We had a great chat last week about Dave Ramsey’s brand of personal finance. One of the few things that we all agreed upon was that there are very different rules for personal finance depending on your education, geographic location, and age.
Megan McArdle talks about different spending patterns in red and blue states. She says that blue state families spend too much on education. They spend too much on homes to buy access to better high schools and take out a second mortgage on their house to pay for college tuition. Red state families spend too much on their cars.
So, let’s talk about personal finance again, but let’s leave out the examples of the TJ Maxx girl and free-spending medical students. Let’s just talk about middle class, suburban families. I’ll talk about blue-state suburban families, but feel free to bring in the red-state equivalents.
It’s really hard to come up with an ideal-type suburban family. Even if I narrow down suburban families to this little area of Northern New Jersey, I can think up dozens of different models. Three examples with fictional names:
1. The Pre-Boom Family – There’s a big difference in finances between families that bought their homes before the housing boom and those that bought their homes after the housing boom. Kate bought a really cute home on a nice block in a nice suburb for $220,000. One year later, that house was worth $500,000 without a single improvement. She and her husband were able to put down a 50% down payment. In their early 50s, they have no mortgage. She’s a SAHM and will never need to work. They put on a huge addition on their house and take fabulous vacations. Even with the real estate corrections of the last year, their home with their improvements is now worth $750,000. They are frugal, but their stability comes from their real estate luck.
2. The Post-Boom/Declining Income Family. Dan bought his home three years after Kate, so he has a 30-year mortgage. He and his wife work at two careers. Each of those careers have seen a significant drop in income. One of those careers used to support a family in the 70s, but now they need to double up to get by. With two full time careers and long commutes, they have greater expenses than Kate. They have to pay for childcare for their three children. The need a housecleaner and lawn services, because they are never at home to do those things. They have to spend more on their vehicles. They often need take out food from restaurants. They buy lunch at work every day, because they have no time to make sandwiches the night before. They can’t shop around for supermarket deals; the only time that they have to shop for food is Sunday afternoon. It’s nearly impossible to be frugal, when you have no time. Even if they found time to make sandwiches the night before, Dan would still be financially shaky, because he bought his home at the wrong time and because his salary is low.
3. The Education Spender. Sue buys a house in the most expensive town in order to get access to the top ranked high school. She sends her three boys to sports camps and travel sports leagues, which can add up to $10,000 per year. She hopes that her children will attend a better school or get scholarships, if they are good at lacrosse. Her husband’s salary pays the mortgage, but they don’t have much left over to put into the 401K or to fund the rainy day account. They spend so much on their mortgage that they have no money put aside for college. The kids aren’t super smart, so they probably won’t get any scholarships. College tuition will be funded with second mortgages on the house.
Yes, Sue is doing a lot of things wrong. You shouldn’t spend so much on a house that you can’t fund the 401K plan. Sports are a bad college investment. Nobody should fund college with a second mortgage. It’s better to go to a good public college than an expensive private school. Megan makes those points, and I totally agree with her.
However, there is a practical version of Sue. The first priority should be living within your income and creating a rainy day account, but after that, the next priority should be education. There are more educational options in wealthier towns. Sue isn’t totally stupid. A greater proportional of the high school attends a four-year college, there are more honors classes, there are better special-ed support, the teachers are paid more, and so on. There are many more career opportunities for kid who finish a four-year college, and the high school in the wealthy town gets most of its kids on that track. The trick is to get into the town, but without gettting sucked into the competitive spending environment.
Sue’s home in the wealthy town becomes an investment. It only increases in value, because other families want access to the schools. After the kids leave the high school, Sue promptly sells the home and moves to a cheaper area.
I’m not sure how to come up with personal finance advice that would cover Kate, Dan, Impractical Sue, and Practical Sue. Their situations and priorities are so different. Frugality might be the least important piece of advice.
Apt. 11d 
It does not sound like Kate needs financial advice, unless she is failing to ensure that her retirement is secure. Things appear to have worked out for her.
But it is true that families that may appear to be similar on the surface can have very different financial structures. I see this in my own neighborhood, which has various mixtures of the families described here.
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I think my advice to all of them is that you have to be flexible enough to live within your means, and not some theoretical income (the one you think you deserve, the one your parents had, the one you had before downsizing, the one you had before your house decreased in value).
Can I borrow language and call it mindful spending, including giving up things you really want or even think you need in order to maintain your fiscal stability? It’s the advice I believe for government spending as well (with the caveats that investment can pay off, that income as well as spending can be modified).
We are currently in the midst of obsessing about schools, because our local community has all fed into the same obsession about schools (me included). And, I agree with those who say one can obsess too much about what you can buy and what you need to buy in schooling. There are special circumstances, but there are also lots of kids who will get the same education nearly wherever they go, including, specifically, capable children with lots of parental support. They won’t necessarily get the perfect fit, but that, too, might be a value in disguise, learning to deal with a less than perfect fit, making them better educated and stronger students and people in the long run.
