High income/high debt thread - Page 2

[crayfishgirl]

Originally Posted by erigeron 

Hmm... from a certain standpoint that does make sense. I am of two minds about it. And I do plan to pay off the higher-interest student loans first. The flip side for me is just that being in so much debt makes me nervous. It makes me feel like if something goes wrong, somebody else actually owns the rights to my life and can take away things that are important, or claim my income, or ruin my credit. I suppose if we were debt-free we'd still have that with water bills and stuff, but that's paying for stuff we're using as we use it, so it feels different. If we owned our house free and clear, it wouldn't matter if one of us lost our job--and if I hated my job, I could quit without stressing out about having another one lined up. 

Plus, on our current accelerated payment plan, we'd have the house paid off before our kids are in college, which frees up some income for tuition. 

I know exactly where you're coming from, and I contemplated getting a 15 yr term mortgage when we refi'd recently.  I read several articles that said otherwise, and since it would have been a push for us we went with the 30 year.  Anyway, here's a couple that may be of interest to you (and others here). 

http://www.forbes.com/sites/davidmarotta/2012/04/13/mailbag-should-i-pay-off-my-mortgage-early/2/

http://www.emarotta.com/using-a-mortgage-wisely/

 

[LoveOurBabies]

Is your ultimate goal to pay off your mortgage as soon as is possible? I admit, I was a little confused reading all those posts, but I did read rather quickly and was conversing with dd at the same time, so it could be confusion that I am entirely at fault for.

Would you consider moving to a cheaper area to reduce your debt mortgage/mortgage stress?
 

[erigeron]

Interesting articles, crayfishgirl. They seem to rest on the assumption that one has plenty of investments in addition to the mortgage. When viewed as part of a whole portfolio, that does make sense. I'm not sure how to apply these principles to our lives, though, because that is not us. We only have maybe $20k in retirement savings and, like I mentioned, $400k of debt. For someone who has 500k of investments and a 150k mortgage, they can be content with having the debt and drawing the tax/investment benefit in the knowledge that if something happened they would have the funds to continue paying on their mortgage. 

We've thought about moving, but I dunno. We have lived here less than 6 months. It is a nice house and we like the area apart from the fact that we can't walk anywhere. I'm skeptical that we'll be able to get a house that my husband will tolerate for significantly less than we paid for this one, and if we rented we'd probably pay almost as much in rent as we do now on our mortgage. I haven't ruled out moving, but I don't think it'll be a financial panacea.

[delightedbutterfly]

Happy to see this thread... Have been hanging out in the getting out of debt and no spend threads which I enjoy but I sometimes feel our situation is a bit different.

We're new to this high(er) income and we still have lots of work to do in regards to planning and using it wisely. We only have a small amount of bad debt (~$3000) which should we spend wisely be able to pay off in the next couple months. But we hold two mortgages. One smaller one (but not really small) that our tenants cover the entire running costs plus a wee bit extra for no problem. Although we'd rather not own this property it's in an area that only just hit a housing/job recession mid last year.

And a larger mortgage that is in one of the few booming markets in our country... But rent is crazy high for less than we have and our house is almost perfect. Different than if I'd built but almost perfect for our needs as a pre built. Our current interest rates on both are ridiculously low. But we only have 5 year terms on both 30 year mortgages. (What I wouldn't give for a low 30 year term on a 30 year mortgage!) Anyways we only plan to hold on to the other house as long as it's suiting our needs. When we are able to sell and not lose too much of our equity then we will, otherwise we'll just keep holding on.

Our current needs fall into needing to plan for retirement and re starting an investment portfolio.

[ItsBasilThyme]

We have a very similar financial situation. We live in a high cost of living area and have about 500k in mortgage debt and just under 100k in student loan debt. No credit card or car loan debt. It's hard to decide what to prioritize putting extra money to. What I've decided is that even though it feels good to me, putting extra to the mortgage makes no sense. The interest rate is low, it's tax deductible, and that tax deduction also allows us to itemize which lets us deduct even more stuff. If not for our mortgage, we wouldn't be able to deduct other things, so it's like the deduction that keeps on giving. I'm in no hurry to pay it off. We're not underwater or anything, so if we had a catastrophic financial hit, we'd just sell it.

Student loans make more sense for us to pay off. They're at 6.8% (grad school rate) and give no tax benefit. At the same time, the ability to defer them in hardship makes them somewhat low risk. 

401k or IRA makes A TON of sense to prioritize. Tax benefits, employer match to a certain percent, and put in a higher risk fund since we're only 30 means our returns are at least as much as student loan rates and hopefully will average out to be higher over the long term. 

