By now you know that my voice in the personal finance community is quite different from those of other physicians. I believe that physician households can achieve financial independence far sooner by combining aggressive budgeting and investment diversification.
I don’t believe that financial security only happens at 7-figure savings and I don’t think it’s only achievable through investing in index funds or real estate. The options for gaining independence from a steady paycheck are endless.
In this post, I want to address the minimum wage issue and disprove the point that a person living on minimum wage is financially screwed and cannot get ahead. In the process of discussing the numbers, I hope to learn more about budgeting and developing financial independence.
Like most of my posts, I pick a topic which interests me and then I start writing the outline for it. I research it and set out to prove or disprove my hypothesis. This has been invaluable during my learning process to figure out the financial world.
Personal finance is the intersection of my career and freedom to spend my time any which way I please.
What Does A Minimum-Wage Household Look Like?
A minimum-wage household often includes a couple who both started working right after high school, earning $10 dollars per hour.
I could use an example of a 1-person household, but my audience believes that life is much simpler for a single person and exponentially harder for a couple with kids. So let’s use a 3-person household for my example.
Though the federal minimum wage is set at $7.25 as of this writing (2017) by the Department of Labor, most States have their own laws which often calculate a higher rate, closer to $10/hour.
The map below shows the States in green which have higher minimum wage than the federal rate and the light blue show States which have the same minimum wage as the federal rate. There are States with no minimum wage laws and then there is Georgia, whose minimum wage is $5.15/hour.
As of this writing, there are major wage increases coming up for many States. The NCLS keeps track of such legislature changes, State by State, if you’re interested.
Living Wage Calculation
States determine their minimum wage based on the city and the costs of living in those cities. This is called the living wage which is tracked in detail by various groups, such as the famous MIT on their website.
The main categories which are tracked in the living wage are the following household expenses:
- Child care
- Other necessities (household goods, personal care, apparel)
There are lots of other websites, companies, and institutions which track such living wage expenses but I am using the MIT data because it’s fairly representative of other numbers I have seen, and they do a great job breaking it down.
2 Examples For Household Expenses
I am going to use my home State, Oregon and my city, Portland as an example. It’s not a cheap city to live in.
I will use the published MIT data for a couple with a child. That’s 2 working adults and 1 toddler.
- Food $688/month
- Child Care $574/month
- Medical $520/month
- Housing $1,208/month
- Transportation $779/month
- Other $458/month
According to MIT, in order for this family to afford these minimum expenses in Portland, Oregon, they must earn a net income of $50,000/year or $4,200/month.
San Diego, California
The second example I will use is San Diego, California. This city is well-known for its high cost of living. Since I lived there from 2009-2014, I think it will be a good example to use here.
- Food $688/month
- Child Care $618/month
- Medical $513/month
- Housing $1,499/month
- Transportation $779/month
- Other $458/month
In order for this family of 3 to afford these minimum expenses in San Diego, California, MIT data states they must earn a net income of $55,000/year or $4,580/month.
Income @ Minimum Wage
So let’s look at a couple earning minimum wage and trying to make a life with their child in either city.
2,000 hours is the number to remember whenever you want to calculate someone annual salary based on their hourly income. If a person makes $10/hour then they earn $20k/year.
2,000 hours is 8 hours per day, 5 days per week, 50 weeks a year. This might seem like a lot but I’ll show below why it’s far too conservative.
At $10/hour neither household would be able to afford their respective cities, according to pretty much any data set I have looked at online. At that rate, they would earn a gross of $40k/year which would be in the $35k/year of net income, or $2,920/month which isn’t enough to cover the $4k+/month of needed income.
2 Working Adults & 1 Toddler Household
Let’s talk a little about what a dual-income household can accomplish in either Oregon or California, earning a minimum wage. According to the information above, US minimum wage isn’t enough to support living in these cities and so they would be living in poverty.
Why would two 18-year-olds work only 8 hours a day or only 5 days a week? It goes without say that when you are earning only minimum wage then you would be picking up extra hours in order to earn a better income.
At minimum wage jobs, often in the food preparation/serving industry, there is a lot of opportunity for overtime which pays more than minimum wage.
Why not work as a waiter/waitress in order to earn the minimum wage plus tips? Tips often go unreported and therefore won’t be taxed.
Also, there is no reason for 2 functional adults to advance their income by moving up the ladder. From food preparer to server, from server to assistant manager, to manager, to assistant district manager to DM.
There is no reason that these two 18-year-old cannot earn at least $13-15/hour. Even in the healthcare field, working a front desk or getting a CNA degree can drastically bump the minimum wage number.
But, to keep things fair, we are going to assume that this couple continues to earn $10/hour but they better work overtime and weekends, holidays and cash out their vacations if possible. This should bring the income number closer to that $13/hour.
We will now end up with $52,000/year of gross income or a take-home of $46,000/year which is $3,800/month.
Why would they have a child if there is a risk of poverty? Let’s assume it was a mistake and they chose not have an abortion.
Why would they live in States like Oregon or California, when minimum wage jobs are abundant in much cheaper States?
