Middle Class Struggle

[admin]

Interesting read, somewhat contrarian. Who would think that we can blame the struggle of the middle class on two parent incomes and safeneighborhoods. Not necessarily mcmansions and overspending on consumer goods.

http://www.news.harvard.edu/gazette/2003/10.30/19-bankruptcy.html

[lamoneyguy]

The most important line in this article:

“Families are not going broke over lattes,” Warren quips. “Families are going broke over mortgages.”

I’m so sick of David Bach and his “latte factor.” The fact is, few people actually go to Starbucks every day, or eat out for lunch every day.

~lamoneyguy

[JWM in SD]

I know, that one has always bugged me too. In my own experience, it’s not the little things that kill, it’s the big expenses. Although the small expenses can add up, they are also far more controllable than incurring a big expense. I’ve tried to explain this to my wife numerous times but she doesn’t buy it.

[noone]

This article reflects views that I’ve held for years. Decades ago a second income allowed a family to afford some small luxuries. Somewhere around the 80’s that changed though, and double incomes have practically become a necessity.

I recall another thread that speculated about high tech salaries being one of the causes for skyrocketing housing prices. I think there is something to that, but primarily due those families that consist of two high tech workers. I’m a high tech worker, but I don’t earn enough to afford a $600k-$700k home. In fact even with a salary near 100k a year, according to standard lending practices and current interest rates, I cannot truly afford even a $400k home.

Perhaps if my spouse also earned 100k, we could afford one of these homes. But that would not last long if one of us were out of work for any significant period of time.

I wonder if the information in this book will lead to any real change. Probably not.

[an]

I have to disagree on the first 2 posts about the latte factor. I think the small expenses are the one that caught you by surprised. The big expense, you have to sit down and really think about whether you can afford it or not. But the small things such as going out to dinner/lunch/breakfast instead of making your own food/drink. Those are the thing that you just spend and not think about. It’s the things that you buy that don’t think about that really affect your finance. He does not mean just coffee at Starbucks when he talk about the “latte factor”. He means the small stuff and being alert and think about what you buy. I can almost guarantee you that if you add up your yearly expense, the eating out and those other small stuff will be much greater than the large expenses.

[kewp]

You know, I get somewhat peeved whenever someone mentions the “X” factor for the high prices in SD.

I expect to pay a premium for the weather, nice city, good salary tech job, etc. Those are solid ‘fundamentals’.

They do not, however, explain the 100% appreciation in a few years. Its nothing but rampant speculation, easy credit and mortgage fraud.

[PerryChase]

I agree with asianautica. The latte factor is what makes many folks who would otherwise be middle-class poor.

Some of my immigrant friends have taught me important lessons — that you can be very well-educated and have all the necessities in life such as close friendships and families on a modest income.

[lamoneyguy]

Which would you rather cut, your monthly housing outlay, or the discretion to eat out, buy a latte or a new shirt once in a while? I would rather live in a modest home and live comfortably day to day. Many are the opposite. They would rather kill themselves over their home and scrimp day to day. The problem is exactly what the article addresses. If they have a disruption in income, they are overcommitted and cannot scrimp any more day to day. If something happens to my income, I can cut back the day to day stuff.

I agree we should be mindful of the small stuff that adds up, but I think it’s the house and car this is killing most people. They struggle over the big decision for a few days, weeks or even months. But once they do it, they just accept that big ol’ monthly nut like it’s a tax on life.

~lamoneyguy

[startingout]

Come on, I’m sure we could all cull a few frappucinos from our budget and dine out less, but I doubt that those frivolities are what is breaking the bank for the middle class.

Looking at my own budget, even I did cut out what I would call “luxuries” from my life, I wouldn’t be saving a siginicant enough amount of money to make it worth cutting out in the first place.

A lot of older people I talk to about the financial situation of young people today give me the same stock answer: “Well, you just have to not buy designer clothes, live a simple life, not use your credit cards, and you’d have a lot more money.” And while that is true for some people, I really don’t think it applies to most. I don’t think the older generations realize that what has increased isn’t luxury spending, it’s cost of basic living. If the rent on my quite modest 2 bd apt wasn’t so ridiculously high, I’d have a lot more money to put towards savings.

[recordsclerk]

The “latte factor” does go a long ways towards savings. It’s not just going out for dinner or buying clothes. It’s a way of life and of saving. Everyone has a latte factor, it’s what we do about it that counts. I love cars, electronics and Starbucks, but I limit myself. By limitting
your everyday purchases you can save more then you think. Sometimes I think about how anal I am about saving money, but at the end of the month it’s nice to you I still have money left over. I would consider my wife and I to be in the upper middle class, but we still spend like we did last year before she graduated from the RN program and started working as a nurse. We go out all the time, but we use coupons. She still cuts my hair. I do my own lawn and home maintanence. We buy clothes at Walmart(clearance rack) or at least I do. Our cars are paid off and we have no credit debt. Maybe that designer shirt and pants only sets you back $200, so you put it on your credit card and decide to only make the minimal payment. That shirt and pants will end up costing you more then the original $200. Lets say you put all you latte factors on your credit card. Now a year has gone by, and your outstanding balance is $20,000 and you can only afford the minimun payment. Your interest rate goes up to 18%, your rent increases by $100, gas continues to go up, and Starbucks raises it’s lattes by $.35, What are you going to do? I tell you what I would do, I would call my mommy and ask for a loan that I possible couldn’t pay off.

