Evaluating Spending At Any Income Level

I recently came across an article about how families living in Silicon Valley Valley need to have equity in a business – in addition to a $250,000 household income – if they want to send their kids to a “good” college and also retire well.  The authors included a sample spending spreadsheet for their hypothetical couple living in a million dollar home, and not including a hefty $54k for mortgage and real estate taxes, the spending total is over $60,000/year.  It includes things like six thousand dollars on clothing, $2400 on a gardener, and over four thousand on a housekeeper.  They also budget $2700/year for cell phones, cable and internet.  The authors then go on to make their case for how it’s basically not possible for this family to save enough to pay for their kids’ education and also fund their own retirement.

The spending totals on that spreadsheet are far from frugal, and include a lot of things that are wants rather than needs.  There’s nothing wrong with spending money on wants (life would be pretty boring if we only spent on needs).  But if doing so is going to put you in a position where you are unable to attain your long-term goals (in this case, funding college for your kids and retirement for yourself), it might be wise to double check those spending figures.

Our own family of four is very well dressed (usually in high end brands) on less than $500/year, thanks to yard sales and thrift stores.  Our town is having it’s annual garage sale day next month, and I’ll probably be able to get our son’s entire kindergarten wardrobe without spending more than about twenty bucks.  Not everyone wants to shop at yard sales and thrift stores for their clothing, but another alternative is to focus on maintaining a small, well-designed, high-quality wardrobe comprised of a few timeless pieces of clothing that all work together.  You can buy them new if you prefer, but you certainly don’t have to continue spending $500 every month to add to it.  Check out Miss Minimalist and Be More With Less for inspiration.

Housekeeper and gardener?  That would be us, with a little help from our sons.

We don’t have cable TV (we got rid of our TV in 2009, although we recently got a factory refurbished flat screen TV that’s mounted on the wall in our basement and hooks to our laptop with an HDMI cable.  It’s basically a giant screen for our laptop, which makes Netflix and library movies more enjoyable to watch.), we spent $10/month on our shared cell phone, and our internet costs $65/month.  So our total in that category is $900/year, and we feel very spoiled with all of the instant media and communication we have at our fingertips.  I could go through the rest of that spending list in similar fashion, but those were a few that stood out for me.

There’s nothing wrong with spending the amounts listed in the spreadsheet.  But only if doing so does not put your primary financial goals in jeopardy.  Having hired help and spending $500/month on clothing are luxury expenses.  They shouldn’t be put forth as basic expenses, followed by a description of why a family is unable to save enough for retirement.

Moving on a little, another factor that stood out about this article was the assumption that saving for the kids education should take priority over saving for your own retirement.  That seems a little backwards to me, unless you want to end up being a financial burden on your well-educated kids in your later years.  Kids can work, focus on scholarships, go to less expensive schools, do the first two years at community college and then transfer to a four-year school.  And in a worst-case scenario, there are student loans available.  Funding one’s retirement beyond Social Security doesn’t usually have a lot of other options besides many years of savings.  So I’d say if you have to choose, opt for funding your retirement first.

But let’s assume you do want to help pay for your kids’ education.  It’s not all or nothing.  We’ve been putting $100/month into 529 plans for each of our boys since they were born.  Our son who just turned five has about $8,300 in his account, and our two year old has a little over $3,000.  Are we on track to be able to fully-fund a law degree from Harvard?  Absolutely not.  But will our boys have a very good start towards paying for a four-year degree at the good state university 20 minutes down the road?  I would say yes.  My siblings and I all went to that university, and we’re all happily working in jobs that we enjoy and that pay us well.  We all graduated debt-free, thanks to scholarships, our own savings, and help from our parents.  We took courses at the community college in our hometown too, which made sure that we wouldn’t be on the five-year college plan, despite some changes in majors along the way.  Since we all went to an in-state school, applied for and maintained scholarships, and graduated in four years, the assistance my parents provided wasn’t a danger of derailing their own retirement plans, even though they had children in college continuously from 1994 until 2002, and usually more than one kid at a time.

All four of us are grateful for the support our parents provided during college, but we’re also proud of the work we did ourselves to fund our education.  This combination approach is what my husband and I are aiming for with our boys.  So far, we’re quite happy with the progress towards that goal, even though the amount we’re saving for our boys’ education is a small fraction of what we’re saving for our own retirement and general future.  We want to help give our boys a good start, but with the understanding that we’re launching them towards financial independence from their parents by the time they graduate from college.  That seems much more feasible if we start teaching them from a very early age that they’re partly responsible for funding their own life (including college when we get to that point), than if we were to just pay for everything, including college, and then expect them to suddenly go from being entirely dependent on their parents to fully self-supporting.  We’ve already started this with our older son – he has a savings account at our local credit union now, and a spending jar where he accumulates funds to be used at thrift stores and yard sales.  We have a lot of years to teach him about money before he has to be able to do it on his own, but the years have a way of slipping by very fast.  The earlier we start reinforcing good money habits, the better.

Obviously that article I referenced is describing a life that is far removed from ours.  We live in a town where the median house sale price so far this year is about $210,000 (Our own house was recently appraised for $240,000, but that’s after four years of working on it.  We bought it for $215,000).  Our mortgage is $850/month, including real estate taxes.  We’re able to save a good chunk of our income while maintaining a very good standard of living, mainly because we buy most of our stuff secondhand, and the activities we enjoy are mostly free or low-cost (hiking, biking, disc golf, soccer in the park, etc.).  I don’t know what it would be like to live in an area where the median house price is a million dollars.  But I’m sure that the sinking feeling of not being able to prepare financially for the future must be stressful for high-income families, just as it is for low-income and middle class families.  The difference is that the high-income families have a lot more flexibility to fix the situation than they might think at first glace.  It requires some changes in expectations (like maybe planning to save enough to send your kid to the state university rather than an Ivy League school), and maybe some second glances at the monthly budget to see what’s really necessary and what’s not.  If you’re a high income family, you can afford to have things in your budget that the rest of us can’t – there’s nothing wrong with that.  But if you’re including so many extras in the budget that you’re causing yourself financial stress, you’re living beyond your means.  And that’s not a good idea, no matter how large your income is.