$688/month for a family of 3 isn’t a whole lot. However, if food is prepared at home with a diet of mostly beans, potatoes, seasonal vegetables and fruits then $688 is actually somewhat luxurious.
Since this couple works in the food industry, then it’s likely that they will have access to the tons of wasted food that we have here in America. This should drive that $688 even lower.
There are oodles of free websites that will teach you how to keep your grocery budget below $300/month for a family of 4. So I will go with $300/month food budget for this family of 3.
Child care expenses
I would expect that there are friends or family that one can use as a couple to help take care of their toddler.
While high-income earners may have to move away from their social network in order to pursue appropriate careers, those who are working minimum wage, have the option of staying close to home, close to family and friends.
Sure, if the need suddenly arises it will be costly but that’s where social capital comes in. Making friends and networking online or going to meetups in order to meet other couples in similar situations, doesn’t require a whole lot of income or resources.
$574/month isn’t a whole lot for childcare from what my friends tell me. However, 1 partner can work the day shift and the other could work the night shift.
Sure, it doesn’t make for a very fun household but when earning a minimum wage, having a child is no longer a luxury and if it was by choice then it becomes an expensive overhead and if it was an oops-baby then it requires a sacrifice.
I would budget $100/month for childcare expenses which is still quite generous given the options laid out above.
This one is pretty easy. $520/month is too high of a couple who are both employed full-time. Even if their employer doesn’t offer health insurance at such low-paying jobs, they are likely to offer major discounts on healthcare.
There are plenty of minimum wage jobs which offer healthcare. Even if only of the 2 wage earners has healthcare coverage, it will be enough to get the whole family covered.
I will set medical expenses at $150/month. My buddy’s dad offers all his fast food workers a decent health insurance at $75/month.
I am a bit radical when it comes to lifestyle expenses. I think a family of 3 could quite easily live in a 1 bedroom apartment since I grew up in a 2 bed, 1 bath apartment with my parents and sister.
With these low incomes, it wouldn’t be hard to qualify for some gov’t housing. There is often a wait list but having a child and full-time jobs can certainly help the process.
In Portland, there are 1-br apartments that can be had for $3,000/month and there are those going for $800/month.
I believe in paying a little more for housing in order to save on other costs, transportation being the main one. A safe neighborhood is also more conducive to being social, going for walks etc.
I believe that housing expenses could go up a little from the suggested $1,200 to $1,300/month in the Portland area.
The poorest neighborhoods have the most fast food restaurants and some of the nicest used cars with plenty spent on rims and paint jobs. The Targets and Walmart are overrun with people trying to buy excess household goods.
Getting to such destinations requires a car, I rarely see people walking in lower-income neighborhoods.
The average US household has transportation expenses close to $10k a year, or $750/month for an average of 2 cars. MIT’s data suggests $780/month which is fairly spot on.
Does a couple working minimum wage jobs need 2 cars? Do they need cars? How about bicycles? Public transportation, perhaps?
My good friend V. has a car that she drives maybe once a week. She is a professional and spends no more than $1,500/year on everything car related. For this couple,
For this couple, $150/month should be a very fair automobile budget.
Clothing, household goods, and child-related expenses can get pricey. There is soap, deodorant, personal hygiene products, diapers, etc.
I have made my own deodorant and soap for dirt cheap. I still buy clothing used at various thrift stores nearby. I repair tears in my clothing and just finished sewing up my jeans, a pair of exercise pants. In the recent past I have even repaired my shoes.
According to MIT, $458/month is needed for such expenses. That amount seems way excessive. I think $300/month would be a good budget. In this, I am including subscriptions to some informative podcasts and a healthy budget to buy books for further education.
The Dr. Mo modified MIT Living Wage Calculation
Based on my math, the following monthly budget would be more reasonable for either Portland or San Diego for a family of 3:
- Food $300/month
- Child Care $150/month
- Medical $150/month
- Housing $1,300/month
- Transportation $150/month
- Other $300/month
The total for this household is $2,350/month. That’s the amount of money an American household of 3 would need to live a comfortable life in either California or Oregon.
The income for this couple should be $3,800/month from my calculations above.
Putting It All Together
This family should have a disposable income of $1,450/month without working a whole lot of extra hours and without even increasing their income through job advancement.
$1,450/month invested month after month starting at age 18 would be worth $3.2 million after 50 years.
This is assuming they didn’t take advantage of the 401k offered at work. This is assuming no raise in the minimum wage laws which is about to go from $10 to $15 in California.
These numbers are assuming that this couple wouldn’t take advantage of living with family or renting a spare bedroom.
We are assuming that they would live in Portland, Oregon and not a much cheaper city such as Salem.
I am not trying to be tough on those who earn a minimum wage. But I don’t see the argument that $10/hour is an unlivable wage. Through budgeting and leveraging the benefits offered through work, a household can drastically reduce their overhead.
By converting Netflix time into bread-making time, one can save hundreds of dollars.
Conversely, that $1,450/month of disposable income could be passed up in return for having more time to spend together as a couple or perhaps spending that time learning skills to earn a high living.
Of course, if the higher income is used to buy bigger and nicer cars and rent larger homes then it might be best to either stay put or make it a career to keep chasing bigger/better things in life.