Overestimating The Distance Your Income Can Buy You

Every few months a thread similar to this goes up at imamother.  A family has broken the 6 figure income mark (combined), feels they are making good money, and wonders what in the world is going wrong.  They are living month to month, have some debt, and are not able save, and can't make heads or tails of why not.

Granted, not every stage in life is one where you will be able to get ahead.  There will be times in the Circle of [Financial] Life where everything that comes in, goes out.  However, I do think it is problematic if that time is when your children are not yet even elementary school age.  Not to be a party pooper, but I am absolutely certain that the norm is that children get more expensive, not less.   And, that is regardless of the price that can be fanagled with the future day school/yeshiva.  I really should write more about the Circle of [Financial] Life because it is good to understand what the trends are in terms of increasing and decreasing expenses.

Sadly, six figures earned between two income earners, paying full time daycare (and in this instance, tremendous health care costs), is not "we both have we well-paying jobs" but rather, baruch Hashem we are employed.  It is really wonderful to see people pleased with their lot, but their lot simply can't justify a $1,600 mortgage payment + associated utilities, $1,500 in monthly babysitting costs (which I always deduct from the lower income taxed at the marginal rate), car payments, $1,600 monthly mortgage, and 10% maaser (G-d bless them).  And it is duly noted that these type of budgets that leave the family hand-to-mouth generally lack other costs that many (myself included) would deem fairly necessary including life insurance.  This scenario is a change from what I see on the other side of the spectrum where a couple making a combined $200,000 feels the are not well-paid, feels unfortunate in their incredible lot, and also lives hand-to-mouth.

We have to be realistic about what our earning power, debt, and any amassed savings mean in terms of realistic spending for our own situation.  So many people overestimate their buying power, thinking their earnings are sufficient, but they really don't have a handle on what their earnings mean both in the present and in the future.    I am still of the opinion that a realistic spending plan (not including costs that are tied to a second income or are actually optional, even if seemingly socially obligated) should fit comfortably within the single, higher income.  Where that is not the case, some changes should be made to accommodate the reality.  Naturally, it is impossible to advise based on a post that does not even include an income breakdown or without knowing enough about the couple.

Lest anyone think that overestimating spending power is limited to people with average or slightly about average incomes, (hashgacha pratit) is the next post on imamother in the finances section.  This couple has 13K left per month for savings and is trying to buy a home where they need a 400K downpayment.  They are currently renting a home as they don't like their old neighborhood and their own home is overleveraged and is currently rented out.  They considered a loan modification, but they can't get one (well, of course not, there is no equity and now it is rented) and she worries if they are undersaving for retirement at 2K per month (yes if you are double income with a 2 million dollar home!).  Goodness, my head is spinning.  If you have 13K a month left over after paying your expenses, you are in a fantastic position, but there is a lot to consider.  My own rule of thumb is that your mortgage payment should be easy to support at the income level you can expect over a lifetime.  When buying an insanely expensive home, your home, by definition, is generally not a liquid asset in the least.  It also will not generally increase in value over time, leaving you with equity, as a more average home.  These are just the facts on the ground.  You must be able to pay the mortgage payment easily with the income you can easily expect not just today, but tomorrow.  Most high paid athletes eventually blow out their knee, and I believe people who hit the jackpot wealth wise will often blow out their figurative knee so to speak eventually.  If you are in the financial sector, you also need to consider that overleveraging yourself endangers your own career and your earning ability.

I have no real problem with wealthy people buying very pricey homes, but I do think they are better off paid for or mostly paid for.  Start smaller and trade up, rolling the savings along the way and the proceeds into the next property.  Or, if you choose a massive mortgage, have a lot of that in cash to tide you over in a rought spot.  If you are talking about saving for the downpayment on that type of home while renting yourself (and renting out an overleveraged property), you just aren't there yet.  With $156,000 to play with annually, you can get there. . . but come back in 10 years!

Well, now we've seen that you can be both very average and have quite tremendous earning power and be out of touch with the distance your income can buy you.

(Typing fast, please excuse any errors.  I can make corrections later).