A couple of weeks ago I shared with you ten characteristics of debt-free people of modest means.
In that article I specifically asked my readers to consider this question:
“Why is it that there are families out there with household incomes under $40,000 comfortably making ends meet and saving for retirement with no debt on the books — or at worst, a single mortgage payment — while others who make millions per year like Sinbad, Ed McMahon, Mike Tyson, and Stephen Baldwin have trouble keeping their financial heads above water?”
While my list of ten traits was met with general acceptance, I did manage to start up a minor debate between the readers as to whether or not it was really possible for the majority of folks here in the good ol’ United States of America to make ends meet on $40,000* per year.
How can I make such a claim?
Well, I live in Southern California, one of the most expensive places to live in the United States. In its 2009 list of the most expensive cities, Forbes listed Los Angeles second; only New York City had a higher cost of living.
Even so, I know many people living here right now that are making ends meet on $40,000 or less.
I know if I had to, I could make it here too on that amount of money – and if I can live on an annual income of $40,000 here in Southern California, I am certain I could make it most everywhere else in America.
So how do I know for sure?
Well, if you’re a regular reader here at Len Penzo dot Com you know I have been meticulously tracking every penny I’ve earned and spent for over a dozen years now.
Although I have a much more detailed breakdown, here is a top-level summary of just my key household expenses in 2009:
Keep in mind, most of these expenses should be considered conservative. Why? Because if I was making only $40,000 per year I would certainly work much harder to cut some of those costs down.
For example, you can bet I would be much more vigilant about limiting our gasoline and utility bills. Likewise for the retail purchases. But without a doubt, the biggest area where I know I can really cut corners if need be is the family grocery bill; although we do plan our dinner menus in advance to save money, we do a poor job of taking advantage of coupons and special sales.
In addition, we currently eat lots of steak and other expensive cuts of beef which considerably raises our food costs. I am quite certain that, if I had to, I can easily cut our grocery bill by at least 25 percent.
But, Len, what about the mortgage?
Well, my mortgage payment is a bit less than $640. And although I bought my home almost 13 years ago, with almost zero effort I found on the Internet a 3-bedroom, 2-bath, 1400 sq. ft. single family home within 10 miles of where I live currently renting for only $895 per month, or $10,740 annually.
So add it all up, and those basic expenses come to just over $36,000 per year.
Yes, I realize I still haven’t accounted for federal, state and social security taxes. But I am certain I could offset whatever taxes would be deducted from my paycheck with the savings I’d get by reducing costs on my grocery, utility and other bills.
Would my family be living like kings and queens? No.
But here’s how we would be living: in a respectable and comfortable home in Southern California, with two insured cars in the garage, and presentable clothes on our backs. We’d also go to bed each night with full bellies. On top of that I’d still have a little money left over to put away toward my retirement nest egg each week, a few bucks to put toward an emergency fund in case my water heater broke, and even a little something to take the family out to dinner once every month or two.
I admit, it’s not ideal. Clearly, it is a no-frills lifestyle; but despite what you might think, it’s certainly not anything close to poverty either. It’s just not.
So if you and your family are blessed with good health, but you find yourself still having trouble making ends meet on $40,000 per year – and are truly serious about living within your means — I strongly suggest you reassess your situation and see where you can cut back on your expenses.
Otherwise, you’ve really got nobody to blame but yourself.
* Considering that this post was originally written in 2010, after adjusting for inflation, that’s equivalent to approximately $44,100 in 2015.