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“Can I borrow language and call it mindful spending, including giving up things you really want or even think you need in order to maintain your fiscal stability?”
Or figuring out what it is that you want most and what you don’t care about. As an upper-middle class family, you can’t have everything, but you can have a number of nice things. For my family, we have a big house walking distance from my husband’s work, two kids in private school and a third headed that way and lots of expensive routine household help (cleaning and yard). And yes, that is as hideously expensive as it sounds, even in Texas. However, we don’t travel much at all, except 1) grandma visits 2) in-state 3) business/pleasure trips where we piggyback on a conference or other work function. We don’t have any nearby family, but I think I last hired a babysitter about a year ago when our youngest was fresh from the hospital and we weren’t unpacked yet from a move. Our meals out are infrequent and almost always at the sort of places where you order at the counter (although we LOVE our campus cafeterias and dine there with somewhat embarrassing regularity–it’s very cheap for us). We also have one car, current trade-in value around $2,000. Also, my husband has been getting handier and handier, and it has lately saved us a lot of money. In the last three months or so, he’s replaced a toilet, a faucet, and an alternator for our car, and he keeps our electronics perking along well beyond their normal life span. We also spend huge amounts of money during on summer extracurriculars (I put away $150 every month just for summer activities), but are much more minimalistic about the school year.
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#1 here, and we know we are staggeringly lucky. We often hear from others, too: “I could never buy into this neighborhood now.” Part of what this nabe does for us is that our kids ramp up their game to match their friends, they aspire to be better. If we were starting out now, we’d probably be struggling to get a house in the town where our kids get aspirational messages. I wish those messages didnt come packaged with some bling type messages, but it’s a package.
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Honestly, I’d probably advise family number 2 to move to a red state. I’m watching my neighbors — man and wife are both elementary school teachers with good pensions — finish paying the tuition at our local state university for their two children, and they are now moving on to buying a beach house. They bought a good enough education for their kids to take the place in their community, but not enough for anyone to ever work on Wall Street or attend Harvard Law School presumably. In contrast, a lot of my friends who live in DC live in much smaller houses, will never have a beach house, and are driving themselves sick with worry about their kids’ educations.
the blue state lifestyle is very expensive — there are actually places in the country where kids can get into the orchestra and even the select orchestra without private lessons. Ditto for soccer. But most of those places are not in Boston, NY or DC.
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You don’t even have to move to a red state (or a purely red state) to get what louisa is recommending. The Cleveland area is pretty blue, and in the smaller towns and suburbs you get an awful lot for very little money (that $500,000 house in CT is going for under $200K; I had a 2400sf 4 bedroom house on an acre of land that was in the mid $100s). Picking up and moving and starting over is in many ways limited to those who are already in the better financial positions, and of course there is a huge cost associated with it (monetarily, but also in social connections, and just psychologically) but I honestly think that is probably the best option for many people. If they can find work, of course. All of it presumes they can find work.
I’d love to move back to New England to be near my family, a decade after moving to Ohio (and now upstate New York, for a job). But I doubt it will ever happen, barring some windfall. Especially in my line of work, the salaries do not go up enough to make up for the tripling in housing costs and everything else.
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It seems like #3 Sue should be re-named “The Sports Spender.” $10k a year on sports in which her sons have no future and no scholarship prospects? Get those boys out of the going-nowhere-but-the-ER sports and have them use their newfound free time for starting their own business (may I suggest: lawn care and snow removal?). But the real challenge will be going against all the other suburban lemmings and the phenomenon of social proof around Sports. And saying no to the kids.
They could also sell the house to get out from under that untenable mortgage, move somewhere more affordable with a decent but not top notch school. Time to ask what’s the real difference between current Awesome School and Just Fine School for these kids, who I imagine would be fine anywhere safe and average because they are in the middle of the bell curve and don’t need services. They are the perfect candidates for satisficing.
#2 Dan and his wife have a Time Problem. They could start waking up earlier, going to bed earlier and in general trying to manage their time better. Keeping a time diary for a week might show them ways to find a little more time here and there and create some efficiencies. If push comes to shove, they could let things go around the house and yard a bit more and stop paying for those services.
#1 Kate – Just needs to make sure they are fully insured against everything that could expose them to liability, i.e. umbrella and disability policy. Make sure they have an estate plan with all of the beneficiaries correctly named, and all of the paperwork in order and in a findable location. A nice place to be indeed.
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They could start waking up earlier, going to bed earlier and in general trying to manage their time better.
Waking up earlier and going to bed earlier doesn’t actually give you more time. Some people feel alarmingly smug that they are awake from 5:00 a.m. until 10:00 p.m. instead of from 8:00 a.m. until 1:00 a.m., but it’s the same number of hours.
