3/28/2011 4:14 PM ET|
How to live well on $40,000 or less
Two couples share tips on owning a home, raising kids and enjoying life on a modest income. It doesn't require huge sacrifices, but you have to be focused.
An MSN Money reader took issue with one of the couples I profiled in "How to become a one-income family." The couple had lived on $30,000 for a while but were now bringing in as much as $70,000 because of a successful at-home business.
"Please write an article that shows what a real family living off of $40,000 a year can do," the reader scolded.
So I did. In fact, I'll show you two:
- Tracy and Danny Kofke, an at-home mom and a special-ed teacher, live near Atlanta with their daughters, ages 3 and 6. Adjusted gross income: just over $36,000.
- Amy Halloran and Jack Magai, a freelance writer and an arborist/choreographer, live near Albany, N.Y., with sons ages 7 and 12. Adjusted gross income: about $30,000.
A lot of people live on less than that. In fact, both families are still well above the current federal poverty guideline of $22,350 per year for a four-member family. I chose them because they live in or near large cities, rather than in the deep (and cheap) countryside.
If you can own a home and raise kids in metro Atlanta on $36,000 a year, as the Kofkes do, you obviously have something to teach. And even though Halloran and Magai lucked out with cheap housing, their annual income is slightly less than the federal minimum wage for two people.
Savvy spending and a certain amount of sacrifice let them live in ways that mirror their personal values -- and they do it debt-free. Here's how the two couples make it on a lot less than some people think you need to survive.
Strategy 1: Know where every dollar is and where you want it to go.
The families chose to live on less -- the Kofkes so that Tracy could be home with their children, and Halloran and Magai so that they would have more time for family and artistic pursuits.
The biggest tool in their frugal arsenals is careful attention to spending. Danny Kofke clears about $2,200 each month. Major monthly expenses include:
- Mortgage: $850
- Food: $466
- Roth IRA: $250
- Internet/TV/phone: $160
- Utilities: $150
- College funds for their daughters: $100
That leaves about $200 a month for everything else, from gasoline to new shoes. The Kofkes are OK with that.
"We may not have it all, but we have enough," says Danny, 36, the author of "How to Survive (and Perhaps Thrive) on a Teacher's Salary."
Amy and Jack have similar expenses:
- Mortgage: $900
- Food: $400
- Retirement: $833
- Internet/phone: $170
- Utilities: Heating and cooking are wood-fired
When the Kofkes want something special -- a 50-inch HDTV, two diamond bands for their 10th anniversary -- they tighten their belts, save up and pay cash. Both families manage some travel to see relatives. Amy and Jack own cellphones and iPods. The Kofkes have satellite television service for that HDTV.
Tracy, 39, earns money here and there by painting murals and banners, providing child care and teaching art classes. Half goes to savings and half shores up the budget. But since that income is unpredictable, they budget to live on Danny's salary alone.
"We know where every single dime goes," Tracy says.
Strategy 2: Start with cheaper housing.
Housing is generally the biggest drain on any budget. After two years of teaching abroad, the Kofkes bought a home in Florida. A couple of hurricanes later, they moved to Georgia. They bought a three-bedroom place: less house than they qualified for, but big enough for their needs and small enough to be affordable. A 15-year mortgage helps them pay it off faster. (Assume that's always better? Read "The 15-year vs. 30-year mortgage debate.")
Amy and Jack left expensive Seattle in 1999 and headed east in search of a duplex with some land, figuring that a tenant and a garden would lower their costs. They found an old triplex set on three-eighths of an acre for a scant $38,000 -- and financed only $18,000 thanks to a generous first-time homebuyer grant.
Their original mortgage was $125 a month, far less than the property taxes. That changed recently when the couple took out a home equity line of credit to do major renovations. (See today's home equity rates.) The mortgage is now $900, but two tenants kick in a total of $550.
Inexpensive housing is a must for people with irregular income. It also lets the couple divert one-third of their earnings to retirement accounts.
Strategy 3: Get creative about meeting needs.
The books stay balanced thanks to a mix of old-time and modern frugality:
Tracy gets a ton of children's hand-me-downs from friends. She makes some of her girls' clothes and all of their Halloween costumes, and sometimes does a little sewing for pay.
She watches sales carefully and estimates she saved $1,600 last year by using coupons. Danny carries his lunch to work every single day. The family will enlarge its garden plot this year.
They hang on to their vehicles, a car bought new nine years ago and a used minivan they got when Tracy went back to work briefly in 2005. Both will be driven until the wheels fall off.
