by" comfortably and even afford something nice now and then, makes me feel rich. It's all a matter of perspective and in my perspective that "hope change stuff" is working out just fine for me. I actually have some of that now.

[WhatMoney]

Well, Average Joe making $50,300 could make it fine if he would not have financed that $40K SUV. A family of four can live on $600/mo food easily - stop buying prepared meals and deli food. The income tax calculation is wrong too. Federal income tax on $50,300 for a family of 4 with kids is only $8. The FICA 7.65% payroll tax is $3,863, so his Fed tax bill including SS/Medicare and assuming no other deductions or credits, is $3,871, not $4,100.

I put in more reasonable expense numbers for Joe, only $500/mo for transportation, and he has $1,127/month left - which is plenty of wiggle room.

Of course a high state income tax and sales tax will reduce this to about 1/2 that amount. He's surviving - not living like a king, but getting by and saving $5K to $10K per year for emergencies or vacations. His health care costs will be going down in a few years too as the HCR provisions kick in.