Low-Income People Spend 55% of Their Income on These Two Expenses

I once wrote an article about the illogical things that low-income people do that keeps them in poverty. It included things like not having an emergency fund and spending money on things they really don’t need.

Many people commented that these habits weren't just the habits of low-income people. This is true. But when rich people have these habits, it doesn't negatively affect their lives (usually).

Another comment was that these habits were not the only reason that low-income people stayed in that poverty range. This is also true. There are many reasons that those with a low-income often stay in that category. And many of those reasons are completely out of their control.

#1 Housing is expensive!

One thing that low-income people spend a proportionately larger percentage of their income on is housing.

What is included in housing costs?

Usually, when people are talking about the costs of housing, they are including rent or mortgage, utilities, taxes, and insurance premiums.

Business Insider looked at where the top 20% of earners and the lower 20% of earners were spending their money and compared them. Honestly, I wasn't surprised when I saw the numbers.

Housing is a major expense for low-income families. They spend just over 40% of their income on average on housing expenses; the top 20% of earners spend just under 30% of their income on housing.

In my experience this is true.

When I was at my lowest earning, I was paying $550 for rent. And this was a great price! But, I was also paying on average $300 a month for utilities. I didn't pay property taxes or house insurance. So, I was paying about $850 a month for housing.

Our family income was around $2500 a month. So, we were spending almost 35% of our income on housing. Our rent was significantly lower than the norm for our area. We were in a 4 bedroom house (two adults, two teenagers, and a baby) so any other comparable house would have been around $900 a month, plus utilities.

We were trying to buy a house because we felt that would decrease our housing expenses. We would have had money for a damage deposit, but when I went to the bank for pre-approval on a $60,000 house (ya, it wasn't a palace) they told me that I couldn't afford the $350 monthly payments.

That's the way it works. You can't get approved for a mortgage if they think you're going to spend more than a certain amount of your income on housing. Typically, for most banks, that amount is 28%.

But I paid more than that amount in rent in utilities. And never missed a rent payment. Doesn't matter to the banks though.

Of course, one reason rent is so high is that most landlords are in it to make money. And I've learned since that when pricing a house for rental, you have to take into consideration more than the mortgage.

I've recently decided to rent my house. In deciding how much to charge for it, I realized that in order to just cover my mortgage payment, my property taxes, and my insurance premiums, I have to charge $800 a month. If I wanted to make more money to pay my mortgage off faster, I'd have to charge more.

Thus, rent is high for a renter (for my area; every location is different).

So, since low-income families can't buy a house, they have to rent. Because most landlords are looking to make some profit from the rental of a house (or apartment) they need to charge higher.

This is just part of the reason that people who have lower incomes pay more for housing.

Business Insider notes that almost 50% of people in the lowest 20% of income earners were retirees or college students. That may have skewed how much the lowest 20% spend on housing. Retirees may own their houses and college students could live in dorms or with roommates or even at home.

#2 You have to eat, right?

The other area where low-income people spend a larger portion of their income than the top 20% of earners is food. Why would someone in the lower 20% of income earners spend more money on food?

First you have to consider how much they are actually spending on food.

The upper 20% were spending an average of $12,350 a year on food. That's about $1,000 a month. The lower 20% of earners were spending only $3,767 a year on food. That is only $314 a month!

One reason low-income families may spend money on food is the availability of grocery stores in their neighborhoods. If you live in the city, you likely don't have a big box store within walking distance or on the bus route to your house. You have a corner grocery store.

Corner grocery stores and smaller individually owned stores charge more for food.

Why not just make a once a month trip to a bigger store to take advantage of savings?

If you don't have a car and it's going to take three bus transfers to get home from the grocery store with the savings…well, you get the idea.

Food isn't negotiable. Despite what something, many families that are in the low income range are trying to eat healthy. And healthier food costs more in smaller grocery stores because the shelf life isn't as long. In order to feed their family's healthy food, low-income families need to spend more.

Food and housing aren't options

Low-income, rich or somewhere in between - you have to eat and you need somewhere to live. You can only cut back on those expenses so far before you are doing more harm than good.

For low-income families who want to save money for a mortgage or for an emergency fund or anything else, it can be very challenging when up to 55% of their income is going towards only two things.

Is it surprising that getting out of poverty is so hard?