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May 16, 2011


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$327,500 of their net worth is home equity - I hate when people count the value of their homes in their net worth. It is volatile and not a liquid asset, and in most areas continues to drop.

If you take out the home equity, their net worth is just their retirement savings plus emergency fund - under $100k.

However, I certainly commend them for staying free of credit card debt and car loans on such a small income. They could have done what most Americans do and lived beyond their means, but they haven't - very good for them.

The biggest point I noticed - without his defined benefit retirement plan this couple would be in a lot of trouble in terms of retirement savings. That defined benefit plan is probably worth $15k or more in annual salary in today's dollars. Nice luxury to have.

Because they live in a high cost area, the majority of their net worth is tied up into their house. He's 51 and they only have $84K in retirement and $13K in savings.

BUT, his defined benefit plan is a beauty, so if they finish off that mortgage and are careful with helping financing the kids college, I'd say they've got it made...

Mark, why wouldn't you include home equity in net worth? It is an asset, and while not "liquid" to the extent that many other types of assets are, it has a value. If they lost their jobs, they could sell their house and realize a $327,500 cash position (or close to it) with which to either buy a cheaper house in a lower cost of living area or rent. In fact, if they invested that money and could earn 8% on it, that'd give them $26,000 per year to pay for alternative housing.

if they hadn't been able to take advantage of a huge run up in housing prices, their net worth would be far lower. that income can't built an equivalent net worth today, i'm afraid.

It was said that only a fruiting tree gets stones thrown at it. So far the comments were just that, stones to this family's fruiting tree of not having any debt and actually having saving. I am not scholar of any note but I can gander than majority of Americans have lots of debt and have virtually nothing to their name in form of saving. (I'm one of them.)

I sense a little bit of "Sour Grapes" from some readers because the Covalts are doing so much better than many Americans in their income bracket. Currently California is in the process of closing 70 state parks because of the state budget deficit problem, I hope that the Covalts are not impacted. With 14 and 8 year old children they no doubt bought their home for a whole lot less than it's current worth judging by the fact that they have so much equity and a fairly small loan. We bought the Bay Area, CA home that we currently live in back in 1977 and even though it has dropped qbout 15% since the high, it is still valued at about 8 1/2 times what we paid for it.

It would appear that, to their credit, the Covalts haven't made any major financial mistakes such as a divorce, living beyond their means, or acquiring lots of credit card debt. While it is unlikely that they will ever become wealthy, their chances of enjoying a very nice retirement, in a very nice part of the country is very high. Their children's college education may not be a huge problem for them because San Diego State University is only 13 miles away.

The defined benefit plan is a great thing to have. We have both been receiving ours for 18 years. Mine is a fixed amount but my wife's is not and has doubled in size since she retired. Unlike our Social Security benefits, our defined benefit plans have huge investments earning income every year to back them up.

Its already been said but come on- their "impressive" net worth is 88% housing?

Lets see what they've really saved over the 30 years they have worked:

Retirement + cash = 97k (They only have 97k to live on in retirement right now which will get them through 2-3 years.)

7% annual return, 30 years
$1,000 per year saved. (its less as you increase their annual rate of return fyi)

1. The only reason they have a lot of equity in their home is that they have been paying down the debt (with what they have saved/earned.) It's not like they bought the house for $48k (the debt left on it) and then it went up by a few hundred thousand. That would be a different take on how well they are doing IMO (a reflection on their ability to save/invest).

In other words, many of you seem like you think they'd be better off if they had a $300k mortgage (which is what many people their age have -- probably higher in that area of the country) and another $250k in savings/investments. Their net worth would be the exact same, but that seems like it would make a world of difference to you. Really??

2. Note how the financial planners (who have an incentive to find something wrong so they can "add value") noted that the couple is doing well?

3. Is anyone getting the point that they are doing this in a very high cost-of-living environment on an average salary? If they can do it here, then anyone with similar levels of income (which is a good portion of the population) should be able to do even better because their costs will be much, much lower. And yet most people will argue that it can't be done...

