No offense, but I don't buy your argument for one second. First of all, a person making $10 per hour could not afford to save half of his/her income. But that aside, where can someone earn 7 percent, or 5 percent, or even 3 percent for that matter, these days?
About the only place that could be done is the stock market, and we already know how easily that can turn into a nightmare and you can lose your shirt.
There are certain investments that can have a pretty high rate of return, but I certainly would not recommend someone with a very limited amount of income getting involved with some type of "risky" money making scheme.
Certificates of Deposit (CD's) are paying less that 2 percent right now, and have been that way for some time. I have no idea when they will start paying a better rate of interest, could be years for all I know. Additionally, as inflation eats up at least part of the gains, depending on where the money is invested, whatever gains there are may be taxed.
Not trying to be a jerk here, but I have no idea where someone with a few dollars can invest and make anywhere near that high of an interest rate. If you have a way of doing it then I would suggest that you start an investment company because you could earn a fortune helping others make money.
Lets take an example.
Husband, wife and 1 kid. Husband works the $10/hour job, 40 hours a week, every week and lives in Illinois, wife stays at home with the kid. In Illinois he would receive $233 (more or less, this number from a quick and dirty online calculator from the state) for food a month, he would also qualify for Medicaid. I'm not sure exactly if he would qualify for reimbursement for AC/Heat.
Income is:
$1600/month from job
$233/month for food from state
$4850/year = $404/month from federal government as a tax credit for having kids and basically no money
Total:
$2237/month
Bare essentials:
$500/month rent
$120/month for utilities on average (got that number from my personal average of gas, electricity, sewer, water, and garbage)
$233/month on food (won't be eating great, but certainly can be done)
$30/month in clothing (bought from Goodwill/Salvation army. Though they would be so poor I'm sure getting donations would be possible. So could be $0/month, but lets just stick with $30/month)
$100/month for misc. child costs
Total: $983/month
Remaining: 2237-853=$1254/month
Pretty much essentials:
$2000 paid for beater car that lasts, for the sake of argument, 3 years before a new beater is needed.
$2000/36 months = $55/month
$100/month in gas
$40/month in insurance
$40/month for maintenance
$10/month for cell phone service (or likely $0/month with something like SafeLink Wireless)
$20/month for DSL internet
Total: $265/month
Remaining: 1254-265=$989
That invest half his income comes to $800/month, that leaves $189 to save each month to build an emergency fund.
Investing that $800/month into good mutual funds long term, will get about that 7% inflation adjusted amount
Check out some dates with
http://www.moneychimp.com/features/market_cagr.htm
If you invest long term (15+ years) there isn't a 15 year period in which you would lose money, with returns in the 5%-15% range usually.
So in short, its doable. Difficult (you would barely have any life at all), and you would be getting government assistance. But you could do it.
Edit: Forgot about the ROTH IRA tax credit which they would qualify for at that income level, which would give another $1000/year as a credit (so $83/month)
Double Edit: $2000/year as they are married on that income, so $166/month extra. That would pay for some fun on the side.
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