An annual income of $57,432 for a family of four (two adults and two children) sounds like a solid middle class existence, doesn’t it? Consider this hypothetical family who are not exactly living the “American Dream”:
Our hypothetical family living in Minneapolis, Minnesota, consists of two parents who earn a total of $57,432 per year from jobs outside of the home. Each parent works 40 hours a week, for 52 weeks each year. One earns $20,000 annually and the other earns $37,432, before taxes. They have two children, ages seven (in elementary school) and three (in full-time day care).
This family literally has nothing, not one cent, left over after paying for a subsistence lifestyle that covers only their most basic needs. To estimate what this family’s budget might look like, I used mostly estimates and assumptions from the Jobs Now Coalition report which you can read here: http://www.jobsnowcoalition.org/reports/2010/cost-of-living2010.pdf. I modified these estimates in a few places a bit by using other information I was able to find looking at various rental housing ads and day care information for Minneapolis.
Our hypothetical family’s annual expenses are as follows:
Food: This family cooks and eats all of its meals at home, and buys its groceries following the USDA “Thrifty” family food plan, the lowest cost family food plan for which the USDA calculates data. Our hypothetical family’s monthly grocery bill is $572.
Total annual food cost: $6,864.
Housing: This family’s housing expense is based on renting a two-bedroom apartment that is decent, safe, and sanitary rental housing of a modest (non-luxury) nature. The costs include utilities of heat, water, electricity and gas, but not telephone service, which is included in the “clothing and other” category. Our hypothetical family’s costs are based on the HUD fair market rent (FMR) at the 40th percentile level, meaning that 60% of the rents in the area would be higher than this family’s housing. Their monthly housing expense is $900.
Total annual housing cost: $10,800.
Health Care: This family’s health care expenses include insurance costs as well as out-of-pocket costs. The deductible for the health insurance is assumed to be $1000 with a 20% copayment. The budget for this family is a weighted average of costs of employee contributions under employer-sponsored insurance plans for family coverage and under private non-group coverage, plus average out-of-pocket costs for this sized family. This family’s monthly health care cost is $569. With two adults working, chances are better that at least one of them has employer-provided health insurance, and that the worker pays an average of about 25% of the premiums for the employer-sponsored health insurance policy, which would result in a lower monthly and annual cost. If neither parent is able to cover the family under an employer-sponsored health policy, however, this family would have to purchase a non-group private health insurance policy at a considerably higher cost.
Total annual health care cost: $6,828.
Transportation: In this family all workers drive to work and the costs of driving to work, school, church and grocery and other necessary family driving are included in the monthly estimate. Costs of social/recreational uses of their car are not included. Public transportation costs are not used in this budget because less than 5% of metropolitan area residents in Minnesota who work outside of the home get there by public transportation. The assumptions for costs are for working five days/week for 50 weeks/year. Average commuting distances are used for Hennepin County. The transportation costs are determined using $.55/mile, the IRS reimbursement rate which is designed to account for all costs of maintaining and operation an automobile, including fuel, repair, depreciation and insurance. It is assumed that this family travels about 1,250 miles per month, or about 15,000/year.
Total annual transportation cost: $8,292.
Child Care: The three-year old goes to full-time day care, and the school-age child goes to after-school care for 3-4 hours each school day. The school-age child also goes to full-time day care for 12 weeks in the summer when school is not in session. This family’s child care expense for the three-year-old is an average of the costs of center-based child care expense and in-home day care in the metropolitan area. Center-based care is generally more expensive than in-home day care, so this expense would be less if they can find acceptable home-based care, but more if they use a center. The after-school and summer care for the seven-year-old is assumed to be provided by the Minneapolis Parks and Recreation Department’s Rec-Plus program for school aged children. This family’s monthly child care expense is $1,083.
Total annual child care cost: $12,996.
Clothing and other necessities: Included here are clothing, telephone service, household furnishings, cleaning and house maintenance supplies and personal care products, using averages for families with young children, and the lowest cost basic telephone service. The averages for personal care items and clothing are adjusted downward by 50% to assure that only the most basic needs are included. Minnesota sales tax is included on all items except clothing and shoes. This family’s monthly expenses for clothing and other necessities is $316.
