What Is a Living Wage? – Minimum Income for Basic Needs Above Poverty

Early in his term, President Joe Biden announced his support for an idea lawmakers on the left had been pushing for years: increasing the federal minimum wage to $15 per hour. Proponents assert the current hourly rate of $7.25 is simply too little to maintain a decent standard of living. To stress this point, several politicians and other public figures took part in the Live the Wage Challenge in 2014, living on minimum wage for one week to show how difficult it is.

Many state and local governments have already passed their own minimum wage increases. The Economic Policy Institute (EPI) reports that more than half of all states in the United States have minimum wages above the federal minimum, and 45 cities and towns have adopted wages higher than the minimum level for their state. But lawmakers in other states have pushed back, claiming higher minimum wage laws will hurt business owners and limit job growth. According to the EPI, 26 states have already passed “preemption laws” to bar municipalities from raising their local minimum wage levels above the state level.

At the heart of this debate is the question of what really amounts to a living wage. In the words of the Fight for $15 campaign, the question is how much America’s workers need to “feed our families, pay our bills, or even keep a roof over our heads.” And as it turns out, that’s not at all a simple question to answer.

Defining Poverty

In announcing his support for the minimum wage hike, Biden declared, “If you work for less than $15 an hour and work 40 hours a week, you’re living in poverty.” However, according to FactCheck.org, this isn’t quite true. Even the current federal minimum wage is technically enough to keep a full-time worker with no dependents over the federal poverty line.

But it’s not clear how much that statistic matters. For one thing, many low-wage workers do have dependents, and the cost of supporting them pushes them below the poverty level. That explains why a 2021 Congressional Budget Office report found that the proposed wage hike would lift roughly 900,000 Americans out of poverty by 2025.

Yet even this number may be an understatement. There are many problems with how the government defines poverty — so many that even the government itself doesn’t always rely on it. In other words, someone who falls above the government’s official poverty line isn’t necessarily making a living wage.

Minimum Wage & the Poverty Guideline

Technically, the federal government has more than one way of defining poverty. When people talk about the “poverty line,” they’re usually referring to the poverty guidelines set by the Department of Health and Human Services (HHS). There are actually three separate guidelines: one for the contiguous U.S. and higher ones for both Alaska and Hawaii, where the cost of living is higher.

As of 2021, the poverty guideline for most of the country is $12,880 for a single person. A person earning $7.25 per hour working 40 hours per week would bring home $15,080 per year before taxes — assuming they took no vacation or sick days. Therefore, this single person would indeed be making enough to be slightly above the poverty guideline in most states.

However, the picture changes for people raising children on minimum wage. According to the National Employment Law Project, roughly 1 in 4 workers with minimum-wage jobs have kids to support. The poverty guideline for a family of three is $21,960, so a single parent trying to raise two kids on that same $15,080 per year would be well below it.

Problems With the Poverty Guideline

Even if you assume anyone whose income falls below the poverty guideline is “poor,” and anyone above it is getting along just fine, not all minimum-wage workers are over the line. However, it’s not clear whether that’s even a reasonable way to define poverty. The poverty guidelines are based on the official poverty threshold from the Census Bureau, and the formula used to calculate this threshold is pretty archaic.

The poverty threshold was first developed in the mid-1960s by Mollie Orshansky, a Social Security Administration worker. At the time, the government didn’t have the accurate figures it has today to show how much the average household spends on the things they need to live, such as food, housing, and health care. The only expense Orshansky could calculate with any accuracy was food costs, based on food plans developed by the U.S. Department of Agriculture.

Orshansky found a 1955 USDA survey that showed the average American family spent one-third of its after-tax income on food. Based on that, she estimated the smallest amount a family could live on would be three times the amount they needed to feed themselves on the most frugal diet possible. Today, the Census Bureau continues to calculate the poverty threshold by taking the cost Orshansky worked out for a “minimum food diet” in 1963, adjusting for inflation, and then multiplying it by three.

The problem is that a lot has changed since 1955. A 2019 survey from the Bureau of Labor Statistics (BLS) shows that the average American family now spends less than 10% of its pretax income on food. Its biggest expense is housing, which accounts for 25% of income. Transportation and health care also take up a sizable chunk of the budget.

The Census Bureau admits that the poverty threshold isn’t the best measure of whether someone’s income is enough to meet their needs. It stresses the threshold is only “a statistical yardstick,” not “a complete description of what people and families need to live.” So even according to the government, being over the “line of poverty” is no guarantee someone actually has enough money to cover their basic needs, let alone extras like a movie or haircut. That’s the point politicians were trying to highlight through the Live the Wage challenge when they tried — and for the most part failed — to survive on minimum wage for a week.

The Supplemental Poverty Measure

In 2011, the Census Bureau designed a new way of calculating how many Americans live in poverty, known as the supplemental poverty measure (SPM). It’s a lot harder to calculate than the official poverty threshold, but it offers a clearer picture of how much someone really needs to get by.

