“Personal finance is more personal, than it is finance.”
This quote might be cringey but it could not be more true.
I see so many people argue on social media that personal finance is black and white.
They argue that is right and there is wrong for everyone. This could not be further from the truth.
Let me walk you through 3 similar scenarios where the decision of what to do and what is affordable would be entirely different for each group.
To set the stage for this, know that in all 3 scenarios the family currently makes $200k and is wanting to buy a $800k home.
1. This family is wanting to buy a home as they are going to have kids soon. They are told based on $200k of income they can afford about $800k.
But… here’s the thing, one spouse makes $140k and the other makes $60k. When they have their first child, they plan to have the spouse who makes $60k stay at home. The plan it move to one income, have 1-2 more kids, and stay at home that entire time. Meaning it will be 10+ years till that spouse returns to work.
This means income will drop to $140k pretty quickly after they move and they do not expect their total income to change much as the other spouses income based on their career is pretty steady overtime with a max 3% inflation increase a year. But many years it does not even go up that much.
Because of this little income growth and losing $60k of income, they could not afford this house as it would eat up over 50% of their take home pay. It’s really hard to save, invest, travel, etc. when your house take’s up that much of your pay. Plus they want to cover their kids college costs where ever they want to go. They cannot afford this house and accomplish all of those goals.
2. This family is wanting to buy a house as they have 2 younger kids and need more space. They make $200k and also get a yearly bonus of 10% of income which allows them to invest and stay on track.
Things might be a little tight now moving to this house, but for this family, daycare will be over in 2 years which will free up just over $3k a month.
So even though it will be tight in the short term, it is the right decision for them to buy this now and save a little less. Sure, that may not be ideal, there may some risk, but it’s a short term thing where more income will open up down the line and their income typically goes up at least 10% per year. And the one spouse gets a minimum 10% bonus each year that he can count on.
This family can buy this house affordably and it be their forever home.
3. Exact same scenario as 2 but bonus CAN be 10%, but sometimes 0%. And after day care, private school will start and be more expensive.
This family could not afford this house. The bonus is spotty. Child care may go away but private school will start and cost even more than what they are currently paying.
The only way to make this house work is if they can guarantee more income, cut costs like private school, etc.
This decision will will really come down to their values. They could choose to buy now and if income isn’t higher, they send their kids to public school. And if it is higher, then they can go to private school. Or they could choose to go smaller and make sure private school happens. 2 entirely different families could make a different choice here based on their priorities.
Finance is situational. It is personal. There is no right answer for every situation.
The goal of this is to show you that personal finance is not black and white. What you can and should do changes person by person.
Situation by situation.
I have some clients who extend themselves on their house, but they don’t travel, don’t go out for nice meals, don’t buy new, nice cars, etc.
So that works for them.
And then others who buy very low relative to income so they can have nice cars, nice vacations, more expensive experiences, pay for private school and college, retire early, etc.
You have to understand what you value and then align your spending with that.