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.

17 comments:

  1. You can live off minimum wage but who wants to? Good skills and work ethic sell!

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    Replies
    1. Good skills are the most important thing. I know a lot of hard working people with a great work ethic that are being held back by a lack of skills.
      And acquiring those skills here in Texas? Good luck with that.

      Delete
  2. Don't forget- tax time. You will get almost all of your money back plus Earned In come Credit. You also qualify for food stamps at this level of income. In some states you qualify for health care as well.
    I agree with Daddy PAul- but the reality is that there are many people who cannot find themselves out of the min wage jobs- even with a good education. My nephew just landed his first full time job at 30. He has a degree and a good work ethic. The thing keeping him from a job? Lack of employment.

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  3. Janette, I figured the actual tax bill based on income for a standard deduction so if the witholding is right you won't get a rax refund. A person in the example would not qualify for the Earned Income Tax Credit. Also the income is just a little bit too high for food stamps. If you have dependents or other special circumstances then you might get tax refunds, tax credits or qualify for government aid but I was looking at just a single person.

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  4. There are some interesting issues or conflicts or gotchas involved.

    In many areas and especially in California I think, finding a room for $300 is going to be mighty difficult.

    If you rent a room, you are going to have food storage (refrigeration) constraints when there is only one refrigerator to store food for several people. So you're not going to be able to stock up on freezeables when they are at best prices.

    For that matter, if you rent a room you are going to have STUFF storage issues unless you live a minimalist lifestyle and Stop Buying Crap. Of course if you're earning minimum wage you're not going to be able to buy a whole lot of crap.

    Similarly, when several people share housing, the concept of energy conservations goes out the window, so to speak.

    Everyone figures that THEIR energy use costs THEM only say one-fifth of what they actually use, and the incentive to conserve is lost. And even if you conserve, that will save you only a few pennies a day because your conservation is split several ways.

    $100 per month for food works only if you have access to reasonably priced food (are not in a 'food desert') or can grow your own (participate in Community Supported Agriculture). Many farmers markets have discounts for food stamp recipients but none for the non-recipient earning minimum wage.

    Transportation issues will affect where you can live (you can't live easily in a lower-cost outlying area if it doesn't have bus service and you don't have a car) and how much you pay for food (if you can't easily get to the cheap food, you'll pay more for food.)

    There are a lot of constraints at minimum wage and a number of tradeoffs are required.

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  5. RB Boren, You make a lot of good points.

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  6. Most minimum wage jobs are not 40 hours per week, they are usually 20-30 hours per week, so the employer does not have to pay benefits. They don't guarantee you a certain number of hours, so you can't assume you get the full 30 hours each week. You would have to budget for 20 hours week, not 40. Also, the employer often expects you to be available at flexible hours (flexible for them, not for you), meaning you might be scheduled to work day shift one day, night shift the next, split shift the following day, be off a few days, etc. The hours you would be scheduled would vary, so that it would be very difficult to work 2 minimum wage jobs part time. And if the company would suddenly decide that lunchtime burger sales were down, and they need fewer people, suddenly your 20-30 hours might drop to 10-20. Even if you were lucky enough to find 2 minimum wage jobs that fit around each other, you would have difficulty using public transportation if you had to go directly from one job right after the other one. If you didn't have a car, you would have to carry your second work uniform with you, along with your second meal. And if you happen to be in Los Angeles, you wouldn't be able to do this at all, because the public transportation there is so poorly designed and poorly scheduled it would be impossible. The cheapest ghetto studio in LA is about $650 to $750 a month.

    ReplyDelete
    Replies
    1. Then don't live in LA.

      Delete
  7. You almost had it right just multiply the expenses by two and that's how it really is living off minimum wage.

