Food Spending by Family Size

Last year I wrote about Grocery Spending by Income Group.    Yeah you guessed it, rich people spend more.    Today we'll follow that one up with the sequel and look at how much families spend based on family size.

I got the data straight out of the BLS Consumer Expenditure Survey .   Specifically the numbers below are from the tables for Size of consumer unit.


First family size and spending on monthly basis :

Pretty obviously, bigger families spend more.

But what about the amount spent per person? 

There the trend reverses and for larger families they spend less per person.    I assume this is due to a couple factors.   First I'm assuming that the larger the family the more smaller children and I'd assume smaller children consume less food (usually).     So a typical family of 4 with 2 little kids isn't going to eat as much per person as 2 adults would.   Second I'd also guess that larger families are better at economizing on their food spending due to necessity.   Its one thing to splurge on the steak if you're a single person but buying 5 steaks is going to hit your pocket book a lot harder.


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Which Debt Should You Pay off First?

I recently saw someone asking what debts they should tackle first.   When you are deciding which order to pay off debts you should generally pay off the highest interest rate debts first.   But not all debts are created equally even if the interest is the same.    Some debts are worse to carry due to their nature and there are other concerns than just the interest rate.

Below I  list what I think are the priority order of debts you should repay in general.  I start listing the worst kinds of debts and then move on to the lower priority debts.   This is not meant to be any kind of hard fast rule or anything since every situation is different in various ways.   This list of debt priority is more a generalization and there will be exceptions.

Here are what I think are the priorities for repaying debts :

Worst kinds of debts :
Loan sharks -  This item is mostly tongue in cheek as I would hope you don't borrow money money from the type of people who would break your knee caps.   But in case you do owe money to any criminal types its a good idea to pay that back and not borrow from them again.
Court judgements or fines - Any time a court tells you to do something its in your best interest to do what they said.  We don't have debtors prisons in the US but courts still have a lot of power to punish you for not obeying them, even if its dealing with with just paying parking ticket or a debt judgement.

Payday loans - Payday loans, car title loans or any other short term debt will generally have the worst interest rate terms. 
Pawn shops - While they may be a bit cheaper interest than payday loans the pawn shop loans generally carry collateral and you can lose your property if you don't repay within the terms of the loan.
IRS Tax debts - The worst thing about tax debts to the government is the power that the government has to collect the money.   If you do owe the government taxes then you should work with them to setup repayment terms.    The IRS isn't the worst lender out there and their terms are often better than you'd think. 

State or local tax debts -   State or local governments are pretty similar to IRS debts in general.  You want to get that paid off so the government doesn't punish you.   I don't know how generous the terms are for state/local levels and they may vary drastically.
Buying stock on margin -

Debts to friends and family (maybe) - I list this one because sometimes borrowing money from friends and family can lead to very uncomfortable situations and strain the relationship.   You should do your best to pay back relatives and friends as soon as possible.   Even debts with fair terms between relatives that trust one another can end up harming the relationship if you fail to pay back the loans.   The amount of interest often doesn't impact this situation as much, its more the fact that you owe them money  and they are worried about getting it back.   But this situation varies based on the friends or relatives.  Some relatives and friends don't worry as much if they know they can trust you.  For example if your rich uncle loans you some money to go to college then they may not worry much if you don't pay them off right away.  But even there its not good to abuse the situation and you should make payments as required.  If you do borrow from people you know then make sure to sign a promissory note and pay them interest, that will help the situation.
401k loans -   I am not a hater of 401k loans, however they have disadvantages.  The key problem with a 401k loan is that usually if you lose your job you have to pay back the balance immediately.   If you can't do that they cash your 401k out and pay it off for you which then incurs taxes and a 10% penalty.  This is a real risk with a 401k loan and you should pay them down to avoid that happening. 

Higher interest debts: (over 7%) 
High Interest Credit cards - Typical credit card interest is in the 15-30% ballpark.   That is among the most expensive debt you can carry.   If you can't pay off a credit card then you may be able to do a balance transfer to get a good promotional rate on another card.



Paying down PMI on a mortgage - Usually the amount of PMI on a home loan is going to cost you effective interest rates that are in the ballpark of 10%.   That includes the interest on the mortgage itself plus the PMI.   You can figure it yourself by taking the (annual PMI cost ) /  (amount of equity your short of 20%) + mortgage % rate.
Higher interest student loans - Student loans follow you for life.   You can't get rid of them in bankruptcy (with rare exception).    Many student loans carry interest rates of 6.8% which is a relatively high rate but not excessively high.  But some student are higher and can exceed 10%.


Car loans - An auto loan isn't the worst kind of debt and worst case you can sell the car.  But on the other hand you generally don't want to lose your means of transportation.  Auto loans may have higher interest rates as well, and some of the worst ones are over 10%. I've occasionally heard of them hitting the 15-20% level.

Higher interest personal loans & peer-to-peer - You may be able to get a personal loan from a bank or credit union without collateral.   These are often better than credit cards or payday loans and the like, but still often carry fairly high interest.   My credit union offers rates around 8-12%.  In this day thats a very high interest rate.   You can also get personal loans from peer-2-peer lenders like Lending Club or Prosper.  I'd put those in a similar category.