[jztz]

Living within one’s means is what counts. Agree with PerryChase that immigrants seems to know this better. They’d have a 15-year mortgage while driving a 10 year old car, and simply skipped dinning out and latte. One can still live very comfortably without many of the small “luxuries” as referred here by people. Actually, these are luxuries are desirable only because people grow up having them and feel that they can’t live without. In reality, one can live with almost any reasonable income — your compromise may include share homes with roommates, driving a used car, etc, etc. It’s better live this way when you’re young, and hopefully not having to worry about money at all when you’re old. I think that most American middle class kids grow up having experienced too much material abundance that their expectations of necessity are skewed. They should have struggled a little more while they’re young.

[Anonymous]

Original poster here:

I’ve been thinking about this article today and came to the conclusion that in most situations it would help to apply the ‘latte’ factor and also what we could call the ‘Lexus’ factor. Even on the big expenses like insurance, housing and automobiles we have choices. The tendancy for humans to adapt to higher levels of material pleasure and also to try to keep up with the neighbors are largely to blame for the fact that many middle class families in North County chose to drive a Lexus and not a Toyota, or heaven forbid a Chrysler! Here’s an example you might find in Carlsbad:

Monthly Cash Flow
10,800 – Two parent income, $130,000/year
-3,500 – Total taxes, social security, medicaid etc.
-3,500 – Mortgage payment plus taxes, mello roos
-1,400 – Car payment, 1 car (45,000 balance, 8%, 36 mo.)
-400 – 401k, 3% monthly contribution
-400 – Monthly groceries (low estimate)
-300 – Dining out (low estimate)
-200 – All health care premiums, fees (low estimate)
-100 – Life insurance
-300 – Utilities
-200 – Household items (Low estimate)
-50 – Charity (low estimate, cheap SOBs)
-50 – Gifts given for weddings, birthdays, X-mas (low!)
-50 – Entertainment (movies, concerts, kids events)
-100 – 1 x yearly vacation, $1,200 (low estimate!)
-50 – Personal care (haircuts, wife gets a cheap one)
-50 – Clothing (low estimate)
-100 – IRA contribution/month (low!)
——
ZERO Remaining

Not included: Day care, pre-school, gym membership, private schools, auto insurance and more)

POINTS
-Buy a $25,000 Toyota and not a $50,000 Lexus, save $500/Mo.
-Buy a $600,000, not $900,000 home, save $2,000/Mo.
-Don’t dine out as much, save $200/Mo.

This family can lose money each month, or they can apply the latte and Lexus factors and save up to $2,700/Mo.

[lamoneyguy]

No doubt, living below your means is key. There’s no disagreement here. First of all, I would NEVER spend $200 on shirt and pants. Not even close. Sometimes I go to the outlet stores, and head straight for the sale rack, and still leave empty handed shaking my head at how overpriced the name brand stuff is.

I own three pairs of jeans, for which I paid a combined total of fifty dollars. They look sharp, and unless I gain or lose a bunch of weight, I don’t see any need to buy more for several years. Also, I haven’t paid a dime in credit card interest in about ten years.

All I am saying is that I believe most people have a “too much house” or “too much car” problem more than they have a “latte factor” problem. I agree that you should watch the little expenses that do add up, but sometimes it’s putting a bandaid on a fractured leg. People can go around patting themselves on the back for making coffee at the office instead of going to Starbucks, but their mortgage is 45% of their gross income. I don’t care how many Lattes you skip, you need surgery, not a bandaid.

~lamoneyguy

[lamoneyguy]

I LOVE the idea of the “Lexus Factor.” Can I steal it an write about it on my blog? I’ll credit you. “Juice, from Piggington” Is there any other way that I should credit you?

The Lexus Factor is all about the car, the McMansion and the private schools that are beyond most people’s means. Great stuff.

~lamoneyguy

[Anonymous]

Sure, it’s yours and I hope to see the book someday! There is another factor I was thinking about as well. It has to do with the fact that people in cities like New York, San Diego and LA seem inclined to need a totally different level of material wealth than those with the same income in say Lincoln, NE or Des Moines, IA. EG: Warren Buffet lives a less materialistic life than a middle class family in Encinitas with a 900k home and a BMW.

I haven’t coined this one yet, so feel free!

[Author]

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