It's Not What You Make, It's What You Spend, Part 437
Why is it the same story over and over again? Do people never learn? Or maybe they're just not reading Free Money Finance. ;-)
Anyway, here's yet another story of a couple who, though they make a great income, aren't making much financial headway because they are spending like crazy. I've detailed this problem before in the following posts:
Here's the situation on this couple from USA Today -- with comments from me added in:
Tim earns more than $100,000 a year as a senior bank loan officer; Caren makes about $65,000 a year as a physical therapist.
A couple things here. First, they make a good income. $165,000 a year is nothing to sneeze at. Second, the guy is a senior executive at a BANK. You'd think he'd know a few things about handling money. Guess again.
Yet despite their ample salaries, they say they're "absolutely unable to put money aside, except with retirement accounts."
Dinners out, fixing up the house and splurging on gifts for each other and for Edson, 13 are some of the indulgences they find hard to resist. They seldom argue about how much they spend, they say, because they both do too much of it.
Yes, it's the same old story. Even if you earn $165,000 a year, if you spend $180,000 a year, you're going backwards.
This also reinforces what I see a lot with financial "experts" -- planners, advisors, journalists, etc. They may have some knowledge about how to handle money, but they lack the discipline to actually put it into practice. I've recently seen planners talk about how they have credit card debt, journalists admit that they can't control their spending, and advisors admitting their savings plans are non-existent. And this is coming from people who have good knowledge of personal finances. But I would never take their advice if they can't follow it themselves. An undisciplined advisor is just like a fat doctor to me -- and someone I won't use or recommend.
A heavy debt load stands in the way of putting away more retirement money. The couple owe $285,000 on their mortgage — most of it at a 6% fixed rate — plus about $125,000 in other debt, including on credit cards and loans to buy a car, a motorcycle and a boat. Their plans to install a new hardwood floor and a pool in the near future could push them deeper in the red.
At this point, I'm close to slitting my wrists...
One thing they're not worried about is the cost of Edson's college education. They've decided that college expenses shouldn't derail their retirement savings. "We basically told him that he can work his way through college," Caren says. "He can get loans; he can get a job. That's what makes the world go 'round."
Oh, sure. Shaft your son's college education because you can't control your spending. Real nice. I guess they're even below the inadequate average savings Americans have for their college-bound teenagers.
The story of this family continues in another piece, this one where a financial planner gives them some advice. The main thoughts:
Bill Hart, a financial planner in Jacksonville, is calling for a "lockdown" on discretionary spending by the Mayberrys for at least a year. "What's hard about this is that you guys have developed habits, and you have to break those habits," such as eating out regularly, says Hart, co-founder of Retirement Strategies.
A limit on spending means not installing that pool. And no new hardwood floors — at least for now, the planner advises. The couple must focus on paying off debt and boosting savings to increase their chances of being able to retire within 15 years, he adds.
Ya think? How about putting them on a BUDGET!!! ;-)
The good news is that it appears that the couple is taking these recommendations to heart:
When the Mayberrys sat down with Hart more than a month ago, the couple's goal was to be free of all liabilities, except mortgage debt, in four years. But after seeing their debt and savings figures splashed across the pages of a financial plan, they've decided to act more quickly. They hope to get rid of all their debt, except their mortgage, as soon as possible so they can focus on saving. "If we really work hard on this, we can do it in 12 months or by the end of next summer, maybe 15 months," Caren Mayberry says.
However, the planner warns of something I was thinking of myself:
Hart gives the couple an "A+ for motivation" but reminds them that, "This is a marathon, not a sprint."
The piece goes on to list the other steps they are taking. They're on the right path now -- I just hope they can stick to it.
I don't need to say this, but I am anyway: it's not what you make, it's what you spend. If you spend more than you make, you're going to go backwards financially. On the other hand, if you spend less than you earn, you're on the path to becoming wealthy.
The Learning Channel now has some sort of program where it takes a family with fat, lazy kids led by fat, lazy parents and has an expert come in to whip them into shape in three weeks. One of the show's gimmicks is digitally manipulated projections of what the kids will look like at age forty. The expert imposes weekly rules like "no television" and "no junk food" and "dad has to spend time with the family". The program has a great point, but it's almost laughably awful to watch.
What if there were a similar program, but for adults (especially young adults)? What if there were a program where Andrew Tobias or David Bach went into the homes of couples like the one you describe above (or hell, into my house!) and did the same thing? "What are you thinking? New hardwood floors and a pool? Where's that money going to come from? For the next year, you're only allowed $XXX per month for discretionary spending."
Financial boot camp for young adults now there's an idea...
Posted by: J.D. @ Get Rich Slowly | May 30, 2006 at 03:31 PM
FMF,
Has anyone ever asked you and your readers about saving via 401k vs. saving via mutual funds in these circumstances?
No 401k employer match
No employer retirement contribution
No debt
Fully funded Roth each year
Fully funded emergency fund
Is there an advantage to saving via a pre-tax 401k vs. saving via a post-tax mutual fund? I've tried to work this out in my head before and I can't get a handle on it. I think it might have something to do with the tax bracket and estimated returns, but I am confused.
Thanks.
Posted by: Terry | May 30, 2006 at 06:09 PM
It is really hard to understand how a couple that is well educated and successful in their careers can get in such a mess.
As a senior bank loan officer, if he wants a wakeup call he should arrange to spend a few months on secondment to the collections department of the bank. Seeing first hand what happens to people who have their homes, cars etc reposessed can be a rather sobering and, quite frankly, scary experience.
Posted by: traineeinvestor | May 30, 2006 at 11:35 PM
Not only are they shafting their kid by not saving anything for his college bill, their high income will disqualify him from ANY government need-based assistance, and if he takes on loans they will be much more expensive. The poor kid is going to have to get himself declared independent in order to afford anything at all.
Posted by: Kira | May 31, 2006 at 09:03 AM
Anyone have any thoughts for Terry?
Posted by: FMF | June 01, 2006 at 04:10 PM
I would love a money reality show.
It all comes down to the old savings It is not what you make, it is what you save.
Posted by: Frugal Momma | June 02, 2006 at 06:51 PM
Terry -- No, I don't think we've addressed that yet. Stay tuned, I'll add it to my list and see if I can get to it. ;-)
Posted by: FMF | June 09, 2006 at 10:06 AM
I think as people's income goes up they expect more. The Millionaire Next Door really has it right. I see it all the time with my (recently graduated) friends. They spend money because they expect to be making it soon. Also they feel they have to spend this money to maintain status. High speed internet, cars, and plasma tv's are the latest "necessities."
http://www.catchagideon.com
Posted by: Brendan | October 27, 2006 at 09:41 PM