35 thoughts on “$400,000 and Broke”

  2. I watched the video. Uh, you might not join the club, buy a new 60k car every four years just to start off. And 25k on two vacations? Yikes. And 5k on fundraisers? No.

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    1. Wait, aren’t the fundraisers charitable contributions? I’m thinking someone who makes 400K should be contributing that, at least.

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  3. We went down to one car. So far it’s been working. Zipcar is close enough for back-up, plus I hardly ever go anywhere outside of a circle with a three-mile radius.

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  4. We have one real car, plus a ’97 Corolla for Steve’s Get-To-The-Train-Station vehicle. But we’re about to drop some serious cash on a roof. It hurts. I have to make another phone call for one more quote. Stalling…

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    1. We have a ’95 as a second car. This spring it failed inspection because of extreme rust. Apparently, we were lucky not to have had the frame fall apart while we were moving. Stupid road salt.

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      2. Our family’s second car was a 1970 Volkswagon Beetle (my dad’s commuter car from when he bought it used in ’72 until his death in ’93). At some point in the mid 90s it developed a hole in the floor where battery acid had leaked. The hole made the front passenger seat too dangerous to use, so my grandfather took it out. At first we covered the hole with a bathmat, but eventually my grandfather welded a piece of sheet metal over it. It actually increased functionality, because it meant we could fit someone with long legs and/or groceries. First gear was sticky, there was a problem with the transistor, it wouldn’t drive over 55 MPH, the heater and turn signals didn’t work, and the windows wouldn’t wind down (luckily it had aviator windows so you could manually signal by snaking your hands out of them). I drove the car until 2005, when my mother finally got rid of it after the breaks failed a second time (luckily neither time while I was driving).

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  5. Haven’t we done this before? (that is, been shocked at people who seem unable to live on 400K, or whatever the threshold is). Yup, it was Todd Henderson: http://delong.typepad.com/sdj/2010/09/todd-henderson-we-are-the-super-rich.html.

    In Googling, I found this: http://www.torontolife.com/informer/features/2012/02/15/almost-rich/ on being rich in Toronto, and commentaries: http://whatever.scalzi.com/2012/02/17/not-being-able-to-scrape-by-with-200k-is-usually-your-own-fault/

    I don’t care how other people spend their money, as long as they don’t complain about paying taxes or assume their choices are available to everyone.

    I can’t access the article either, but, really, is the person’s spending a result of conspicuous consumption that can be easily cut, like a new car purchase and vacations? Usually people who find them selves broke on 400K salaries have made spending commitments (houses, tuition, loans) that are hard to eliminate.

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    1. Well, actually, I don’t know any facts about people who find themselves broke on 400K/year. I’m just presuming that it’s more likely that they have fixed (difficult to change) expenses, rather than simple consumption.

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      1. The article had more details. Places the family could cut, immediately:

        $21,000: dining out and other entertainment
        $12,000: neighborhood club dues
        $26,000: vacations (2 annual), 1 weekend getaway for parents

        $30,000: groceries, family of 4

        (Suggestion: Use the neighborhood club more, “entertainment” elsewhere much less. Visit family on vacation. Drive to said vacation. Learn to cook. $30 K for a family of 4??)

        The “housing expenses” part of the article doesn’t seem to work. $1.2 M house, $850,000 mortgage. The article claims this means:

        $87,000 mortgage payments
        $24,000 property taxes.

        However, online mortgage calculators I use give a 4.5% rate, which would be roughly $52,000 per year. So, get a new mortgage. Downsize the house, which would also decrease the amount spent on property taxes.

        I suspect the theoretical family budget understates the expenditures for the 2 children’s sports at $10,000 per year.

        So, bj, I think the answer is usually consuming too much.

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      2. The budget also didn’t include private school. The lessons I learn from these budgets is the disconnect between what people think an income level will buy, and what it really buys.

        I’m not sure what consuming “too much” means — presumably here it means that they aren’t saving enough for retirement. I guess it should be obvious to everyone that you can survive on less than 400K a year, since almost everyone does, and not while living in misery. So the real question is how much can you consume on that salary while still saving sufficiently?

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      3. bj said:

        “The budget also didn’t include private school. The lessons I learn from these budgets is the disconnect between what people think an income level will buy, and what it really buys.”

        Yep.

