Higher Income Spending/Saving Strategies?

[disneysteve]

P.S., However, I do not have any debt or house payment. House has been free and clear for over 30 years.

This is a huge distinction.

If OP was debt-free and wanted to go out and buy a car for 65K+, I probably wouldn't have a problem with that. That isn't the case, though. This is someone with a $3,500 mortgage payment who sounds like he doesn't really have a good solid financial plan and roadmap for the future. Can he afford the car? Yes, probably so. Should he buy it at this point in his life? Probably not. I think some other things need to be taken care of first before indulging in a luxury purchase like that.

[snshijuptr]

F2point8, I think the main concern on this forum is the purchase of luxuries without a plan for future goals. I'm glad we have you thinking about your goals now. I think you're starting to figure out that its not about depriving yourself until retirement, but being on a steady sfae path toward all your goals by allocating money to those items. If there is money left over at the end of the month, then you can spend it on luxuries like this. I think after you sit down and look at your finances, you'll have a better idea of how stable you are and be more confident in your decision either way.

[minnie1928]

This paragraph gives me the impression you need to re-think your approach to money. You shouldn't be comparing your monthly mortgage against your friends that earn less. Just because they're living in debt doesn't mean you should be. $3500/month is gigantic, regardless of your income. I know it can be difficult, but try to keep an objective perspective.

The mortgage amount is completely dependent upon where he lives. When I lived in PA, that would have been a HUGE payment. However, in Northern NJ I wish I had a payment that low.

[EEinNJ]

Buy a Miata for $25K, all the fun and half the price. Need faster and 4 doors for the kids? Mazdaspeed 3 for the same price. But I'm biased, I have both!

Overall, I think the OP is in great shape financially. Applause for being sensible about it and asking yourself questions about values. So many struggle to make it, and when they finally do they don't know what to do with it- or worse, don't wait 'til they have it, and spend it all.

[tzsgti]

Just what is this dream job that pays $316k a year for 1.5 years experience, only works 30 hr/wk, gives 7 weeks vacation a year, is not too stressful, not on Wall Street, and is fairly secure? Doesn't sound like any small business or well-paid profession (law, medicine, engineering, big-5 accounting) that I'm familiar with.

Regardless, if you want to maintain the $18k/mo lifestyle to which you've grown accustomed, you will need to sock away about $5.4 million dollars for retirement. Are you on track?

I know we are getting personal but i am curious as to what it is as well.

[f2point8]

Just what is this dream job that pays $316k a year for 1.5 years experience, only works 30 hr/wk, gives 7 weeks vacation a year, is not too stressful, not on Wall Street, and is fairly secure? Doesn't sound like any small business or well-paid profession (law, medicine, engineering, big-5 accounting) that I'm familiar with.

Regardless, if you want to maintain the $18k/mo lifestyle to which you've grown accustomed, you will need to sock away about $5.4 million dollars for retirement. Are you on track?

In what way doesn't it sound like any of the well-paid professions? Just curious. I will say that we chose to live in a less desirable location (by many people's standards, including our own in some ways) for the foreseeable future for the sake of being able to have this lifestyle (in terms of time off) and income. Salary is played in part by how hard you are to replace, and having a relatively unique skill set in a less desirable location with a small population contributes greatly to my current situation of income and lifestyle/time off.

Judging by some of the responses I'm not sure I've conveyed the "lifestyle" we live now. Yes- 9K/month roughly is what we are spending monthly, but that includes what we donate monthly to various charities (totaling a little over $3000 per month, which might surprise some BTW, perhaps less so to others- not to toot my horn or anything since I hope with my life this posting is completely anonymous ), and a few small luxuries that I'd be happy to cut out and probably will shortly (like the extra movie channels on TV we don't even watch).The mortgage may sound disastrously high, but I live in a state and county that has huge property taxes- 5 times or more than other states I've lived in which adds tremendously to the mortgage payment. Not that we couldn't have chosen a smaller house, but my wife really likes this one, and that is important to her, less so to me. Since starting this job, the other ~50% of the monthly income has gone to get furniture for the home, a little remodeling, some travel, and savings. I wonder if I had made it sound like we are burning $18K monthly buying diamond-studded watches, etc. I still have the same wristwatch I got in school 8 years ago, the same daily loafers I got almost 2 years ago, and my wife and I still bargain shop for groceries, hotel deals, everything. So far we've just been trying to get established after living on very little the last 10 years. Now that the home is about the way we like it (and having furnished our home almost from scratch) we are trying to decide how best to spend the money we had been putting into the home. Again, the home is very nice and I enjoy it, but I would be happy in a smaller home with a smaller mortgage. My wife is encouraging me on the car probably in part because she knows I've worked hard to get to this point, and she knows that she is getting probably a little more satisfaction from the home than I am, and the car would be something that would give me something I really enjoy. It is something I could do without too, and if it ever came to a pinch I could let it go (or not get it in the first place), but I know it would certainly be fun have nonetheless I know I know how to be happy with much less than I make monthly right now. I also know that spending money doesn't make me any happier. But for me part of life is making some great memories, and I guess it is to each his own what kind of car/house/clothes/relationship/country/state those memories are made in.