@John & @Limey - I was NOT criticizing this couple, if you read my full comment I was praising their efforts. I was simply criticizing the use of hypothetical equity to inflate their net worth. If you have stocks, bonds, etc. you can sell them very quickly and have that cash in hand. With a house there are several problems 1) People tend to overinflate the value of their house, so unless they got this number from an actual appraisal it is not a solid #, 2) Selling a house takes time, sometimes a long time, so the value of a house cannot be counted on in an emergency, 3) Even if they sold the house and moved to a rental property and banked the cash, the money will be used over time to pay the rent, doesn't really improve their situation.

@FMF - Based on the numbers my best guess is they bought the house for about $100k, so they have realized several hundred thousand in appreciation.

@John,Limey,FMF - I am bitter about housing. I have followed all of the personal finance "rules" - lived within my means, saved for retirement, grew my career etc. BUT because I bought a $192k house in 2004 (that I could easily afford, my payment was less than 25% of my income at the time, less now) that is now worth less than $100k my net worth is NOTHING. My neighbors walk away from their houses, decreasing my value even more. Banks get bailed out. I now owe over $150k on a house probably worth $80k. I didn't stretch too far to buy a house, and now I am hosed. If my house would have went up in value $300k like these folks, my life would be incredibly different right now, but because of the housing decline I am no better off than I was 7 years ago, despite following all of the "rules". This drop is going to set me back more than 10 years financially from where I should be. YES, I AM BITTER.

To continue - my argument is this - Housing is an exchange of money for a place to live. I have been forced to think this way to avoid getting more upset about my situation. I give the mortgage company money, I get a house to live in. I can't even think about equity, etc.

Mark B --

How did you get that they bought the house for $100k?

@Mark - where are you getting the idea that their house went up in value 300k? While I think it has probably increased in value a fair amount, I think a lot of the reason they only have 47k left on their mortgage is because they have been paying it down.

I think overall this couple is doing pretty well. When you consider his defined benefit plan along with their savings, the fact that they have 41k in retirement income before social security is pretty good. Considering that they are doing fine on 59k while paying down a mortgage - once it is paid off, plus an additional 15 years of savings, why is there a huge concern with their retirement?

@Mark B.: Sorry to hear about your financial situation. But what are you going to do about it? Seems like you have three choices:

1. Cut your losses, sell your home, and move to a new home that isn't depreciating in value.

2. Attempt to increase the value of your home by making your neighborhood more appealing, helping sell properties near you, etc.

3. Do nothing, and let the value of your home fluctuate.

It sucks that your home value tanked, but that is a risk with any investment. At least it was a home you can afford. What is your plan for addressing the issue? Have you looked at refinancing?

Kudos to them. They are obviously doing well.

I am very interested in what they paid for their house. Although this is a high cost of living area, what makes it so high (compared to other areas) is housing. If they bought their house back in the 90s, housing was much closer to the national average, so their cost of living would be closer to average.

For example, if an 'average' cost of living today figures a $900 mortgage or rent, and that's what their mortgage is (because they bought when prices were much lower), their personal cost of living is not so high compared to other areas. It's not mentioned in the story how long they lived in the house, but with a $47,000 mortgage, I seriously doubt they bought after 2000. I am bright green with envy.

@FMF - I think it would be difficult to stay debt free and save money every month if their housing costs were much more than 25% of their pay, would you agree? 25% = roughly $14k, or just over $1000 month. Say $300/month for property tax, leaves about $700/month = about $100k loan.

@Aaron - 1) I can't sell because I would have to come to closing with more than $50k in cash that I don't have. 2) I am on the Board of my HOA and we are TRYING to improve the sub, but banks won't loan us money to fix our roads (the same banks that got bailed out!). 3) As you can see, I am doing something. 4) I have tried refinancing, but banks won't refinance a home with negative equity.

My only 2 options are 1) walk away and destroy my credit, deal with my conscience or 2) keep paying, living in a declining neighborhood, hoping someday to get back to the breakeven point. Not great options. What did I do wrong compared to these folks? Nothing. Just bad luck I guess.

The banks made poor investments and got made whole again. Why not me?

The point I am making is that likely by buying their house before the major appreciation, they essentially have taken the high cost area out of the equation. A young couple just starting out making this same amount of money would not be able to afford this area.

