In Bloomberg, Megan McArdle gives advice to the downwardly mobile. (By downwardly mobile, she means average middle class workers who are earning less than the past.) She was inspired by an article in the Wall Street journal about finding work after a period of unemployment. We’ve talked about this topic before on this blog, so let’s come back to this subject.
In the past ten years, our income has changed dramatically. At first, things were tight, as we recovered from graduate school. Then for about a year or two, things were great – a big bonus and double incomes. Then 2008 happened. A few years later, Steve was downsized and took a consultancy gig. Ups and downs. Everybody has ’em. Luckily, our downs weren’t terrible, and we learned some good lessons along the way.
Related: Read about Lance Armstrong selling off his stuff.
Megan’s lessons (budget, live within your means, save) are all excellent. Let me add a few of my own:
1. Live like a graduate student. Always. Even after you are doing well. If possible, socialize with graduate students, because you’ll always feel rich.
2. Assume that you’ll lose your job for a period of time and that your income will be cut in half. You don’t have to assume that you’ll have zero income, because you can always get a low paying job somewhere. You also don’t have to assume that the job loss will mean permanent unemployment. People lose their jobs every day, so it’s really important to think through the worse case scenario. I even know a professor with tenure who lost her job, because the school got rid of the whole department. Now, do you have a plan? Do you have a plan that will mean the least disruption for the kids?
3. Never spend your whole paycheck, even when things are going well. If you earn a bonus, do NOT assume that it will happen every year. Do NOT spend your bonus on your mortgage. A bonus should go straight to savings.
4. Drive a crappy car. Live in a modest home. Try to keep the non-negotiable expenses to a minimum. In the flush years, spend your money on a trip to Mexico, not a house with granite countertops. A nice vacation is a one-time expense; a mortgage is every month.
5. Cook dinner six days a week.
6. Do not take out a second mortgage on the house for college.
7. Splurge on ONE thing that makes you happy — travel, food, clothes — but do not spend splurge on all of those things.
8. Have friends that bring you bottles of wine and bourbon, when the bad things happen.
Apt. 11d 
I definitely have 1 and 8 down. 😉
One way I keep drinking costs down is to drink all the free alcohol on campus. If you’re subtle about it and can hold your liquor well, no one will notice that you had 5 glasses of wine instead of 1 at the reception. Also, department happy hour. A perk of being in multiple departments is multiple happy hours. I try to make the free stuff on campus balance out the not so cheap bars in the neighborhood. State schools usually don’t have the same amount of copious free alcohol, but they have student bars with $1 pitcher nights, so it probably averages out.
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The same applies to free food, except that often the time/food ratio isn’t worth it. (It’s not “free” really if you have to attend a 2 hour lecture to eat it). Also, costs saved now would be offset in the future with the bypass surgery needed to deal with a diet of mostly brie.
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(It’s not “free” really if you have to attend a 2 hour lecture to eat it).
For a while my wife helped run talks at Penn where Continuing Legal Education credits were available. The talks almost always had receptions after there. We’d pretty much always see a group of 4-5 people (not together, but the same people) at all the receptions. They never were at the talks. They were staff at the university somewhere, but not affiliated with the law school. They’d just show up for the receptions, eat food and often drink wine. This is a bit harder to do w/ small talks, but mostly you just need to lose your sense of shame.
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This can work if you dress anonymously enough and go to a large reception, say, one attended by over 50-100 people. It also works if you show up to the reception late enough so all the important people have left and it’s just the grad students left eating the food.*
*Though by then the shrimp are usually all gone.
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Believe me, “you can always get a low paying job” is not true for unemployed adults any more, especially those who have more professional resumes and are clearly looking for stop-gap positions.
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How about “you can always get low paying work–except if you live in some hell hole like Michigan”?
That was one of my major life lessons growing up in a temporarily downwardly mobile family in a rural area–there aren’t always jobs, but there’s always work. When I was a kid, my dad put together a little bit of this and a little bit of that to eke out the necessaries of life for a household of five–some ranching, some cedar salvage for the shake mill, some tutoring, whatever seasonal or temporary jobs he could get. (The first paycheck job that I can remember him getting was when I was in 7th grade.) And of course we had well water and firewood from the property, which probably helped a good deal with utilities.
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I don’t totally agree with 1 and 4. I think it makes sense to buy durable goods (e.g., clothes, a new kitchen) during good times, assuming that nice things are what makes you happy, and provided you pay all cash, because then you can enjoy the nice things during downturns.
