I know we’re preaching to the choir, but…

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?

37 Responses to “I know we’re preaching to the choir, but…”

  1. 101 Centavos Says:

    Good question, why didn’t these folks save and have a plan to cope with job loss? “Why, it came out of the blue, and now I don’t know what we’ll do”. Job loss is probably one of the single most likely personal disaster to befall a family, and yet it never seems to be a topic for forward planning.
    Another thing that’s distressing is the low quality of editorial check at the NYT. Kids having “Eagle ears”?!! Eagle eyes, maybe, but ears?
    Here’s from the Urban dictionary:
    Someone who claim they can hear everything but cannot.
    1) We were bad-talking him behind his back and he thought he heard us compliment him. He sure has eagle ears.
    2) Old eagle ears should start dating rabbit eyes.

  2. Jacq @ Single Mom Rich Mom Says:

    I think it depends on whether this is the first time they’ve had the rug pulled out from under them or not. If you’ve never had the experience of being unemployed for a long time and unable to find any work in your field, you probably have a tendency to think that something like that could never happen to you.

  3. Everyday Tips Says:

    A lot depends on the situation. Ideally, you make a lot of money and save a lot of money, and then you will be ready for anything. I know some people that made a lot of money and tied it all up in their house and retirement. Both are a form of savings, but they have very little in the bank because they didn’t take a more balanced savings approach.

    I have noticed people tend to spend close to what they make. They get told what sized house they can afford based on their income, they then get a nice car, blah blah. People tend to buy what they can instead of what they should. It is very unfortunate.

    • nicoleandmaggie Says:

      I do think a lot of the problem comes from overextending on the house and the car specifically (and travel to some extent). With a car especially I like the idea of only buying what you can pay for WITH CASH. That way you’re not stuck with a depreciated asset worth less than you owe on it. This is especially true if you’re high income. If you’re low income you may need to take out a loan simply because you need a reliable way to get to work and you can’t afford to pay cash, even if it’s only 4 figures worth (the appreciating asset in this case being the person themselves, even if the car is not).

      With the house, it’s easy to think, oh we can always just sell it and move someplace smaller… but even in a hot market it can take a while to move the house and there can be cash outlays necessary to make the selling possible. In a cold market, selling can drag on for years.

      There’s a limit on saving for retirement in tax-advantaged accounts so I think most high income people are safe there, unless they’re moving to annuities and life insurance policies before they really have enough wealth (and lack of debt) for doing that to make sense.

  4. Spanish Prof Says:

    In my case, you are preaching to the choir. Last year, I was horrified when I realized I had spent 500 dollars at Sephora throughout the whole year. I graduated from my PhD with 5K in credit card debt (only debt I had), and my Argentine father scold me for an hour about how I was adopting the worst traits of American culture, overspending (and he loves this country, by the way). We live on my income as a TT professor (I think last year, my husband made 10% of what I made). I am saving like crazy for retirement, and we still have grad-student furniture.

    Every year, we decide to spend 700-1000 dollars on a new furniture item, and that’s how eventually we might end up with a decent looking apartment. Two years ago, we bought a new bed and a new mattress. Last year, my husband’s computer collapsed, so we had to buy a new computer. I hope this year I get to buy the dresser.

    I also go back to Argentina once a year, and I’m not willing to give up on that. I hope my car lasts forever (my example is a colleague of mine that got his car as a grad student and finally changed it when he made it to Full professor), and that I have enough money in the bank to buy a book or get a beer whenever I want. But I really do not understand those people who live way beyond their means, as if it was an entitlement.

    • nicoleandmaggie Says:

      I think when you’re not making a lot of money it is harder to save a lot of money. When we were in graduate school, we lived in crappy apartments but our rent was STILL half of our income (except the two years we worked as RAs and got free housing, thus enabling us to save for a downpayment). But when our income shot up because we got jobs, we didn’t immediately start spending the same percentage of our income we had before… we were able to enjoy a MUCH higher standard of living just lifestyle inflating a little rather than the whole amount. (A good thing since summer salary doesn’t last forever!)

  5. First Gen American Says:

    We got an unexpected one time bonus at work 2 weeks ago between 2 and 6% of one’s annual salary, which is significant. All employees got it, and it’s the first time anything like that had ever happened. I’ll say that most people already had it spent by the end of the day. It was joyous hearing people’s stories of treating the family to a vacation, or finally being able to buy family room furniture, but also sad because only 1 person I spoke to said she was going to save it. Also, most are making good salaries to begin with, so they should be able to budget for those things without a bonus. A lot of those folks are extremely house poor.

    It was truly a windfall for everyone and for most part it got spent before it even hit people’s pay stubs. Mine is going straight to the last bit of mortgage in case you’re wondering.

    My family income is quite high, but we also save like crazy, so I guess I’m part of the choir. I’m always paranoid about a family health issue or job losses popping into our lives. I feel a little more secure with 2 incomes but not much because we both work at the same company. I’m ultra conservative when it comes to money. I’m afraid of taking any time off and not being able to get back to the same type of job, etc.