Floating rate or promotional rate debts
Adjustible Rate Mortgages (ARM) - An adjustable rate mortgage may give you a very low current interest rate.   Amerisave says I can refinance my house to a 5 year ARM at just 2%.  Sounds great.  However when interest rates go up in the future that rate will climb.   That loan can go up 2% a year and could hit 7%.  If that happens your monthly payments could nearly double.    Its not easy to pay off a home mortgage for most of us given that this is usually a very large amount of money, but with a mortgage you usually have the option to refinance an ArM into a fixed rate loan.  Even if your house is under water and you owe more than its worth the governments HARP program can help you refinance to a reasonable fixed rate.
Home Equity Line of Credit or HELOC - A home equity line can be had for fairly cheap right now, assuming you can get one.   The rates are currently pretty low since they are tied to indexes like LIBOR or the prime.  For example my credit union offers loans as low as prime + 0.5% and that is about 3.75% right now.  But that credit line is variable and could go as high as 17%.
Temporary low interest promotional rates - You can often make purchases of furniture or other major home items with 0% deals.   These promotional rates carry a big 'gotcha' in their contracts.  If you do not pay off the debts in full before the end of the promotional period then they levy high back interest for the entire term.  Make sure to read the terms of any promotional deal and pay them off within the term to avoid any penalties.


Medium rate debts (5-7%)
Student loan debts - Depending on when you got your loans and the exact terms, it is possible to get student loans with relatively moderate interest rates.  These aren't a extremely high priority but certainly worth paying off to avoid the interest costs.   Plus as mentioned earlier you really can never get out of student loan debts so you should pay them off when you can.

Lower Priority debts

Rental / Business loans -  If you have debts versus collateral that is used for business purposes then that kind of debt is not generally as high a priority as loans against your personal property.   For example a mortgage on a rental is not as high priority as a loan on your own personal residence.   Worst case if you lose the rental you simply lose an investment property, but if you lose your primary residence then you may be homeless.     You should however of course try to pay down or refinance higher rate loans.   Today is a great time to refinance a rental property.   As long as your rental loans are low interest and you're cash flow positive then I see no reason to need to pay them off fast.


Low fixed rate debts (under 5%)

Personally I don't worry much about paying of low interest debt fast.   If you have a fixed loan and the interest is low then this is not a high priority to pay off fast.    If your debts are in the 5% or lower level and are fixed and have no other risks or problems then these should be your lowest priority of debt to repay.   In some cases I would not even worry about paying the debts off faster than the term of the loan.   For example with mortgages down as low as 3% level I see no need to pay those off fast.  Inflation will grow faster than that and in a few years you can probably get over 3% in various safe investments.

Keep in mind like I said above, this is pretty general in nature and theres always exceptions since everyones situation will be unique.
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Pay Off Your Student Loans Before Saving For Childs College

Recently I've seen a couple people listing their budgets that include items for both savings towards a child's 529 plan and paying of parents student loans.   If you're in your 20's or early 30's then it may be common to have a balance on your student loans and also have children.

Most student loans tend to be in the 6-8% range and some private loans can run higher interest rates than that.     Paying interest on those loans is costing you money. 

Generally speaking most people should pay off their own student loan debts before they start saving for their children's college via a 529.

I understand how parents naturally and rightfully feel a need to put their children first.   However saving for your children while paying your own debts doesn't really benefit the children.  You need to ensure your family's finances in general to benefit the stability of your children.  Eliminating debt and having a good solid family financial condition is pretty important for your children as well.   

Theres several reasons why paying down your student loans first makes sense.

For one the relatively high interest rates on student loans are a guaranteed cost and you'll do better avoiding that guaranteed interest cost as opposed to hopping for growth in a 529.

Theres no guarantee your child will go to college or need the money.   They may not want to go to college or they might end up with a handsome scholarship. 

Financial aid can help your child pay for college or they can take out loans of their own (just like you did).


Two Exceptions : 
Low interest loans.   If your own student loans are particularly low interest rate like in the 2-3% range then I would consider it OK to pay them off slowly.  
Generous 529 incentives.    A small handful of states have tax credits for 529 savings.  Indiana gives 20% and Vermont gives 10%.   For those two states saving in a 529 can make sense so you benefit from the tax credit.  Most states only give a deduction and a deduction isn't generally worth it.


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Grocery Spending by Income Group

The BLS CEX has data on average spending in food categories covering grocery spending and spending on eating out.   They have tables that break the data down by income groups.  The data here is from 2011.

First we can see the amounts that people spend on eating at home and eating out based on income groups :

Click image for full size

I also thought it would be interesting to see what percent of the grocery budget for food eaten at home goes to different types of foods.   For example : Do poor people eat more carbos and less veggies as a portion of their entire grocery budget?   Or do rich people spend more of their budget on steaks and fancy cheeses? 

I found it interesting that there is fairly little variation in the percent of the grocery budget that goes to each category across income groups.   The differences in % of total budget spent across income groups varies only 1-3%.    For example every income group spends 9-10% of their grocery dollars on nonalcoholic beverages.   Now of course we can see from the first chart that peoples spending on groceries goes up with income.  However the portions spent in each aisle of the grocery store seems to stay fairly consistent no matter how much you make.   So poor people and rich people spend about 10% of their grocery money in the beverage aisle, 22% in the meat section, 11% on dairy, etc.


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Average Annual Spending By Single People

The BLS has the Consumer Expenditure Survey.   One of the tables breaks down the numbers based on the number of people in the household.   This gives us an easy way to find the spending for single people.   This is the 2011 data.

