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Friday, January 15, 2010

Budget Advice: The House is the Problem

There is a mother asking for budget advice and is receiving advice that will not serve her well. Here is the scenario: the husband took a huge budget cut (in after tax dollars, that salary cut would pay my entire minimum mortgage payment and taxes). They committed to a huge mortgage based on past earnings. They have worked on their budget and have made cuts. They both work. After the cuts, they have a $200 monthly shortfall and she is wondering what to do about the $500 tuition which will be more than double in the following year. She is wondering what type of discount to ask for.

Those participating in the thread so far are concentrating on the tuition. But the tuition isn't the real problem. The house is the problem! Even if they were to sent to public school, their monthly surplus would only be $300 a month, or $3,600 a year. Some dental work, car trouble, and an increase in property tax could easily put them right back into the hole.

We all have attachments and the biggest attachment is probably an attachment to our homes, but sometimes you have to let go of the big ticket items like the home or a pricey car lease. Without details, I have no idea if this family can sell their home (so many people over leveraged themselves and are married to a home which crowds out other needs), but sometimes you have to part with the expense that is causing the most problem.

Effective budgeting includes being able to pinpoint the problem. If the problem won't be eliminated by cutting out other big ticket items, as appears to be the case here, you have to concentrate on the real cause of the problem no matter how uncomfortable.

Also see previous related post where tuition clearly wasn't the issue.

21 comments:

Miami Al said...

Interestingly, I remember seeing Dave Ramsey dealing with a family that was down on their luck... I found his commentary inspiring and helped us get through some tough times, but you won't like it.

Caller had been doing well, one spouse making 6 figures, the other doing alright in the 5s... the one in the 6 was in real estate, and is now making in the 50s while finding something else to do.

Looking at their budget, they can limp along but not get anywhere, and wanted advice.

Interestingly, Mr. Ramsey's advise was, people that are doing well, making six figures tend to get back there. It's not like the 6 figure earner (I think the wife, BTW) was a union welder downsized that's permanent, and she'll probably make more money.

So if they can limp along for 6 months or 12 months, it might be worth it instead of something drastic.

I will definitely say that when things were tough, plenty of the people here would have suggested dumping our house... It took a while to get back in the game, but we've turned things around and will be okay in the long run.

And I like our house, we've made it our home, and if we traded down, we'd be back to renovating a new place into this one in 3-5 years...

So, if the cut is permanent, then she needs to cut the house because they can't cover it. But a $300/mo surplus isn't good, but it's "limping."

Losing the house in a down market might be HUGE, and depending on her husband's line of work, he MAY need the status of a big house and a fancy car.

It sounds like a move from preschool to Kindergarten is happening, if the school understands that they'll be back on their feed, then the school should take an IOU for the year and they should pay double the next year.

Otherwise, they have to decide if private school is critical for the year, or if they should do public school for the year, limp along, and hope that things get better during the year.

Or, don't pay the mortgage every month. Fall a few months behind and try to negotiate a modification.

Being cash strapped sucks, and monitoring dollars and cents is infuriating, but there are worse fates in the world than limping along 6-12 months IF the house is an important thing to their family.

Good luck! We got through it, you can too!

LeahGG said...

Miami Al may have a point here. The husband's earnings have been cut, not his earning potential. They may do better putting the kids in public school for a year, maybe dumping a car for an older or smaller car.

The question about the house is if they really have too much house. If they have a 5 br house when they have 2 kids, then maybe it makes sense to dump the house, take the cash, buy a 3 br place with a smaller piece of property, and accept that if they have any more kids, they're going to have to share a room.

It'll save on energy costs and property taxes as well. However, it depends on a lot of factors. Moving costs money. A rental in their area might not be much cheaper than their mortgage, they may be paying down the principle some. It's hard to know if it's really the house.

I will say that I see a lot of Americans who have a lot more car and a lot more house than Israelis with the same size family, and the Americans don't seem any happier.

2 kids to a room is really not the end of the world. Turns out that the kids who don't sleep through the night wake each other up even if they're sleeping in separate rooms :(

And I'm at a loss to explain why a family that doesn't plan to have more than 2 kids would buy a minivan.

Dave said...

The house may or may not be the issue.

Depending on when they bought the house, they may not be able to get out of it.

Orthonomics said...

Miami Al-Sometimes limping along is a good idea, but I'm a bit more skeptical in this scenario.