        My husband makes a very good income for a guy his age in his profession and I would have thought it wealth beyond the dreams of avarice as a younger person, but here’s what it covers for the five of us:

        –big, dated house in excellent location and in reasonable repair. Mortgage is well under 2X income.
        –two kids in hotsy totsy private school (hotsy totsy being about $600 a month in our area)
        –yard help and cleaning help (if you don’t water the lawn much, it only needs to be mowed about twice a month)
        –one paid-off 2004 Ford (value probably about $1500) and one paid-off 2011 Kia (value probably around $12k). Do I want nicer cars and less household help–no way!
        –last hired a babysitter probably twice in October 2012 (after Baby T was born)
        –last went out to a movie–not sure, actually–possibly this decade
        –regular Starbucks for me
        –lots of summer camp for the kids
        –a few extracurriculars during the school year (this is a new thing for us)
        –no revolving debt
        –adequate but not heroic retirement savings, no college savings yet (2015?)
        –two kinda smart phones that get the job done (but not actual iPhones)
        –the ability to write a check for minor household disasters

        It goes REALLY fast when you are actually living on a budget.

        This is our first term of doing school year extracurriculars that you pay real money for that weren’t therapy of some kind. C’s guitar is $100 a month. I found it this month, but next month looks iffy. (Starbucks, you say? I’ll pretend I didn’t hear that.) The kids are also both enjoying fencing, which looks like it will be around $160+ a month. I’d also like to fund one day a week of parents’ day out for Baby T (around $60 a month). We’ll do this stuff as long as we can find the money for it, but when the money runs out, we’ll stop.

        The only good news is grocery budget. I recently had the brilliant idea of instead of just having a monthly grocery budget (and then sniffling for a week when it ran out), splitting it into four equal weeks, which means that the long end of month pain will hopefully turn into four short end of week pains instead. So far, so good.

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      4. One item I missed:

        –a veritable showroom of IKEA furniture (we’re loving a new Stronas solid pine table that extends to seat 10)

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      5. bj wrote: “The budget also didn’t include private school. The lessons I learn from these budgets is the disconnect between what people think an income level will buy, and what it really buys.”

        This income level would comfortably cover private school for two children.

        To stay out of debt, the vacations, frequent dining out and entertainment, and the new $60,000 every four years would go. Even, say, a $40,000 car every five years would represent a decrease from $15,000 every year to $8,000. Just cutting back, say, $15,000 from the entertainment, and $20,000 from vacations, would get them in the ballpark. $43,000, before starting to economize.

        If the kids are in private school, one does not need the house in the good school district. I’m still puzzled by the mortgage amount. If it’s based on the wealth advisor’s experience with customers, I wonder if many of them are effectively living on debt, through mortgages and heloc loans, although they have no rational need for them?

        Of course, some of the mortgage interest would be deducted from some taxes. I don’t know if that’s been accounted for. And some people have contracts with their employers which supply things such as company cars and club memberships.

        A smaller house, with a smaller mortgage, would also mean smaller property taxes. I found a very nice 4 bedroom home in Winnetka for $830,000. Property taxes, $13,000. So, they could remain in the good school district, take out a mortgage for $400,000, assuming they could recoup the equity in the mansion, but save $11,000 on property taxes and $63,000 on mortgage.

        So, are they $10,000 in debt, or $117,000 in surplus?

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      6. cranberry said:

        “I’m still puzzled by the mortgage amount. If it’s based on the wealth advisor’s experience with customers, I wonder if many of them are effectively living on debt, through mortgages and heloc loans, although they have no rational need for them?”

        I actually know the answer to that one.

        Apparently, a lot of financial advisers and people in the upper income levels believe that it’s “sophisticated” to have a big mortgage at a low interest rate and invest the difference. This is one of the financial ideas that Dave Ramsey pushes back against.

        It has a sort of surface plausibility, but one can’t help but notice that the people who push it hardest often have a substantial financial motive (they don’t want you to pay off your house, they want you to invest with them so they get fat commissions on your investment–they don’t get a commission on your paid-off house).

        This is part of the explanation for the mystery of the high-income, high savings, high debt family, which is not uncommon among low six digit households.

        “Of course, some of the mortgage interest would be deducted from some taxes. I don’t know if that’s been accounted for. And some people have contracts with their employers which supply things such as company cars and club memberships.”

        Yes.

        “A smaller house, with a smaller mortgage, would also mean smaller property taxes. I found a very nice 4 bedroom home in Winnetka for $830,000. Property taxes, $13,000. So, they could remain in the good school district, take out a mortgage for $400,000, assuming they could recoup the equity in the mansion, but save $11,000 on property taxes and $63,000 on mortgage.

        “So, are they $10,000 in debt, or $117,000 in surplus?”

