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  • House poor!

    I want to know if you think we are crazy -- my husband and I bought a house in the San Jose area 7 years ago for $1.4 million and put about another $200,000 into it - pool, yard, painting, lights, cabinet refinishing, etc. We eventually ended up with 2 loans - a 30 year 1st currently at $911,000 which we just refinanced at 4.5%. The 2nd is a fixed 15 year mortgage at 6.89% - balance is $259,000. We couldn't refinance the 2nd since the house has gone down in value (maybe worth $1.4 mil -- a few years ago was closer to 1.9!)

    We've recently been working the Dave Ramsey plan and monitor our budget through Mvelopes (Finicity) which I think is a great program.

    Between the mortgage payments, insurance, property taxes, and other important payments (life ins., food, utilities, house maintenance, cash flowing 2 kids in college) -- we don't have much extra money. We also have about $60,000 in credit card debt. Own all our cars. Only about $10,000 in liquid savings. But....we have $1,000,000 in retirement funds (we are in our late 40s).

    My husband is a physician with a large group and it is doubtful he would ever lose his job -- although his income probably will not be going up due to the current state of healthcare in this country. We have more than adequate life and disability insurance if anything were to happen to him.

    I currently do not work but am planning on restarting my career in the fall -- this will take a while since I will be working on hours to become a licensed therapist (LCSW).

    While I know some people would say we should downsize the house, there are several reasons I don't want to do it. First, I would hate to sell at the low point in the market. 2nd - it's a great house in a good location and we have a 14 year-old special needs (moderate learning disability) child and envision someday having a live-in caregiver/housekeeper and maybe renting a room to another special needs young adult. It would also create a lot of stress to our kids if we were to sell.

    Any great ideas to free up some money? We make too much to qualify for any tax breaks on college tuition, medical expenses, etc.

  • #2
    You appear to be living beyond your means to have 60k in CC debt. If your home is more than 35%(30% or less is preferable) of your take home pay, you will likely be better off moving. You could give consideration to your possible increase in income once you begin working.

    If I were you, I would downsize ASAP. The housing market is only getting worse and will not recover for years. You will likely have to forfeit some of your retirement funds, but you are bleeding as we speak.

    I would be putting myself into a position where my housing is not more than 30% of take home pay, payoff the 60k in CC's and rebuild retirement funds as much as need be for providing a good living for my child.

    Comment


    • #3
      I appreciate your comments. A few more pieces of information:

      We are at about 35% for the mortgages.
      Only 1 more year of $25,000 college and he will graduate. The 2nd one is at Junior College and we have some saved for his last 2 years and he will be attending a state school, living at home and so it will cost significantly less.
      We have not occurred any new debt in the last year and are slowly paying off the CC's (will accelerate as we can).
      My husband is paid a draw and then reconciled later - December check is about double a typical month - so we should be able to knock out a lot of debt then.

      Comment


      • #4
        Originally posted by NorthernCalGal View Post
        Any great ideas to free up some money? We make too much to qualify for any tax breaks on college tuition, medical expenses, etc.
        My advice would be pretty simple, back to basics type advice: prioritize your budgeting efforts.

        What I mean by that is, list all your monthly expenses from largest to smallest - then evaluate the largest expenses first. Don't start evaluating generic soap, or clipping 25 cent coupons - start with the big stuff.


        For your 1st item - you would see 'mortgage.' If you are unable or unwilling to reduce your mortgage payment, move onto the next expense.

        For your 2nd item - how could you reduce that expense? If you are unable or unwilling to reduce expense #2, move to expense #3.

        Rinse and repeat.

        Though I would caution you that if you find yourself constantly saying 'nope nothing we can do about that expense' - that maybe you aren't considering cutting out as much as you truly could.


        For your housing expense:
        Is your 35% figure before or after taxes? that's 35% of take home pay like maat was saying, right? (35% of take home is a weakness, 35% of gross is a BIG weakness)

        Note that the recommended percentage is actually 28% of take-home. How much is 7% of your monthly pay? That's how much you are speculating each month that your house value will rise.



        And a million sounds great to most of us, but with a super-high income earner like your husband, that may only represent 3 years salary. That won't last you long in retirement.

        A $10k EF in your situation is woefully inadequate. That's not even 1 month's expense.


        I would highly recommend speaking to a CFP in your area: Certified Financial Planner Board of Standards Inc. - Search for a CERTIFIED FINANCIAL PLANNER™ Professional

        Comment


        • #5
          1st $6074/month
          2nd $2312/month
          Taxes - $1166/month
          Total = $9552/month

          35% = $27.3k/month either gross or net = $327k/year

          So typically there is a lot of disposable income leftover the higher the income. The main discrepancy is whether it's gross or net?

          I think it could work depending on what your other expenses are.
          LivingAlmostLarge Blog

          Comment


          • #6
            In the grand scheme of things, the house just sounds like too much.

            BUT, I am from San Jose. A $1.4 million home is not anything what most people here would imagine it to be. Most my friends and family in SJ spend well more than 50% of their income on their housing (& live in shacks).