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“but it’s the same number of hours”
Obviously. Not sure how the “smug” feeling people you know relate to this topic. Your statement presupposes all hours of the day are equally productive times for most people, and we know that is patently false: there are standard business hours, banking hours, standard school day hours, standard delivery times, etc around which we have to operate. Nobody crosses all the interpersonal little errands off their list between midnight and 2am, but YMMV.
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Speaking as a night owl, I have to confess that nothing good ever happens after midnight these days.
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Interpersonal little errands are what keep me from getting actual work done.
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We are #2. Bought at the peak of the market. We’re in a blue state so 1500 sqft costs a ton of money. Back in my hometown red state, we could get a 3000 sqft house on a lake for what we paid for our current home. However, neither me or my husband could work there. He’s a tenured professor. There’s no easy move there. And I teach in a field most schools don’t offer. We’re niche people career wise. Yeah, we could probably both get programmer/tech jobs anywhere, but we both like our jobs.
We do without housekeeping and do the best we can. We eat a lot of pasta, frozen pizza and tacos for dinner. When I can manage it, I make casseroles and soup on the weekends. I get lunch at school at a reduced price.
We pay tuition now instead of childcare now, which works out to be about the same as childcare.
We have a good amount of money in our 401k. We save what we can. Our usual mode is save, save, save. Oh crap, the car broke down, the furnace broke down, etc. All savings gone. So we never have the proverbial emergency savings for long. An emergency seems to come along frequently.
We also have credit card debt, much of which accumulated as a result of not having the emergency savings account. We mostly really do live within our means, but our emergencies–family weddings across the country, hospital stays, appliance breakdowns–seem to cost thousands. And some people might say, well, I won’t go to the wedding or whatever, but that’s just not us. And of course, you can’t really live without a refrigerator, can you?
Two things would make us better off. One, a lower house payment. Two, less debt (working on it). We budget for most things–even clothes. But stuff happens. It’s the stuff that gets us in trouble.
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I had a friend in college who would stay up really late (or not go to sleep) precisely because he considered those hours after the work were done to be free. Once he went to sleep, he had to get working on the next task. So, he developed a nutty habit of 36 hour days, in which the first 18 hours were work and the next 18 were play, and then he’d crash. Surprisingly, no mind altering substances or stimulants were involved. You had to be careful not to get into a car with him on those 32+ hour days.
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We definitely fell in the right place with the house buying in 2000. Even more than we knew. I recently saw the statistics on the community college feeder high schools — the end of our block was the next district over — 20% of the kids go to the cc as opposed to 12% from the district our kids went to. Staying in the house, too, for the whole time, even when it seemed like there were lovely houses for sale, oh, round about 2006, when I finally got hired full-time. Fortunately that scared my husband and we didn’t move.
Now, even with college tuition (one done, one in his first year), we were able to sell the house and finally move into one that I’m loving every minute of. I work mostly at home and I honestly didn’t know that being out in the country would make me this happy. We won’t have it paid off by the time we retire in 7-10 years, but as long as we are saving what we said we would, I felt like now was the time to do it.
We are blue state and we do spend on education and sports and music lessons and travel (mostly family visits). And I guess that house in the best school district we could afford. Don’t have a car with less than 100,000 miles on it. And our furniture is usually from craigslist.
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I have another real example to add to Laura’s taxonomy.
Yvonne and Brian (to use names from their generation) are a 30-something and a 40-something couple who live in a hotsy-totsy blue suburb. They look more or less like your normal yuppies, with several notable exceptions. The big one is that they bought their suburban house with cash. The other big exception is that they paid about half as much as any of their neighbors, as they bought it as a distressed property a couple years back. (Hopefully the neighbors don’t know–Yvonne tells me that a nearby family who did the same thing was treated as pariahs by their new neighbors.) They have an excellent income from a number of different sources and only one kid, and they used some very extreme methods on their way to buying their suburban home in cash (living with grandma and grandpa for a number of years, hypercommuting, renting a room in a house in their desired school district, etc.). Yvonne is a do-it-yourselfer and very good at furnishing them with an upper-middle class lifestyle via Craigslist. The suburban district can be a bit much at times, but Yvonne is happy about the fact that her son’s middle school peer group has a strong future orientation and the kids are currently buzzing about the question of what high school everybody is going to. It’s like the middle school version of senior year college discussions. Yvonne and Brian spend almost nothing on extracurriculars. Their kid does what’s available at school, and they work him very hard in their various enterprises. Yvonne is concerned about extracurriculars for college, but I was reassuring her that her son’s activities are actually pretty good college application material, but that it’s time to start some record keeping and produce a kiddie resume for him.
