What It Costs To Live In Greene County: Part Four

It's been a little while since the last "What It Costs To Live In Greene County" post, so here's another installment, but let's first recap the previous three posts:

In Part One, I said that I was originally part of a group discussion where the topic was how everyone was tired of reading about how they should put away so much in an emergency savings account every month, allocate a percentage of their wages into a retirement account, earmark funds for that special summer vacation or getaway, and the list goes on and on. In the end, though, it just couldn't be done.

Of course, if you pick up any personal finance magazine off the news rack these days, they are packed with tons of supposed sage advice, penny-wise wisdom, and general financial rules of thumb, but the question is: How practical is it to do these great, glorious things anyway? An even better question I think is: can the "average" person or household do this in Greene County, Indiana?

To help answer these questions -- at least theoretically -- I started putting together an Excel template with the notion that if all of those things you're "supposed to do" couldn't be done on paper then the real-life version would be nearly impossible. So, to put "pen to paper" per se, I looked up some average incomes for the area on the U.S. Census Bureau website and got started.
The median family income in Greene County, Indiana in 1999, which was the most current census information I found, was $41,523.

When I was working more on this template, it dawned on me that I should use these monthly amounts to "back out" into an amount of the original mortgage loan, for example. The thought process being is that a $100 per month mortgage payment sounds spectacular, but what does a $100 per month mortgage payment actually buy you? Say, the area's median home price is $50,000 -- which is the average value for Linton according to the census and another independent housing study in 2005 -- and a normal loan-to-value is 80%, a person must then figure out how much it would take per month to finance a $40,000 loan (80% of $50,000) just so they can own the supposed "average" home in the community.

I tried to estimate true taxes to be paid, not what a person's W-4 tells the employer to take out each pay. This is especially insightful for those who get a large tax refund check at the end of the year -- because basically they've overpaid their taxes for the year to the detriment to their bi-weekly paycheck amount. (Moral of the story: if you get a large tax refund check each year and have lots of high-interest rate debt on credit cards, payday loans, and various loans, get a W-4 form from your employer and change it so you can have extra money each month to pay them.)
It also became apparent rather quickly that there's a lot to think about when defining "average" because it's not as simple as it first seems. Does this include a single-income or dual-income household? How many kids live in the "average" home"? With regard to having children, is it more expensive to raise girls than boys? Does everyone in the house have a cell phone? Will having cable, internet, and other electronic gadgets around the house be considered "average" or not?

Even a family's faith and values can determine where -- and how much -- of their income goes to a church, various charities, sports and leagues, eating out, etc.
To keep moving forward, it really boiled down to the fact that assumptions must be made. Here were some of them from Part Two:

We'll assume the household includes two people, but how the income is split among the two doesn't really matter. It could be that both make $9.98 per hour and work a forty-hour workweek throughout the year, it could be that only one of them brings in $19.98 per hour, or some other combination thereof. The main point is two people live in the household, and the annual household brings in $41,523 -- well, actually, I calculated these hourly salaries of $9.98 each will bring in $41,517, but close enough.

Another assumption will be that there are no children in the household. Yes, I know, it's not likely -- or maybe even "average" -- but kids will complicate this way too much. Their ages alone can greatly sway things; for example, will we be buying diapers or prom dresses? So, let's just argue that they're clearly more expensive and leave it at that. (Some studies have stated it costs more than two hundred thousand dollars to raise the "average" child from cradle through college, so I'll just leave it to those experts to come up with the figures on raising kids.)
We'll also assume that the employer of this "average" couple offers a 401(k) retirement plan and will match 50% of their contributions up to 6% of their pay. This average couple takes advantage of this benefit by contributing 6% of their pay. The employer will also offer health, life, and disability insurance for an assumed rate of $100 per pay period.
Now, back to the calculations:

To start the calculations, the median family income in Greene County in 1999, which was the most current U.S. Census information found, was $41,523. From this, we calculate that if each earns $9.98 per hour, they will earn a combined $41,517 for the year. Like I said before, there's some rounding error here, but it is close enough. Dividing this by the twenty-six two-week pay periods in the year, this amounts to gross combined compensation of $1,596.80 per two-week pay period.