Additional savings/investments make some sense to prioritize. I think prioritizing 3 - 6 months expenses are a good idea. After that, the priority for me falls after 401k / student loans. 

So, my priorities are something like:

1. Contribute enough to get employer 401k match.

2. 3 - 6 months expenses in savings (we calculated this without SL payments). I would include car savings here too if you know you need a new one soon. 

3. Contribute more more more to 401k / IRA. 

4. Pay off student loans

5. Additional investment savings

6. Mortgage

The most painless way I've found to not let our expenses creep up with any salary increases is to "freeze" our income at what it was when we bought the house. Since student loans and mortgage are the biggest part of our bills, and they won't ever go up, any raises or bonuses we've gotten since buying the house have been made invisible to us before we can get used to them. So, if one of us gets a 5% raise, we either immediately increase our 401k contribution by 5% or figure out how much it is and have it direct deposited into a savings account that isn't connected to our main bank, so we don't see it regularly. A few times a year we see how much is in it and decide what to do with anything over 6 months worth of savings based on our priorities. 

[Basylica]

Originally Posted by crayfishgirl 

I wanted to chime in here although we don't have a ton of debt (just to mortgage on our house and a rental property....which is a rental because we were/probably still are under water in it), but I make a good income.  I handle the finances, and sometimes feel like a nag with DH (who stays home with the kids) because I pay attention to the small amounts (maybe too much?).

I'm definitely going to have to check out Chase, Basylica.  I have a languishing account there, and our main bank is CapitolOne (formerly INGDirect).  ING was fully online, but the interest rates on their savings accounts were close to 1%, which is an order of magnitude higher than any of the bigger banks or our local banks.  I've been online banking for years, and quite honestly, if I never have to walk into a bank branch again I'd be perfectly fine. 

I've also read a lot of conflicting guidance about emergency funds, and DH (former investment banker and financial planner) thinks that the 3-6 months (depending on who you read) is overly conservative if you have good credits and assests on which to base a line of credit.  If we needed a chunk of money in an emergency, we have a line of credit we can draw on.  I'm more paranoid about it though so we have two months saved.

As for paying down your mortgage; that's one place where you don't want to put your money....especially if you have a good interest rate and other debt with higher interest rates.  I calculated that with our income tax deduction our mortgage rate is a little under 3%.  It makes more sense to put extra money into a Roth or a college fund than paying down the house.

Yep, me too. I'm in IT anyway....so i'd be ok never being around any people when it came to shopping etc. LOL.

I actually applied for a ING acct once and was rejected because I had bad credit. WTH? evil.

my guy is pretty cool....at this point I call him up and say "move 10 over will ya?" and it's done. I don't have to go in....but since i'm a major googler and resercher, it was nice to walk in and have someone answer questions specifically. It was a good exp, and I seldom seldom have that with in person things. I usually know more than whomever I am talking to. hehehe.

Can't say it'll be the same at every bank....but my guy is pretty awesome.

[macandcheese]

Originally Posted by crayfishgirl 

As for paying down your mortgage; that's one place where you don't want to put your money....especially if you have a good interest rate and other debt with higher interest rates.  I calculated that with our income tax deduction our mortgage rate is a little under 3%.  It makes more sense to put extra money into a Roth or a college fund than paying down the house.

The bolded is really interesting to me. Can you explain how you figured that out? I am trying to decide whether we should refinance our mortgage, and I want to run my own numbers as thoroughly as possible before I commit a bunch of time to communicating with banks. 

[TiredX2]

Originally Posted by macandcheese 

The bolded is really interesting to me. Can you explain how you figured that out? I am trying to decide whether we should refinance our mortgage, and I want to run my own numbers as thoroughly as possible before I commit a bunch of time to communicating with banks. 

Here is a quick article:

http://www.investopedia.com/articles/mortgages-real-estate/11/calculate-the-mortgage-interest-math.asp#axzz2Matdklpe

Basically, many people just directly calculate it based on their marginal tax rate (so, if you had a 6% interest rate (well, refinance, lol) and you were in the 25% bracket, many people assume that their tax adjusted rate would be 4.5%).

You actually need to compare it directly to the rate you would be paying.  So, for people who meet the standard deduction ($11,900 in 2012 for married filing jointly) with other deductions (charitable giving, property taxes, etc...) the above calculation is correct. If you *don't* meet the standard deduction without including your mortgage interest the calculation is a bit trickier (because you need to exclude the mortgage interest paid up to the standard deduction and then calculate the percentage saved.

Does that make sense?