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Yes. I thinned down my wardrobe at one point and then discovered something that the minimalists didn’t mention–when you only have 2 or 3 pairs of pants, having one or two pairs suddenly wear out is a huge disaster. Minimalism is a luxury.
I like Dave Ramsey’s Baby Steps for figuring out what to do first and second and third. A lot of people are doing good things, but doing them out of order and getting into unnecessary trouble.
http://www.daveramsey.com/new/baby-steps/
It gives me chills to talk to somebody and realize that they’ve bought a house while still carrying substantial student loans and/or car debt.
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“I don’t totally agree with 1 and 4.” Me neither, because I think the key is buying only what makes you happy, but only if you can afford it, and that includes thinking about the long term. I do think one has to be careful in buying things that mean continued spending into the future (real estate, houses, and vacation houses being the prime example), ’cause their cost can’t be turned off — and that can be true even if you pay for real estate with cash, because of taxes.
I think that the advice for the potentially downwardly mobile asks people to live as though they didn’t have money when they do, and, then, really, what’s the point? One night as well not work. I think he key is to remember that when you are earning money, that your beta is higher the more you earn, so, if you’re earning 1M, you certainly shouldn’t be spending it all with the assumption that you will earn 1M next year.
Hanging out with people who make less than you (i.e. graduate students) definitely helps.
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bj said:
“I do think one has to be careful in buying things that mean continued spending into the future (real estate, houses, and vacation houses being the prime example), ’cause their cost can’t be turned off — and that can be true even if you pay for real estate with cash, because of taxes.”
Yes. On another forum, a guy wrote in whose family had bought a money pit house, hobby farm, and horses. After a series of unfortunate events, those horses were eating WAY better than the family and were probably better housed. By my math, the family’s income was probably adequate to feed all of the humans reasonably well, but it definitely wasn’t enough to provide for the humans and the horses.
“I think that the advice for the potentially downwardly mobile asks people to live as though they didn’t have money when they do, and, then, really, what’s the point? One night as well not work. I think he key is to remember that when you are earning money, that your beta is higher the more you earn, so, if you’re earning 1M, you certainly shouldn’t be spending it all with the assumption that you will earn 1M next year.”
Right. I can think of an example in my own immediate circle of some people who should have been able to live on their income (a quarter million in good years) but their financial planning was that they’d always make that much and nothing would ever go wrong or they’d buy stuff and then figure out how to afford it. Or they “couldn’t” save cash, so they’d just buy real estate with a mortgage and force themselves to save by paying on the mortgages. It sounds really dumb put that baldly (and these are not actually dumb people), but sometimes people are so busy earning and spending the money (and earning a quarter million takes a lot of time and energy) that they forget to do a little 5th grade math.
“Hanging out with people who make less than you (i.e. graduate students) definitely helps.”
I do that, but I sometimes worry that I’m a bad influence.
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Yes, unfortunately that’s the problem, that hanging out with people poorer than yourself might be good for you but not for them. But, I think it’s better when you are in different life stages.
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bj said:
“But, I think it’s better when you are in different life stages.”
That sounds about right. I have some friends in grad families who have little kids the same age as my littlest, but who don’t have the big hulking elementary children that I do. We also have grad family friends who have elementary children, both currently at our kids’ private school, but they’re pulling out their oldest for next year, in part because it just got too rich for the parents’ blood. That mom seems kind of burnt out–I suppose the better part of a decade as a grad wife and attempting a middle class lifestyle on a grad budget will do that to you. My other grad mom friends are holding up better, but they haven’t been doing it as long–their kids are 3 and under.
I think big and little kids are VERY different in that respect–you can usually give little itty bitty kids a lot of what they need with home production and improvising, but once they get bigger, a middle class (or upper middle class) lifestyle requires paying for stuff.
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My view is 3 is okay until you have 6-12 months living expenses saved up. Then you really probably don’t have a better investment opportunity than the 4-6 per cent you can stop paying on your mortgage debt if you throw a windfall at it. We had an an emergency fund, I got a $35000 inheritance, we threw it at the mortgage, and we were never sorry after. The minimum payment went way down, and even though we kept paying at the old level we felt a lot safer when one of us lost her job.
It’s not lost money: if things go to hell you either sell the house, and there it is, or you can get it out through a home equity loan.