Both the official poverty threshold and the SPM define people as poor if “the resources they share with others in the household are not enough to meet basic needs.” However, the SPM differs in several ways from the official measure:

  • It Counts More People per Household. For purposes of resource sharing, the current poverty measure assumes a “household” is all the people who live under the same roof and are related by birth, marriage, or adoption. The SPM uses a broader definition: It counts foster children, unmarried partners and their children, and any other children who live with the family. This definition recognizes that two adults bringing up five children have just as many mouths to feed, even if they aren’t all related to each other.
  • It Calculates People’s Needs More Precisely. The current poverty threshold is based on food expenses alone. It takes the cost of a basic food budget, as calculated in 1963, and adjusts for inflation. Instead, the SPM looks at what people actually spend today on basic needs: food, clothing, shelter, and utilities. That gives a much more accurate picture of a household’s budget than the current model.
  • It Accounts for Location. The current poverty threshold assumes all people need the same amount to survive, no matter where in the country they live. However, surveys such as the annual Consumer Expenditure Survey from the BLS and the Census Bureau’s own American Housing Survey show that isn’t true. Housing costs, which are the biggest expense for many people, vary widely from one city to another. The SPM accounts for that by factoring in rent or mortgage costs for different parts of the country.
  • It Counts Benefits as Income. According to the current poverty measure, resources include only actual cash coming into the house: wages, pensions and other retirement funds, Social Security benefits, interest, and dividends. However, many low-income earners also receive various types of financial assistance. For instance, they may receive subsidized housing, food aid such as the Supplemental Nutrition Assistance Program (SNAP) or free school lunches, and home heating aid. The SPM counts all these benefits as resources because they help meet the household’s basic needs.
  • It Deducts Certain Expenses. The current poverty measure looks only at total cash income — the amount listed under “total income” on a tax return. However, most people’s actual take-home pay is lower than their total income. Their employer takes a certain amount out for taxes, and there may also be health premiums that come out of pretax pay. Additionally, many people have unavoidable costs — work expenses, child support, or child care costs — that don’t count as taxable income on tax returns. Since these expenses are unavoidable, the SPM doesn’t count the money spent on them as income.

Since 2011, the Census Bureau has released two separate reports every year measuring poverty in America. It bases one report on the official current poverty threshold, while the other uses the SPM. In 2019, the official poverty threshold for a two-adult, two-child family was $25,926. According to the bureau’s first report, 10.5% of the population (34 million people) were below that threshold, thus living in poverty. For context, if all those people constituted an independent state, it would be the second-most populous state in the U.S., between California and Texas, according to 2020 data from the Census Bureau.

The second report for the same year paints a more varied picture. It sets the SPM for the entire country at $29,234 for homeowners with a mortgage and $28,881 for renters. However, this figure differs widely from one part of the country to another. In 16 states and the District of Columbia, the SPM was higher than the official poverty threshold. In 25 states, it was lower, and in nine states, it was more or less the same.

Overall, the second report found slightly more people living in poverty than the first one — 11.7% of all Americans, or around 38 million people (almost equal to the population of California). The difference was especially great for people over 65. According to the official poverty measure, less than 9% of older Americans (4.9 million) live in poverty, but the SPM puts the figure at 12.8% (nearly 7 million).

Defining the Cost of Living

The SPM is more useful than the official poverty guideline as an indicator of how much income people need to barely make ends meet. However, many living wage advocates argue that it still doesn’t reflect a family’s true needs.

A real living wage, they say, should do more than allow people to scrape by. It should enable them to support themselves decently without having to rely on additional help from the government. A worker making a true living wage shouldn’t have to worry every day whether some unexpected expense is going to push them over the edge into poverty.

Various economists and policymakers have tried to analyze the average household budget and develop a guideline for this sort of living wage. Currently, there are two primary alternatives for calculating a living wage, each with its own method for defining basic needs and the income needed to meet them. Their estimates differ significantly, but they’re both considerably higher than either the poverty guideline or the SPM.

The EPI Budget Calculator

In 2015, the Economic Policy Institute (EPI) developed a tool for calculating a living wage. Its budget calculator shows how much money a household needs for a “secure yet modest living standard.” That’s a level of income at which people not only survive but can live in safe, decent conditions.

Like the SPM, the EPI family budget calculator considers food, clothing, and housing costs. However, it also factors in costs the SPM doesn’t, including transportation, health care, child care, and taxes. It also allows a modest amount for extras like phone service, cleaning supplies, personal care items, books, and school supplies. It does not include any money for emergency or retirement savings.

The EPI calculator is adjustable, so you can use it to estimate expenses for households with up to two adults and four children. It uses housing and other expenses for different parts of the country (last updated in 2017) to show how much the cost of living varies by region.

According to the EPI’s budget map, there are some counties in the U.S. where a two-parent, two-child family needs less than $5,000 per month to live modestly and others where it requires more than $9,000 per month. That’s a significant difference, but even the low end of this scale is close to $60,000 per year — more than double both the Census Bureau’s official poverty threshold and the SPM for a family of this size.

The MIT Living Wage Calculator

Another tool for calculating the living wage rate is the living wage calculator developed by Amy Glasmeier, an economic geography and regional planning professor at the Massachusetts Institute of Technology (MIT). It estimates the amount a household needs “to achieve financial independence while maintaining housing and food security.”

Like the EPI calculator, it uses tax and spending data from different parts of the country to estimate the expenses for working families and individuals. It factors in all the basic expenses in a typical household budget, including food, housing, transportation, child care, health insurance, clothing, and personal care. It also accounts for income and payroll taxes.

The MIT calculator is somewhat more flexible than the EPI’s. It can estimate expenses for households with one or two working adults and up to three children. You can also add a second, nonworking adult who provides full-time child care. That increases the number of people living on a single worker’s income but eliminates child care as an expense.

However, MIT living wage calculator’s primary advantage is that in addition to estimating monthly or yearly expenditures, it also shows the hourly wage a worker would need to earn to meet them. For comparison, it also lists the “poverty wage” for a household of a given size — that is, the wage needed to maintain it at the HHS poverty line — and the actual minimum wage in the city or state.

According to MIT, the average living wage at the end of 2019 for a family of two working adults and two children was $21.54 per hour, or $89,606 per year, before taxes. However, it varies widely across different parts of the country — from as low as $76,222 in the McAllen, Texas, region to $131,266 near San Jose, California. Once again, even the lowest estimate from MIT’s calculator is much higher than the official poverty threshold for a family of four — nearly three times as high.

