This is an interesting challenge which I believe I could do if I had to. To reiterate: This posts shows what I would do. As always, I am not you, and it is your responsibility to decide whether you want to and whether you need to hire a certified financial professional to consult before following any of the ideas listed here.
Let me define four terms first:
- Wealthy means having enough money to cover all expenses for a long time.
- Rich means having a large income.
- Poor means having a small income.
- Broke means not having enough money to cover all expenses for a long time.
It is possible to be rich and broke for instance. Consider a guy with a Porsche who does not have enough money to put gas in the tank. It is also possible to be poor but wealthy. Although being poor excludes living in a mansion and having a spendthrift lifestyle, the virtue of being wealthy is that one never has to worry about paying the bills. The only thing to worry about is getting the bills in the first place.
Currently the Federal minimum wage is $5.85 per hour. It is scheduled to increase to $6.55 per hour on July 24th 2008 and to $7.25 per hour on July 24th 2009. Here I will just use the $5.85 number. I will also assume a standard work year of 2000 hours which results in a wage income of $11,700. Using a tax estimator from one of the nation-wide tax companies, the taxes on this amount is estimated to be just under $300 or 2.50%. This leaves us $11,400 to work with.
Now it is obvious that with an income like that, it does not make much financial sense to live in New York or California or other extremely high cost of living areas. I think this is the main mistake many people make. They complain about the high cost of groceries, the high cost of gas, and the high cost of rent, but they would not even consider moving to a cheaper part of the country. The explanations run from “I like it here” over “I like my job” to “All my friends and family live here”. The thing to realize is that if you are paid a minimum wage AND you want to be wealthy, you simply can not afford to live in a particular place just because you like it or want it. You have to make a choice: Which do you want more? To be wealthy and not worry about whether the next paycheck covers all your bills or to live somewhere you like keeping in mind that even if you move, you would probably get to like that place too? Nobody can make that choice for you but yourself.
Assuming that the choice is to become wealthy. The first step is to move into a place that includes at least some utilities (heat, water, garbage, or electricity) and costs less than $500 in rent per month. You can get some decent places in the midwest in that range. It is important to pick an home within walking distance of your job. The greater your ability to walk, the more flexibility to you have. In my opinion a person ought to be able to walk 2 miles back and forth to work each day, but why not aim for 4 miles? It is also nice to pick a place which is fairly close to a supermarket, but not as important as being close to work since you won’t be going shopping that often. In terms of living arrangements the second suggestion is to live with someone else that also brings in an income and then split the rent. Try to be flexible. A one bed-room apartment will work for two people. One could sleep in the living room. Again, it is a choice you make. Another thing to keep in mind is to shop around. If you can save $50 on rent a month, that is $600 a year.
Now let’s assume you find a one bedroom apartment for $400 / month with no one to split the expenses with. That’s $4800 a year. This leaves $6,600.
There will probably be some utilities on top of that. My guess is that they will come around to no more than $1000 if you save diligently on whatever is not included in the rent. For instance, turn appliances or lights off whenever they are not in use, turn the thermostat down (ours is set at 64F during winter and 76F during summer). The leaves $5,600.
If you have a car, sell it. If you really need a car for yourself at some point, you can rent one or get a cab. Otherwise walk. I would recommend start looking about for a used bicycle. That should cost no more than $50. For grocery shopping I would get a used back pack. The old army webbing system, I forget what it’s called, works well and can be had for less than $50 at a surplus store.
It goes without saying that if you do get a TV, it will be broadcast only. A standard cable subscription can easily cost close to one grand a year! If you feel like splurging on connectivity, choose between basic cable (sometimes you have to ask for the “basic” basic) and a dial-up internet. In this case I would pick the net connection.
Food can be radically simplified. Don’t eat out unless you absolutely have to e.g. dinner with your boss and the rare birthday party. A few times a year tops. Buy most things in bulk: Toilet paper, 20lbs bags of potatoes, 10lbs bags of onions, 25-50lbs bags of rice, 15lbs bags of beans. Only eat the vegetables of the season – yes, vegetables are seasonal, although they can still be bought out of season they are much more expensive. Consider only eating meat once or twice a week. Skip the milk. Learn how to cook. I used to live on this while I was saving for retirement. Food should cost no more than $50 a month or $600 a year if you follow these rules.
You are now down to $5000.
I would not go without health insurance. Skipping health insurance and then developing a medical problem causes a lot of bankruptcies. However, on this financial plan you will be saving a lot of money which should allow you to have a fairly high deductible. Of course it is also important to stay healthy. Eating like above and walking to work every day should keep you free from a lot of obesity related diseases. The cost of health insurance will probably be in the $500-$1000 range a year.
In terms of clothing, shop at thrift stores, mend holes, wear it out. The annual costs are trivial!
This leaves you $4000 with all points covered. Did I forget anything?
Here is how I would prioritize it:
- Pay off all credit cards (if any). There are many methods such as debt snowballing. The specifics do not matter as much as throwing all the cash you have at this serious problem in order to get rid of it ASAP.
- Establish an emergency fund. Some people would advise you to do this first rather than paying off the cards. However, if you are paying off your cards, it means that they are no longer maxed to the limit. This in turn mean that you can put emergencies on credit. The reason for this priority is that your emergency fund earns about 4% in interest whereas paying off your credit cards saves maybe 20%. The size of this emergency fund should be several months of living expenses. I prefer 6 months, some people prefer 12 months, but you should not make it less than 3 months. Your monthly living expense here is $617, so 6 months equals $3700 and it should take about a year to save that amount.
- Once this is done open a retirement account and start saving a fixed amount every month. This does not need to be a large amount in the beginning. If I was in this situation, I would actually consider taxable accounts as well since they can be used to boost your income because the funds are not locked down until you reach 59+ years of age. Regardless, if you have come this far, it is time to start looking into real investments.
A final suggestion is of course to spend some of the time you would otherwise be spending watching TV or “hanging out” to improve your skills and education so as to earn more than the minimum wage. I realize that individual situations are different. In fact a majority of people who earn minimum wage are high school students that flip burgers which makes this “guide” useless for a majority of minimum wage earners. However, my main point with this post was to show that despite a low income, it is still possible to become wealthy if wealth is truly something you want.
If you earn more, e.g. $30,000 after tax, which is possible in many low-skilled jobs requiring only 2 year education/training, you can implement the 5 year plan. If you start young enough, you could become financially independent at 25 like these guys.
Originally posted 2008-01-02 07:44:45.