[TiredX2]

We're not *precisely* in this category, but I'm hoping for some good ideas.  I don't consider us high income, but we're firmly middle class (top quintile income) in a relatively high COL area.  We're actually right around the median income for our area, so it definately doesn't feel *high* but, realistically, it's a good amount of money.  We are actually debt free, though. I think we're several years "ahead" of many people on this thread, though, and we have college rapidly approaching (our oldest is in 9th grade) so we are attempting to not inflate our lifestyle now that we have finished paying off our debt.

Originally Posted by pek64 

If each of you have individual Roth accounts, can't you still file separately?

What is the savings of filing separately?

While you "can" have a Roth IRA and file married, seperately, most people find they can't because of the income restrictions.  It realistically doesn't make sense to file married, seperately, if one of the individuals has under $10K of income (I assume there are specific cases in which it does regarding being able to file as head of household, etc... but for the majority of people it doesn't.

To make a full Roth IRA contribution, your modified adjusted gross income needs to be below $166,000 for "married filing jointly" ($0 for "married filing separately"). If your modified adjusted gross income is between $166,000 and $176,000 for "married filing jointly" ($0 and $10,000 for "married filing separately"), you will be able to make a partial contribution. If your modified adjusted gross income is over $176,000 for "married filing jointly" ($10,000 for "married filing separately") you will not be able to contribute to your Roth IRA. You can see by the limits that if you are going to contribute to your Roth IRA, you are going to need to file taxes as "married filing jointly."

Read more: What to Do If Married Couples Have Separate Roth IRAs at Tax Time | eHow.com http://www.ehow.com/way_5811755_do-roth-iras-tax-time.html#ixzz2Mb10GPE7

That said, you should look into the possibility of an IRA rollover.  You can contribute to a non-deductable traditional IRA.  You should be able to then roll that IRA over into a Roth IRA (there have been no income limits on this type of rollover since 2010).  Since the original contribution was non-deductable (so you've already paid tax on it) you only have to pay the additional Roth tax on any earnings.  If you do this rollover quickly, there could be little to no income involved.

That said, I DO NOT KNOW if there are limits to rolling over into a Roth IRA while married filing seperately.  If there are, contributing to a non-deductable IRA would still give you the tax-advantages of the IRA and the possibility of a rollover if/when you file married filing joinly in the future.

Originally Posted by crayfishgirl 

  It makes more sense to put extra money into a Roth or a college fund than paying down the house.

With interest rates as low as they currently are, I don't think anyone could *economically* (emotionally is a different issue) argue that extra money should go into tax advantaged retirement accounts before accelerated mortgage payments.   Hypothetically, you *could* overfund a college savings account and I would say if you might want to take a more balanced approach at that point (of course, the choice doesn't need to be house/ college it could be non-tax advantaged investments/ college or something else).

Originally Posted by erigeron 

 I am of two minds about it. And I do plan to pay off the higher-interest student loans first. The flip side for me is just that being in so much debt makes me nervous. It makes me feel like if something goes wrong, somebody else actually owns the rights to my life and can take away things that are important, or claim my income, or ruin my credit. I suppose if we were debt-free we'd still have that with water bills and stuff, but that's paying for stuff we're using as we use it, so it feels different. If we owned our house free and clear, it wouldn't matter if one of us lost our job--and if I hated my job, I could quit without stressing out about having another one lined up. 

Plus, on our current accelerated payment plan, we'd have the house paid off before our kids are in college, which frees up some income for tuition. 

I read something several years ago that really "felt" true for me.  And that was that while there are *economic* choices, you can't ignore the emotional aspect of them.  So, experts might suggest 3-6 months of expenses in an emergency fund (and some would suggest up to 12 months) but if that doesn't feel right TO YOU, then it's not right FOR YOU.  The example given was a couple who did have six months of emergency funds, but for the wife that was simply not enough.  She felt constant stress about "what if" (and it's not as if they had high risk jobs).  The expert said that FOR THAT COUPLE, a two year emergency fund was worth the economic "hit" (since they would be earning little interest on it compared to if they invested the money for long term) but the quality of living is important, too--- and for her, the additional savings made her life BETTER than if she had the extra money invested in the market.