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  8. Rent of $300 per month? Where I live in the Maryland part of greater DC, a single room is $500 or so, and that assumes you spend a lot of time (5-10 hrs. per week) looking and are ready to move on a moment's notice despite not being able to afford a car because the gas, insurance, depreciation, and repairs will crush the life out of you. Ordinary single room rent is more like $600/mo.
    Food of $100 per month? If you mix flour and milk, maybe, but you won't be able to include fruits, vegetables, nuts, meat, or eggs. And since you can't afford a car as discussed earlier you're going to be spending 3 hours for a round trip to the nearest Sam's on public transport and won't feel like carrying 30 or 40 lbs. of stuff with you since you would be needing to buy in absurd bulk...
    Utilities of $75 per month? Maybe, but that means no TV, no computer, miserable summers with limited A/C, low-flow showerheads, washing clothes in a 5-gallon plastic tub and hanging them on a shoe rack to dry, and limited cooking and dishwashing. Of course cooking will be limited already because the extra space you'd need for cookware and the stuff used to clean it would raise the rent...
    Transportation of $100 per month? Ok, if you can walk to work and back.
    Clothing of $20 per month? Reasonable, but you won't be able to go climbing or hiking since your clothes could be damaged or worn, and you'd better not get the wrong type of laundry detergent even once, if your clothes are damaged it will take over a month to recover on minimum wage...

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  9. nightvid, as I clearly said in the article 'its not easy'. If you live in a higher cost area then its even less easy. Food of $100 per month is certainly do able. $75 for utilities assumes shared housing and split bills and no TV or internet or phone. $100 /month will usually get you a bus pass and it doesn' cost money to walk. Yes as I said 'its not easy'. And in particularly high cost areas (DC metro ) its not really feasible.

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  10. Jim R.,

    I am skeptical that you can eat a well-balanced diet on $100/month without raising the rent (due to extra square footage necessary for cookware and dishwashing materials).

    Give me a list of one month's worth of groceries, and what you'd need for preparation. Take $1.70/sqft/mo for cabinets necessary for storage and cleaning of pots, pans, dishes, and utensils. Make it add to less than $100/month. You will get eternal bragging rights.

    My apartment is too small for that, but I save more on rent than the premium I pay in food for not cooking.

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  11. Nightvid,

    You can do $100 a month. Its not super healthy but its not too hard. Cereal for breakfast, sandwich and fruit for lunch and a frozen meal for dinner will easily get you under $100 without even clipping coupons or shopping around much. Course you can't go to the yuppy grocery store or buy organic. You go to the cheap grocery store and buy cheap stuff.

    I did do a $5 /day budget a while back but that would be about $150 a month
    http://www.freeby50.com/2011/04/example-5-day-grocery-budget-for-one.html

    Most housing has kitchen facilities or kitchen access.

    If you live in a super expensive area then its not very possible and if you are living on very low income then you really ought to move somewhere cheaper. As I said its not practical in expensive places like SF or NYC.

    I'm skeptical that $100 month on rent savings justifies you eating out. How much do you spend on eating out and where are you eating this well balanced diet??


    Jim

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  12. Jim,

    Not enough protein, too many carbohydrates, and not enough calories.

    I eat prepared food from the grocery store salad bar, a lot of lunch meat and bread, some fruit, and milk, occasionally a frozen meal as well, (almost) no eating out but no cooking either. Including a few splurges on drinks it comes to about $180/month, and being a young man in his mid-20s I need over 2400 Calories per day and over 15% of it from protein.

    Rent in the place with a decent kitchen for cooking and decent cupboards for storage was $120/month higher than where I live now. Add in $7/month for cookware+plates+utensils depreciation, $5/month for rental insurance on those belongings, and $5/month for cleaning, so I save $137/mo. by not cooking and spend $80 more, so I still come out ahead in the end. More importantly, I am healthy and happy!

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  13. $22 /month for depreciation, insurance and cleaning of your pots and pans seems inflated. Dishes last a long time and don't cost that much to buy. Renters insurance is fairly cheap and easily covers the cost of cookware without additional monthly costs. Cleaning dishes may cost you a couple extra bucks a month based on electricity (if you even pay it) and cleaner.

    I'd say your realistic cost is more like $2 not $22.

    Jim

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  14. I've saved all year to afford another car and it is the make or break scenario for me living in a rural area so I can get to work. I now get paid more than minimum but still things like buying a lemon with savings could leave me unemployed and destitute. It seems the climb out of poverty is done in stepping stones. By taking the next step with careful planning I can move up but my new car must last me at least two years. I'm surfing clunkers.

    ReplyDelete
    Replies
    1. Above comment said : "It seems the climb out of poverty is done in stepping stones."

      That sounds right to me.

      Jim

      Delete

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