We have found some very helpful advice here. We did find some used M3's that are about 2 years old with low miles, under warranty, listed approx 15K dollars under new prices. That might be an option we consider, or maybe just save a few more months and decide on something else, even if it is a 335i or 135i, which are both great cars as well. Infiniti has some great cars as well it seems, but they haven't really been on the list of "dream cars" for me, mainly because I didn't know much about them until recently.

[zetta]

In what way doesn't it sound like any of the well-paid professions? Just curious.

Most of the professions require long hours, anywhere from 45-90 hr/wk, especially in the early career-building years. Medicine has residency, law and accounting have crazy years where you work your butt off to make partner. Engineers don't make over $250k unless they start a very successful company. A woman who cuts back to 30 hr/wk after having kids takes a significant paycut and considers herself lucky to have the option. As for specialized knowledge, I'm neighbors with scientists in bio-tech, and they spend years in post-doc training and their initial starting pay is less than my salary as a senior engineer.

Judging by some of the responses I'm not sure I've conveyed the "lifestyle" we live now.

Monthly expenses (mortgage, 1 car payment, dining out, insurance, charity, utilities, etc.)=~$9,000-10,000 (usually less, but just rounding here)
Disposable monthly income ~$8000-9000

I read this to mean you were spending $9-$10k on mortgage, etc., and then another $8-$9k on "disposable" wants, for a total of $18k/mo. Not sure how much is going into your 401k.

If you're on track to reach $5.4 million by your desired retirement age, I see no problem with buying your dream car.

[f2point8]

My annual 401K contribution is 16500, plus another 19500 employer match, to a little over $35K per year. We plan to keep saving, and $3000 monthly averaged over the year would be very easy, $4000 with a little more restraint but still quite doable. One thing I do need to figure out is how best to invest the savings I am doing- it seems like everyone I talk to says something different. Without knowing what rate of return I can reasonably get, it is hard to know how much that would produce at retirement. Along the same lines, it is hard for me to gauge how much I'd really need at retirement, given that I'm assuming that we'd have met our goal to be debt free at that point. With no housing or car payments (or charity contributions), our monthly expenses are $1000-1500 (food, utilities, dining, etc.). Now add on top of that some money for travel, medical care, etc, and we haven't changed our standard of living much if we retire on 60-80K/year in today's dollars. What am I missing here?

Steve- I see you are quite the regular at posting in this forum, and I appreciate your insight. It seems that you thought my mortgage surprisingly high. I did notice on another thread you mentioned that your PITI (did I get that right- principal, interest, taxes, insurance?) was 13.5% of your gross income- did I get that right? I'm not trying to single you out here, honestly... I just got the impression you thought that was too much of my monthly income. The $3500 I quoted is PITI, which is 11.7% of the monthly income. Talking with my wife, I realized the mortgage itself is closer to a little over $2000 per month. Like I said, the "T" where I live is the gotcha.

By disposable monthly income, I mean money that isn't accounted for by any obligation and charity, and is outside of what we budget for living (eg dining out, movie rentals, groceries, etc.).

Again, I appreciate the help- whether or not we decide to get a third car of some sort, your posts have helped my thinking.

[disneysteve]

Steve- I see you are quite the regular at posting in this forum, and I appreciate your insight. It seems that you thought my mortgage surprisingly high. I did notice on another thread you mentioned that your PITI (did I get that right- principal, interest, taxes, insurance?) was 13.5% of your gross income- did I get that right? I'm not trying to single you out here, honestly... I just got the impression you thought that was too much of my monthly income. The $3500 I quoted is PITI, which is 11.7% of the monthly income.

I just reread my replies so far and I don't see where I said that. If something I said implied that, my apologies. That wasn't my intent. I think a mortgage payment that is 11.7% of gross is terrific. Overall, I think you guys are doing great. My concern is that there just seems to be a lack of a big picture plan going forward.

One thing I've said in many threads here is that once the basics are covered, I don't really care how the rest gets spent. It just doesn't matter. In your case, I want you to make sure that the basics are covered. Personally, we don't budget our day to day spending. It just isn't necessary for us to do so. We have 21% minimum of my gross income going to savings and 50% of my wife's gross going to savings. I believe that has us on track for a comfortable retirement at a reasonable age. As long as all of the bills get paid each month, I don't see any reason to worry about how the rest of the income gets spent. It might be on groceries or restaurants or travel or collectibles or charity or theater tickets. Doesn't matter because the big picture stuff is taken care of. For example, I haven't got a clue what we spend on food each month. Don't know. Don't care.