The kid going into school is their oldest. Even if they would opt for public school until they recover, there is at least one younger child who they will probably want to send to pre-school. Chances are that the family wants their kids in Jewish schools and if a 40K salary cut makes the home unaffordable, 2 or 3 tuitions are going to really hurt even if the salary recovers because 2-3 tutions + camp (mother works too) will easily eat up the $40K after Uncle Same takes him bite.

I don't want to make too many assumptions, but an emergency fund or cutting back on retirement contributions could fill in that $2400 budget shortfall while they see if the salary will recover to the point of affordability, but it sounds like those options might have been exhuasted as they are looking at a $500 pre-school tuition as the cause of the $200 monthly shortfall.

Dave Ramsey recommends the home (on a 15 year note) only take of 25% of take-home pay. I love Dave, but I'm a bit more liberal and would say around 30-40% of take home pay after retirement on a 30 year note isn't unreasonable. I've went as high as 50% bc (before children) which I would not do again, although it did turn out to be a great move.

I don't know if the family can get out of the home, but I don't think this big cost can be ignored.

What I don't believe Dave Ramsey would ever recommend is promising an IOU to the school and paying double the next year. That is a real debt that would have to be paid and if things don't turn around, you would still have to pay that debt. And if you are incurring other debts at the time, you are going to run into a bad situation if things don't improve.

I don't know what line of work the husband is in, but it probably was something in the financial field because the salary cut is pretty huge.

Lion of Zion said...

LEAH:

"2 kids to a room is really not the end of the world"

i am stilling trying to figure out when it became a halacha that an ortho house must have enough bedrooms for each child and separate rooms (in addition to the living room) for den, tv room, play room, etc.

"And I'm at a loss to explain why a family that doesn't plan to have more than 2 kids would buy a minivan."

my bergen county friends tell me its necessary for carpool.

LeahGG said...

In the US, where space used to be cheap and building materials are cheap, it didn't seem like a huge luxury to have lots of big rooms. Now that everyone wants to live in "desirable" areas, and we realized that you have to heat those rooms,and heat is no longer coming from the woodpile outside, it's time to come off of that cloud.

As for carpools, true, you'll have to be part of a smaller carpool if you only have a regular car. Still, it has to be cheaper than driving a minivan.

Of course, Americans have been screwed both by the car manufacturers and their own attitudes. In Israel, there are several seven-seater CARS (not minivans) available. I don't think that most of them are even available in the US. (EG Mitsubishi Space Wagon, but there are several others)

LeahGG said...

Actually, I see that the Mazda 5 and the Kia Rondo are available in the US.

Avi said...

I won't comment on the house, but I have to weigh in on minivans, because some of the comments here are way off base. Minivans are extremely efficient. Mine gets about 1 MPG worse than our midsize car. The car can seat 3 kids. The van can seat 6 kids. This isn't a difference between a big carpool and a small carpool, it's the difference between a carpool or driving your kids both ways each day. And it's MUCH more efficient to drive a minivan in a carpool than driving both ways every day yourself. Nobody likes minivans, you buy them because they make tremendous economic sense.

tdr said...

Just to clarify Ramsey's pov on percentage of income towards the house. He does recommend that monthly payments not exceed 25% of monthly income, but he can "live with" 30% or 40% especially if it's short term.

As far as taking an IOU to the school -- you are right on. It's debt and should be avoided or will come back to bite them later on.

Orthonomics said...

In my parents' day teenage brothers and sisters shared rooms. I imagine any family that tried that today would be told it is inappropriate. Well, when you live in one and two bedroom homes, there isn't much choice. I'm one of those parents that would prefer to have each kid in a separate room, but it probably isn't possible.

Regarding the cost of moving, I will say this. We kept the cost to under $600 by moving all of the stuff on our own and only hiring a mover for the furniture and other large items. Of course, we were just moving within a small radius. Constant moving is a good argument for buying vs. renting. I don't think it is a good argument against a longer term downsize in a small radius.

LeahGG said...

Every time I've moved, it's cost me considerably more than $600, because I've inevitably lost a day of work, things have been lost or broken, and somehow the moving company wouldn't pay, things that worked in the old house couldn't work in the new house so you end up buying new shelves/furniture/stuff. (couldn't move myself as I don't own a car, plus physical disability)

There ends up being a lot of hassle that can't be put into a cash amount.

Plus, if you use a real estate agent to sell a house and buy the next, you pay agent fees, legal fees, etc.