Our plan was also to pay off the house before our first child headed off to college.  We actually made our goal four years early and are now deciding what to do with that "extra" money for the next four years (probably remodeling on the house).  While we knew that economically it wasn't the most sound choice (statistically, we could be making twice as high returns on investments as our mortgage interest rate), it was definatelly the emontionally sound choice.  It is definately freeing to not have the mortgage payment to deal with!  We also figured that if we paid it off and did not feel that relief, we could always take out a new mortgage. :)

I do sometimes think that we "should" take out a mortgage and invest that money, but it doesn't feel right.  A common question (on Boggleheads--- if you haven't read some over there, you "should") about paying down your mortgage is the following: Picture yourself with no mortgage.  Now, think, if I was presented with this investment opportunity, would I TAKE OUT a mortgage to be able to invest in it.  If your, personal, answer, is "yes" then you should be investing instead of accelerating payments.  If your answer is "no", then you shouldn't (of course, this depends on a realistic view of both your tax situation and the investment payouts, but you get the idea ;) ).

[LoveOurBabies]

Originally Posted by TiredX2 

We're not *precisely* in this category, but I'm hoping for some good ideas.  I don't consider us high income, but we're firmly middle class (top quintile income) in a relatively high COL area.  We're actually right around the median income for our area, so it definately doesn't feel *high* but, realistically, it's a good amount of money.  We are actually debt free, though. I think we're several years "ahead" of many people on this thread, though, and we have college rapidly approaching (our oldest is in 9th grade) so we are attempting to not inflate our lifestyle now that we have finished paying off our debt.

Our plan was also to pay off the house before our first child headed off to college.  We actually made our goal four years early and are now deciding what to do with that "extra" money for the next four years (probably remodeling on the house).  While we knew that economically it wasn't the most sound choice (statistically, we could be making twice as high returns on investments as our mortgage interest rate), it was definatelly the emontionally sound choice.  It is definately freeing to not have the mortgage payment to deal with!  We also figured that if we paid it off and did not feel that relief, we could always take out a new mortgage. :)

Please feel free to refuse answering my question, but how did you manage to be completely debt free with your eldest only in 9th grade? My eldest is in 2nd grade and I can't imagine us being debt free in 7 years time. Looking for some ideas as I'm commited to doing this, but on one income it seems almost impossible.

[TiredX2]

Originally Posted by LoveOurBabies 

Please feel free to refuse answering my question, but how did you manage to be completely debt free with your eldest only in 9th grade? My eldest is in 2nd grade and I can't imagine us being debt free in 7 years time. Looking for some ideas as I'm commited to doing this, but on one income it seems almost impossible.

Well, we started out going from grad school (for DP) to him getting a good job.  We did not greatly improve our standard of living then.  We kept down to one car for the next 4 years (until our 2nd child was 2.5).  We did move from a 600 sq foot apartment to a 900 sq foot apartment and spend more on groceries immediately, but otherwise we concentrated on paying off student loans.  We did NOT have that much student loan debt, luckily.  I think this was a HUGE thing, because many of DP's friends bought very expensive toys when they graduated from college (BMWs and the like).

Then we saved for our down payment, putting basically an extra rent payment away each month.  Any raises/bonuses/ etc were not incorporated into our standard of living but saved. We bought the smallest house in the neighborhood (now there are smaller, but at the time--- and to be clear, it's a fine house: 4 beds, 2 baths, 2000 sq feet).  We took out a 30 year loan and just kept chugging away.  When interest rates went down, we refinanced to a 15 year mortgage (and, btw, this was when 4.875 was "down" for a 15 year loan).  We sent in extra money.  Saved extra and kept sending it in.  Our goal was to finish it off 15 years from our original purchase date (which was when DD was 2.5, so right before she would go to college).  We decided to pull some money out of investments this last year and just pay it off instead.

We are very lucky because my husband makes a good living.  That said, we've  often been under the median income for our area, and are now right around the median income (and that includes singles).  We kept our first car until it was totalled (not our fault).  We've kept our 2nd for 9 years now with no plans on getting rid of it.  Our third (which replaced the first) we've had for 8 years with, once again, no plans on replacing.  Most people around us "upgrade" their houses (to more the 3-4,000 sq feet range) when they can afford it, and we've skipped that. We've been VERY lucky because DP's extended family owns a cabin and a close family friend owns a beach house so we  have to rent free vacations a year.  We've done Disney and some other places, too, but not yearly or semi-yearly.  We kept track of our money (were were above middle class)--- like tracking groceries, clothing, etc...  We do basic frugal things (cloth diapers when the kids were younger, family cloth all along, we buy quality shoes but the kids only have a few pairs, etc...). 