Here are the main categories  and the annual & monthly amounts:

 

	yearly	monthly
Food at home	$2,072	$173
Eating out	$1,567	$131
Alcohol	$370	$31
Rent/mortgage	$7,176	$598
Utilities	$2,380	$198
Household operation	$692	$58
Housekeeping supplies	$348	$29
Household furnishings	$859	$72
Apparel and services	$1,021	$85
Car purchases	$1,235	$103
Gasoline /motor oil	$1,399	$117
Other vehicle	$1,418	$118
Public transport	$316	$26
Health insurance	$1,232	$103
Out of pocket medical	$880	$73
Entertainment	$1,522	$127
Personal care products	$388	$32
Reading	$90	$8
Education	$782	$65
Tobacco	$255	$21
Misc	$577	$48
Cash contributions	$1,446	$121

Now I've renamed some of the categories from the CEX report and I've rearranged a couple of them.  I did that just to present it in what I think are simpler budget categories.    There are a few things to keep in mind with these numbers.   They are averages across the entire population and not everyone spends money on all of these.   So for example most people don't spend $255 a year on tobacco but the 20% or so of people who do buy tobacco probably spend $1275 a year and averaged out that comes to $255.  

Gotta have a graphic so there's the categories shown with percents :

(click image to see full size)

 Here's the list sorted by the size of the spending  per category: 

	yearly
Rent/mortgage	$7,176
Utilities	$2,380
Food at home	$2,072
Eating out	$1,567
Entertainment	$1,522
Cash contributions	$1,446
Other vehicle	$1,418
Gasoline /motor oil	$1,399
Car purchases	$1,235
Health insurance	$1,232
Apparel and services	$1,021
Out of pocket medical	$880
Household furnishings	$859
Education	$782
Household operation	$692
Misc	$577
Personal care products	$388
Alcohol	$370
Housekeeping supplies	$348
Public transport	$316
Tobacco	$255
Reading	$90

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It Doesn't Really Cost $287,000 to Raise a Child

I saw 2-3 blog articles lately about the government estimate on how much it costs to raise a child.

I found one article from CNBC titled The Inflation of Life - Cost of Raising a Child Has Soared discussed the topic.    The title says the cost has "soared" and the article explains that the cost cited has "surged 25 percent over the last 10 years".   Now I don't know about you but +25% in 10 years isn't exactly "soaring" inflation.   In fact just simple math tells us its no more than 2.5% a year on average.   Thats below what I'd expect for a normal inflation rate.   I have no idea how the author of that article thinks this is "soaring" prices.     But anyway thats a separate topic, the meat of the matter is the actual amount the government figures it costs to raise a kid.

For that they say :

"The government's most recent annual report reveals a middle-income family with a child born in 2010 can expect to spend roughly $227,000 for food, shelter and other expenses necessary to raise that child - $287,000 when you factor in projected inflation."

 $227,000 total over 17 years comes out to about $13,350 annually.    Thats a pretty hefty sum.   Must be a lot of diapers and texting plan charges.

That article was talking about the 2010 numbers from the 2010 report.   However the government just put out a 2011 report this month.    I first wrote up this article talking about the 2010 numbers cause I didn't see the 2011 data yet.  Then I found the 2011 data and had to rewrite bits.  So if I got some numbers mixed between 2010 and 2011 then thats probably the reason.


Where does this number come from??

For that we need to go to the source.   Who is in charge of determining how much children cost?   Why the U.S. Department of Agriculture of course!



"Spending" doesn't equal "Costs"

Looking at the 2010 report a couple points stick out ; 

1) "Child-rearing expenses vary considerably by household income level."
The range is pretty wide from as low as $8,480 among low income families up to to $23,690 for higher income folks.

2) "Since 1960, the first year USDA produced child-rearing expense estimates, the Consumer
Expenditure Survey (CE) has been used as the basis for the estimates."


The data they use is the Consumer Expenditure Survey.   Thats the BLS survey about how much households spend.     The data is really based on how much people spend rather than how much it costs.    How much people spend is not the same thing as how much something costs.

Consider these two questions :
a) How much does it cost to feed a person?
b) How much does an average American family spend on groceries and eating out?

Do you think those are the same question?   I do not.

I assume the answer to a) would be a more minimal or basic cost and the answer to b) would be a higher than required amount.    Our actual spending patterns include spending that is not necessary.   For this reason I don't equate average spending to cost.  

They also break down the spending of different income groups.   Lower income families spent $8,480 while more affluent families spent $23,690.    What we're actually getting is not the cost to raise a child but the average spending per child for a middle class family.


Where does the money go?


Here is a graph from the report indicating the % of total spending for each budget category from 2011.

Click image for full size

And here is how the amounts in each budget vary across the age of the child for 2011:

Here are the totals in table format for each category :

Age	Housing	Food	Transportation
0-2	$3,920	$1,400	$1,690
3-5	3,920	1,490	1,740
6-8	3,920	2,100	1,860
9-11	3,920	2,400	1,870
12-14	3,920	2,580	1,990
15-17	3,920	2,570	2,150
Total	$70,560	$37,620	$33,900

Age	Cloting	Health care	Child care and education	Misc.
0-2	$760	$850	$2,860	$890
3-5	610	800	2,740	1,090
6-8	680	940	1,680	1,110
9-11	710	1,000	2,110	1,100
12-14	840	1,410	1,910	1,170
15-17	900	1,330	2,400	1,050
Total	$13,500	$18,990	$41,100	$19,230

and the totals are :

Age	Total
0-2	$12,370
3-5	12,390
6-8	12,290
9-11	13,110
12-14	13,820
15-17	14,320
Total	$234,900

Note that this is for the middle income family with before-tax income: $59,410 to $102,870 (Average = $79,940) and both parents present.

Housing is about 1/3

The 2011 report says : "As a proportion of total child-rearing expenses, housing accounted for the largest share across income groups, comprising 30 to 32 percent of total expenses on a child in a two-child, husband-wife family.."

Housing is a large portion of the cost to raise a child.  You may not think about this really since you have to have a house and adding a child to the family doesn't really  seem like it adds to your housing costs but it does.   With more children you need (or at least want) more bedrooms.   Those extra bedrooms require more space which costs more.   The larger house has higher utility costs, maintenance costs, etc.   It all adds up.  