Location, Location, Location

The EPI and MIT calculators offer somewhat different estimates of what constitutes a living wage in America. However, there’s much more variation within each calculator across different parts of the country.

This table shows how each tool estimates the annual cost of living for a family with two working parents and two children in five different areas, including urban, rural, and suburban makeups. For comparison, it also includes the SPM’s estimates of a poverty wage for these same areas. The SPM and MIT costs are based on data from 2019. The EPI figure uses data from 2017. The official 2019 poverty line in the U.S. based on the same family size was $25,750.

SPM (Poverty Line) EPI (Living Wage) MIT (Living Wage)
Baird, Texas

(Callahan County)

$26,028 for homeowners with a mortgage

$22,713 for homeowners with no mortgage

$25,752 for renters

(Figures are for “Texas Nonmetro.”)

$67,370 $77,492 ($18.63 per hour)
Aurora, Illinois

(DuPage County)

$30,429 for homeowners with a mortgage

$25,825 for homeowners with no mortgage

$30,047 for renters

(Figures are for “Chicago-Naperville-Elgin.”)

$95,602 $99,551 ($23.93 per hour)
Los Angeles, California $37,468 for homeowners with a mortgage

$30,803 for homeowners with no mortgage

$36,918 for renters

$92,295 $112,361 ($27.01 per hour)
New York City, New York $35,530 for homeowners with a mortgage

$29,432 for homeowners with no mortgage

$35,026 for renters

(Figures are for “New York-Newark-Jersey City.”)

$124,129 $112,325 ($27 per hour)

(Figures are for “New York-Newark-Jersey City”)

Oklahoma City, Oklahoma $26,888 for homeowners with a mortgage

$23,321 for homeowners with no mortgage

$26,591 for renters

$81,552 $84,538 ($20.32 per hour)

These figures reveal a few patterns. For one, the cost of living is generally higher in urban areas than in rural or suburban ones. It’s also higher in big cities than in small ones and higher on the coasts than in more central parts of the country. All these factors put together mean that a living wage in large coastal cities, such as Los Angeles and New York, is much, much higher than in small inland towns.

The chart also shows the official poverty standard is lower than it should be. Even in rural Baird, Texas, the 2019 SPM finds that a family of four with a mortgage needs a little more than $26,000 after taxes to get by, yet the official poverty measure for 2019 is less than $26,000 before taxes. It’s clearly not enough to meet a family’s needs, even in the cheapest parts of the country, and it’s nowhere near enough in expensive coastal cities.

Why a Living Wage Is Higher Than Many People Think

If you live in New York City, you’re probably nodding your head in recognition right now. But if you live in an area with a lower cost of living, it may come as a shock to see that there are places where a family could need over $90,000 per year to pay all its bills. Perhaps you even suspect the data must be wrong somehow.

But there’s no lack of evidence these numbers are accurate. For example, a 2017 survey by CareerBuilder found that across the country, 78% of workers — including nearly 1 in 10 of those making over $100,000 per year — live paycheck to paycheck. And while it’s tempting to think these individuals must be struggling due to poor spending habits, such as dining out too often, the calculations from the EPI and MIT show that in many areas, a family could easily have trouble making ends meet, even on a $100,000 salary.

The detailed cost breakdowns from the EPI and MIT calculators shed some light on just why so many people struggle to get by on what looks like a middle-class income. They identify four expenses that hit budgets particularly hard: child care, housing, transportation, and health care.

Child Care

According to MIT, the average family of four spends 21.6% of its income on child care — more than it devotes to housing. Like so many other costs, this one varies widely by region.

For instance, according to Child Care Aware, the average cost of day care in Massachusetts is more than $36,000 for an infant and a 4-year-old. For a family with a $100,000 annual income, keeping these two children in day care would eat up more than one-third of its earnings. By contrast, in Arkansas, the average cost for two children of these ages is only $10,936 — around 11% of that same $100,000 income.


MIT reports the average family spends 17.2% of its income on housing. However, this expense varies even more dramatically than child care costs.

In some cities, rent and mortgage costs are ridiculously high. The most notorious of these is San Francisco, where according to a 2018 SmartAsset study, the average rent is nearly $4,400 per month for a two-bedroom apartment. That means a family of four (with the children sharing a room) would have to spend over $52,000 per year on rent — more than half the annual budget for a family making $100,000.

However, the same study found that in Memphis, Tennessee, the average rent for a two-bedroom is just $769 per month, or $9,228 per year. That’s less than 10% of a $100,000 salary.


The Federal Highway Administration (FHA) reports that the average American family spends about 19% of its budget on transportation. This cost also varies by location — but in just the opposite way from housing costs. While housing is usually most expensive in densely populated cities, transportation costs most in the “exurbs” — the distant outskirts of a city, where cars are the only way to get around.

According to the FHA, families in the exurbs spend an average of 25% of their income on transportation. By contrast, those in cities and other walkable neighborhoods can often live without a car, cutting their transportation costs down to 9% of their income. That creates a dilemma for many people: deciding whether to move into the city and pay exorbitant rates for rent or stay out in the suburbs and spend more money — and more time — driving.

Health Care

Health care costs also take a big bite out of many people’s budgets. According to the Kaiser Family Foundation, the average employer-sponsored family health care plan cost $21,342 in 2020, and workers paid $5,588 of that out of their own pockets. For individuals, the average total cost is $7,470, with workers paying $1,243.

For those who must buy their own health plans, such as self-employed people, the costs are higher still. According to a June 2020 eHealth study, families that purchased a health insurance policy through the federal exchange in 2020 paid an average of $1,152 per month — $13,824 per year — in premiums. On top of that, the average family policy had an annual deductible of $8,439, so a family’s out-of-pocket health care costs could easily come to more than $22,000.

