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Tuesday, September 22, 2009

Surviving a Layoff:
The beauty of a reasonable mortgage

Hat Tip: Rosie

This is a story about a family that is trying to make it through a layoff with severance, unemployment, and a bit extra while still making their house payments and without dipping into their savings. The article gives a number of tips that the frugal are quite familiar with, e.g. finding free entertainment and using the library. There is nothing particularly revolutionary, although I like the advice that luxuries are what you make of them.

What the article doesn't point out is the factors that are most important in keeping this family afloat during a (hopefully) temporary setback, and that is their previous spending and budgeting habits. They don't have to maintain loan payments on student loans, car loans, credit cards, and a house. The mortgage is their only debt and they have some savings. And their mortgage is manageable on a lesser, single income.

Here are things I think should be avoided like the plague:
*Buying a home for which the monthly mortgage payment is dependent on two incomes (or rent money or help from parents). I'm not opposed to earning more income, I'm opposed to tying up more than one regular income in order to make a mortgage payment. Life happens. Be prepared.
*Mortgage insurance. I know I'm out of step, but I do believe in coming in with that traditional down payment. Mortgage insurance can be a tremendous expense and if you have to refinance yourself out of it, you can be stuck in quite a rut in a falling market.
*ARMS, LEGS, BODY PARTS: I was surprised to find out that there are people still taking out ARMS (adjustable rate mortgages), especially right now when, with good credit, you can get a loan 30-year fixed rate loan at an unbelievable 5% or below. Anyone who has been a homeowner for a while now will tell you that you don't take an ARM when you can lock in a low rate for the long term. Those who are new to home ownership might be surprised to find out that at one time 8% was considered good. My parents talk about when a mortgage could run in teens.
*Refinancing over and over again: Refinancing can be a wonderful thing. In fact, we refinanced recently. But refinancing costs (a nice chunk of change I might add) and interest rate is only one determining factor in the calculation of whether or not refinancing is worth it. A friend of mine in the business tells me that there are those who return for a refinance like clockwork every 3-5 years. When you are using refinancing as a way of increasing cash flow, you can be almost certain that refinancing is one expensive proposition.
*Always hold a mortgage (i.e. continue to refinance) because you will save on taxes. You only save on taxes to the extend your itemized deductions exceed your standard deduction. Paying more interest so Uncle Sam can have a lesser piece is just silly. As one of my accounting profs used to say, the idea isn't to lower taxes, it is to increase profitability [and lowering taxes may or may not be a component of such].

And here is some BAD financial advice you might be given that you is worth rejecting:
*"Don't worry too much about buying a home that seems to be too expensive for your budget. Your income will grow and it will get easier." And if your income doesn't grow? But even if the 7 bad years never arrived and we lived perpetually in the land of the 7 fat cows, tuition will easily eat those income increases! So you still need to be able to afford the home.
*"Your home is your biggest asset." It is also your biggest liability!
*"Buy now. You can always refinance." On top of the fact that interest rates are are about as low as they can get, refinancing has become a lot more difficult.

Things I like: Fixed term loans (30 year fixed is still my favorite although we always throw extra at it), 20% down payments, and a reasonable size monthly mortgage payment. Yeah, I know. I'm no fun. But this is how you can survive a setback in tact.

45 comments:

Anonymous said...

I don't understand your advice about not relying on 2 incomes. Are you saying that mortgage,food,tuition,etc. should all come out of the first income? What should the 2nd income money go to?

homeowner said...

Just bought a house. 15 years at 4.375% with buying 1 point. Put 20% down. We are paying a lot more every month but believe being done in 15 years will make it worthwhile. We will be done before the kids are done with high school. Nonetheless we could afford though it would be tight to pay the mortgage on one salary or at least one salary and one very reduced salary.

Pays to shop around both for mortgage rates and for contractors. The price differences can be enormous.

Sima said...

Anonymous -- what it means is that one shouldn't take out a mortgage based on the premise that you will always have two incomes with which to cover it. Of course, if you have two incomes both can be used for your various expenses. However, if you weren't counting on both to cover the mortgage, at least you won't lose the house if one of you loses a job/gets ill/decides to be a SAHM/etc.

Anonymous said...

