Just a 46-year-old mom of 2 in Northern California. My kids are Monkey Monkey(MM) and Drama Llama (DL). I am married to Monkey Hubby (MH).
http://www.bankrate.com/brm/news/retirement/20071003_persona...
I posted an older article recently; the same points and topic. But this was an updated article at bankrate.com this week.
I am still stuck on this part:
"At age 30, one should ideally have a savings-to-income ratio of 0.1, or 10 percent, and a debt-to-income ratio no greater than 1.7, or 1.7 times your income. Translated into dollar amounts, this means that a 30-year-old with a household income of, say, $50,000 should have $5,000 in savings and an overall debt no greater than $85,000."
Seems extreme to me, and I am not a debt lover by any means.
Of course his reply in this article is as follows:
"People might find that the recommended debt levels are not achievable given the average cost of housing -- this is one reason why many cannot afford to sufficiently save for retirement," says Farrell. "As financial advisers, there is little we can do about the cost of housing, but we can help our clients understand how housing costs may affect financial security."
True I guess, but living where housing has always been insane, you have to suck it up. I tend to notice that people back home are much more fugal (out of having little other choice in order to afford the roof over their head). BEcause of that lifestyle, people can easily afford much more. Of course dh and I drew the line twice at having a mortgage no more than 4 times our income. & we drew the line FAR lower than most people around here. To someone in say Kansas, we are crazy (yes I have many relatives there who think we are crazy.
). But it's all relative I guess. Out here we are cheapskates. LOL. But I have never felt we were stretching it to have such a big mortgage.
There are many reasons why and many factors not considered in this "1.7" ratio:
1 - Interest Rates (very low these days which means you can borrow more for less).
2 - Income Tax Rates (& of course income tax deductions which means the mortgage we pay is not nearly so high once you consider the tax breaks for said mortgage).
I keep reading about how few people get real tax breaks for their mortgage. Um, in Cali pretty much every does.
Also, our income tax rates have been extremely low this entire decade. More disposable income for the mortgage. MUCH more.
3 - 2-income versus 1-income status. 4 times might have been high, but was not including 2 incomes. We never relied on that. On the flip side we could get our ratio down to a solid 2 if dh got a job but I am not sure we would be any better off financially. We would have work expenses, daycare (VERY expensive out here) and our tax benefits would go down considerably. We would be slammed by AMT for one. Could we be better able to afford our mortgage in that case? Not sure it would make much difference. Not to mention that would not help our stress levels and medical expenses are bad enough as is. But seriously.
4 - It really depends on the type of debt. I think it is expected young people will have more high-interest debt. If all you have is a mortgage with a low rate, I imagine you can afford more.
As evidence by the fact that all the other ratios mentioned would be very easy to surpass in our case.
10% income saved by age 30? How about 100%?
Pay off your mortgage by 65? We were planning 45. Even if we never prepaid a dime we'd be debt free by 55. No plans to take on any MORE debt this lifetime.
& so on...
Of course, he does mention the 28% house expenses to income ratio (or did in the last article). I think that is probably much more relevant. We've pretty much always been in that range, and that was always more our measure of affordability than the dollar amount of our loan. (Though for long term thinking I don't think the ratio is bad. We try to keep in mind that if we were ever forced to move there is no guarantee we would get such a good interest rate again, and we are trying to up our savings considerably in anticipation of higher income tax rates, etc. Just because it is good now doesn't mean you should assume it always will be - for sure).
I also heavily agree the ratio should go down with time. The age we expect to pay off our DREAM home is the age many people like to upgrade their home, etc.
Anyway, this article goes on about starting young and the power of compounding as well. Good for the young people.
---------------------------------------
P.S. BM is watching TV and just told me we HAVE TO get a TV in our car. I guess he has never noticed those on the road before, but just saw a commercial. He is amazed that people would have TV in their cars and think that would be cool. He looks like a kid on Christmas Day - what a find!!!! Dh and I aren't going for it. Sorry buddy. LOL. Darn commercials...
I posted an older article recently; the same points and topic. But this was an updated article at bankrate.com this week.
I am still stuck on this part:
"At age 30, one should ideally have a savings-to-income ratio of 0.1, or 10 percent, and a debt-to-income ratio no greater than 1.7, or 1.7 times your income. Translated into dollar amounts, this means that a 30-year-old with a household income of, say, $50,000 should have $5,000 in savings and an overall debt no greater than $85,000."
Seems extreme to me, and I am not a debt lover by any means.
Of course his reply in this article is as follows:
"People might find that the recommended debt levels are not achievable given the average cost of housing -- this is one reason why many cannot afford to sufficiently save for retirement," says Farrell. "As financial advisers, there is little we can do about the cost of housing, but we can help our clients understand how housing costs may affect financial security."
True I guess, but living where housing has always been insane, you have to suck it up. I tend to notice that people back home are much more fugal (out of having little other choice in order to afford the roof over their head). BEcause of that lifestyle, people can easily afford much more. Of course dh and I drew the line twice at having a mortgage no more than 4 times our income. & we drew the line FAR lower than most people around here. To someone in say Kansas, we are crazy (yes I have many relatives there who think we are crazy.
). But it's all relative I guess. Out here we are cheapskates. LOL. But I have never felt we were stretching it to have such a big mortgage.There are many reasons why and many factors not considered in this "1.7" ratio:
1 - Interest Rates (very low these days which means you can borrow more for less).
2 - Income Tax Rates (& of course income tax deductions which means the mortgage we pay is not nearly so high once you consider the tax breaks for said mortgage).
I keep reading about how few people get real tax breaks for their mortgage. Um, in Cali pretty much every does.
Also, our income tax rates have been extremely low this entire decade. More disposable income for the mortgage. MUCH more.
3 - 2-income versus 1-income status. 4 times might have been high, but was not including 2 incomes. We never relied on that. On the flip side we could get our ratio down to a solid 2 if dh got a job but I am not sure we would be any better off financially. We would have work expenses, daycare (VERY expensive out here) and our tax benefits would go down considerably. We would be slammed by AMT for one. Could we be better able to afford our mortgage in that case? Not sure it would make much difference. Not to mention that would not help our stress levels and medical expenses are bad enough as is.
But seriously.4 - It really depends on the type of debt. I think it is expected young people will have more high-interest debt. If all you have is a mortgage with a low rate, I imagine you can afford more.
As evidence by the fact that all the other ratios mentioned would be very easy to surpass in our case.
10% income saved by age 30? How about 100%?
Pay off your mortgage by 65? We were planning 45. Even if we never prepaid a dime we'd be debt free by 55. No plans to take on any MORE debt this lifetime.
& so on...
Of course, he does mention the 28% house expenses to income ratio (or did in the last article). I think that is probably much more relevant. We've pretty much always been in that range, and that was always more our measure of affordability than the dollar amount of our loan. (Though for long term thinking I don't think the ratio is bad. We try to keep in mind that if we were ever forced to move there is no guarantee we would get such a good interest rate again, and we are trying to up our savings considerably in anticipation of higher income tax rates, etc. Just because it is good now doesn't mean you should assume it always will be - for sure).
I also heavily agree the ratio should go down with time. The age we expect to pay off our DREAM home is the age many people like to upgrade their home, etc.
Anyway, this article goes on about starting young and the power of compounding as well. Good for the young people.
---------------------------------------
P.S. BM is watching TV and just told me we HAVE TO get a TV in our car. I guess he has never noticed those on the road before, but just saw a commercial. He is amazed that people would have TV in their cars and think that would be cool. He looks like a kid on Christmas Day - what a find!!!! Dh and I aren't going for it. Sorry buddy. LOL. Darn commercials...