Associated Press story by Ken Sweet and Emily Swanson
http://bigstory.ap.org/article/965e48ed609245539ed315f83e01b6a2NEW YORK (AP) — Two-thirds of Americans would have difficulty coming up with the money to cover a $1,000 emergency, according to an exclusive poll released Thursday, a signal that despite years after the Great Recession, Americans' finances remain precarious as ever.
These difficulties span all incomes, according to the poll conducted by The Associated Press-NORC Center for Public Affairs Research. Three-quarters of people in households making less than $50,000 a year and two-thirds of those making between $50,000 and $100,000 would have difficulty coming up with $1,000 to cover an unexpected bill.
Even for the country's wealthiest 20 percent — households making more than $100,000 a year — 38 percent say they would have at least some difficulty coming up with $1,000.
Comments
Say I'm 45 years old making $100K. I'd guess close to 30% of that goes for state, local and federal taxes. Don't laugh. Michigan has a 4.25% income tax and a 6% sales tax (and arguably the worst roads in the nation). Throw in gas tax, liquor tax, tobacco tax, phone tax, etc. and there's some serious money there.
Maybe I contribute a big chunk (10%?) to my 401K or IRAs. - but am too young to take any out for emergencies. I've got a wife and 3 kids to feed, house payments, 2 car payments and insurance. I pay union dues or professional fees at work. And I'm paying to take night classes to better my professional skills.
Yep - I can see where there wouldn't be an extra $1,000 laying around.
http://www.apnorc.org/PDFs/EconViews/economy report draft_v5_DTP Formatted_new image.pdf
Wasn't it just a few months ago that virtually the same percentage of people couldn't deal with a $500 emergency with money from savings? Wait, yes it was:
http://www.mutualfundobserver.com/discuss/discussion/25235/most-americans-are-one-paycheck-away-from-the-street/p1
I guess things are improving. Now we're up to a $1,000 emergency before those same people have to move beyond savings. (The current poll says 66% would have trouble paying the unanticipated bill in cash or check, i.e. from savings.)
As the current article states explicitly, there's nothing new here. "Americans' struggle to save isn't new."
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Regarding tax burdens (Hank's post) - there is a tendency to underestimate tax burdens (by excluding payroll taxes primarily, but also sales tax, etc.). But there is also a tendency to overestimate tax burdens, in part because people see things like sales tax on each receipt received, in part because people think in terms of marginal income tax rates rather than average tax rate, etc.
I've a back of the envelope calculation below. The bottom line is that total tax burden appears to be significantly less than 30%, which should leave the household with thousands of dollars for savings, assuming that the expense estimates were accurate (i.e. not more than $70,000/year).
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A couple w/3 kids and $100K in ordinary income would owe fed taxes of $7691 (or less; I used a standard deduction - not itemizing mortgage interest, state income tax, etc). I assumed the 401K was traditional (not Roth).
Michigan income tax is $2975 under the same assumptions. That's less than 11% between federal and state. Add in 7.65% for payroll taxes and we're up to 19%.
Sales tax - not 6% of gross income, since a lot is spent on nontaxable items (home/mortgage, food, 401K). Let's say 5/10 is spent on taxable stuff, 3/10 is spent on taxes (original assumption), 1/10 on 401K, and 2/10 on food/mortgage/etc. So sales tax is 3% of gross. We're up to 22%.
The rest is noise or nonexistent. Phone-specific "taxes" are largely fees imposed on phone companies that they are allowed to recover as add-on charges if they so choose. That is, the charges are not taxes, but revenue to the phone companies that they justify by saying it goes to paying their taxes. Part of your cost of service, not a tax.
Gasoline? Don't count the sales tax portion (we've already counted that above). The rest of gas taxes are measured in cents/gallon - 18.4c at the federal level, 19c at the state level. In round numbers, let's say 500 gallons/year at 40c/gallon or $200/year. On an income of $100K, that's 0.2%.
So let's just add another 2% for all this noise and call it a day. 24%. 6% or $6K less than estimated in taxes.