I understand the point made by ananymous no. 1. What I would add, however, is that if a family needs two incomes to get by, whether both incomes are needed for rent, food, mortgage or tuition, both working spouses should, if at all possible, purchase good private disability insurance (the insurance you get through work may not be very good because federal law (ERISA) makes it very easy for insurers who provide coverge as part of an employee benefit plan to disclaim coverage or cut someone off after a short time) and life insurance.

Anonymous said...

Sima -

Say both parents make 100K. What you are saying is that if one of the parents stops working, the 100K should cover tuition, mortgage, food, etc.. That implies that the other 100K is discretionary.

The reality is that if you are paying full tuition for a number of children, the 100K is not enough to cover everything so both parents need to work.

Anonymous said...

I too believe in buying less than you can afford (I'm paying the price in a long commute), but we should also acknowledge that
the couple in the article probably had some luck going for them. I suspect that unless they have a home that is well above average, when they bought their home in Crystal Lake Illinois, the price was low enough that their mortgage, tax and insurance is no more than rent for a two bedroom apt. in the NY/NJ metropolitan area.

SephardiLady said...

I don't understand your advice about not relying on 2 incomes. Are you saying that mortgage,food,tuition,etc. should all come out of the first income? What should the 2nd income money go to?

I'm not saying anything about tuition. I'm addressing a survival budget. If one income can't cover the mortgage and other *basic* expenses, I think the family is simply overextended.

This family is NOT living poor, they are living on a slim budget until the tables turn and the reason that they can live on a slim budget is a combination of a low mortgage + savings/lack of other debt.

Anonymous said...

How is relying on two incomes when you have two spouses working any different that relying on one income when only one spouse works? Should only those with very fat bank accounts have one parent be a stay at home parent since it's bad to rely on one income?

Dave said...

In your opinion is it reasonable to be set up in such a way that if one income is lost (temporarily), the mortgage and food can still be payed but tuition assistance may be required?

My other comment is that this is what emergency funds are for.

SephardiLady said...

That implies that the other 100K is discretionary.

The reality is that if you are paying full tuition for a number of children, the 100K is not enough to cover everything so both parents need to work.


I see no problem with a second income contributing/covering to tuition. Where such a family can no longer make tuition payments, hard decisions need to be made (should the scholarship fund not be able to pitch it).

In your opinion is it reasonable to be set up in such a way that if one income is lost (temporarily), the mortgage and food can still be payed but tuition assistance may be required?

In an ideal world, it would be wonderful if one income could cover everything. But we don't live in an ideal world. It seems to me that tuition assistance to help those who are otherwise responsible, but have been hit by a large setback, are good candidates for tuition assistance.

It certainly doesn't bother me that certain families who have been surprised by something out of the ordinary have been given some assistance in the meantime, especially when these families have always tried to pay in full in the past.

SephardiLady said...

How is relying on two incomes when you have two spouses working any different that relying on one income when only one spouse works?

Relying implies a simple, basic budget. If you MUST have two incomes to meet basic expenses, you are up a creek if one income earner takes a paycut, gets laid off, you get hit with a bill beyond the ordinary, a child has needs that must be attended to and a break from working must be taken.

Of course, relying on one income is risky (emergency funds are always a good idea), but if you are covering the basics, the other spouse can take a greater income producing role to help cushion the blow. In the case of a dual income family, I guess one could always suggest they take a 3rd and 4th job.

Should only those with very fat bank accounts have one parent be a stay at home parent since it's bad to rely on one income?

Huh?? I don't understand the question. I support relying (i.e. the basics) on a single income whether or not a parent choose to stay home or work. I've made the case plenty of times that in a single income family, the non-income earner can provide an unseen economic benefit by being frugal. I've also made the case that working when there are young children in the home doesn't necessarily benefit the family (at least in the present) because you have to earn a fairly significant amount to be able to cover daycare, transportation, camps, conviences you might not need, etc.

I don't understand the question.

Anonymous said...

I'm sorry that the question was not clear. What I was trying to say is that if you are preaching hedging your bets and being prepared for job loss and other financial setbacks, then doesn't that mean that for other than those with a hefty nest egg, shouldn't both parents be working to minimize the odds that there will be no breadwinner?

