The Three Biggest Expenses for Middle-Income Americans — and How to Afford Them

how to manage money

Median household income in the U.S. recently dropped to just over $50,000, and the shrinking population of middle-income Americans and growing divide between the one and 99 percent are making what were once typical household expenses major financial burdens and a threat to family savings.

Interestingly enough, however, when Go Banking Rates asked every day, middle-class Americans what the leading cause of financial hardship was for them every month, the answer wasn’t mortgage payments or rent.

We uncovered the top three biggest expenses middle-income families are struggling with today, and how they can take back control of their budgets. Understanding how to manage money wisely is increasingly important when the odds are stacked against you, but know that it is possible to reduce the threat of living paycheck-to-paycheck and an overdrawn bank account by realigning your approach to a few specific monthly costs.

#1. Auto Loans

According to Kelley Blue Book, about 50 percent of all new car buyers are “upside down” on their auto loans. Despite a high level of depreciation straight off the dealership lot, millions of Americans — myself included — endure the cost of financing a new car.

Make Your Money Work Better for You

The Consumer Expenditure Survey, administered annually by the U.S. Bureau of Labor Statistics, found that vehicle purchases and auto loans accounted for almost $3,000 of household expenses in 2010.

Cindy Lail of Lawrenceville, GA sits right on the median household income line, with a $50,000 – $60,000 annual income, but still finds a monthly car payment too straining on her budget.

“I was tempted to say our hardest expense [was] the medical insurance,” shared Lail, “But when I think about it, the one I struggle the most with is the car. Part of the problem is that our income does fluctuate, so it is difficult to commit to a car payment.”

If you consider yourself a middle-income earner strapped with an auto loan, you can relate with Cindy. However, you can still take simple steps to save money month-over-month.

How to Cut Costs on Auto Loans

There’s no magic wand available to make you auto loan disappear once you’ve signed the dotted line, but minimizing the amount of money wasted on interest charges can make a significant difference in how much wiggle room you have in your budget at the end of the month.

Make Your Money Work Better for You

Consider refinancing your auto loan. For a long-term savings game plan, seek out a shorter repayment term, in addition to lower auto loan rates, to save money double-fold. Keep in mind that when applying for refinancing, there is no obligation to accept the new loan if you a receive an offer equal or worse that your original loan.

Count yourself fortunate if you are not making monthly payments toward an auto loan. If you find yourself in the market for a vehicle upgrade from your daily driver, lean more toward a used vehicle with low mileage, a reputation for longevity and at a price that allows you to put forth at least half of the asking price in cash.

#2. Health Insurance Costs

While Lail identifies auto loans as a dominant financial hardship, others are calling out health insurance costs as being their budgets’ Achilles heel.

President Obama’s health care reform changes are already starting to save some Americans money on items like generic prescription medication, but $3,157 of your hard-earned money goes directly to medical needs.

Make Your Money Work Better for You

When asked what the most expensive monthly household expense was for her, Deb McAlister-Holland of Dallas, TX, said that there’s “no question” as to the biggest culprit.

“Our family is uninsured — the cost of COBRA for a family with pre-existing conditions is still prohibitive, and our state doesn’t offer a health care insurance exchange due to the fact that our governor opted out.”

The out-of-pocket health insurance costs can be detrimental, especially for individuals with pre-existing conditions or high-deductible requirements.

For McAlister-Holland, the expense is almost four times the national average. “Medical care costs are unpredictable, enormous, and unavoidable. So far this year, we’ve spent over $12,000 in medical care costs, and we didn’t get many routine things done.”

How to Manage Money for Health Costs

A helpful tool for those with a high-deductible health plan is the health savings account (HSA). These are tax-exempt savings accounts, created specifically for helping patients pay for their deductible health insurance costs.

You can find these products at banks and credit unions, which typically advertise them as a type of high-yield savings account. There are restrictions as to who can open an HSA, but as long as you qualify, you can help reduce this annual expense. The IRS requirements are as follows:

  • Depositors must be covered under a high-deductible health plan, with a minimum deductible of $1,200 (self-only coverage) or $2,400 (family coverage).
  • You have no other health coverage; some exceptions may apply.
  • You are not enrolled in Medicare.
  • You cannot be claimed as a dependent on someone else’s 2011 tax return.
Make Your Money Work Better for You

#3. Student Loan Debt

The NY Fed announced that the average student loan debt among those under 30 years of age is $20,835 — up 56 percent from 2005. Students continue to take out thousands of dollars in student loans either because of financial need or to attend a prestigious school in hopes of being more competitive in the job market upon graduation.

However, with more jobs being added to industries like food service and retail, more graduates are finding themselves underemployed and with worsening student loan debt.

College graduate, Scott Hughes, faces this very challenge each day. “My toughest expense is without a doubt my student loans. I have a recent grad four-year degree with a technical major and I make just under $25,000 per year. My debt is more than I earn in a year, and my monthly payment is equal to my rent.”

How to Deal with Student Loan Debt

If you’re swamped with student loan debt, the damage is done, but you can soften the blow by consolidating your student loans. Student loans can charge a variety of interest rates, depending on the lender, some at extremely high rates.

Consolidating your student loans can not only keep monthly expenses low with fewer interest charges down the line, but also makes managing student loan debt simpler with one easy payment.

Remember, however, that before you change the terms of any loan, whether it be refinancing your auto loan or consolidating student loans, it’s important to ensure the new rate and associated costs are low enough to warrant it. Be sure to get several quotes before committing to new loan terms.

It’s said that the middle class is disappearing — combat the widening gap between rich and poor by preserving your savings. With the average household’s median net worth dropping to about $57,000 in 2010, learning to save significant amounts of money on major monthly expenses can make a huge difference to your middle-income budget.

Photo: Sh4rp_i

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About the Author

Jennifer Calonia

Jennifer Calonia is a personal finance journalist covering topics about banking, consumer savings, loans and debt. Her features and helpful savings tips encourage and empower households across America to achieve financial balance.

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