this post was submitted on 01 Oct 2023
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Can confirm, I only have a low rate mortgage and otherwise no debt. I bought my cars with cash, worked my way through school, etc, and I have a comfortable savings. We're not rich, we just don't piss away our money to interest.
Honestly, if you can avoid credit card interest and make an average income, you can probably afford a home by your 30s in most of the US.
I don't think that's even remotely the case for the vast majority of the workforce. It takes an incredible position of privelege to think otherwise.
For the average US citizen, they have a spare ~$200/month (see my comment history for context) the median US home price is $420,385 according to redfin. That means your closing costs (4%) + minimum down payment (3.5%) for an FHA loan would be (.075 * 420385) $31,528 which would take 157 months assuming you had no emergencies or extra expenses at all. Leaving you destitute to pay your mortgage on a home which will have inevitably increased in price since you started saving.
It's a pipe dream for most US citizens, everyone has surprise expenses. People lose jobs, people buy things for leisure (what's the point of living if you don't?) Once they spend their 13 years of perfectly saved money to buy the average house, how do they afford the inevitable expenses? Save another 13 years to pay for another roof? Unfortunately now they have a mortgage which will be more expensive than their rent.
I assume the context you're talking about is this article:
And then you estimate the income as being ~$6275 or so, hence your $200 extra number.
That figure seems to come from this study by BLS. Instead of taking that number at face value, let's take a look and see where people are spending their money. The following is for a 4-person family unit, because that's the default for the USDA food plans (dollar figures assume $6083 per month to expenses):
What stands out to me is the insane amount of spending for transportation. Here's what I estimate, assuming two cars and excluding acquisition costs:
So let's assume $300/month for both, that means people are spending ~$800/month on acquisition and maintenance. That's nuts! Over 10 years, that's ~$96k! You can buy a new car for $25-30k with a 10 year warranty, so something doesn't add up. If you finance new cars, you're usually forced to get comprehensive insurance, so not only are you paying a high finance charge (including interest), you're also forced into a higher insurance payment.
My strategy is to buy quality older cars and keep them for 10 years or so. For example, I bought one car ~9 years ago for $10.5k w/ ~60k miles, and I've spend <$5k total (probably $2-3k, I DIY pretty much everything) on repairs and maintenance. But let's say I actually spent $5k, that means my average monthly expense is ~$140 for acquisition and maintenance. Double that and I'm under the average expenses in a car by almost half ($300/month for insurance+gas and $300/month for acquisition and maintenance, so $600 vs ~$1100).
So just with that, we can increase the savings per month by $500, meaning $700/month saved. To get that $30k down payment would take ~4 years. That's totally reasonable.
I think people on average just don't know how to follow a budget, save money, etc. I really don't think we have an income problem in the US (at least for the median household), we have an education and priorities problem.
If you have actual numbers for a household, I'd love to go through it because I've made a ton of assumptions here.
I don't disagree that spending less on transportation helps to save for a down payment. Finding inexpensive and reliable cars is not an easy task, but for people who were lucky, like myself, to find one it makes one chunk of the budget easier to stomach.
I own a home, so I'm not speaking from a place of woe is me, but from a position of empathy.
Don't forget you have to qualify for your mortgage, even if you have a downpayment. Lenders will let you spend up to a max of 43% (and most far less than that) of your pretax income on your mortgage payment. If you're the average household, 6275 * .43= $2698.25 monthly maximum payment. The average home price is $420,385 as we established earlier. Minus our down payment you could almost (but not quite) afford the loan with a PITI of 43%, the new payment would be around $2700/month with interest rates as they are today around 7.5%. But let's say you are above average income wise for the sake of the narrative.
Oh shoot, $2700/month? That changes our household budget, now you're spending at least an extra $800/month not including maintenance, utilities, and the many other expenses that come with home ownership. If you take that money out of your transportation budget you're left with $300/month, hope you don't have any surprise expenses! If your property taxes go up you have to give up something to afford it. Lose your job, lose your house. Paycheck to paycheck for the next 30 years, sounds like a nightmare to me.
On top of that affordability is getting worse, living expenses are rising, wages aren't rising as quickly, the average person who didn't luck into a home already will be less and less likely to afford one.