You note that if one parent is a SAHP, that parent can always enter the job market if the the other loses his/her job or can't work. However, it's not so simple. If the working spouse is laid off, that may mean (particularly when there is a high unemployment rate) that the SAHP is going to be searching for a job at the worst possible time when it is very hard to find work. Also, depending on prior education and work experience, someone who has been out of the job market for a while may either have no marketable skills or dated skills. Yes, that person may be able to get a minimum wage or low-earning job, but counting on a SAHP parent to fill the gap caused by the other's spouse's loss of work seems to be as risky as taking on a mortgage that requires two wage earners.
(BTW- SL probably doesn't fall into this category since she is doing part-time frelance/consulting work, obviously reads to stay on top of her field and perhaps goes to a seminar or conference now and then, and apparantly has a degree and pre- stay athome work experience in her field.)

Commenter Abbi said...

We have 4 years left on our mortgage, but that's after getting generous help from both our parents to help with the down payment. Our oldest will be in 5th grade.

Refinancing is practically unheard of here and the banks won't even think of offering you a mortgage without at least 40-50% down.

Anon 12:31: all the reasons you listed are my constant harangue about why SAHPing is not a great idea. You can add lack of 401(k)/retirement planning/pension where applicable to the list as well (yes, one can try to put away for retirement also on one income, but, let's get real, how much will really be left from a single income to add to a retirement fund?)

Dave said...

How is relying on two incomes when you have two spouses working any different that relying on one income when only one spouse works?

Assume that in a given area, the odds of any individual worker either being unemployed for multiple months to be 10% over a 5 year period.

We can now compare the three cases.

Single Income Required, Single Worker: 10% chance of losing the house

Dual Income Required, Two Workers: 20% chance of losing the house

Single Income Required, Two Workers (assuming either income can support the house): 1% chance of losing the house

Dave said...

(The word "either" in there was left over from an earlier draft, but I simplified things)

Anonymous said...

Dave: That's helpful, but I'm not sure your math works in all situations. The dual income couple may have more in savings. If the two members of the couple work in different fields or different industries they may have very different odds of getting laid off. Also, losing a job doesn't immediately translate to loss of a house, particularly with unemployment comp (yes, I know its low) and severance if you are lucky enough, as well as mortgagees not jumping into foreclosure with the first missed payment. The key is how long someone is out of work.

Anonymous said...

From my perspective, while this family has been prudent and responsible, it's not entirely clear that they are continuing to be responsible by not having the Dad enter the job market. I guess that depends on how much they have in savings and how long it takes the mom to find a new job. Mom is assuming that she will get a new job at similar pay and with similar benefits as her old job, but sadly for many who have been laid off, that is not always the case.

Dave said...

It's deliberately simplified to show the difference in risk exposure between requiring two incomes and requiring one.

Anonymous said...

SL: I suspect that many of your readers and commenters are not the ones who make the mistakes that you discuss or if we did in the past, have now learned. I suspect that your good advice is not reaching the people who need it the most. What would be terrific would be to develop some curricula for some basic financial education and planning and budgeting for high schools and some programs for adult education at Jewish Community Centers and Shuls. Does anyone know if any of that is being done? The younger one learns some of the basics the better -- i.e. before getting into debt, before foregoing the opportunity to save for retirement in your 20's so you can get the benefit of decades of compounding, before trusting th guy with the sure thing, etc.

Anonymous said...

Anon 10:59am - I don't understand your advice about not relying on 2 incomes. Are you saying that mortgage,food,tuition,etc. should all come out of the first income? What should the 2nd income money go to?

The point is that only one income should be relied upon for the "basics". Basics are loosely defined at the things essential to maintain life - housing, food, transportation to work, heat, medical care (in the modern world, health insurance), etc.

The reason for this is that it is almost inevitable that one spouse might be out of work for a period of time. And during that time, you only have one income upon which to survive.

An emergency fund is another technique to alleviate the situation when one of the workers in a household is out of work for a period of time. Though I am not sure exactly how tuition assistance committees view "emergency funds", or if they even permit such a thing (enforced irresponsibility? :-).

Mark

Anonymous said...