            All that said, I don't see what difference it makes financially if you downsize the house. If you sell low and buy low, it doesn't really matter. Some of the lower priced homes in the area appreciate much faster anyway.

            I do think you are crazy, but all our friends and family are EXTREMELY house poor and seem content with that. We moved - there is so much more to life than paying that much money just for a place to live.

            Comment


            • #7
              I crunched the numbers based on what you have said. I concur with LivingAlmostLarge in regards to the numbers. Depending on whether you were saying gross or net figures, your household income is between $230,000 and $330,000 per year. Please note this is only an estimate.

              You have $10,000 is liquid savings right now. That is MAYBE one month worth of expense so you are not prepared for emergencies at all.

              As for the $1,000,000 in retirement savings- please do not even think about touching it! Leave it alone for now; you should only be tapping into your retirement savings under dire circumstances. These are NOT dire circumstances; you have options, however they may be painful in the short term. That $1,000,000 should be left alone so it can grow.

              If I were you, I would put retirement savings on hold for now. Meaning, I would not contribute anymore money to retirement until you get this mess straightened out.

              To put things simply, you have too much house. You said you are at 35% with your house; that is too much especially considering your large income. You need to seriously re-evaluate your housing decision and consider moving.

              Now, I know you said that your house was worth $1.9M but is now worth about $1.4M. Selling might be scary to you because you will probably end up selling for less than what you paid in the first place? That being the case, I want you to first understand that what you paid for a down-payment and what you paid so far on the mortgages are SUNK COSTS. These costs should not reflected in your decision making, so that is irrelevant. Based on your numbers, you could sell the house for approximately $230,000 over what you owe. The sale of your house will allow you to pay off the two mortgages, pay off credit credit debt, and put a down payment on a different house. This would mean a significant drop in housing, but this will solve most of your problems.

              Your other option is to liquidate some of that retirement savings and pay off the CC debt and 2nd mortgage. This would leave you with the 1st mortgage and approximately 23% of your income going to housing, which is MUCH more manageable. However, this option would weaken your retirement and result in some considerable opportunity costs as you would be unplugging a large portion of money from investments.

              Whichever option you choose, you have a couple of other things to take care of. First of all, you have to build up a liquid emergency fund equal to 6 months of expenses. You're at $10,000 so you have a ways to go. You also need to get on a written budget and manage your money properly. That $60,000 in CC debt tells me that you have had some serious budgeting problems. If you do not get on a written plan, your debt will simply grow back after you pay it off.
              Check out my new website at www.payczech.com !

              Comment


              • #8
                You may have already thought about this but why not let your kids pay for their own college? Could they take a loan out for their education? You could always help them pay off that loan in the future once you get more stable.

                Comment


                • #9
                  Sorry for your situation OP. I don't have any specific additional advice other than what the others have already said, but I do think your situation is a prime example of how unfair the current tax system is. The current system does not take into account how high cost of living and housing can be in one area compared to another which is just plain wrong. For you not to be able to deduct tuition costs is just plain wrong also, especially considering how much you are paying out of pocket. Hope things work out for you.

                  Comment


                  • #10
                    It is not really such a bad pit you have there. Just a little adjustment on the needs spending and you will be able to free up some. Dave Ramsey's advices are good. But have you tried another?

                    Comment


                    • #11
                      Originally posted by NorthernCalGal View Post
                      Any great ideas to free up some money?
                      If you would post your income and expense information, we could help answer this question for you.

                      It does sound like you are house poor from what has been said so far. It is sometimes impossible to overcome that no matter how frugal you get in other areas of your life, but without seeing actual numbers, that is impossible to say.

                      I am very curious why you have $60,000 in credit card debt and why you only have $10,000 in savings.

                      Remember, the rule of thumb for housing is that your monthly payment shouldn't exceed 28% of your income. It sounds like you are way over that. Sounds to me like you overbought on the house. If you earn $350,000 or in that area and you paid $1.4 million, that's where you went wrong. Now you are trying to fit everything else into that situation.
                      Steve

                      * Despite the high cost of living, it remains very popular.
                      * Why should I pay for my daughter's education when she already knows everything?
                      * There are no shortcuts to anywhere worth going.

                      Comment


                      • #12
                        It may not be enough to fix the situation completely, but you could try to start out with the basics: a revised budget, and try to plan inexpensive meals using coupons. I don't know about you, but one of my major costs every few days- not even weekly - are groceries. If you can learn to use coupons and shop sales, it just might help put a dent in your expenses. Good luck.

                        Comment


                        • #13
                          To clarify:
                          Gross earnings between $450,000 and $500,000 the last few years.

                          1st mortgage: $4700
                          2nd mortgage 2911
                          Property taxes: 1550
                          Insurance: 270

                          We are putting in the 16500 into 401K but the medical group has a pre-tax cash balance plan - they add double our contribution before they distribute earnings. So we are locked into that.