In my area, the average is right around $450k, so I think we're pretty representative of the rest of the US. I did a quick search, and I saw a dozen or so listings for townhouse around $300-350k. If we look at the top end, with a 20% down payment ($70k), the mortgage+HOA is ~$2500/month. If we look at the bottom end, it's ~$2300. I even see one as low as $2k/month. Note, this doesn't include utilities or maintenance. So for an average household income of $6275, we're looking at 30-37% of your income for the mortgage + HOA.
Rent for a similar place (2-3 bed, 2 bath) is $1500-2000. So it is currently cheaper to rent in terms of cash flow, but buying keeps your payment constant (inflation will be on your side) and builds equity, so longer term it should still be cheaper to own vs rent.
Are you assuming a massive $800/month transportation budget or something?
Let's assume $6275/month income, here's a budget that I think makes sense:
So, the major expenses come out to ~$5100/month. Add in another $500 or so for other stuff, and $5600 is a decent spending estimate. That leaves $600-700/month for savings, or 10-11%. Typical retirement savings goal is 10-15%, and that could be met by trimming some of these expenses by $200-250/monthn (a lot of that is taxes if going for pretax investments).
So yes, mortgage rates and property values certainly make things difficult, but I hope I've showed that it's not as hopeless and many people assume. I think the average household could own a house and still save 10-15% of their pretax income. They'd need to drive older cars, but nothing unreasonable (5-15 years old; both of my cars are 15+ years old and have minimal maintenance costs).
Unfortunately, the average person seems to suck at budgeting, which is why I say it's more often a budgeting problem instead of an income problem. The important thing is to establish good budgeting habits early, and then the focus should be on increasing income. Ideally, as your income rises, your spending doesn't rise as quickly, so you end up with more cash flow as you get to the point where you want to invest in a house.
Bingo. But people don't want to hear that the problem is themselves, it's far easier to complain about and blame other people.
Exactly.
I can point to plenty of extreme examples of rich people losing everything because of poor financial planning, such as lottery winners, sports stars, and trust fund kids. You can't outearn a spending problem, and you can often outsave an income problem. Most millionaires are also frugal, and that is extremely interesting to me.
For example, my brother retired super early because he was extremely frugal, and now he lives on a pretty typical average income in terms of regular spending (though his house certainly isn't typical). He's a millionaire, but he lives on someone like $60k/year. Why? He doesn't see value in spending more money, so he stopped working as soon as his savings growth outpaced his spending needs. He had a great job (actuary, eventually became VP), and he decided to retire at 40 after living in $50-60k/year or so and earning more than double that.
On the flip side, my cousin lives in a higher cost area than me and they're in a single income household making a mediocre salary (social worker, so something like $70k in a higher cost area). They own a house and are on their way with retirement savings, and they do this while having four kids. Part of their plan is to live near family so they have free baby sitters, inexpensive vacation options, and someone to help with household projects. I'm guessing they spend about $50-60k/year just like my brother. They'll probably work until normal retirement age and have a healthy retirement.
So I look at these examples and can't help but think that money problems are often symptom of poor financial education or mismatched priorities, or both. Occasionally there's a legitimate income problem, but if you're making around an average income, it's usually a budgeting problem.
So I'm getting closer to 30 so I think this relates to me and my experience well to share.
I've been paid a pretty reasonable pay middle class+ generally just shy of that perfect $70,000 of legend on average. Managed to pay off my absurd credit card debt from college and stopped payments on my college loans. I don't have a car I bile to get around and am generally frugal and had my company helping pay for a lot my stuff
I had about $11,000 pre COVID and that was practically all wiped out during the worst of it because Florida didn't believe in unemployment. At which point I was 26ish.
I think pre COVID I may have actually managed to hit over $30,000 by early 30s enough to actually put down on a house.
I now make over $70,000 a year... I have saved about $2,000 this last year living the same frugal life, still no car, still no debt payments really... I don't think your math works anymore. It's so completely soul crushing now how fast I went from doing ok to being in a gutter.
What are the main differences? If you don't mind, could you share your budget?
I know housing has increased a ton recently, but according to BLS data it isn't that much higher (like 10-15% from 2020 to 2022, which is high, but not "end of the world" high). Food has increased a lot, but food away from home has grown a lot faster than food at home, so I'm thinking there's a difference in what people eat (e.g. more delivery than before perhaps?).