If it's going to make a big difference in your budget, it's worthwhile, but it's not always worthwhile. When I was renting, I decided it was absolutely not worth moving to save even $50 a month, and $100 a month was only worth it if I thought there was a good chance I'd stay in the new apartment for 2 years or more.

LeahGG said...

Toyota Sienna says 17/23, Corolla says 26/35. Huge difference there.
And the Sienna's starting price is $10K higher than the Corolla's.

Mazda 5, on the other hand, starts $3K higher than the Corolla, and it's gas mileage goes up to 28mpg. Not as good as the Corolla, but for something that properly seats 6, it's not a terrible compromise.

LeahGG said...

then again, what do I know, I "drive" a Graco DuoGlider and just pray that I won't stall out going up a hill... this engine really needs an overhaul.

megapixel said...

how about this temporary solution?
rent out their big house and move to a smaller house till they get back on their feet. the rental would cover the mortgage plus probably part of the rent on their new small house. I dont know where they live but in my neighborhood this would work cuz rentals are high due to demand.

I never had my own bedroom! (BH - I am currently sharing with my husband and newborn baby!)
I have THREE kids in one room and TWO kids in the other (small) room. My problem will be where to put the newborn when she needs to get out of my room. I am loathe to put a fourth kid in one room and even more loathe to put a third kid in a small room. I need more space and dont know where to get it from. Maybe these people will give me one of their excess rooms!

Miami Al said...

Megapixel, a great idea...

BTW: I don't know who this person is, what their budget is, and how "close" things are. The past 18 months have been tough on a lot of us, and one sized fits all advice doesn't work.

If the income loss is permanent, gotta downsize.

The family can choose:
Public schooling and limping, re-evaluate as things get better.
Downsize (possible short sale, etc), missing mortgage payments, etc., and private schooling.

I don't pass judgement one way or another... HOWEVER, I think that staying in a house that you can't afford with private schooling and asking for a tuition discount is particularly lame and mooching off the community. You CAN afford it, you choose not to, hand them an IOU and repay when you're on your feet, or downsize and keep paying.

They don't need charity.

Anonymous said...

I can understand one minivan, but I see a lot of families with two. If you are going to have a minivan, how about having the other car be an escort or echo, or a prius?

mlevin said...

How about renting out one of the rooms to students or something. This way one may avoid the hassle and expense of moving and create an income out of his home.

When we bought our house we ended up renting out our basement, our garage and our driveway.

Avi said...

@Anon 8:54 PM - For most people, 1 minivan and 1 car makes sense, but I can easily see scenarios where two minivans make sense. For example:
-both are older/American minivans, so one can be in the shop while the other used for carpool
-one is older, and rather than wait for it to die and be stuck, you buy another minivan now, and a car when the minivan does die. In the meantime, you have two vans even though you only really need one.
-when both parents drive carpool and can't swap cars during the day (i.e., one parent drives to school and the other picks up).

You can certainly spec out a Sienna or an Odyssey and spend over $40K, but in general minivans aren't luxury purchases, they're utilitarian. Here in Teaneck, the most popular minivan seems to be the Sienna LE - reliable, 8 seats, low on frills.

ProfK said...

As someone who has a house on the market to be sold, you can't count on selling your home to reduce your expenses, at least not within a reasonable time frame. Real estate agents are telling their clients that it can take from 1 to 1-1/2 years to sell in today's market, unless you are willing--and able--to take a huge loss on the house by reducing the selling price to way below market price.

If you need to reduce expenses NOW you are going to need to look for other places to cut spending because you can't count on getting rid of your house all that fast.

Miami Al said...

ProfK, a bunch of my neighbors seemed to have cut their housing costs by not paying their mortgages.

The foreclosure process is so backed up here that it takes a year and half to foreclose, the banks are PAYING people to do deed in lieu to help with moving costs, anything to avoid this fiasco.

It's kind of funny to see the families that bought at the peak that were complaining and suffering and broke a few months ago that are now frequent patrons of local restauarants.

ProfK said...

Miami Al,

The banks here are not being quite as "helpful." If someone is at the point of not being able to pay the mortgage then they are way beyond what I think SL is referring to, that is, going smaller on housing to reduce costs.

My point was that it might be good advice to reduce the size of a house and therefore the monthly costs but you can't count on it helping out for quite some time. That advice works better in good economic times, not in bad. We don't have to move so we can afford to wait out the real estate slump. Those with serious money flow problems can't afford that wait and are going to have to look to other areas to save money while waiting for their house to sell.