    • nicoleandmaggie Says:

      We also work for the same employer… they can’t fire us without a bit of advance notice, but it sure has sucked not getting raises. There’s more cuts on the horizon too.

      I wonder if those folks are also spending the unexpected taxes they’ll have to pay on the bonus… though they probably have withholding set high enough that they’re ok.

      Wow, last bit of mortgage? That’s impressive! We’ve still got 132K to go, give or take.

      • Tara C. Says:

        My employer actually takes taxes off of our bonuses, before we even see them. They go through payroll normally.

        They do take off a flat 25% (marginal rate) though instead of adjusting for your actual rate.

  6. Molly On Money Says:

    I agree with Everyday Tips. It’s almost going against the social tide to live on a fix amount of $ and as your income goes up your expenses don’t.
    I spent yesterday raking over our budget coming up with new ideas on how to cut back. Once I confirm our expenses are less than our income I do several passes to see how I can cut back even more. I’m committed to not increasing our expenses even if our salary goes up.
    My husband is getting laid off this year and a few years back it would have turned our lives upside down. I’m sure we would have lost sleep over. We will cut back on aggressively adding to our savings but it won’t effect us other than that. It feels so good!

    • nicoleandmaggie Says:

      You’re doing great!

      I’m not saying it’s bad to inflate the lifestyle a little bit (no need to go all early retirement extreme). I feel like we can afford our weekly fancy cheese indulgence… but there’s no need to spend 100% of any wage increase, or to extend completely on big ticket items that add in extra debt and reduce precautionary savings.

      I guess this is where Elizabeth Warren’s balanced money formula comes into play… except I still say not to balance based on income alone!

  7. MutantSupermodel Says:

    It’s more likely than not the Joneses symptom. The more you make, the higher up you’re catapulted, or feel you have to be. And you keep up, knowing that because you make so much money, you can always save another day. This is my Ex. I lived this nonsense and hated every second of it. It IS harder to save a lot of money when you don’t make a lot of money but it’s easier to fall in a spending trap when you make a lot of money than it is when you don’t make much.

  8. Linda Says:

    I think for many people — me included — it’s a constant struggle to not fall into the lifestyle inflation trap. Often you can’t even see it very easily until someone else points it out to you. Spending — not saving — is reinforced in the messages all around us on TV, radio, billboards, buses, etc.

    I was in my mid-30s before I had an emergency fund and I may not have even built one up without help from my (now ex-) husband. Going through one year without an EF (post divorce) where I was focusing on building one back up was stressful. Now that I have the EF and other healthy targeted savings accounts, I find it so much easier to indulge myself just a bit more and not save so aggressively. Yep, constant struggle.

    One thing to note about this article: while it talks about the real fears/worries and notes that families are using more services, it does not report that any of these families have lost their homes or had to move. Maybe they did have an EF after all, and were just stressed about having to tap into it?

  9. Comrade PhysioProf Says:

    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.

    What kinda f***en cheese do you buy? Gold plated?

  10. Bashir Says:

    Perhaps we are choir alternates. Right now our income is higher than it has previously been. Which leads to a lot of conversations about what we could or could not afford, what should be upgraded if anything. The big thing being housing. We recently spent some time deciding between two options, one being significantly nicer, more expensive but technically affordable at our current income. We were on the fence for a while, but doing the calculations and just starring at the number of how much we’d save by taking the cheaper option was just too much. So we decided to save, eventually.

    Of course literally a week after we did a bunch of unexpected expenses popped up.

    • nicoleandmaggie Says:

      It’s good they came after taking the cheaper option rather than the more expensive!

      I must say though, I am happy to be living someplace with central air and central heating. There are a lot of things I wouldn’t want to give up that we used to live with because that’s what we could afford.

  11. Donna Freedman Says:

    I’m 53. My mom always worked. Almost all of my friends’ moms worked, usually outside the home. Thus it surprises me that a woman with kids ages 10 and 12 didn’t ALREADY have that part-time job.
    Did they honestly think that hubby’s job would always be there? Didn’t they consider extra expenses such as college funds for the kids?
    Or maybe she’s a solid-gold money-stretcher and they’re managing to make all bills plus save college funds and emergency fund on $90k a year. If so, that’s a good use of her off-hours. (Especially if things are cheaper in Ohio.)
    If not, then I wonder why she didn’t think about looking for part-time work when the economy started rumbling a few years ago.
    Since we don’t know the whole story, it’s hard to say.
    Sure hope he has life insurance, though. If he were hit by a bus tomorrow that family would be in a world of hurt.

  12. Debbie M Says:

    I think the problem is that no one thinks they’ve hit the job lottery. They feel they’ve become the sort of people who make a lot of money by getting educated, getting experience, and building those contacts. It doesn’t feel like luck–it feels earned.

    Another problem is that it can cost more to have a high-paying job. Your dress code may be more expensive. Valuable information may be discussed at lunches at restaurants–and the code may be that you pay 1/n of the total bill rather than for what you actually ordered. One would think you could still have lower-priced housing and, just getting made fun of a bit, lower-cost transportation, though.