I'm fortunate because I bought before 2020, so my housing costs are largely fixed. However, running the numbers with local data still indicates that buying is feasible, it'll just take longer.
In Florida, rents and house prices have increased way more than 10-15% in the last few years, where are you? We bought our house in 2020, the house across the street (slightly smaller and less yard but comparable) sold for 54% more than we bought ours for; and that price was in line with the other houses being sold.
I really thought we were buying at the peak when we did buy the house, assumed it would decrease from what seemed an outrageous amount (double what the previous owners paid in 2010) but it's about impossible now for most. Everyone I work with rents, unless they had a house before I did.
I'm in Utah, and we're in the same situation (our house doubled since we bought, which was ~9 years ago). The numbers I cited are national though, so obviously it'll lose a bit of nuance that's more relevant to specific states, and numbers can vary wildly from city to city. Also, other expenses can vary wildly as well, such as auto insurance being much more expensive in Florida (from what I hear) vs Utah, despite both being no-fault states.
But even in my area, there are still affordable houses. Mine may have doubled, but houses just 15 miles or so away haven't increased nearly as much.
Well the most obvious difference is rent and utilities and food.
My rent went from 1550 a month for a small condo in Florida to 2600 because my landlord sold the unit to a new owner who went out of their way to fight me on the price and make the few months I was under them pretty awful. (They offered to go month to month while we figured it out and after the first month raised the price by a shit ton) So then I spent a good amount of money having to move all my stuff (which I did take the bold decision to pay a couple grand to completely leave the state in order to save on rent) but I'm in a cheap rent city with abundant housing and am still paying more at about $1850 months now plus $250 in utilities each month and about another $180 for phone and Internet since it's not like I have a family plan.
I do really like to eat more than hotdogs and try to be healthy but it means I spend probably about $600 a month on food even cooking at home 5 nights a week.
Part of the massive loss of money has been trying to move to find work, cheaper rent, and a state that might treat me better.
I have an HSA that doesn't have any matching from my job because I work tech which means I'm a contractor that is owned by a company in India making a lot off of me and I thought I would put $250 a month to my 401k but it's not matched either and is just a waste of money since it won't amount to anything when I retire.
Then I now have to pay $175 for student loans and about $50 for credit card debt cause I'm trying to raise my credit score.
I definitely feel like I should be saving more per month than I am but actually don't know where it goes. Public transit isn't cheap actually, but I doubt it is eating my income. I think it's just costs of like, getting a passport renewed cost hundreds, tooth filling fell out and dental work cost hundreds, we got fleas from buying used items and treating cost a couple hundred. Just things just one issue at a time eat into what I have
Paying credit card interest doesn't increase your score whatsoever, paying your bill on time does. Just pay whatever is due (statement balance, not minimum payment) and you'll get positive payment history. Don't waste money on interest.
It sounds like you need a budget. Track every penny so you know where everything goes. Worst case scenario, you don't find any waste, but you do know where your money is going.
I do that and make corrections every so often. I'll realize I'm spending more than I expected at restaurants, or my car insurance went up, or whatever.
Perhaps it's time to look around for a new job. I don't know what you mean by "work tech," but surely you're worth more than whatever they're paying you (you can at least get better benefits). I also don't know if you're Indian or American, but I do know plenty of companies can handle immigration paperwork (e.g. mine does, we have plenty of people who used to work at InfoSys at my org).
Right now is a rough time to look, but there are opportunities everywhere.
Good luck! I hope you can get into a more comfortable financial situation.
That rent hike is insane, I'm sorry that hit you. Not sure if you're looking for suggestions, if not ignore my message.
All those numbers seem right, except maybe the internet/phone adding up to $180 - I use mint mobile, which has you pre-pay, but can be as cheap as $15/month. Also make sure you're calling into your ISP and asking for promotions - unless you're under special conditions, internet shouldn't be more than $75/month.
This part I'm less sure about without knowing deets like what rate your student loans/cc are at, but I think you have the right idea with not paying into your 401k when you have outstanding debt, which is an inverse 401k. If the interest rates are manageable I'd first ensure you have an emergency fund of a few months cost of living, then put that towards paying off debt faster.
LoL yeah the rent hike was killer and I have since decided to try and do better so I'll be trying to get a rental acquainted real estate agent and do lots of my own searching in a month. I think I might be able to get back to 1600 at least and I have a GF to help split costs now.
