How much money do you need? Let's start with $100K
It's no wonder that people, even those who make an upper-middle-class income, aren't saving for retirement and are spending all that they earn.
This post comes from Bob Sullivan at partner site Money Talks News.
Editor's note: This is part of a series by Bob Sullivan called The Restless Project.
It seems like a simple enough question: How much money does a normal American family need to afford to be … normal? You already know what I'm about to say next: Coming up with a realistic average family budget is fraught with peril.
There are obvious geographic problems: What's normal in New York City is not normal in Omaha. There are honest questions about what "need" is: Some parents feel their kids need private school, others don't. Is normal a three-bedroom house in a leafy neighborhood, or an apartment? So it goes.
A brilliant professor friend of mine named David Cloutier, who is working on a book for Georgetown University Press about luxury, kicked this question around on Sunday. His research addresses the issue that people often confuse need and want, and this leads to all sorts of trouble, including financial trouble. (Here's one of his essays).
Of course he's right: We all know folks who spend too much on granite countertops, Wolf ovens, Cadillac Escalades, and a fourth bathroom. On the other hand, I am often in the position of defending middle-class Americans who are slowly slipping further and further behind, even while it seems like they make a lot of money.
I think they are forced to pay too much money for decent housing near decent schools, and that pretty much wrecks every budget, whether or not they splurge on restaurant food and nice shoes. Add in occasional thoughts about lack of retirement savings and college costs, and you have a lot of restless parents.
Back to this weekend's exercise. David and I discussed what kind of income an American family needs to live a normal, decent life. I want you to help us. Below, I'm going to lay out the framework of a family budget, and I want you to say what I'm missing. Or, what's excessive.
There are some ground rules to make the discussion a little more focused, but feel free to break the rules if you like. Just leave an explanation, such as, "Where I live in Columbus, Ohio, a three-bedroom apartment only costs $1,400."
Before we start, a few numbers for context. The median household income in America, the point at which half of households earn more and half earn less, is right now $53,891, according to Sentier Research, which bases its math on census data. Of course, that number stacks families in San Francisco against families in Columbia, Mo., so it's a bit misleading. An interesting starting point, however.
So here goes. For the purposes of discussion, we're talking about a hypothetical four-person household: A married couple with two children younger than 10. We're going to assume both parents work and that the family must pay for child care for one while the other goes to a medium-priced private school. They live and work near one of America's largest cities -- Washington, D.C., or Seattle, or Chicago. The goal is to come up with a number at which a family of four should feel like it's at least paying all the bills.
To make it simple, we're going to have them rent a three-bedroom apartment, rather than pay a mortgage (where they would benefit from the mortgage interest tax deduction but be on the hook for repairs and property taxes).
Also to simplify the exercise (admittedly, a bit farcically so) we are describing the amount of money a typical family spends to be normal, which is very different from income, which would be seriously impacted by a variety of taxes: federal, state, and perhaps local income tax, sales taxes, auto registration fees, and so on. This is the amount a family needs after all those taxes, and all those tax deductions, are taken into account.
Still, with all these limitations, it seems a worthwhile conversation to have, if for no other reason that it's a good excuse to examine the monthly budget, something few of us do very well. Here's my first stab at it. Note that I've gone with big round numbers to make your personal comparisons easier.
When I do my back-of-the-envelope calculation, I come up with a nice round number of $100,000 of spending power. Also, please note the budget includes nothing for emergency savings or retirement, which should be getting at least another 10 percent or so of this family's money. It also doesn’t include emergencies, expenses for elderly parents, or unexpected high-ticket health care costs like braces.
Personal finance columnists keep writing breathless stories about American families not saving for the future, even "upper-middle-class" families who earn between $75,000 and $100,000 annually. This budget shows why.
One adjustment this hypothetical family might make is for the older child to attend free public school and the younger child to stay home with a parent. That saves $3,000 monthly and lowers annual expenses to $63,600, but it also means the family must live on one income instead of two.
So, what did I forget? What line item is unrealistically high? How does this budget match up with your budget?
More from Money Talks News and Bob Sullivan
Problem in this list is need versus want - let's get closer to needs..