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Speaking of priorities, I just overspent on postage by 32 cents to avoid going to the post office tomorrow morning. I would say that is worth it to me. #gradstudentluxuries
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“They never were at the talks. They were staff at the university somewhere, but not affiliated with the law school. They’d just show up for the receptions, eat food and often drink wine.” Doesn’t there come a point where this is stealing?
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Maybe- I’ll admit I found it unseemly when I realized what was happening- but there was always lots of food left over at these things, and usually nice stuff. It would be put out for students, but even then, lots of it got thrown away. I assume the law school also thought it was worth “losing” a bit of food and drink to not have the general unpleasantness of having to check IDs or badges or the like. (Whether it would legally be stealing, I’m less sure. The events were open to the public [though most people would have to pay to get CLE credit] as were the receptions. There were not explicit signs or the like saying “only people who came to the talk can eat this food”. The people generally allowed on campus (I think), so I suspect it would not amount to stealing, in the legal sense, but it was a bit unseemly.
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I would amend #4. Live below your means in housing, too. Do not buy the largest house in the nicest neighborhood. Buy an older house in a good school district. Or rent a beat-up house or apartment in a good school district.
This is where I differ from Megan McArdle. Public school districts can be very different in their offerings. It is not worth 60% of your income, of course. However, there are stark differences in academic offerings and culture between districts. Investigate everything about a school district before moving. Sometimes a “not as nice” district will be closer to other programs your children can take advantage of. Our local voc/tec high school offers vacation courses in useful subjects, both fun and useful, for amazingly low rates. If you lived close enough for your children to walk either to the school, or to bus service for that school, it could be one way to cut living expenses, but not your children’s opportunities.
I would not splurge on travel out of the country, clothes, or a car.
As to #6, well, it depends on your child. I think a second mortgage makes more sense than a non-dischargeable student loan. Don’t parents often co-sign such loans? I’d rather take the risk of losing the house, than tie everyone in the family to a loan which can’t be discharged. And it depends on the child. If the kid’s a future engineer with strong skills, taking out a loan for a degree from Virginia Tech could make sense.
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cranberry said:
“As to #6, well, it depends on your child. I think a second mortgage makes more sense than a non-dischargeable student loan. Don’t parents often co-sign such loans? I’d rather take the risk of losing the house, than tie everyone in the family to a loan which can’t be discharged.”
Yeah. They are both unappetizing choices, but I think the co-signing is much worse than the second mortgage.
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For awhile I was the only working mom in my department, and everyone had been trained to put all the leftover pizza from all the functions in the fridge with a note on my door saying, “There’s pizza for your kids in the fridge.” I probably fed my kids leftover pizza from on-campus functions once a week for several years. It was the best “benefit package” ever. It felt so good to show up at home with pizza and not have to rustle up dinner once a week. Also, we saved money by not having to purchase pizza.
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If possible, socialize with graduate students, because you’ll always feel rich.
There’s kind of a Dazed-And-Confused-meets-middle-age” about that.
“That’s what I love about these grad school women. I get older, they stay the same age.”
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It seems like the hardest financial change for people to make is to adjust their mindsets to accept some (or, more) deprivation than they are used to. This means accepting that they’ll live in a smaller house, drive a crappier car, not have the latest fashions, or be able to spend as much on entertainment compared to their peers. Once people get over that hurdle though, the actual work that needs to be done to become financially stable–like the activities listed in the article– are fairly easy in comparision
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I think all eight work for me.
My daughter claims that we taught them how to save, but not how to spend.
It’s true we still live like grad students. We only recently bought a house that we really wanted — having done the least expensive house in the best neighborhood (for schools) for 13 years. It’s odd to feel like maybe it’s ok, we can afford it, we’re more than half done with the college tuitions, we’ve already had the job loss and reorientation in the last couple of years. We have old cars.
We do travel — that’s our #7. Flew to my son’s regional wrestling meet last weekend even if it meant being there for less than 30 hours. Seeing him qualifying for the national competition? WOW. Well, at least that meet will be within driving distance.
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Student loans are not cosigned by parents. It’s all on the kid.
My biggest nonessential expenses are clothes and conferences. I see these expenses as keeping me employed.
My plan in case of unemployment is to move south. It’s cheaper to live there. I wouldn’t move until I had a job but that’s the plan. I have a similar plan for if mr. Geeky leaves me. :). I have family in the south so that’s where I’d start. Having skills one can parlay into a job is good, too.
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