If 6% is contributed to the employees' 401(k) retirement account, a total of $95.81 per pay is removed from this amount before income taxes. Combining this amount with an $8,000 IRA contribution each year (this will be talked about in another part of the series), the retirement deduction for tax purposes should be $10,491.06. On the couple's 2007 tax return, taxable income is further reduced by the standard deduction of $10,700 and personal exemptions of $6,800; therefore, taxable income will be $13,526 for the year. Taxed at the 2007 percentage of 10% for this tax bracket (up to $15,600 per year for those married & filing jointly), total federal income tax should be $1,353 or $52.02 per pay period. The employees' share of Social Security will be 6.2% or $99 per pay. Medicare is 1.45% or $23.15 per pay. Of course, the Governor will want his share, too, which amounts to 3.4% for the State of Indiana or $17.69. The county will get 1.1%, or $5.72, as well.

This leaves $1,203.41 net per pay period, which was calculated as summarized below:

$1,596.80
Gross Pay ($41,517 / 26 pay periods per year)
<95.81>
401(k) Deduction
<52.02>
Federal Income Tax
<17.69>
State Income Tax
<99.00>
Social Security
<23.15>
Medicare
<5.72>
County Tax
<100.00>
Estimated Employer Health, Life, & Disability Insurance
$1,203
Net "Take-Home" Pay (Rounded)
Yearly, of course, this amounts to $31,288.52 "brought home" to spend as needed -- or $2,607.38 per month.

Now, we'll look at "average" monthly expenses from Part Three, which are certainly the most interesting -- and the more subjective -- part of the series. To take out as much subjectivity as possible, we'll use general rules-of-thumb or "supposed to" amounts first. If none were found or exist, we'll use national averages. If no national averages are found, we'll use "guess-timates."

First, let's deduct $260.74 per month for tithing and charity. Now, some argue that this figure should be 10% of gross income, while others say 10% of take-home pay. Still others say that 10% should go to your church, and various charities are on top of that amount. Of course, some do not attend a church nor give to charity at all, so they have no expenditures in this category. All arguments aside, we'll use 10% of take-home pay for church and charities.

Second, let's deduct $8,000 per year or $666.7 per month for IRA contributions for this "average" couple. This fits under the "supposed to" category, as many do not do this, but we're all supposed to be. After all, if you're not looking out for your own retirement, who is?

Third, we'll deduct $180 per month for a home phone, internet access, satellite or cable subscription, and a cell phone plan. This is based on $60 for phone and internet, $60 for cable or satellite, and $60 for a cellular plan. Sure, some plans and subscriptions are cheaper, some are more expensive. In any event, there are a number of access fees and charges, as well as various taxes, on each, so we shouldn't forget those. (Remember buying that cellular plan that was supposed to be $39.99 a month, but your first bill was more like $60 with all the extra fees and charges? Funny how that works, isn't it?) While this $180 is not completely necessary -- people do actually live without these conveniences -- we'll include them.

Fourth, we have to eat. This one falls under "subjective" and a "guess-timate" because no rules-of-thumb were found. It all depends on your appetite, likes and dislikes, where you shop, etc., etc. For groceries, let's plug in $300 per month. Dining out, while not necessary, we will still include an occasional trip to a casual dining restaurant or some fast food along the way by using $100 per month. For those not spending time in a restaurant, chalk this expense up as for entertainment too, say, a movie out or the like.

Fifth, we need a roof over our heads. In fact, that probably should have come closer to first in the list, but we didn't forget nonetheless. Sure, you can rent, but in Greene County there's a very high percentage of home ownership. Looking at the 2000 U.S. census data and a recent housing assessment completed in 2005, we note that the median home value in Linton is approximately $50,000. Typically, a bank will loan 80% loan-to-value against that home, so our mortgage will be about $40,000. Current rates on a 30-year loan are 6.5% or so. So, based on this data, our mortgage payment each month will be almost $260.

Utilities to heat and cool the home, as well as provide light, water, sewage, and trash pick up will be estimated at $175 per month on average. Of course, winter and summer bills tend to be the highest, but we'll just use an average among all months.

Along with home ownership comes the pleasure of paying property taxes, casualty insurance, and maintenance. Since this is our primary residence and we have a mortgage, though, we can apply for a homestead exemption and a mortgage exemption at the Courthouse. Both will cut our property tax bill significantly, which by my calculations will be $434 per year or $36.14 per month. This is based on the old rate in the City of Linton of 3.6140%. (Look at my older posts to see what the new, higher rate will be: http://gcdailyworld.com/blogs/chriswathe... ) Insurance against fire, tornado, and other disasters is estimated at $400 per year or $33.33 per month. Again, this depends on a lot of circumstances, including the age and condition of the home, the credit score of the homeowner, the amount of the deductible, etc. Along with routine maintenance, which we will estimate costing $500 per year, we'll need to replace some more costly aspects too. For example, although it's far from a daily expense, we will eventually need to replace the roof, exterior siding or paint, floor coverings, the furnace & air conditioning, and various other miscellaneous items. We'll estimate the costs of replacing these, as well as their useful lives, as follows:

Roof
$4,000
20years

Exterior
$2,500
25 years

Floor Coverings
$2,000
12 years

HVAC unit
$3,000
20 years

Misc.
$1,000
20 years

True, all of these items can have widely varying prices and useful lives, but these are the assumptions. Combined with our estimate of $500 for maintenance per year, these will all total $1,166.67 per year or $97.22 per month.

