Money in the Media #13

The Middle-Class Crunch:
A Look at 4 Family Budgets

Ahhh Monday. Another week of work and another Money in the Media Monday! This week we’re taking look at a very interesting The New York Times article called “The Middle-Class Crunch: A Look at 4 Family Budgets.”

As promised, this article takes a look at the budgets of 4 families with varying incomes and expenses to see how they’re getting by. Middle Class is defined using income as anywhere from $48,000(two-thirds the national median) to $145,000 for a family of 3. As you can imagine, these varying income levels would provide a very different life for that family of three. On top of this added complexity is the fact that the cost of living in Sheboygan, Wisconsin and San Francisco would be drastically different.

The Koch’s from Sheboygan, Wis.

The Koch’s have been getting by on Trevor’s salary alone after Lauren decided to quit her full time position to take care of their children due to the high cost of childcare. This is a decision many families are forced to make as childcare can sometimes be as high as a mortgage payment.

Their budget can be deceiving as there are many line items missing that will eat up that $768/month difference between their listed expenses and income; items like: clothes, kids activities, vet visits for their 3 cats, car maintenance, gifts for birthdays and holidays, etc. All of these “little” costs can add up to big hits to their budgets in the months that they strike.

There are also large gaps in their financial protection. Lauren and Trevor are not able to afford health insurance for themselves due to the high deductibles the plans were offering; nor do they have life insurance. This would leave them and their children open to many potential threats were something to happen to either Lauren or Trevor.

It looks as though Lauren was just able to get an hourly position earning slightly more than before. This could be enough to make a difference on some of their debts to which they currently pay over $1,000/month. Freeing up that money, while it would take a while would be worth it for the opportunities it would afford them.

Their debts include $70,000 in student loans for degrees neither of them were able to complete (3.9 million undergrads just in the last 5 years are in the same boat), some credit card debt and a car payment. Even just being able to throw Lauren’s new income at one of these options would create some breathing room going forward.

Being in this much debt and having to afford the payments while providing young children with the life Lauren and Trevor want to give them is extremely stressful. This family mentions several times that they are extremely stressed out just trying to make ends meet. Once some of their debt is gone, the first things that they say they would add to their lives is therapy and hopefully the healthcare to go with it.

Espinosa and Townsend from Layton, UT

Already we can see that the majority of the increase in monthly income is eaten up in the $900/month increase in rent compared to the Koch’s. However, with this increase in income, Melanie and Brett are able to give their girls a bit more in terms of each having their own room and attending daycare. This comes at a cost of $1,200/month to send them both to school plus an additional $187/month just to keep up with everyday expenses for them.

An important missing piece of their budget is their retirement savings. Melanie says that they would like to save for retirement and the girls’ college funds, but they aren’t able to right now and are in survival mode, essentially living paycheck to paycheck. Once they are able to pay off the remaining $16,000 in student loans and their cars to free up that cash, I would suggest that they prioritize saving for retirement OVER saving for their girls’ college. The reason being that they will have a much smaller timeline to recover their retirement finances than their daughters will. Also, they can save their girls a lot of stress in the future to not have to worry about having money to fund Melanie and Brett’s retirement as well as their own.

Rodriguez and Allen from San Francisco, CA

As you can see, the take home pay for Amanda and David is much higher than the previous 2 families. While they do live in a much higher cost to rent (almost six times that of the Koch’s for their 2 bedroom apartment), they still have some room in their budget for some “luxuries.”

The most startling part of Amanda and David’s situation is that Amanda, who had been on maternity leave, will not have a job to return to due to federal funding cuts. This means that the family’s line to line budget will be underwater until Amanda is able to find work again. Unlike the days of old, most families now require a dual income household just to get by as wages have otherwise been stagnant.

The costs of both parents working is seen directly in the costs of child care, transportation, clothing, etc (about $3,000/month). For Amanda and David, these costs came at the expense of their savings. While they are putting away about $1,000/month for retirement, which is amazing, they do not show any savings in standard accounts for an emergency fund or other potential future high cost endeavors.

The Schluckebier’s from Iowa City, IA

Mike and Lindsey seem to have it all figured out even though they’re not the highest paid of the 4 families reviewed. The main differences are that they earn decent salaries while living in a reasonably priced area and they have consistently leveraged their resources in order to improve their situation. By this I mean:

  • They both worked full time during grad school to minimize debt with Mike working as a resident assistant to secure free housing.
  • They bought a small, modest home and dedicated themselves to paying an extra $800/month on it while still contributing to retirement funds. (They also had good timing and were able to buy in 2008 when prices were low.)
  • Mike bikes to work, so they only have one car that is paid off.
  • Keep their cell phone costs low at $12/month.

While individually, these things may seem small, when added together they have created a solid foundation for them to save for retirement, their kids’ college funds and other discretionary savings for anything else they may want to do in the future. What gave them a good head start is that they’ve been intentional with their finances throughout their college and working careers.

Of course, it helps dramatically that they also bring home more than double what the Koch’s do, but there are many families that bring home the same amount and still live paycheck to paycheck. They may be lucky, as Lindsey mentions, but they also took that luck and made decisions to keep the dice rolling in their favor.

Things to Consider

Since the families incomes, locations and expenses are so vastly different it is difficult to compare the values themselves. However, if we look at them as percentages, it may help. Taking a look at the top 3 expenses in most families budgets, being housing, transportation and food can give a better image of where each family’s budget goes every month.

Between these three costs we can start to see a picture of how these families cover their base expenses. Two families, Lauren and Trevor from Wisconsin and Amanda and David from San Francisco spend approximately 47% of their incomes on these three expenses combined. That is just under the recommended rules of thumb for the 50/30/20 rule if we count their only needs as shelter, transportation and food.

This would leave 30% left for wants and 20% for savings. However, there are other costs to consider, such as debt of which the Koch’s pay an additional 22% of their income. Luckily, the budget numbers provided were based solely on Trevor’s income and with Lauren’s new job, they may be able to create some wiggle room in their budget to work that debt % down to zero.

The family who paid the highest for these three budget items was Melanie and Brett Townsend from Utah. They currently pay 60% of their income just on these expenses. Some of this is because they have 2 car payments rolled into their transportation number, but even as their budget stands at this point, they have over a $200 deficit every month. Over the course of 10 years, that works out to be an additional $24,000 in debt that they would need to take out in order to cover their expenses.

In order to get their budget in line, I would suggest that they tackle these three line items to see if they can make some lasting impact on their budget to not only balance their budget, but try to save for retirement and college as well. Changing the smaller line items can definitely help, but if these three big expenses are kept under control then going for that coffee doesn’t seem like such a big expense.

On the other hand, the Schluckebier’s from Iowa are only spending about 24.5% of their income on these major line items (Not counting the extra $800/month they choose to pay on their mortgage). Keeping these line items in check has allowed them the financial freedom to save for retirement, their kids’ college funds and donate a few hundred dollars to charity every month.

Where Do You Fall?

So, seeing where all of these middle class families budgets fall, where are you in your budget? How much do you spend on housing, transportation and food every month? How to you feel about what you are spending your money on? Let me know in the comments below!

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