Mark B --

I'm not sure. They seem like the kind of people that save money in other areas so they can pay off their debt as quickly as possible (which means they would have a larger than average % to housing while they paid off debt.) That's the situation we were in while we paid off our mortgage.

That said, they probably didn't get a $350k loan either (since their income doesn't justify it), so perhaps the purchase price is higher than what you imagine and lower than what I imagine.

Very commendable, how they have been able to do this on that combined income and in that location.

Unless they obtained a windfall somewhere, they must have been outstanding savers and solid investors who dislike debt and obtained benefits from compounding over time. I'm guessing that these are people who truly have the ability to discern wants from needs.

They paid $145K back in 1991. That's what happens to house prices in places where people actually want to live- they tend to go up significantly over time.

If I were you, I would learn everything I could about manias like the one you got caught up in when you bought in 2004 in Vegas or Phoenix or wherever you bought, and don't let it happen to you again; not only so that you don't get caught in another one, but also to learn how to profit from them.

FMF- "to Become Wealthy"... wealthy seems like an aggressive word in this case. Im fine with the article and I understand the point. Your title seems a bit... over the top. Then again, maybe my definition of "wealthy" is wrong.

2. Who cares what some financial planner has to say? These are the same guys who claim they have a "sufficient emergency fund tucked away for the unexpected" when they only have 13k saved. By my calculations, based on their savings rates, that will get them 3-6 months.

My issues :1. they are anything but wealthy. 2. most of their wealth is in an illiquid asset that they require to survive.

I think these words get confused on this blog a lot and are the root of many debates:


Does the 250k family survive? yes. secure? yes. Rich? not really and unlikely to ever be.
Is the above family wealthy? no. rich? no. secure? maybe. survive? yes.

FMF, I'm in agreement with you. I think too many people overestimate the amount of income it takes to have savings and "make it". I'm guessing the problem is that people don't want to make the difficult choices to live on less than what it appears everyone else is living on (a.k.a. keeping up with the Joneses).

I was just talking with my wife the other day about that NPR article. We were talking about minimum wage and a "living" wage. My comment was that people expect an upper middle class lifestyle on minimum wage instead of a minimum lifestyle (just enough to survive, which is essentially all it provides). Assuming that everyone should have a "living" wage (which seems to mean an upper middle class lifestyle) borders on communist economic theory.

My neighbors have a similar net worth and most of the net worth is tied up in their home. Although we don't live in as expensive of a city such as San Diego, my neighbors are in their early 30's and their combined income is probably 60% of the Covalt's.

At first glance, you would assume they were also very thrifty if you didn't have all of the relevant facts. Her father is from Texas and in the oil industry and bought/gifted their home. I believe to really determine how well someone is doing one needs to factor in inheritance, trust, and gift income.

Tyler --

1. Perhaps the title is over the top. Wouldn't be the first time I'd written one that was. Somehow "Average Couple Does OK but Not Great" makes me think most people wouldn't read the post.

2. Even if they are not wealthy, they are doing fine financially. They have a lot in their house because they have chosen to pay it down. Would you feel better if they had more debt but the same amount (of the debt) in liquid investments (see my previous comment.)

3. They are doing fine in one of the highest cost markets in America. I hear all the time that "this can't be done" or "I can't save" because a market is too expensive. Oh yeah, is your market more expensive than this one? Most likely it isn't...

Tyler --

All of those words are subjective. We've discussed before that most people define the "rich" or "wealthy" as those a couple economic classes (roughly) above themselves. And as their income/net worth rises, their definitions change (yes, those with $5 million believe it takes $10 million to be wealthy and those with $10 million believe it takes $20 million to be wealthy.) Your comments seem to be right in line with these findings.

I usually look at median net worths to determine whether I think someone is "wealthy" or not, trying to take some of the subjectivity out of the equation.

Old Limey, I always wonder....where in the Bay Area do you live? My husband and I grew up here, and find that it is a very difficult place in which to both save and raise a family - unless that is, you were fortunate enough to have bought a home here in the 70s! :)

@Pop - I do not live in an area that experienced a "mania" as you describe it. The worst part about where I live is that we never saw the double-digit appreciation of home values that many areas saw, but we DID see the double-digit declines, so we got hit twice as hard.

