Frugal Babe

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Evaluating Spending At Any Income Level

May 30, 2013 By Frugal Babe

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.

Filed Under: Debt 12 Comments

Comments

  1. Michelle says

    May 30, 2013 at 2:37 pm

    We definitely want to lower our spending and live a more frugal lifestyle. Great post!

    Side note – I’m jealous of how low your mortgage payment is. Ours is $960 a month, but our house is also only $125K. Our property taxes are over $200 a month though! UGH…

    Reply
    • frugalbabe says

      May 30, 2013 at 2:59 pm

      Michelle, our mortgage payment used to be $1500/month, but we refinanced into a new 15 year loan this spring. The new payments are much lower because the loan amount this time around was $108k (it was $171k when we bought the house, but we aggressively paid down the loan balance for the first three years we lived here – now we pay just the minimum and put the extra payments into a municipal bond fund instead, which we can use to eventually pay it off in a lump sum). Also, the new payments don’t include insurance (about $650/year), and the old one did. We now pay our insurance directly to our carrier instead of via escrow with our lender.

      When we refinanced, we went from having 8 years left on our old loan (assuming we only paid the minimum amount due) to having 15 years left. But we know that we’ll pay it off in less time either way since we have money set aside to do that, and the new loan reduced our interest amount by about $200/month right from the start. So it made sense for us.

      Property taxes can be a tough one. Ours are under $2000/year. We have really great schools too – I have a lot to be thankful for!

      Best of luck with cutting your spending. Focus on what you want most and it will be more obvious where you can make cuts.

      Reply
    • Shelley says

      May 30, 2013 at 6:22 pm

      Guess I should feel good that our mortgage payment is only $537 a month!!! :)

      Reply
  2. caitlingracie says

    May 30, 2013 at 3:57 pm

    Great post! After reading through the comments on the main article I’m a little alarmed by some of the responses. Some pointed out that spending so much on clothes etc. was not necessary, but some just seemed to throw up their hands and even say that’s why they aren’t having kids.

    I also love your plan for helping your boys with college. That’s what I plan to do if I have kids. Having gone to a state school paying most of my own way and taking out loans, and seeing classmates whose parents paid their whole way, I don’t think they did them any favors.

    I think a big part of the issue is that people can’t accept that they can’t have everything. They don’t stop to think that they might not even want everything (or at least not at the expense of being stressed out and in debt). I have friends who only pay the minimum on their student loans and credit card bills, while I sacrifice more to pay down my student loans as much as I can. I love the Dave Ramsey quote “live like no one else, so later you can live like no one else.”

    Reply
    • frugalbabe says

      May 30, 2013 at 5:05 pm

      Thanks! I agree about needing to realize that we can’t have everything. I think a lot of people just assume that they should have the same stuff as their peers (who might be in debt for it) or their parents (who might have worked for many years before buying/doing the stuff they have or do now). And they don’t stop to think about how much they can actually afford. The trick is to choose a lifestyle that fits our income, not to choose whatever lifestyle we like and then lament that it’s draining every penny we have.

      Reply
  3. shannon langer says

    May 31, 2013 at 6:06 am

    Hi, I lurk your blog a lot! Just wanted to say this article you’re writing about is so far removed from most of our reality. I’ve come to believe we don’t serve our kids well by living a grand lifestyle and raising them up to expect that. I guess regardless of income I would never see myself living somewhere like Silicon Valley! A person has lost perspective when designer clothing and a gardener are “needs.”

    Reply
  4. Economies of Kale says

    May 31, 2013 at 6:24 am

    A housekeeper and a gardener as needs? Really?

    Not being from the US, I always find it interesting reading about people saving for their kids’ education above everything else, which always seems to include paying for their room and board. It always makes me think that they remain kids into their 20s, with no responsibilities.

    I went to (and still attend) a public university here in Australia. Just about everyone does. The fees are subsidised by the government and you have two choices to pay: upfront (with a discount) and deferred, where you begin paying the amount off once you start earning over $49000 a year. These loans have no interest and are indexed according to inflation only.

    My point is, the responsibility is on the student to pay for their own university fees. There are some people whose parents pay for it up front, but that is very uncommon.

    In terms of room and board, around 90% of my friends lived with their parents, at least for the first couple of years. I chose to work as a waitress throughout uni, and when I had saved enough I moved out into a sharehouse with friends. Some of my friends chose not to work, and they continued to live with their parents until they graduated and got a job.

    Did I struggle sometimes? You bet, but the skills of working in a low-paying job, budgeting for rent and bills, and being responsible for my own food were just as important as what I was learning at university.

    Reply
    • Kellie says

      December 13, 2013 at 2:52 am

      As a fellow Aussie, love your comment. We really do have it good here and it has always baffled me how many people seem to go “away” for uni in the States. That is quite uncommon here except for rural kids who have no choice.

      Reply
  5. GamingYourFinances says

    June 20, 2013 at 6:31 am

    Wow! At $60k/yr in spending and the 45% tax rate quoted in the article, this family uses $109/yr in pre-tax income to sustain their spending alone. That’s easily double the avg persons income!

    Thanks for posting this article, good to see my frugal lifestyle is worth the decreased stress because it seems at any income your personal finances can become stressful unless you control your spending.

    Reply
  6. GamingYourFinances says

    June 20, 2013 at 6:31 am

    Wow! At $60k/yr in spending and the 45% tax rate quoted in the article, this family uses $109/yr in pre-tax income to sustain their spending alone. That’s easily double the avg persons income!

    Thanks for posting this article, good to see my frugal lifestyle is worth the decreased stress because it seems at any income your personal finances can become stressful unless you control your spending.

    Reply
  7. GamingYourFinances says

    June 20, 2013 at 6:31 am

    Wow! At $60k/yr in spending and the 45% tax rate quoted in the article, this family uses $109/yr in pre-tax income to sustain their spending alone. That’s easily double the avg persons income!

    Thanks for posting this article, good to see my frugal lifestyle is worth the decreased stress because it seems at any income your personal finances can become stressful unless you control your spending.

    Reply
  8. Anna Zheng says

    December 26, 2013 at 1:51 pm

    Hi I’m a Zumba instructor in NYC who is also a medical student. Frugality is a necessity in NYC. I want to teach Zumba to women, especially busy moms, and keep costs low. In keeping with the holiday cheer in the new year, I am holding FREE Zumba classes. Thereafter, $6 a class for early birds!* Quality Zumba should not cost a fortune!

    *Early birds: first 5 people who sign up for the class.

    Details:
    Tuesday, January 7th, 2014
    37 W 26th Street, 9th Fl
    FREE Zumba class. Flatiron District. 5:15P arrival. 5:30P class.

    To RSVP & hold your spot, please email
    ZumbawithAnnaZheng@gmail.com.

    Thank you and happy holidays everyone!

    Reply

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