Jack and Amy buy only used vehicles, including one truck for work-related tools. His arborist business provides all the wood they need to heat their home, a huge advantage in their cold, snowy region. Most clothing comes from thrift or consignment shops. They buy health insurance from a state program that offers coverage for small-business owners.
The family has a large garden and supplements it with fruits and vegetables from an Amish produce auction. (Sample price: butternut squash, 50 cents each.) Sometimes Amy stops by a farmers' market at the end of the day to propose a trade: the couple's unsold strawberries or bok choy for some jars of homemade jam or kimchi.
The couple forages (with permission) from fruit trees in their area, pressing their own cider and cutting up and dehydrating apples. The older son, Francis, taps trees and produces up to a gallon of syrup per year. Weasels killed off the family chickens, but they plan to buy more.
Amy cooks from scratch -- including bread, yogurt, ketchup and chutney -- and cans and freezes excess produce. "We eat fairly high on the hog (because) we can get great ingredients cheap," she says.
The way they live is the way that I (and perhaps you) grew up: Most clothes handed down through cousins and then my two older sisters; two pairs of shoes a year (bought a size too big so we'd "grow into them"); a few toys at Christmas, but never during the rest of the year; a garden that yielded many summer meals and whose surplus was frozen or canned for winter; all meals prepared from scratch and eaten at home.
Everyone I knew lived that way. That's probably why I was able to cope as a broke single mother, washing diapers on a scrubboard because I couldn't afford the quarters for the laundromat -- and again when I left my marriage and returned to college, packing the same bagel-and-apple lunch each day.
Both couples have a more modern frugal hack as well: the rewards credit card, which both use and pay off in full each month. The rewards are taken as cash, naturally, and funneled back into their budgets.
Strategy 4: Get even more creative about meeting wants.
The Kofkes are fans of their city's recreation department, whose benefits include tumbling classes for Ava and Ella, free entertainment such as magic shows, and of course the library for books and free DVDs. Tracy is about to start a two-day-a-week preschool teaching job that includes free tuition for 3-year-old Ella.
They rarely eat out, but once a week the girls spend the night with their grandmother. That's "date night" for their parents: a dollar movie rental and a sub sandwich from the grocery store.
Amy and Jack barter their skills to get music lessons for the boys. They get a lot of useful items for free thanks to word of mouth, discards left by the side of the road (the source of cabinets and a sink for their kitchen remodel) and The Freecycle Network.
They've also developed their own network of like-minded individuals interested in reducing, reusing and recycling. Almost any need can be met within the group.
"I don't like to see useful things going to waste," says Jack, 47.
Strategy 5: Stay true to your goals.
Living this way is not easy, but it is satisfying. Amy sometimes tires of spending so much time hustling for jobs (the freelancer's curse), and occasionally wishes she could travel more. Even so, she's very happy with her life.
"It's not like I want other, better things," she says. "I don't feel deprived."
In recent months, the Kofkes have had to deal with a major auto repair, the medical co-pay for Ella's tonsillectomy and a furnace breakdown on a Sunday (much more expensive than on a weekday). Money siphoned out of the emergency fund had to be put back in.
And then there's the occasional "what if?" moment, such as watching a flashy car zoom past your 9-year-old beater.
"Of course I want it," Danny says.
But to get it, he'd have to take a second job, or his wife would have to go back to work and put their younger daughter in day care. "So far, there has been no item that has been worth (the trade-off)."
Tips from the pros
This lifestyle cannot succeed without a budget: Lower earnings mean less margin for error. Start with the absolute minimum you need for food, shelter and utilities. Finding out how little you need is actually liberating, says CPA Sally Herigstad.
"You have a lot more options when you're not a slave to high living expenses," says Herigstad, the author of "Help! I Can't Pay My Bills!" and a frequent contributor to MSN Money.
That budget should also include irregular or unpredictable expenses (class pictures, traffic tickets). "Leave some room for that so you're not putting your income all the way down to zero," says Kimberly Palmer, the author of "Generation Earn: The Young Professional's Guide to Spending, Investing and Giving Back."
A few more suggestions:
Planning a change? Start saving now. The Kofkes chose to start living on Danny's salary even before Tracy stopped working. The trial run proved they could do it and also yielded an emergency fund.
Think outside the mall. Brainstorm ways to meet needs for little or nothing. When relatives ask what to give the children as gifts, Tracy suggests things like ballet class. Jack and Amy visit a nearby university at the end of the school year, when students discard everything from bookcases to canned goods.
Educate yourself. Personal finance sites like MSN Money's Smart Spending blog, online urban homesteading resources and plain old library books have plenty to teach.
Look for extra income. Neither couple relies on a single paycheck. "Diversity is the name of the game if you're not going to have one big funding stream," says Amy.