Individuals paid an average of $456 per month ($5,472 per year) with deductibles of $4,364, for a total potential out-of-pocket cost of almost $10,000. That’s significantly better than the cost for families, but if you only make $30,000 per year, it’s still a third of your income.

Student Loans

Many Americans are struggling with one more expense the EPI and MIT calculators don’t even mention: student loan payments. According to the Pew Research Center, 37% of all adults under age 30 and 22% of those aged 30 to 44 have student loans they’re still working to pay off.

Like many other expenses, student loan debt varies by location. According to The Institute for College Access and Success, the average student loan balance for graduating college seniors in 2019 was nearly $29,000. However, in Utah, the average was under $18,000, while in New Hampshire, it was over $29,400. Overall, graduates in the Northeast tend to carry the most debt, while those in the Southwest have the least.

Pro tip: If you have student loan debt, consider refinancing to a lower interest rate. This can help reduce the amount of time it takes to become debt-free. Companies like Credible allow you to compare lenders so you can find the best possible rates. They’re even offering a cash bonus to Money Crashers readers of up to $750.

A Survival Wage vs. a Living Wage

The SPM and the EPI and MIT living wage calculators offer vastly different pictures of what it takes for a family to get by. All three agree it varies considerably by location, but across all areas, the SPM’s standard is much lower than either the EPI’s or MIT’s. There are differences between the EPI and MIT estimates too, with MIT’s typically being higher. But they’re much closer to each other than either of them is to the SPM.

That reflects the fact that the SPM isn’t really meant to be a living wage in the same sense as the EPI and MIT measures. The SPM is merely an alternative way of calculating the poverty level. It reflects the bare minimum people need to survive, assuming they take advantage of all available forms of government aid.

The EPI and MIT calculators, by contrast, are looking at how much people need to live decently. That means meeting all their basic needs without depending on government benefits. It means living in a home that’s structurally sound and sanitary, eating nutritious food, and having a car if necessary. It also allows for items beyond the bare necessities, such as clothing, cleaning supplies, personal care, and phone or Internet service.

There’s a lot of middle ground between the poverty budget set by the SPM and the living wage set by the EPI and MIT. That means there are many low-wage workers in the U.S. who aren’t technically living in poverty but are still financially insecure. It’s a constant struggle for them to pay for minor expenses like a car repair or new shoes for their kids. They make enough to get by but not to get ahead.

There’s one point on which all three guidelines agree: The current federal minimum wage of $7.25 per hour is not a true living wage. In many parts of the country, it’s not even a subsistence wage.

At $7.25 per hour, a two-earner family would bring in $30,160 per year. Even according to the bare-bones SPM standard, that’s not enough to support a family of four in suburban DeKalb County or urban Los Angeles and New York. And based on the EPI and MIT calculators, it’s not nearly enough in Oklahoma City or Baird.

In fact, according to the EPI and MIT, even Biden’s proposal for a $15-per-hour minimum wage isn’t ambitious enough. In Baird, the cheapest of the five municipalities on the list, MIT calculates it would take two incomes of at least $18.63 per hour to support a family of four. The EPI’s cost of living estimate for Baird is a bit lower, but it still works out to an hourly wage of $16.19, more than a dollar above the proposed level. And in every other city on the list, the minimum wage would need to be around $20 per hour or more.

Of course, passing a minimum wage this high at the federal level is overwhelmingly unlikely. Given how much resistance there is to the idea of a $15-per-hour federal minimum wage, there’s essentially no chance Congress could ever agree on anything like the $27-per-hour living wage needed in Los Angeles.

Fortunately, it doesn’t have to. If the federal government doesn’t intervene, individual states and cities can tackle the problem by passing their own minimum wage laws to ensure workers living there can make enough to maintain a decent, modest lifestyle. Given the wide variation in the living wage across different parts of the country, it’s a viable way to meet workers’ needs in high-priced cities without unduly burdening employers elsewhere in the country.

Final Word

There’s no way to pin down the meaning of a living wage with a single number. The cost of living varies too much from one part of the country to another. If lawmakers want to set the minimum wage at a livable level for everyone, they’ll have to do it at the city and state levels — which is exactly what’s happening now.

That’s where the EPI and MIT data can be a real help. State and local governments wrangling over the minimum wage can use these tools to figure out just how much a household needs to get by in their area. Based on this information, they can make sensible policy choices — not just about wages, but also about who should qualify for benefits, such as food aid or reduced mortgage rates.

The EPI and MIT calculators are useful for individuals too. Looking at these budget calculators can help you evaluate your household budget and see how the amount you’re spending in different categories compares to the reasonable minimum. You can also use these tools to estimate how much it would cost to have a child or how much you could save by moving to another city.

Source: moneycrashers.com

Balloon Payment Mortgage – What It Is & How It Works

Mortgages come in many varieties. One lesser-known type of mortgage is the balloon payment mortgage, sometimes called simply a balloon mortgage. Often a mystery to home buyers, this type of mortgage comes with unusual terms, a potential for huge savings, and enormous risk.

What Is a Balloon Mortgage?

A balloon payment mortgage is a short-term home loan with low monthly payments where the bulk of the loan is due at the end of the loan period.

Unlike a typical mortgage, the balance of a balloon mortgage isn’t designed to fully amortize — reduce to $0 through debt payments — throughout the loan payment term. Instead, the borrower pays the majority of the loan off in one lump-sum payment at the end of the term.

How Does a Balloon Mortgage Work?

Balloon loans can be any loan with a lump-sum payment schedule, including auto loans, personal loans, and mortgages. The lump sum can be due at any point during the loan term, but it’s most often due at the end.

Balloon mortgage terms can be as short as 18 months, but they’re more typically five to seven years.