Mark: I note that you do not list tuition in the basics. Does that mean it's a luxury? If it's a basic, then doesn't that mean tuition committees should look at emergency funds or at least emergency savings over a fixed amount?

Jeffrey said...

To SL: From an economic standpoint what you are basically saying is keep your fixed costs as low as possible. I’m sure you would also endorse keeping your variable costs low, but in an emergency you can cut variable costs, but not necessarily fixed costs. Your advice is very sound, but I would just suggest the following and would be curious in your thoughts:

1) Frum people tend to have larger-than-average fixed costs because they tend to live in expensive areas and have large families.
2) Even calling tuition a variable cost (which it is and isn’t), the high cost of tuition tends to create higher fixed costs (e.g. both parents work, you need two cars, child care, etc.)

It’s still possible to be able to afford the basics on one salary, just a bit more challenging…

Anonymous said...

Jeffrey: It all depends on what the amount of that single salary is. I know many families with two earners making far less combined than other families with a single earner.

SephardiLady said...

it's not entirely clear that they are continuing to be responsible by not having the Dad enter the job market.
No argument here. Perhaps his word working has more potential and because of the severance they can buy time to explore that possibility.
I suspect that many of your readers and commenters are not the ones who make the mistakes that you discuss or if we did in the past, have now learned. I suspect that your good advice is not reaching the people who need it the most. What would be terrific would be to develop some curricula for some basic financial education and planning and budgeting for high schools and some programs for adult education at Jewish Community Centers and Shuls.
Judging by the discussions here, I don't believe my readers are only of one mind. I do think a forum like this is a good way to help those of a similar mindset to articulate thoughts about finances. Hopefully once the ideas can be articulated, they can be expressed with confidence when misleading advice is given.
As for developing a curriculum, it is an intriguing idea, but I have very mixed feelings about schools introducing a personal finance curriculum. I guess you could say I'd rather "homeschool" this part than outsource it to schools that may or may not have their own house in order. The foundation of my own personal finance education came from the home with no real curriculum.
When it comes to introducing the curriculum through shuls, you often need a rabbinic stamp, and I'm not sure that would be so easy to come by where the advice threatens other interests.

SephardiLady said...

What I was trying to say is that if you are preaching hedging your bets and being prepared for job loss and other financial setbacks, then doesn't that mean that for other than those with a hefty nest egg, shouldn't both parents be working to minimize the odds that there will be no breadwinner?

I think children benefit from having a parent in the home. We all take risks in life. I can only speak for myself, but if this risk fails I know it has still benefitted our family and if we need to make some serious changes we will just have to do that and go forward from there.

Anonymous said...

SL: I agree that children benefit from having a parent at home, and depending on the family's circumstances, it's a worth risk taking. Likewise, for some families, buying a home even if two incomes are needed for the basics can also be a risk worth taking. The criteria you propose -- waiting until you have 20% down and also having a six or more month emergency fund would mean for many couples with median incomes, waiting until their mid-
30s or later to buy and paying exhorbitant rent in the interim. What makes sense in part depends on where the market is and how rents compare to the costs of home ownership.

SephardiLady said...

I’m sure you would also endorse keeping your variable costs low, but in an emergency you can cut variable costs, but not necessarily fixed costs.

I written posts both about keeping fixed and variable costs low. It is smart to recognize what is variable and what is fixed, even if you choose to spend more generously. Habits are easy to form and tough to break.

1) Frum people tend to have larger-than-average fixed costs because they tend to live in expensive areas and have large families.

From the outset, it is a good idea to think about the area you are choosing and the viability of living in such an area. Some areas have very limited housing choices. Other areas have a more diverse pricing structure.

Having a large family isn't cheap, but the variable costs decrease with each child (tuition is another discussion because you are at the mercy of whatever foces). If I am already heating my home, another kid won't make the heat bill go up. Clothing can be recylced. And large families are often known for making a dollar stretch "Cheaper by the Dozen."

2) Even calling tuition a variable cost (which it is and isn’t), the high cost of tuition tends to create higher fixed costs (e.g. both parents work, you need two cars, child care, etc.)

Aboslutely correct. (As far as tuition when laid off, I think that is a different discussion).

Mike S. said...