They figure housing costs by the extra bedrooms required for children.   Plus they then add in any associated costs for that bedroom like extra utilities, etc.     They give a figure of $3,920 for middle income families.   That comes out to about $327 per month for housing.    That seems inflated to me.   I don't think that going from a 3 bedroom 1500 sq ft house to a 4 bedroom 1600 sq ft house would really add $327 to the monthly costs of that house.    Currently the median home price is around $160,000.   You can finance that for about $900-$1000 monthly PITI, plus add in maybe another $100 for repairs and $300 a month for household utilities and you get say $1400 per month total for housing.   In fact this is about the total housing spending for a middle income family according to CES.  Should one extra bedroom account for 23% of housing costs?  I don't think so.  I'd assume more like 10-15%.    Cut 1 bedroom and 100 sq ft out of a typical house and it won't cut your total costs by 23%.  Repairs and maintenance won't go down much and at worst would be proportional to the amount of square footage for a bedroom.   Same goes for utilities.  I think its more realistic to figure an incremental cost per bedroom of closer to 10% of household spending or about $140 per month.
I think the USDA probably overestimates the real incremental cost of housing a child by around 100%. 


Childcare and education seems high at older ages

Why does childcare and education cost $2,400 for your 15-17 year old kid?   I'm guessing this is mostly for education.   I know that there are some costs for k-12 education that parents carry like fees for sports or clubs, but I don't imagine the average runs north of $2000 a year for middle class families.    Yes I do realize some families do spend a lot of money on sports but that is not so common that the average would end up at $2400.   I suspect this may include the cost of private education spent by some families.  I assume that CES data would include that cost in family spending survey.

Food includes eating out and isn't frugal

About 40% of the food spending in the CES data is from eating out.   Otherwise families often aren't particularly frugal in their food spending.   I don't think that the figures cited are particularly high and I dont' doubt those are the typical averages, but they are higher than what is really necessary.

Does it Really cost $1690 a year to drive a baby around?

The USDA figured transportation costs for children as a % of total household transportation spending.   The 2010 report says "For a child in a two-child, husband-wife family, the per capita method (factoring in only family-related travel) resulted in approximately 15 percent of total transportation expenses being allocated to the child"    So roughly speaking they're assuming that if a family spends about $10,000 on transportation then 15% or $1690 of that is due to the child.    If you have to drive a baby across town to child care then I guess it could add up to that amount.   But I think this is a pretty inflated number that probably over states the amount children add to your transportation bill.  


Whats it really cost?

How much do you want to spend?     Seriously theres no single right answer to how much it costs to raise a child.    There are many variable expenses and some are optional entirely.    I don't think the USDA measure is really wrong, it is just answering a different question.   They answer the question asking "how much do average Americans spend".   Thats useful to know but its not really the same as answering "how much do children cost".   I think the USDA gives you a ballpark figure that is probably higher than necessary.   You can certainly raise children on much less than the $234,900 total they figured.   Poor people do it all the time.  

If I were to throw out a figure I would guess that the USDA number is probably inflated by around 50-66% give or take.   I think a figure of $8000 or $9000 per year is probably more realistic and reasonable for a fairly good baseline spending amount.   However this is just a pure guess on my part.   The amount you can spend varies greatly.   Past basic costs for food, clothing, shelter and medical care it truly does depend on how much you want to spend more than anything.



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Drop Out of Society and be a Hippy Farmer for $500,000

Have you ever wanted to drop out of society and become a farmer?   I've had those day dreams on occasion.  Of course I don't know much of anything about farming and  I never particularly enjoyed working in my parents vegetable garden.   But this raises the idea in my head of a sort of retirement that is an 'off the grid' lifestyle.   But this I mean achieving financial independence by having sustainable lifestyle and minimal cash expenses.   If you own a home, buy a solar panel for your electricity and grow all your own food in a garden then you could be effectively financially independent with relatively lower up front costs.    This kind of lifestyle is probably more along the lines of a hippy commune rather than modern farming. 

I figured it would be a fun exercise to try and determine how much it would cost to fund such a lifestyle.

Some assumptions :

1) You'll need to live in a semi-rural or rural area.   I'm just going to look at properties in my general area with sufficient acreage.   Costs for real estate vary substantially.   Ideally for this to work well you might do best by relocating to a low cost area of the country.   Furthermore an area with a mild climate and some sun could keep your heat and electricity costs low.    I'm not sure what area of the country would work best for this kind of thing, somewhere in the rural South could work well.
2) You'll produce your own food.   This will require some acreage and it will take time. 
3) I assume you won't have to pay income taxes since your income will be pretty minimal.   You won't owe social security or medicare either as you won't have wages.  Your tax liability should be close to zero other than a property tax bill.
4) I'm assuming that you are not taking advantage of government welfare programs like food stamps or medicaid.   Its possible you might qualify for such programs if your income and asset levels are below thresholds but I wouldn't want to plan nor be dependent on government handouts.
5) For any ongoing expenses I will assume that money in the bank can be drawn out at a 4% rate and that it will last forever.   This is not a 100% safe assumption as a small % of the time  you can run out of money.   Alternatively I could figure on buying an immediate annuity if you're old enough and that will help you manage expenses indefinitely.
6) I'm generally assuming a frugal lifestyle with basic necessities and no frills.   I'm sure there are various expenses that people would want to add to what I list here so keep in mind I'm not trying to cover everything for everyone.


Sorting the budget categories.  

Some expenses can be crossed off by up front capital spending and others are going to require monthly spending.   I'm not going to make my own toilet paper or evade paying property taxes so a certain amount of spending is unavoidable.