If I would have bought in 2004 in say Vegas, my house would have doubled in value by 2007 before then dropping by half - so I would be about even. One year after buying my home it had appreciated about 3% and has since dropped more than 60%.

What could I do to avoid this again? Not buy a house ever again, just rent I suppose. Otherwise, there is no guarantee that it wouldn't happen again.

In the meantime I employ FMF principles of living below my means trying to pay down my mortgage faster to get out of the red. That is the best I can do.

As you said... Im here complaining because of the title! Your point is correct.

Your question about the house is valid. I think you should have your home paid off before you retire. (not a high standard here) Unless you plan on selling the home and downsizing, you shouldnt count your primary home as an asset. You need the home to survive. Why not be more conservative with the net worth calcs?

Tyler --

FYI, you've given me a good idea for a new post -- the subjectivity of "wealth", "rich", etc. Should be a fun discussion...

if you don't mind me asking, where do you live?

To start, I'd be careful about including home value in net worth. If one's home is worth $1M, they can downsize to a nice $250K home and have $750K. But at $375K, there's not as much downsizing to do.

If one has a great defined benefit retirement plan, that combined with social security may be all they need to have a great retirement. And the goal of simply having the house paid in full means that one big expense is gone.

But if you have a higher income, social security covers less of your pre-retirement income, and fewer people now have that defined benefit plan. By the more conservative numbers, this guy should have about 10 times his income in retirement accounts. He's 51 and barely has 1.5 times that. But again, the defined benefit plan sort of throws away those numbers.

Pop is right. They paid 145k for their house in 1991. It is scary what you can find out about people using spokeo and redfin/zillow. Here is a link to their house on redfin: I am not sure how they came up with a 422.5k value. The Zillow estimate is 344k.

Mark B.,

Based on your information, it sounds like the drop in your home's value may be an overreaction to the national housing market (in other words, if your market didn't experience high appreciation preceding the big drop, perhaps it shouldn't actually have dropped so far). Markets go up and down and up again. While housing may take a long time to get to the levels seen in 2006, the market should recover eventually. Consider all the people that were agonizing over their retirement and investment accounts being cut in half in 2008 - the market is now almost back to the same point. Obviously the stock market has more and faster volatility than the housing market.

Anyway, my point is, unless you are anxious to sell, just ride it out for a while. It sounds like you're doing that, and working to pay down the mortgage, which is good. You can't guarantee something like the housing bust won't happen again, but that's life. Now at least you're more aware of the possibility and the signs, and perhaps you can take steps to "insure" yourself against such future events.

FYI, Their house was bought in 1991 for purchase price of $145,000. (I found this in public record via some searching/research) With current value of $375k that equates to about 4.9% annual growth over 20 years. That would give them monthly payments in the $900-$1000 ballpark. Their house would have peaked around $500k and is down about 25% from the peak in the boom.

I don't see anything in the article about them paying down the mortgage with extra payments. $145k loan 20 years ago would give them outstanding principal around $60k. It is always possible they refinanced at some point or payed extra. But just taking a 30 year mortgage and paying it for 20 years would get them pretty close to their current situation.

Side note, their property taxes would be about $2000 a year.

CC --

That is scary...

Since their housing costs are pretty much fixed at a price that's close the national average, it seems unfair to keep saying that they are doing so well 'in such an expensive market.' They ARE doing very well, but they really do not have the 'expensive market' factor at this point in time.

They are doing very well financially, on a fairly average income. But it's not like I could go out and buy a house in Poway on that same income and have those same monthly payments. If I bought a comparable $344k house (their home's Zillow estimate), put 20% down, and financed $275k at 5%, my monthly payment is around $1500. My property taxes are higher than theirs. That mortgage payment for today's purchaser seems pretty unrealistic on a $59k income - probably around 40% of monthly take home pay, before paying insurance, taxes, and repairs. That's today's financial reality for average income families living in a high cost-of-living city.

But isn't this still doing well in an expensive market? People who bought 20 years ago in a cheaper market would have a much smaller mortgage payment than they do. You can't compare someone who has lived in an area for 20 years with someone who is just moving in. The costs will never be the same. The apples-to-apples would say to take someone in the less expensive market (where maybe they would have paid 100k for a similar house, instead of 145k, but would have only seen 100k instead of 200k of appreciation).