Rent - chop 800 off that rent, you may lose a bathroom and the home office and the nicer finishes, but cut it down to what is needed. Why increase a landlord's net worth with so much of your take home? Say each are grossing 50,000 - roughly $25 per hour..one of you is working 90 hours to pay that 2,200 rent each month, roughly..keep 32 of those hours for yourself.
Cell phone - chop 100 off that, there are 4-person plans for 100/mo out there, IF you must have them.
School tuition - drop it and spend some time with your child doing homework, it'll be ok
Clothing and other supplies, cut that in half - save 250 - bury misc school supplies here.
There, 800 + 100 + 1,500 + 250 = 2,650/mo. 31,800 per year.
What to do with that - Save, between the 2 of you, 20,000 a year for retirement (will help bring taxable income down, saving about 3,600/yr if done pre-tax too). Sock another 6,800 away per year in a beginning emergency fund. Put 2,000 aside and teach yourself how to invest. Put 2,000 toward future tuition to assist the kids in paying for their college. 8,000 each when it comes time will help, but will require THEY get some skin in the game too.
Child care is expensive, but it won't be but a couple of years and that 18,000/yr expense is gone - increase retirement savings and set some aside for a substantial down payment on a home when that ends. To alleviate some of the expense during the early years, if you have shift options - have one spouse work earlier, the other a later shift - cut those child care expenses in half or more.
This could be a reasonable way for a $100,000 household to live normally AND look forward to retiring some day.
Interesting perception, but the real answer to his question on what's missing, well just like other posters... taxes, gas, savings and chairity. That said, what he thinks is needed may be close for some, but what I find more truthfully is that that's why our debt is so high. People think they need what they want and not really what they need. Like most posters, I could cut those cost down based on real need.
If you're living hand to mouth, look at the difference between what you need, verses what you want. Cable TV and iphones are nice, but you can't eat them.
I'll play your game. Let's say your goal is to save 10% of your income, or $10,000 a year. - Cut out the private school ($18,000). That will do it.
If your goal is to save 20% of your income or $20,000 a year, cut out the private school ($18,000), cut out the cell phone ($2400). That will do it.
Let's say you're 35 years old. That leaves 35 years to retirement. $20,000 a year invested at 6% will be worth $2,228,695 in 35 years. How much do you need ?
Crazy numbers, for at least for 90% of the country, and no mention of all the taxes the local-state-federal governments put on you.
Most can live comfortably on half, and in fact, most do. Out of touch and making numbers up is what qualifies as "brilliant" now?
So if you're including families that have been in their home for a while, that $2200 is likely to be closer to $1000.
You're sending your "average" kid to a $18,000 per year private school? The Catholic Schools in my area are between $6,000 and $13,000. The public middle school my nephew attends is a Presidential Blue Ribbon school ranked 2nd in Maryland (which is ranked 1st in its schools) based on the standardized tests in math and reading. The tuition is $0. The public high school he'll soon attend is ranked 8th in the state and is also a Pres. Blue Ribbon School.
He was asked if he wants to attend a prestigious Catholic High School with a $12,900 tuition. He replied that that public high school 1/2 mile from his house is rated higher, has higher avg. SAT scores, etc. and he wants to go there.
Those two things alone knock $32,000 off the money needed.
My guess is writer Bob Sullivan is too wealthy to have studied how the average American gets the best bang for the buck.
Hope in one hand and sh*t in the other and see which hand fills up first.
I make (individual) about the median income of $55k a year. After regular income taxes (federal, SS, medicare) my take home is about $3700 a month. That is reality and that is what I live on. Since you used a similar income for your family of 4 scenerio I'll grant you some child credit relief and assume neither working parent makes enough to warrent being taxed above 28% - so we'll call their income $4500 a month.
Health Ins. $600
School Tuition $0
Child Care (1) $1100
Student Loan $500
Clothing / Misc. $200
I'm pretty frugal and this is a scrape by on your belly budget - they're still not making it. Little Johnny is not going to a private school. Little Suzie is not going to a quality daycare, but a wharehouse. Beans and rice and rice and beans. They are screwed as most of us are with stagnant wages and rising rents and prices.
$100k is generous, but I'd say they need at least $75k to make it and not want to blow their brains out. The kids can sell drugs or maybe they can pimp the mother out.
Noone not on the dole should have 2 kids anymore - see above budget for proof.
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