How A Family Making $63K a Year Can Survive the Next Three Months

We realize there is a lot of stress and scrambling for many families and we know that each situation is wildly different. We aim for this outline to be a helpful scenario rather than a set-in-stone prescription.

Meet the hypothetical average American family. We’ll call them average Joe and average Josie. They’ve got two kids and a house with a white picket fence. They love apple pie and baseball (which they would definitely tell you about), and they live paycheck to paycheck with a weighty debt balance (which they definitely wouldn’t).

With COVID-19 shutting down businesses and upending normal life, this razor-thin margin is feeling sharper than ever (they’ve been stress-baking a lot of apple pie lately). Their financial state—oh boy, can we just keep baking pie and not think about that yet?

Last week, Average Joe found out he’d be getting his pay cut temporarily—and while he’s thankful to still have a job, the 30% income cut will be felt.

So, they’re toying with the idea of getting an official budget set up. It also sounds about as intimidating as creating their own sourdough starter. They know they could be doing better, they should be doing better, but it’s easier to just not deal with it.

So, let us reach out, take their hand, and walk alongside this hypothetical average family as we map out a plan for the next few months. By the end, there will be less stress-eating and a lot more power posing.

We’ll help them make a game plan to not just make it through the current uncertainty but to thrive when this is all over. There’s good news: it’s gonna be OK! They’re going to get through this and they might be actually end up stronger than they were before.

Where did these numbers come from?

We’ve done some research to reflect an average American’s financial state with credit card balances, student loan debt, savings and checking account balances, and spending. For the data heads among us, this picture is patched together across multiple sources (listed at the bottom). We went with the median wherever it was available as that often tells a truer picture than a true average (extremely high incomes skew averages to not-so-helpful levels). Consider this data “inspired by a true story” and intended to be helpful rather than the end-all picture of average American spending.

Financial Snapshot: Meet the Joneses

Ages: Joe: 37, Josie: 33
Location: Chicago, IL
Income: $63,000/year
- Joe: $45,000 (now $31,500)
- Josie: $18,000 (she works part-time)
Take-Home Pay: $3,800/month (now $3,000/month)
Living situation: Two kids, ages 5 and 7 years old. Joe works full time, Josie works part-time.
Savings account balance: $2,600
Checking account balance: $2,900
Debt: -$261,872
- Credit card: -$6,348
- Car loans: -$12,150 (payments of $393/month):
- Student loans: -$41,374 (payments of $460/month)
- Mortgage: -$202,000 (payments of $1300/month)

First, we need to see where their money usually goes. While they’ve not formally tracked spending before, they looked back at the last few months to pull together a list of categories and spending.

Here’s where their money goes:

Groceries	$475
Mortgage	$1,300
Student Loans	$460
Car insurance	$100
Utilities	$150
Auto Loan	$393
Phone	$70
Internet	$45
Gas	$220
Healthcare	$300
Spotify	$10
Netflix	$9
Amazon Prime	$12
Miscellaneous	$250
Fitness	$70
Donations	$150
Gifts	$70
Education	$117
Clothing	$155
Entertainment	$268
Vacation	$170
Dining out	$290
Credit card minimum	$25
Total spending	$5,109

This is the first time they realize their life costs $5,109 a month and they were only bringing in $3,800 a month (and that was before the pay cut). Well, that finally explains why their credit card balance just kept climbing higher.

2. They Divide Spending into Needs and Wants

We plop these numbers into a budget and they separate out their needs at the top (ordered by bill due date) and their wants at the bottom. They chose this list—some people’s needs will be other people’s wants and vice versa.

Now that this list is organized, we see that Joe and Josie’s Needs cost $3,538 per month and their Wants cost $1,571 (for the grand total of $5,109 of expenditures per month). Remember, they’re bringing in $3,000 a month. We’ll get to that soon.

The good news:

Their expenditures are finally organized
There’s wiggle room to cut expenses
Now they know: the money they have ($5,500 total) will get them through a month and a half of their needs (even if they don’t bring in another single dollar of income). That feels ok!

The bad news:

They’re still spending more than they make: that means their financial health would be getting worse every month instead of better if they continue in this direction.

Ok, more good news than bad news here. We can work with this!

Now let’s keep going.

3. The Joneses Slim & Trim Their Expenses

With life upended and the real picture of their finances laid out, Joe and Josie need to match their budget to their income. They need to go through and slash costs until they’re spending less than they’re making. This is an essential practice for financial health in any circumstance, but especially glaring at the present moment.

Their spending on “Needs” stays mostly the same (though less on gas and less set aside for health) and here’s their slim and trim list for Wants:

You’ll see they cut out fitness, vacation, education, clothing, and entertainment. They definitely left Netflix, Spotify, and Amazon Prime for sanity and so they wouldn’t feel completely restricted. They’ll definitely spend on vacation again at some point, but while they’re turning their financial story around, they’re choosing to cut back.

4. They Give Every Dollar a Job

Now it’s time to take the money they have ($5,500 total) and give each one of their dollars a specific job. Because they just have a few days left in April, they’re earmarking $75 for any additional expenses through the end of the month and then moving on to fund next month. They keep going until their “To Be Budgeted” number (in the green box below) is at $0.

Here’s how they budgeted the money they had:

The “Budgeted” column in this YNAB Budget shows how many of their dollars are assigned to each category. As money gets assigned out, the “To Be Budgeted” number gets smaller.

You might notice they’re paying the minimum on their credit card—they’re currently on a 0% credit card promo until October (and tackling that balance now just seemed too overwhelming to them with so much uncertainty at hand). We’ll come back to that later.

The good news:

They’ve budgeted into June with the money they have now.
They’ve cut expenses to a manageable level. This puts their financial health on the mend.
There are plenty more levers to pull to cut expenses. They’re just getting started!
Right now, they both still have jobs (albeit a reduced income) so they will continue bringing in more dollars when their next paycheck hits.
Their budget is aligned with their priorities.
They’re dealing in reality: the money they have is the only money they’re spending.

The bad news:

This approach uses the money they had in savings, money that probably provided a very real sense of security.
The next paycheck will be smaller with Joe’s pay cut and they’ll look to trim further.
There is still the looming doom of that credit card balance in the background.

5. Stimulus Money: Hip, Hip, Hooray!

A huge boost just came to Joe and Josie in the form of a stimulus check—direct deposited to their bank account. This unexpected windfall gives them extra wind beneath their wings. Because they’re a family of four making less than $75K a year, they just got an inflow of $3,400(!!).

Now it’s time to give every one of those dollars a job (again!). Here’s what they’re doing with it:

Setting aside $2K for an emergency fund (this gives them that sense of security back and gives a cushion for unexpected expenses).
Sending an extra $50 to fun money and an extra $50 for eating out (Does Texas Roadhouse do pick-up?).
Budgeted the rest of the money for their essentials and it takes them through almost all of June.

When the “To Be Budgeted” turns red, they’ve budgeted more than they have. They adjust costs until it is green again.

And just like that, Joe and Josie went from feeling tangled and in the dark about their money, and now they’re feeling aware and more in control of what their money needs to do.

Coming up next…

Josie gets laid off and files for unemployment. Stay tuned and watch as the Jones family cuts expenses further and rolls with the punches in the next installment.

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Sources:

The post How A Family Making $63K a Year Can Survive the Next Three Months appeared first on You Need A Budget.

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Monday, April 27, 2020