Total annual clothing and other necessities costs: $3,792.
Net taxes: This category includes the net effect of taxes and tax credits. The taxes are payroll taxes (Social Security and Medicare) and federal and state income taxes, but not property taxes which are included in housing expense category, and sales taxes which are included in the costs for other categories. This family’s net tax amount per month is $655.
Total annual tax costs: $7,860.
Summary and grand totals:
Annual income: $57,432
Total expenses: $57,432
What is not included in this budget: There is no provision in this budget for education or training beyond high school, debt payments (such as for student loans), life insurance, retirement or other savings. There is also no provision in this budget for saving for a down payment for a house. No provision is made for any vacation expense, expense of owning pets, entertainment such as movies or sporting events, gifts of any kind (including birthdays and Christmas), or any restaurant meals. There is no provision for fees for children to play sports or purchase any toys or sports equipment. There is also no provision for any kind of big ticket items such as washing machines, televisions or computers. There is nothing provided for high speed internet access, cell phone service, or cable or satellite television service. This is a bare bones budget.
BUT WAIT! This family’s budget is a whopping 256% of the 2011 United States poverty line which is now $22,350!
Our textbook asks us to consider what sorts of items this family could cut out of its budget for it to be considered officially poor and eligible for certain government assistance programs. The first place to start might be the second income (the lower one). If one parent did not work outside the home, half of the income is lost, of course, but the family would save $12,996 annually on child care. It would also save about $3,000 on transportation costs. Interestingly, foregoing one income also saves considerably on taxes because of the interplay of tax brackets and low-income tax credits. This family’s annual tax bill would drop from $7,860 to around $300. Considering that in our hypothetical family, one parent earns only $20,000, so quitting this job actually saves them money!
Even after cutting all of these items out of the budget, this family is still a long way from the official poverty line, although they certainly are not living what you normally think of as a middle class life. If this family’s income dropped and they had to make more cuts, they would be dangerous ones to make. The family could chose to go without health insurance and to postpone necessary medical care for themselves and their children. If both parents kept working and they still needed day care, they might decide to “get by” by leaving the older child alone in a latch-key situation during the school year, and by leaving him with a stay-home relative or neighbor in the summer. These are not easy choices, as the quality of this kind of care (or no care at all in the case of latch key) may not adequately protect this young child. This family could try to save some on transportation expenses by moving closer to work, but that might entail higher housing costs. Another way to save on transportation would be to drive a cheaper, more fuel efficient car, but costs of trading one car for another usually involve spending money rather than saving it. This family could move to lower cost housing that is likely to be in an area of the city with higher crime, with drugs and gang violence. This family might scrimp on food and try to use food shelves to try to keep hunger at bay, at the cost of good nutrition for themselves and their children. They could try to find used clothing and shoes for their growing children at garage sales or ask other family members for hand-me-downs, at the possible cost of their self-esteem and pride.
The long-term impacts of this “subsistence budget” life on the children in this family are substantial. If the family experiences any crisis that depletes their budget in any way, they risk not being able to pay their rent and eviction. This family is one crisis away from homelessness. Even without such a crisis, with no money for savings, there can be no saving for college for the kids. Nor can there be any extras like music, dance, or tennis lessons. Summer camps and enrichments programs are out of the question too. If one of these children needs a private tutor to help with the math or reading, this family can’t afford it. This family won’t be paying for SAT/ACT review courses or college application fees either. If the children manage to get into college, it will likely be a community or less prestigious institution, and their chances of graduating are much less than children of more affluent families (Newman, p. 315). Having less access to higher education also means less access to the better paying jobs for these children as well.
It must be emphasized that this family is working hard, and is not enjoying any vacations, entertainment, restaurant meals, computer or digital technology, or even any birthday parties for their kids. Yet without better paying jobs, the American Dream seems to be just beyond their reach.
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