Thanks - 24% also sounds pretty burdonsome ... but here's a few taxes or fees you may have overlooked:
1) Re gas tax - If you believe the EPA window stickers, we're all getting 25+ mpg - than at that (unlikely) average, your estimated 500 gallons of fuel would take you 12,500 miles. However, if the family of 5 (from my example) has two vehicles and multiple drivers, miles driven might be higher. EPA figures are based on brand new perfectly tuned vehicles. Drive a 5-year old vehicle in 10 degree (F) Michigan winter on snow covered roads and that figure falls. We have two. The newer mid sized model does average 22-23 year round. But our older 10-year old (larger) one averages only 15-16 mpg.
2) Federal tax on a 750 ml bottle of wine (14% alcohol by volume or less) is 21 cents. A couple enjoying one bottle a day would pay about $77 a year in this tax.
3) Cigarettes (assuming all this stress has led our hypothetical couple to smoke) are taxed at $2.00 a pack. Two persons each smoking a pack a day would pay an additional $1,460 a year in taxes.
4) Local property taxes on homes seem missing from your calculation.
5) There's a 7.5% federal tax on domestic airfares (about $40 for a $500 ticket). For a family of 5 that's $200 added to the cost of one domestic round trip flight.
6) If the family rents a car while at their destination, more taxes are paid.
7) Auto and watercraft registration, state park permits and fishing or hunting licenses are more properly tagged user fees ("noise" I suppose), but these nonetheless reduce the family's disposable income.
I'm not advocating families drive gas-guzzlers, smoke, drink or take vacations - increasing their tax burden. Just trying to make some sense of the original article's point that a large number of families find it difficult to obtain $1,000 on short notice for emergency expenses.
More to the point of people's struggling to pay an unexpected $1K bill - 57% might have no struggle - they would pay it by cash, check, or credit card paid off immediately. Count me in that last category - I just experienced such a bill (radiator + A/C condenser problems in car), and I got 2% back by charging it.
Maybe some of those people using credit cards but carrying no balance are juggling their expenses. Or maybe they are just using plastic as a convenient (and rewarding) form of cash. But that diminishes the shock value and doesn't fit the AP's narrative.
Many Americans are indeed in precarious financial situations. 62% (5/8) of currently employed people said that their pay had stayed about the same or lost ground over the past five years. (32% said they were getting steady advances and 5% said their pay had increasing rapidly.) That's the literal wording used in the questionnaire. (Question #37 in the polling results here.) Unvarnished, out there for you to consider. Unlike the AP's story.
Cherry picking data sells papers, but it doesn't help the discussion.
Obviously I haven't done due diligence on this one. Just having some fun and thought Mark's post deserved more attention.
Wisest thing about money anyone ever said to me was a financial advisor my wife and I spoke to around 1990. At the time we were maxed-out on credit and struggling despite both having good jobs. He said something like: "You guys don't really have a problem. You both make good money. The problem is you're earning $105,000 and spending $110,000. If you could somehow learn to get by on $104,000 a year, you'd be fine!"
Really changed our lives.
I think we both got a little sidetracked on taxes. When people talk about the percentage of money going to taxes, it is usually to make a point about how onerous the tax burden is. (But in related conversations, user fees are not tagged as taxes, as you mentioned, so that the politicians can say they're not raising taxes.)
Those conversations are somewhat tangential to the matter here. When talking about savings rates, the starting point is (or IMHO ought to be) take home pay. That is, after payroll taxes, after 401k's, after union dues, what's in your paycheck? Then what do you spend money on? Housing (including as you said, property taxes). Food, clothing. Entertainment. And so on.
What matter in each of these categories is the total cost, and not how much of that goes to the manufacturer vs. the retailer vs. the government. Bury it all in a VAT and people won't even think in terms of sales tax - they'll just be paying the cost of the item ("tax included") and thinking about how much of their take home pay it is costing them.
There are lots of things going on here. The AP hyped the figures by excluding CC charges (as noted in my last post). Most people's wages are not keeping pace with inflation (muted though it may be), though employment and thus household income is very slowly rising. Americans' savings rates have traditionally been low (do we know the current trend?). ACA is causing health care expenses to take a bigger or smaller chunk of take home pay depending on income, family size, etc.
It's hard to make sense of it all.
I learned along time ago ... Don't loan money to family members as it will create hard feelings when it does not get paid back. So now, if I feel it is warranted, I gift it and forget about it taking the money form a goodwill account.