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’m actually living this. I have been underemployed throughout this recession and it’s what happens when you have to take the lower end non-career path type jobs that are easily available. You barely DON’T make it . . .
Now, in 2008, the median home value was roughly $225K.
Yes, some bought at a peak, but the typical guy didn’t.
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.
Interestingly, look at the average american’s lifestyle. And this part cracks me up: Look at the homes “average” people live in in american movies and TV shows and then look at the homes the average people live in in British, Japanese, Irish TV and movies. Look at the kitchen’s and living rooms of those homes. Their yards, where they keep the washer and dryer (if they have one). And interesting picture emerges.
All that said, our taxes and the way they are collected sent me to my own Galt’s Plateau. Just as the purpose of a tv show is to get me to watch commercials, I feel as if the purpose of my job is to get my company to pay me wages from which the government will take a sizeable chunk and leave me just enough to keep me from bringing out the pitchforks and torches. And then they tax what I DO spend to live.
I literally feel like an indentured slave to the government. The answer is to ween myself from this “let them eat healthcare” lifestyle and learn to get by with less, but it is MY less. Freedom is worth more than all the riches the government “lets me have”.
My bro in law lives in the Phoenix area. I looked up his neighborhood on Zillow almost two years ago and a fascinating thing was apparent. Almost all the homes were valued at the $425k to $475K range, except about 7 of the homes were in the $235 to $275k range. I looked up the details and found one thing in common with all of the “cheap” homes: They had recently sold for that price.
Those 7 homes were showing the REAL value of all the homes in the neighborhood. :)
Good article. While I don’t agree with all the assumptions, most were spot on and the author was generous in leaving out some costs, especially related to raising kids.
The whole analysis is completely bogus, both overly rosy (leaving out state and local taxes) and overly dire, since the “typical Joe” raising two kids alone probably rents or owns a cheap starter home, rather than owning a median priced home.
I know more people that re-fied than didn’t. Most at the max that they could wring out of their equity, meaning that they actually have a mortgage based on 2006 or 2007 appraisals.
More sloppy math. That cost per mile is lower when you drive 15,000 miles (more than typical) because the fixed costs like insurance are spread out more.
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My family has a 300 car payment, 120 in insurance, and about $50 a week for gas. So we are at $620 right there without repair bills and tires and so forth, plus the cost that will accrue when we have to replace the second car which is paid for. Easily reaches the $700 that he is using in his article for his monthly.
I bought a brand new 1977 subaru and sold it after driving 138,000 miles. After adding in the price of gas, tires, spark plug replacement, oil, and all other repairs, insurance licenses and deducting the amount I sold it for, it cost me $.06 a mile. I kid you not. It impressed me because I read a few years later in one of my bicycling magazines that that is the exact same amount per mile it costs to ride a bike. :)
‘Course, that was then.
I found the article fascinating, but thought the author’s typical electric bill very underpriced. I wish I had gas and electric bills like that!
One thing for sure — in the USA ( unlike in most other countries, except maybe Canada or Australia, or perhaps if you live in the New York City and surrounding area), YOU CANNOT SURVIVE WITHOUT A CAR !
In Asia for instance, cars are not necessities. In the USA, without a car, it would be like your legs are being cut off.
Most families need to maintain more than one car.
*THAT* is additional expense most people in the world can do without.
I own a cheaper starter condo, but the monthly fees get outrageous. Hard to find people that are not paying at least 1,000 a month if they bought after the late 90’s.
I found the article fascinating, but thought the author’s typical electric bill very underpriced. I wish I had gas and electric bills like that!
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Depends on your house size. He is looking at a family with a small square footage bought in the 2000’s.
And you think it doesn’t pay to be an illegal alien here, not paying taxes???????
‘running in the red every month’ , putting it on credit cards he couldn’t pay off...
The assumptions are calculated on a one breadwinner family. That may have been true in the 1950s but its not true today. Both husband and wife have to work of necessity to keep the family afloat and to make ends meet. If you’re the only provider and have kids then things begin to get tough. Life has never been easy and not even liberal policies are going to help most people “get by.” Just the opposite by adding more expenses they must figure out how to pay for on top of those they already have to take care of.
“since the “typical Joe” raising two kids alone probably rents or owns a cheap starter home, rather than owning a median priced home.”
Median priced means median income. It isn’t the more wealthy buying median homes.
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