Remember what frugality gets you. "Time to spend with your child, or the freedom to start your own business," author Palmer says. "If you love your life, it's worth any $200,000-a-year job."
Save money today
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Safe at home: Want to keep your family and your valuables safe? Check out "A master thief's home-security tips."
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Wow, many of you people have no clue. I would consider myself rich if I was living off of $40,000 a year. My husband and I are in our early twenties and live off of about $1600 a month, which is not even $20,000 a year. We spend $500 a month for rent for a 2 bedroom apartment in a duplex. Lawn care is the only thing included. Utilities (water and electric) run us about $100 - $120 a month depending on the season. Our cell phones cost $60 a month for 700 shared minutes and 1000 texts each. We do not have cable, home phone, or internet, even though we could get all three of those for $150 a month if we wanted. We have no need for cable or a home phone and the library is less than a mile from my house, so I can get internet for free there. We have a paid off 07 Chevrolet Malibu, but there was a time when that added an extra $220 a month to our budget for the payment. Insurance for it costs only $85 a month. We use about $100 in gas a month. Food and toiletries and household items runs us about $60 - 80 a week, and we don't live off of rice and beans or ramen noodles. We spend maybe $200 each on clothes a year. We get most of our clothes from thrift stores or outlet stores. We don't have health insurance, but we have reasonably good health and we exercise and try to keep as healthy as possible. When we do get sick, we can go to a quick care clinic for less than $100 a visit, which we have only used a total of three times in the past four years we have been married. We occasionally eat out or go out on dates to the movies when we can get a good deal. Even after all this, we still usually have a little money left at the end of the month, usually about $100-$200, which we always place in our savings account to use in case of an emergency. We currently have about $3200 in there. We don't receive any kind of government assistance and we know we could live even cheaper if we had to. Don't say it can't be done, because it definitely can be done.
I am single with no children, but I will speak to those who say $400 for four people is impossible. My parents are from the islands and most of my friends as well. I will say the norm is about 2 kids and two adults in a family.
Growing up we did not eat out. The staple in the house was RICE (survival food) and some kind of meat/potatoe stew. We ate this way everyday growing up. Its filling and can last till the next nights left overs until another kind of rice was made (for variety) with another kind of protein.
As an adult, I will say, I miss the heck out of those meals. They were always good! and even as we grew older (the kids in the family) we always craved the home cooked food over pizza/mcdonalds even to this day.
My mom taught me HOW to cook economically. For example, I make meat sauce in a very large pan and use some for lasagna and some for sphaghetti...and those are my lunch and dinner for the week. It works well...for a family of four, I could see how they can survive on $400 a month...survival foods people...rice/potatoes/pastas.....they last and they are filling.
I completely agree that the above is a joke. There is no way these families are making it when the "unexpected things" happen.
I can tell you though, we live in the country and pay $750 in rent. So, to say the city is alot more expensive isn't so. Also, in our area $40,000 per year is way more of an average salary. Our county averages on $32,000. We are raising our 4 kids on a salary of $30,000 a year at this time and I am a full-time student. But, that means that we cut cable, we live without some simplicities in life and our kids thankfully don't have the eyes to see it yet. They have learned family night is watching a $1 movie from Redbox and maybe a splurge of $5 pizza from Little Ceaser's (if the grocery store didn't have a good sale on pizzas in the last few weeks)...
Amy and I are the product of parents who were deeply affected by the depression, but we were also shaped by the slacker/ DIY ethos of the 90s in Seattle. Our base frugality makes up for our distaste for planning. Thus, though budgeting seems like a laudable notion, we have never really been able to pull it off. We had a few episodes of money woes early on when my seasonal cash cow went dry for the winter. We learned that lesson, so now we make sure that there is around $20K in the bank as we head into winter. Luckily this hasn't been too hard. Luck is an important element of our success I think. For those who feel this is too deterministic, look at it this way -- success depends on how sharp an eye you keep out for what luck brings your way. And the habit of looking is a deeply-ingrained lesson which we are careful to teach our kids and share with those around us, including the readers of this column.
Cars: over the pas 7 years we have been given two usable cars from my parents & a friend, combined blue-book value of 5K. We live in a small city 10 miles from the metropolitan center of our area, so our total annual driving (including deductable business miles) is under 20K miles. Thus the fuel and repair costs are low. Still when a repair is needed we always ask for an assessment of the life of the vehicle, and say to the mechanic I'll have to talk to my husband/ wife about it and get back to you. We had one vehicle to share between us for almost a year because the right car wasn't coming along. During that time we had to borrow cars from neighboring friends. We also loan our cars to them.