Spending categories that can potentially be covered via one time up front costs:
These are the expense categories that you could cover via one time costs.  For example if you buy a house outright then you dont' have to pay rent or mortgage payments in the future.  Or if you buy solar panels you won't have to pay for the electricity. 
Housing - Buy a home with land. 
Electricity - Buy a solar panel array and/or wind turbine
Heating - via electricity and/or wood furnace
Food -  Grow your own fruits and vegetables and raise livestock
Water - Via water well
Garbage - Recycling, composting and burning.
Television - TV antennae

Expenses with mostly unavoidable ongoing costs : 
Health insurance - Find a high deductible plan
Property taxes - No way around this usually.  Might get discounted rate for rural farming use, low income or homestead.
Auto insurance - Insure just one car with cheapest plan possible.
Gasoline - Minimize driving
Auto repair / maintenance - DIY everything possible.
Household items / clothing - You could be a total cheapskate on some of these items but at some point you need to buy some new clothes somewhere and I don't think theres good free alternatives to buying some toilet paper.

Optional expenses :
Internet -You could pay anywhere from $20 to $50 for typical internet plans.   Internet service could provide multiple benefits such as phone via VOIP or entertainment via online steaming.
Phone -  A cheapo pay-go cell phone will run you $5-10 a month.  Barebones landlines are usually in the $20 range. 


Housing - I found a house with a 5 acre lot for around $100k to $150k range.   That will cover your food and housing in one.  This is not a fancy house at all and is likely to need some repairs.  Depending where you live, if you shop around you can likely find cheaper housing with acreage in rural areas.
Electricity - A quote on FindSolar.com says that a solar array to cover electricity use of $80 per month in my area would cost me about $30k after tax incentives.   If I put $24k in the bank and drew it down at 4% rate then I would have enough to spend $80/mo or $960 a year on electricity.  Given that math I'm better off just buying electricity from the utility.   However I could get a smaller array 1/4 the size for just $5000 after taxes and cover 25% of the cost.   I could combine a $5000 solar array and $18,000 in the bank and cover my electric costs for total cost of $23,000.  Wind turbines could also work if you live in a relatively windy area.   A 900W turbine could cost around $3000.
Heating - I could heat the house with electricity.   That would roughly double the electricity needs and cost me another $24,000 if I just bought electricity from the utility.   Or I could buy extra land and harvest wood to burn in a fireplace.   Another property with 16 acres instead of 5 acres costs about $180k or $30k more than the 5 acre home.   So that extra 11 acres is about $30k more.

$200,000 total would cover a house with 15 acres of land and a solar panel that would generate all my electricity and heat needs.  

Health Insurance - The cost of health care is a potentially huge problem to account for long term.   Health costs have been rising faster than inflation for a while and this is one category that is hard to plan for.  I'm not going to try and solve that here but I'll just estimate a relatively cheap health care costs and cross my fingers.   Of course if you were to do this for real then planning for your health care costs would be a major item that I wouldn't just ignore or hope for the best.   But I'm just doing this as a thought exercise so today I'll ignore the huge looming problem of health costs and figure for basic health insurance coverage.    Ok... enough disclaimer... Shopping at eHealthInsurance I find policies that would cover a family of 4 with a large deductible.   Monthly premiums are around $350 and the deductible + maximum annual out of pocket runs $5000 to $10,000 range.    If I wanted to cover that $350 monthly premium out of pocket indefinitely then I'd have to have about $105,000 in the bank.     The cheapest plans run $200 to $250 a month but they have deductibles totaling $20k for a family and out of pocket maximums around $50k.    Either way I figure I'm looking at $125,000 in the bank to indefinitely cover health insurance and out of pocket costs. 

Property Taxes - If I assume that the property tax is a straight 1% of the property value then I'd be spending about $2000 a year on this tax.   $50,000 in the bank would cover that indefinitely.

Auto insurance, gasoline and auto repair - I'm sure many people would argue that a car isn't necessary for such a lifestyle and I understand that.   I however have always had a car since I've been 16 and I would prefer to keep the ability to drive.   A car can also be a virtual necessity in a rural area.   If I drove one car and had nothing but liability then the auto insurance would probably cost $300 to $500 per year.  I'm going to assume $450 just to pick a number.   Very minimal driving of just 20 miles a week would add up to only about 1000 miles a year.   If I bought gasoline that would cost $200.  Repair and maintenance will also cost a bit, but if you DIY all that then you just have to pay for parts.  I'd estimate another $250 annually for repair/maint.   All in thats about $900 per year for the car costs.   $22,500 in the bank would cover all the auto costs for one cheap car driven minimal amount.

So far I've got a running total of nearly $400,000.   Half of that would be spent on a house and electricity generation.   The other half would be set aside in the bank to cover future costs for health insurance, automotive and property tax.    If you throw in another $100,000 in the bank that should give you money to cover the other items like household expenses, toilet paper and some optional spending on an internet connection.

I figure that $500,000 in up front and ongoing spending could potentially cover a semi 'off the grid' and back to the land semi retirement lifestyle.    Of course this is just an example and I'm sure the costs will vary pretty drastically based on where you live and the details.


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Household Spending on Alcohol and Tobacco

I used to smoke cigarettes but I quit several years ago.   That habit cost me thousands of dollars over the years.   I am probably classified as a 'social drinker'.   I don't drink alcohol regularly but I am known to have a drink now and then.   But honestly at this point I cant remember the last time I actually had any alcohol and its probably been at least a couple years.   This is one area that I spend a lot less than average compared to most Americans.

The average American household spent $412 on alcohol and $362 on tobacco products in 2010.

