From time to time, I receive questions from the Marriage, Kids and Money audience. I thought this week I'd shake up the show format a little bit by answering one of the questions I received recently about controlling expenses when we have a high income. Enjoy!
I saw Dave Ramsey live a couple of years ago and it resonated with me. I began promptly to hack away at my debt and contribute 15% to my 401k. I gross $8,000 a month before all the fun stuff comes out, including insurance, etc.
- $500 goes into a high yield savings (Currently, there is about $6,500 in that).
- $1425 is currently my mortgage payment. Then we have all the normal bills, etc.
- The summer was a bit brutal on my budget as I spent $750 in 6 weeks on summer day care, plus $1,000 on a broken AC.
So given all that … My question is “How can I get ahead?” Maybe I just need patience?
We’re planning on moving soon and I am already doing research on how I can find a safe place in a good school district. But I don’t want that to drive us further into the monthly mortgage hole.
Anyway, I hope I do not sound overly neurotic but I would love your input.
First of all, congratulations on earning such an impressive income, Tina! That is awesome. You should be proud.
And I've been in your position too. How could we be making all of this money and have nothing to show for it at the end of the month?! I'm familiar with this life conundrum.
When we’re feeling strapped, it's usually an earning issue or a spending issue. Given that you’re making a solid income each month, I would say we should try to focus our efforts on the spending side today.
And don't worry. A lot of people have themselves in a much more difficult financial situation. According to a new survey from CareerBuilder, 8 out of 10 Americans are living paycheck to paycheck. Given that you're saving and investing consistently, you’re more financially savvy that 80% of the country!
In an effort to reduce your financial stress, I have THREE AREAS that I'll recommend to help you improve your money situation:
- Budget and plan your monthly spending
- Save more of your hard-earned money
- Prepare for buying your next home
1. Budget Monthly
I’m not sure if you’re doing it already, but I would highly recommend living on a monthly budget going forward. I'm a big fan of Mint. My wife and I have used this program for the past 5 years and its changed the way we communicate, save and live. We have less money fights and we've been able to achieve our financial dreams a lot easier.
Whether it's Mint, YNAB, Personal Capital or just a plain old excel sheet, if you’re able to outline the specifics of your cash flow each month, you’re gonna feel a lot less strapped.
2. Savings Opportunities
Let’s say you’ve now outlined everything in your monthly budget and the numbers are looking a bit tight. Again, you have two options – earn more or spend less. I’d say you’re earning a great amount of money. There’s always ways to increase your income, but let’s focus on potential savings opportunities.
I’m gonna go out a limb (with the help of the US Department of Labor) and say these are the three top spending areas in your budget:
I don’t think your mortgage is too crazy honestly. Depending on your tax bracket and where you live, we can conservatively say you’re mortgage is around 25% of your income. You're in line in my opinion.
Take a deep look into your car situation. Are you leasing some expensive cars? If so, you could consider downgrading from the pricey lease to a less expensive purchase? That’s more of a long-term plan, but something to consider for sure.
How much are you eating away from home? Could you do some trimming there?
How about groceries? If you have an Aldi near you, they have an excellent selection of organic and healthy options that cost a whole lot less. We switched to Aldi for our family of four and we’ve been saving about $300 per month and pretty much eating the same food.
No Aldi? No problem. Try reducing your grocery shopping to weekly and going with a list. Avoid the grocery store or Costco “pop-ins” as much as possible.
Outside of the house, your car(s) and food, there are plenty of other areas where you can continue making tiny dents in the spending machine.
- Reexamine all of your insurance costs (auto, life, home, etc) annually and make sure you’re getting a competitive rate.
- Cut the cord on cable TV. It is amazing what an HD Antenna and a Netflix subscription can do to your TV life.
- Declutter your home and sell unnecessary items on Craigslist.
3. Buying Your Next Home
Onto the last piece of the puzzle … buying your next home. Since this is incredibly important, you want to make sure you're doing it right.
I have 5 suggestions to make sure you don’t end up house rich and cash poor. To put it in your words Tina, you don’t want to “fall into the monthly mortgage hole!”.
1. Save up for an Emergency Fund
Accumulate at least 3 months of expenses for job loss, unexpected issues with your new home or random kiddo mistakes. As an example, my daughter cracked and broke our porcelain sink with a huge drinking glass last year. “Whoopsy Daddy!” With an Emergency Fund, it allowed us to not lose our cool on our 4-year-old.
2. Avoid Private Mortgage Insurance (PMI)
PMI is an insurance for the mortgage company that YOU pay for on THEIR behalf typically when you put down less than 20%. It is insuring them in case you default on your mortgage.
