High Income Earner Wonders Where to Go From Here
It isn't every day that I receive a note from a reader that is doing very well financially. This email underscores just how much of a bite tuition for is and just how important it is to make good financial decisions right from the start, whether you are learning in kollel or earning well into the six figures. The burden of tuition leaves very little room for error.
I think the letter also underscores the importance of being careful with the property of one's fellow, an instruction in Pirkei Avot. It takes incredible earning power for a couple to jointly earn $350,000. (The income this couple earns is split nearly evenly). There are few with such great earning power and just like they need to guard their own finances, we need to make sure that we are using their tuition and tzedakah dollars with care.
I am going with the writers numbers regarding after-tax income, as well as some of the estimated expenses, although I'm sure we can quibble. Taxes take a huge bite out of those in the upper income brackets. Normal employees can't do much to escape that. And, more children and greater itemization don't have the impact they do on those in the lower tax brackets.
Hi, I’m an occasional reader of your blog. I could use a bit of your help and perhaps help from your readers. Let me explain: My wife, two children (hopefully we’ll have more children soon) and I live in Manhattan and are looking to move in the not-so-distant future out of Manhattan. My wife asked me to figure out how much we could afford to borrow for a house, so I did the math, and I determined that we could reasonably afford to live in most places in the New York Metro area. Then I started
looking and asking around how much were the tuition costs in various
I nearly fell over backwards. There were very large disparities between neighborhoods with Northern New Jersey averaging over $15,000 per child, but schools in Brooklyn and Queens were considerably less. I did the math and figured that although my wife and I are very fortunate and collectively earn approximately $350,000 per year, if we were to have a total of four children and send them to school at $15,000 per kid per year, we really wouldn’t have much room for much else in our lives. Before you say WHAT?, please look at the numbers:
After we pay taxes and contribute to our 401k plans we’re left with about 55% of $350,000, or about $192,500, which is about $16,000 per month. Here’s a sample starter budget, BEFORE TUITION COSTS :
Property Tax (1,000)
Food & Household Items (1,200)
Heat, Electric, Water, Sewer (750)
Life, Home, Auto Insurance (600)
Student Loans (600)
Medical & Dental Bills (350)
Car Repairs, Gas, Tolls (250)
GRAND TOTAL BEFORE
Now let’s assume we have four kids and we spend $18,000 per child ($15,000 tuition + day camp + books + clothes). This totals to $72,000 for four kids or about $6,000 per month. So let’s go back to our budget:
GRAND TOTAL BEFORE
Tuition & Other (6,000)
So we’re left with $2,250, but that is without:
· Giving anything to charity;
· Saving for college
· Saving for other events such as Bar Mitzvahs or weddings
· Shul Dues
So here’s my conclusion: move somewhere where the tuition costs are moderate.
The schools don’t have to be prep schools or top notch or have all the bells and
whistles. Nor am I endorsing public schools or the Chasidishe Yeshivas. However, as long the school provides a decent education, that’s good. If sending kids to what is considered an “excellent” school means cutting back on retirement savings or charity or college savings, maybe it doesn’t make sense to send kids to an “excellent” school.
I realize we’re extremely fortunate to have what we have, but I want to make sure to use it wisely. I’m sure we could reduce some of the numbers above, but it won’t make a ton of difference. However, getting the $6,000 per month tuition cost down to let’s say $4,500 per month would make an extraordinary difference.
So where am I going wrong? Or maybe even right?
First off, please forgive me if it seems like I am "talking down," I'm not used to giving advice in this type of scenario. That said, I am as stunned by the numbers as you are. It only goes to prove that everyone must be careful with the income Hashem has blessed us with.
I don't know that my advice will sound particularly profound, but then again, the ins and outs of healthy personal finance aren't particularly complicated. So I will put forward a some rules of thumb that will hopefully help you build wealth quickly so that you can more freedom to choose the schools and their neighborhood you feel is really best for your family.
I don't think there is anything wrong with choosing a school with fewer bells and whistles, but I think it would be far better if you really positioned yourself to be able to have freedom of choice when it comes to the chinuch of your children. Ultimately you want to get rid of the debt you do have, buy a home, and then put away money like there is no tomorrow. Paying off your home before you have more tuitions staring you in the face would be a fine idea too. Money put away earlier, as you know, will yield incredible dividends and give you far more freedom, so that is the basis of my advice.
- Pay off the student loan really quickly, preferably before you take on any additional debt (i.e. a mortgage). Things will look a bit more rosy when the student loan isn't taking up its own line item in the budget.
- Budget all regular expenses around (less than) a one income.
- While you still have "only" two children, you should be attempting to bank as much as possible for 1) an emergency fund, 2) college funds and other long term expenditures from the next car to the weddings, and 3) paying off your home. As your kids get older, more of your current income will be eaten up by day to day expenses and it will get harder to save. So the quicker you can put away funds, the better.
- Build an emergency fund of one years worth of expenses to insulate you from downturns in income, changes in the tax code, and job loss. The additional interest your emergency fund earns can be designated to fund the college savings plans.
- Don't overbuy when purchasing your first home purchase. It is easier to sell a more average home that is in nice condition with some nice cosmetic updates than it is to sell a more custom home. There is no reason not to buy a home that will suit your families needs and wants in the future, but until you know where you want to live and where you want to educate your children, you likely don't want to "marry" a home. So steer clear of anything too custom at this point.
- Make sure you are sufficiently insured: life, disability, and an umbrella policy beyond liability. Those in high yielding professions are very vulnerable, so make sure you are well protected in cases of liability.
- Frugality is the underpinning of getting ahead financial, no matter how much or how little you earn. Frugality is how you will build passive income streams (interest, dividends, capital gains) that can be used to fund future expenses. The quicker you get out of debt and start to build passive income streams, the more choices you will have
- Speaking of frugality, I most certainly do not expect high income earners to exercise the same types of frugal behaviors as I do. Chazal tell us we should eat at our means, so I don't expect those with quarter million dollar incomes to be making the same choices as those with five figure incomes. The saying "it takes money to make money" is a true one. But even where you do have to spend additional money to maintain the sanity needed to do your job, maintain whatever image and social expectations might be required (e.g. inviting the entire office to a daughter's wedding), you can still exercise frugality, albeit on a different level, through patience and preparation. A good read is the book The Millionaire Next Door.
- Make sure you have a great financial advisor and tax advisor on your team. I am not familiar with the all of the ins and outs of the AMT, but certain investments that might provide little return can throw you through loops, so you need to have a reputable advisors.
- While I normally do endorse using competent professionals in the community where the prices and expertise are competitive, when you have high income levels, you definitely want to maintain a great deal of privacy. Don't feel bad about employing outside of the community.
- Continue to maintain relationships with other high income earners, but also make sure cultivate friendships with a more frugal crowd to eliminate some of the pressures that come with running with a wealthier crowd.
- Don't be afraid of your wealth. Hashem has given you an incredible gift to do many things, from building your own tuition "endowment" to giving tzedakah generously. Don't feel pressured to support everything because you have a high income. You still have the right to be prudent even if blessed with wealth.
I am really most interesting the advice my fantastic commentors will offer. But before I open the forum, I want to make one more note. This particular family is fortunate that they work a fairly normal work week. Other families with similar incomes often work crazy schedules that leave their additional funds tied up in hiring around the clock childcare, even as their children grow.
Comments. . . . . . . .