Debt Prison

One of the often overlooked figures is the amount of net income we have, left over from mandatory expenses, which we can actually spend. In contemplating this idea, I thought it would be a good exercise to put together an actual budget showing how much money a person would have left over each month - on an income of $60,000.  The expenses that I will deal with in this article are taxes, insurance, inflation, and interest (the price we pay for borrowing money). Feel free to email this article to a friend by clicking on the link above. To hear a podcast of this article in windows media player click here.

Taxes

Pause for a second and think of the percentage that you feel best represents the amount of income you pay in taxes.  Your real tax rate is 40% (MSN Money article), give or take a few percent. A study for the National Bureau of Economic Research showed that “As a consequence, a 30-year-old couple earning only $20,000 a year has a marginal tax rate of 42.5%, while a 45-year-old couple earning $500,000 pays at 43.2%. There are some exceptions: A 30-year-old couple earning $50,000 a year, for instance, pays 24.4%, and a 60-year-old couple making $150,000 a year faces a tax rate of 47.7%.”

The average tax on income levels between $20,000 and $500,000 is 40.3%.  Allow me to be clear about this.  This means that you work until the end of May before you begin earning a dime that goes somewhere besides government.  A lie you say… how could this be, 40%?  Your tax rate is this high because of all the tiny crevices where the government embeds taxes.  For example, our power bill, cell phone bill, the other phone bill, water bill, gas bill, cable t.v. bill, and on and on, is loaded to the max with taxes.  Not to mention all the embedded taxes that are fixed into everything we buy.  Let’s say you buy a gallon of milk for $3.80.  How much of that money goes to pay for taxes on gasoline for the farm equipment used to grow grain and ship it to market?  How much of that $3.80 goes to pay employee taxes or land/equipment taxes on the cow farm?  So, thanks to all these unnecessary government programs (defense and law enforcement excluded), we are left with $36,000 from our original $60,000 of income.  How does that make you feel?  Knowing that instead of making $60,000, you are actually making just under 40K.  Yes, I know, it upsets me too.

Click here for the tax rate table.

Insurance

It seems like you need all types of insurance these days.  Insurance for your house, car, life, eyes, teeth, health, burial, business, disability, and so on…  I wonder how much Americans are spending on insurance? For this part of the exercise I’ll include the insurances that I pay per year:

Home:        $650
Car:           $840
Health:       $1440
Disability:   $360
Life:           $360
Burial:        $180

Living a life without debt:       $Priceless

You may notice a trend regarding these figures, they are quite low.  Probably much lower than the average wage earner.  But my house is small.  My car is paid for so I only have liability vehicle insurance.  My life insurance is low because I’m in my 30’s.  I would be willing to bet that these figures are more likely 50% higher for the ‘average’ wage earner.  So I’ve just lost another $3830 of my income to expenses that are mandatory.  That would be another 5% of my $60,000 income lost to expenses.  That’s leaving me 55% of my gross income that I can actually spend or $33,000.  Man that income figure is getting mighty low.

Sigh

Inflation

According to the government inflation is about 4.3% to 4.9% per year.  Inflation is a measure of the rise in ‘costs’ per year of goods and services.  Now please bear in mind that when the government computes inflation (yak, cough, aaahhh) they refuse to include food and energy.  So the rise in prices when you buy groceries at wal-mart, or the rise in prices at the pump (currently $3.60/gallon), are interestingly not included in the governments inflation figures.  In other words - the governments inflation figures are grossly under reported.  Inflation is more likely around 6 to 7 % for the average American.  This is a measure of the purchasing power of your dollar.  So last year when you spent $93 on goods, today you would have to spend $100 for the same items.

I haven’t gotten a raise in four years, leaving me at $60,000 for the last 48 consecutive months.  So in 2005 I made $60,000, but today in 2008 (thanks to inflation of the George W. Bush type) I’m actually earning around $51,000.  My best friend currently lives in southern California.  He called the other day and asked me how much I thought inflation was.  The reason he asked is because he just got a 3% raise.  We both laughed, knowing that it wouldn’t even be enough to cover the costs of inflation. 

I wish there was something we could do about this.  Perhaps we could just buy gold and sit on it.  Do you think that would work?  No….probably not…  The point is that inflation is taking a large amount of our income each year.  Just for arguments sake we’ll say inflation took another 5% of my income - leaving me with 50% or $30,000.

At this point we have only $2,500 per month to spend on necessary items.  We’ve already lost the other $2,500.

Interest

Well my friends we’ve finally arrived at the grand brouhaha.  That dirty, dirty little word that starts with ‘I’.  Let’s look at interest on a house loan, car loan, and credit cards.  It’s easy for me to compute interest because I use a nifty, free debt calculator courtesy of carbuyingtips.com.  It works with Microsoft excel. 

You’ve just bought a house for $170,000, and you were one of the responsible debtors who received a great interest rate of 10%.  Let’s say you financed the house for 20 years.  The interest paid over the entire course of the loan is $223,000; keep in mind that’s just the interest.  Since some loans are structured differently I’ll just divide that by 20 years, which brings us to $11,150 per year (as an average over the life of the loan).  If you are in this circumstance you can subtract another $11,150 from the $30,000 that you had left over.  That’s quite a hefty fine for having to have something right now, don’t you think?  Dude, just imagine the house you could build for $223,000…. or even half that.

Sigh

You’ve just bought a new Nissan Maxima for $25,000.  Since you’re an idiot you financed it for 60 months at 6% APR.  This means you’ll end up paying $4,000 in interest over the life of the loan.  Divided by 5 years that comes to $800 per year in interest alone.  That’s another 1% of your income down the tube.

The average American household has over $8,000 in credit card debt.  If you’re lucky your interest is about $150 per month or 3% of your gross annual income.  What a shame….

Conclusion

As you can see, only one of the above mentioned categories is one that we can control.  Interest is the only item I mention that we have the power to limit and destroy.  Notice that before I got to interest, half of our income was already gone. Hence my premise, Americans can’t afford credit.  We’re all nearly broke, thanks largely to government and all of their b.s... 

So if you are wondering why $60,000 will barely pay your bills anymore then perhaps the above is a decent explanation.  As the years go by, government taxes increase, inflation increases, but often our level of income doesn’t. Feel free to leave your comments below.

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