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]

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]

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]

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]

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]

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.