I'm not sure what else to say.  One thing we consistently did was not commit to a payment until we knew we could keep it forever.  For example, we didn't have cell phones for longer than most people we know because I *knew* once we had one we would get used to it, so I didn't want to have it until I *knew* we could afford it forever.  We don't have cable or satelite. DP would definately like more electronics (he doesn't even have a laptop right now since he can bring home his work one--- and I know "not having an individual laptop" is NOT a hardship, but it is "odd" with the people we know, lol).  I hope that helps.  If you have any more specific questions I'd be happy to answer.  I'm definately not a guru or anything--- we've had a combination of a supportive family, hard work, luck and planning really start to pay off.

[LoveOurBabies]

Originally Posted by TiredX2 

Well, we started out going from grad school (for DP) to him getting a good job.  We did not greatly improve our standard of living then.  We kept down to one car for the next 4 years (until our 2nd child was 2.5).  We did move from a 600 sq foot apartment to a 900 sq foot apartment and spend more on groceries immediately, but otherwise we concentrated on paying off student loans.  We did NOT have that much student loan debt, luckily.  I think this was a HUGE thing, because many of DP's friends bought very expensive toys when they graduated from college (BMWs and the like).

Then we saved for our down payment, putting basically an extra rent payment away each month.  Any raises/bonuses/ etc were not incorporated into our standard of living but saved. We bought the smallest house in the neighborhood (now there are smaller, but at the time--- and to be clear, it's a fine house: 4 beds, 2 baths, 2000 sq feet).  We took out a 30 year loan and just kept chugging away.  When interest rates went down, we refinanced to a 15 year mortgage (and, btw, this was when 4.875 was "down" for a 15 year loan).  We sent in extra money.  Saved extra and kept sending it in.  Our goal was to finish it off 15 years from our original purchase date (which was when DD was 2.5, so right before she would go to college).  We decided to pull some money out of investments this last year and just pay it off instead.

We are very lucky because my husband makes a good living.  That said, we've  often been under the median income for our area, and are now right around the median income (and that includes singles).  We kept our first car until it was totalled (not our fault).  We've kept our 2nd for 9 years now with no plans on getting rid of it.  Our third (which replaced the first) we've had for 8 years with, once again, no plans on replacing.  Most people around us "upgrade" their houses (to more the 3-4,000 sq feet range) when they can afford it, and we've skipped that. We've been VERY lucky because DP's extended family owns a cabin and a close family friend owns a beach house so we  have to rent free vacations a year.  We've done Disney and some other places, too, but not yearly or semi-yearly.  We kept track of our money (were were above middle class)--- like tracking groceries, clothing, etc...  We do basic frugal things (cloth diapers when the kids were younger, family cloth all along, we buy quality shoes but the kids only have a few pairs, etc...). 

I'm not sure what else to say.  One thing we consistently did was not commit to a payment until we knew we could keep it forever.  For example, we didn't have cell phones for longer than most people we know because I *knew* once we had one we would get used to it, so I didn't want to have it until I *knew* we could afford it forever.  We don't have cable or satelite. DP would definately like more electronics (he doesn't even have a laptop right now since he can bring home his work one--- and I know "not having an individual laptop" is NOT a hardship, but it is "odd" with the people we know, lol).  I hope that helps.  If you have any more specific questions I'd be happy to answer.  I'm definately not a guru or anything--- we've had a combination of a supportive family, hard work, luck and planning really start to pay off.

Thank you mama, very much. You've done extremely well and you deserve the peace of mind of being debt free. It's hard to not give into the toys and the bigger homes. We know this all too well. Personally we live in an 800sq ft home - It's what we could afford. Meanwhile, all the families we know wouldn't dream of such a small space and shared bedrooms for the kids, but we know we're doing the right thing. DH and I drive used cars that are paid for. We don't do the whole upgrade thing. More like wear it out to the ground. :) We are definitely the oddballs amongst DH's colleagues.

I want to acheive the same goal of being completely debt free by 8 or so years, but as I type this, we owe over 300k for the mortgage. This is the 800sq ft home! Property is through the roof, unlikely to ever go down and moving is not really an option. In fact, our house has even increased in value over the last year and a half. Crazy stuff. It seems impossible to reach that goal of being mortgage free.. And the road ahead, oh so long. My goal this year is to pay off all non mortgage debt and so far, so good.

See, when I ask my DH if he wants to be mortgage free, he says it's nice but he is in no rush. He doesn't want to retire. He would probably want to change jobs and cut back on hours, but retiring is not something he wishes to do. He enjoys doing what he does on a daily basis. So it makes my efforts at wanting to be mortgage free, a little futile.

My biggest challenge is feeding our little ones. Groceries cost so much, they are gluten free by necessity and I don't want to sacrifice their intestinal health in order to be debt free quicker. But at the same time, spending what we do makes me cringe. I don't do packaged foods at all, everything is made from scratch. Always on the lookout for more ideas in this department..

