
I was assisting a lender in evaluating private loan applications and we came across two sad and surprising situations. There are two real couples in their early 50’s, one couple has blue collar jobs in the country and one couple has white collar jobs in the city, but both are sprinting toward financial calamity. Both couples earn a high income but are confused about why they cannot save a penny for an emergency fund, let alone a retirement account. It is an easy problem to diagnose: neither couple is willing to control their lifestyle spending. They are behaving just like 20% of Americans who spend more than they earn; according to a 2014 study by the Federal Reserve.
Couple A: their combined income is a little over $110,000, she is a nurse and he is a machinist. Their combined income is a lot of money for the rural area in which they live. So where is their money going? They both drive brand-new leased pickup trucks, and lease new ones every two years. They rent their home and it has an outbuilding chocked full of toys: jet skis, a boat, snow mobiles, and ATVs. But all of these toys are purchased on credit, they have no equity in anything they own. Each summer, they rent a cottage on a lake for weekend trips.
Couple B: their combined income is a little over $140,000, she is a professor and he works at a consulting company. Their combined income doesn’t go as far in their expensive city, but it should be far more than adequate to support this couple who have no children. So where is their money going? To appear successful, they rent a much larger apartment than they can comfortably afford. They eat out every single night, normally at expensive restaurants with their friends; and shop without a thought to the cost. They take at least one very expensive vacation each year.
Both couples have very different lifestyles but their finances are identical: no home ownership, no savings at all, no retirement accounts, and large credit card balances. The country couple don’t see a big financial problem yet while the city couple is beginning to suspect there is something wrong because their peers are talking about affording an early retirement. Both couple A & B have the same problem: they spend all of their income, and sometimes more. This leaves no extra money for normal expenses like maintenance, savings, emergency fund, vehicle replacement, or retirement.
Most people are unaware of financial ratios, savings targets, or where to get personalized advice on these matters. Only when finances reach a breaking point do most people re-assess their spending to appropriate levels for their income. Please follow the model of the financially literate by living below their means and actively map out their financial life to avoid any financial crisis in the first place.