Childcare: We have friends in the neighborhood with kids, and we take turns looking after them as a group. To achieve this we keep an eye out for buildings for sale and entice like-minded people to move here. 3 have done so in the past 8 years. The article didn't mention community much, but it makes a big difference. A lot of meals at home are joined by neighbors, around our big table, and that makes the frugality enjoyable.
The house: We bought a very solid brick building, in an undesirable location, needing very little other than cosmetic work. I do almost all the work on it myself. Insurance is cheaper on a less valuable building. The downside is that we have less equity than somebody in a more desirable area. We don't have cable TV.
There's no car payment, insurance for house or auto, heat, auto expenses like gas, tires, oil changes, brake jobs, etc, and no property taxes mentioned. And what about job loss insurance? If he gets laid off, unemployment won't be enough to cover the mortgage. The price of housing is atrocious.
People can be so narrow-minded. They read these articles then complain about how it doesn't work in reality or won't for them. Well thats because most aren't willing to make the sacrifices! One of these couples LEFT the HIGHLY overpriced (and overrated) West coast housing market to find more affordable housing options. So it would be hard for it to work on the west coast, which is why they didn't stay there but if you don't want to move, fine, don't. She's not saying everyone can live on one income or on $40K. She's telling you you can live well on less if you make different choices. But don't say this doesn't work just because you have different situations.
Most people CAN rearrange their lives to save more money or live on less but they are so caught up in the 'how success looks' that they won't. So articles like this are dismissed instead of contemplated. If you want to live on less, try it. Maybe you don't want to or have to live on $40K which is fine. Use whatever figure is feasible for you. Or...be like all of these other people that lose income and take a dive off a roof when the Range Rover gets repo'd.
My Husband and I (35 & 41yrs old) make about $80K gross combined. That's not a lot of money but it's feasible for where we live. We moved from our 1800 sq ft $1300mth house in the 'burbs to a fixer upper 980sq ft mobile home. We bought it outright with savings for a mere $5k. My family was horrified that we'd be labeled 'trailer trash'. Others kinda frowned on it. We didn't care what other people thought. We have an aggressive goal of saving $40K in cash in 2 years so we can move to a little place near our Coast. We also want to travel more. We couldn't do that without some kind of sacrifice. So we figured out what's important to us--big frou frou house with unused rooms or living debt-free and being free to roam. So we bought our mobile home, put 3k in it to fix it up to our standards and ultimately dropped housing expenses (incl utilities) down to roughly $350 per mth. We built in a buy back clause so when we move in 2 years, we are selling it for $14K which means $6k in profit. We still have our cell phones, cable, put money in our 401K's, go out to eat sometimes so we are not living like peasants. The addtl amount we save means we live on basically $55K per year. We are paying down the one remaining credit card which will be paid off in Oct. I opted NOT to buy a new car when my 12yr old clunker died. We dont have mass transit and both work outside the home so we had to do something. We opted to get a $1400, 2001 Truck from craigslist instead of getting new one. We have one nice 4yr old car (with one payment left-woot). Now people can't figure out how we can afford to travel pretty much whenever we feel like it. We never argue about money. We don't fear minor emergencies. We hate the high gas prices but they are not going to undo us. We don't even fear job loss- we actually could live on one income, though it would slow down our plans considerably and we don't want to live on one income. Just saying we could if we had to...
The one change of not buying a new car (which is what most people feel they must do before even paying off the ones they have) & moving to what some consider a 'trash park' (our park is very nice, everyone must own, no crime, no scrounge) is all it took for us to change our lives from being Like everyone else vs living OUR way and very soon without debt. In less than 2 years, we'll be able to move to the Coast without stressing or putting off our dreams until we're too decrepit to enjoy them.
If you want to you can too. It's all about choices and deciding what you can live without. Or you can keep doing what you're doing.
I guess the people in her examples don't pay for medical expenses, health insurance, or auto insurance, or auto maintenance, or home repairs, or toilet paper, or shampoo, soap, cleaning supplies, deodorant, gas for the lawn mower, lawn mower tune-ups, property taxes...
Great article as usual. My husband and I (kids grown, but we still help them out) live on about $20,000 per year. We have no mortgage or any other loans. We have all the insurance requirements and eat very well. We even travel several times a year. We live very frugally and have a great time doing it. We work part-time and have lots of freedom which we wouldn't trade for meals out or any other so-called luxury. I'd rather head for the mountains with a picnic lunch than head off to work to buy a meal in a restaurant. One of the commenters said you only live once, which is very true, and I'd rather live free than stuck behind a desk all day.
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