Higher Income Spending/Saving Strategies?

[f2point8]

I finished school almost two years ago, and I have been fortunate enough to be in a field that offers relatively high income in a fairly stable profession--not Wall Street CEO high, but much higher than I was getting in school. My wife and I have tried to keep spending in check, but feel like we are just learning about the ways of personal finance.

One of the questions we face now is the purchase of a new car, where we feel the want versus need friction burning.

Being new to the forum, I think sharing my actual figures would be helpful, but I do not wish to offend anyone by sharing this information. If anyone cares to respond and give me the go-ahead, I'd like to break down our savings/income stream/debt and get your take on our decisions. I assume my registration at this site keeps everything anonymous, and that this forum is geared to helping people in any income bracket.

I have done a search on this topic, but I haven't found a post with figures that I felt helped me much. If, after getting further on this topic someone can point me to a previously discussed post that applies to me, I'd appreciate it.

[jeffrey]

Yes, everything is anonymous - feel free to share away. The more detailed information you provide, the better people can give their opinion on your particular situation.

[zetta]

Go ahead and share your figures. In general, a ratio of 50% to needs, 30% to wants, and 20% to savings is a good rule of thumb. Have you established goals such as retirement, house downpayment, kids, college, etc.?

[disneysteve]

The amount of your income really is irrelevant to the conversation, though if you post actual numbers, it will help us make specific recommendations. The reason it is irrelevant, though, is that we can just as easily speak in percentages. The breakdown zetta gave - 50/30/20 - is a good starting point. That comes from Elizabeth Warren's book, "All Your Worth" which is a good read for everyone. If you aren't saving 20%, something is probably wrong. If your needs are consuming more than 50%, something is probably wrong.

I'm a physician, so also toward the higher end of the payscale around here. I find this site to be a very valuable source of information and I've learned a lot around here. Again, it doesn't matter how much you make. It matters how you spend it.

If you can post numbers, it will help us pick apart the specifics of your situation. Before you buy that next car, let's see the details. I consider a car to be a need for most people, but that need can easily be filled for no more than $20,000 tops, and many here will argue for a number much lower than that (which I wouldn't necessarily disagree with). If you want to spend more than that, you are firmly in the "want" category and need to know that the purchase fits into your "wants" budget. There is nothing wrong with having wants and luxuries in your life IF YOU CAN AFFORD THEM.

I'm looking forward to seeing the details and helping out along with everyone else.

[bjl584]

Go ahead and post it. As you learn more about finances you will discover that income isn't the most important thing. You will also discover that people with high incomes do not necessarily have a high net worth. Income and wealth are two different things. Welcome to the forum.

[jIM_Ohio]

Originally Posted by f2point8

I finished school almost two years ago, and I have been fortunate enough to be in a field that offers relatively high income in a fairly stable profession--not Wall Street CEO high, but much higher than I was getting in school. My wife and I have tried to keep spending in check, but feel like we are just learning about the ways of personal finance.

One of the questions we face now is the purchase of a new car, where we feel the want versus need friction burning.

Being new to the forum, I think sharing my actual figures would be helpful, but I do not wish to offend anyone by sharing this information. If anyone cares to respond and give me the go-ahead, I'd like to break down our savings/income stream/debt and get your take on our decisions. I assume my registration at this site keeps everything anonymous, and that this forum is geared to helping people in any income bracket.

I have done a search on this topic, but I haven't found a post with figures that I felt helped me much. If, after getting further on this topic someone can point me to a previously discussed post that applies to me, I'd appreciate it.

Save based on percentage of income. Shoot for 20% savings for starters. 20% of gross to savings.

15% of gross to retirement.
5% of gross to short term savings needed.

Whether you make 20k, 100k, 200k or $2 M that 20% guideline still exists...

Live on less than you earn
Pay yourself first

the problems a person making 200k or $2 M will have which are different would be tax shelters and other topics like that which are different than the tax situation of a person making 50k or 100k will see.

[disneysteve]

Originally Posted by jIM_Ohio

the problems a person making 200k or $2 M will have which are different would be tax shelters and other topics like that which are different than the tax situation of a person making 50k or 100k will see.

Another problem that higher income earners have is peer pressure. When everyone you know earns 30K, there isn't nearly as much pressure to drive fancy cars, live in a big house, have a huge home theater system, take exotic vacations, etc. Once you start earning big money, though, you find yourself surrounded by luxury and start thinking that is the way you are supposed to live.

I can tell you that although I am a physician, I have exactly zero friends who are physicians. Why? Because my wife and I made a conscious choice years ago not to live the lifestyle people expect for our income level.

If you let yourself get sucked into the lifestyle of the rich and famous, it is hard to get ahead financially.