Did you find some areas almost impossible to reduce cost in? Giving up the toys, bigger house etc is not really something we struggle with. Our utilities, grocery and gas bill are awful though and drain a lot of funds. And how did you keep going at those times when you felt you had had enough already? Did you set up a monthly allowance for spending or a reward system for every goal you had acheived? Currently the budget allows for zero spending money, unless the kids need new clothes/school supplies, their are holes in DH shoes/workshirts or we have a birthday party to attend or host. That's about it. No take out - No holidays - No fricken fun at all!

[TiredX2]

Originally Posted by LoveOurBabies 

I want to acheive the same goal of being completely debt free by 8 or so years, but as I type this, we owe over 300k for the mortgage. This is the 800sq ft home! Property is through the roof, unlikely to ever go down and moving is not really an option. In fact, our house has even increased in value over the last year and a half. Crazy stuff. It seems impossible to reach that goal of being mortgage free.. And the road ahead, oh so long. My goal this year is to pay off all non mortgage debt and so far, so good.

See, when I ask my DH if he wants to be mortgage free, he says it's nice but he is in no rush. He doesn't want to retire. He would probably want to change jobs and cut back on hours, but retiring is not something he wishes to do. He enjoys doing what he does on a daily basis. So it makes my efforts at wanting to be mortgage free, a little futile.

My biggest challenge is feeding our little ones. Groceries cost so much, they are gluten free by necessity and I don't want to sacrifice their intestinal health in order to be debt free quicker. But at the same time, spending what we do makes me cringe. I don't do packaged foods at all, everything is made from scratch. Always on the lookout for more ideas in this department..

Did you find some areas almost impossible to reduce cost in? Giving up the toys, bigger house etc is not really something we struggle with. Our utilities, grocery and gas bill are awful though and drain a lot of funds. And how did you keep going at those times when you felt you had had enough already? Did you set up a monthly allowance for spending or a reward system for every goal you had acheived? Currently the budget allows for zero spending money, unless the kids need new clothes/school supplies, their are holes in DH shoes/workshirts or we have a birthday party to attend or host. That's about it. No take out - No holidays - No fricken fun at all!

I don't think we could have made it (definately not as quickly) in *that* high cost of living area.  We're in a relatively high COL area (Seattle area) but nothing that out of control.  Of course, I guess if we were buying *now* (instead of 11.5 years ago) we would have had a larger mortgage than that, too.

DP was on the mortgage free bandwagon, but he definately doesn't have a big desire to retire.  He enjoys his work.  I think a HUGE motivator for him was that his parents always told him not to worry about college costs--- they'd take care of it.  Then, when he actually went to college he found out how they planned on "taking care of it"--- huge loans.  He did that (expensive liberal arts college) for half a year and then dropped out.  Did community college for the next year and then went to a state school where he ended up having as much debt in the next four years as he took the first two terms.  So... it's very important to him that we have a source of funds for our kids' college educations.  He's very grateful for the help he got from his parents (which was substantial, paid about 2/3 of the state school costs, but wouldn't have been a sizable dent in private school tuition) but he really wants to pay for our kids to go to college.  Now, *I* don't want to go into debt for that (like, he would be happy taking out a mortgage to send them to school), so he really wanted to get the mortgage paid off before we were facing tuition bills.

We did relax our rules after several years.  Like you said, it just gets overwhelming and then you seem more likely to have a BIG backwards step.  I don't know how many years ago, but many years ago DP & I each started getting a monthly allowance.  Basically, at that point, we were so afraid to spend any money on ourself (because it was so out of habit) that we almost *couldn't.*  So, we each got $20/month to do with whatever we wanted.  Looking back, it really wasn't that much but it made a big difference.  It's hard never being able to buy *anything*, and it's actually harder to do that knowing you *COULD* but you are just chosing not to.  I think there does need to be a balance, but each family needs to find that balance on their own.

[erigeron]

We have always each had a monthly allowance. Well, my husband has. I, after a while, kind of didn't, but I also don't tend to splurge hardly at all, and we agreed that since I was usually so frugal it was okay for me to buy what I wanted on the rare occasions that I did. 