Monthly payments throughout the loan term are either:

  • Interest Only. You pay interest that accrues each month, so your payment at the end is the full amount you borrowed.
  • Balance and Interest. You’ll make payments toward the interest and principal, so your payment at the end is less than the full amount you borrowed.

If you make balance-and-interest payments, your monthly mortgage payment is similar to what you’d pay with a 30-year mortgage, except the balance comes due after just a few years.

If you make interest-only payments, your monthly payment is lower than what you’d pay with a typical mortgage, and you owe the amount you borrowed in one lump sum after a few years.

Balloon mortgage rates are often lower than those for longer-term mortgages, and balloon mortgages can be fixed-rate or variable-rate loans. Balloon mortgages tend to come with lower closing costs, so they may be easier to afford or qualify for than a typical mortgage.

Example of a Balloon Payment

Say you’re purchasing a house for $250,000. You make a down payment of $50,000 and borrow a $200,000, seven-year balloon payment mortgage at a 4.5% fixed interest rate.

If you make balance-and-interest payments of $1,013 per month for 83 months, you’ll owe a balloon payment of $175,066 after seven years, according to the balloon mortgage calculator from MortgageCalculator.org. You’ll have paid $59,176 in interest.

With the same mortgage on a typical 30-year term, you’d pay $1,013 per month. Over the life of the loan, you’d pay back the $200,000 you borrowed plus $164,680 in interest.

What Happens If You Can’t Pay a Balloon Payment?

Balloon payment mortgages present a risk for homeowners because you count on being able to afford a large payment five or seven years down the road. However, borrowers have options to get rid of a balloon payment.

How to Get Rid of a Balloon Payment

You have four main options to meet or eliminate your obligation to a balloon mortgage payment:

  • Pay It Off. The simplest — but maybe not the easiest — option is to stick to the original plan and make the balloon payment to pay off your loan.
  • Sell the Home. If you can sell the home for more than what you owe in a balloon payment, you can pay off the mortgage and profit from the home sale.
  • Refinance. Borrowers commonly refinance the mortgage before the balloon payment comes due. This can change the interest rate and extend the repayment term to set you up with ongoing monthly payments.
  • Reset. A balloon payment mortgage might come with an option to reset at the end of the term. These are sometimes called “convertible” balloon mortgages, and the lender writes the terms when you take out the original loan. For example, a 3/27 convertible balloon mortgage will start with three years at the original interest rate and then give you the option in year four to pay the balance or convert the loan to a fixed-rate, fully amortized 27-year mortgage with a new interest rate based on market rates.

Selling a Home With a Balloon Payment Mortgage

Homeowners who plan to sell quickly after buying a property often benefit from the low interest and low monthly payments of a balloon payment mortgage. You save money as long as you can sell the home at a profit before the balloon payment comes due.

This plan can benefit home buyers who plan to move within a few years, buyers who want to flip properties for a profit, and commercial developers who want to build on and sell property.

The risk in this plan is the timing. You could end up needing to sell a property in a down market when prices are low or buyers are scarce. You lose money or face foreclosure if you can’t sell for more than what you owe on the mortgage.

Refinance vs. Reset

Refinancing or resetting a balloon mortgage lets a borrower enjoy the initial low-interest, low-payment period while avoiding the balloon payment.

Accepting a convertible balloon mortgage now could put you at a disadvantage if you expect your credit to improve over the next few years. The lender sets the reset terms based on your current credit score, so interest and terms might be less favorable than you’d get by refinancing to a new loan.

Refinancing down the line when you’ve built better credit seems wise, but you risk needing to refinance during a period when market rates are high. Signing up for a 30-year fixed-rate mortgage in the first place could prove more financially beneficial.

Refinancing might be your best option, though, if you can’t afford to make the balloon payment when it’s due. In that case, even a higher interest rate is better than foreclosure.

Is a Balloon Mortgage a Good Idea?

Balloon mortgages come with risks and rewards that make them a good or bad fit for different types of buyers.


  1. Interest rates are often lower than with standard 30-year fixed-rate mortgages.
  2. This type of mortgage is often easier to qualify for.
  3. Closing costs are often lower.
  4. Monthly payments are lower, especially if you make interest-only payments.
  5. You pay less in interest over the life of the loan.


  1. You must pay back the bulk of the loan — potentially hundreds of thousands of dollars — in one payment.
  2. Counting on selling the home, refinancing, or resetting the loan risks unfavorable terms in a poor market.
  3. Interest-only payments don’t let you build home equity.

Who Should Get a Balloon Payment Mortgage?

Because of the risk for borrowers, balloon mortgages are more common in commercial real estate — where businesses can absorb ill-timed balloon payments — than for private home buyers. But some private home buyers can benefit from this type of mortgage too.

A balloon payment mortgage might be right for you if:

  • You Move Often. When you know you’ll sell your home within seven years — regardless of the market — a short-term loan might make sense.
  • You Flip Houses. When you buy a home intending to sell it in a year or so, a balloon mortgage could help you get started with lower upfront costs.
  • You’re Early in Your Career. If you expect to have significantly higher income within a few years and could afford a balloon payment or higher monthly payments after resetting the mortgage, the loan could be a good fit.
  • You’re Building Credit. If you expect to improve your credit in a few years, you may be able refinance the loan later to a longer term at a more favorable interest rate, depending on market rates in the future.

An adjustable-rate mortgage (ARM) — which starts with a period of three to seven years at a low fixed interest rate and then switches to a variable rate for the remainder of the loan term — can offer most of the same benefits with less risk than a balloon mortgage. However, an ARM might come with higher closing costs and be tougher to qualify for.