        Very good.

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  6. Yes, we’ve had this conversation before, but I do enjoy this topic. It’s funny to see what other people consider essentials. There’s something toxic about the culture of consumption in UMC communities. Like this one. I’m very proud of my son who said that he was one of the few kids in town that wears Old Navy shirts. Smirked. Then said, “I enjoy a $5 t-shirt.”

    People can spend their money on whatever they want. Not matter how silly that stuff is. But when they spend too much on silly stuff and then go backrupt and spread their debt to other people, then that’s annoying.

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    1. I agree, that spending too much on silly stuff and then spreading the debt around on people who lived more frugally is more than annoying. Also more than annoying is when people making that kind of money say they *can’t* afford something, like college tuition for their children or paying their fair share of taxes (like Todd Henderson did). if you make 400K/year you can afford to save for your retirement and pay your children’s college tuition and your taxes (though it might mean fewer/less expensive cars, vacations, houses, etc.).

      But, not many people making 400K declare bankruptcy, though many more of they whine.

      I also like these discussions because I’m in favor of a lot more openness about money in this country. I think people have unrealistic notions of what different levels of income buy, in every ladder of the income scale. In the lower ends, the rich are guilty of not understanding how difficult it is to live prudently on low incomes with no security net and marginal resources. On the other end, in ratcheting what everyone thinks of as a “middle class” life (expensive cars, bedrooms for every child and bathrooms for everyone in a house, private college tuition, a 6 month salary diamond and a 50K wedding, . . . ) and then thinking you are entitled to it.

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      1. I’ve never gotten the “a bathroom for every person” mindset. I would say 1 bathroom for every 3 people is pretty optimal. I have lived mostly in 1 bathroom homes from age 16 – now, and probably can count on one hand the number of times it’s been a huge problem.* The biggest issue is lots of sleepover guests from multi-bathroom homes. People don’t seem to get it’s rude to spend an hour in the bathroom doing god knows what if you’re not home alone.

        *I think our max bathroom ratio during one Christmas was about 8:1, but with holiday schedules not everyone needs to be up and showered at the same time so it was fine.

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    2. I’m wearing my $7 or was it $3 Old Navy t-shirt today too! Go Jonah! (Of course I won’t tell you about my new knee-length leather skirt….)

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  7. We have some relatives in a high-expense coastal area who make around $250k and have a number of big mortgages on several properties and a disabled adult child. The problem is that they can just barely scrape by on $250k with their mortgages and the adult child expenses (about $1500 a month) plus (at least in the past) a scary line of credit. Whenever there is a dip in income, it’s panic time.

    I don’t know the exact details, but their idea is that they “can’t” save and so the only saving method that works for them is to have high mortgages that they are paying off. (The last house they bought cost roughly 10X the value of our home, and then they did a renovation that cost 2X the value of our home.) There have been signs of progress, but for many years, the plan was to just work harder and longer whenever problems loomed, which only gets you so far when you’re dealing with debt with that many zeroes. Also, you eventually get old and can’t work round the clock anymore.

    The other problem has been their near-religious faith in their local real estate market. Whenever prices dip, they can’t sell because they’re underwater. When values soar, they can’t sell because the market is so hot.

    It’s been somewhat frustrating, but there have been signs of improvement the last few years.

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    1. “I resemble that [geographic location]” – 🙂 Sounds like Vancouver…

      If you can’t afford to live somewhere (which to me means living within your means, saving for retirement, little/no consumer debt, etc), then you can’t afford it. And that’s okay – there are many lovely places to live.

      If we hadn’t stayed in the market we wouldn’t have moved back.

      Help me here – are there other cities where people have so drunk the koolaid of “it’s awesome” that they’ll live in extreme debt or substandard living conditions to be there? And this is as adults with kids, etc.

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      1. http://www.cbc.ca/news/canada/british-columbia/vancouver-s-housing-2nd-least-affordable-in-world-1.2505524

        You’re #2 for unaffordability, second only to Hong Kong.

        I think San Francisco and NYC are some of the other members of that particular club (the Koolaid drinkers) in terms of price per square foot, but Vancouver sticks out as being a junior member of that small club in terms of employment possibilities and household income levels. (Not sure whether to put CA beach communities on the list or how they all compare in terms of how many people are trying unsuccessfully to live there with children.)

        I have to include this internet classic:

        http://www.crackshackormansion.com/

        http://www.crackshackormansion.com/part2.html

        For one of the “crack shack or mansion” game items, the captions says, “$1,628,000 Vancouver Mansion. How does that song go again? “If I had a million dollars, I would borrow 600k from my parents.”