Now the way we manage our finances is like this. A check comes in. I pay bills, allocate a certain amount to each of us (at this point it is $200-300 every 2 weeks) and transfer to our individual checking accounts, and then share most of the rest out between our savings accounts, keeping a little in the checking account in case of unexpected expenses. The amount we have in our individual checking accounts is supposed to be used for all our variable expenses (including stuff like groceries and gas) and also for anything fun we might want to buy. If we overshoot the money we had, we can transfer more, so it's not designed to make either of us feel put-upon or to make us try to offload expenses on the other. It provides a low level of motivation for us to stick to a budget so we don't have to transfer funds. This eliminates the problem of not knowing how much money is in the joint checking account because we're both using it, and also eliminates the "Why did you spend $10 at X store" bickering. My husband isn't willing to do cash budgets or an envelope system, so this is the closest we can get to having a budget for groceries, etc. We can't be too strict because with both of us working and sharing childcare, we don't necessarily know who's going to end up running what errands and needing what money. 

We haven't been doing this for long but it seems to be working so far. 

I think it's one thing to be austere because you have to, or to do it for a short time, but if you're talking years, I think that a little bit of freedom in the budget can make a big difference. Allowing each of you a small amount of "fun money" each month could go a long way, I think. 

[LoveOurBabies]

Thank you for your replies! Upon further thought, I've decided that a reward system would be good. I think for every X amount we pay off the mortgage principal, we get X amount of dollars to spend on anything we like, no questions asked. I know DH won't reject this proposal. :)

erigeron, I am much like you in that I don't splurge regularly. It's more so big purchases spread out over a period.

That's a good system you have set up there. We have something similar except our checking account is joint.

TiredX2, we're also looking at paying for our children's tuition in full, but on one condition - they have to get a credit average (65+) each semester, in order for their fee to be covered. So similar the way a scholarship works (without the pressure of a HD average). I figured it would provide motivation to do well and not waste time. I know my eldest would take us up on this offer easily - Academic, natural born team leader and loves a challenge. My other DC I am not too sure of just yet, but I am hoping that they will see that it's a win-win all around.. Hard work = Better grades = Better job opportunities + leaving college with no debt.

I totally agree about it being hard to spend after a while. Personally, I've become so accustomed to saying 'not this month, we'll leave it for now' that it becomes hard to discern between purchases that need to be made NOW as opposed to expenses that can truly wait that extra month.

[MrsBone]

I am not in your exact position but I wanted to reply. We just recently went from making plenty of money, to the point that we could spend 200.00 and I wasn't worried about paying the bills or feeding my family to a 33% pay decrease. Makes us sound pathetic, I know but I just had to post because I'm trying to get back on a budget because its actually needed now. That said, we have 20,000 in savings, and virtually no debt, including our cars and our house. At the ripe old age of 29. I feel incredibly blessed but also a bit guilty. The reason for our great fortune is due to unfortunate circumstances. If anyone wishes to know I can share a bit. We received a large inheritance, early. Now we are virtually debt free and DH has been able to accept his dream job, albeit less money. I stay at home, live in the country and we are done at having 2 kids. Really our situation is fine but I'm the one that pays the bills each month and knowing that his income is going to make it so that going out to eat once a week and going and doing fun things with our kids whenever we want to is going to be harder makes me a little blue. I have been in a lot of your shoes though. Granted it was before we had kids but still. I look at that 20,000 in savings and wonder how long it wil stay there.

[ItsBasilThyme]

I agree that not inflating your lifestyle is really the key. We live in a very HCOL area, so even though our mortgage is large, we have a 980 sq ft home that hasn't been remodeled since it was built in the 50s. Sometimes I wish we had done what our friends do and buy large 3/2 homes in the nice neighborhoods, but we're happier knowing we can save a chunk every month.

For discretionary money, I like to keep our bills down and spend money on non-recurring things instead. So, our cars are 7 years old (and will hopefully last another 5), and we don't have cable. But we do spend money on having friends over, doing things, etc. All stuff that if we have a tight month we can just skip unlike a car payment. It seems a lot less stressful to keep the major bills down than to worry over things like gas and take out.

[SunRise]

Originally Posted by ItsBasilThyme 

I agree that not inflating your lifestyle is really the key. We live in a very HCOL area, so even though our mortgage is large, we have a 980 sq ft home that hasn't been remodeled since it was built in the 50s. Sometimes I wish we had done what our friends do and buy large 3/2 homes in the nice neighborhoods, but we're happier knowing we can save a chunk every month.

For discretionary money, I like to keep our bills down and spend money on non-recurring things instead. So, our cars are 7 years old (and will hopefully last another 5), and we don't have cable. But we do spend money on having friends over, doing things, etc. All stuff that if we have a tight month we can just skip unlike a car payment. It seems a lot less stressful to keep the major bills down than to worry over things like gas and take out.

