Can you ever get ahead with a low income?

I was asked this question by a woman after a presentation a few weeks ago. The question didn't stump me, I knew the answer immediately, and I also knew she wouldn't like the answer.

No, you really can't get ahead if you have a low income.

Let me explain.

"Getting ahead" is the operative part of this question. Getting ahead suggests not only maintaining financial obligations, but planning ahead and being prepared for future financial necessities. I've hesitated to write this post for years. The conversation about living wage, minimum wage, and poverty is a much bigger conversation than a simple financial analysis. But, it's important to at least consider what the options are for those in these income situations. My goal for this post is to specifically answer the question, what income does a person in Indianapolis, IN have to make in order to be financially solvent? Here we go.

Before we go much further, we should get familiar with the differences between minimum wage, poverty wage, and living wage. You’re familiar with minimum wage. In Indiana, it’s $7.25/hr. Minimum wage is relatively cut and dry. It’s a law. And many employers utilize this law to set their company’s minimum wage. Poverty wage is a calculation which determines the amount of money a person must earn in order to afford very basic shelter and low cost food, priced at around $1.25 per day. In Indiana, poverty wage is $5.00/hr, as determined by a Massachusetts Institute of Technology (MIT) project called The Living Wage Calculator. It can be found at LivingWage.MIT.edu.

Which brings us to living wage. A living wage is described as the amount of money it takes to afford decent clothing, shelter, and nutrition. According to MIT, living wage for one adult with no kids in Indiana is $9.74/hr. The living wage jumps to $20.36 when a one adult household also has one child. The huge increase in the living wage calculation is due to child care costs and the other expenses associated with raising a child, such as regular medical care. (courtesy of Indy Star)

Indianapolis is an affordable city to live in. It regularly ranks itself as a reasonable place to find decent housing at a good price. That being said, a person working full time at minimum wage would still have to spend roughly 86% of their monthly take-home pay on rent. This immediately rules out this income level as viable for financial solvency.

What about $10/hr?

Monthly net income for a $10/hour earner is roughly $1,125.79, after tax. We’ll assume rent and utilities at $450 per month. Say healthcare expenses are in the realm of $166 per month, this includes the cost of health insurance. $250 per month for food gives a person a budget of about $8 per day. With about $260 left in the budget, transportation starts to come into focus. Unless this person uses public transportation, walks, or bikes, getting to and from work becomes cost prohibitive. How can you afford gas, insurance, maintenance, or even a car payment with just $260? You can’t.

Let’s not forget this person has no money leftover for savings, debt reduction, emergencies, personal care, or the costs associated with raising a child. A lone adult can barely survive on $10 per hour in Indianapolis. (courtesy of Indy Star)

When you make $10/hr you have zero margin of error. Every decision has to be on point to prevent any financial pitfalls. As your income grows so does your margin of error because as our income increases we increase our obligations. The question then becomes, how do we prevent ourselves from expanding our lifestyle too far, once income has grown?