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To use Dave Ramsey terminology, Yvonne and Brian have both a good offense and a good defense. They are both very strong earners and very strong savers, although I think they’ve probably loosened up a bit since settling into their new home. From Yvonne’s stories, I think they make at least some effort to camouflage themselves to match their peer group (Laura’s group 2 and 3), although financially, they could really not be more different.
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I don’t agree with Megan McArdle that blue state professionals live by the “social norm (…) that you send your kid to the best college he or she can get into, by any means necessary.” Maybe the professionals she knows, or has interviewed? I can think offhand of many professional families in our blue town in our blue state who decided to send their (smart) children to state schools. The children could have gotten in to private schools (or did), but the parents preferred either in-state options, or were influenced by merit aid to send their children to public (or private) schools out of state.
I suggest a different framework for blue state professional families with high school age children. It’s probably too simple. You’re either a sports family, a music family, or an academic family. Call them S,M,or A. A and M are more likely to overlap. By the time the kids finish high school, many are firmly entrenched on one of the tracks. The family has invested money and time in that child’s career. I am not convinced that investing in sports training pays off in the college rat race, on the whole.
Yeah, yeah, there are the all-American and all-state stars in the big sports who get recruited. On the other hand, for every recruited athlete, there are lots and lots of non-recruited athletes who receive no bump in admissions for their sports participation. On the other hand, their grades are not as good as they could be, because they spend so much time playing, training, hanging out with teammates, neither reading nor doing homework.
My kids know students who were recruited athletes. On the whole, though, I would not say the kids got into “better” colleges by training as athletes. I suspect the same kids might have gotten into the same colleges, had they chosen to spend the time studying and doing academic extracurriculars. I’ve read “Reclaiming the Game.” I know there is an admissions advantage for recruited athletes, when compared to other students. From the students in our small sample, though, I can think of counterexamples of students who chose less selective colleges due to the colleges’ sports offerings. They liked the coach better, or they thought they’d be more likely to play. So on the whole, I think it’s a real gamble to think that being the best badminton player in the country will get your child into a better college. Your child is just as likely to choose a less selective college because it has a better badminton setup. Or because the student host was nicer at the overnight visit at the less selective college.
Then there’s the social division between the athletes and all the other students at selective colleges. A friend’s child (athletic) chose to transfer colleges, due to a social gulf between athletes and the rest of the students at that particular college. And pursuing an athletic career at college can make certain majors impossible, due to team practice and competition schedules. Some of these students are competing around the country, which makes it hard to keep up with the academic students who stayed at school and used the library.
In my opinion, parents in our towns choose to cultivate athletic talents in their children for the following reasons: 1) Social, both parents and children. You share an interest in the team, you start coaching and organizing. It becomes difficult to “drop out” of the network. 2) They don’t want unfit children. 3) They fear their children will be more likely to be bullied if they’re not sporty. 4) They want their children to play on the high school teams.
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“In my opinion, parents in our towns choose to cultivate athletic talents in their children for the following reasons: 1) Social, both parents and children. You share an interest in the team, you start coaching and organizing. It becomes difficult to “drop out” of the network. 2) They don’t want unfit children. 3) They fear their children will be more likely to be bullied if they’re not sporty. 4) They want their children to play on the high school teams.”
None of those are terrible reasons. I don’t know your area, but one other item comes to mind: 5) The kid doesn’t have other interests, and the parents are afraid of what the kid will do if he has too much free time.
I remember once hearing a Dave Ramsey call from a woman who was hiding from her husband the fact that darling daughter’s equestrian activities were costing $1,000 a month. I do not know how you hide $1,000 in horse expenses for any length of time, but she somehow managed. (I suppose travel teams probably cost something like that if there are hotels and meals to cover and music can also be very expensive, when just the instrument costs as much as a new car.)
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@cranberry – Your comment is spot on. S, M and A’s love that.
“They fear their children will be more likely to be bullied if they’re not sporty.”
Have they never heard of Locker Room Bullying which has been going on since forever? What do they make of the news about NFL player Jonathan Martin and the bullying he encountered at the hands of a sociopathic-sounding teammate that made him quit the Miami Dolphins?
“I think it’s a real gamble to think that being the best badminton player in the country will get your child into a better college. Your child is just as likely to choose a less selective college because it has a better badminton setup. Or because the student host was nicer at the overnight visit at the less selective college.”
Amen! Or because the women provided more sexual favors on the football recruiting visit (Oklahoma State).
Ok, so my anti-sports biases aside, I’ll grant that if the parents themselves were collegiate or professional athletes themselves (that would be .5 of 1% of families at most?), maybe a sports focus is worth the investment and opportunity costs because perhaps those kids have better genes/information. I know of one couple who were both recruited athletes at Stanford, and I get why they want to focus their Amazonian childrens’ efforts on sports.
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