Sixth, we need to get to work. So, we need to look at vehicle loans. Although the "sky is the limit" on prices paid for a set of wheels, we'll use a fairly conservative amount, such as $13,500 as a loan amount. This may buy a smaller car or a larger one with a decent down payment. Based on a 6% interest rate and a 60 month loan term, our payment will be about $260. (There's just something about having a car payment higher than a mortgage payment; hence, they're equal here.) Insurance is of course required by law, but again depending on the company, coverage, deductible, and credit score of the applicant, prices can vary widely. We'll use $500 per year, which is $41.67 per month. License plates figure into the mix, too, and these are estimated at $250 per year (20.83 per month). Lastly, we need to put gasoline in the tank. According to national data, the average person puts about $1,000 into their tank each year.

Most of us in Greene County observe Christmas, although national studies indicate a wide range of what we spend during the holidays. National Public Radio reported a figure of only $466, while other studies said $700 to $1,000. At the risk of being called Scrooge, we will use the NPR figure because we're running out of money quickly. Using the $466 per year, that equates to $38.83 being set aside each month. (Christmas accounts are nice ways to set aside for this, as they pay a little more interest than typical savings accounts. They also "earmark" funds for a specific purpose, so you're not as tempted to spend them throughout the year on something else.)
Seventh, we consume a lot of things that will be simply thrown away, but necessary nonetheless. Such items include toilet paper, paper towels, floss, tooth paste, soap and shampoo, etc. Having not a clue what all this stuff costs the average couple, we'll use $25 per month, so at least we acknowledged it.

Eighth, we'll put a measly 1% of our income into savings each month, which is $34.60.
There. We did it! We have $1.97 left each month to our name!

But wait! The average consumer has $10,000 of credit card debt. At a typical 2% of the balance minimum required payment ($200), we're now $198.03 in the hole every month.
How can this be? (Now you also know why I didn't even add in kids to the situation. I knew we'd already be in the hole because I had the spreadsheet in front on me. OK, I admit that wasn't fair…)

But before we discuss some likely scenarios of how this can be and what assumptions we may have gotten all wrong, let's talk about some things that were possibly left out:

One item is a second vehicle. Since both persons in this household work, they will likely both need a vehicle. This potentially adds another payment to the budget, but it certainly adds additional maintenance and repair expenses, as well as money needed for insurance and license plates.

Another criticism was nothing was allowed for clothing. Now, this is really a subjective topic, as I know some people who would not think to wear anything but higher-end, name-brand clothes, while I've also seen some pretty good garage sale & Goodwill ensembles, costing only a few bucks.

While a payroll deduction was made for employer-provided medical insurance, it was also brought up that no allowances were made for co-pays on doctor visits and prescriptions. Guilty! Of course, this is also highly variable depending on family health. Some may never go to the doctor or go for merely an annual check-up, while others may be in-and-out of the hospital regularly.

With that said, now we're back to discussing some likely scenarios of how this can be. In a word: debt. In a likely scenario, credit card balances grow slowly, while balance transferring the debt from card to card until a few years have went by. At that point, a home refinance is used to consolidate it. And the cycle begins again.

Nationwide, this brings up another current event: the downturn in the housing market. If a person's home isn't worth more and more each year, what will happen to this cycle?
It obviously crumbles.

From a Greene County perspective, however, this is likely of little significance because the cost to build verses the market values seem to be so disproportionate. That is, the likely sales price of your home is far less than the actual cost to rebuild your home new. If you've had your home recently appraised, you can verify this by looking at the different approaches to value used. It's very likely that you'll see the cost to build scenario produces a much higher dollar figure until it is reduced by depreciation. On older homes, depreciation can be a rather large amount too.

Nonetheless, the real question is: how much more can the average consumer bear? It seems under the weight of rising gasoline prices, utility rates, property tax hikes, and growing grocery store bills, the "average Joe and Jane" are getting crushed further. For some time now, consumers have made it through using credit cards and the equity in their homes, but where will it come from next?