                          Other big items in the budget (monthly):
                          College - approx. $2,000 (University of California is no longer a deal!)
                          Flex Spending Health Care $400
                          Life Insurance $300
                          Credit cards $1200
                          3 cars - gas/maintenance/insurance
                          And all the rest that goes into supporting a family of 5. Food, clothing, pets, utilities, pool and yard maintenance, charity giving, special needs horseback riding, occasional vacations,

                          Much of my husband's pay gets distributed in quarterly extra distributions and towards the back end of the year as they meet their projected goals. So, for, example, the first few paychecks we net about $18,000. We ended up with a big check at the end of last year but didn't do our tax planning well and had to pay $15,000 in taxes.

                          Also made some big ticket purchases over the last few years using cash - $30,000 car; $30,000 solar roof system (will break even in cost of electrical at year 7); $15,000 fake lawn in back yard (dogs were ruining real one -- high cost to maintain it). I know we made some bad decisions in the past. I'm hoping we can hit those credit cards hard by the end of this year.

                          As far as a safety net, the docs earn paid sabbatical time and always have several weeks in the "bank" - so if there were a disability we could pull from that to cover til the benefits kicked in. My husband in a very secure position in the group and it would take a huge scandal or other unlikely crazy occurrence to jeopardize his job.

                          We do not see cashing the retirement savings as an option.

                          We paid $108,000 in Fed taxes last year and $34,000 in State.

                          MonkeyMama - I appreciate your understanding of this area. We are in the Cupertino school district which they all know about in China and India.

                          As far as college goes, we made a commitment that we would pay for undergrad. My dad told me that, but got loans in my name, ended up divorcing my mom and remarrying someone with younger kids. Stuck me with the loans. I don't want to do anything like that and don't want to go into any more debt - so 1 more year of cash flowing college and the rest should be o.k.

                          Also - we do have about $30,000 in the bank but only $10,000 earmarked for savings - the rest is earmarked for property taxes, life insurance, and other things that don't get billed monthly but we set aside the money monthly so we'll have it when the time comes for the bill.
                          Last edited by NorthernCalGal; 05-10-2011, 08:32 AM.

                          Comment


                          • #14
                            The math so far:
                            Income:
                            $450,000 (low end of gross)
                            -142,000 (federal and state taxes)
                            -16,500 (401 k contribution)
                            --------
                            $291,500 net
                            = $24,300/month ($18,000 is the lowest received but the average is $24,300)

                            Monthly expenses:
                            $9431 (mortgages, insurance, etc.)
                            $2000 (college tuition)
                            $ 400 health care
                            $ 300 insurance
                            $1200 (credit card payments)
                            --------
                            $13,331

                            For the average month:
                            $24,300 net pay
                            -13,331 listed expenses
                            -------
                            $10,969 leftover for what you say are your "other" expenses of food, clothing, gasoline, car maintenance, pool and lawn maintenance, vacations, pets, utilities, etc. How much are you spending per month on those things?

                            Your leftover cash is more than our family's net take home pay and, other than the cost of pool maintenance and pets, we still have to pay the same expenses as you (food, clothing, gasoline, car maintenance, lawn maintenance, vacations, etc.).

                            For our family of 4 (kids 9 and 12), 2 cars and a 2200 sf house on a one acre lot we spend $2150per month total for: food, eating out and entertainment, children's activities, utilities, charitable giving, clothing, yard maintenance, gasoline, car maintenance, and vacations.

                            We don't have a pool or pets. We have one less car and one less kid, and our kids are younger. Our house may be smaller than yours. If you double what we pay for all of these things, that's $4300/month -- which would still leave you $6000 of leftover cash on average per month.

                            You need to come to grips with what your real budget is. Where is your money really going?

                            Comment


                            • #15
                              Originally posted by frugalgirl View Post
                              $10,969 leftover for what you say are your "other" expenses of food, clothing, gasoline, car maintenance, pool and lawn maintenance, vacations, pets, utilities, etc. How much are you spending per month on those things?

                              Your leftover cash is more than our family's net take home pay and, other than the cost of pool maintenance and pets, we still have to pay the same expenses as you (food, clothing, gasoline, car maintenance, lawn maintenance, vacations, etc.).

                              You need to come to grips with what your real budget is. Where is your money really going?
                              This is an excellent point and something you really need to take a look at. Most day to day expenses are regressive meaning they have a greater impact on people who earn less money. A gallon of gas is $4 whether you earn 20K, 200K or 500K. A gallon of milk is $3.50 no matter how much you earn. With an income of 500K, you should be sitting pretty with a huge savings account and tons of disposable income. The fact that you are not points to a problem with that "other" category of your budget. Remember, median income in this country is 50K, one-tenth of what you guys earn. Even in a HCOLA, you should have no problem being debt-free and investing heavily on your income.
                              Steve

                              * Despite the high cost of living, it remains very popular.
                              * Why should I pay for my daughter's education when she already knows everything?
                              * There are no shortcuts to anywhere worth going.

                              Comment

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