One of the reasons people buy houses is because the payment stays the same, whereas rent payments go up. So to say that their living expenses now are in line with the average, when they started making those payments 20 years ago, it seems to me that they are doing well.

Another thing to consider is that when they bought the house 20 years ago they were probably not making anywhere near the $59k they make now. Its likely their household income was closer to $30-35k in 1991. So they would have been putting around 1/3 of their income into mortgage payments.

Historically what has happened is that there was a huge building boom that got underway after WWII to provide the victorious, homecoming GIs with an affordable place to live.
In Silicon Valley where I live, just a few miles from HP, APPLE and a host of Hi-Tech companies, in 1946 & on you could buy a home for less than $10K. They were easy for GIs to buy because of the GI Loan legislation that offered $0 down loans at less than 4% interest.
Here's one of the least expensive I just found on Zillow.
Built 1947, 2Br 1Ba, 990 SF, current value $426,500, value in January 2007 $620,000.
The housing peak was around 2005 when the price may have been even higher.
It's hard to find any kind of home selling for less than $500K even now.

The problem later on was that many people thought that the rise in home prices was never going to stop and since 1960 when we came here all it did was to pause now again. During the Carter years when interest rates were very high I invested in partnerships that gave 2nd. trust deeds to homeowners with a limit of 30% Loan to Value. It was lucrative for us because we received interest rates as high as 16% in some cases, and it was good for the homeowners because they could get cash out of their home and start living above their means. The problem was with the homeowners that continued to add to their debt near the top of the Housing Bubble. They ended up "Under Water", unable to refinance, and faced with two choices 1)Keep making payments and hope that prices will eventually go up, or 2) Walk away, ruin your credit, and lose everything you put into the home.

It's a little different in the stockmarket, when there's a crash and you are on margin then you either have to eventually put up more money or sell out at a loss.
The Internet Bubble is still a very long way from its peak value of 11 years ago as evidenced by these Nasdaq 100 values.
10/01/1998 1273
03/27/2000 4704
10/07/2002 804
05/13/2011 2379

I can remember days back in the 70's, 80's, and early 90's at work when we would talk about the rising value of homes, and being engineers, it only took a few simple calculations to see that we were in a market that was rising at an unsustainable rate because eventually the prices would outstrip people's ability to buy. I think the beginning of the end was when America started losing its high paying factory jobs and started having so much made in China, Vietnam, Indonesia and any other country with a really low labor rate.
This is why much of the country is still stuck in a jobless recovery.

Sarah - "You can't compare someone who has lived in an area for 20 years with someone who is just moving in." You're right!

I'm thinking that 20 years ago, Poway/San Diego was not as expensive compared to other housing markets. National average home price in 1991: $100k. This house in 1991: $145k, or 45% more than the national average (still expensive, true). National average home price in 2010: $175k. This house in 2010: $344k, or 96% higher than the national average. So, they were in an expensive market in 91, but it wasn't as comparatively expensive as it is today.

I don't mean to take away from their solid financial position - they are doing great! Good for them! I'm sure that plenty of families who started in a similar position aren't as solid. But their entry into this 'expensive' market is different than it would be today. They did plenty right. But I think a family would need more income to replicate their success, if that family were starting out today.

Jim brings up a good point too, they probably earned less when they bought the house. To put 1/3 of your income on a mortgage today seems like a gamble, although it paid off in their case. But knowing what we know now, I wouldn't DARE put 1/3 of my income on a mortgage. Maybe I'm foolish, or that's a mistake on my part, but it just seems to great a risk.


I'm not sure what to say to this. This Poway couple is not really experiencing a high cost of living as their biggest cost (housing) is significantly reduced because they bought into the housing market before it exploded. How much would their net worth take a hit if they hadn't had the last 20 years in housing runup and had to pay today's average mortgage in Poway? Answer - not much - Tyler points out that they're saving less than $100 per month outside of their home equity - not very impressive.

