In this writeup, I'll take a look at the practical economics of trying to make a living writing short fiction in the U.S. This topic regularly comes up on message boards and at conventions. People usually speak in generalities ("You can't make a living writing stories!" "Can, too!") or cite specific-but-individual anecdotes without other data or analysis.
I'm going to take the approach that it is possible to survive on the proceeds from short fiction; the question then becomes, under what conditions can it be done?
Let's start by looking at the U.S. federal government's standards for poverty. The 2006 US poverty threshold for a single person is $9800, which works out to $817/month. A person working 40 hours a week at a job that pays $6.85/hour – which some rural school districts in Ohio are paying teachers, so it's not just burger wranglers bringing home this kind of paycheck – makes about $890/month after taxes.
As millions of college students know, it's entirely possible to survive on $800 (or even less) each month if you're able to split costs with other people and you can approach your financial situation with some savvy creativity.
Let's assume, for this scenario, that you are living with a group of other people in a large house. You are not anybody else's dependent for tax or other purposes (meaning your costs are lowered but nobody's there to bail you out if you can't make your share of the rent) and you likewise do not have any dependents (not even a goldfish). You are not trying to pay off loans or other debts. You live in a city and can use a bicycle, public transportation or carpools to get around so that you don't have the expense of maintaining a car. You are willing to shop at thrift stores, get most of your books and CDs from your public library, and you're not above dumpster diving if the situation warrants it.
Furthermore, we'll assume that you are fundamentally healthy, do not have a drug/alcohol habit, and are not accident prone. The budget we're going to work will not support your blowing $60 at the bar every Friday night, nor will it support the kind of health insurance that would actually keep you from going bankrupt should you actually get sick.
Under the above scenario, you could probably rent a room in a shared house in a student neighborhood for about $200 a month1. Your share of the utilities might come to $50, your food about $250, your transportation costs perhaps $45, plus $55 for things like aspirin and shampoo and the occasional treat at the neighborhood coffee house.
This means that each and every month, you need at minimum $600 to survive. At $600 per month, you'd be under the federal poverty level and would qualify for food stamps, but getting food stamps as a freelancer is often an unreliable prospect at best so we'll pretend this option doesn't even exist. But be aware that it could be an option, as might other forms of public assistance depending on where you live.
So, we know what you need to make; now let's focus on how you're going to make it.
The SFWA/HWA-designated professional rate for fiction is $0.05 a word. But most markets really don't pay that, and you might not have the luxury of shopping a story around much, so let's go with $0.03/word. At three cents a word, you'd have to sell 20,000 words worth of stories every month at minimum without fail.
Working from the assumption that 30% of your writing has to be rewritten/scrapped or simply doesn't sell for the required amount (and this is a very generous assumption), that output increases to 28,600. But if you think about it as having to produce 954 words a day to make your minimum, it doesn't seem that bad; most proficient writers can crank out a page an hour, so you're looking at 4 hours of butt-in-chair work each day.
By a similar calculation, if you wanted to upgrade your lifestyle and make $817/month, you'd have to write 1200 sellable words of fiction each day.
Things get much better if you're able to write children's stories and technical nonfiction. You can get $0.25/word for children's stories from the top markets; a 1,500-word story at that rate gets you $375; sell two of those and you've earned your nut for the month.
Writers with scientific knowledge and good research skills can sell short technical articles for $0.50 or $0.60 a word; a 1400-word article that might take you three solid days to research and write would earn you $800. Sell one of those a month, and the pressure's largely off. Sell two of those, and you're doing better than a 1st-grade teacher's aide in Delaware, OH. You could get a cat! (If your roommates will let you)
Things get even better if your fiction passes as literature in the eyes of the arts community and you can get yourself a grant every once in a while. (Finding and landing grants is a specialized skill in itself, but good first steps are subscribing to Support For Writers and checking with your state and local arts groups).
However, things get considerably worse if you think about how long it takes some publishers to read and respond to your work, and that many fiction markets don't pay until the work is published. If you send a sellable story out to market, it might be over a year before you see a check for it, even if it gets accepted by the very first place you send it to. Having some savings to fall back on becomes very, very important when you think about the dry spells you might encounter.
Once you've sold a stack of stories to decent publications and have started getting a name for yourself, a producer may notice one of your stories and buy the rights to it for film or television. That's like winning the lottery, both in payout and probability. More realistically, as a "name" story writer, you may be able to sell a collection. Collections are hard to sell to publishers because publishers find them hard to sell to readers, but if you succeed you may get a fairly decent advance of anything from a few hundred to a few thousand dollars. The advance for a story collection most often won't be as good as what you'd get if you sold a novel, unless you're clever and you've written a bunch of short stories featuring the same characters and have strung them together to make your collection look enough like a novel that publishers and readers will accept it as such.
And that's the moral of this writeup: if you want a career as a fiction writer, you need to start writing books, and that means writing novels, Harlan Ellison notwithstanding.
Of course, you could always try to become a creative writing professor. If you have the patience to teach and the temperament to deal with academia, a faculty position is a pretty sweet gig if you can find one. If you have a Master's degree, solid literary publication credits and luck, you might be able to find a job at a community college. If you want to teach at a large university, though, you'll need an MFA as well as lit credits and teaching experience. MFA programs can be tough to get into2a, expensive, and will likely mean you have to move to a new state for school 2b. Furthermore, they pump out many times more graduates than there are waiting faculty jobs.
But what if you don't want to (or find that you can't) write novels, don't want to teach (or can't do an MFA), and you don't have savings to fall back on? A part-time job that doesn't suck out your soul 3 can help tremendously. Some part-time jobs at colleges and public libraries can come with health insurance benefits; competition for these low-paid jobs can therefore be fierce, but they're worth looking for and applying to. Also, check out your local Starbucks; some stores offer health benefits for part-timers. Having a job that doesn't devour your energy but which gets you out of your room (and your own head) a couple of times a week can be a huge mental health boost.
In short, you can survive as a short fiction writer if you're healthy, single4, hard-working, prolific, and willing to cut a very low economic profile. A few thousand dollars saved in the bank before you start won't hurt, either.
1: If you live in an expensive area, $200 for a room in a 5- or 6-bedroom house may require some very hard searching and willingness to compromise your personal standards when it comes to cleanliness, building integrity, housemate appeal, and neighborhood safety; in very expensive places, it may be virtually impossible. There are other alternatives that determined writers have taken, however. I know of a young male writer who, for about a year, lived in an old van parked behind a friend's small house in California and wrote/submitted stories on a laptop connected to the household wireless network. He showered at the gym at a nearby college and was able to cook his meals in the house. Eventually he started making enough money that he was able to get a proper apartment.
2a: MFA programs can be particularly hard to get into if you've actually been getting paid for your fiction and have consequently been tainted by genre.
2b: Locals need not apply to many MFA programs.
3: The soul-sucking jobs are often well-paid but can cause despair that in turn causes chronic illness and writer's block; if you suspect you might have a soul, it's best to avoid evil jobs if you can.
4: Suffering for your art is noble; making your family suffer for it is bullshit.