    Finally, we’re just plain spoiled. Things go so perfectly right so very often that it can be hard to remember that things can go wrong (or even horribly wrong).

    Am I part of the choir? Can’t tell. On the one hand, part of me wonders where all my money’s going when I’m making over twice as much as what I used to think was a nice comfortable salary. On the other hand, I know exactly where that extra money is going – extra charity, inflation, retirement savings, next-car savings (I always buy used for cash), travel, computers, and paying off my mortgage (which doesn’t cost that much more than apartment living and will cost significantly less when I’m done paying off this mortgage). So it’s a mix of lifestyle inflation (cars, travel, electronics), regular inflation, and savings.

  13. bogart Says:

    Oh, yikes. I can’t imagine how it could be possible to draw those salaries in OH and not save money.

    Although. I thought this one sentence in that NYT article was really, really interesting: “A sign of how deep this recession has reached into the middle class: here in Franklin County, 44 percent of the disadvantaged attend suburban schools, compared with 32 percent five years ago.”

    Suburban schools. Not public schools. Suburban schools. See Elizabeth Warren’s take on what the practice of local funding of public schools (coupled with integration, and, separately (but equally ;)?) greater competition for admission to institutions of higher ed … when my dad graduated from high school, simply doing that got him admission to our flagship state university, but had he been black or female, no academic accomplishment no matter how fabulous would have gained him admission) has done to our families, stability, communities (her Two-Income Trap book).

    So, yeah. You buy (or rent) the house, or you pay for private school, or you don’t have kids. (Here’s an example of lifestyle creep: We own a modest-by-local (and probably middle-class US in general) home in a place with good (no, really) public schools. Our property taxes alone equal, inflation adjusted, what I paid for rent when I was in grad school. In fairness, that was as a single person in modest quarters, but OTOH, our current home’s tax value is about 5/6 of the median home’s tax value in our district, so some of the “modest” still applies, though the home is larger than my apartment was.).

    (Do I win an award, or perhaps a wrist-slapping, for most parenthetical comment?)

    I have more thoughts on the whole when-do-you-let-your-lifestyle-creep-up question, but you’ve reminded me I’ve got some fancy cheese in the fridge (thank you!), so I’ll go nosh a bit.

  14. Lindy Mint Says:

    Thankfully the economy has been a good reminder to everyone that jobs aren’t permanent, and more people are socking their money away.

    I’m sure though when things turn around, only a few of us will remember this lesson. Because BMWs are really fun to drive.

  15. Carnival of Personal Finance: Cupid Edition | Well Heeled Blog Says:

    […] because of bad money decisions [Moolanomy] or misaligned financial priorities [Military Wallet], or lifestyle deflation [Nicole and Maggie].” Cupid […]

  16. Funny about Money Says:

    Well….as a veteran of a 25-year marriage to a corporate lawyer, I can say that spending tends to expend all available money.

    We were not living especially high off the hog, day-to-day. Our home was nice but not gaudy; it was largely furnished with hand-me-downs. But by the time I walked, we didn’t have a lot of spare money. What we did have was in a retirement fund that my (now ex-)husband wouldborrow against to pay our income taxes. He liked to travel, and when he traveled we went first-class: we stayed in places like the Mark Hopkins and the Greenbrier, and we ate in very nice restaurants. That consumed a ton of money. And he refused to budget because, he once told me, “budgeting is for poor people.” Having grown up in poverty, he was determined not to live like a “poor person.”

    We sent our son to a private school. It was not the priciest school in town, but it sure wasn’t cheap. Even after I managed to move us into a school district where the public schools were more or less adequate (nationally, Arizona’s school system ranks either at the bottom or third from the bottom, depending on which study you’re looking at), he insisted on keeping our son in the private day school.

    We ate out a lot. When I got home from work I was tired and often didn’t feel like cooking. My son was a picky eater and also was allowed to speak to me in ways that I wouldn’t have survived when I was growing up, and so the dinner hour could be quite the ordeal. Going out to eat was the path of least resistance.

    And as Debby points out, there are costs to earning a six-figure income. The firm required associates and partners to eat lunch out — preferably at the private business club they were all required to join. Partners absolutely were not allowed to brown-bag. Nor does one show up at one of the finest law firms in the Southwest decked out in a Penney’s suit from and a Mervyn’s shirt.

    When we divorced, we were three-quarters of a million dollars in debt. Part of that was because of an unwise business investment; part of it was because we lived on the cuff; part of it was because he simply refused to budget and refused to set aside savings in anything other than a 401(k)…and he wouldn’t have done that if the firm hadn’t required it. I kept him out of bankruptcy by borrowing on margin against my own sole and separate funds — otherwise our son wouldn’t have been able to go to the expensive private liberal-arts college upon which we blew $130,000 in tuition.

    Once he repaid the loan to me, I contrived to get back on my feet financially. Last I heard, he was still in debt up to his teeth; at 70 he has no plan to retire — ever.

  17. Funny about Money Says:

    oops: typo engendered by frenzied dog yapping! Make that “Spending tends to expand to fill all available money”!!!!

  18. Moments of Fame | Funny about Money Says:

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