[f2point8]

Okay- this is the first time I've sought online opinions about our finances, so I was just a little apprehensive! This is going to be long, so bear with me:

First though I appreciate all the responses so far. I think the advice you've given so far is very sound, and I think that overall we have been trying to follow it so far, although I know my wants sometimes cry out louder than my voice of reason. But I feel like I have suppressed my wants for quite a while in a lot of areas. Enough preamble!

Financial overview:
Stable job in what seems to be a stable profession
Contracted salary currently $360K/year, yearly raises contractually tied to inflation, approx $30K/month. After taxes, SS contribution, and retirement contribution, down to $18,000/month
Monthly expenses (mortgage, 1 car payment, dining out, insurance, charity, utilities, etc.)=~$9,000-10,000 (usually less, but just rounding here)
Disposable monthly income ~$8000-9000
Retirement savings so far (1.5 years of work) $73,000 (I contribute legal max, ~1.2x employer match)
Bank account savings so far: $82,000 (for now thought of as emergency fund, later to be used for kids college?)
We have nearly a year's supply of food and water on hand for emergency.
I have very good life insurance/disability insurance plans included in above expenses.
2 kids.
Credit card debt=0

When we bought a family car about 18 months ago, I got advice that instead of paying cash, it was better to keep the cash in the bank since, in an emergency, cash is king. We have the savings account as a buffer to pay for 6-8+ months expenses (without skimping on anything) in case my job should be lost, plus all that food stored (should have a lower grocery bill!). I have thought this good advice to a certain extent since I've heard of a lot of people who had little debt, but also little cash who got wiped out when a financial storm hit.

Some of the other disposable income has been used for travel, but most of it has been to fund getting our home furnished, painted, and a few remodeling projects, paid for in cash. That set of projects is now nearly complete.

We have a second, older SUV in good running condition.

We are looking for a third, fun car for us to drive- a sporty car. We have that disposable income stream of about $8000/month. We'd like to keep perhaps $3000-4000/month for general savings, and probably about $2000/month saved for travel. That leaves us $2000-3000/month that we could use for a car payment (not that we'd have to use all of it). We have $10-15K already in checking (that is not counted above) saved for a down-payment for a car.

Okay- so here is the question: I am in my early 30's. I worked very hard (in my opinion) to get to this point in my life. I feel like I have a lot of time to let my savings grow at the rate I’m building it. The cars I am feeling drawn towards cost between $65,000-$90,000. I know, I know--Totally not frugal, a totally self-indulgent want, not a need. My wife really wants me to get one (again, I know- who wouldn't kill to have such an encouraging wife!) I feel like I spent a lot of my youth getting to where I am now, and I don’t want to wait until I am so old that I can’t physically get into a sports car before I buy one. I can see the value of saving and paying cash for something, but again, in today's economy I don't mind paying a little extra in interest for a lease or a loan, and keep my cash/investment pile for a rainy day. A car in that price range seems to command a loan/lease in the $1000-1600/month price range with $10-15K (60 month loan- higher of course for a shorter loan). I guess I think that if I ever got into a situation where money got tighter, I could unload the car, even if at a loss, and pay the difference with some of my savings. But I also know it is this kind of thinking that gets a lot of higher-income couples into financial trouble if it persists. Even the $1600 a month for a payment leaves so much wiggle room it is hard to ignore the urge to buy, since we could still be saving at least $4000 a month or more (around 20% of our net).

I am not opposed to getting a used version of some of the cars I'm looking at- it is just that with certain used performance cars I've heard that repair expenses can be a hassle- and for me the expense isn't so much a problem (within reason) as the hassle of driving to a qualified repair place (I live over an hour outside any major city). Having one still under most of its warranty would be nice, if for no other reason than repair needs seem less likely.

Any thoughts on this situation?

Thanks.

[bjl584]

Before everyone starts to give advice, I'd like to know what kind of car you are considering purchasing.

[disneysteve]

Do you currently have a MINIMUM of 20% of gross income going to savings? Would you still have a MINIMUM of 20% of gross going to savings if you bought your luxury dream car?

[snshijuptr]

You have said your goal of saving for a car and retirement, but you have not set out any other goals. You do say that your Emergency Fund might become a college savings fund for your children.

So here are my questions:
1) Are you on track to retire at the time and lifestyle you want? Is this a conservative estimate?
2) What savings goals do you have? Are you on track to fulfill these goals?