That figure is from the BLS Consumer Expenditure Survey data for 2010.   They also have the spending broken down by income quintiles. 

First of all is the total dollar spending :

As you can see the amount spent on alcohol goes up increasingly with income.   Most Americans drink alcohol of some form.   Interestingly  a Gallup poll found that the percent of people who drink alcohol increases with income.   So part of the increased spending is due to more people drinking.  I would also assume the increased spending is due to purchase of higher cost alcohol.   On the other hand tobacco spending peaks in the middle quintile and is lowest in the highest quintile.   I would assume here that the spending amount is based mostly on what percent of the people in the quintile are tobacco users.

Its important to point out that the average spending figures here include all households including those that do and do not drink alcohol or smoke tobacco.   Only about 20% or so of Americans smoke tobacco so most households would have a $0 expenditure on tobacco.  However if you average in the spending that the 20% or so do incur from tobacco then you end up with the averages given.   On the other hand over 60% of Americans drink alcohol, so most households do have spending on alcohol.   Most of them do so in moderation but some people have a problem and they should look into how to get sober from alcoholism. 

Now lets look at the spending as a % of the average income for the quintile:

For both alcohol and tobacco the spending as a % of the household income goes down as incomes increase.  Lower income households spend nearly 5% of their total income on alcohol and tobacco while the highest quintile spends just about 0.7%.  

Portions of this article sponsored by Drug Treatment.com.
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How to Not be "Poor" on $100,000 a Year

 In another of the long line of upper income people whining about being poor, downtrodden or failing to make ends meet I bring you :  First Person: How to Earn $100,000 and Still Feel Poor    I will give the author credit that their sob story is not nearly as bad as if it came from someone making $250,000 or $500,000 a year.  However I still fail to see how the majority of the country which manages to survive on less than $70,000 a year would have much sympathy for someone who makes considerably more money.

One of the worst parts of the article is when they ask : "Is six figures the new minimum wage?"  

No.   It is not.   Making $100,000 is nothing at all like making minimum wage in any way.  There is really no comparison whatsoever.    Minimum wage is $7.25 an hour.  That works out to $15,080 per year if you assume 40 hours a week for 52 weeks.     Making $100,000 a year is not at all similar in any way to making $15,080 a year.  To me this seems like someone asking if caviar is the new Velvetta cheese or if Mercedes-Benz is the new cross town bus ticket.

Lets examine the authors allegedly 'poor' life.

Here are the facts that I got out of their article:
1. Family income "recently topped" the $100,000 level
2. They live in Tampa Florida area
3. Expenses include:
utilities : $350 
car insurance : $300
internet, cable, phone $175
mortgage : $1222
car loan : $300
gasoline : $500
food : $1000
4. They have 2 sons in community college and they're spending $15,000 annually on books and tuition and one son covers $5000 of the costs.
5. They also say : "We bought a new car this past year so our son could earn money for college delivering pizzas."
6. Their house is underwater, which isn't uncommon nowadays especially in Florida.   They are paying extra towards the principal : To try to stay above water on our mortgage, we pay an extra $250 a month to the mortgage company."

Their take home income

First she says that their income recently topped $100,000.   From that I can assume they are only marginally above $100,000 level.    This doesn't tell us what their take home income is after taxes but we can guesstimate that.   A family of 4 with $100,000 gross income would have a federal income tax bill of approximately $10,650 with the minimum standard deduction and exemptions.  They would also have to pay about 5.65% currently towards social security / medicare or another $5650.  Their taxes would be about $16,300 per year.    That excludes any possible deductions or credits.  They live in Florida which has no state income taxes.   I could be wrong on this guesstimate but I'm probably not far off.   That leaves them $83,700 annually or $6975 per month after taxes.

Spending

The sum of the expenses they listed is $3,847 per month.   They also have college expenses of $15,000 or $1250 per month.   They put $250 extra towards their mortgage.   In total they document spending of $5,347 per month.

Income - Spending

The monthly income I figured at $6975 and their documented spending  is $5347.    The difference is $1628 per month.    Thats a pretty healthy amount.  Its feasible this money is eaten up by some retirement savings, health insurance premiums and miscellaneous undocumented spending.  

Problem areas

Looking at the areas that they spend money on I see three items right off that appear to be too high.

Food:  They are spending $1000 and she claims "our food budget just provides the basics for four people".
That is about 25% more than average spending per person.   The Consumer Expenditure Survey says that average household with 2.5 people spends $6129 annually on food.   That works out to $204 per person monthly and this family is spending $1000 for 4 people.   The average American household spends about 40% of its food budget on eating out so its not even especially frugal.   She does say she has two boys in college, so maybe those two boys eat a lot.   But I don't really see how someone could say that $1000 per month for 4 people "just provides the basics".   Thats over $8 per person daily.

College:  I'm not sure how they could be spending $15,000 a year on tuition and books for a community college in Florida.   I looked up community colleges in Tampa and the tuition rates seem closer to $3000 a year there for in state rates.  I know college textbooks are pricey but they aren't that expensive.   I think something is missing in this information or they are actually going to some sort of private junior college.  Either way they really should not be spending so much money on community college.  

New Car Purchase :  She says that they bought their son a new car so he could make money delivering pizzas.   That makes no sense to me.   You certainly do not need a new car to deliver pizzas.

I am not even going to go into their other expenditures like the $350 for utilities, $300 for insurance and $175 for their internet, cable, phone bills.   I think its quite likely they could cut those bills further if they wanted to.

If you are able to save money, pay for college out of pocket, eat well, have a reasonably nice home, drive new cars, and do the other things this family does then there is really no reason for them to 'feel poor'.

Nobody making $100,000 a year should be complaining about being poor.