Final Word

When they first came on the market, balloon mortgages were only available to real estate investors. They generally make sense for home buyers who plan to flip a property quickly to ensure they have enough money to make the balloon payment. These mortgages offer the benefit of low closing costs, low interest rates, and low monthly payments, making home investment more affordable.

Now that balloon mortgages are available to home buyers for any property, you have the option to use one for your primary residence. But the benefits largely disappear if you plan to stay in your home beyond the length of the loan.

Lenders might promote balloon mortgages to borrowers with poor credit as a way of getting a favorable interest rate, but beware the risks. If you can’t afford the balloon payment when it’s due, you could face foreclosure. Or you’ll have to refinance the mortgage and risk less favorable terms. Consider an adjustable-rate mortgage or other options for low-income home buyers to get similar benefits without the risk.

Source: moneycrashers.com

Here’s How 3 Vintage Clothing Businesses Built Their Brands

It’s tempting to think that selling your old clothes on sites like Poshmark or ThredUp will immediately generate passive income that supports your brunch habit and annual rent increase.

But if you want long-term success and a recognizable brand that people return to, running a vintage resale business is anything but easy. It takes work, say small business owners who have done it. But it is possible.

We talked with three vintage clothing business owners about how they got their start, crafted their aesthetic and built their brand.

3 Sellers Making a Go in the Vintage Clothing Business

Sara DiNatale of Lucky 727 Vintage

Sara DiNatale has always loved secondhand clothing, so it makes sense that she spent a lot of time in thrift stores.

At first, she shopped for herself and bought items tailored to her tastes. But over time, she started to recognize what items were popular and trendy, even if she didn’t like them, like a Harley Davidson T-shirt.

“Maybe it wasn’t my aesthetic, but I knew that someone would totally die for this,” said DiNatale, who lives in St. Petersburg, Fla. “I did it enough times that I was like: ‘Why don’t I try this?’”

One of her first sales was a Dooney & Bourke vintage belt that she purchased on a bidding website for herself. When it arrived, she discovered that it didn’t fit. She resold the piece for more than double what she paid.

That was a teaching moment for DiNatale: She realized that there was money to be made in vintage. So she took the profits and invested them back into more vintage purchases that she would then sell.

For those starting out, she says, don’t take money straight out of your pocket. Either sell what you already own or invest what you’ve already earned into something else.

DiNatale partnered with a friend when she decided to officially start a vintage side-hustle. They chose clothing resale app Depop to start because DiNatale felt she knew their market and had a similar style.

A woman wearing vintage coveralls shows off other vintage items she sells on Depop and Etsy. The second photo is vintage shoes.
DiNatale loves secondhand clothing, so she started a side business selling vintage pieces with a friend in January 2020. Her biggest piece of advice: Know what sells. Chris Zuppa/The Penny Hoarder

If she could do it over, she might not make the same choice. Depop’s audience skews young, she says, and doesn’t always see the value of spending a high price on an item, even if it’s a high-quality vintage piece. On Etsy, DiNatale has found she has a better chance at getting a buyer who understands the quality of the garment, but there is also more work involved with the platform.

DiNatale’s colleague came up with the name Lucky 727 Vintage, a play off of St. Petersburg’s area code. She and her partner chose to make a business name, partially because Depop requires it and partially because they wanted to interact online with customers as a single entity. They also made an Instagram page at Depop’s suggestion, although the Instagram account ended up working out as a separate revenue stream for local customers.

The vintage business is what you make of it, DiNatale said. Since starting in January 2020, Lucky 727 Vintage has sold 200 items, about evenly split between the two co-owners. On average, DiNatale makes about $100 a month in profit, although some months it comes out to much more than that.

DiNatale has learned some tricks:

  • First, make sure your product descriptions have appropriate information, like measurements and garment details. If someone has to message you to ask a question, they may no longer be interested by the time you respond.
  • Keep apprised of any changes to Depop’s interface through a sub-Reddit and watch for algorithm changes that could affect how your merchandise is promoted.
  • Most importantly: Know what sells. DiNatale is an avid Dr. Martens fan, and she knows that vintage Docs go quick and at a high cost. They are the rare item she will shell out for in advance, because she knows she’ll make a return.

Jenna Wu of Nanena Vintage

Jenna Wu didn’t always appreciate her love of thrifting. In fact, as a child, she was ashamed that she had to shop at thrift stores, a necessity in her low-income family.

It wasn’t until she got older that she realized thrifting could be cool. She was inspired by a friend who had an unconventional style but always looked amazing, and almost all of her clothes were thrifted. That turned Wu’s thinking, at the same time she started to look into the dangers of fast fashion and waste.

Now, Wu has come full circle. She runs a full-time business based in Portland, Ore., called Nanena Vintage, a play on her nickname of “Nena.” The perks of running a vintage clothing business are the flexibility — you set your own schedule — and the creativity of presenting and packaging the clothes to make them look as desirable as possible.

When Wu started thrifting for money, she was working in customer service and felt drained by her 9-to-5. Running a thrifting business was an artistic outlet that she actually enjoyed. Her partner encouraged her to pursue it full-time.

Jenna Wu, a vintage clothing entrepreneur, shows off some of her vintage clothing on a rack.
In 2019, Wu’s entire income from vintage was $5,000. It has increased since then, but she’s still unable to live independently off the money she makes from Nanena Vintage. Photo courtesy of Jenna Wu

Wu’s style gravitates toward feminine and classic pieces, but she tries to intersperse styles that are popular and trendy as well. She’s always keeping an eye on what people want to buy, but she’s also focused on the quality of the material and the uniqueness of the design. And there’s one thing she absolutely doesn’t do — streetwear.

When pricing, she takes into consideration how much time it takes to find what she calls a “gem” in a sea of mediocre items. All that time spent goes into the price a reseller will charge for a garment.