[f2point8]

Honestly I don't know how much I'd even want for retirement, but at this point it seems like there are a ton of factors that go into that. At age 33 it is hard to know what the future will hold, and I've already gotten a little jaded I suppose having this economic downturn hit just as I started working, seeing my parents' and many senior coworkers' retirements dwindle drastically in a few short weeks. I don't think it is a dream of mine to leave my children a huge fortune- I'd rather they go out and work for it as I had to do (but at least giving them a start). I don't know what a reasonable goal for retirement is for me, but a quick calculation shows that at my current rate I should be able to have as much or more than I think I'd want. That could change, of course! I don't think I dream of a huge estate- I don't want to save my whole life to retire as a millionaire, only to have more of my youth spent in preparation of the day I can drive that luxury car with crippled hands and a bad back. I am trying to balance living and enjoying the present while putting a reasonable amount against future needs and emergencies.

Steve, are you suggesting that 20% of gross should go to combined savings monthly (retirement, emergency fund, etc.) or to savings beyond retirement savings? If it is combined then I think I'd still be in good shape roughly. I don't really know- I laid out my numbers as best I know how at this point.

Brian, I'm not sure what car I'd get, but I'm entertaining the frivolous notion of a new M3 or a used 911.

[tulog]

Originally Posted by disneysteve

...

The breakdown zetta gave - 50/30/20 - is a good starting point. That comes from Elizabeth Warren's book, "All Your Worth" which is a good read for everyone.

...

Steve, I haven't read the book yet. Just curious to learn a bit more about how the 50/30/20 was derived. Can you provide more details?

Are the 30% want and 20% savings arbitrary numbers? Is 20% the number that will allow you to get to a certain level of savings? If you spend less than 30% on wants will you feel some sort of deprivation?

My own numbers currently: 20/20/60

[tulog]

Originally Posted by f2point8

Brian, I'm not sure what car I'd get, but I'm entertaining the frivolous notion of a new M3 or a used 911.

Since you are considering an M3, what about an 135i plus engine management (380-400hp) plus LSD. Faster than an M3 or base 911, much more torque in the powerband from 1400-5000 rpm, and save tens of thousands.

[f2point8]

I have driven the 135i- fun little car. My wife isn't as jazzed about it though, and no matter what you can do to the engine, add the M package, whatever, it won't be the same car. as the M- I've driven both. The M isn't just about absolute power like a muscle car. And when you configure all the add-ons and performance enhancements to the 135i (or 3-series for that matter) the prices end up being closer than you'd think.

I found a review of "All Your Worth" at amazon.com. To quote the reviewer (who quotes the book): "For example, drive a less expensive car. They write: "Buy used...Drive it until it falls apart, and then keep driving it. Drive your car until the odometer flips. Drive it until you're on a first-name basis with your local mechanic. Drive it until you embarrass your kids. And then drive it some more. And laugh all the way to the bank."

To me that's fine if you are saving money for something else or if finances are tight, but in economic theory there is this idea of Utility- what may matter to one person may be of little value to the next. To the authors of All Your Worth, it would appear they offer a car as an example of something with low utility to them, laughing to the bank so they can save for something else of a higher utility to them. That is commenting on the quote from the book, since I haven't read that book yet.

I really value all your opinions here- I am just trying to figure out what I want for myself. Call it youthful naivete if you wish- but when I retire I envision myself placing a higher value on time than money, spending time with grandchildren, fishing, reading, etc. I sure medical expenses will figure into there as well. But I really don't want to die with a lot of money in the bank. I'd like to feel like I'm enjoying some of my Utility now while not totally burning my bridges later on. Of course I want to save for a decent retirement, and I have a good start to it, and I have a lot of time to add to those savings if I decide to later on. What is it that everyone is saving for besides a basic retirement and a rainy day? I know people with incomes between 200K-800K annually who save up for and buy that cabin in Vail, or that summer home in Jackson. Is that what I should be saving for? On the one hand I don't get people who live paycheck to paycheck, but on the other hand I don't get the point of pinching pennies through your youth so you can buy that overpriced summer home when you are 60 and enjoy it for only a few years, or to dump a fortune on your kids so they don't have to learn how to work for themselves and blow it all quickly. Is it possible to land somewhere in between? Sorry for the ramble...

[f2point8]

So if we save $3000/month from monthly income, plus $1375 retirement contribution (self) plus $1650 (employer match)= $6000/month total savings monthly, this is the 20% mark, correct? (6000/30000=20%). $4000 monthly saved from monthly income would be even better, and doable. Does this fit with All Your Worth principles, or does employer match retirement not count?

[dannin]

You mentioned that you don't want to have accrued too much of a retirement fund at the expense of working too hard and giving up too much of your youth. That is a very valid point and I agree with you 100%.

But, the other thing to consider is that the more quickly your retirement fund grows, you'll be able to retire earlier and enjoy all your free time when you're 45 or 50 instead of 65, etc.