My point is that for you, if you have 20%+ going to savings and all of your other financial obligations are taken care of, buying a sports car might be perfectly reasonable. It probably is. I just wasn't quite convinced of that fact earlier in the thread.

Another thing that I often think is that certain expenses should pretty much be capped no matter how much I earn. Cars are a perfect example. Let's say I earn 100K and I buy a car for 25K. That's 25% of my income. If I earned 300K, the same percentage would have me spending 75K for a car, but that doesn't mean I should. I'd probably still spend the 25K or maybe a little more, like 30 or 35K and have it represent a much smaller percentage. My personal preference would be to drive the cheaper car, boost the savings rate and be able to retire sooner, but that may not reflect your own personal preferences and life goals.

[f2point8]

Steve, I appreciate your reply. One poster above did say the $3500 was huge (and by some standards it is, by others not as much), and I think I blended the collective replies, over-read between the lines (as I frequently tend to do) and assumed that most everyone was out to say I spent way too much on my house!

I think everyone has something that they put a higher value on. You are 100% correct in that for transportation purposes alone (and with a great deal of comfort) $25K is all you'd need to spend on a vehicle in most cases. But I think some people place a higher value on the other intangibles a car might offer than other people might value. When I lived in a location with more things to enjoy around me, I probably would have placed a car lower on the list. Where I currently am, I think I place a car higher on that list. I'll just need to make sure everything else is taken care of before I make that choice. That is probably what you have been saying all along.

[disneysteve]

I think some people place a higher value on the other intangibles a car might offer than other people might value.

Exactly. Personally, we love to travel. Some years, we've spent close to 10% of our income on travel. That's a lot. We realize that. I know other people who hate to travel. They don't like being in unfamiliar places with strange beds, unusual food, etc. To them, what we spend on travel seems outrageous. To me, spending 65K on a car is just nuts. To others, like yourself, it might be perfectly reasonable.

[zetta]

Now add on top of that some money for travel, medical care, etc, and we haven't changed our standard of living much if we retire on 60-80K/year in today's dollars. What am I missing here?

What you're missing is that you're probably not living a 60-80k lifestyle today, even after you subtract out the mortgage, charity, and dream car. You've been able to freely spend for furnishings, etc., and you may want to travel. I think you'd likely feel pinched. Today you want a dream car, once you have it other wants will come along. The options I see are to save for a retirement that replaces most of your current income, or to live today as if you only made 60-80k, save the rest, and retire early.

I'd suggest really analyzing your spending to see what your needs/wants/savings breakdown really is.

A rough guess at your numbers appears to be:
Gross: $316k
401k: $16.5k
Taxes & other deductions:$84k
Take-home (after tax & 401k): $216
Needs: $6k/mo = 72k
Wants: $9k/mo = 108k
Savings: $3k/mo = 36k

Normally the ratio is figured off your gross. Since you have such a large tax bite I think we have to count paying them in the needs catagory.

Needs: 84+72/316 = 49%
Wants: 108/316 = 34%
Savings: 16.5+36/316 = 16.6%

I'd say if you put $4k/mo to long term savings you'll be doing ok.

For retirement, check out this calculator:
Flexible Retirement Planner

[feh]

Another thing that I often think is that certain expenses should pretty much be capped no matter how much I earn. Cars are a perfect example. Let's say I earn 100K and I buy a car for 25K. That's 25% of my income. If I earned 300K, the same percentage would have me spending 75K for a car, but that doesn't mean I should. I'd probably still spend the 25K or maybe a little more, like 30 or 35K and have it represent a much smaller percentage. My personal preference would be to drive the cheaper car, boost the savings rate and be able to retire sooner, but that may not reflect your own personal preferences and life goals.

+1

In other words, just because you can afford to buy something doesn't mean it would be sensible to purchase it. That goes not only for cars but for homes also.

[disneysteve]

In other words, just because you can afford to buy something doesn't mean it would be sensible to purchase it. That goes not only for cars but for homes also.

Right. I think some of the rules of thumb we often hear are aimed at people of average income, not those of much higher than average income. In fact, I think the 50/30/20 breakdown should be adjusted for higher incomes because needs should take up a smaller percentage as income increases since many needs are relatively fixed amounts. For example, medical costs are the same whether you earn 50K or 500K. Putting gas in your car costs the same regardless of income. Groceries cost the same no matter what you earn. Sure, you may buy a better cut of meat or some more organic veggies, but overall, the cost isn't that much more.