- Posted November 26, 2018
A Few Planning Rules of Thumb
This week will be short and sweet, I’m addressing a few questions I get quite often.
1. Is there an average amount most people spend on groceries? How do I know if I’m spending too much?
First – I will never tell someone they are spending too much on anything, it’s not for me to say. What I will continue to do is help them understand what they have available and work with them to weigh what their priorities are. From there we sort out what to they should be spending.
But if you’re just starting out with and would like a good baseline to estimate how much you may be spending on groceries, I recommend USDA’s cost of food plan (https://www.cnpp.usda.gov/sites/default/files/CostofFoodJan2018.pdf). It’s a PDF, and breaks it down by family size, ages and a range of plan types (thrifty to liberal).
2. We want to have children, how will this affect our plan?
USDA has another great tool – the Cost of Raising a Child Calculator (https://www.cnpp.usda.gov/tools/CRC_Calculator/default.aspx). What I really like is the feature asking where you live, because it can help those considering a move understand in real terms what will happen to their cost of living. Down side, it doesn’t consider the cost of raising a child with a disability.
Given the broad range of disabilities, from physical to intellectual/developmental, I haven’t found a single rule of thumb to use. This is because calculators like the USDA’s consider a child’s care until age 18 in most cases, and when you have a child with a disability you could be caring for them for much longer.
So I ask parents to calculate how much they are paying out of pocket for therapies and other disability specific costs per month. This gives us an annual expense, which is then multiplied by the number of years they reasonably expect to care for their child – in most cases I encourage them to expect to transfer the responsibility around age 70. Not being cruel, but realistically how able do many of us think we will be to perform very physical tasks for our adult children?
3. How much should I spend on a house?
Lenders will almost always offer more to my clients than I am comfortable with them taking on. I encourage families to spend no more than 30% of their gross income (so if you make $100k don’t spend more than $30k/year) on housing expenses. Where do I get this number from? From HUD’s website – “Families who pay more than 30 percent of their income for housing are considered cost burdened and may have difficulty affording necessities such as food, clothing, transportation and medical care.” (https://www.hud.gov/program_offices/comm_planning/affordablehousing/).
I’ve lived in the DC Metro area, I completely understand how difficult it can be to find housing within this price range. But I’m also aware it can be done, and in nice neighborhoods as well; provided you’re willing to be realistic about what you can afford. Unfortunately I’ve seen too many cases where someone’s wants win out over their needs, and they sacrifice saving towards retirement to pay their mortgage.
But Eric, aren’t homes investments? They can be, if they are bought for this purchase – your primary residence should not be considered an “investment”. In my opinion, an investment property is a property which will generate you income – that’s it. Money put into your primary residence can only come back out in the form of a loan (you owe someone else interest) or when you sell (and you will need someplace to live so at least some of that money is going away).
These are my rules of thumb, I’m certain other Advisors/Planners have their own. I’ll gladly consider opposing view points, but please provide supporting documentation. Although I respect opinions, I’m not willing to shift my position on just a persuasive argument, I need data and numbers to make a decision.