Phone plan is from getting scammed by Verizon and I know it's awful but I need to let about another year go by so I don't get forced to pay them like a thousand straight out for my phone. After ill probably move to mint or whatever, maybe Fi, anything that's cheaper. My home Internet is actually the cheap part at like $55 for gigabit fiber.
And student loans are just gonna be a fucked thing forever. It was a private loan cause my dad said it would be a smarter idea to go with his bank and it has a variable interest that i thinks is up to 18% now on..... so yeah I just find the minimum I can (which is more than 0 now cause I get paid enough) but yeah I'm trying to make sure I can have 3 months of rent and cheap food costs in my account but it means I really won't get enough to put a down payment on stuff to get a car or house.
Edit: I'm just realizing it really might be a good idea to see if literally anyone else is willing to give me a loan for the amount of my outstanding student loans just so maybe i can get a fixed rate
Refinancing that is an EXCELLENT idea especially at 18% interest rate. That shit should be illegal and sounds downright predatory...
That's not a cheap rent city. You're in a higher priced area. My area is a lower cost of living area. Rent is under $1,000/mo unless you want to live in a luxury high rise by the water.
I pay $80/mo for Internet on one of the higher plans and $45/mo for a cell phone plan. Total $125/mo. How is yours so much higher?
This is where tracking your income and making a budget comes in.
Where exactly are you spending your 70k that leaves you with only 2k at the end? Especially when you're not paying off debt? Genuinely curious.
When I hear about middle class people struggling to pay the bills, I'm always curious what their lifestyle looks like and where they are spending their money. Literally today I saw a news article that broke down a family's monthly expenses like this:
$1700 rent
$800 payment for two cars
$400 insurance
$250 phone
$60 internet
food paid for with whatever's left
The big thing that stood out were the cars. They obviously bought some brand new cars that they couldn't afford. If they sold those and replaced them with beaters their budget would be solved.
The worst part is, the news article was trying to paint this example as proof that the economy is ruined and only new laws can save us.
Who the fuck is paying $250/mo for their phones?? I literally pay $20/mo. Unlimited voice and text, 5gb data, and pay as you go past that. But I'm on WiFi almost all the time so I've never used a lot of data.
Or does that include the cost of buying a new phone? A new android phone is like $500 and lasts probably five years. Doesn't add up
I'm assuming they financed a flagship smartphone through the cell provider. Still a pointless waste of money
The phone also stands out.
$250/month is just nuts! We pay like $30/month for two lines, though I could see up to $60/month for two lines being reasonable (unlimited data at Mint for two lines). We spend about $500 every 3 years or so for phones, so add in ~$30/month to save for that, round a bit for taxes, and you really shouldn't be paying more than $100/month for two lines.
Insurance also seems high. We pay ~$50/month for two cars, though they're older cars and we are in our 30s with clean records, so we've got that going for us.
So since I don't have a car payment, have inexpensive insurance, and don't pay out the nose for my phone, I save like $1400/month vs those numbers you quoted. So if the average person actually spends that much (I doubt it), by cutting out some unnecessary expenses, they could buy a house.
I'm not sure if this is really representative of everyone, but it's telling that the news decided to use that example when trying to convince viewers the economy is bad. I'd love to see more research into middle class spending habits, as I suspect that predatory lending and consumerism cause problems more than inflation.
Agreed. For now, you can check out the BLS data here. The categories leave a lot to be desired, but I think it's still interesting. Specifically, the amount people spend on transportation is terrifying, and that's definitely on the "predatory lending" end of the spectrum.
We have clean driver records and paid off cars, and insuring 3 cars 4 drivers is running $900 a month for us here. That is car insurance alone, no car payment. Phone we do pay $200 but it's covering 8 people, calls text unlimited data on 8 phones so if we made the kids pay could reduce that to about $50.
But your $50 car insurance is unusual. And not everyone can get a rate like that while simultaneously living close enough to work to manage the rest of the transportation expenses.
I don't think it's that unusual in my area. I've never paid more than $450 or so for 6-months of coverage on two cars, and I've been with multiple insurers. Granted, I get liability only, but comprehensive coverage isn't that much more expensive (esp. on the older cars I drive). Something different is happening in Florida that isn't happening here.
And I don't live that close to work, my commute is ~25 miles each way. I live in the suburbs and work in the city.