Barely Making it on $150,000 a Year

Here's another piece to add to my collection that includes Another Example that Earning a Boatload of Money Won't Make You Wealthy, How to Overspend on a Six-Digit Income, and How to Go Broke on $200,000 a Year. Basically they all tell the story of people who make a ton of money but are going backwards financially because they can't spend less than they earn. The details:

"We're struggling week to week to get by," says Brian, 42. "Any money that comes in gets chewed up right away."

Digesting that fact becomes harder when you consider that the Schuetts earn a comfortable living, with Amy, 39, pulling in $150,000 a year as a hospital psychiatrist.

Says Amy, "We live from one paycheck to the next, we're struggling to save and we never seem to have enough money to do anything fun."

Ok, so their situation was made worse by the husband being laid-off for a bit -- but they're still making $150,000!!! And I don't get the picture that they were doing so well before he was laid off. There are two big reasons for their problems:

A closer look at the Schuetts' finances reveals, for example, that a big chunk of their income is eaten up by two rental properties. Brian purchased them thinking they'd generate extra income, but he has yet to find tenants. Even when the properties are finally occupied, the area's softening rental market probably won't allow them to make enough to cover carrying costs.

Meanwhile, the two houses are expected to appreciate only about 3 percent a year - the couple can do better than that with Treasuries (bonds, at least, will never need expensive new wiring).

It's the same old story from here on out -- they need to get their spending under control, pay off debts, and start saving. It's a simple formula, but requires discipline to make work. And lack of discipline is usually what gets people in this sort of mess.

To read more of my thoughts on spending less than you earn, see these links:

• Ultimately, You Must Spend Less Than You Earn

• Little Splurges Kill Your Net Worth

• Look After the Pennies and the Dollars Will Look After Themselves

Comments

[Duane Gran]

I'm as critical of real estate investment as the next fellow but when the article states, "[T]he two houses are expected to appreciate only about 3 percent a year - the couple can do better than that with Treasuries" it makes an unreasonable comparison.

The 3% appreciation is leveraged, thereby making the actual return is much higher. For a recent purchase you may only own 20% of the principal but the appreciation is for the entire amount. It must also be said that leverage cuts both ways, but article makes an unreasonable comparison to the rate of return between real estate and treasuries.

[Shadox]

Although I agree with your sentiment, I have to add that in some regions of the country $150K per year may not be as much as it sounds. Silicon Valley and Manhatten are two such regions that come to mind.

This is doubly true if you are raising multiple kids.

[Kurt]

Duane, you have to remember that they are going to be paying 6% on the 80% they borrowed. I'd argue the actual return is much lower than treasuries (somewhat mitigated by any rental income they'd receive).

[Edmund]

3% is expected return, not actual return.

When you are leveraged, your expected return goes up but the standard deviation of return also goes up. You are not being compensated for the additional risks that you are taking when you factor in the mortgage interest.

[Chris]

These stories remind me that money doesn't build wealth, good financial planning does.

[Ryan Waggoner]

Some of you should try calculating the IRR or NPV on a few solid real estate investment properties. You'll find that returns that rival the stock market can be gained over time. Have you ever stopped to think about the fact that REITs make returns that rival the stock market? How are they doing it if real estate only gains 3% per year?

On second thought, keep doing what you're doing. More for me...

[db]

No matter how you calculate it, the pertinent part of this article is that THIS family got themselves into a mess with their real estate investment schemes. It clearly states that they aren't finding tenants for their investment properties and don't have the same rosy glasses on about how profitable it would be when they first got into it.

It seems to me that they bit off more than they could chew. In this situation, wouldn't they have been better off to either have put that money into the bank or equities (or even an REIT), or stuck to one investment property instead of jumping into two?

Personally, I think a significant number of people who jump into real estate investing would do far better to just stick their money in the REIT and save themselves the headache. While also sidestepping the ludicrous run-up in home values.

OK, veering off topic so I'll shut up.

DB