How to Overspend on a Six-Digit Income

Here's another example of the fact that it's not what you make that determines your financial success -- it's what you spend. Said another way, even if you make $100,000 a year, if you spend $110,000 a year you're still going backwards financially.

This story from the LA Times highlights how one couple is headed in the wrong direction financially despite making $100,000 a year. The details:

The Newlands look like misers, but their finances tell a different story. They had racked up $26,000 in credit card debt, despite household income of nearly $100,000 a year after taxes.

The easygoing couple — a wooden sign in their kitchen reads "Relax" — acknowledge they have spent mindlessly on pricey throw pillows, unwatched DVDs of NBC's sitcom "Friends" and a host of other forgettable items.

"We've squandered our money on a lot of frivolous junk," says Helen, 44, a former accountant.

Eating out has taken a big bite too. Until recently, the family could be found up to twice a day at the Red Lobster, Souplantation, McDonald's or other chain eateries. Their restaurant tab last year was about $8,600.

To help make ends meet, they've chipped away at the equity in their home, which over 14 years has more than tripled in value to $660,000. The Newlands have converted this asset to a spendable reservoir of money through a $50,000 home equity line of credit and a $92,000 second mortgage.

The list goes on and on of bad steps this couple have taken financially and the full piece gives all the gory details. It also provides how a financial planner suggests they get back on track. Not surprisingly, spending less than they earn is at the top of the list.

Comments

[jldude]

This reminds of Andrew Tobia's book, How to Get By on $100,000 a Year. Which I recently re-read. It was written in the 70s. That was an outrageous sum of money then, it's still alot of money today.

[MrAtoZ]

The kicker is that the wife used to be an accountant, and the husband is a "risk management consultant." Sounds like the financial risks they have need to be better accounted for....

[Kurt]

Two thoughts: $100K after taxes is a LOT. Think $150K as most people report income (pre tax). Second, you may disagree, but with over a half million in home equity, they seem to be doing at least okay. It may seem like funny money to you, but they could sell, drop it in a bond fund and get $30K/year pretax. Not travel the world without a care in your head rich, but they won't be on the street any time soon.

[Chris]

These home equity loans just baffle me. Why would anyone 'tap' into the equity of their home for spending cash? An equity loan, or second mortgage, is (as far as I'm concerned) a last resort to consolidate high-interest debt to avoid bankruptcy.

All of these articles act like homes are financial piggybanks to be raided at any time. If your home value doubles, you can 'take advantage' or 'use' your home's equity for cash.

But these are still just low interest loans. They aren't taking advantage of anything, they're BORROWING money using their house as collateral. Would these people go on a shopping spree if they were given a 5% interest $50,000 limit credit card?

They bought a home for $220,000 (I'll assume with a zero down loan) and now 14 years later they should have a principle of around $165,000, but now they owe another $142,000 on it...a total of $307,000...almost a hundred grand more than they paid for it 14 years ago!!

What on earth are these people thinking?

[MoleOnABull]

Chris,

Good point.

It seems like they have the attitude towards their home that their home is something that they'll never pay off... so why not borrow against it? The payments are always going to be there.

[Paul]

Keep in mind the cost of living in LA. I suppose they would need about $150,000 in pre-tax income to clear $100,000 after taxes.
I put $150,000 in one of those cost of living calculators to compare this to where I live in the midwest. The equivalent pre-tax income in the midwest is about $90,000.
That is not bad, and a couple should be able to live comfortably here on such an income. Still, I would consider it a middle class income and could understand how a couple could get into debt. I understand that they are a two-income family so they also have a fair amount of work-related expenses such as commuting costs. etc.

[Lord]

Sorry to say it, but does anything think they will really change their habits? By this age they have pretty much decided how they want to live.

[Karen]

Lord,
I think it's a possibility. After all, dh and I are 39 and only last year did we have the same "ah-ha" moment. It struck me as funny this coupls has DVD's of the Friends sitcom that had never been watched. We have Seinfeld DVD's that have also never been watched. In the last year we've worked our way out of $26,000 in student loan debt, $10,000 in Disney Vacation Club debt, and $15,000 in car debt. A few more thousand on the car and we'll start tackling the HELOC. Amazingly, the amount of debt we've paid off is inveresely proportional to the amount of "crap" we bought in the last year.

So you CAN teach old dogs new tricks.

[oneway]

wow.

[Lazy Man and Money]

I think Paul has a point. With the costs of earning two incomes (commuting and such) and the location, LA, I'm not sure this couple is really raking in the money.

Remember that credit card debt has a way of snowballing. They may just been a fraction off in their budgetting over a long time and not made a priority over money because - let's face it - it's not a lot of fun for people to budget.

[db]

Sounds like they have all the makings for some great ebay sales or yard sales.

@Chris:
This whole borrowing against home equity mystifies me too, for the exact same reason. It never fails to amaze me the way some people think of their debt around a piece of real estate -- it seems to me like the basic principle of OWNERSHIP has really been lost is some circles.

DB

[DH]

I did not like the financial adviser's advice (in the LA Times article) that put an emphasis on how they needed to save for their kids college education. If their kids have a college education handed to them on a platter, they'll be more likely to end up as clueless as their parents. I say let the kids earn scholarships, take some loans, and/or go to State U. and work part time if they want go to college.