About six years ago, my husband and I had a fairly comfortable lifestyle. I worked full-time and my husband worked part-time as a graduate assistant. We had one child, and we had no credit card debt. We did have my student loan debt from graduate school, though it was less than $10,000. We budgeted and set aside money for yearly expenses such as home insurance and twice yearly expenses such as car insurance, as well as car repairs. My employer automatically withdrew 8% of my salary and deposited it in a retirement account.
Sounds good, right? We thought so. We thought we could afford vacations and a weekly outing to our favorite sushi restaurant at the tune of $50 a visit. After all, we were able to pay in cash.
In retrospect, we were misguided. We couldn’t afford our lifestyle. Here is why:
We didn’t have a big enough emergency fund. We did have an emergency fund of about 3 months of living expenses. In an era where “fewer than four of 10 American adults have an emergency fund to fall back on in the event of some financial disaster, according to a nationwide Bankrate.com poll” (Bankrate), we were doing good, but we stopped saving when we hit 3 months of saving. We should have kept saving until we reached 6 to 12 months, but we didn’t.
If we had, it is very likely that when we had two more kids back-to-back and I quit my job because daycare was going to eat up so much of my salary, we would have avoided racking up much of the credit card debt we are now trying to pay off. We would have had a large cushion, which, in retrospect, I would have taken over weekly sushi dinners any day.
We didn’t fund Roth IRAs. Yes, my employer automatically took 8% of my salary for retirement, for which I am very glad, but we didn’t save independently for our own retirement. We should have set aside an amount every month to contribute to our Roth IRAs. Just making a few simple changes to our lifestyle or our bills could have helped us find more ways to contribute to our retirement. We became complacent because my employer was deducting money for retirement.
We didn’t fund an educational savings account. We now have three kids and no money saved for college. Our oldest is almost eight, so college is only 10 years away. Our youngest two are much further away from college, but when they go, we will have to pay for both of them at once because they will be only one grade apart in school. We have a lot of catching up to do, as does most of the country. The New York Times reports, “The findings of a survey of 1,200 parents of children under age 18 . . .by the Gallup Organization and Sallie Mae reveal families, on average, save $2,676 annually for their children’s education, for a total of just uner $14,000.”
We didn’t save for a house. We live in an area where homes in less desirable neighborhoods go for $300,000 (and that is after the housing market bubble) and property taxes average $8,000 to $12,000 a year. Thankfully, we didn’t fall into the trap of buying a home we could not afford. However, in the next few years, we plan to move to an area of the country with a lower cost of living. In anticipation of this move, we should have been diligently saving for a house, but we didn’t.
We thought that we were living a comfortable lifestyle that we could afford, but we left out several important aspects of a strong financial position. Now, we have to pay off debt before we begin to tackle the missing components of our financial lifestyle. Had we realized earlier that we couldn’t afford our lifestyle, we might not have so much debt to pay off.
Can you afford your lifestyle, or do you just think you can?
I think increasing your lifestyle along with income is super easy to do, and most of the time you don’t even notice it because as you say, you feel like “you can afford it”. Going to the sushi place doesn’t put a hurt on the budget, so you don’t really notice it, but at the same time that luxury comes at the expense of some other goal. I’m sure we’ve done this in one area or another at times – allowing our need for fun and to live in the moment – causing us to forget for a time about our future goals – some of which are similar. Saving for kids college, saving for a house, etc.
Oh, and 8-10k for property taxes a year? Yikes. I thought ours were high at around $2700/year!
Taxes of $8,000 to $12,000! There’s no way you could convince me to live in a place like that. Wow.
Yes, the taxes are ridiculous. Homeowners here, in addition to their monthly mortgage, also have to pay $800 to $1000 in property taxes, on average. I can’t wait to move to an area with a lower cost of living so we can finally afford a house!
I use to be in the same boat by not having anything saved up for my son’s college. Thankfully, I have been able to change that and should have quite a bit for him later on if I keep on investing as I currently am. Great Post.
I think once I get into my house (currently being remodeled) and get roommates in there with me I’ll be able to afford my lifestyle once again. Small risk for hopefully a big reward in the future.
Equally important to the question of “can you afford it,” is the order in which you listed the four items… build an emergency fund first, save for your retirement, then college, and finally a home purchase. The list makes a simple and quick test to see… “can you really afford it right now?” Nice post!
Thanks for sharing! An important reminder that making small changes in the present can have a huge impact on the future! I think we all know that intellectually, but it takes hearing stories like yours to really internalize what that means and then create positive change in our own lives.
I really see our situation in this post. In many ways I think we can’t afford our lifestyle. We are saving a lot into retirement but are not saving for a house downpayment (a few years off) and our emergency fund is underfunded (though we have other cash on hand). I don’t know – we simply can’t afford to fund all of our priorities until after we graduate!
Wow – you think you’re doing everything right, and still realize there is always more you could be doing.
Life events have a way of knocking over your best laid plans, don’t they?
I see ourselves in so many of the areas you mentioned. We used to eat out, that stopped in January of this year with a commitment to not enter a restaurant again until our vehicle is paid off. We are striving for a 6 month emergency fund before we really get serious about paying off our mortgage. Had we put the brakes on the smaller splurges much earlier we would be a lot closer to our goal.
oh you were so financially irresponsible.