I relate to this part -  I cut cable many years ago because I just didnt feel like "giving" more money to someone else. I have limited expenses which gives me more discretionary money. In fact I dont even own a cell phone yet because I dont want to pay for land line and cell nor do I want to get rid of land line just yet. car is 10 years old and Im debating about replacing it, but I am also wanting to see how many miles I can get on it.   I do live in a low cost of living area, and could have afforded more house (and maybe I will upgrade), but right now mortgage, escrow and home maintenance @ 19.5% of take home pay.

LBYM is key, however you adjust it.

Mrs. Bone - I know what you mean about how long 20,000 will last. When I am saving it feels good, but I fear how fast it would disappear. So I continue to up my cash savings to cover a year of expenses (I have 7mths saved), and then continued to up it even more (maybe I am secretly aiming for a 2 year work release vacation).

[MariaMadly]

We're in a strange status, too.  Always had a safe and comfortable, to us, income, but are now in the middle of a few years of very high income (over $150,000 per year).

DH and I are almost 50, and our two sons are in college.  DH is active-duty military and hit a really high income level just as both our sons hit school.  The colleges they attend both meet full need, so as our income went up, so did our share of the tuition.  We have absolutely no problem with that, but we do joke that DH's juicy paychecks couldn't have come at a worse time.

The thing with us is that his current assignment -- and all that lovely money -- expires in about four years.  So he'll be job hunting in his mid-50's (experienced and awesome, but still very stressful and uncertain) and our family income will likely end up being much lower than it is now.  We've taken a really aggressive approach and plan to have the mortgage paid off in the next four years.  His car got totaled and we decided not to replace it for now.  He's buying a bicycle instead.  :-)  When the dryer broke down a couple of years ago I wouldn't buy a new one, and we've got both indoor and outdoor clotheslines now.  No cable except for internet.  Basic cell phones rather than smart phones, though DH and I are often tempted.

Back years ago, we just stayed careful.  We're another family that held off on the latest gadgets.  We did buy very, very good stuff wrt toys and clothes for the kids as they were growing up; we found we needed less and it lasted longer.  When we built our house, we took out a loan for half the mortgage the bank said we were eligible for (this was in 2003 / 2004 -- terrifying).  Our home is only 28 x 28, 3 bedrooms, 1.5 baths, but even the kids say they can't imagine needing anything bigger.
 

Our sons will have undergrad loans of under 10K apiece; DS2 already has cash set aside for repayment, DS1 has it available it just has to be transferred.  They're both interested in stipend and tuition-paid grad programs (at this point, anyway for DS2, and DS1 is nail-biting waiting to hear back about his apps), so no added expense there.

About college financial aid:  Many schools have a "net price calculator" on their own financial aid website.  That tends to give the most realistic cost of attendance and level of aid; it's nice information to add to the federal government estimators you can use.

We have savings of around 32K, checking that varies from $200 to $11,000 (I mean it!), pay our credit card off monthly, have only the mortgage for longer-term debt, drive an eight year old car, and have a $70,000+ HELOC for emergencies ("Think of it as a seventy-thousand-dollar credit card!" the agent at the bank told me over the phone.  I gulped.)

A word about budgeting:  We have tried to craft one for years and never nailed it down.  Now I just use two basic tools:  I keep a record of the low balance in our checking account just before each pay day and track and compare that.  And I forecast our checking account balance for the upcoming two to four pay periods (one to two months):  I subtract our fixed costs, then see what if anything is available for discretionary stuff that month.  It's sort of a check-register-of-the future, and for us it works better than freaking out because I spent my monthly $27.00 on clothes for the month and my boots just blew out.  We don't really care what we spend it on -- we care about what's available.

He did run a retirement estimator, and once the mortgage is paid off we can live on just his basic pension with some money left over every month.  That doesn't even include social security (maybe I shouldn't . . . ) or other small pension payments.  This kicks in when he's 60, so he's got that gap of six years or so, but it looks less scary now that we're planning for it.

[Peony]

This is us. I only have a few minutes so I'll have to come back later. We would be considered upper middle class but have very little to show for it. Multiple reasons really. We invested heavily in real estate over a decade when it was "the thing to do". And when the bubble popped, well.... We live in high COL area. We have managed to sell off all the properties but one that is so underwater, I don't see us ever getting out of it. It is currently rented out at a loss while we rent ourselves because of lack of downpayment. DH is a business owner and we've bought several investments to go along with his company to build up for the day when we can sell the company. And then we have significant medical needs in our family and due to being self employed, it all falls on us because of crappy private insurance. Our monthly medical bills are more then many people's gross salaries. And off for a school run.