Why and how do spending ratios change?

[PauletteGoddard]

Case 1: It used to be that 10% tip was standard, then within recent history it is now 15%, and some quarters I've been to insist that 20% is the new 15%. How does this change: with stealth inflation?

Case 2: The Canadian personal finance books I read in the early 1990s offered a rule of thumb of paying a price equivalent 2 to 2.5 times a household income for a home. The average interest rate on mortgages then was around 8.5% - 9%. Now, being acutely if not perfectly aware of the housing bubble (people were still buying at the peak), people here, with a mortgage interest deduction available to them, don't blink at buying a house at 4.5 times their income. Is that the new normal or is that a panic reaction to escalating residential real estate prices? Would buying a home priced at three times one's household income be risky/foolish when mortgages are at 6.5-7%? How does the ratio scale according to interest rate? How do people in non-North American countries determine the comfortable/average/typical home price:income ratio?

average household income: $50000
House Price APR Price:Income Ratio
$150000 8.5% 3.0
$225000 6.0% 4.5

Assume all mortgages are for thirty years, with fixed interest rates.

[disneysteve]

Just because something has become the norm does not mean it is good or right.

The old rules of thumb still apply if you want to live within your means. The problem is mortgage brokers started loosening their guidelines and making increasingly risky loans and we are now seeing the consequences with the whole sub-prime market mess. And buyers are at fault, too, because they have been greatly overextending themselves.

[snafu]

If your ratios were followed the greedy real estate agents, greedy developers, greedy counsellors who set tax rates, greedy re-sale owners, greedy bankers and mortgage brokers would have so much smaller a group of 'qualified' buyers to hook for 30 + yrs.

It is not uncommon to pro rate mortgages for 50 years and if you look at the amatorization schedules you see the advantages to the lender.

Since PET changed the mortgage rules, they are renewed every 5 years and presumed both the value will increase substantively and your income will likewise increase over 5 years.

Should the value drop, you will owe more than value which is currently the situation in some American regions.

[PrincessPerky]

humph, I still tip 10%...15 if you were a top notch waiter.

Don't give in

[FrugalFish]

Maybe it's all conspiracies?

Seriously though, I often wonder if a lot of what we are fed as "the right thing" to do with our money is based on information released and marketed by the industry it benefits- such as mortgage companies.

When it comes to restaurants, I'd guess what's happened is that most people started tipping 15% because we've been feeling generous as a whole. Since it has somehow evolved into the norm, it's become the baseline for average service.

[Scanner]

I think resteraunts should just add a 15% service charge to the bill instead of this whole tipping thing.

A tip should be for doing something special for me, not for doing your job.

I don't get a tip every time I get a nice back crack (although I'd take one ) and relief.

But yes, I lament the lack of hard and fast rules in financial management. The only one I think has been violated to much detriment is the 20% down rule for a house. The idea of private mortgage insurance on top of the mortgage. . ..that really stinks.

Rules can be good or they can be bad.

I think one of the harmful effects of rules/recommendations is the "Save 10% of your salary." What happens is (and we did this a couple of years) is you say, "Well, I can't do 10%. . .when I am able to. . .I'll do that" and then you end up doing nothing.

The same could be said for a mortgage. If you want a $200,000 house, you need $40,000 down.

You could be earning really well and only have $25,000 for it. . .should you not do it and not make the terrific gains to be made in housing?

Hard call. . .no steadfast rules for anybody, I guess. Just "guidelines."

[PrincessPerky]

now I have a pirate voice in my head 'they're more like guidelines" -pirates of the carribean

[cptacek]

I think it is because people are afraid of math and don't track what they spend their money on.

I only tip 15% if they are a good server. If they are only average, I'll tip < 10%. If they are bad, they don't get one.

As for how much to spend on your house, people don't sit down to see what exactly their bills are and how much they can afford to pay every month. So, instead of tracking their spending, figuring out what they are comfortable with, etc., they just take what the "experts" say.

Also, because there are a lot more two income families out there, more of the second income can go to expenses like this. Then, these families get in trouble because one of them wants to stay home or the couple gets a divorce. They both want the same standard of living they had before, with half the income.

[cptacek]

Originally Posted by Scanner

I think one of the harmful effects of rules/recommendations is the "Save 10% of your salary." What happens is (and we did this a couple of years) is you say, "Well, I can't do 10%. . .when I am able to. . .I'll do that" and then you end up doing nothing.

Or "you can contribute up to $4000/$15000". If you can't contribute the whole thing, you might not contribute at all.

[InDebtInDC]

Originally Posted by disneysteve

Just because something has become the norm does not mean it is good or right.

Truer words have not been spoken. I spent my entire life questioning this phenomenon.


I attribute this to the propaganda propagated by companies who stand to profit from consumerism.

[katwoman]

You know why ratios are set up, tracked and published? So they can be used as a measure of behavior. Doesn't mean they're right or wrong or even accurate predictors.

[disneysteve]

Originally Posted by disneysteve

Just because something has become the norm does not mean it is good or right.

This also doesn't apply just to financial issues. I use this line often at work when speaking about obesity. Just because 2/3 of Americans are now obese doesn't mean it is okay. Yes, it is the norm, but it is definitely not good or right.

