You can't afford to be average

Roger Schlesinger
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Posted: Oct 12, 2007 12:01 AM

Take a look at the statistics and you will realize what the title of this piece is trying to tell you. It is frightening and something that only the people going through it even know about.

Here goes the scary truth about economic conditions in this Country at this time.

In 2006 the average household income in the United States was $48,201 or about $4000 a month. This information comes from the U.S. Census Bureau where we also learned that the bottom 20% of Americans earn $23,202 per household while the upper 6.37% earn 1/3 of the income in the Country! I'll bet you didn't know that. Take home pay for the average household, without withholding for state or federal taxes would be $3695 a month, maximum.

The average credit card debt per household is $8367 and requires a payment, on average, of $209 per month. According to the Bureau of Labor Statistics income rose 188% from 1990 to 2003 while credit card debt rose a whopping 350% during the same time period.

The increase in credit card debt show no sign of slowing.

The total debt per family excluding mortgage payments is $18,654 an additional 10,000+ in obligations for installment debt including automobile payments. One could add another $261 a month for debt repayment on the additional $10,000. Debt repayment therefore totals on average about $470 a month.

The National Association of Realtors tells us the average price of a house in our Nation is $230,000 with the West checking in with an average of $345,000+ as the most expensive area and the Midwest averaging $165,000+ and is the least expensive area.

Putting this all together we can see there are definitely problems. Classically you are suppose to spend a maximum of 40% of your gross income on your mortgage, property taxes and insurance payments which means $1600 a month. A recent report shows the median mortgage payment in 2006 was $1687, not including property taxes and insurance. Property tax and insurance on your house would be at least $280 a month.

Let's add it all up and look at the results. Starting with $3695 a month net, excluding any taxes, subtract the mortgage, property tax, insurance and debt payments ($2438) and it nets you $1258 for all your necessities for the month. Everything you need to stay alive comes out of that figure, which amounts to $292 a week. This is for an average household with an average house, average debt and average mortgage payment and it is hard to see how this could work without major problems. Before you start cranking out the emails I know that you will tell me that these folks shouldn't own a house and you need to rent. First of all rents aren't that low any more and second, you lose your tax deduction so what you save in rent goes in a great part toward income taxes.

Let us get down to reality. You obviously can't own the average house if you make the average income and have the average debt and average house payment. So what do you do? Let us look at every part of the equation. We will start with income. Education generally means more opportunity if you have the time and strength to acquire the knowledge. If you don't you need to look for industries that generally pay more than what you are making. This may include leaving your home and moving to places that offer greater opportunity.

Next is debt which most people use as additional forms of short term income. This however, becomes long term liabilities and the so called answer becomes just a bigger problem. If you have any equity in your house you must try to roll your other debt into your mortgage. You owe $18,600+ in debt and pay $470 a month. If you put your debt into your home mortgage you would pay $130 additionally on your mortgage per month, but your would be saving $340 a month on your current debt. This gives you an extra $80 a week which would certainly help.

You could take an additional $18,600 out of your house, if you have the equity, and use it for reserves. Reserves are the simple mysterious answer to most of the problems in life. They stop you from going right back into debt and can help you weather most storms. If you used the $18,600 as additional income taking $100 a week from it would last 3.5 years. Hopefully in that time your house will increase in value which makes up for some or all of the money you took and may give you a chance to do it again, if necessary.

With better planning, if possible, you increase your weekly spendable income to $472 from $292. You actually have a chance of making it work with that income. This is a hypothetical exercise based on median figures that actually exist in our economy. I did this exercise to show you how you need to financially plan the smallest expenditures, and of course the results are even more dramatic if you do the same with larger numbers.

If you can't make any of the above work you need to move to a less expensive area and begin again. As long as there is time on your clock you are able to keep moving toward a successful outcome. It may not be what you have in mind but you certainly will enjoy the results if you can turn your situation around.

The numbers I see on a daily basis are much more disturbing than the ones I just brought forth, because most of the applications I look at have higher earnings, larger mortgages, as little in reserves as the example which was zero, and infinitely higher debt. To those who fall into that category I can only stress the following. You can't keep doing it your way and not have something explode. It could be you, and it is very fixable before it ever has to get to that.

Your way certainly isn't worth your health, your retirement or your life! So why not consider some of my suggestions. Make every dollar count; use your house, if you have one, to create better cash flow; create reserves and do it all based on a well designed plan You can get it done. I have seen hundreds if not thousands turn their finances around and I have the faith that you can be added to that number.