Wu started by selling her items on Depop and found success. She was selling at least one item a day. But a year in, she saw her sales drop off. She wasn’t sure why — had the algorithm changed? As sales continued to dwindle, she decided to switch to Instagram.

It was a learning curve at first.

“You just have to keep at it and keep going and then eventually people will find you,” she said.

Wu has a money-saving tip for anyone starting out: Create your own shipping labels rather than going to the post office.

And if you do want to go out on your own and make vintage a full-time business, be prepared for it to take time before becoming financially viable. When Wu first started, in 2019, her entire income from vintage for the year was $5,000. It has increased since then, but she’s still unable to live independently off the money she makes from Nanena Vintage. In December 2020, she made $1,200 in profit.

Lesson learned: If you want to transform your vintage clothing business from your side hustle to a full-time gig, save up in advance.

Esmeralda Castañeda of Esme Vintage Shop

For Esmeralda Castañeda, selling vintage clothes was initially a way to make money while in graduate school.

She learned the tricks of the trade by watching Youtube videos from longtime vintage sellers who had gotten their start on eBay. But she wanted to sell on a more aesthetic-driven forum — that’s why she initially chose Depop.

Like DiNatale, Castañeda recommends starting with selling your own clothes rather than buying clothes to sell. The first six months of her business were a lot of experimentation with where to shoot photos, how to style them and what backgrounds were best. But it’s harder to experiment if you’re depending on a return from your investment.

Castañeda doesn’t take her vintage reselling lightly — she recommends looking into when things were made and what to expect in material and fit based on the decade, because fakes do happen. Understanding the history behind the clothing helps to make your products better.

Castañeda doesn’t really have a defined style for the clothes she sells — instead, she tries to do a little bit of everything. Her website has designations for mod fashion, minimalist, romantic and classic. She says she skews more toward the romantic and minimalist side, but that’s largely because of what she finds in her local Indio, Calif., thrift stores.

“That’s the thing with vintage,” she says. “You really can’t dictate too much unless you are going to be exclusive. You’re not going to find enough to make a really good income. You really need to have a broader reach.”

Although Castañeda got her start on Depop, where she has almost 10,000 followers, she’s actually seen more of what she calls “influence” on Instagram. For those starting out, Castañeda recommends starting on Instagram and building a brand there. If you’re not finding success, Depop is a good way to have a built-in audience, but she finds Instagram better for building something long-term.

All three vintage business owners agree that making money with your vintage clothing business is totally dependent on how much you work. Some months, Castañeda says, she brings in as little as $500, while others can be as high as $3,000.

“A lot of people assume for some reason that this is passive income, but it’s not,” she says. “You do have to do something to get the income going.”

Elizabeth Djinis is a contributor to The Penny Hoarder.



Source: thepennyhoarder.com

7 Steps to Prepare for Tax Season

By midnight on April 15, taxpayers must e-file or mail their federal and, if applicable, state tax returns for the previous calendar tax year without penalty. Well before the deadline, have you hunted and gathered all your documents, looked for a tax pro or software, and learned about any new tax credits or deductions you might be eligible for?

You should have received a Form W-2 by Jan. 31 or, with any mail delay, soon thereafter. The same deadline applies to certain 1099-MISC forms for independent contractors. Each financial institution that paid you at least $10 of interest during the year must send you a copy of the 1099-INT by Jan. 31 as well.

Waiting until the last minute to prepare for tax filing is never advisable. If taxpayers work for one employer, their taxes may not be complicated, but if they have side gigs or they’re self-employed, tax returns can take a while to fill out.

7 Tax Prep Tips for 2021

Before taxpayers file, here are some tasks they need to do.

1. Decide on Hiring a Pro or DIY

Taxpayers can either prepare and file their taxes on their own or hire a professional. If they choose the latter, they can go to a tax preparation service like H&R Block or contact a local accountant or other tax pro.

The costs for a professional vary, and the more complicated a return is, the higher the costs will be.

The IRS has a tool where taxpayers can find a tax preparer near them with credentials or select qualifications.

If you’re going it alone, IRS Free File lets you prepare and file your federal income tax online for free. There are two options, based on income.

•  You can file on an IRS partner site if your adjusted gross income was $72,000 or less. This is a guided preparation, and the online service does all the math.
•  Those with income above $72,000 who know how to prepare paper forms and can do basic calculations can fill out and file electronic federal tax forms. (There is no state tax filing with this option.)

2. Collect Tax Documents

By the end of January, you should have received tax documents from employers, brokerage firms, and others you did business with. They include a W-2 for a salaried worker and 1099s for contract workers or freelancers.

Employers will send the documents in the mail or electronically.

Investors might receive these forms:

•  1099-B, which reports capital gains and losses
•  1099-DIV, which reports dividend income and capital gains distributions
•  1099-INT, which reports interest income
•  1099-R, which reports retirement account distributions

Other 1099 forms include:

•  1099-MISC, which reports payments in lieu of dividends
•  1099-Q, which reports distributions from education savings accounts and 529 accounts

If taxpayers won anything while gambling, they’ll need to fill out Form W-2G. If they paid at least $600 in mortgage interest during the year, they’ll receive Form 1098, whose information can be used to claim a mortgage interest tax deduction.

A list of income-related forms can be found on the IRS website.

Last year’s federal return, and, if applicable, state return could be good reminders of what was filed last year and the documents used.

3. Look Into Deductions and Credits

Take the standard deduction or itemize deductions? The higher figure is the winner.

The vast majority of Americans claim the standard deduction, the number subtracted from your income before you calculate the amount of tax you owe.