While I can't quarrel with your rules of thumb as rules of thumb, I do not really like rules of thumb for major financial decisions. Individual circumstances vary tremendously. If you can't decide how much of a mortgage makes sense for you or how big an emergency fund you need without rules of thumb, you probably should still be living with your parents, rather than trying to establish your own household.

For example, although fixed rate mortgages are probably the best choice for most people in today's climate, they won't be for everyone.

For example, if you are an active duty serviceman who will move in 2 years (and you have found that buying makes sense for you) it probably makes sense to take the ARM because you are unlikely to have the mortgage long enough for it to cost more than a fixed. And the emergency fund needed by a tenured professor is quite different from that needed by someone in a business like real estate that can produce large income in some months or years, and noting in others. And whether you should or shouldn't expect your income to rise depends on your situation, too. If you are a grad student and your income doesn't rise upon graduation, you have bigger problems than your mortgage.

Fundamentally, being able to analyze financial choices is a basic skill that all independent adults need. Rules of thumb may be useful to alert yourself that you are looking at the situation incorrectly, but they are no substitute for analysis.

Jewboy said...

One problem I see-in communities I've lived in, Atlanta and Baltimore, it is hard to get a "reasonable" mortgage with home prices in the frum community inflated. In Baltimore, you can get a really cheap house if you'll take a very small one in a dangerous area. Having everyone move to the midwest isn't a reasonable solution.

conservative scifi said...

Having read the article about this family, I don't understand why both parents aren't trying to find jobs. If they had a 3 year old, I would understand wanting one parent to be able to stay home.

There is no indication that the father is homeschooling. So with a 7 year old, why doesn't the father, a former schoolteacher, get a job as a teacher (or carpenter). If he worked in an elementary school (especially the one his son attends), he could drop his son off and pick him up just as he does now, have summers off with his son, etc. That is, he would obtain all the benefits of "stay at home" parenting with the benefits of a job.

Also, while I understand that the mother may want a break from work (afterall, many of us work to live, not live to work), why not seriously look for a job, at least, rather than expect to be off a year. Perhaps she could also pick up some money by getting a lower skill job or temp during the school day, so she could be home with her family, and pick up a little cash.

Anonymous said...

Amon - Mark: I note that you do not list tuition in the basics. Does that mean it's a luxury? If it's a basic, then doesn't that mean tuition committees should look at emergency funds or at least emergency savings over a fixed amount?

Purposely not included in basics because it is clearly a luxury. There is no doubt at all because it is crystal clear where it ("tuition") falls in the hierarchy of my list (housing, food, ability to work, medical care, etc).

Mike S - For example, if you are an active duty serviceman who will move in 2 years (and you have found that buying makes sense for you) it probably makes sense to take the ARM because you are unlikely to have the mortgage long enough for it to cost more than a fixed.

BAD example! It *NEVER* makes sense to buy if you will move in 2 years, and not because you couldn't concoct a scenario in which the numbers work out, but because of *RISK*. However, there is one small exception - the case in which the employer will cover any and all losses and costs (and this case is becoming more and more rare as the years go by).

Mark

Mike S. said...

Mark,

That isn't the case in some small communities where the movement of military personnel at a large base dominates the housing market.
Also, the deferral of capital gains as long as you keep buying can make renting a lot more expensive than it would otherwise be for many military personnel who move every 2 or 4 years.

Not to say that your advice isn't correct in the vast majority of cases. Just that everyone needs to be able to analyze his or her circumstances and not rely on general advice.

SephardiLady said...

I've never opposed running numbers. But rules of thumb are a good place to start and make a comparision between the two.

Mark-I agree with you that tuition, while important, isn't quite a basic.

Charlie Hall said...

We just bought a house! I have to thank President Bush for ruining the economy because it made a really nice frum neighborhood affordable (25% drop in prices over past two years). ;) FHA mortgage, 3.5% down payment, 5.375% interest rate with zero points. We love it. We are very blessed.

We do need both incomes, though. My wife and I have very similar incomes. She will never be unemployed as she is a primary care physician. I am a full professor at a medical school and it is very unlikely that I will ever be unemployed, and there are five other medical schools that would be an easy commute if that ever did happen. But the mortgage payments are very much within our comfort zone and after the tax savings are within $100 of what we were paying for rent.