 
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Low Cost of Living versus Higher Wages

One common idea in personal finance is that it is beneficial to live in an area that has a lower cost of living.   Keeping your expenses lower is a basic tenant of financial success.   Living in a lower cost area can have a huge impact on your finances.    The other side of this however is that wages are generally higher in the high cost areas and lower in the lower cost areas.    You could pit this as a choice between lower costs and higher income.   Whats better?   

Do you come out ahead living in a low cost city and earning lower wages or living in an expensive city with higher pay?

To examine this issue I decided to do a case study for one profession in a few cities.   I am arbitrarily picking both the profession and select cities to look at for my case study.

I'm going to look at one profession : Computer programmer.    I picked that because its close to my own career field and because I think its a relatively high wage job where pay rates also varies considerably from city to city.    If the wages for an occupation do not vary from city to city then its much more of a given that you'd do better in lower cost cities.   If your wages are relatively low then again it is much easier to come out ahead in a lower cost city.

I'm going to look at 4 cities that are in different cost categories :

Very expensive : San Francisco CA
Pretty expensive : Seattle, WA
Pretty cheap : Minneapolis, MN
Very cheap : Grand Rapids ,MI

Basically I chose these cities because San Francisco and Seattle are likely to have more programmers that get paid larger wage and then I chose Minneapolis and Grand Rapids as semi-random examples of lower cost cities to use as alternatives.    You might end up with entirely different results if you picked four different cities. 

Wage,  Housing and  Cost of Living

First lets look at how wages and cost of living compare for a computer programmer in the four cities.   Since housing is the largest expense, I'm going to pull that figure out as well.   I got average wage amounts for computer programmers for each city from the BLS Metro wage estimates for May 2010.  Median home prices are for Q3 of 2011 and I got them from the Realtor.org site from their metro median prices data.  (Direct file link).   Lastly I got the cost of living (COL) index figures from the Sperlings Best places cost of living site.

Here is the data :

	Wages	Median home	cost of living
San Francisco	$94,310	$491,000	185
Seattle	$92,840	$286,000	149
Minneapolis	$69,070	$160,000	108
Grand Rapids	$63,420	$111,000	84

Now if you simply look at pay rates proportional to home costs or cost of living index then everything falls in line.  Pay versus COL goes up with cheaper cities and the pay versus home cost increases as well.   we can express the ratios of Pay versus COL and pay versus housing as follows:

	pay/col	pay/home
San Francisco	$510	19%
Seattle	$623	32%
Minneapolis	$640	43%
Grand Rapids	$755	57%

If we simply stop there then it would be a given that Grand Rapids is the best city because your pay / cost ratios are the best there.   But real life is not so easy.    The ratio between pay and cost of living doesn't really mean all that much.   What really matters is the amount of money you have left over after your expenses.  

Lets look at an example of how that works : Consider two hypothetical cities A and B.   Lets say wages are $100k in A and only $50k in B.   Then lets estimate that the cost of living in A is 125%  more than city B so that the COL's are A = 225 and B = 100.  Wages / COL would be A = $100k/225 = 0.44 and B = 0.5   The wage / cost of living ratio is better in the cheaper and lower cost B city.   However what if your basic expenses are only $35,000 in city B and 125% more for $79k in city A.   At the end of the day when you take your wages minus total expenses you're left with only $15k in city B and $21k in city A.   You come out ahead in the more expensive city even though expenses are 125% more and wages are only 100% more.

With this thinking in mind its more important to look at how much money you're actually left with after accounting for wages minus expenses.

Disposable Income after taxes and housing


I'm going to figure an amount for the disposable income after figuring taxes and housing costs. This is an estimate of what a computer programmer would be left with in each city after paying taxes and a home mortgage.

I used MortgageCalculator.org to estimate the monthly payment for a $100,000 home at about $820 including principal, interest and property tax.   (note that property tax varies widely so this is a simplification on my part)   I then multiplied by 12 for a years worth of mortgage payments. This is the total housing cost in each city based on buying a median price home.   I am assuming 100% financing which isn't too realistic nowadays but it negates the issue of having to deal with varying size of down payments.

I used the tax calculator at Money Chimp to figure the federal income taxes assuming a married couple with 2 kids and only the one income.    I also added 9% of wages to the taxes to account for FICA and state taxes.   I know that 9% is not very accurate and state taxes probably amount to more on average, but I had to arbitrarily pick a figure so I just went with 9%.

	Wages	Tax	Home	Disposal
San Francisco	$94,310	$17,825	$48,314	$28,171
Seattle	$92,840	$17,472	$28,142	$47,226
Minneapolis	$69,070	$11,767	$15,744	$41,559
Grand Rapids	$63,420	$10,411	$10,922	$42,087

Now we start to see something interesting.    First lets throw out San Francisco since its obviously too expensive to come out ahead though the wages are highest there.    After you pay your taxes and mortgage the programmers living in Seattle are left with more money than those in Minneapolis and Grand Rapids.   Of course you still also have to spend money on various other things so that will likely eat up Seattles gains, right?   Lets take a look.  Here are the more detailed cost of living figures for Seattle, Minneapolis and Grand Rapids:

	Seattle	Minneapolis	Grand Rapid
Overall	149	108	84
Grocery	110	109	98
Health	116	102	95
Housing	243	106	55
Utilities	89	97	92
Transportation	114	110	96
Miscellaneous	122	114	93

If you look at the overall number or the housing umber that is where we see the largest variation.  Housing is almost 5 times as expensive in Seattle as it is in Grand Rapids.   But once you account for housing the other costs between cities only vary 10-20% more than not.   Housing cost alone inflates the overall COL considerably.   The cost of living differences with housing excluded are much less from city to city.