For tax year 2020, the standard deductions are:

•  $12,400 for a single filer
•  $24,800 for a married couple filing jointly
•  $12,400 for a married couple filing separately
•  $18,650 for a head of household

Individuals interested in itemizing tax deductions can look into whether they’re eligible for a long list of deductions like a home office (and, if eligible, whether to use the simplified option for computing the deduction), education deductions, health care deductions, and investment-related deductions.

The IRS notes that you may benefit from itemizing deductions if any of these apply:

•  Don’t qualify for the standard deduction.
•  Had large uninsured medical or dental expenses during the year.
•  Paid interest and taxes on your home.
•  Had large uninsured casualty or theft losses.
•  Made large contributions to qualified charities.
•  Have total itemized deductions that are more than the standard deduction to which you otherwise are entitled.

Then there are tax credits, a dollar-for-dollar reduction of the income tax you owe. So if you owe, say, $1,500 in federal taxes but are eligible for $1,500 in tax credits, your tax liability is zero.

There are family and dependent credits, health care credits, education credits, homeowner credits, and income and savings credits.

Taxpayers can see the entire tax credits and deductions list on the IRS website.

4. Make a Final Estimated Tax Payment

Taxpayers who do not have taxes withheld from their paychecks can pay estimated taxes every quarter to avoid owing a big chunk of change.

In 2020, the first two quarters of taxes were due on July 15. The third was due on Sept. 15, and the fourth was due on Jan. 15, 2021.

5. Apply for a Payment Plan If Needed

Another way to prepare for taxes is to apply for a payment plan with the IRS, if that seems necessary.

Just know that penalties and interest will accrue until you pay off the balance.

For the 2020 tax year the IRS issued revised COVID-related collection procedures . They include:

•  Taxpayers who qualify for a short-term payment plan may now have up to 180 days to resolve their tax liabilities instead of 120 days.
•  Qualified individual taxpayers who owe less than $250,000 may set up installment agreements without providing substantiation or a financial statement if their monthly payment proposal is sufficient.
•  The IRS is offering flexibility to some taxpayers who are temporarily unable to meet the payment terms of an accepted offer in compromise (settlement of a tax bill for less than the amount owed).
With a long-term payment plan, taxpayers may pay taxes for a period of more than 120 days with monthly payments.

In general, the payment plans are available to individuals who owe $50,000 or less in combined income tax, penalties, and interest or businesses that owe $25,000 or less, combined, that have filed all tax returns.

A short-term payment plan has a $0 setup fee online, by phone or mail, or in person.

A long-term payment plan has a $31 setup fee online, or $107 by phone, mail, or in person. (The setup fee is waived for low-income payers.)

Taxpayers can pay for the plans on the IRS’s website.

6. Decide Whether to File for an Extension

If you need more time to prepare your federal tax return, you can electronically request an extension until Oct. 15 to file a return.

To get the extension, you must estimate your tax liability and pay any amount due by April 15 to avoid penalties.

7. Look Into CARES Act Provisions

The CARES Act was passed in March 2020 to help Americans during the COVID-19 crisis. The act included the Federal Pandemic Unemployment Compensation program, which gave people who were collecting unemployment compensation an extra $600 per week through July.

At the end of 2020, the president signed a $900 billion coronavirus relief bill, which gave people earning unemployment an extra $300 per week for up to 11 weeks.

Unemployment assistance does count as income, which means the base amount and the enhancements of $600 and $300 are taxable.

Most government agencies were to provide a paper copy of Form 1099-G, reporting unemployment compensation, by Jan. 31 of the year after the year of payment.

Other programs under the CARES Act aimed to assist struggling business owners. They include the Paycheck Protection Program, the Employee Retention Credit, Economic Injury Disaster Loans, and Payroll Tax Postponement.

The PPP program gave employers the chance to borrow up to 2.5 times their average monthly payroll, or up to $10 million, to cover workers’ paychecks. A forgiven PPP loan is not taxable under federal law, and business owners can deduct qualifying expenses paid with the money from the forgiven PPP loan, according to the U.S. Small Business Administration.

With Economic Injury Disaster Loans, business owners could borrow up to $2 million or they could receive a cash advance, which would not need to be repaid, up to $10,000. Emergency EIDL advances aren’t included in income, and taxpayers can deduct business expenses they paid using the advance, Bloomberg Tax notes.

The Employee Retention Credit , which gave employers a tax credit for keeping workers on the job, could reduce expenses that business owners would otherwise pay on their federal return and is not counted as income, according to the IRS.

Special Distribution Provisions

Another CARES Act provision provides for special distribution options and rollover rules for retirement plans and IRAs and expands permissible loans from certain retirement plans.

The IRS lays out the rules in a piece titled “Coronavirus-related relief for retirement plans and IRAs, questions and answers.”

In general, an individual could take a distribution of up to $100,000 from employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs without the typical 10% additional tax on early distributions (before age 59½).

The provision also increases the limit on the amount that a qualified individual can borrow from a retirement plan. An IRA does not count. It permits a plan sponsor to offer qualified individuals up to one additional year to repay their plan loans, too.

The criteria for qualified individuals can be found on the IRS’s website, but it basically says that individuals who had the coronavirus or had a spouse or dependent with the virus, or who experienced financial hardship because of coronavirus would be eligible.

The Takeaway

“Tax prep” isn’t a phrase signaling that big fun is on the way, but putting off the inevitable isn’t the best choice. Prepare for tax season as early as possible by gathering documents and information, choosing a preparer or getting ready to DIY, and learning about new tax credits and deductions.

Still have questions about preparing for taxes? SoFi’s Tax Help Center can answer tax questions as they apply to investing, stock options, loans, college, and retirement accounts.

You can also find out more about coronavirus tax relief, check your tax refund status, and make a tax payment from the hub.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.

Source: sofi.com

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