Anonymous said...

Mike S - That isn't the case in some small communities where the movement of military personnel at a large base dominates the housing market.

I think you didn't understand my reasons for not buying when definitely moving in 2 years. The main reason is risk, risk that every few decades, the housing market drops (as it has recently). Usually this doesn't occur nationally, but this time it did. Still the risk is there and not worth taking for 2 years. And there is a specific risk that a military base might be slated for closure - the minute that information gets out, housing prices in the area drop like a rock. Even a rumor of such closure has caused prices to drop a few percent rather quickly. Other reasons include the overall costs of purchasing/selling/maintaining amortized over a 2 year period are almost never worth it.

Also, the deferral of capital gains as long as you keep buying can make renting a lot more expensive than it would otherwise be for many military personnel who move every 2 or 4 years.

I think you are also ignorant of recent (maybe a decade or so ago) tax law changes that did away with the capital gain deferral and replaced it with an outright capital gains tax exemption up to $500k if you live in the house for 2 of the previous 5 years. It is also *NOT* a one time exemption and can be used many times in ones lifetime. And it does *NOT* depend on purchasing another house. Yes, you can buy a house for $200k, live in it for 2 years, then sell it for $300k and not pay a penny in capital gains taxes ever (has to be primary residence, of course).

Not to say that your advice isn't correct in the vast majority of cases. Just that everyone needs to be able to analyze his or her circumstances and not rely on general advice.

This is correct. But it is critical to have all the correct information (yes, including current tax law, for example) available before balancing the options and making the decision.

SephardiLady - I agree with you that tuition, while important, isn't quite a basic

Anyone who thinks it is part of the basics has to be asked what they would give up instead among the basics (food? housing? a job? medical care?). It's just so self-evident that it is lower in the hierarchy of basics, and it is hard for me to understand how it could possibly be that not everyone realizes it. Of course, that might be part of the overall problem in the first place :-)

Shabbat Shalom all!

Mark

Nudnik the Lurker said...

Chinuch is not a variable. Tuition is a variable expense.

You must provide your children with a quality Jewish education. That's a mitzvah right up there with keeping kosher.

But nowhere does it say that it must be in a school building, that it must be 8 - 4, or that it must be given by a licensed teacher.

You can provide perfect chinuch through homeschooling, volunteer tutors, or some of the new online initiatives that are popping up. Those are VARIABLE expenses, because your chinuch can cost between $100 (well, you probably need some supplies) and $15,000 a year.

Food is a variable expense, not because you can starve, but because there is a range of costs that can work with food. You can eat steak and go out for dinner once a week, or live frugally on rice, beans, tuna and eggs.

That should clear up some of the confusion. :-)

Mike S. said...

You are correct that I was unaware of the tax law change. I haven't had to consider buying or selling a home seriously in 20 years. The politics of base closings, however, prevents them from coming up too suddenly. Last round it took several years just to set up a BRAC to propose closings, and they took effect over a period of another decade.

Both the risk you assume and the benefits of assuming it will vary depending on many personal and local factors. And while there was a national decline in housing prices, how big it is varies quite widely by locale, and in ways that are easily understood. Places that were wildly overbuilt on speculation or that saw some of the more ridiculous run ups crashed a lot harder than places that saw relatively modest increases during the boom.

Anonymous said...

One of the reasons for not buying and selling every two or so years is because if you need to use a broker, the fees will reduce the proceeds. There are other costs involved in buying and selling. Without an increase in the home's value of at least a few percentage points every year, there will therefore be a loss just due to the costs of buying and selling. Also, the first two years of mortgage payments is going to be almost all interest. The owner will not be building any equity in that short time unless house prices are rising. That's what people counted on during the go go years. It worked great for some people for a short time, but then many people ended up getting burned when the market dropped.

Jeffrey said...

Tuition has aspects of fixed and variable costs. It’s fixed in the respect that it’s (almost) a necessity, but variable in the respect that if one had a serious illness or the like, hopefully the school would recognize this and offer assistance.
But if we want this whole yeshiva system to function, tuition really needs to be at the top of the variable cost list. So after one has paid their mortgage and property taxes, and bought food and clothing (I’ll leave out a few other items), tuition is near the top. The enormous problem is that for many people, once they have paid their fixed costs, there just isn’t that much left over. And if the school administrators say mortgage your house to pay for school, they are a bunch of fools.

