Question

Challenge In 2005 , the poverty threshold for a family of four was an annual income of just over \(\$ 19,800\). Based on this income, devise a monthly budget for a family of four. Assume that no taxes or payroll deductions will reduce the family's income. Also assume that the family lives in an apartment that costs \(\$ 700\) per month. Provide a detailed account of your estimated allowances for food, clothing, and other expenses.

Short answer

Rent: $700, Food: $314, Clothing: $95, Other: $541.

Step-by-step solution

Determine Monthly Income

First, we need to convert the annual income to a monthly income by dividing it by 12 months. Since the annual income is \( \\(19,800 \), we calculate the monthly income as \( \\)19,800 \div 12 = \\(1,650 \). Thus, the family's monthly income is \( \\)1,650 \).

Expenses for Rent

The problem states that the family lives in an apartment costing \( \\(700 \) per month. Rent is typically one of the larger expenses, so we subtract this from the monthly income. Therefore, \( \\)1,650 - \\(700 = \\)950 \) remains for other expenses.

Allocate for Food

One of the largest essential expenses is food. It's reasonable to allocate approximately 33% of the remaining income after rent for food during budget setups. So, we calculate \( 0.33 \times \\(950 = \\)313.50 \). Let's round it to \( \$314 \) for simplicity.

Budget for Clothing

After food, clothing is another essential expense. Depending on the family's needs, they can allocate around 10% of the remaining income to clothing. Therefore, \( 0.10 \times \\(950 = \\)95 \).

Other Expenses

With the remaining money, the family can budget for other necessary expenses such as utilities, transportation, healthcare, and entertainment. After allocating funds for rent, food, and clothing, we have \( \\(950 - (\\)314 + \\(95) = \\)541 \) left for these additional expenses.

Key concepts

Understanding the Poverty Threshold

The poverty threshold is an important concept in understanding economic hardships and the assistance needed by families. In simple terms, it refers to the minimum level of income deemed adequate for a family to survive in a given year. This threshold is set by governments and is used to measure the number of people living in poverty. For example, in 2005, the poverty threshold for a family of four was set at an annual income of just over $19,800.
This means that any family of this size earning less than this amount would be considered as living in poverty. The threshold takes into account basic needs such as food, clothing, and shelter, but does not account for regional differences in cost of living.
Understanding this concept is crucial for planning a family budget, as it offers a benchmark for the minimum income needed to cover essential expenses.

Monthly Income Calculation for Budgeting

To manage finances effectively, it is important to calculate a monthly income, especially when annual income figures are provided. Converting annual income to monthly figures helps in planning and allocating funds for various expenses efficiently.
To perform this calculation, you divide the annual income by 12 months. For example, with an annual income of $19,800, the monthly income would be \( \frac{19,800}{12} = 1,650 \). This amount represents the total monthly earnings available to cover all household expenses.

• Ensures a better grasp of available finances each month
• Aids in making informed decisions about spending and saving

The conversion to monthly income helps set the foundation for creating a practical and balanced family budget.

Essential Expenses Allocation

Allocating funds to essential expenses is a vital step in managing a family's budget. Essential expenses typically include costs such as rent, food, and clothing.
The first priority should often be rent since it usually takes up a substantial part of the budget. In our example, the monthly rent is $700, which leaves $950 for other expenses.
Next, it is wise to allocate funds for food, which is another crucial need. A common approach is to reserve around 33% of the remaining income after rent, which would be approximately $314.
Clothing also requires an allocation, typically around 10% of the leftover budget, equating to $95.

• Rent: The significant and fixed monthly cost
• Food: Set a reasonable portion to ensure adequate nutrition
• Clothing: Allocate based on individual family needs

After these essential expenses, the family should plan for other critical areas such as utilities, transportation, and any healthcare costs with the remaining funds.