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      2. In my area, they’ve started asking for over $225,000 for a three bedrooms with no off-street parking. I’ve been here long enough that it’s starting to seem insanely expensive to me.

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      3. It definitely is a junior member – at least with NYC, well, it’s NYC with all that a world class city brings.

        It’s the Sally Field of cities – somehow foreign real estate investment (a land bank for the uber wealthy) means “they like me, they really like me” instead of “I can no longer afford a reasonable quality of life here”.

        So it’s an odd way of living beyond your means. It’s not overspending on luxuries but rather living like a pauper for no reason.

        And for those who convince themselves that the stratospheric prices will fund their retirement? You still have to leave to cash out. So why not move now and live somewhere affordable?

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      4. Sandra said:

        “It’s the Sally Field of cities – somehow foreign real estate investment (a land bank for the uber wealthy) means “they like me, they really like me” instead of “I can no longer afford a reasonable quality of life here”.”

        Yeah. And if they really liked Vancouver, wouldn’t they live there year round, rather than just leaving their homes empty?

        You look at a map and Vancouver is the major Canadian city closest to East Asia. It could have all of the charm of [insert most boring Canadian city here] and there would still be lots of Asian investment there.

        “So it’s an odd way of living beyond your means. It’s not overspending on luxuries but rather living like a pauper for no reason.

        “And for those who convince themselves that the stratospheric prices will fund their retirement? You still have to leave to cash out. So why not move now and live somewhere affordable?”

        Yep.

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  8. My husband had this routine he used to do that involved repeating the statement: “we live in a nearly half a million dollar house. Why does it have lineoleum in the kitchen?” I admit, I still find the disconnect between what you pay and what you get mind boggling.

    Loved the story about the VW. We had one growing up that was always the same age that I was — it was a 1964 VW. And my dad (who was a doctor) bought it used! Also had a hole in the floor and the heat didn’t work, in upstate New York, in the winter. My dad sold it when I was in high school to a bunch of college guys, and we would see it around town from time to time. (It had a distinctive speckled elephant paint job — grey until my brother and I helpfully washed it with clothing detergent to surprise dad and managed to take the finish off the paint.)

    When we lived in military housing, we actually lived in a place where officers lived on one side of the street and enlisted families lived on the other. We would always notice that the officers were driving beaters and the enlisted families tended to purchase shiny new cars. (We’ve only ever had a ‘new used car’ so that used to really surprise me.)

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    1. “My husband had this routine he used to do that involved repeating the statement: “we live in a nearly half a million dollar house. Why does it have lineoleum in the kitchen?” I admit, I still find the disconnect between what you pay and what you get mind boggling.”

      Hah!

      I’ve told the story of my DC/MD/VA house hunt here many times, but my version of your story during the house hunt was, “Hey, this is a $475k/$495k house and it’s kinda cute (even it’s tiny). What is it doing in this slum?”

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  9. I went to school with, dated, and briefly married into the upper-upper middle class/lower upper class (yearly household incomes between 500k-1 mill), and honestly, it bought you a lot of comfort and some splurges but not wealth out of sight. The cars and TVs and hotels were nicer, but life was not qualitatively different from my upbringing bouncing around the middle middle and lower upper middle class. You still have to prioritize what to splurge on vs. what to save on to some extent. So, really nice cars but a modest house (for the income). Housekeeper and gardener but clipping coupons for shopping. Private schools and a country club membership but no designer clothes for mom. $30 wine at dinner every night, but home cooked meals. To really have it all, I’m pretty sure you need to be comfortably in the 7 figures or you’re going to get into financial trouble.

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  10. We spent tons and tons of money to send Ian to camps this summer. He is falling into horrible grey area. He’s too high functioning to go to special ed summer school, which the school district would have paid for. But he needs an aide for regular camps that admit special ed kids. There aren’t that many of those types of camps, so they tend to be expensive places. And then we have to pay double to cover the aide. We spent about 10K on activities for Ian this summer.

    Now we need a roof. So, we’re on an extreme austerity plan for the rest of the year.

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  11. I was thinking about the budgeting, the idea that there’s some level of income where you aren’t prioritizing what to splurge on. I thought maybe Bill Gates, but then, I remembered an article about Larry Ellison’s budgeting difficulties. For Ellison, the prioritization involves deciding whether he buys Lanai or maybe some less well known island in the Pacific (and, improves his cash flow and accounts for potential precipitous drops in his stock value). We don’t hear those stories about Gates, ’cause it seems like their family makes those decisions without getting into any danger. But, ultimately, everyone has to prioritize and budget, I think.