Miami Al said...

Economic terms:
Fixed Costs: Costs which you cannot change in short term
Variable Costs: Costs which you CAN change in the short term
Short Term: normal operating time frame
Long Term: a period of time in which all fixed costs are variable

These terms matter, because in the Short Term, tuition is fixed or variable, depending on how you look at it. If you sign a 9 month Contract in August, and lose your job in October, your cost is fixed in that you signed the contract, so in the short term, tuition is fixed. In the long term, you can provide Chinuch (the Mitzvah) by any number of methodologies, and in the long term, if the community's rules require a certain school, you can move communities. One has an obligation to keep Torah, not to live in their current town.

OTOH, Tuition is variable in the short term, because you could simply not pay it. Anyone who has run a business in tough times knows that you prioritize the A/P issue, so while the family balance sheet deteriorates as you "owe" the school money, you conserve cash.

Plenty of people are sending their children to school without paying, just join them.

When push comes to shove, you decide what is important. The global discussions of failed economic models are separate from the individual decisions. See the Paradox of thrift and the Broken Window fallacy, plenty of economic models that illustrate market failure because each person acting in their own self interest sometimes choose a non-optimal setup. The problem with fixing them is that usually our institutions designed to govern and handle market failure fail to address the market failure and create some unrelated problems.

Shabbat Shalom y'all!

Miami Al said...

Jeffrey, some of us argue that your suggestion is the CAUSE of the tuition problem, the idea that Tuition is the #1 variable cost. As a result, after paying Mortgage, Food, Health Care, Car Payments, and other "basics", 100% of your money goes to Tuition until "paid in full."

The problem is not that most people have little left after fixed costs, the problem is that very few people can make enough that exceeds Fixed Costs + Tuition. Since one's life is identical if one makes Fixed Costs + $1 (and pays $1 in tuition) or Fixed Costs + $50,000 (and pays $50,000 in tuition), there is no advantage to making Fixed Costs + $50,000.

As a result, we have lawyers becoming stay at home moms after the kids are in school (who worked when the children were toddlers, but once tuition started to hit, dropped out of the workforce because there was no point), "wasting" the expensive education and dropping income, and we have families buying the most expensive house that they qualify for since being prudent just means paying more tuition for a smaller house.

If basics costs $50k/year and tuition brings that to $150k/year, then the large masses whose income will fall between $50k and $150k either work less to drop down the scale, or up their fixed costs to match their income.

Jeffrey said...

To Miami Al:

Several points: I don't think we disagree. My point that tuition needs to be the #1 variable cost is directed at those who spend first and then wonder how will they pay tuition and end up requesting scholarships. You can't go about taking expensive vacations and buying new cars and expect others to foot the bill for tuition.
It's equally problematic, as you've said that some schools might expect a family to cough up every last cent after the family has paid for the "basics." And you're correct that the marginal benefit from earning fixed costs +$150,000 instead of fixed costs +$50,000 might be nothing.
As I've said to friends it's much less expensive to borrow $500,000 to buy a house than to send three kids to school.

tesyaa said...

I have to confess I don't understand the point about two incomes. Can't a single earner be laid off? And if so, isn't it better to have two salaries in the case of one being laid off? I don't buy the point about the SAHM suddenly going back to work when the earner loses his job. It was hard enough for me to find a job in my field after being a SAHM; and I had the advantages of 1) searching in a good economy; 2) having full professional qualifications that are recognized and desired in my industry; 3) having years of previous work experience; 4) being willing to take a job below my qualifications, at a lower salary than I would be making even if I hadn't taken 9 years off. It's not as easy as it sounds, ladies (or gentlemen for you SAHDs)

Gmar chasima tova

SephardiLady said...

If one income earner gets laid off, having a second income earner already working would of course be preferable. But you would still be up a creek if you have to have both incomes to pay the mortgage + buy basic food and essentials.

This is NOT a post on one income families vs. two income families or anything in between (that would be us!). It is a post on mortgages and budget planning.

tesyaa said...

dropped you an email also -- I got the honey at ShopRite