Like middle-class families everywhere, the Mendells, Steins and Wrights judged their own financial health by how they thought their neighbors were doing. How wrong they were....
When Ernest and Miriam Wright traded in their downtown Philadelphia row house for a four-bedroom on Willow Lane 2½ years ago, they hoped to swap city life for a suburban idyll. No more urban anonymity and late-night howls from the drinkers at the bar next door.
And there was a bonus: The bigger house in the burbs actually cost less than their home in Philly (though they did take out a larger mortgage to pay for it), giving the Wrights a $100,000 cash cushion.
But the price of fitting into their new neighborhood has turned out to be a lot higher than the Wrights bargained for. With a bigger mortgage and higher property taxes, they're spending nearly $1,000 more a month on housing than they did in the city.
Then there are the incidentals of life on Willow Lane. Landscaping cost $1,500. Remodeling the 20-year-old kitchen cost $25,000. They've upgraded to a Subaru Outback from a Volkswagen Jetta.
And next year they'll spend $13,000 to send Jillian to kindergarten at a private school in the more exclusive part of town - even though the town's highly rated public schools are a major draw for Wallingford....
the Wrights, who make a combined $85,000 a year, are coming up a few hundred dollars short every month, sometimes nearly a thousand....
In two years, the Wrights have blown through $60,000 of the money they banked from the sale of the house in Philly ($40,000 is left) and have $7,000 in balances on their credit cards.
Don't you want to shake them and yell, "What planet are you on?". It's obvious they don't have a budget or any idea of where their money is going. OK, the Wrights are still saving for their retirements, but for how much longer? How much longer will they afford to live their affluenza lifestyle?
The advice I'd give them is simple:
- Budget. Draw up a budget based on the one existing income alone. Include childcare and travel expenses for when the wife returns to work, college funds for the kids, debt repayment, investments both inside and outside retirement vehicles, maintenance of an emergency fund, any home renovations they plan to have.
- Wife's career. When Mrs Wright gets a job, keep to this existing budget and use her income for additional debt repayment, investing and college funds for the kids.
- Children's education. Ditch the private school. It is unnecessary - they have excellent local schools - and costs them more than just the school fees; the "keeping up with the Jones' " lifestyle it engenders will kill their finances.
- Cars. Start saving now for their next vehicle. They should keep their existing vehicle for as long as possible, but should plan for it to need extensive work within 5 years. They don't need two cars now, so shouldn't buy another.
None of the couples in the article can see the wood for the phantom trees. They think they can spend their way to wealth, without realising that they're just digging themselves into a pit. A bit of foresight and delayed gratification will give them strong financial futures and the opportunity to fulfil their dreams.