Since PMI can add up to 1% of the cost of your mortgage, it should be avoided if possible.
For example, if you’re getting a $100,000 mortgage, you’d be paying an additional $1,000 per year or $83.33 per month of unnecessary costs. Go for at least 20% down and you’re golden.
3. Keep Mortgage Payment to Less Than 25% of your Income
It looks like you’re doing this already Tina so no worries here. The point is to leave enough room for life’s “other expenses”. Too much house can make for a difficult and somewhat boring life.
We partnered with LendingTree to get us the lowest rate possible. Check them out.
4. Consider the Cost to Update and Furnish Your Home
Depending on your taste, style and overall family situation, this can be a lot of money! A lot of people only consider if they can afford the down payment, but they don’t factor in the updates. Be smart and factor this in.
You don’t have to go hog-wild at Pottery Barn either. Finding deals on Craigslist and Facebook Marketplace is totally doable if your budget is tight.
5. Work with Experts
Don’t do this alone. Get an excellent real estate agent that knows your area well.
Always get an inspection. Even the “perfect” house can have flaws. You need to know about them.
With prices being crazy high around the US, get an appraisal. This independent expert will confirm the pricing is in line with the neighborhood.
In summary Tina, I think you are kicking butt on the income side of things. Take a hard look at your expenses with a monthly budget and see where you could be saving further. Getting intimate with your finances before you buy the new home will help you feel more comfortable with this HUGE family decision.
Do You Have a Question about Marriage, Kids and Money?
If you have a question for me, please email me at andy “at” MarriageKidsandMoney.com, contact me on Facebook or Twitter.
I’d love to read your question on the show and provide an answer like I did for Tina today. As long as I’m getting questions and you all feel like it's providing value, I’ll do it once a month.
Big Disclaimer! I’m in no way a financial expert. I don't have CPA or CFP designations. I’m just a guy who has worked hard to become debt free and set his family on a path toward financial independence. I’ll answer questions that I feel comfortable with or defer to experts that I've met or interviewed on the podcast.
If you're looking to join me for an MKM challenge this month, click here.
This is ridiculous. This is advice for 20 years ago. Try this on: 92k income family w/1 baby.
We live in a crummy small 2 bdrm rental with poor heat and cracks in the walls. Its on the edge of the city, the best balance of travel time to work vs price we could find.
My field (international aid/development) is generally in major cities and we like our secure jobs so not ideal to leave.
My round trip to work is 1.5hrs with driving baby to daycare then transiting myself to work, if I transit all the way its 2.5 hrs each way. If I drive all the way its 300+ in parking/mnth. There is no transit to my husbands work so we need 2 cars.
Tell me how to do better. Bring home is 5320/mnth.
1125 Daycare (for 3 days a week, work is allowing me two work from home days – highly stressful with a 16mnth old, only daycare we could find with space, normal going rate)
380 car insurance
470 gas + transit
800 groceries (we eat simple, I go certain days and times even for sale meat)
250 phones (2 personal my work phone I require since Im home 2 days)
120 Internet & share of Utilities
482 Student loan repayment
120 Baby programs and play (sportball, art, this is important to us)
100 gym membership (the one thing we do for ourselves, and we actually go, mental & physical health).
Thats 5527. It doesn’t include any cleaning products or miscellaneous, car repairs, the money we send to Africa for my husbands siblings to be able to go to school, gifts, eating out (which we rarely do). My husband has tried to pick up extra work in food delivery etc, but it works out to 12-15/hr not including gas and wear on the vehicle which is already 10 years old – so not really worth the extra stress on us all. I do side contract work when it comes, but it still doesn’t make the budget work.
Give me an answer other than ‘budget better or make more’ or ‘unroot your whole family and leave your jobs and support system to go somewhere you’ll be unhappy’. Get it through your head the pull up your bootstraps advice no longer works.
STOP THESE REDICULOUS USELESS ARTICLES. Say it like it is. Unless you making over 200k or born into it – youre screwed our current economy and world doesnt work like it used to.
Thank you for this candid feedback, Julie. I feel the anger and frustration you’re going through right now.
Here are my thoughts. I hope they help.
I understand that ‘house rich and cash poor’ is where you’re chronically broke because you are spending too much on home ownership because you bought too much house.
What’s it called when you’re chronically broke because you spend too much on home rentership?
It happens to a lot of people in high cost of living areas for sure. Certain parts of the country make it very difficult to live a decent life without paying an arm and a leg. Let me know if you have any questions Terry. I’m happy to help.