So I’ve been a saver for as long as I can remember and in my younger years and have finally had a child in my 30s. Despite making a combined 120,000 a year with my wife, we purchased a 235,000 home with 20% down so our mortgage payment, taxes, and utilities comes out to be around 15% of our income, and now with daycare for one child that’s about 12% of our income and when we have a second child daycare will be another 12% of our income. If we continue to contribute 25% of our income towards retirement, that adds up to 70% of our income. Now, if we ever feel a little pinched, we can just scale back our retirement contributions to 15% I stead of 25%, but we are used to living on much less than we make (no other debts). Anyway, that’s an anecdotal example of why I think people should strive to save 25% of their income. Obviously the other life choice of buying a house much less than we can afford (I understand the struggle is real out there) but also driving our modest cars into the ground for as long as we can (Hyundai and Prius) contributes to our financial comfort.
That’s obviously going to work better if you have twice the median household income, and houses cost less than the median house price.
I whole heartedly agree with the idea of pre-adjusting your spending to align with a new reality (kids, single income, etc)
We started putting away daycare payments when we found out we were having our first ($300/wk) and that really did help.
I never endorse ‘rule of thumb’ or ‘one solution fits all’ rules.
The fundamentals are the same. Budget based on priorities.
Breaking down your information:
* A combined (net?) income of $120k ($10k/mo).
* Home purchased at $235k with a down payment of $47k.
* Mortgage payments, taxes, and utilities cost about $18k ($1,500/mo).
* Daycare cost about $28.8k ($2.4k/mo) [$14.4k ($1.2k/mo) each].
Your recommendation is to allocate retirement contributions of 25% ($2.5k/mo) and to scale it down to 15% ($1.5k/mo) if needed.
Final monthly breakdown of $10k/mo net:
* 15% ($1.5k): Mortgage payments, taxes, and utility costs
* 24% ($2.4k): Daycare costs
* 25% ($2.5k): Retirement contribution
* 36% ($3.6k): Misc. daily expenses.
I’d say your numbers are out of touch with most people. Not everyone nets $10k a month and should you have meant gross, that just makes it even harder for most people to target the 25% that you recommended.
You said 15% for taxes? That’s far too low for your income so I’m guessing you have a large dividend paying income where your investment gains are subjected to long term tax rates (~15%) which would mean everyone needs to first get to that large invested amount.
You purchased your home for $235k. Where is this? Any major city or even outskirts of those cities are double that price or more now. To save up $47k while paying rent and working at the same time is a lot easier said than done.
The median household income in the US, for easy calculations, it approximately $70k gross. The breakdown would most likely be:
* ~25% (~$1.5/mo): Federal and state income taxes
* 35-40% (~$2.2k/mo): Household Rent
* ~28-32% (~$1.75k/mo): Misc. daily expenses
* ~7.5% ($0.5k/mo): Savings/Retirement
Where it took you less than 2 years to save for a home down payment, a realistic timeline today if they purchased a home at the price you purchased at would take about 8 years. As home prices are now higher, it would take even longer. Your recommendation of 25% should have just been a recommendation to make more money.
What state did you buy your house for 235k. One thing which isn’t fully appreciated in these threads is hcol vs lcol lifestyle and expenses.
I didn’t think investing 25% of my paycheck was possible until the pandemic. I have always looked at stock market dips as a time to invest, so I upped my 401K from 10% to 15% around April 2020. Gradually increased it to 25% and that’s where its been for almost 2 years now.
Two big advantages are it lowers your taxable income and if you invest in mutual funds, the risk is minimal. The stock market is down year to date -5% and I’m down -6.0 year to date, but keeping at 25% each paycheck. In 2020, I was down -19% in April and finished the year up 21%.
I can’t wait to send my kids to school and not spend 2k/mo on daycare. What will I even do with that money? JK I’ll invest it.
You did buy a house on much less than you can afford. We barely scrape 100k a year but bought a 400k house.
Just to clarify, do you include 401k and Roth IRA in those 25% or is this apart from that? And did you invest that 25% anywhere or just saved them as cash? Just curious to learn!
Nice goals. However, some background should have been added like where OP lives, I’m assuming in an LCOL area with that house price (3br, 2ba) Also, OP mentions in the comments their under graduate degree was paid for, worth mentioning in the post because that definitely impacted OPs finances.
OP you should go over to r/fire and you won’t be down voted for being out of touch with most people. I instead you will be down voted for being to spendy where 25% is the bare minimum. I personally was close to 50% savings rate when I was single. Never bought a new car always used, had roommates because it was cheaper, even though I had a good salary out of college. Now that I have a family on one income, we are still able to max out 401k, HSA, but my savings is definitely not where it used to be. The good thing is due to early savings and compounding, I don’t have to contribute to retirement and over shoot if I waited to 67 to retire. Now it’s a matter of how early I can go part-time depending on when my wife wants to go back to work.
Over at r/fire people are doing it even at below median income, so I don’t agree with most people that it can’t be done my most people, it’s just how bad do you want to do it.
We did something very similar (but bought 8 years ago now) and have a goal of saving 30% of income this year but we are also older and have a child with a disability to think about so we are highly motivated to live below our means to have money for the future. That said, I feel like we live very comfortably and we absolutely lucked out in buying what we did. Our house has more than doubled in value and our income has doubled since we bought so we’ve been very fortunate.
👍🏾Great personal finance goal! But I’m sure you’re gonna get plenty of opposing opinions. In my data-less non-scientific opinion a primary unmentioned reason for low saving rates is probably lifestyle inflation, too many people want the most expensive house with a boat attached to the biggest truck in the neighborhood. With that said I understand investing up to a quarter of one’s income may be an impossible dream for some and coming from a very poor upbringing my opinion is not meant in any way to belittle those who struggle with meeting monthly expenses and low wage jobs.
Damn my wife and I make about 110k combined and have 2 kids…..can barely save 100 dollars a month because daycare is raping my wallet.
Reading this the first thing that came to mind was that guy that went from rags to riches with an app or product I can’t remember. Articles were written about how an inspiration and anyone that works hard can have the same.
Then in a interview he admitted that his parents who are multi millions funded everything.
Haha jokes on you, I’m Dutch we don’t have a cuisine.
It’s great to see so many more people aware of how many potentially harmful germs are out there around us. Before the pandemic, it was a very niche thing but now, there are so many devices that helps us fighting that.
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