When you’re making a lot of money… save a lot of it!
The New York Times had a really distressing article about families making well into the 6 figures suddenly dropping to no income or lower middle class income. The effects on kids in wealthy communities was kind of heart-wrenching.
Why didn’t these people live well below their means and SAVE when they were raking in the dough? Especially in the cases in which one parent was the sole income for the family?
It should be easier to drop from 150K to 30K than it is to drop from 60K to 30K because you have had so much more capital to build up precautionary savings. A family can live plenty comfortably on 80K/year or even 100K/year. [And don’t tell me it’s different in the SF Bay Area or NYC. I’ve run the numbers/lived it. We could not change our lifestyle at all (well, we would be renting instead of buying and have a more reasonably sized, but not cramped, house in a nice walkable area) and live in CA or Boston so long as we were bringing in that much combined, and there’s plenty more spending we could easily trim if we were to move to one of those places.] And yet, you get stories like the one in the article in which the mighty fall harder than those who have had a lot less wherewithal to cushion the fall.
One of the benefits of “over-saving” if you’re reaching for financial independence or trying to pay off your mortgage early is that not only do you have a big kitty saved up that will smooth things over in case of a long-term emergency, but you are also kept from inflating your lifestyle. It’s a bit easier to drop from middle class to lower middle class than from upper class to lower middle class just because you’re not trying to make a ginormous mortgage payment on a mcmansion or big car payments on a luxury car or all those other fixed costs that you can’t get rid of right away.
That’s not to say you shouldn’t lifestyle inflate at some point. But don’t do it just based on income. If you’re high income, chances are you won the job lottery. If you lose that job, simple reversion to the mean (mean regression) is going to suggest that your next job will have a salary closer to the average salary in that field. If you’ve been spending all your money you’re just not going to be able to spend that much money with your next job without going into debt, because you won’t be making that much. (You may also get raises, but you can take those raises into account when you get them.)
The missing portion of the equation is wealth. Spending based on income by itself can be unsustainable. People usually prefer to have gradually increasing standards of living, not dropping from a really high standard of living to a lower one. You can keep your spending increasing steadily regardless of wage income if you spend based on your wealth and income combined, not just one or the other. If you save a nice emergency cushion and then save up so that your money makes its own income, you are less dependent on the vagaries of the job market and you’re not used to spending your entire salary in the first place.
We may not both get tenure here. We can live on one salary without cutting our consumption much. Retirement savings will drop. Mortgage prepayment will drop. But we won’t really feel it (except during the monthly mortgage updates). We probably would stop buying quite so much fancy cheese (mainly because I like watching the mortgage payment go down), but we would not have to cut it out entirely. We would not have to sell the house (though we could). We would not default on a car payment or dip into an emergency fund. If we were spending based on both of our salaries and not saving as much as we are, we would be much more frightened about the possibility of not getting tenure.
(#2 says: we can both live on one salary. His. My salary is for crap. This is why he can’t move to be with me. Argh. Actually, we could TRY both living on mine, except for one thing: health insurance. We both need it. Also, we aren’t willing to make hyper-major-third-world-minimalist changes to our lifestyles. That would not make us happy. We enjoy having Stuff and the freedom to buy it. I also enjoy being able to spend whatever I want at the grocery store, which couldn’t happen if we only had my income, and would make me unhappy and stressed. Bottom line: women need more money.)
Are we preaching to the choir? Or do you think lifestyle inflation should happen before you have a huge rainy day fund, so long as you’re still raking in dough? At what point should you stop?