[InDebtInDC]

Originally Posted by disneysteve

This also doesn't apply just to financial issues. I use this line often at work when speaking about obesity. Just because 2/3 of Americans are now obese doesn't mean it is okay. Yes, it is the norm, but it is definitely not good or right.

You know it naturally follows that when you start questioning the norm, it is you who is challenged, not the merits of your argument, much less the norm.

[PauletteGoddard]

You know it naturally follows that when you start questioning the norm, it is you who is challenged, not the merits of your argument, much less the norm

Now, this is getting personal.
Seriously, whenever I see the majority of Americans do or think something, and I do or think something else, I assume it's my thinking or action that's the problem. That's why my blog has that note about welcoming dissenting opinions or facts that challenge my positions.

[disneysteve]

Originally Posted by PauletteGoddard

Now, this is getting personal.
Seriously, whenever I see the majority of Americans do or think something, and I do or think something else, I assume it's my thinking or action that's the problem.

Funny but my wife and I tend to be just the opposite. When we watch the news and hear that the majority of Americans are doing whatever, and we don't, we wonder what the heck is wrong with all those people.

[PauletteGoddard]

Funny but my wife and I tend to be just the opposite. When we watch the news and hear that the majority of Americans are doing whatever, and we don't, we wonder what the heck is wrong with all those people.

I wonder if you and your wife were born in the U.S.--I wasn't. When immigrants go to a new country, they tend to watch the natives to see how things are done. Maybe I shouldn't beat myself up for being stupid when I see the natives do things I don't understand: could be historical cultural baggage on both sides holding me back from comprehension, could be my obstinate insistence on long-term planning and personal lack of the national characteristics of optimism and faith. I've asked my American husband, and he just says "people are stupid everywhere" and "don't expect to understand everything we do. I don't understand why we are the way we are."

Which is why I love the SavingAdvice forums and the blogs: the individual posters and commenters here are pursuing life, liberty and the pursuit of happiness but aren't doing it the way entities funding corporate mass media would have them do it: in eternal servitude and hive-mindedness. People here are more inner-directed and calculating (in a good way).

[disneysteve]

Originally Posted by PauletteGoddard

I wonder if you and your wife were born in the U.S.--I wasn't. When immigrants go to a new country, they tend to watch the natives to see how things are done. Maybe I shouldn't beat myself up for being stupid when I see the natives do things I don't understand:

my American husband, and he just says "people are stupid everywhere" and "don't expect to understand everything we do. I don't understand why we are the way we are."

That's really interesting. Yes, we were born here so maybe that's why we don't look to the majority to see what we ought to be doing. More often than not, I look at the majority and wonder where this country is heading.

I love your husband's point of view - "people are stupid everywhere." I've said the same thing many, many times.

[Joan.of.the.Arch]

How interesting that you brought up the question of immigrant vs native born. When I read your blog today, PG, one of the things it spurred me to think about was the perspective of an immigrant. I wondered how much of your "open eyes" might be due to feeling like you really needed to watch out for how things work in order to make sure your got it right in a system that you probably understand better than you give yourself credit for, but will always be wary about. (I'm thinking about the immigrant perspective often these days since there are so many more immigrants in my life than ever before.)

The perspective of immigrants can help keep me humble. I probably give myself too much credit for going against the grain, for deliberately not participating in the herd mentality. But then some of my immigrant friends will reveal to me how much further I could go in my independence, in my willingness not to be drawn into the current ultra-consuming way of life. Funny thing is, I know some of them hope to get to an ultra consuming way of life, but they understand they will do that after they have plenty of extra money, not before. Some of these folks come from poverty, some from what is middle class in their country. They live well, now I would say. Comfortable homes, but simple and not cluttered to the hilt with crap. There really is a big difference in their homes and homes of many others I know.

Earlier this year I was telling some immigrant friends about downpayments and mortgages. I'm sure I didn't repeat a rule of thumb about income to purchase price ratios, but I surely did tell them what percentage the lenders will say they need as down payment in order to get the best rates. They decided they are a few months shy of buying since they want a really good rate. They read financial sites on the internet like crazy trying to figure it all out. This particular couple is from a totally different sort of economic system. I think their desire to survive and thrive causes them to learn and make more informed decisions more than the average native born person. I really do. I think they are becoming quite savvy.

Uhm, I do tip 15% and I never thought about doing otherwise. Never wondered why 15% should be the magic number. Thanks for getting me to open my eyes....I don't even remember the days when 10% was a standard restaurant tip, though I surely must be old enough. I think my eating out back then wasn't really a possibility, so it wasn't something I ever thought about.

[PrincessPerky]

Originally Posted by Joan.of.the.Arch

Uhm, I do tip 15% and I never thought about doing otherwise. Never wondered why 15% should be the magic number. Thanks for getting me to open my eyes....I don't even remember the days when 10% was a standard restaurant tip, though I surely must be old enough. I think my eating out back then wasn't really a possibility, so it wasn't something I ever thought about.

I was a waitress when that was standard...It was good enough for me then, is good enough for me now.