[SavingNJ]

I am just learning, here are my thoughts and probably not the logical explanation you looked for (BTW, I had earned around $350K a year and my combined household income was higher, but I live in northern NJ).

1. As pointed out earlier, the 50/30/20 is just a starting point, depends on one’s goal, it is easier for high income earner to spend much less than 50%, hence putting more in saving and earlier retirement. I knew a dentist who sold his practice at mid 40s and retired. May be he has other incomes, I don’t know.

2. I think you did very good in terms of savings, with 1.5 years work and disposable monthly income $8000, you managed to save $82,000

3. I am not sure what kind of profession you are in, but I have seen jobs evaporate overnight, many of them in upper management, senior VP, MD (managing director). During this economic downturn, it is difficult to find comparable jobs. I think they are doing okay and some may even retire early because of the boom market in the past decade, but I thought your saving is too low (even you are young, but I have concerned on the security of the job, and I am not comfortable that you have only worked 1.5 years, again I live in NJ, the expenses here are higher)

4. Will buying this dream car of yours lead to your desire of buying other luxury items?

5. I don’t have a formula, and don’t have a theory, and may be I am cheap, but I probably will wait until I have over $300K in the emergency/saving account before I look into buying a $65,000 to $90,000 car. But then I knew people in my salary range bought high price cars. I always have my Toyota. My point is I would make an effort to save to buy the car (may I say a toy?).

6. Again not much of a theory, I always thought it is “easier” to live on a $16,000 emergency fund with living expenses of $2000, rather than on a $80,000 emergency fund with a living expenses of $10,000. I know the latter means I have more ways to cut, somehow I also thought that I would have more to lose (say bigger house). I always make sure that my savings can pay off the house, car etc..

[tzsgti]

I know people on this board cant fathom spending 60-70K on car but if you look at it this way. I don't think anyone here would stop themselves if they had enough after savings to buy something that they really liked or was dreaming for it as a kid.

On another note the M3 will save you thousands in the long term over the Porsche. BMW has an amazing 4/50,000 miles free maintenance that covers every wear and tear part on the car except Tires. So basically for 4 years all you have to do is put gas in it and change the tires. They even have an extended plan that goes to 7 years/100,000 miles for about 3 grand. I am sure you know the Porsche specially a used one will cost you thousands on maintenance. The M3 is a phenomenal car and IMHO the best all around car out there.

Id say if you are happy with what you are putting way a month and you figure at what age you want to retire. If you figure how much you would have ended up with at the age you want to retire and you are happy with that number then I would say go for it. Just letting you know this forum will be very biased against getting a car in that price range no matter how much you make.

Edit: To add some advice on the M3. Its a buyers market right now so you can get pretty good deals on any M3. I have heard of even new 2010 and 2011 orders being put in for about 500 over invoice which is about 5k off MSRP. You can easily get a fully loaded car for the lowerr 60s. And BWW has great low financing options as an incentive. 0.9 precent for 24 months and 3.9 for 60 months. So if your are going to finance that will be alot less then a new car.

[jIM_Ohio]

Originally Posted by disneysteve

Another problem that higher income earners have is peer pressure. When everyone you know earns 30K, there isn't nearly as much pressure to drive fancy cars, live in a big house, have a huge home theater system, take exotic vacations, etc. Once you start earning big money, though, you find yourself surrounded by luxury and start thinking that is the way you are supposed to live.

I can tell you that although I am a physician, I have exactly zero friends who are physicians. Why? Because my wife and I made a conscious choice years ago not to live the lifestyle people expect for our income level.

If you let yourself get sucked into the lifestyle of the rich and famous, it is hard to get ahead financially.

I don't believe in peer pressure. I believe that some minds are stronger willed than others.

As an FYI one of my 3 best friends is one of top children's surgeons in the city. I am sure he makes quite a bit more than me. He pays to have someone do his yard, pays to have driveway shoveled and pays for other little things like that... I do those things myself.

I hang out with him, he hangs out with my family... I used to coach his son's soccer team. He takes much different vacations than my wife and me... his family lives in a slightly nicer part of town... but at same time my house is bigger (LOL)... he can also listen to the greatful dead a lot longer than I can ever tolerate and also likes the Eagles which I could never get into...

I think the important thing with friends is to know why you are friends. I don't hang out with my Dr Friend because he has money, I hang out with him because he can tolerate my opinions and I can tolerate his LOL. Income is not an issue because we do different things with our spare time but when we do hang out, its always fun to discuss politics and similar considering he is most liberal person I know and I tend to the conservative side. We have respect for each other-that makes good friends... spending because friends spend implies you are a weak person or need new friends.

(Steve none of this is directed at you, I think you know that, but wanted to make sure).