A salary of 86K (SF average) for a family of 4 would barely cover the 20% down payment on my all-time low 4.25% mortgage rate (used to be 5%) in my 1500 square foot $800K starter home next to a crappy public school in San Mateo. Our house is smaller than almost all in my neighborhood (most are two stories, mine is one) and at or below average in upkeep, so it's not like we're living large. My monthly payment including taxes & insurance is $4,018. The gross salary for 86K is 7166/month. That does not include any deductions for 401K, medical insurance, and of course, taxes. That leaves little to no extra money for a family making 86K to buy food and clothing, much less build $425K in net worth.

If I had bought my house 20 years ago, I'd have a much higher net worth too. I bet when you include house equity, 95% of the families that bought and still own their house from 20 years ago have higher net worths than those families that bought within the last 4-5 years.

Yes, my house could be cheaper (next to abysmal schools), but the median home value in San Mateo is $590K. If you recall, the previous discussion about $250K involved a family living next to a top public school in their area. The site you point to that calculates cost of living is a bit of a black box, and seemingly only providing indexes, but not actual values, that could be compared. These statistics seem meaningless.

Do me a favor - take this family from Poway making the average 56K. Give them a raise to $86K and move them to San Francisco for free. Show me the analysis on how they can afford a house in an area of San Francisco or the peninsula that has a top-notch public school. My guess is it's virtually impossible, or at the very least much harder than it is now for them in Poway.


You say: I usually look at median net worths to determine whether I think someone is "wealthy" or not, trying to take some of the subjectivity out of the equation.

Net worth is a relative value - you must account for where that person lives as well. My retirement could last me a lifetime in Thailand, but just a few years in San Francisco. It's about relative buying power, not absolute savings/equity.

I think this couple is doing well. It's tough to raise 2 kids in a high cost area like San Diego on that income. Yes, it was cheaper there in 1991, but it was still an expensive place to live even 20 years ago.

I'd say they fit in Jean Chatzky's "financially comfortable" category. They are never going to be rich and his pension is doing a lot of the heavy lifting. But even without the home equity and pension, I bet they are doing better than most people who are raising kids in the San Diego area at their age and income level.

As FMF pointed out, the median net worth for people in their late 40s is about 98K. They have about that much in cash and retirement savings. And I suspect the median net worth figures for the country as a whole also include home
they are still doing better than average no matter how you slice it.

If average Americans were financially sane like these people our country would not be in the mess it's in today.

@ FMF....I'm flattered that you linked to my post, but you referred to me as "Matt" instead of "Mark". Please correct. Thanks!

Mark --

I'm so sorry! I hate it when I mix thing up like that. I changed it.

I give you permission to call me FFM for awhile as a payback. ;-)

Another thing to consider: FMF's analysis doesn't take into account the impact of prop 13 on the Poway's expenses. If you buy today in CA, you not only pay a higher price for your house, but your property taxes are much higher than someone who bought in 1991.

Even if they did buy their home 20 years ago and didn't prepay their 30 yr mortgage, they still did far better than most people at their income level because during that 20 years they didn't 1) run up credit card debt, and 2) they didn't take out a home equity loan and spend it.

I also wonder if they had 2 incomes sometime during the last 20 years....and then at some point she stopped working to stay home with their kids? They have a low combined income now, but possibly they made more in the past that allowed them to come up with the 20% down on their house.
Or perhaps they got "help" from relatives for the down payment, like some young couples do?

My point is that you can't tell if their current income is all they ever had during the past 20 years while they were building their net worth. Extra income from her working part of the time, and cash from relatives would have made a huge difference.

What's the average net worth of a Poway resident that bought their house in 1991? I bet it's about the same.

I was really impressed with this post so I did the math. $425k coming all from saving & investing is barely feasible. That means they put about $250 in the market over their working years, or saved $10k/year. That leaves $25k to feed a family of four -- very, very hard. (Here I'm assuming their $60k income in their expensive city is equivalent to roughly $40k in an average-cost-of-living city, and I'm subtracting $5k in taxes). Very, very hard.

Part of the explanation is their house appreciated roughly $150k in real terms (since house tripled in value, minus inflation). So they saved "only" $7k/year, and fed their family on a whopping $28k/year. Still impressive, so I'd say FMF has a point in his post.

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