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A Tale of Two Homes – Results Will Surprise You.

Nice Home + BMW

This is a tale of two homes and our perceptions.  I am going to use random images, but two real stories about families for my examples.  Names are left out, but I want to dispel the belief about outward appearances.

Below is an image of two different families.  Which one do you believe is more successful?

Nice Home + BMWFamily #1

  • They purchased a 3,000 square foot home.
  • A nice new BMW in the driveway.
  • Earning close to $150,000/year.

This family has Iphones and data plans for everyone in the family, all the newest gadgets and accessories for the home.  They have riding lawn mowers, nice clothing, the latest styles and gadgets.  Pretty much what you would expect from a very successful family.

 

Trailer HomeFamily #2

  • They purchased a used 3 bedroom trailer.
  • They own a late model Honda Accord.
  • Earning close to $75,000/year.

This family has Trak phones they share if someone is leaving the house.  They still have nice gadgets in the home, just not the latest all the time.  They have nice cloths they get on sale only if they outgrow or are beyond repair.

If you follow my blog and know me, then you probably already know the answer to the question.  The family living within their means with a paid off home are doing much better.  Let’s take a look at the numbers for a minute.

Family #1 – $150,000 after taxes is surprisingly not as much as you think after the government digs into your pockets, so although it seems like a lot you do need to consider the take home pay is much lower than the actual salary.  In fact if you are a resident of California here is a breakdown for you.  On that page they broke down all the federal and local taxes and the family ends up taking home $97,000.

The beautiful home is about $2,500 per month and if they have two nice cars, that is $900/month.  Now the great cell phones and data plans for a family can run upwards of $200/month or more.  Already we are at $43,000 in expenses and we have not gotten to the eating out, new gadgets, credit card debt, student loans, utilities, food, etc… yet.

Remember the commercial about the guy who looks like he has everything?  You probably don’t want to be this guy, even though on the exterior his life looks great to everyone around him.

Family #2 – $75,000 after taxes is also not great, but they are not taxed as heavily as the $150,000 household.  This household’s take home pay is about $53,000 after taxes.  The key here is they have a home that is paid for and they just pay a lot rent of $250/month and their cars are paid for.  They have two Trak phones at $200/year so if someone leaves the house they have a phone for emergencies, to get directions, etc…  Comparing the same basic living expenses they are now at $3,200 per year. Now we can add food, fun, etc…  We are probably sitting at around $25,000 – $30,000 for expenses plus some fun.  The rest can be used to save for retirement, enjoy some family outings or other stuff as needed.

Why is this important to see?  Family #2 is recession proof and Family #1 is one job loss away from losing everything.  Family #2 has enough money to stack away a very nice emergency fund that could carry them for 1-2 years if necessary.  Family #2 also has very different retirement income requirements compared to Family #1.  Think of the expenses and how much you will need to save.  Family #2 could live very nicely on $30,000 for the rest of their lives.

If you read my post on Cognitive Dissonance, you know the perception difference between the two families is going to be very different by the public in general, however if you are part of the CageFree Tribe you know and understand “The book should not be judged by its cover”.

There is a lot of comfort in knowing you are going to be okay no matter what life throws at you.  Even Family #1 can be considered frugal if that family was able to purchase the home with cash, cars with cash and they had their 1 year of expenses emergency fund with a great retirement.  The median income for families is hovering around $50,000 however, which means a lot of people who do live like this are doing so with a lot of debt over their heads (remember that video above?).

My biggest reason for showing this example is to increase awareness that just because the Jones’s have nice things does not mean they are more well off than what we typically associate with other walks of life.  Imagine if you life in the less expensive home with less overall expenses and you retire.  Let’s take a very conservative estimate and say you were only able to save and invest $500,000 over your lifetime.

The $500,000 you saved if it made 0% interest over the coming years of your retirement would allow you to get this much money added to your Social Security each month.  I know the market has not been great, so the averages some investment places mention of 10% overall may or may not be the norm, so I was very conservative and took it down as low as 5% in my numbers below just to show you how if your expenses are low, even a small income can mean a very comfortable life.

  • 5% interest your annual income would be approximately: $25,000/year
  • 6% interest your annual income would be approximately: $30,000/year
  • 8% interest your annual income would be approximately: $40,000/year

Now let’s look at the total picture.  Here is the average social security payout per month, which is $1,335 according to the social security site.

If you are single here are your numbers with social security + retirement ($500,000 saved & invested) for your annual income projections (these do not account for gains or losses in the account, not if you are able to put more than $500,000 away).

  • 5% interest retirement + social security: $41,020/year
  • 6% interest retirement + social security: $46,020/year
  • 8% interest retirement + social security: $56,020/year

Next if you are married and both of you are eligible for social security + retirement ($500,000 saved & invested), here would be your approximate monthly income with this model.

  • 5% interest retirement + social security: $57,040/year
  • 6% interest retirement + social security: $62,040/year
  • 8% interest retirement + social security: $72,040/year

The more expensive our lifestyle, the more we need to be comfortable at retirement and before retirement, which is why the numbers are important.  Dave Ramsey has a great saying to “Live like nobody else today, so you can live like nobody else tomorrow”.  If we are careful about our spending, we not only help make ourselves and our families recession proof, we make it so we will be worry free in retirement.

A couple very important points here are we need to have a strong defense, which is our ability to budget and stay within our budget.  We also need to be saving enough and investing for our retirement on top of what we may or may not receive from social security.

A lot to digest, but hopefully it helps show why we should never judge a book by its cover.  The country song that talks about the guy on the front porch in his rocking chair living simply and could buy your BMW with cash comes to mind.  Just because we can do it at the moment does not mean we should.

Have a great day!

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