February 3, 2011

Surviving on Minimum Wage? : An Example Budget

Can you live off of minimum wage?  I think it is possible for a single adult to support themselves with a full time minimum wage job.   Its not at all easy of course but with very careful and frugal spending you may be able to get by.   I really don't think minimum wage could support more than one person and in higher cost cities it may be nearly impossible to live on just minimum wage.   But for a large number of single adults living in medium or lower cost cities I think minimum wages are enough to survive on.         Before some of you get too upset about how it absolutely can't be done, bear in mind I think that there are various situations where it is not really possible. 

How much do you actually make

Federal minimum wage is $7.25.     If you work full time 40 hours a week and 50 weeks a year then thats about 2000 hours per year.   I'm going to semi-randomly use California state income taxes as an example.  Your state income taxes are likely to vary but aren't going to be significantly more.  

Income :   $7.25 per hour x 2000 hours a year = $14,500 annual income.

Taxes : Income tax = $515 using standard deduction, social security / medicare = $1,109.
State income taxes:    $255 estimate for California.     Total $1,879

After tax income :  $12,621 annually or $1,051 per month.

That gives us a little over $1,000 a month to work with.   Its not a lot.

How I come to my Budget

I'm starting with rough baseline costs for necessities and savings.   The dollar figures I give are example amounts only and of course everyone's unique situation will be different.   Undoubtedly some of the amounts are going to be too low or too high for a specific situation depending on the person in question and what city they live in.   I'm just using basic example numbers here to give a rough starting point.   

First, the Necessities

Lets cover the basics of shelter, food, clothing and transportation: 

Monthly spending for the mandatory basics :
Rent : $300
Food : $100
Utilities : $75
Transportation : $100
Clothing : $20

Notes on each of these major entries:
Rent :   I have only $300 dedicated for rent so this assumes you're sharing housing or renting a room.  With this little income to live off of having private housing is not affordable.   In many higher cost cities this may not even be practical. 
Food : I'm using a very minimal bare bones $100 monthly food budget.  This would give you just over $3 per day to spend on food.  That is not much at all, but it can be done with careful frugal spending.
Utilities:   I'm using a rough estimate number of $75 for utilities.   In many places your utilities may be lower.  I'm assuming only basic household utilities like electric and gas.  This does not consider phone or cable.  In shared housing I'd also assume you split utilities.
Transportation: I consider transportation costs to be generally mandatory since people need some way to get around either public transportation or a car.   A monthly bus / metro pass is probably the best option here.  A car simply may be too expensive depending on the insurance costs and usage.  In some cities you can get around by just biking or walking but that doesn't work well in Northern winters or many less pedestrian friendly cities.     If you can you may choose to go without transportation costs which will cut your expenses considerably.
Clothes:   I put in $20 for clothes.   If you shop at thrift stores and hunt for bargains that should be enough money to keep you clothed.

Again the numbers are just baselines to meet basic living needs.   You may desire to spend more on certain categories above the baseline amounts here.  If you do want to increase a particular expense then you can do that with discretionary money after we've paid all our basic bills and covered all the basic needs.

Save for the Future

Now that we've covered the basic costs of shelter and food and such we should put some money aside.   I put paying down debt and health insurance in this category because in a way they are similar to savings.   Paying of debt and having insurance is planning ahead for your financial future much like putting saving in the bank.

Savings or Paying down Debt: : $100
Health Insurance : $150

Paying off Debt :  Hopefully you aren't in debt but if you are then you should focus on getting rid of the debts.   If you currently have debts then you should use the snowball method of paying off your debts one at a time.   I would first start by building some sort of emergency fund as a reserve, and then dedicate your savings money to debt pay off instead. 
Savings :   I'd like to save about 10% of income.   This should be put aside for emergencies or other misc. costs.   It will also double as retirement savings.   You could put a portion of your savings in a Roth IRA so that it will grow towards retirement but still give you access in case you need it for an emergency.   Roth IRAs are a good option for anyone in a very low tax bracket since you'll be locking in low tax rate today and get tax free withdrawals when you retire.

Health insurance :  Health insurance may seem too expensive on such a tight budget.   I think that health insurance is something you should make room for in your budget.    You can use an online site like eHealthInsurance to shop around for an individual plan or sign up for the low cost option at your employer if they offer one thats practical.   You can keep your monthly costs lower by getting a HMO or POS plan and choosing a higher deductible option.    Health insurance costs vary a lot from state to state.   At eHealthInsurance I can get a minimal high deductible plan for something around $100 to $200 range.  

Spend the Rest however you need / want

So for I've accounted for $895 in monthly spending.    We started with $1,051 in monthly after tax income so we've still got about $156 left to spend per month.    That money can be spent on items you need to increase your budget for basic items where you desire. For example you could spend a bit more on transportation if you'd really prefer to have a car.

Some items you may want to spend any left over money on :
Cell Phone: pay as you go plan for $10 / month
Home Internet : $20 to $40 for a basic high speed account
Pet : you could afford to keep a pet but if you encounter costly vet bills it may be a real problem
Hobby:  you might set aside a budget for your favorite hobby
Gifts : giving is important to many people and this may be a portion of your expenses

Many gotchas that keep it from working

I've tried to present what I think is at least a somewhat realistic basic budget plan for someone to support themselves on minimum wage.   But I realize that this just wont work in various situations.
Large debt burdens:   If you've got $750 in monthly loan payments then it would not be possible to live on just minimum wage.
Higher cost living areas:  I don't imagine its possible to live on minimum wage in a city like New York or San Francisco.
Major emergency costs:  Inevitably something bad may happen that presents you with a major financial set back.  Even if you do have health insurance a large medical bill could give you significant out of pocket costs.
Special needs:   You may have ongoing costs that not everyone else has like medical prescriptions or

Bottom Line:  It would be difficult to survive on minimum wage.  In at least some cases I think a single person can 'get by' on minimum wage income.

Minimum wage sign image from DOL site.

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