I'm going to use the Consumer Expenditure Survey to get national average estimates for how much households spend in the basic categories.   For example the CES says that the average spent on transportation is $7,677.    Using the national average as a baseline equal to 100 we can then calculate how much an average household is likely to spend on each category given the different cost of living index.   For example if the average for transportation is $7,677 nationally and people in Seattle spend 114 index on transportation then we can estimate that Seattle residents spend 114 / 100 * 7677 = $8,752 on transportation and likewise if the index for transportation is only 96 in Grand Rapids then we can estimate that people there spend 96/100 * 7677 = $7,370.    I use this logic to estimate the spending for various categories in each city and then sum up the totals. 

Here are the total average household spending estimates normalized to the cost of living index for each category for the cities :

	Seattle	Minneapolis	Grand Rapid	national
Grocery	$3,986	$3,950	$3,552	$3,624
Health	$3,662	$3,220	$2,999	$3,157
Utilities	$3,257	$3,550	$3,367	$3,660
Transportation	$8,752	$8,445	$7,370	$7,677
Miscellaneous	$8,932	$8,346	$6,809	$  7,321
SUM	$28,589	$27,511	$24,096	$25,439

As expected it does cost more to live in Seattle but not by a wide margin.   When you set housing aside the spending  in the other major categories does not vary as greatly.

Now lets put it all together and see how much you are left with after paying your taxes, paying a mortgage and then spending an average amount on other categories.   We can do that by taking the disposable income after taxes and mortgage figured above and then subtracting the sum of other spending in the last table.

	After tax & home	Other spend	Net Saved
Seattle	$47,226	$28,589	$18,637
Minneapolis	$41,559	$27,511	$14,048
Grand Rapids	$42,087	$24,096	$17,990

That 'net saved' amount is the bottom line you would be left after :

Wages - taxes - mortgage payment - sum of other spending = net saved

By this estimation you actually come out ahead in Seattle.    Surprised?

There are several things that should be noted and kept in mind.  

This won't happen for any occupation or any city.   As I said early on if your wages are much lower then you'll generally do better in the low cost city.  I'd much rather try to live on minimum wage in rural Michigan than in Seattle.    Where the jobs are matters too.   Just because housing is cheap in the Midwest doesn't mean you can find a job there in your field.  I'd rather be gainfully employed in high cost San Francisco than be unemployed in Michigan.    I used average wages, median home values and average spending for other categories, but individuals are not average.   Everyone's spending behavior is different and you should figure out how spending and costs would impact you rather than look at what the average American spends.

Remember how I picked a low amount for the FICA and state taxes?    You might now point out how that alone could throw everything off.   Being off 1-2% on the state tax rate would mean Seattle falls behind.  I would point out that Washington state is one of the few states with no state income tax.   So, figuring actual tax burden may put Seattle even further ahead.   It is more analysis than I care to do today and thats why I simplified it by picking an arbitrary number.    It is important to keep in mind that if you were to do a real comparison for yourself then you should really figure the actual tax burden for each city in question based on the state and local tax rates.

The points I'm trying to make are :
The answer isn't as simple as finding the lowest cost city or comparing the wage / cost of living ratios.   The more important factor is the amount of money left after expenses are taken out of wages.
You really have to scrutinize individual occupations in specific cities and there aren't any broad rules that tell us if you'll do better financially in a cheaper city or a higher cost area.
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Its OK to Round to the Dollar When Budgeting

Sometimes you'll see people talking about tracking your spending "to the penny" when discussing budgeting.   I don't know for sure if that is meant to be taken literally or not.   However I can confidently say that its not really necessary to track every cent of your spending.    It is OK to track your spending to the nearest dollar.   After you add it all up, rounding off the value of your purchases and expenses will be just about equivalent to tracking the exact numbers.

Lets look at an example of 10 figures.   Below are ten actual dollar value purchases from one of my credit card statements.  I compare the actual bill to the amounts rounded to the nearest dollar.

actual	rounded
$88.35	$88
$35.00	$35
$43.15	$43
$95.32	$95
$92.33	$92
$28.89	$29
$22.97	$23
$60.00	$60
$3.99	$4
$42.27	$42
sum	sum
$512.27	$511.00

As you can see after you add up the totals the difference is only $1.27 out of $512.27.

If you have 10 transactions then the most that those could be off by rounding to the nearest dollar is $5.

For example lets say you had 10 purchases all of $1.50   If you rounded those to the nearest dollar you'd round up to $2.   That would mean you add 50¢ for each transaction and you'd be off by $5 total compared to the actual purchases.    However the cents values of your purchases are almost always going to be randomly distributed more than not.   You won't have a ton of purchases with 50¢ in change.  You'll have several purchases of 90¢ or more and many of 10¢ or less worth of change.   They will tend to even out over a larger sample.

I looked at a set of almost 500 purchases in my credit card statements to date.   For various groups of numbers I compared rounding to actual figures.

Looking at groups of 30 purchases the most that the rounded figures were off versus the actual numbers in total was $2.54     For groups of 10 purchases the sum of the rounded values was at worst $1.78 less than the sum of the actual numbers.  With a larger group of 60 figures the impact of rounding versus actual was $3.52 in worst case.   

As a percentage basis the error induced by rounding was usually around 0.1% to 0.2%.    The worst case I found was off by 0.5%.

If you're doing a monthly budget then you may have 20 to 30 individual financial transactions to record.   If you round those figures then its likely the rounding will only change the totals by a couple dollars which will be less than 0.5% difference.  


Bottom Line : Rounding off your spending transactions to the dollar is not going to change your budget in a meaningful way.   Rounding can save you some time and make budgeting easier.

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