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  12. And, there’s nothing wrong with spending money you have, if you’re also saving and planning for risk and the future (I think that’s where a lot of people fall short, not budgeting for the big expenses that occur irregularly or far into the future, like college costs, house maintenance, cars, medical costs, taxes, . . . .). Taxes are an interesting one for us, because we pay taxes on income we don’t have yet (taxes paid quarterly, income comes at the end of the year), so it’s an expense that needs to be saved for ahead of time. A lot of people get into trouble over that — unpaid American taxes on royalties earned during WWII were apparently the bane of Agatha Christie’s existence.

    But, if you’ve planned for those expenses, spending money on summer camp, or private school, or iPhones, or designer shoes, or wine, or whatever it is one enjoys is not something that disturbs me at all. I don’t see the value of frugality for its sake alone. I’ve never understood 100 dollar sweatshirts, but their existence doesn’t bother me. Fortunately, my kids have never wanted those things, and have not been brand conscious. The older has taken it as a activist point, not to wear, say Lululemon (I’m “middle class” enough to have been shocked when I went into that store and looked at a sweatshirt and then saw the price). But, if she wanted to, I’d give a lecture, but may let her buy, maybe (and, that’s my kid, on whom I get to impose my values). Other people’s kids? their decision.

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    1. bj said:

      “Taxes are an interesting one for us, because we pay taxes on income we don’t have yet (taxes paid quarterly, income comes at the end of the year), so it’s an expense that needs to be saved for ahead of time. A lot of people get into trouble over that — unpaid American taxes on royalties earned during WWII were apparently the bane of Agatha Christie’s existence.”

      Yes–that’s a big one.

      I think the way people get into trouble is that they don’t set aside 2014 money for 2014 taxes, assuming they’ll be able to use 2015 money, but then their 2015 and 2016 money doesn’t materialize, so they wind up in a world of hurt.

      It’s very, very important to be setting aside money for taxes as it comes in.

      “But, if you’ve planned for those expenses, spending money on summer camp, or private school, or iPhones, or designer shoes, or wine, or whatever it is one enjoys is not something that disturbs me at all. I don’t see the value of frugality for its sake alone. I’ve never understood 100 dollar sweatshirts, but their existence doesn’t bother me. Fortunately, my kids have never wanted those things, and have not been brand conscious. The older has taken it as a activist point, not to wear, say Lululemon (I’m “middle class” enough to have been shocked when I went into that store and looked at a sweatshirt and then saw the price). But, if she wanted to, I’d give a lecture, but may let her buy, maybe (and, that’s my kid, on whom I get to impose my values). Other people’s kids? their decision.”

      I’d theoretically tell my daughter (who in real life is not into clothing stores or clothing) that she could do it, if she were content with that being her only new clothing item for the fall. Alternately, she could buy it with her own money. There’s nothing that focuses a child’s mind on getting value like using their own money.

      Dave Ramsey’s new book on kids and money deals a lot with these issues. I believe in one of his stories about raising his kids (either in the book or on the radio), he mentions how his kids all suddenly fell in love with Old Navy once they were being handed their clothes budget in cash and realized they could either get two items at higher end stores or a bunch of stuff at Old Navy.

      The 12-year-old recently spent $40 of her own hard-earned money on a ukulele. She LOVES that ukulele and plays it all the time. She’s also interested in buying an embroidery machine, which would be at least several hundred dollars. It would not surprise me at all if she does it. In related news, she’s given me a $6 bid for helping me weed the beds around the house this weekend, a task I had previously looked forward to without enthusiasm. Win-win!

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      1. The negotiation for the weeding job was actually pretty masterful on C’s part.

        She asked what I’d give for the weeding project. I said $5 for the whole thing, with my help, and payment only if the whole job is done–no partial payment for partial work.

        C held out for $6 for the project. I agreed.

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      2. Amy P: bj, and others, pay taxes effectively in advance. So instead of waiting until April, 2015 to pay the taxes on 2014 income, they’re paying the tax now, in advance, quarterly, determined by the previous year’s income. Which is not such a problem, I suppose, if the income stream’s reliable. If there are big years and small years, though, you have to keep in mind that you have to keep money on hand to pay taxes in advance, even if you won’t earn much this year. I think that’s how movie stars, or others who are in feast or famine industries can get into trouble.

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